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Davos X Factors

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On January 23-27 the World Economic Forum held its tres chic annual meeting in Davos, Switzerland.  Admission was by invitation only.  Nick Paumgarten of The New Yorker offered the following explanation of how different segments of society view the annual Davos event:

People like to project onto Davos their fears and fantasies about the way the world works. Right-wingers see insidious, delusional liberalism, in its stakeholder ethos and its pretense of world improvement.  They picture a bunch of Keynesians, Continentals, and self-dealing do-gooders participating in some kind of off-the-books top-down command-control charade.  Left-wingers conjure a plutocratic cabal, a Star Chamber of master puppeteers, the one per cent – or .01 per cent, really – deciding the world’s fate behind a curtain of heavy security and utopian doublespeak.  The uninvited, the refuseniks, and even many of the participants see a colossal discharge of hot air, a peacock strut.  They all deploy, with a sneer, the term Davos Man, coined by the late political scientist Samuel Huntington, who decried a post-national wealthy globe-trotting élite.  Davos Man can be either a capitalist oppressor or a Commie conspirator.  Either way, he is a windbag, a pedant, and a hypocrite. Businesspeople who have never been to Davos find many ways to be dismissive of it: “I can’t do business there.”  “It’s too political.”  “It’s not what it used to be.”  The translation may be that that person has not been invited.

The World Economic Forum’s website explained the role of its official communities:

A key part of the Forum’s activities is the creation of distinctive communities of Member and Partner companies as well as leaders from civil society for more informal opportunities for interaction.

I would assume that at this year’s meeting, one of the most popular topics must have been risk management – including risk aversion.  Ever since the financial crisis, the world has been on the verge of economic chaos.  The possibility that Silvio Berlusconi could return to power in Italy has heightened concerns that the European sovereign debt crisis could reverse course from its current recovery trajectory and head into oblivion.

One of the World Economic Forum’s communities is the Risk Response Network.  The RRN “was launched to provide private and public sector leaders with an independent, impartial platform to map, monitor and mitigate global risks.”  It is comprised of individual representatives of leading global corporations, research institutions, media outlets, governments and NGOs.  The Risk Response Network released a 78-page report for this year’s annual meeting entitled, Global Risks 2013 — Eighth Edition.  The report’s topics included:  Testing Economic and Environmental Resilience, Digital Wildfires in a Hyperconnected World, The Dangers of Hubris on Human Health and Building National Resilience to Global Risks.

I found Section 5 of Global Risks 2013 to be particularly interesting.  It begins on page 55 of the report and is entitled, “X Factors”.  The report described this section in the following terms:

In this section, developed in collaboration with Nature, a leading science journal, the Risk Response Network asks readers to look beyond our high-risk concerns of the moment to consider a set of five X factors and reflect on what countries or companies should be doing to anticipate them.

*   *   *

X factors are serious issues, grounded in the latest scientific findings, but somewhat remote from what are generally seen as more immediate concerns such as failed states, extreme weather events, famine, macroeconomic instability or armed conflict. They capture broad and vaguely understood issues that could be hatching grounds for potential future risks (or opportunities).

The five X Factors discussed in the report were these:

Runaway climate change:  Is it possible that we have already passed a point of no return and that Earth’s atmosphere is tipping rapidly into an inhospitable state?

Significant cognitive enhancement:  Ethical dilemmas akin to doping in sports could start to extend into daily working life; an arms race in the neural “enhancement” of combat troops could also ensue.

Rogue deployment of geoengineering:  Technology is now being developed to manipulate the climate; a state or private individual could use it unilaterally.

Costs of living longer:  Medical advances are prolonging life, but long-term palliative care is expensive.  Covering the costs associated with old age could be a struggle.

Discovery of alien life:  Proof of life’s existence elsewhere in the universe could have profound psychological implications for human belief systems.

My favorite was the last X Factor:  Discovery of alien life.  Although the report focused on the notion that astronomers involved in the study of exoplanets could find spectral information revealing chemical signs of life, the last paragraph of the section provided some insights on the fear which has been keeping this subject under wraps for years:

Through basic education and awareness campaigns the general public can achieve a higher science and space literacy and cognitive resilience that would prepare them and prevent undesired social consequences of such a profound discovery and paradigm shift concerning mankind’s position in the universe.

So The Powers That Be are worried about “undesired social consequences” and “paradigm shift”.  Why is that not a surprise?

Those in search of “the right stuff” on this subject might be interested in what the late astronaut, Gordon Cooper had to say about it.

A good “basic education and awareness campaign” should begin with that video clip.


 

John Ashcroft Was Right

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Many commentators have expressed surprise about the extensive criticism directed against President Obama by liberals.  During the new President’s third month in office, I pointed out how he had become the “Disappointer-In-Chief” – when he began to elicit groans from the likes of Keith Olbermann and Rachel Maddow.  President Obama has continued on that trajectory ever since.  More recently, Obama’s mishandling of the economic crisis resulted in a great cover story for New York Magazine by Frank Rich, entitled, “Obama’s Original Sin”.  Although Frank Rich may have been a bit restrained in his criticism of Obama, Marshall Auerback didn’t pull any punches in an essay he wrote for the New Economic Perspectives website entitled, “Barack Obama:  America’s First Tea Party President”:

Cutting public spending at this juncture is the last thing the US government should be doing.  Yet this President is pushing for the largest possible cuts that he can on the Federal government debt.  He is out-Hoovering the GOP on this issue.  He is providing “leadership” of the sort which is infuriating his base, but should endear him to the Tea Party.  This is “the big thing” for Barack Obama, as opposed to maximizing the potential of his fellow Americans by seeking to eliminate the scourge of unemployment.  Instead, his big idea is to become the president who did what George Bush could not, or did not, dare to do:  cut Medicare, Medicaid and Social Security.  What more could the Tea Party possibly want?

Glenn Greenwald of Salon has been a persistent critic of President Obama for quite a while.  Back in September of 2010, I referenced one of Glenn Greenwald’s exceptive essays about Obama with this thought:

Glenn Greenwald devoted some space from his Salon piece to illustrate how President Obama seems to be continuing the agenda of President Bush.  I was reminded of the quote from former Attorney General John Ashcroft in an article written by Jane Mayer for The New Yorker.  When discussing how he expected the Obama Presidency would differ from the Presidency of his former boss, George W. Bush, Ashcroft said:

“How will he be different?  The main difference is going to be that he spells his name ‘O-b-a-m-a,’ not ‘B-u-s-h.’ ”

John Ashcroft’s prescient remark could not have been more accurate.  Who else could have foreseen that the Obama Presidency would eventually be correlated with that of President George W. Bush?  Although it may have seemed like a preposterous notion at the time, it’s now beginning to make more sense, thanks to a very interesting piece I read at the Truthdig website entitled, “If McCain Had Won” by Fred Branfman.  Branfman began with a list of “catastrophes” we would have seen from a McCain administration, followed by this comment:

Nothing reveals the true state of American politics today more, however, than the fact that Democratic President Barack Obama has undertaken all of these actions and, even more significantly, left the Democratic Party far weaker than it would have been had McCain been elected.

More important, the sentence immediately following that remark deserves special attention because it forms the crux of Branfman’s analysis:

Few issues are more important than seeing behind the screen of a myth-making mass media, and understanding what this demonstrates about how power in America really works – and what needs to be done to change it.

From there, Branfman went on to explain how and why McCain would have made the same decisions and enacted the same policies as Obama.  Beyond that, Branfman explained why Obama ended up doing things exactly as McCain would have:

Furious debate rages among Obama’s Democratic critics today on why he has largely governed on the big issues as John McCain would have done. Some believe he retains his principles but has been forced to compromise by political realities. Others are convinced he was a manipulative politico who lacked any real convictions in the first place.

But there is a far more likely – and disturbing – possibility.  Based on those who knew him and his books, there is little reason to doubt that the pre-presidential Obama was a college professor-type who shared the belief system of his liberalish set …

*   *   *

Upon taking office, however, Obama – whatever his belief system at that point – found that he was unable to accomplish these goals for one basic reason:  The president of the United States is far less powerful than media myth portrays.  Domestic power really is in the hands of economic elites and their lobbyists, and foreign policy really is controlled by U.S. executive branch national security managers and a “military-industrial complex.”

The ugly truth strikes again!  The seemingly “all-powerful” President of the United States is nothing more than a tool of the plutocracy.  It doesn’t matter whether the White House is occupied by a Democrat or a Republican – the policies (domestic, foreign, economic, etc.) will always be the same – because the people calling the shots are always the same plutocrats who control those “too big to fail” banks, the military industry and big pharma.  As Branfman put it:

.   .   .   anyone who becomes president has little choice but to serve the institutional interests of a profoundly amoral and violent executive branch and the corporations behind them.

Perhaps in response to the oft-cited criticism that “if you’re not part of the solution – you’re part of the problem”, Fred Branfman has offered us a proposal that could send us on the way to changing this intolerable status quo:

But however important the 2012 election, far more energy needs to be devoted to building mass organizations that challenge elite power and develop the kinds of policies – including massive investment in a “clean energy economic revolution,” a carbon tax and other tough measures to stave off climate change, regulating and breaking up the financial sector, cost-effective entitlements like single-payer health insurance, and public financing of primary and general elections – which alone can save America and its democracy in the painful decade to come.

Wait a minute!  Didn’t Obama already promise us all of that stuff?

Perhaps the only way to achieve those goals is by voting for Independent political candidates, who are not beholden to the Republi-cratic Corporatist Party or its financiers.  When the mainstream media go out of their way to pretend as though a particular candidate does not exist – you might want to give serious consideration to voting for that person.  When the media try to “disappear” a candidate by “hiding” that person “in plain sight”, they could be inadvertently providing the best type of endorsement imaginable.

The same level of energy that brought Obama to the White House could be used to bring us our first Independent President.  All we need is a candidate.


 

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Unwanted Transparency

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Immediately after assuming office, President Obama promised to provide a greater degree of transparency from his administration:

Transparency and the rule of law will be the touchstones of this presidency.

Did you really believe that?  Do you remember Jane Mayer – author of that great book, The Dark Side, which exposed the controversial “enhanced interrogation techniques”?  Well, she just wrote an article for The New Yorker, discussing the Obama administration’s use of the Espionage Act of 1917 to press criminal charges in five alleged instances of national security leaks.  At the outset of the article, Ms. Mayer made this observation:

Gabriel Schoenfeld, a conservative political scientist at the Hudson Institute, who, in his book “Necessary Secrets” (2010), argues for more stringent protection of classified information, says, “Ironically, Obama has presided over the most draconian crackdown on leaks in our history – even more so than Nixon.”

Meanwhile, another sort of unwanted transparency is catching up with the Obama administration:  transparent motives.  Many commentators are finally facing-up to the reality that Obama never gave a damn about the unemployment crisis.  I have repeatedly emphasized that President Obama’s February, 2009 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 – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – 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.

A recent interview with economist Tim Duy focused on the inadequacy of the Economic Recovery and Reinvestment Act of 2009:

What went wrong with stimulus?  Why does unemployment remain so high?

I don’t think anything “went wrong” with the stimulus, other than it simply wasn’t enough to fill the depth of the economic hole caused by the recession.  There was simply a lack of political willpower to fully acknowledge the depth of the problem and bring to bear the appropriate resources.  The result is an economy that is not bouncing back quickly enough to close the output gap and create sufficient job growth to drive the unemployment rate down lower at a faster pace.

Is the economy not weak enough to justify more stimulus?  Or do policy makers think that deficit spending is not able to generate more jobs?

Yes, the economy is weak enough to justify additional stimulus, and the persistently low rates of government debt should prove that current fears of deficit spending are unjustified.  Some policymakers appear to believe that a commitment to fiscal austerity will in fact generate more job growth, but this is nonsensical –  austerity would only aggravate the existing challenges (as it has in Greece).  There is currently no constraint that prevents more fiscal stimulus from being effective in promoting additional economic growth.  Longer run, yes, the US federal budget does need to be addressed, but letting growth stagnate now will only intensify that challenge in the future. Policymakers, however, appear enamoured with the idea that these challenges need to be addressed now, and this attitude poses another risk to the recovery.

I want to focus on what Professor Duy described as a “lack of willpower”.  That lack of willpower was rooted in a lack of authenticity.  President Obama was never concerned about what most of us would consider “economic recovery” – reducing unemployment to just below five percent.  Obama’s goal was to do just enough to avoid another Great Depression.  Once that goal was accomplished, it was time to move on to other things.  My cynicism on this subject was validated in a recent essay by Mark Provost for Truthout, entitled, “Why the Rich Love High Unemployment”.  In fact, Provost’s article was met with such widespread enthusiasm that it was republished in its entirety on the following websites:  Naked Capitalism, Angry Bear and The Economic Populist.  Here are some key points from the piece:

Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate.  A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.

On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies.

*   *   *

But when it comes to jobs, US policymakers fall short of their rosy self-evaluations.

*   *   *

The gap between economic growth and job creation reflects three separate but mutually reinforcing factors:  US corporate governance, Obama’s economic policies and the deregulation of US labor markets.

*   *   *

Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan.  The stimulus provided relief, but it was too small and did not focus on job creation.

The administration’s problem is not a question of economics, but a matter of values and priorities.

Mark Provost’s essay featured this infamous quote from a Washington Post article written by Steven Rattner (Obama’s “car czar” during 2009 – whose task force was overseen by “Turbo” Tim Geithner and Larry Summers):

Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy:  its flexibility and its productivity.  Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness (the president’s new favorite word).  In the long run, increasing productivity is the only route to superior competitiveness.

*   *   *

That kind of efficiency is perhaps our most precious economic asset.  However tempting it may be, we need to resist tinkering with the labor market.  Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity. And weak productivity would exacerbate the downward pressure on wages that caused the last decade to be the first in our history in which wages (after adjustment for inflation) declined.

In other words, productivity is more important than those pesky “wrenching human costs”.  Too bad there just isn’t some kind of spray or ointment for those things!  This attitude exemplified what Chris Hedges discussed in his book, Death of the Liberal Class.  In a recent article for Truthdig, Chris Hedges emphasized how the liberal class “abandoned the human values that should have remained at the core of its activism”:

The liberal class, despite becoming an object of widespread public scorn, prefers the choreographed charade.  It will decry the wars in Iraq and Afghanistan or call for universal health care, but continue to defend and support a Democratic Party that has no intention of disrupting the corporate machine.  As long as the charade is played, the liberal class can hold itself up as the conscience of the nation without having to act.  It can maintain its privileged economic status.  It can continue to live in an imaginary world where democratic reform and responsible government exist.  It can pretend it has a voice and influence in the corridors of power.  But the uselessness and irrelevancy of the liberal class are not lost on the tens of millions of Americans who suffer the indignities of the corporate state.  And this is why liberals are rightly despised by the working class and the poor.

To repeat an important statement from Mark Provost’s essay:

The administration’s problem is not a question of economics, but a matter of values and priorities.

The unemployment crisis is destined to continue for several years – thanks to the administration’s abandonment of those human values discussed by Chris Hedges.


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Another Cartoon For The Bernank To Hate

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Those of us who found it necessary to explain quantitative easing during the course of a blog posting, have struggled with creating our own definitions of the term.  On October 18, 2010, I started using this one:

Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.

What I failed to include in that description was the fact that the Fed was printing money to make those purchases.  I eventually resorted to simply linking the term to the definition of quantitative easing at Wikipedia.org.

Suddenly, in November of 2010, a cartoon – posted on YouTube – became an overnight sensation.  It was a 6-minute discussion between two little bears, which explained how “The Ben Bernank” was trying to fix a broken economy by breaking it more.

We eventually learned a few things about the cartoon’s creator, Omid Malekan, who produced the clip for free on the xtranormal.com website.  Kevin Depew, the Editor-in-Chief of Minyanville, interviewed Malekan within days of the cartoon’s debut.  Malekan expressed his disgust with what he described as “the Washington-Wall Street Complex” and the revolving door between the financial industry and those agencies tasked to regulate it.  David Weigel of Slate interviewed Malekan on November 22, 2010 (eleven days after the cartoon was made).  At that point, we learned a bit about the political views of the 30-year-old, former stock trader-turned-real estate manager:

I’m all over the map.  Socially, I’m pretty liberal.  Economically, I’m fairly free-market oriented.  I generally prefer to vote third party, because it’s just good for the country if we get another voice in there.  To me none of this is really partisan because things are the same under both parties.  Ben Bernanke was appointed by Bush and re-appointed by Obama, so they both have basically the same policies.  The problem, really, is that monetary policy is now removed from people in general.  People like Bernanke don’t have to get elected.  There’s a disconnect between them and the people their decisions are affecting.

One month later, Malekan was interviewed by “Evan” of The Point Blog at the Sam Adams Alliance.  On this occasion, the animator explained his decision to put “the” in front of so many proper names, as well as his reference to Ben Bernanke as “The Bernank”.  Malekan had this to say about the popularity of the cartoon:

To be fully honest, I had no idea this would get the wide audience that it did.  Initially when I made it, it was to explain it to a select group of friends of mine.  And any other straggler that happened to see it, and I never thought that would be over 3 million people.  But, the main reason was cause I think monetary policy is important to everybody because it’s monetary policy.  Unlike fiscal policy or regulation, monetary policy, because of the way it impacts interest rates and the dollar, impacts every single person that buys and sells and earns dollars.  So I think it’s something that everybody should be paying attention to, but most people don’t because it’s not ever presented to them in a way they could hope to understand it.

Omid Malekan produced another helpful cartoon on January 28.  The new six-minute clip, “Bank Bailouts Explained” provides the viewer with an understanding of what many of us know as Maiden Lane III – as well as how the other “backdoor bailouts” work, including the true cost of Zero Interest Rate Policy (ZIRP) to the taxpayers.  This cartoon is important because it can disabuse people of the propaganda based on the claim that the Wall Street megabanks – particularly Goldman Sachs – owe the American taxpayers nothing because they repaid the TARP bailouts.  I discussed this obfuscation back on November 26, 2009:

For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism.  A recent example came to us from James Stewart of The New Yorker.  Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008.  Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown.  (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program.  The acronym for that job title is SIGTARP.)   In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”.  That was a pretty weak start.  Stewart went on to imply that the SIGTARP report refuted the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations.  Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”.  One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government.  Here’s that passage from the SIGTARP report:

When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity.  These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008.  AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY.  The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.

FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets.  After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest.  After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.

The end result was a $12.9 billion gift to “The Goldman Sachs”.

Thanks to Mr. Malekan, we now have a cartoon that explains how all of AIG’s counterparties were bailed out at taxpayer expense, along with an informative discourse about the other “backdoor bailouts”.

Omid Malekan has his own website here.  You should make a point of regularly checking in on it, so you can catch his next cartoon before someone takes the opportunity to spoil all of the jokes for you.  Enjoy!


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Disappointer-In-Chief Keeps On Disappointing

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September 20, 2010

Many prognosticators have voiced their expectations that disappointment in the Obama Presidency will destroy the campaigns of Democratic candidates in the 2010 elections.  The rationale is that disappointed former supporters of Obama will be feeling too apathetic to vote in November, while the energized supporters of Tea Party candidates will turn out in huge numbers.  Beyond that, many pundits believe that Obama is actually having a “radioactive” effect on those campaigns where he intercedes.  Discussions of this subject eventually result in speculation that President Obama will not seek a second term.  After all …  he couldn’t possibly intend on running for re-election after what he has done to his supporters.  Consider the way Mr. Obama speaks about his supporters and there are only two explanations.  The first explanation is based on the theory that Obama is arrogant and unconcerned – taking his constituency for granted.  The second theory is that he is unconcerned about what his supporters think of his performance because he has no intention of seeking a second term.

President Obama recently spoke at a $30,000-per-plate fundraising event for the Democratic National Committee at the home of Richard and Ellen Richman.  (Think about that name for a second:  Rich Richman.)  Mr. Richman lives up to his surname and resides in the impressive Conyers Farm development in Greenwich, Connecticut.  Christopher Keating of the Capitolwatch blog at courant.com provided us with the President’s remarks, addressed to the well-heeled attendees:

.   .   .   Democrats, just congenitally, tend to get — to see the glass as half empty.   (Laughter.)  If we get an historic health care bill passed — oh, well, the public option wasn’t there.  If you get the financial reform bill passed — then, well, I don’t know about this particularly derivatives rule, I’m not sure that I’m satisfied with that.  And gosh, we haven’t yet brought about world peace and — (laughter.)  I thought that was going to happen quicker.  (Laughter.) You know who you are.  (Laughter.)

The tactlessness of those remarks was not lost on Glenn Greenwald of Salon.com.  Mr. Greenwald transcended the perspective of an offended liberal to question what could possibly have been going on in the mind of the speaker:

What’s most striking about Obama’s comments is that there is no acceptance whatsoever of responsibility (I’ve failed in some critical areas; we could have/should have done better).  There’s not even any base-motivating vow to fight to fix these particular failures (we’ll keep fighting for a public option/to curb executive power abuses/to reduce lobbyist and corporate control of our political process).  Instead, he wants you to know that if you criticize him — or even question what he’s done (“well, I don’t know about this particular derivatives rule, I’m not sure that I’m satisfied with that”) – it’s your fault:  for being some sort of naive, fringe-leftist idiot who thought he would eliminate the Pentagon and bring about world peace in 18 months, and/or because you simply don’t sufficiently appreciate everything he’s done for you because you’re congenitally dissatisfied.

*    *    *

Sitting at a $30,000 per plate fundraising dinner and mocking liberal critics as irrational ingrates while wealthy Party donors laugh probably does wonders for bruised presidential egos, but it doesn’t seem to be a particularly effective way to motivate those who are so unmotivated.  Then again, Barack Obama isn’t actually up for election in November, so perhaps the former goal is more important to him than the latter.  It certainly seems that way from these comments.

Of course, liberals weren’t the only Obama supporters who felt betrayed by the President’s abandonment of his campaign promises.  In fact, Obama owed his 2008 victory to those independent voters who drank the “Hope and Change” Kool-Aid.

Glenn Greenwald devoted some space from his Salon piece to illustrate how President Obama seems to be continuing the agenda of President Bush.  I was reminded of the quote from former Attorney General John Ashcroft in an article written by Jane Mayer for The New Yorker.  When discussing how he expected the Obama Presidency would differ from the Presidency of his former boss, George W. Bush, Ashcroft said:

“How will he be different?  The main difference is going to be that he spells his name ‘O-b-a-m-a,’ not ‘B-u-s-h.’ ”

One important difference that Ashcroft failed to anticipate was that Bush knew better than to disparage his own base.  The likely reason for this distinction could have been Bush’s intention to run for a second term.



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The Lehman Fallout

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March 16, 2010

Everyone is speculating about what will happen next.  The shock waves resulting from the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, have left the blogosphere’s commentators with plenty to discuss.  Unfortunately, the mainstream media isn’t giving this story very much traction.  On March 15, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal.  Here is some of what he said:

Look, I know that Lehman collapsed a year and a half ago, but this is a major story — one that finally gets awfully close to putting the crimes in the crisis.  I’ll go ahead and say it:  If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times.  This on the biggest financial news story of the week — and one of the biggest of the year.  These papers have hundreds of journalists at their disposal.  The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.

I’m hardly the only one who has noticed this.  James Kwak of Baseline Scenario wrote this earlier today:

Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.

At the Zero Hedge website, Tyler Durden reacted to the Columbia Journalism Review piece this way:

Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention.  As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the NewYork Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America’s key media organizations.

One probable reason why the Lehman story is being buried is because its timing dovetails so well with the unveiling of Senator “Countrywide Chris” Dodd’s financial reform plan.  The fact that Dodd’s plan includes the inane idea of expanding the powers of the Federal Reserve was not to be ignored by John Carney of The Business Insider website:

Why do we think these are such bad ideas?  At the most basic level, it’s hard to see how the expansion of the scope of the Federal Reserve’s authority to cover any large financial institution makes sense.  The Federal Reserve was not able to prevent disaster at the firms it was already charged with overseeing.  What reason is there to think it will do a better job at regulating a wider universe of firms?

More concretely, the Federal Reserve had regulators in place inside of Lehman Brothers following the collapse of Bear Stearns.  These in-house regulators did not realize that Lehman’s management was rebuking market demands for reduced risk and covering up its rebuke with accounting sleight-of-hand.  When Lehman actually came looking for a bailout, officials were reportedly surprised at how bad things were at the firm.  A similar situation unfolded at Merrill Lynch.  The regulators proved inadequate to the task.

Just think:  It was only one week ago when we were reading those fawning, sycophantic stories in The New Yorker and The Atlantic about what a great guy “Turbo” Tim Geithner is.  This week brought us a great essay by Professor Randall Wray, which raised the question of whether Geithner helped Lehman hide its accounting tricks.  Beyond that, Professor Wray emphasized how this scandal underscores the need for Federal Reserve transparency, which has been so ardently resisted by Ben Bernanke.  (Remember the lawsuit by the late Mark Pittman of Bloomberg News?)  Among the great points made by Professor Wray were these:

Not only did the NY Fed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better.  Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)

Geithner told Congress that he has never been a regulator. (see here)  That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NY Fed.

*   *   *

More generally, this revelation drives home three related points.  First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable.  He must determine what did Geithner know, and when did he know it.  All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released.  Further, Obama must ask what has Geithner done to favor his clients on Wall Street?  It now looks like even the Fed BOG, not just the NY Fed, is involved in the cover-up.  It is in the interest of the Obama administration to come clean.  It is hard to believe that it does not already have sufficient cause to fire Geithner.  In terms of dollar costs to the government, this is surely the biggest scandal in US history.  In terms of sheer sleaze does it rank with Watergate?  I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.

It remains to be seen whether anyone in the mainstream media will be hitting this story so hard.  One possible reason for the lack of significant coverage may exist in this disturbing point at the conclusion of Wray’s piece:

Of greater importance is the recognition that all of the big banks are probably insolvent.  Another financial crisis is nearly certain to hit in coming months — probably before summer.  The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.

Oh, boy!  Not good!  Not good at all!  We’d better change the subject to March Madness, American Idol or Rielle Hunter!  Anything but this!



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Inviting Blowback

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March 11, 2010

Is it just a coincidence that “Turbo” Tim Geithner was the subject of back-to-back feature stories in The New Yorker and The Atlantic ?  A number of commentators don’t think so.

The March 10 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title is meant to imply that Getithner’s efforts to save America’s financial system are working but he’s not getting any credit for this achievement.  From the very outset, this piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he has been widely criticized as a tool of Wall Street.

The article by Jo Becker and Gretchen Morgenson in the April 26, 2009 issue of The New York Times helped clarify the record on Geithner’s loyalty to the big banks at the public’s expense, during his tenure as president of the Federal Reserve of New York.  That piece began with a brainstorming session convened by Treasury Secretary Hank Paulson in June of 2008, at which point Paulson asked for suggestions as to what emergency powers the government should have at its disposal to confront the burgeoning financial crisis:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer.  He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward.  Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.

The recent article in The New Yorker defends Geithner’s bank bailouts, with a bit of historical revisionism that conveniently avoids a small matter referred to as Maiden Lane III:

During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses.  While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers.  Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars — and much of that related to propping up General Motors and Chrysler.

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

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

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

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

Gawd!  Yeech!

The reaction to the New Yorker and Atlantic articles, articulated by Yves Smith of Naked Capitalism, is an absolutely fantastic “must read” piece.  Ms. Smith goes beyond the subject of Geithner.  Her essay is a tour de force, describing how President Obama sold out the American public in the service of his patrons on Wall Street.  The final two paragraphs portray the administration’s antics with a long-overdue measure of pugilism:

But the Obama administration miscalculated badly.  First, it bought the financiers’ false promise that massive subsidies to them would kick start the economy.  But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment.  Obama took his eye off the ball.  A Democratic President’s most important responsibility is job creation.  It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering.  Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny.  But as public ire remains high, the press coverage has become almost schizophrenic.  Obvious public relations plants, like Ben Bernanke’s designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program.  While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Administration’s priorities truly lie means the fissures are becoming a gaping chasm.

So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts.  It may have no choice.  Having ceded so much ground to the financiers, it has lost control of the battlefield.  The banking lobbyists have perfected their tactics for blocking reform over the last two decades.  Team Obama naively cast its lot with an industry that is vastly more skilled in the dark art of the manufacture of consent than it is.

Congratulations to Yves Smith for writing a fantastic critique of the Obama administration’s combination of nonfeasance and misfeasance in responding to both the financial and economic crises.



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Compare And Contrast

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November 26, 2009

We have seen and heard so much discussion during the past week concerning the dismal performance of Treasury Secretary “Turbo” Tim Geithner while testifying before the Joint Economic Committee — I won’t repeat it.  At this point, there appears to be a consensus that Turbo Tim has to go.  The scary part comes when pundits start tossing around names for a possible replacement.  One would expect that President Obama might be wise enough to avoid the appointment of another “Wall Street insider” as Treasury Secretary.  Rumors are circulating that The Dimon Dog (Jamie Dimon, CEO of JP Morgan Chase) is being considered for the post.  This buzz gained more traction when bank analyst, Dick Bove, recently voiced support for Dimon as Treasury Secretary.  The handful of Geithner supporters deny that Turbo Tim ever was a “Wall Street insider”.  This assertion is contradicted by the fact that Geithner was the President of the New York Federal Reserve at the time of the financial crisis, when he served as architect of the more-than-generous bailouts of those “too big to fail” financial institutions — at taxpayer expense.

These days, the most vilified beneficiary of government largesse resulting from the financial crisis is the widely-despised investment bank, Goldman Sachs — often referred to as the “giant vampire squid” — thanks to Matt Taibbi’s metaphor, describing Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism.  A recent example came to us from James Stewart of The New Yorker.  Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008.  Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown.  (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program.  The acronym for that job title is SIGTARP.)   In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”.  That was a pretty weak start.  Stewart went on to imply that the SIGTARP report refutes the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations.  Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”.  One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government.  Here’s that passage from the SIGTARP report:

When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity.  These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008.  AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY.  The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.

FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets.  After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest.  After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.

On November 21, one of my favorite reporters for The New York Times, Pulitzer Prize winner Gretchen Morgenson, wrote an informative piece concerning the recent SIGTARP Report.  Compare and contrast Ms. Morgenson’s discussion of the report’s disclosures, with the spin provided by James Stewart.  Here is some of what Ms. Morgenson had to say:

The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted.  Goldman Sachs, Merrill Lynch, Societe Generale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded:  “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.”  The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

*   *   *

Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.

*   *   *

Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G.  That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”

*   *   *

As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.

*   *   *

The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm.

*   *   *

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said.  “But the U.S. taxpayer never agreed to be the victim of investments that should undergo a rigorous audit.”

After reading James Stewart’s November 19 blog posting and Gretchen Morgenson’s November 21 article from The New York Times, ask yourself this:  Are Gretchen Morgenson and Janet Tavakoli “conspiracy theorists”      . . .  or is James Stewart just a tool?



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Spread The Word

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September 29, 2009

I’ve seen quite a few articles and broadcasts from “mainstream” news sources during the past few weeks that have actually made me feel encouraged about the public’s response to the financial crisis and our current economic predicament.  Six months ago, the dirty picture of what caused last year’s near-meltdown and what has continued to prevent the necessary reforms, was something one could find only by reading a relatively small number of blogs.  Michael Panzner wrote a book entitled Financial Armageddon in 2006, predicting what many “experts” later described as unforeseeable.  Mr. Panzner now has a blog called Financial Armageddon (as well as another: When Giants Fall).  At his Financial Armageddon website, Mr. Panzner has helped ease the pain of the economic catastrophe with a little humor by educating his readers on some novel measurements of our recession level — such as the increased use of hair dye and “The Hot Waitress Index”.   (He ran another great posting about the increasing number of disastrous experiences for people who tried to save money by cutting their own hair.)   Meanwhile, Matt Taibbi has continued to serve as a gadfly against crony capitalism.   Zero Hedge keeps us regularly apprised of the suspicious activities in the equities and futures markets, which are of no apparent concern to regulatory officials.   Some bloggers, including Jr Deputy Accountant, have criticized the manic money-printing and other inappropriate activities at the Federal Reserve — which resists all efforts at oversight and transparency.  One no longer experiences the stigma of “conspiracy theorist” by accepting the view that our financial and economic problems were caused primarily by regulatory failure.

On September 23, Dan Gerstein wrote a piece for Forbes, about the impressive, 25-page article concerning last year’s financial crisis, written by James Stewart for The New Yorker, entitled:   “Eight Days”.  At the outset, Mr. Gerstein noted how the New Yorker article provided the reader with some shocking insight on someone we all thought we knew pretty well:

But the biggest eye-opener was that the most incisive and damning questions raised by any of our leaders during this existential crisis came from none other than the era’s top free-market cheerleader in Washington, George W. Bush.

*   *   *

Paulson and Bernanke alerted Bush that AIG was about to fail, warned of the massive ripple effect AIG going bust would have on the global economy, and explained why the Fed could not intervene with an insurance company to stop this systemic threat.  In response, Bush asked  “How have we come to the point where we can’t let an institution fail without affecting the whole economy?”

The question raised by President Bush is still tragically apt, since nothing has been accomplished in the past year to break up or downsize those institutions considered “too big to fail”.  Mr. Gerstein’s experience from reading the New Yorker article helped reinforce the understanding that our current situation is not only the result of regulatory failure, but it’s also a by-product of something called “regulatory capture” —  wherein the regulators are beholden to those whom they are supposed to regulate:

Once disaster was averted and the system stabilized, Paulson, Geithner and Bernanke had no excuse for not laying down the law to Wall Street — figuratively and literally — in the ensuing weeks.  By that I mean restructuring the deals we struck with the banks to get far better returns for taxpayers and rewriting the rules governing the financial system to prevent them from ever thinking they could gamble risk-free with our money again.

*   *   *

There’s no apparent sense of apartness or independence between regulator and regulated.  To the contrary, there’s a power imbalance in the wrong direction, with the regulators dependent on and even at the mercy of the regulated.  What does it say about the integrity and even the sanity of this system when the doctors have to ask the inmates how to restructure their treatments?

I was particularly impressed by Dan Gerstein’s closing remarks in the Forbes piece.  It was encouraging to see another commentary in a mainstream media source, consistent with the ranting I did here, here and here.  Mr. Gerstein expressed dismay at the lack of attention given to the unpleasant truth that we live in a plutocracy which won’t be changed until the people demand it:

That’s why I was so disappointed to find Stewart’s epic article buried in the elite pages of the New Yorker.  It should have been serialized on the front pages of every newspaper in the country last week, so every American would be reminded in full detail of just how warped and rigged our financial system has been — and why it still is.  Maybe then it might sink in that getting mad won’t get us even in the power struggle with the financial elites for control of our economy, and that change won’t happen until taxpayers demand it.  You want public accountability for Wall Street?  Let’s start with an accountable public.

Each time an article such as Dan Gerstein’s “Too Close For Comfort” gets widespread exposure, we move one step closer to the point where we have an informed, accountable public.  It’s unfortunate that his commentary was buried in the elite pages of Forbes.  That’s why I have it here.  Spread the word.



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The Big Bite

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March 12, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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