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Elizabeth Warren To The Rescue

March 4th, 2010 Posted in Uncategorized

Mar, 04 2010

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March 4, 2010

We reached the point where serious financial reform began to look like a lost cause. Nothing has been done to address the problems that caused the financial crisis. Economists have been warning that we could be facing another financial crisis, requiring another round of bank bailouts. The watered-down financial reform bill passed by the House of Representatives, HR 4173, is about to become completely defanged by the Senate.

The most hotly-contested aspect of the proposed financial reform bill — the establishment of an independent, stand-alone, Consumer Financial Protection Agency — is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him. As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman. Back on January 18, Elizabeth Warren (Chair of the Congressional Oversight Panel and the person likely to be appointed to head the CFPA) explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

* * *

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

The latest effort to sabotage the proposed CFPA involves placing it under the control of the Federal Reserve. As Craig Torres and Yalman Onaran explained for Bloomberg News:

Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

* * *

Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.

* * *

The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency. JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

Barry Ritholtz, author of Bailout Nation, recently discussed the importance of having an independent CFPA:

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.

The Fed is the wrong agency for this.

In an interview with Ryan Grim of The Huffington Post, Congressman Barney Frank expressed a noteworthy reaction to the idea:

“It’s like making me the chief judge of the Miss America contest,” Frank said.

On Tuesday, March 2, Elizabeth Warren spent the day on the phone with reform advocates, members of Congress and administration officials, as she explained in an interview with Shahien Nasiripour of The Huffington Post. The key point she stressed in that interview was the message: “Pass a strong bill or nothing at all.” It sounds as though she is afraid that the financial reform bill could suffer the same fate as the healthcare reform bill. That notion was reinforced by the following comments:

My first choice is a strong consumer agency . . . My second choice is no agency at all and plenty of blood and teeth left on the floor.

* * *

“The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up,” Warren said. “The lobbyists’ closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters — and something even better to say to the lobbyists.”

Congratulations, Professor Warren! At last, someone with some cajones is taking charge of this fight!

On Wednesday, March 3, the Associated Press reported that the Obama administration was getting involved in the financial reform negotiations, with Treasury Secretary Geithner leading the charge for an independent Consumer Financial Protection agency. I suspect that President Obama must have seen the “Ex-Presidents” sketch from the FunnyOrDie.com website, featuring the actors from Saturday Night Live portraying former Presidents (and ghosts of ex-Presidents) in a joint effort toward motivating Obama to make sure the CFPA becomes a reality. When Dan Aykroyd and Chevy Chase reunited, joining Dana Carvey, Will Ferrell and Darryl Hammond in promoting this cause, Obama could not have turned them down.

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A Wary Eye On The Indicators

March 1st, 2010 Posted in Uncategorized

Mar, 01 2010

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March 1, 2010

The past few days brought us some observations by a number of financial commentators, who expressed concern about how our economic recovery is coming along. Although none of the following three are ready to start sounding alarms, they all seem to share a similar tone of discouragement.

Don Luskin of The Wall Street Journal ’s Smart Money blog began his February 26 piece with an explanation of how proud he used to be about the accuracy of his May, 2009 declaration that the recession had ended. Although he still believes that he made the right call back then, the most recent economic indicators have muddied the picture:

I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened. What worries me is that these statistics have all started to get a little worse recently.

Luskin explained that although initial unemployment claims reached their peak in early April, the four-week moving average has risen 7 percent from where it was a few weeks ago.

Over history, upticks like that have no predictive value. There have been many of them, and very few have led to recessions. Still, 7% is a big reversal. In May when I got excited about the drop in claims, that drop was only about 4%!

Luskin found another disappointing trend in the fact that earnings expectations for the S&P 500 are now growing at a much slower pace than they were in April. Two other trends concerned him as well. The fact that the dollar has rallied ten percent in the last couple of months raises the question whether “the fear that gripped world markets in 2008 and 2009” could be returning. Finally, the fact that the credit spread between Treasuries and “junk bonds” is now at six percent after having been below 5%, brings a little discomfort simply because of a move in the wrong direction. Nevertheless, Luskin is still optimistic, although his perspective is tempered with realism:

So is the economic recovery over? I don’t think so. I think it’s just being tested. None of the indicators I use to detect the onset of recession are giving signals. But it’s haunting, nevertheless. After the horrific global recession we went through, you’d think we ought to come roaring back. We’re back, but we’re not exactly roaring.

In Sunday’s Washington Post, Frank Ahrens wrote an article discussing three indicators that “spell trouble for the recovery”. Here’s how he explained them:

— On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.

— On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey’s “present situation index” — how confident consumers feel right now — which hit its lowest mark since the 1983 recession. On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.

— On Thursday, the government’s report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted. Forecasters expected new jobless claims to drop by about 20,000.

Taken together, what do these reports tell us?

We’ve got a long way to go to get out of this economic mess, and we may be actually losing a little ground.

At the conclusion of that piece, Mr. Ahrens added that another factor holding back recovery is the current state of activity in the stock market. Investors seem to be exhibiting caution, uncertainty and “a hard-to-shake sense that we haven’t hit bottom yet”.

As I frequently point out, one of my favorite financial gurus is Jeremy Grantham of GMO. The February 26 issue of Bloomberg Business Week featured an article by Charles Stein concerning Grantham’s career. In the section of the piece discussing Grantham’s current outlook, we see yet another view toward a very lean, slow recovery process:

Grantham’s favorite asset class today is high-quality U.S.stocks, companies defined by high, stable returns and low debt. The allocation fund had 31 percent of its money in that category at year-end, sometimes called blue chips, according to the GMO Web site. In the interview, he said he expects such stocks to return an average of 6.8 percent a year over the next seven years, compared with 1.3 percent for all large-cap U.S. stocks.

Emerging-market stocks may rise about 4 percent annually in the next seven years, as investor enthusiasm for economic growth in developing countries carries the stocks to unsustainable levels, Grantham said.

“Why not go along for the ride?” he said. The MSCI Emerging Markets Index returned an average of 22 percent in the past seven years, compared with a gain of 5.5 percent by the S&P 500 index.

U.S.government bonds will return 1.1 percent a year over the seven-year period, according to the latest GMO forecast. The Bank of America Merrill Lynch U.S. Treasury Master Index rose 4.3 percent from 2003 through 2009.

Grantham said he expects a difficult, not disastrous, period for the economy and investments.

“It will feel like the 1970s,” he said. “One step forward, one step back.”

None of the three gentlemen whom I have quoted here are seeing visions of rainbows and unicorns in our economic future — at least not for the next few years. Be sure to keep the opinions of these experts in mind if the cheerleading by some perma-bull, TV pundit motivates you to “get in on the ground floor of the next stock market rally”. You could save yourself a lot of money and even more pain.

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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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Rethinking The Stimulus

February 22nd, 2010 Posted in Uncategorized

Feb, 22 2010

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February 22, 2010

On the anniversary of the stimulus law (a/k/a the American Recovery and Reinvestment Act of 2009 — Public Law 111-5) there has been quite a bit of debate concerning the number of jobs actually created by the stimulus as opposed to the claims made by Democratic politicians. For their part, the Democrats take pride in the fact that John Makin of the conservative think-tank, the American Enterprise Institute, recently published this statement at the AEI website:

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

A few months ago, I had a discussion with an old friend and the subject of the stimulus came up. My beefs about the stimulus were that it did not offer the necessary degree of immediate relief and that a good chunk of it should have gone directly into the hands of the taxpayers.

I recently read a blog posting by Keith Hennessey, the former director of the National Economic Council under President George W. Bush, which expressed some opinions similar to my own on what the stimulus should have offered. Although Mr. Hennessey preferred the traditional panacea of tax cuts as the primary means for economic stimulus, he made a number of other important points. With so much fear being expressed about the possibility of a “double-dip” recession, our government could find itself in the uncomfortable position of considering another stimulus bill. If that day comes, we have all the more reason to look back at what was right and what was wrong with the 2009 stimulus.

Keith Hennessy began with this statement:

Unlike many critics of the stimulus law, I think that fiscal policy can increase short-term economic growth, especially when the economy is in a deep recession. In other words, I think that fiscal stimulus is a valid concept. This does not mean that I think that every increase in government spending, or every tax cut, (a) increases short-term economic growth or (b) is good policy.

At the end of his second paragraph, he got to the part that was music to my ears:

If the Administration had instead put $862 B directly into people’s hands, you would have seen more immediate spending and economic growth than we did, even if people had saved most of it.

In contrast, government spending is powerful but painfully slow. If the government spends $1 on building a road, eventually that entire $1 will enter the economy and increase GDP growth. Your bang-for-the-deficit-buck is extremely high. The problem is that bang-for-the-buck doesn’t help us if that bang occurs two or three or four years from now.

* * *

I would instead prefer that people be allowed to spend and save the money how they best see fit. My preferred path also has less waste and bureaucracy.

A bit later in the piece, Hennessey said some things that probably caused a good number of the CPAC conventioneers reach for the Tums:

I agree with the Administration that last year’s stimulus law increased economic growth above what it otherwise would have been. I agree that employment is higher than it would have been without a stimulus.

Of course, Hennessey complained that “The law was poorly designed and inefficient” — in part because the money was funneled through federal and state bureaucracies — another valid point. Then, he got to the important issue:

Given a decision last year to do a big fiscal stimulus, I would have preferred, in this order:

1. putting all the money into a permanent reduction in income and capital taxes;

2. putting all the money into a temporary reduction in income and capital taxes;

3. putting all the money into transfer payments;

4. what Congress and the President did.

Given the policy preferences of the President, his team’s big policy mistake last year was to let Congress turn a reasonable macroeconomic fiscal policy goal into a Congressional spending toga party. Given his policy preferences, the President should have insisted that Congress put all the money into (2) and (3) above. He would have had a bigger macro stimulus bang earlier.

In case you’re wondering what “transfer payments” are — you need to think in terms of “wealth transfer”. In this case, it concerns situations where the government gives away money to people who aren’t rich. A good example of this was the stimulus program that took place under President Bush. Individuals with incomes of less than $75,000 received a $300 “stimulus check” and households with joint incomes under $150,000 got $600.

My own stimulus idea would involve a “tax rebate” program, wherein the taxpayers receive a number of $50 vouchers based on the amount of income tax they paid the previous year. The recipients would then be instructed to go out and buy stuff with the vouchers. So what if they spent it on imported merchandise? The American retailers and shipping companies would still make money, finding it necessary to hire people. The vouchers would display the person’s name and address. In order to use the vouchers, identification would be needed, so as to prevent resale. The maximum amount of cash change one could get back from a voucher-funded purchase would be $10.

Hopefully, we won’t need another stimulus program. However, if we do, I suggest that the government simply give us vouchers and send us shopping.

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An Early Favorite For 2010

February 11th, 2010 Posted in Uncategorized

Feb, 11 2010

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February 11, 2010

It appears as though the runner-up for TheCenterLane.com’s 2009 Jackass of the Year Award is well on his way to winning the title for 2010. After reading an op-ed piece by Ross Douthat of The New York Times, I decided that as of December 31, 2009, it was too early to determine whether our new President was worthy of such a title.

Since Wednesday morning, we have been bombarded with reactions to a story from Bloomberg News, concerning an interview Obama had with Bloomberg BusinessWeek in the Oval Office. In case you haven’t seen it, here is the controversial passage from the beginning of that article:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

Many commentators have expounded upon what this tells us about our President. I’d like to quote the reactions from a couple of my favorite bloggers. Here’s what Yves Smith had to say at Naked Capitalism:

There are only two, not mutually exclusive, conclusions one can reach from reading this tripe: that Obama is a lackey of the financiers, and putting the best spin he can on their looting, or he is a fool.

The salient fact is that, their protests to the contrary, the wealth of those at the apex of the money machine was not the result of the operation of “free markets” or any neutral system. The banking industry for the better part of two decades has fought hard to create a playing field skewed in their favor, with it permissible to sell complex products with hidden bad features to customers often incapable of understanding them. By contrast, one of the factors that needs to be in place for markets to produce desirable outcomes is for buyers and sellers to have the same information about the product and the objectives of the seller.

Similarly, the concentrated capital flows, often too-low interest rates, and asymmetrical Federal Reserve actions (cutting rates fast when markets look rocky, being very slow to raise rates and telegraphing that intent well in advance) that are the most visible manifestations of two decades of bank-favoring policies, are the equivalent of massive subsidies.

And that’s before we get to the elephant in the room, the massive subsidies to the banksters that took place during the crisis and continue today.

We have just been through the greatest looting of the public purse in history, and Obama tries to pass it off as meritocracy in action.

Obama is beyond redemption.

At his Credit Writedowns website, Edward Harrison made this observation:

The problem is not that we have free markets in America, but rather that we have bailouts and crony capitalism. So Americans actually do begrudge people this kind of monetary reward. It has been obvious to me that the bailouts are a large part of why Obama’s poll numbers have been sinking. It’s not just the economy here — so unless the President can demonstrate he understands this, he is unlikely to win back a very large number of voters who see this issue as central to their loss of confidence in Obama.

Is it just me or does this sound like Obama just doesn’t get it?

Victoria McGrane of Politico gave us a little background on Obama’s longstanding relationship with The Dimon Dog:

Dimon is seen as one of the Wall Street executives who enjoys the closest relationship with the president, along with Robert Wolf, head of the American division of Swiss bank UBS. A longtime Democratic donor, Dimon first met Obama in Chicago, where Dimon lived and worked from the late 1990s until 2007.

And both Dimon and Blankfein have met with the president several times. In their most recent meeting, Obama invited Dimon to Washington for lunch right before the State of the Union, according to a source familiar with the meeting.

Some commentators have expressed the view that Obama is making a transparent attempt to curry favor with the banking lobby in time to get those contributions flowing to Democratic candidates in the mid-term elections. Nevertheless, for Obama, this latest example of trying to please both sides of a debate will prove to be yet another “lose/lose” situation. As Victoria McGrane pointed out:

But relations between most Democrats and Wall Street donors aren’t as warm this cycle as the financial industry chafes against the harsh rhetoric and policy prescriptions lawmakers have aimed at them.

As for those members of the electorate who usually vote Democratic, you can rest assured that a large percentage will see this as yet another act of betrayal. They saw it happen with the healthcare reform debacle and they’re watching it happen again in the Senate, as the badly-compromised financial reform bill passed by the House (HR 4173) is being completely defanged. A bad showing by the Democrats on November 2, 2010 will surely be blamed on Obama.

As of February 11, we already have a “favorite” in contention for the 2010 Jackass of the Year Award. It’s time for the competition to step forward!

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Beyond The Banks

February 4th, 2010 Posted in Uncategorized

Feb, 04 2010

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February 4, 2010

I recently saw the movie Food, Inc. and was struck by the idea that there are some fundamental problems that span just about every situation where government corruption and ineptitude have facilitated an industry’s efforts to crush the interests of consumers. At approximately 36 minutes into the film, Michael Pollan explained how government efforts to prevent abuses in the food industry are undermined by the fact that the government always relies on the “quick fix” or “band-aid” approach, rather than a strategy addressed at solving a systemic problem. In other words: government prefers to treat the symptoms rather than the disease.

As I thought about Michael Pollan’s remark, I was immediately reminded of our financial crisis. In that case, the solution was to bail out the “too big to fail” financial institutions. As legislative proposals are introduced to address the systemic problems and prevent a recurrence of what happened in the fall of 2008, the lobbyists have stepped in to sabotage those efforts.

There were two other factors discussed in Food Inc. as presenting roadblocks to effective consumer-protective legislation: the revolving door between the industry and Washington, as well as “regulatory capture” — a situation where government regulators are beholden to those whom they regulate.

We have seen the impact of these two factors in the financial area and they have been well-documented. The “revolving door” was the subject of two recent essays by John Carney at The Business Insider website. Carney discussed “The Banking Blob” as a secret club of Senate staffers and Wall Street lobbyists:

Staffers on the powerful Senate banking committee are part of what is known as “The Banking Blob,” a person familiar with the matter told us. The Banking Blob is made up of current banking committee staffers and former staffers who are now bankers or lobbyists. They frequently socialize together, often organizing happy hours and parties.

“They move in a pack. They socialize together,” the person says. “Hell. They even inter-marry.”

The Blob is made up of both Republican and Democratic staffers. Outsiders tend to think the Blob members view themselves as “cooler” than other Capitol Hill staff members. Often a job on the banking committee leads to a well-paying job for a Wall Street firm or a position at a K-Street lobbyist law firm.

Carney had previously discussed the problem of Senate banking committee staffers who see their job as simply a stepping stone to a lucrative banking job:

The allure of banking is hardly a mystery. The money is better. Far better than the government wages paid to Capitol Hill staffers. After years of toiling in government service, many staffers dream of a better life in one of the leafy neighborhoods that are so posh you cannot get there on DC’s Metro. . . .

“Everyone talks about people going from Goldman to government. But the problem is the other way. Too many staffers go from Capitol Hill to banking. And even more aspire to make that move. It corrupts the process,” the staffer told us.

The third problem — “regulatory capture” — is best epitomized in the person of “Turbo” Tim Geithner. Joshua Rosner recently dissected Turbo Tim’s often-repeated claim that he has always worked in “public service”. Rosner demonstrated that the only sector that has been “serviced” by Geithner was the banking industry:

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question.

* *   *

The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those it has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

*   *   *

In truth, Geithner’s ineffectiveness in his role as NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident.

*   *   *

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense.

One important lesson to be learned from our government’s inability to do its job regulating the financial sector, is that this failure is primarily caused by three problems:

An unwillingness to address a systemic problem by choosing, instead, to focus on “quick fixes”;
A revolving door between government and industry;
Regulatory capture.

Legislators, consumer advocates and commentators should focus on these three problem areas when addressing any situation where our government proves itself ineffective in preventing abuses by a particular industry.

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The Outrage Continues

February 1st, 2010 Posted in Uncategorized

Feb, 01 2010

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February 1, 2010

The news reports of the past few days have brought us enough fuel to keep us outraged for the next decade. Let’s just hope that some of this lasts long enough for the November elections. I will touch on just three of the latest stories that should get the pitchfork-wielding mobs off their asses and into the streets. Nevertheless, we have to be realistic about these things. With the Super Bowl coming up, it’s going to be tough to pry those butts off the couches.

The first effrontery should not come as too much of a surprise. The Times of London has reported that Goldman Sachs CEO, Lloyd Blankfein (a/k/a Lloyd Bankfiend) is expecting to receive a $100 million bonus this year:

Bankers in Davos for the World Economic Forum (WEF) told The Times yesterday they understood that Lloyd Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts. “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals.

Blankfein is also thumbing his nose at the American taxpayers. Despite widespread media insistence that Goldman Sachs “paid back the government” there is a bit of unfinished business arising from something called Maiden Lane III — for which Goldman should owe us billions.

That matter brings us to our second item: the recently-released Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). The report is 224 pages long, so I’ll refer you to the handy summary prepared by Michael Shedlock (“Mish”). Mish’s headline drove home the point that there are currently 77 ongoing investigations of fraud, money laundering and insider trading as a result of the TARP bank bailout program. Here are a few more of his points, used as introductions to numerous quoted passages from the SIGTARP report:

The Report Blasts Geithner and the NY Fed. I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.

*   *   *

Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.

*   *   *

Note the refutation of the preposterous claims that taxpayers will be made whole.

*   *   *

TARP Tutorial: How Taxpayers Lose Money When Banks Fail

My favorite comment from Mish appears near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

Mish’s last remark (and his link to an earlier posting) brings us to the third disgrace to be covered in this piece: The AIG bailout cover-up. On January 29, David Reilly wrote an article for Bloomberg News (and Business Week) concerning last Wednesday’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies. I regularly dismiss them. However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg/Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank.

* * *

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kaptur told Geithner at the hearing: “A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you.”

The “cover-up” aspect to this caper involved intervention by the New York Fed that included editing AIG’s communications to investors and pressuring the Securities and Exchange Commission to keep secret the details of the bailouts of AIG’s counterparties (Maiden Lane III). The Fed’s opposition to disclosure of such documentation to Congress was the subject of a New York Times opinion piece in December. The recent SIGTARP report emphasized the disingenuous nature of the Fed’s explanation for keeping this information hidden:

SIGTARP’s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and Congressional pressure, AIG disclosed the identities of its counterparties, including its eight largest: Societe Generale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Credit Agricole S.A.), Barclays PLC, and Bank of America.

Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.

The SIGTARP investigation has revealed some activity that most people would never have imagined possible given the enormous amounts of money involved in these bailouts and the degree of oversight (that should have been) in place. The bigger question becomes: Will any criminal charges be brought against those officials who breached the public trust by facilitating this monumental theft of taxpayer dollars?

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The Dishonesty Behind The Bernanke Vote

January 28th, 2010 Posted in Uncategorized

Jan, 28 2010

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January 28. 2010

While reading a recent Huffington Post piece by Jason Linkins, wherein he criticized President Obama’s proposed spending freeze, I was struck by Linkins’ emphasis on the notion that this proposal signaled a return to “institutionalized infantilism”:

One of the most significant things that Obama promised to do during the campaign was to simply level with the American people — deal with them in straightforward fashion, tell the hard truths, make the tough choices, and go about explaining his decisions as if he were talking to adults.

Linkins referred to a recent essay about the freeze, written by Ryan Avent of The Economist, which underscored the greater, underlying problem motivating politicians such as Obama to believe they can “slip one by” the gullible public:

This is yet another move toward the infantilisation of the electorate; whatever the gamesmanship behind the proposal, Mr. Obama has apparently concluded that the electorate can’t be expected to handle anything like a real description of the tough decisions which must be made.

Matt Taibbi made a similar observation about our President, while pondering whether the announced reliance on the wisdom of Paul Volcker meant an end to Tim Geithner’s days as Treasury Secretary:

Obama, as is his nature I think, tried to take the fork in the road all year, making nice to his base while actually delivering to his money people, not realizing the two were perpetually in conflict. His failure to make a clear choice, or rather to make the right choice, is what has doomed him everywhere politically.

It will be interesting to see what comes next, whether this is just for show or not.

We are now witnessing another example of this “infantilisation of the electorate” as it takes place with the dishonest maneuvering to get Ben Bernanke’s nomination to a second term past a filibuster. Here’s how this scam was exposed by Josh Rosner at The Big Picture website:

Sources have suggested that Senator Barbara Boxer (D-CA) intends to vote “yes” on Chairman Bernanke’s cloture vote and “no” on the floor. The cloture vote requires 60 “yes” votes to approve and really is THE vote to confirm. The floor vote only requires a simple majority to pass and therefore is a less important vote requiring fewer “yes” votes.

Get it? These Senators believe they can go back to their constituents with a straight face and tell the chumps that they voted against Bernanke’s confirmation when, in fact, they facilitated his confirmation by voting for cloture to give Bernanke a boost over the potentially insurmountable, 60-vote hurdle. This sleight-of-hand comes along at the precise moment when we are learning about Bernanke’s true role in the AIG bailout. As Ryan Grim reported for The Huffington Post:

A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide “troubling details” of Bernanke’s role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

Yves Smith of Naked Capitalism disclosed that Congressman Darrell Issa, who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, “believes there is evidence that says Bernanke overruled his staff and authorized the rescue”. Ms. Smith explained how Issa is pushing ahead to investigate:

Rep. Darrell Issa of the House Oversight Committee has asked to Committee Chairman Towns to subpoena more documents from the Fed regarding its decision-making process in the AIG bailout.

* * *

In addition, Issa has noted that the Fed had failed to comply in full with previous subpoenas, and has not released any documents relative to AIG prior to September 2008 or after May 2009, even though they fall within the scope of previous subpoenas.

Congressman Issa’s letter can be viewed in its entirety here.

You may recall that the fight against the Fed for release of the AIG bailout documents became the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.

There are plenty of reasons to oppose confirmation of Ben Bernanke to a second term as Fed chair. Senator Jim Bunning did a fantastic job articulating many of those points during the confirmation hearing on December 3. Beyond that, economist Randall Wray gave us “3 Reasons to Fear Bernanke’s Reappointment” at the Roosevelt Institute’s New Deal 2.0 website. Dr. Wray concluded his essay with this statement:

To be clear, I would prefer to replace Bernanke with someone who actually understands monetary policy and who advocates regulation and supervision of financial institutions.

The really pressing issue at this point is whether the withheld AIG bailout documents, which are the subject of Congressman Issa’s latest inquiry, might actually reveal some malefaction on the part of Bernanke himself. A revelation of that magnitude would certainly kill the confirmation effort. If Bernanke is confirmed prior to the release of documents indicating malfeasance on his part, I’ll be wishing I had a dollar for every time a Senator would say: “I just voted for cloture –but I voted against confirmation.”

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The Battle Over Bernanke

January 25th, 2010 Posted in Uncategorized

Jan, 25 2010

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31. There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination. In order for the Senate to proceed to a vote on the nomination, 60 votes will be required. At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes. A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation. Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone. Then again, they want pretty much the whole Obama economic team gone. But Geithner and Summers aren’t up for a Senate vote. Bernanke is. And if Dems start bailing, don’t expect Republicans to save him. No politician in America gains anything by voting for Bernanke. A “no” vote is a free vote. Wall Street still loves him, though. Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term. Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke. Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”. An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession. At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed? Well, some folks seem to think it will send markets into a tailspin. But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year. The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March. The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues. Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke. Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences. The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3. If you’re not familiar with it — give it a read. Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.

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Taking The Suckers For Granted

January 21st, 2010 Posted in Uncategorized

Jan, 21 2010

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January 21. 2010

In the aftermath of Coakley Dokeley’s failed quest to replace Teddy Kennedy as Senator of Massachusetts, the airwaves and the blogosphere have been filled with an assortment of explanations for how and why the Bay State elected a Republican senator for the first time in 38 years. I saw the reason as a simple formula: One candidate made 66 campaign appearances while the other made 19. The rationale behind the candidate’s lack of effort was simple: she took the voters for granted. This was the wrong moment to be taking the voters for chumps. At a time when Democrats were vested with a “supermajority” in the Senate, an overwhelming majority in the House and with control over the Executive branch, they overtly sold out the interests of their constituents in favor of payoffs from lobbyists. Obama’s centerpiece legislative effort, the healthcare bill, turned out to be another “crap sandwich” of loopholes, exceptions, escape clauses and an effective date after the Mayan-prophesized end of the world. Obama’s giveaway to Big Pharma was outdone by Congressional giveaways to the healthcare lobby.

The Democrats’ efforts to bring about financial reform are now widely viewed as just another opportunity to rake in money and favors from lobbyists, leaving the suckers who voted for them to suffer worse than before. Coakley Dokeley made the same mistake that Obama and most politicians of all stripes are making right now: They’re taking the suckers for granted. That narrative seems to be another important reason why the Massachusetts senatorial election has become such a big deal. There is a lesson to be learned by the politicians, who are likely to ignore it.

Paul Farrell recently wrote an open letter to President Obama for MarketWatch, entitled: “10 reasons Obama is now failing 95 million investors”. In his discussion of reason number five, “Failing to pick a cast of characters that could have changed history”, Farrell made this point:

Last year many voted for you fearing McCain might pick Phil Gramm as Treasury secretary. Unfortunately, Mr. President, your picks not only revived Reaganomics under the guise of Keynesian economics, you sidelined a real change-agent, Paul Volcker, and picked Paulson-clones like Geithner and Summers. But worst of all, you’re reappointing Bernanke, a Greenspan clone, as Fed chairman, an economist who, as Taleb put it, “doesn’t even know he doesn’t understand how things work.” And with that pick, you proved you also don’t understand how things work.

Another former Obama supporter, Mort Zuckerman, editor-in-chief of U.S. News and World Report and publisher of the New York Daily News, wrote a piece for The Daily Beast, examining Obama’s leadership shortcomings:

In the campaign, he said he would change politics as usual. He did change them. It’s now worse than it was. I’ve now seen the kind of buying off of politicians that I’ve never seen before. It’s politically corrupt and it’s starting at the top. It’s revolting.

* * *

I hope there are changes. I think he’s already laid in huge problems for the country. The fiscal program was a disaster. You have to get the money as quickly as possible into the economy. They didn’t do that. By end of the first year, only one-third of the money was spent. Why is that?

He should have jammed a stimulus plan into Congress and said, “This is it. No changes. Don’t give me that bullshit. We have a national emergency.” Instead they turned it over to Harry Reid and Nancy Pelosi who can run circles around him.

As for the Democrats’ pre-sabotaged excuse for “financial reform”, the fate of the Consumer Financial Protection Agency is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him. As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman. Elizabeth Warren, the person likely to be appointed to head the CFPA, explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

* * *

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.

With all the coverage and expressed anticipation that the Massachusetts election will serve as a “wake-up call” to Obama and Congressional Democrats, not all of us are so convinced. Edward Harrison of Credit Writedowns put it this way:

But, I don’t think the President gets it. He is holed up in the echo chamber called the White House. If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.

I agree. I also believe that the hubris will continue. Why would any of these politicians change their behavior? The “little people” never did matter. They exist solely to be played as fools. They are powerless against the plutocracy. Right?

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