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Geithner Gets Bashed in New Book

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Much has been written about “Turbo” Tim Geithner since he first became Treasury Secretary on January 26, 2009.  In his book, Too Big to Fail, Andrew Ross Sorkin wrote adoringly about Geithner’s athletic expertise.  On the other hand, typing “Turbo Tim Geithner” into the space on the upper-right corner of this page and clicking on the little magnifying glass will lead you to no less than 61 essays wherein I saw fit to criticize the Treasury Secretary.  I first coined the “Turbo” nickname on February 9, 2009 and on February 16 of that year I began linking “Turbo” to an explanatory article, for those who did not understand the reference.

Geithner has never lacked defenders.  The March 10, 2010 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title was meant to imply that Getithner’s efforts to save America’s financial system were working, although he was not getting any credit for this achievement.  From the very outset, the New Yorker piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he had been widely criticized as a tool of Wall Street.

Edward Harrison of Credit Writedowns dismissed the New Yorker 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.

Another article on Geithner, appearing in the April 2010 issue of The Atlantic, was described by Edward 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!

In November of 2008, President George W. Bush appointed Neil M. Barofsky to the newly-established position, Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  Barofsky was responsible for preventing fraud, waste and abuse involving TARP operations and funds.  From his first days on that job, Neil Barofsky found Timothy Geithner to be his main opponent.  On March 31 of 2009, the Senate Finance Committee held a hearing on the oversight of TARP.  The hearing included testimony by Neil Barofsky, who explained how the Treasury Department had been interfering with his efforts to ascertain what was being done with TARP funds which had been distributed to the banks.  Matthew Jaffe of ABC News described Barofsky’s frustration in attempting to get past the Treasury Department’s roadblocks.

On the eve of his retirement from the position of Special Inspector General for TARP (SIGTARP), Neil Barofsky wrote an op-ed piece for the March 30, 2011 edition of The New York Times entitled, “Where the Bailout Went Wrong”.  Barofsky devoted a good portion of the essay to a discussion of the Obama administration’s failure to make good on its promises of “financial reform”, with a particular focus on the Treasury Department:

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

It should come as no surprise that in Neil Barofsky’s new book, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, the author pulls no punches in his criticism of Timothy Geithner.  Barofsky has been feeding us some morsels of what to expect from the book by way of some recent articles in Bloomberg News.  Here is some of what Barofsky wrote for Bloomberg on July 22:

More important, the financial markets continue to bet that the government will once again come to the big banks’ rescue.  Creditors still give the largest banks more favorable terms than their smaller counterparts — a direct subsidy to those that are already deemed too big to fail, and an incentive for others to try to join the club.  Similarly, the major banks are given better credit ratings based on the assumption that they will be bailed out.

*   *   *

The missteps by Treasury have produced a valuable byproduct: the widespread anger that may contain the only hope for meaningful reform. Americans should lose faith in their government.  They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable.  The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.

In his review of Barofsky’s new book, Darrell Delamaide of MarketWatch discussed the smackdown Geithner received from Barofsky:

Barofsky may have an axe to grind, but he grinds it well, portraying Geithner as a dissembling bureaucrat in thrall to the banks and reminding us all that President Barack Obama’s selection of Geithner as his top economic official may have been one of his biggest mistakes, and a major reason the White House incumbent has to fight so hard for re-election.

From his willingness to bail out the banks with virtually no accountability, to his failure to make holders of credit default swaps on AIG take a haircut, to his inability to mount any effective program for mortgage relief, Geithner systematically favored Wall Street over Main Street and created much of the public’s malaise in the aftermath of the crisis.

*    *    *

Barofsky, a former prosecutor, relates that he rooted for Geithner to get the Treasury appointment and was initially willing to give him the benefit of the doubt when it emerged that he had misreported his taxes while he worked at the International Monetary Fund.

But as more details on those unpaid taxes came out and Geithner’s explanations seemed increasingly disingenuous, Barofsky had his first doubts about the secretary-designate.

Barofsky, of course, was not alone in his skepticism, and Geithner’s credibility was damaged from the very beginning by the disclosures about his unpaid taxes.

*   *   *

Barofsky concludes his scathing condemnation of Geithner’s “bank-centric policies” by finding some silver lining in the cloud – that the very scale of the government’s failure will make people angry enough to demand reform.

Once Geithner steps down from his position at the end of the year, we may find that his legacy is defined by Neil Barofsky’s book, rather than any claimed rescue of the financial system.


 

Manifesto

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For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense.  From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008.  Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis.  The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent.  Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.

I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website.  Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe.  Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances.  It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious.  Be sure to read it.  What I present here are some hints as to the significance of this important essay:

The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.

Lost in this debate is any recognition of the problem that lies at the heart of the matter:  a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.

Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

*   *   *

By our analysis, the U.S. economy is presently entering a recession.  Not next year; not later this year; but now.  We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth.  To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago.  The chain of events is as follows:

Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks.  Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

*   *   *

Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding.  The rest is debt to the bank’s own bondholders, and equity of its stockholders.  When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense.  This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all.  All of the bank’s liabilities – even to its own bondholders – are protected at public expense.  So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens.  This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market.  Depositors don’t lose a dime.  While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

*   *   *

If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing.  The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs.  We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.

For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky).  My favorite comment from Mish appeared 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.

On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’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.

At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers.  In the United States there is no such concern.  The public is much more compliant.  Whether that will change is anyone’s guess.


 

Elizabeth Warren Should Run Against Obama

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Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election.  It’s not a very likely scenario, although it’s one I’d love to see:  Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.

A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild.  It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took.  Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate.  However, many astute commentators consider that as a really stupid idea.  Here is the reaction from Yves Smith of Naked Capitalism:

We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).

A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question:  whether she even has a shot at winning.

*   *   *

The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest).  A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe.  But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice.  If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).

Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle.  Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well.  David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:

He’s about to lose his job.

*   *   *

Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution.  In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.

And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.

In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.

There was the New York Fed banker cozy with Wall Street: Timothy Geithner.

There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.

There was a career bureaucrat named to lead the Securities and Exchange Commission:  Mary Schapiro.

To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.

*   *   *

The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters.  In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.

*   *   *

What began as a two-step approach:  1) saving the banks, and then 2) saving homeowners, was cut short after the first step.

Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government.  The government caused the financial crisis.  The government ruined the housing market.

It wasn’t true at the start, but it’s becoming true now.

Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012.  When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.

The disillusionment factor afflicting Obama is not something which can be easily overlooked.  The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray.  Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:

Many people are “disappointed” with Obama.  But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope.  In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group.  He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people.  He told us what his leadership style is, what his agenda was, and he’s executing it now.

I expressed skepticism towards Obama from 2005, onward.  Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one.  Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him).  He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.

I just wish Elizabeth Warren would fight back and challenge Obama for The White House.  If only   .   .   .


 

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Discipline Problem

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At the conclusion of a single, five-year term as Chair of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair is calling it quits.  One can hardly blame her.  It must have been one hell of an experience:  Warning about the hazards of the subprime mortgage market, being ignored and watching the consequences unfold . . .  followed by a painful, weekly ritual, which gave birth to a website called Bank Fail Friday.

Bair’s tenure at the helm of the FDIC has been – and will continue to be – the subject of some great reading.  On her final day at the FDIC (July 8) The Washington Post published an opinion piece by Ms. Bair in which she warned that short-term, goal-directed thinking could bring about another financial crisis.  She also had something to brag about.  Despite the efforts of Attorney General Eric Hold-harmless and the Obama administration to ignore the malefaction which brought about the financial crisis and allowed the Wall Street villains to profiteer from that catastrophe, Bair’s FDIC actually stepped up to the plate:

This past week, the FDIC adopted a rule that allows the agency to claw back two years’ worth of compensation from senior executives and managers responsible for the collapse of a systemic, non-bank financial firm.

To date, the FDIC has authorized suits against 248 directors and officers of failed banks for shirking their fiduciary duties, seeking at least $6.8 billion in damages.  The rationales the executives come up with to try to escape accountability for their actions never cease to amaze me.  They blame the failure of their institutions on market forces, on “dead-beat borrowers,” on regulators, on space aliens.  They will reach for any excuse to avoid responsibility.

Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.

The difference between Sheila Bair’s approach to the financial/economic crisis and that of the Obama Administration (whose point man has been Treasury Secretary “Turbo” Tim Geithner) was analyzed in a great article by Joe Nocera of The New York Times entitled, “Sheila Bair’s Bank Shot”.  The piece was based on Nocera’s “exit interview” with the departing FDIC Chair.  Throughout that essay, Nocera underscored Bair’s emphasis on “market discipline” – which he contrasted with Geithner’s fanatic embrace of the exact opposite:  “moral hazard” (which Geithner first exhibited at the onset of the crisis while serving as President of the Federal Reserve of New York).  Nocera made this point early in the piece:

On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner.  She favored “market discipline” – meaning shareholders and debt holders would take losses ahead of depositors and taxpayers – over bailouts, which she abhorred.  She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it.  (“Our job is to protect bank customers, not banks,” she told me.)

Bair’s discussion of those early, panic-filled days during September 2008 is consistent with reports we have read about Geithner elsewhere.  This passage from Nocera’s article is one such example:

For instance, during the peak of the crisis, with credit markets largely frozen, banks found themselves unable to roll over their short-term debt.  This made it virtually impossible for them to function.  Geithner wanted the F.D.I.C. to guarantee literally all debt issued by the big bank-holding companies – an eye-popping request.

Bair said no.  Besides the risk it would have entailed, it would have also meant a windfall for bondholders, because much of the existing debt was trading at a steep discount.  “It was unnecessary,” she said.  Instead, Bair and Paulson worked out a deal in which the F.D.I.C. guaranteed only new debt issued by the bank-holding companies.  It was still a huge risk for the F.D.I.C. to take; Paulson says today that it was one of the most important, if underrated, actions taken by the federal government during the crisis.  “It was an extraordinary thing for us to do,” Bair acknowledged.

Back in April of 2009, the newly-appointed Treasury Secretary met with similar criticism in this great article by Jo Becker and Gretchen Morgenson at The New York Times:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson, Jr. convened the nation’s economic stewards for a brainstorming session.  What emergency powers might the government want at its disposal to confront the crisis? he asked.

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.  Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

Geithner’s utter contempt for market discipline again became a subject of the Nocera-Bair interview when the conversation turned to the infamous Maiden Lane III bailouts.

“I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts.  There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut.  There could have at least been a little pain for them.”  (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G.  There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued:  “They didn’t even engage in conversation about that.  You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

This article by Gretchen Morgenson provides more detail about Geithner’s determination that AIG’s counterparties receive 100 cents on the dollar.  For Goldman Sachs – it amounted to $12.9 billion which was never repaid to the taxpayers.  They can brag all they want about paying back TARP – but Maiden Lane III was a gift.

I was surprised that Sheila Bair – as a Republican – would exhibit the same sort of “true believer-ism” about Barack Obama as voiced by many Democrats who blamed Rahm Emanuel for the early disappointments of the Obama administration.  Near the end of Nocera’s interview, Bair appeared taken-in by Obama’s “plausible deniability” defense:

“I think the president’s heart is in the right place,” Bair told me.  “I absolutely do.  But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing – I think those are two very different things.”  What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks.  But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral.  “I don’t think regulators can adequately regulate these big banks,” she told me.  “We need market discipline.  And if we don’t have that, they’re going to get us in trouble again.”

If Sheila Bair’s concern is valid, the Obama administration’s track record for market discipline has us on a certain trajectory for another financial crisis.



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Obama On The Ropes

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You’ve been reading it everywhere and hearing it from scores of TV pundits:  The ongoing economic crisis could destroy President Obama’s hopes for a second term.  In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012.  Dean’s statement was unequivocal:  “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House.  A chorus of commentators has begun singing that same tune.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people.  After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

*   *   *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer.  Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner.  Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011.  At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery.  I remember that fall of 2009 as a very frustrating one.  It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit.  A number of us tried to make the case that more action was desperately needed and would be effective.  Normally, meetings with the President were very friendly and free-wheeling.  He likes to hear both sides of an issue argued passionately.  But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough.  As luck would have it, the next day, a reporter asked him if he ever lost his temper.  He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”.  Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal.  Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012.  Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years.  The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”.  Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin.  Barack Obama is probably suffering from some awful nightmares about that possibility.


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Obama And The TARP

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

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

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

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

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

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

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

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

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

*   *   *

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

*   *   *

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

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

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

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

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


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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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Why Au-scare-ity Still Has Traction

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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, 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 – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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Time For Another Victory Lap

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

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

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

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

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

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

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

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

*   *   *

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

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

*   *   *

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

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

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


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More Wisdom From Jeremy Grantham

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One of my favorite commentators, Paul Farrell of MarketWatch, recently discussed some of the prescient essays of Jeremy Grantham, who manages over $100 billion as chief executive of an asset management firm – GMO.  Paul Farrell reminded us that Grantham warned of the impending financial crisis in July of 2007, which came as a surprise to those vested with the responsibility of paying attention to such advice.  As Farrell pointed out:

Our nation’s leaders are in denial, want happy talk, bull markets, can’t even see the crash coming, even though the warnings were everywhere for years. Why the denial?  Grantham hit the nail on the head:  Our leaders are “management types who focus on what they are doing this quarter or this annual budget and are somewhat impatient.”

Paul Farrell is warning of an “inevitable crash that is coming possibly just before the Presidential election in 2012”.  He incorporated some of Grantham’s rationale in his own discussion about how and why this upcoming crash will come as another surprise to those who are supposed to help us avoid such things:

Most business, banking and financial leaders are short-term thinkers, focused on today’s trades, quarterly earnings and annual bonuses.  Long-term historical thinking is a low priority.

Paul Farrell’s article was apparently written in anticipation of the release of Jeremy Grantham’s latest Quarterly Letter at the conclusion of the first quarter of 2011.  Grantham’s newest discourse is entitled, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”.  The theme is best summed-up by these points from the “summary” section:

  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste.

After applying some common sense and simple mathematics to the bullish expectations of immeasurable growth ahead, Grantham obviously upset many people with this sober observation:

Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period.  Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution.  Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.

We have all experienced the rapid spike in commodity prices:  more expensive gas at the pump, higher food prices and widespread cost increases for just about every consumer item.  Many economists and other commentators have blamed the Federal Reserve’s ongoing program of quantitative easing for keeping interest rates so low that the enthusiasm for speculation on commodities has been enhanced, resulting in skyrocketing prices.  Surprisingly, Grantham is not entirely on board with that theory:

The Monetary Maniacs may ascribe the entire move to low interest rates.  Now, even I know that low rates can have a large effect, at least when combined with moral hazard, on the movement of stocks, but in the short term, there is no real world check on stock prices and they can be, and often are, psychologically flakey.  But commodities are made and bought by serious professionals for whom today’s price is life and death. Realistic supply and demand really is the main influence.

Grantham demonstrated that most of the demand pressure on commodities is being driven by China.  This brings us to his latest prediction and dire warning:

The significance here is that given China’s overwhelming influence on so many commodities, especially in terms of the percentage China represents of new growth in global demand, any general economic stutter in China can mean very big declines in some of their prices.

You can assess on your own the probabilities of a stumble in the next year or so.  At the least, I would put it at 1 in 4, while some of my colleagues think the odds are much higher.  If China stumbles or if the weather is better than expected, a probability I would put at, say, 80%, then commodity prices will decline a lot.  But if both events occur together, it will very probably break the commodity markets en masse.  Not unlike the financial collapse.  That was a once in a lifetime opportunity as most markets crashed by over 50%, some much more, and then roared back.

Modesty should prevent me from quoting from my own July 2008 Quarterly Letter, which covered the first crash.

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In the next decade, the prices of all raw materials will be priced as just what they are, irreplaceable.  If the weather and China syndromes strike together, it will surely produce the second “once in a lifetime” event in three years.

For the near-term, we appear to be in an awful double-bind:  either we get crushed by increasing commodity prices – or – commodities will become plentiful and cheap, causing the world economy to crash once again.  It won’t bother Wall Street at all, because The Ben Bernank and “Turbo” Tim will be ready and willing to provide abundant bailouts – again, at taxpayer expense.


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