TheCenterLane.com

© 2008 – 2017 John T. Burke, Jr.

Government Should Listen To These Wealth Managers

Comments Off on Government Should Listen To These Wealth Managers

A good deal of Mitt Romney’s appeal as a Presidential candidate is based on his experience as a private equity fund manager – despite the “vulture capitalist” moniker, favored by some of his critics.  Many voters believe that America needs someone with more “business sense” in the White House.  Listening to Mitt Romney would lead one to believe that America’s economic and unemployment problems will not be solved until “government gets out of the way”, allowing those sanctified “job creators” to bring salvation to the unemployed masses.  Those who complained about how the system has been rigged against the American middle class during the past few decades have found themselves accused of waging “class warfare”.  We are supposed to believe that Romney speaks on behalf of “business” when he lashes out against “troublesome” government regulations which hurt the corporate bottom line and therefore – all of America.

Nevertheless, the real world happens to be the home of many wealth managers – entrusted with enormous amounts of money by a good number of rich people and institutional investors – who envision quite a different role of government than the mere nuisance described by Romney and like-minded individuals.  If only our elected officials – and more of the voting public – would pay close attention to the sage advice offered by these wealth managers, we might be able to solve our nation’s economic and unemployment problems.

Last summer, bond guru Bill Gross of PIMCO  lamented the Obama administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

In my last posting, I discussed a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO).  El-Erian emphasized that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:

Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort.  It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.

One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago.  But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.

On October 31, I focused on the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation.  Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule.  In addition to expressing some supportive comments about the OWS movement, Grantham noted that he would provide a special supplement, based specifically on that subject.  Finally, on February 5, Mr. Grantham made good on his promise with an opinion piece in the Financial Times entitled, “People now see it as a system for the rich only”:

For the time being, in the US our corporate and governmental system backed surprisingly by the Supreme Court has become a plutocracy, designed to prolong, protect and intensify the wealth and influence of those who already have the wealth and influence.  What the Occupy movement indicates is that a growing number of people have begun to recognise this in spite of the efficiency of capital’s propaganda machines.  Forty years of no pay increase in the US after inflation for the average hour worked should, after all, have that effect.  The propaganda is good but not that good.

*   *   *

In 50 years economic mobility in the US has gone from the best to one of the worst.  The benefits of the past 40 years of quite normal productivity have been abnormally divided between the very rich (and corporations) and the workers.

Indeed “divide” is not the right word, for, remarkably, the workers received no benefit at all, while the top 0.1 per cent has increased its share nearly fourfold in 35 years to a record equal to 1929 and the gilded age.

But the best propaganda of all is that the richest 400 people now have assets equal to the poorest 140m.  If that doesn’t disturb you, you have a wallet for a heart.  The Occupiers’ theme should be simple:  “More sensible assistance for the working poor, more taxes for the rich.”

I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  Back in November of 2010, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.  It’s hard to imagine that Mitt Romney would take a tougher stance against those zombie banks than what we have seen from the Obama administration.

Our government officials – from across the political spectrum – would be wise to follow the advice offered by these fund managers.  A political hack whose livelihood is based entirely on passive income has little to offer in the way of “business sense” when compared to a handful of fund managers, entrusted to use their business and financial acumen to preserve so many billions of dollars.  Who speaks for business?  It should be those business leaders who demonstrate concern for the welfare of all human beings in America.


wordpress stats

Plutocracy Is Crushing Democracy

Comments Off on Plutocracy Is Crushing Democracy

It’s been happening here in the United States since onset of the 2008 financial crisis.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  One year ago, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.

As it turns out, a few of those same banks are flexing their muscles overseas as the European debt crisis poses a new threat to Goldman Sachs and several of its ridiculously-overleveraged European counterparts.  Time recently published an essay by Stephan Faris, which raised the question of whether the regime changes in Greece and Italy amounted to a “bankers’ coup”:

As in Athens, the plan in Rome is to replace the outgoing prime minister with somebody from outside the political class.  Mario Monti, a neo-liberal economist and former EU commissioner who seems designed with the idea of calming the markets in mind, is expected to take over from Berlusconi after he resigns Saturday.

*   *   *

Yet, until the moment he’s sworn in, Monti’s ascension is far from a done deal, and it didn’t take long after the markets had closed for the weekend for it to start to come under fire.  Though Monti, a former advisor to Goldman Sachs, is heavily championed by the country’s respected president, many in parliament have spent the week whispering that Berlusconi’s ouster amounts to a “banker’s coup.”  “Yesterday, in the chamber of deputies we were bitterly joking that we were going to get a Goldman Sachs government,” says a parliamentarian from Berlusconi’s government, who asked to remain anonymous citing political sensitivity.

At The New York Times, Ross Douthat reflected on the drastic policy of bypassing democracy to install governments led by “technocrats”:

After the current crisis has passed, some voices have suggested, there will be time to reverse the ongoing centralization of power and reconsider the E.U.’s increasingly undemocratic character. Today the Continent needs a unified fiscal policy and a central bank that’s willing to behave like the Federal Reserve, Bloomberg View’s Clive Crook has suggested.  But as soon as the euro is stabilized, Europe’s leaders should start “giving popular sovereignty some voice in other aspects of the E.U. project.”

This seems like wishful thinking.  Major political consolidations are rarely undone swiftly, and they just as often build upon themselves.  The technocratic coups in Greece and Italy have revealed the power that the E.U.’s leadership can exercise over the internal politics of member states.  If Germany has to effectively backstop the Continent’s debt in order to save the European project, it’s hard to see why the Frankfurt Group (its German members, especially) would ever consent to dilute that power.

Reacting to Ross Douthat’s column, economist Brad DeLong was quick to criticize the use of the term “technocrats”.  That same label appeared in the previously-quoted Time article, as well:

Those who are calling the shots in Europe right now are in no wise “technocrats”:  technocrats would raise the target inflation rate in the eurozone and buy up huge amounts of Greek and Italian (and other) debt conditional on the enactment of special euro-wide long-run Fiscal Stabilization Repayment Fund taxes. These aren’t technocrats:  they are ideologues – and rather blinders-wearing ideologues at that.

Forget about euphemisms such as:  “technocrats”, “the European Union” or “the European Central Bank”.  Stephen Foley of The Independent pulled back the curtain and revealed the real culprit  .  .  .  Goldman Sachs:

This is the most remarkable thing of all:  a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti.  The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis.  Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence.

*   *   *

This is The Goldman Sachs Project.  Put simply, it is to hug governments close.  Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort.  Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government.  The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

*   *   *

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent.  Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under.  No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less.  The alternative is a second financial crisis, a second economic collapse.

The previous paragraph explains precisely what the term “too-big-to-fail” is all about:  If a bank of that size fails – it can bring down the entire economy.  Beyond that, the Goldman situation illustrates what Simon Johnson meant when he explained that the United States – acting alone – cannot prevent the megabanks from becoming too big to fail.  Any attempt to regulate the size of those institutions requires an international effort:

But no international body — not the Group of -20, the Group of Eight or anyone else — shows any indication of taking this on, mostly because governments don’t wish to tie their own hands. In a severe crisis, the interests of the state are usually paramount. No meaningful cross-border resolution framework is even in the cards.  (Disclosure:  I’m on the FDIC’s Systemic Resolution Advisory Committee; I’m telling you what I tell them at every opportunity.)

What we are left with is a situation wherein the taxpayers are the insurers of the privileged elite, who invest in banks managed by greedy, reckless megalomaniacs.  When those plutocrats are faced with the risk of losing money – then democracy be damned!  Contempt for democracy is apparently a component of the mindset afflicting the “supply side economics” crowd.  Creepy Stephen Moore, of The Wall Street Journal’s editorial board, has expounded on his belief that capitalism is more important than Democracy.  We are now witnessing how widespread that warped value system is.


wordpress stats

Obama Backpedals To Save His Presidency

Comments Off on Obama Backpedals To Save His Presidency

President Obama’s demotion of his Chief of Staff, Bill Daley, has drawn quite a bit of attention – despite efforts by the White House to downplay the significance of that event.  The demotion of Daley is significant because it indicates that Obama is now trying to back away from his original strategy of helping Wall Street at the expense of Main Street.  This move appears to be an attempt by Obama to re-cast himself as a populist, in response to the widespread success of the Occupy Wall Street movement.

In September of 2010, I wrote a piece entitled, “Where Obama Went Wrong”.  Despite the subsequent spin by right-wing pundits, to the effect that voters had been enamored with the Tea Party’s emphasis on smaller government, the true reasons for the mid-term disaster for the Democrats had become obvious:

During the past week, we’ve been bombarded with explanations from across the political spectrum, concerning how President Obama has gone from wildly-popular cult hero to radioactive force on the 2010 campaign trail.  For many Democrats facing re-election bids in November, the presence of Obama at one of their campaign rallies could be reminiscent of the appearance of William Macy’s character from the movie, The Cooler.  Wikipedia’s discussion of the film provided this definition:

In gambling parlance, a “cooler” is an unlucky individual whose presence at the tables results in a streak of bad luck for the other players.

*   *   *

The American people are hurting because their President sold them out immediately after he was elected.  When faced with the choice of bailing out the zombie banks or putting those banks through temporary receivership (the “Swedish approach” – wherein the bank shareholders and bondholders would take financial “haircuts”) Obama chose to bail out the banks at taxpayer expense.  So here we are  . . .  in a Japanese-style “lost decade”.  In case you don’t remember the debate from early 2009 – peruse this February 10, 2009 posting from the Calculated Risk website.  After reading that, try not to cry after looking at this recent piece by Barry Ritholtz of The Big Picture entitled, “We Should Have Gone Swedish  . . .”

Back in December of 2009, Bill Daley – a minion of The Dimon Dog at JPMorgan Chase – wrote an op-ed piece for The Washington Post, which resonated with Wall Street’s tool in the White House.  Daley claimed that Obama and other Democrats were elected to office in 2008 because voters had embraced some pseudo-centrist ideas, which Daley referenced in these terms:

These independents and Republicans supported Democrats based on a message indicating that the party would be a true Big Tent — that we would welcome a diversity of views even on tough issues such as abortion, gun rights and the role of government in the economy.

*   *   *

All that is required for the Democratic Party to recover its political footing is to acknowledge that the agenda of the party’s most liberal supporters has not won the support of a majority of Americans — and, based on that recognition, to steer a more moderate course on the key issues of the day, from health care to the economy to the environment to Afghanistan.

Unfortunately, Obama was pre-disposed to accept this rationale, keeping his policy decisions on a trajectory which has proven as damaging to his own political future as it has been to the future of the American middle class.

On November 8, Jonathan Chait wrote a piece for New York magazine’s Daily Intel blog, wherein he explained that the demotion of Bill Daley revealed a “course correction” by Obama, in order to a pursue a strategy “in line with the realities of public opinion”.  Jonathan Chait explained how the ideas espoused by Daley in his 2009 Washington Post editorial, had been a blueprint for failure:

Daley, pursuing his theory, heavily courted business leaders.  He made long-term deficit reduction a top priority, and spent hours with Republican leaders, meeting them three-quarters of the way in hopes of securing a deal that would demonstrate his centrism and bipartisanship.  The effort failed completely.

The effort failed because Daley’s analysis – which is also the analysis of David Brooks and Michael Bloomberg – was fatally incorrect.  Americans were not itching for Obama to make peace with corporate America.  Americans are in an angry, populist mood – distrustful of government, but even more distrustful of business.  In the most recent NBC/The Wall Street Journal poll, 60 percent of Americans strongly agreed with the following statement:

The current economic structure of the country is out of balance and favors a very small proportion of the rich over the rest of the country.  America needs to reduce the power of major banks and corporations and demand greater accountability and transparency.  The government should not provide financial aid to corporations and should not provide tax breaks to the rich.

At the website of economist Brad DeLong, a number of comments were posted in response to Jonathan Chait’s essay.  One can only hope that our President has the same, clear understanding of this situation as do the individuals who posted these comments:

Full Employment Hawk said:

.   .   .   The defeat of the Democrats was due to the fact that the Obama administration did too little, not because it did too much.

Daley’s view that it was because the moderately progressive policies of the Obama administration were too far left for the center was totally wrong.  And listening to Daley’s advice to further shift from job creation to deficit reduction was a major blunder that reinforced the blunder of the first two years of dropping the ball on making the economy grow fast enough for the unemployment rate to be coming down significantly by the time of the Fall election.

In reply to the comment posted by Full Employment Hawk, a reader, identified as “urban legend” said this:

Obama should have been making the point over and over and over and over that getting more money into the hands of more Americans — principally right now by creating jobs — is the most pro-business stance you can take.  Continuing to let the 1% dictate everything in their favor is the most anti-business thing you can do.  We are the ones who want demand to rise for the goods and services of American business.  Right-wingers don’t care much about that.  What they do care about is maintaining their theology against all the evidence of its massive failure.

At Politico, Jonathan Chait’s essay provoked the following comment from Ben Smith:

It is entirely possible that no staff shift, and no ideological shift, can save Obama from a bad economy.  You don’t get to run controlled experiments in politics.

But it does seem worth noting that this argument pre-dates Daley: It’s the substance of the 2008 debate between Hillary Clinton and Obama, with Clinton portraying Obama as naive in his dream of bipartisan unity, and the Republicans as an implacable foe.  It’s the Clinton view, the ’90s view, that has prevailed here.

Indeed, it would be nice for all of us if Obama could get a “Mulligan” for his mishandling of the economic crisis.  Unfortunately, this ain’t golf.


wordpress stats

From Disappointing To Creepy

Comments Off on From Disappointing To Creepy

It was during Barack Obama’s third month in the White House, when I realized he had become the “Disappointer-In-Chief”.  Since that time, the disappointment felt by many of us has progressed into a bad case of the creeps.

Gretchen Morgenson of The New York Times has been widely praised for her recent report, exposing the Obama administration’s vilification of New York State Attorney General Eric Schneiderman for his refusal to play along with Team Obama’s efforts to insulate the fraud-closure banks from the criminal prosecution they deserve.  The administration is attempting to pressure each Attorney General from every state to consent to a settlement of any and all claims against the banksters arising from their fraudulent foreclosure practices.  Each state is being asked to release the banks from criminal and civil liability in return for a share of the $20 billion settlement package.  The $20 billion is to be used for loan modifications.  Leading the charge on behalf of the administration are Shaun Donovan, the Secretary of Housing and Urban Development, as well as a number of high-ranking officials from the Justice Department, led by Attorney General Eric Hold-harmless.  Here are some highlights from Ms. Morgenson’s article:

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

*   *   *

Mr. Schneiderman has also come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold.

The deal would require Bank of America to pay $8.5 billion to investors holding the securities; the unpaid principal amount of the mortgages remaining in the pools totals $174 billion.

*   *   *

This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities.

The passage from Gretchen Morgenson’s report which drew the most attention concerned a statement made to Schneiderman by Kathryn Wylde.  Ms. Wylde is a “Class C” Director of the Federal Reserve Bank of New York.  The role of a Class C Director is to represent the interests of the public on the New York Fed board.  Barry Ritholtz provided this reaction to Ms. Wylde’s encounter with Mr. Schneiderman:

If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.

The quote in question, which was reported to have occurred at Governor Hugh Carey’s funeral (!?!)  was as follows:

“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it.  Wall Street is our Main Street — love ’em or hate ’em.  They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused.  She appears to be far more interested in representing the banks than the public.

Robert Scheer of Truthdig provided us with some background on Obama’s HUD Secretary, Shaun Donovan, one of the administration’s arm-twisters in the settlement effort :

Donovan has good reason not to want an exploration of the origins of the housing meltdown:  He has been a big-time player in the housing racket for decades.  Back in the Clinton administration, when government-supported housing became a fig leaf for bundling suspect mortgages into what turned out to be toxic securities, Donovan was a deputy assistant secretary at HUD and acting Federal Housing Administration commissioner.  He was up to his eyeballs in this business when the Clinton administration pushed through legislation banning any regulation of the market in derivatives based on home mortgages.

Armed with his insider connections, Donovan then went to work for the Prudential conglomerate (no surprise there), working deals with the same government housing agencies that he had helped run.  As The New York Times reported in 2008 after President Barack Obama picked him to be secretary of HUD, “Mr. Donovan was a managing director at Prudential Mortgage Capital Co., in charge of its portfolio of investments in affordable housing loans, including Fannie Mae and the Federal Housing Administration debt.”

Obama has been frequently criticized for stacking his administration with people who regularly shuttle between corporations and the captured agencies responsible for regulating those same businesses.  Risk management guru, Christopher Whalen lamented the consequences of Obama’s cozy relationship with the Wall Street banks – most tragically, those resulting from Obama’s unwillingness to adopt the “Swedish solution” of putting the insolvent zombie banks through temporary receivership:

The path of least resistance politically has been to temporize and talk.  But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence.  In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”

Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing.  You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.

We are now past the point of blaming Obama’s advisors for the President’s recurrent betrayal of the public interest while advancing the goals of his corporate financiers.  Yves Smith of Naked Capitalism has voiced increasingly harsh appraisals of Obama’s performance.  By August 22, it became clear to Ms. Smith that the administration’s efforts to shield the fraud-closure banks from liability exposed a scandalous degree of venality:

It is high time to describe the Obama Administration by its proper name:  corrupt.

Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man” category.  But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell.

*   *   *

Team Obama bears all the hallmarks of being so close to banks and big corporations that it has lost all contact with and understanding of mainstream America.

The latest example is its heavy-handed campaign to convert New York state attorney general Eric Schneiderman to a card carrying member of the “be nice to our lords and masters the banksters” club.  Schneiderman was the first to take issue with the sham of the so-called 50 state attorney general mortgage settlement.  As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.

*   *   *

Yet rather than address real, serious problems, senior administration officials are instead devoting time and effort to orchestrating a faux grass roots campaign to con a state AG into thinking his supporters are deserting him because he has dared challenge the supremacy of the banks.

I would include Eric Schneiderman in a group with Elizabeth Warren and Maria Cantwell as worthy challengers to Barack Obama in the 2012 Presidential Election.  I wish one of them would step forward.


 

wordpress stats

Obama And The TARP

Comments Off on Obama And The TARP

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.


wordpress stats


Unwanted Transparency

Comments Off on Unwanted Transparency

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.


wordpress stats


Why Au-scare-ity Still Has Traction

Comments Off on Why Au-scare-ity Still Has Traction

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.


wordpress stats


The Wrong Playbook

Comments Off on The Wrong Playbook

President Obama is still getting it wrong.  Nevertheless, we keep hearing that he is such a clever politician.  Count me among those who believe that the Republicans are setting Obama up for failure and a loss to whatever goofball happens to win the GOP Presidential nomination in 2012 – solely because of a deteriorating economy.  Obama had the chance to really save the economy and “right the ship”.  When he had the opportunity to confront the greatest economic crisis since the Great Depression, President Obama violated Rahm Emanuel’s infamous doctrine, “You never want a serious crisis to go to waste”.  The new President immediately made a point of squandering the opportunity to overcome that crisis.  I voiced my frustration about this on October 7, 2010:

The trouble began immediately after President Obama assumed office.  I wasn’t the only one pulling out my hair in February of 2009, when our new President decided to follow the advice of Larry Summers and “Turbo” Tim Geithner.  That decision resulted in a breach of Obama’s now-infamous campaign promise of “no more trickle-down economics”.  Obama decided to do 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.  At the Calculated Risk website, Bill McBride lamented Obama’s strident posturing in an interview conducted by Terry Moran of ABC News, when the President actually laughed off the idea of implementing the so-called “Swedish solution” of putting those insolvent banks through temporary receivership.

In September of 2009, I discussed a fantastic report by Australian economist Steve Keen, who explained how the “money multiplier” myth, fed to Obama by the very people who caused the financial crisis, was the wrong paradigm to be starting from in attempting to save the economy.  The Australian professor (Steve Keen) was right and Team Obama was wrong.  In analyzing Australia’s approach to the financial crisis, economist Joseph Stiglitz made this observation on August 5, 2010:

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.  He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.  So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked:  Australia had the shortest and shallowest of recessions of the advanced industrial countries.

On October 6, 2010, Michael Heath of Bloomberg BusinessWeek provided the latest chapter in the story of how America did it wrong while Australia did it right:

Australian Employers Added 49,500 Workers in September

Australian employers in September added the most workers in eight months, driving the country’s currency toward a record and bolstering the case for the central bank to resume raising interest rates.

The number of people employed rose 49,500 from August, the seventh straight gain, the statistics bureau said in Sydney today.  The figure was more than double the median estimate of a 20,000 increase in a Bloomberg News survey of 25 economists.  The jobless rate held at 5.1 percent.

Meanwhile, America’s jobless rate has been hovering around 9 percent and the Federal Reserve found it necessary to print-up another $600 billion for a controversial second round of quantitative easing.  If that $600 billion had been used for the 2009 economic stimulus (and if the stimulus program had been more infrastructure-oriented) we would probably have enjoyed a result closer to that experienced by Australia.  Instead, President Obama chose to follow Japan’s strategy of perpetual bank bailouts (by way of the Fed’s “zero interest rate policy” or ZIRP and multiple rounds of quantitative easing), sending America’s economy into our own “lost decade”.

The only member of the Clinton administration who deserves Obama’s ear is being ignored.  Bill Clinton’s Secretary of Labor, Robert Reich, has been repeatedly emphasizing that President Obama is making a huge mistake by attempting to follow the Clinton playbook:

Many of President Obama’s current aides worked for Clinton and vividly recall Clinton’s own midterm shellacking in 1994 and his re-election two years later – and they think the president should follow Clinton’s script. Obama should distance himself from congressional Democrats, embrace deficit reduction and seek guidance from big business.  They assume that because triangulation worked for Clinton, it will work for Obama.

They’re wrong.  Clinton’s shift to the right didn’t win him re-election in 1996. He was re-elected because of the strength of the economic recovery.

By the spring of 1995, the American economy already had bounced back, averaging 200,000 new jobs per month.  By early 1996, it was roaring – creating 434,000 new jobs in February alone.

Obama’s 2011 reality has us losing nearly 400,000 jobs per month.  Nevertheless, there is this misguided belief that the “wealth effect” caused by inflated stock prices and the current asset bubble will somehow make the Clinton strategy relevant.  It won’t.  Instead, President Obama will adopt a strategy of “austerity lite”, which will send America into a second recession dip and alienate voters just in time for the 2012 elections.  Professor Reich recently warned of this:

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.

If inviting a double-dip recession weren’t dumb enough – how about a second financial crisis?  Just add more systemic risk and presto! The banks won’t have any problems because the Fed and the Treasury will provide another round of bailouts.  Edward Harrison of Credit Writedowns recently wrote an essay focused on Treasury Secretary Geithner’s belief that we need big banks to be even bigger.

Even if the Republicans nominate a Presidential candidate who espouses a strategy of simply relying on Jesus to extinguish fires at offshore oil rigs and nuclear reactors – Obama will still lose.  May God help us!


wordpress stats


Screw The People And Save The Banks

Comments Off on Screw The People And Save The Banks

The economic crisis in Ireland (and the rest of Europe) has resulted in a morass of published commentaries, some of which make sense and most of which don’t.  Sometimes it appears as though the writer hasn’t really formed an opinion on the issue, even though the tone of the article seems to be expressing one.  The problem experienced in Ireland is the same as it is everywhere else:  During tough economic times, governments always choose to bail out the banks regardless of the expense and suffering to be endured by the citizens.  The Pragmatic Capitalist recently upbraided the writer of one of the more poorly-thought-out essays dealing with the Irish predicament:

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her.  Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity.  Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this).  What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America   .   .   .

To the extent that the Irish situation bears any resemblance to what we are experiencing (or may soon experience) in the United States, economist John Hussman has written the best essay on this issue.  Hussman began with this point, made by another economist:

“If you have bad banks then you very urgently want to clean up your banks because bad banks go only one way:  they get worse. In the end every bank is a fiscal problem.  When you have bad banks, it is in a political environment where it is totally understood that the government is going to bail them out in the end.  And that’s why they are so bad, and that’s why they get worse.  So cleaning up the banks is an essential counterpart of any attempt to have a well functioning economy.  It is a counterpart of any attempt to have a dull, uninteresting macroeconomy.  And there is no excuse to do it slowly because it is very expensive to postpone the cleanup.  There is no technical issue in doing the cleanup.  It’s mostly to decide to start to grow up and stop the mess.”

MIT Economist Rudiger Dornbusch, November 1998

The TARP bailout was not the only time when our government chose a temporary fix (as in cure or heroin injection) at great taxpayer expense.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  John Hussman discussed the consequences:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The present situation

Europe will clearly be in the spotlight early this week, as a run on Irish banks coupled with large fiscal deficits has created a solvency crisis for the Irish government itself and has been (temporarily) concluded with a bailout agreement.  Ireland’s difficulties are the result of a post-Lehman guarantee that the Irish government gave to its banking system in 2008.  The resulting strains will now result in a bailout, in return for Ireland’s agreement to slash welfare payments and other forms of spending to recipients that are evidently less valuable to society than bankers.

*   *   *

Over the short run, Ireland will promise “austerity” measures like Greece did – large cuts in government spending aimed at reducing the deficit.  Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side, meaning that Ireland will most probably face additional problems shortly anyway.

The “austerity” approach is more frequently being used as a dividing line to distinguish “liberal” economists from “conservative” economists.  The irony here is that many so-called liberal politicians are as deeply in the pocket of the banking lobby as their conservative counterparts.  Economist Dean Baker recently wrote an article for The Guardian, urging Ireland to follow the example of Argentina and simply default on its debt:

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now.  The plan is to impose stiff austerity, requiring much of Ireland’s workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this.  The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one.  There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

Bloomberg News columnist, Matthew Lynn wrote a great article for the Pittsburgh Tribune-Review, setting out five reasons why Ireland should refuse a bailout from the European Union and the International Monetary Fund to opt for default as the logical approach.

Pay close attention to how your favorite politicians weigh-in on the Irish situation.  It should give you a fairly good tip as to what actions those pols can be expected to take when the Wall Street bankers dash back to Capitol Hill for TARP 2 The Sequel.


wordpress visitor


Maria Cantwell For President

Comments Off on Maria Cantwell For President

I was going to hold off on this and give President Obama the benefit of a doubt – at least for a few months.  Nevertheless, after reading the magnificent piece by Barry Ritholtz, entitled:  “The Tragedy of the Obama Administration”, I decided that it was time to start discussing leadership alternatives for the next Presidential term.

On October 30, the Associated Press published the results of a poll it conducted with Knowledge Networks.  Forty-seven percent of the Democrats surveyed expressed the opinion that Obama should be challenged for the 2012 Democratic Presidential nomination.  In the wake of the mid-term election massacre, I expect that more Democrats will be anxious to find a new standard-bearer for their party in 2012.  The AP article concerning the AP-KN poll, mentioned the theory that the public’s opinion of Obama could change if the economy improves.  Unfortunately, most American consumers will not observe any significant improvement in the economy during the next two years.  There is a greater likelihood that the Chicago Cubs will win next year’s World Series.

We currently find ourselves bombarded with a wide spectrum of opinions, which purport to explain what the results of the 2010 elections really mean.  The most obvious conclusion to be drawn from this event is that the voters resent being taken for chumps.  Obama’s supporters were promised change they could believe in by a President and a party that sold its soul to the Wall Street megabanks at the cost of America’s future economic health.  When he had the opportunity to do so in early 2009, Obama refused to put those too-big-to-fail, zombie banks through temporary receivership.  As a result, we are now approaching a situation which – according to financial risk management expert Chris Whalen – will necessitate another round of bank bailouts.  When President Obama had the opportunity and the public support (not to mention Democratic control over both houses of Congress) to enact an adequate stimulus program to save the economy from a decade(s) – long, Japanese-style recession, he refused to so.  If an extra $600 billion had been added to the $787 billion in 2009 (as part of a better-thought-out, infrastructure-based stimulus program) we would be experiencing significant economic growth and a recovering job market right now.  Australia keeps reminding us of this.  (Oops!  Australia just did it again!)  Instead, America finds itself in a situation wherein the Fed is now appropriating that $600 billion toward another round of quantitative easing, which will serve no other purpose than to push investors into the stock market.  According to economist Andy Xie, those stock investors will have an unpleasant experience when Chairman Bernanke’s latest asset bubble pops in 2012.

While many Senate Democrats (along with operatives from the Treasury Department) were busy removing all of the teeth from the financial reform bill, Maria Cantwell was fighting those efforts as one of the few advocates for the American taxpayers.  Back on May 19, Arthur Delaney and Ryan Grim of The Huffington Post described how Senator Cantwell stood up to the efforts of Harry Reid to use cloture to push the financial reform bill to a vote before any further amendments could have been added to strengthen the bill.  Notice how “the usual suspects” – Reid, Chuck Schumer and “Countrywide Chris” Dodd tried to close in on Cantwell and force her capitulation to the will of the kleptocracy:

There were some unusually Johnsonian moments of wrangling on the floor during the nearly hour-long vote.  Reid pressed his case hard on Snowe, the lone holdout vote present, with Bob Corker and Mitch McConnell at her side.  After finding Brown, he put his arm around him and shook his head, then found Cantwell seated alone at the opposite end of the floor.  He and New York’s Chuck Schumer encircled her, Reid leaning over her with his right arm on the back of her chair and Schumer leaning in with his left hand on her desk.  Cantwell stared straight ahead, not looking at the men even as she spoke.  Schumer called in Chris Dodd, who was unable to sway her.  Feingold hadn’t stuck around.  Cantwell, according to a spokesman, wanted a guarantee on an amendment that would fix a gaping hole in the derivatives section of the bill, which requires the trades to be cleared, but applies no penalty to trades that aren’t, making Blanche Lincoln’s reform package little better than a list of suggestions.

*   *   *

“I don’t think it’s a good idea to cut off good consumer amendments because of cloture,” said Cantwell on Tuesday night.

Senator Cantwell has proven herself worthy of our trust.  Her nomination as the 2012 Democratic Presidential candidate will revive the excitement and voter enthusiasm witnessed during the 2008 campaign.  On the other hand, if President Obama decides to seek a second term and wins the nomination, we will likely find a greater enthusiasm gap than the example of November 2.  As a result, by January of 2013 we could have a new administration in the White House, espousing what economist Nouriel Roubini describes as “the economic equivalent of creationism”.

Here’s to a bright future!


wordpress visitor