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Financial Reform Might Actually Happen

April 12th, 2010 Posted in Uncategorized

Apr, 12 2010

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April 12, 2010

The long-overdue need for financial reform is finally getting some serious attention in Washington. As banking lobbyists continue to grease palms in the Senate, we are beginning to hear a number of novel ideas from some clever commentators, focused on preventing another financial crisis.

On April 9, John Mauldin published a thought-provoking essay entitled, “Reform We Can Believe In”. At one point in the piece, Mauldin considered the question that has been hanging over our heads for the past eighteen months:

What happens if we do nothing?

What happens when we have the next credit crisis, when a major sovereign government defaults, as I think will happen? It will be a body blow to many banks, especially in Europe. Once again, we could have banks worried about lending to each other or taking letters of credit, which would be a disaster for world trade and the recovery we are now in.

That we (and Europe and Britain) have taken so long to enact real reform has the potential to really put the world at risk. In the next crisis, we will not have the tools available to stem the tide that we did the last time. Rates are already low. Do you think we could pass another TARP? The Fed’s balance sheet is already bloated. It could get much worse unless we get financial reforms that have some bite.

All this debating about a consumer protection agency and where it should be and all the other trivia is wasting time. Fix the big things. Credit default swaps. Too big to fail. Leverage. Then worry about the details.

Although I left out Mauldin’s suggestion to “leave the Fed alone” from that last paragraph, his essay contains a fantastic explanation of how the Federal Reserve System is organized. Best of all, Mauldin spent plenty of time reflecting on Milton Friedman’s suggestion that we program a computer to set monetary policy, instead of leaving that authority with the Fed:

Let me be clear. There are a lot of things not to like about the Federal Reserve System. I think it was Milton Friedman who said we would be better off with a computer determining monetary policy. A quote from an interview with him is instructive. When asked “Do you still think it would be a good idea to have a computer run monetary policy?” he answered:

“Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.

“In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge. We have seen that in the history of our own Federal Reserve System.

Another perspective on financial reform came from Jim McTague in the April 12 edition of Barron’s. He began with the remark that both the House and Senate reform bills lack adequate measures for “efficient and intelligent policing”. Nevertheless, the solution he embraced was simple:

The aptly named Richard Vigilante, who recently co-wrote a book called Panic with Minneapolis-based hedge-fund legend Andrew Redleaf, suggests this approach: Force all firms managing other people’s money to publish their investment positions in detail before the market opens; this would include hedge funds. Then, the short sellers could punish ineptness before it spreads by betting heavily against a particular institution’s stupid decisions.

“Bankers would hate it. It’s their worst nightmare,” says Vigilante, whom I met with at Firehook bakery on Washington’s Farragut Square. If the system had been in place in 2006, short sellers would have stamped out the smoldering subprime mania before it had a chance to spread, he asserts.

His suggestion is both brilliant and a model of simplicity — it could protect consumers against all kinds of risky financial products — but it will never become reality.

Bankers would scream about the need to protect their proprietary-trading information. And, as was the case with health-insurance “reform,” Congress is bent on ramming a bill, no matter how flawed, through the legislative sausage works in order to mollify an uncommonly angry electorate before Nov. 2. To entertain new ideas at this juncture, even good ones, would upset the ambitious timetable.

Like health care, the new financial regulatory regime is built atop the cracked masonry of the old one. The same flatfoots who were on patrol when the subprime caper went down will be given larger beats to walk. They will be overseen by a brain trust, a Council of Regulators, culled from their ranks, who, like chemical sniffers, would seek to uncover systemic threats to the volatile financial system. In fact, COR is the core of the whole scheme.

The proposal for a Council of Regulators has drawn a good deal of criticism, primarily because it would be chaired by the Treasury Secretary. Matthew Bishop and Michael Green, authors of The Road From Ruin, had this to say about a Council of Regulators in a recent Huffington Post piece:

Indeed, with the Treasury Secretary in the chair, would this council really face down the political leaders and try to stop an emerging bubble spreading a feelgood factor across the nation (as bubbles do, before they burst)? Even in his pomp Alan Greenspan knew that a Fed chairman couldn’t risk being too gloomy about the economy and keep his job. What chance then of a Treasury Secretary, a cabinet member, being so bold?

Rather than another layer on top of the dysfunctional existing regulatory system, America needs to sweep away its absurd proliferation of regulators and replace them with a powerful super regulator, independent of day-to-day politics and empowered to do the job properly.

Regardless of what the final product will include – one thing is becoming increasingly likely: Some semblance of financial reform legislation will eventually become enacted. It won’t be perfect but anything will be better than what we have now. (Well, almost anything . . .)

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Deceptive Oversight

March 17th, 2010 Posted in Uncategorized

Mar, 17 2010

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March 17, 2010

March 16 brought us a few more provocative essays about the Lehman Brothers scandal. The most prominent subject discussed in the reactions to the Valukas Report has been the complete lack of oversight by the Federal Reserve Bank of New York — the entity with investigators in place inside of Lehman Brothers after the collapse of Bear Stearns. The FRBNY had the perfect vantage point to conduct effective oversight of Lehman. Not only did the FRBNY fail to do so — it actually helped Lehman maintain a false image of being financially solvent. It is important to keep in mind that Lehman CEO Richard Fuld was a class B director of the FRBNY during this period. Does that sound like a conflict of interest to anyone besides me? The Securities and Exchange Commission (under the direction of Christopher Cox at the time) has become another subject of scrutiny for its own dubious semblance of oversight.

Eliot Spitzer and William Black (a professor of economics and law at the University of Missouri – Kansas City) recently posted a great article at the New Deal 2.0 website. Among the memorable points from that piece is the assertion that accounting is “the weapon of choice” for financial deception. The Valukas Report has exposed such extensive accounting fraud at Lehman, it will be impossible for the Federal Reserve Bank of New York to feign ignorance of that activity. Another memorable aspect of the Spitzer – Black piece is its reference to those “too big to fail” financial institutions as “SDIs” or systemically dangerous institutions. Here is some of what Spitzer and Black had to say about how the FRBNY became enmeshed in Lehman’s sleazy accounting tactics:

The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed’s behavior made it clear that officials didn’t believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so.

* * *

The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity.

The consequences of the New York Fed’s involvement in this scam were discussed in an article by Andrew Ross Sorkin from the March 16 edition of The New York Times. (You may recall that Andrew Ross Sorkin is the author of the book, Too Big To Fail.) He pointed out that the consequences of the Lehman scandal could be very far-reaching:

Indeed, it now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.

* * *

There’s a lot riding on the government’s oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the S.E.C. and Fed vetted virtually everything they did.

On top of that, Lehman’s outside auditor, Ernst &Young, and a law firm, Linklaters, signed off on the transactions.

The problems at Lehman raise even larger questions about the vigilance of the SEC and Fed in overseeing the other Wall Street banks as well.

The question as to whether similar accounting tricks were being performed at “other Wall Street banks as well” opens a very huge can of worms. It’s time for the government to step back and assess the larger picture of what the systemic problem really is. In a speech before the Senate, Delaware Senator Ted Kaufman emphasized that the government needs to return the rule of law to Wall Street:

We all understood that to restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.

* * *

Many have said we should not seek to “punish” anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values. But this is not about retribution. This is about addressing the continuum of behavior that took place — some of it fraudulent and illegal — and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.

As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes.

The nagging suspicion that those nefarious activities at Lehman Brothers could be taking place “at other banks as well” became a key point in Senator Kaufman’s speech:

Mr. President, I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar “accounting gimmicks” to hide dangerous risk from investors and the public.

We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.

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Three New Books For March

February 24th, 2010 Posted in Uncategorized

Feb, 24 2010

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February 24, 2010

The month of March brings us three new books about the financial crisis. The authors are not out to make apologies for anyone. To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy. All three of these books are available at the Amazon widget on the sidebar at the left side of this page.

Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. It will be released on March 2. Here is some information about the book from the product description at the Amazon website:

ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

In eConned (sic), author Yves Smith reveals:

–why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery

–how economists have come to play a profoundly anti-democratic role in policy

–how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors

–how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers

–how financial regulation enabled predatory behavior by Wall Street towards investors

–how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them

Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s. His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15. Here is some of what Amazon’s product description says about it:

A brilliant account — character-rich and darkly humorous — of how the U.S. economy was driven over the cliff.

* * *

Michael Lewis’s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish: high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror. In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve. He proves yet again that he is the finest and funniest chronicler of our times.

Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”. The essay contains a number of proposals for correcting this problem. Here is one of them:

We believe that the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise. If we triple core capital at major banks to15-25% of assets, and err on the side of requiring too much capital for derivatives and other complicated financial structures, we will create a much safer system with less scope for “gaming” the rules.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. With James Kwak, he is the co-publisher of The Baseline Scenario website. Johnson and Kwak have written a new book entitled, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people: Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others. Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.

Here is some of what can be found in Amazon’s product description:

. . . a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big Finance: from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt. They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.

As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world. Perhaps the message will finally hit home.

If you are interested in any of these three books, they’re available on the right side of this page.

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Preparing For The Worst

November 19th, 2009 Posted in Uncategorized

Nov, 19 2009

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November 19, 2009

In the November 18 edition of The Telegraph, Ambrose Evans-Pritchard revealed that the French investment bank, Societe Generale “has advised its clients to be ready for a possible ‘global economic collapse’ over the next two years, mapping a strategy of defensive investments to avoid wealth destruction”. That gloomy outlook was the theme of a report entitled: “Worst-case Debt Scenario” in which the bank warned that a new set of problems had been created by government rescue programs, which simply transferred private debt liabilities onto already “sagging sovereign shoulders”:

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

* * *

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

To make matters worse, America still has an unemployment problem that just won’t abate. A recent essay by Charles Hugh Smith for The Business Insider took a view beyond the “happy talk” propaganda to the actual unpleasant statistics. Mr. Smith also called our attention to what can be seen by anyone willing to face reality, while walking around in any urban area or airport:

The divergence between the reality easily observed in the real world and the heavily touted hype that “the recession is over because GDP rose 3.5%” is growing. It’s obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.

By this point, most Americans are painfully aware of the massive bailouts afforded to those financial institutions considered “too big to fail”. The thought of transferring private debt liabilities onto already “sagging sovereign shoulders” immediately reminds people of TARP and the as-yet-undisclosed assistance provided by the Federal Reserve to some of those same, TARP-enabled institutions.

As Kevin Drawbaugh reported for Reuters, the European Union has already taken action to break up those institutions whose failure could create a risk to the entire financial system:

EU regulators are set to turn the spotlight on 28 European banks bailed out by governments for possible mandated divestitures, officials said on Wednesday.

The EU executive has already approved restructuring plans for British lender Lloyds Banking (LLOY.L), Dutch financial group ING Groep NV (ING.AS) and Belgian group KBC (KBC.BR).

Giving break-up power to regulators would be “a good thing,” said Paul Miller, a policy analyst at investment firm FBR Capital Markets, on Wednesday.

Big banks in general are bad for the economy because they do not allocate credit well, especially to small businesses, he said. “Eventually the big banks get broken up in one way or another,” Miller said at the Reuters Global Finance Summit.

Meanwhile in the United States, the House Financial Services Committee approved a measure that would grant federal regulators the authority to break up financial institutions that would threaten the entire system if they were to fail. Needless to say, this proposal does have its opponents, as the Reuters article pointed out:

In both the House and the Senate, “financial lobbyists will continue to try to water down this new and intrusive federal regulatory power,” said Joseph Engelhard, policy analyst at investment firm Capital Alpha Partners.

If a new break-up power does survive the legislative process, Engelhard said, it is unlikely a “council of numerous financial regulators would be able to agree on such a radical step as breaking up a large bank, except in the most unusual circumstances, and that the Treasury Secretary … would have the ability to veto any imprudent use of such power.”

When I first read this, I immediately realized that Treasury Secretary “Turbo” Tim Geithner would consider any use of such power as imprudent and he would likely veto any attempt to break up a large bank. Nevertheless, my concerns about the “Geithner factor” began to fade after I read some other encouraging news stories. In The Huffington Post, Sam Stein disclosed that Oregon Congressman Peter DeFazio (a Democrat) had called for the firing of White House economic advisor Larry Summers and Treasury Secretary “Timmy Geithner” during an interview with MSNBC’s Ed Schultz. Mr. Stein provided the following recap of that discussion:

“We think it is time, maybe, that we turn our focus to Main Street — we reclaim some of the unspent [TARP] funds, we reclaim some of the funds that are being paid back, which will not be paid back in full, and we use it to put people back to work. Rebuilding America’s infrastructure is a tried and true way to put people back to work,” said DeFazio.

“Unfortunately, the President has an adviser from Wall Street, Larry Summers, and a Treasury Secretary from Wall Street, Timmy Geithner, who don’t like that idea,” he added. “They want to keep the TARP money either to continue to bail out Wall Street … or to pay down the deficit. That’s absurd.”

Asked specifically whether Geithner should stay in his job, DeFazio replied: “No.”

“Especially if you look back at the AIG scandal,” he added, “and Goldman and others who got their bets paid off in full … with taxpayer money through AIG. We channeled the money through them. Geithner would not answer my question when I said, ‘Were those naked credit default swaps by Goldman or were they a counter-party?’ He would not answer that question.”

DeFazio said that among he and others in the Congressional Progressive Caucus, there was a growing consensus that Geithner needed to be removed. He added that some lawmakers were “considering questions regarding him and other economic advisers” — though a petition calling for the Treasury Secretary’s removal had not been drafted, he said.

Another glimmer of hope for the possible removal of Turbo Tim came from Jeff Madrick at The Daily Beast. Madrick’s piece provided us with a brief history of Geithner’s unusually fast rise to power (he was 42 when he was appointed president of the New York Federal Reserve) along with a reference to the fantastic discourse about Geithner by Jo Becker and Gretchen Morgenson, which appeared in The New York Times last April. Mr. Madrick demonstrated that what we have learned about Geithner since April, has affirmed those early doubts:

Recall that few thought Geithner was seasoned enough to be Treasury secretary when Obama picked him. Rubin wasn’t ready to be Treasury secretary when Clinton was elected and he had run Goldman Sachs. Was Geithner’s main attraction that he could easily be controlled by Summers and the White House political advisers? It’s a good bet. A better strategy, some argued, would have been to name Paul Volcker, the former Fed chairman, for a year’s worth of service and give Geithner as his deputy time to grow. But Volcker would have been far harder to control by the White House.

But now the president needs a Treasury Secretary who is respected enough to stand up to Wall Street, restabilize the world’s trade flows and currencies, and persuade Congress to join a battle to get the economic recovery on a strong path. He also needs someone with enough economic understanding to be a counterweight to the White House advisers, led by Summers, who have consistently been behind the curve, except for the $800 billion stimulus. And now that is looking like it was too little. The best guess is that Geithner is not telling the president anything that the president does not know or doesn’t hear from someone down the hall.

The problem for Geithner and his boss, is that the stakes if anything are higher than ever.

As the rest of the world prepares for worsening economic conditions, the United States should do the same. Keeping Tim Geithner in charge of the Treasury makes less sense than it did last April.

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Maria Cantwell In The Spotlight

November 9th, 2009 Posted in Uncategorized

Nov, 09 2009

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November 9, 2009

Meghan McCain’s recent lament in The Daily Beast struck me as rather strange. She really should know better. Ms. McCain expressed her frustration over mainstream media treatment of “two of the most prominent women in politics — Hillary Clinton and Sarah Palin”. Ms. McCain felt the coverage received by those two politicians has been so misogynistic that she has nearly given up on the possibility that she may ever see a woman get elected to the Presidency:

It seems to me the male-dominated media suffers from a Goldilocks Syndrome that keeps women from shattering the glass ceiling. Worse, I fear it will prevent tomorrow’s female leaders from even seeking office.

Of course, if one can see no further than Hillary Clinton or Sarah Palin when seeking female Presidential candidates, then despair is inevitable. In the summer of 2008, after Ms.Clinton faced up to the reality that Barack Obama had won the Democratic nomination, we heard similar doubts expressed by many despondent female supporters of Hillary Clinton — that they would never see a female elected President within their own lifetimes. At that point, I wrote apiece entitled “Women To Watch”, reminding readers that “there are a number of women presently in the Senate, who got there without having been married to a former President (whose surname could be relied upon for recognition purposes).” One of those women, whom I discussed at that time, was Senator Maria Cantwell of Washington. Maria Cantwell has been in the news quite a bit recently and the coverage has been favorable. As I said in June of 2008, those holding out hope for a female Presidential candidate should keep an eye on her.

In our highly-partisan political climate, one rarely hears a national politician break from “party line” rhetoric and talking points while being interviewed by the news media or when writing commentary pieces for news publications and blogs. Nevertheless, Senator Cantwell has taken the bold step of criticizing, not only the administration’s handling of the economic crisis, but the K Street payoff culture enlisting her fellow Democrats as enablers of the status quo.

On October 30, Senator Cantwell wrote a piece for The Huffington Post, decrying the fact that those financial institutions benefiting from the massive bailouts from TARP and the Federal Reserve “have resumed their old habit of using other people’s money to gamble with the same risky unregulated derivatives that led us into this crisis.” The reason for the failure at every level of the federal government to even consider appropriate legislation or regulations to rein-in continuing irresponsible behavior by those institutions was candidly discussed by the Senator:

Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress, which might help explain why, to date, nothing has been fixed in our porous financial regulatory system. Americans want to know when Congress will put an end to the Wall Street’s secret off-book gambling schemes and restore our capitalist system by requiring real transparency and true competition.

Senator Cantwell’s essay is essential reading, coming on the heels of a rebuke, by her fellow Democrats, against efforts at requiring transparency in the trading of credit default swaps:

Imposing full transparency and true competition will require moving derivative trades onto regulated exchanges. That would mean full transparency of trading prices and volumes, reporting requirements for large trader positions, and adequate capital reserves to protect against a default. The government needs full anti-fraud and anti-manipulation authority. Giving regulators this power will ensure a transparent and competitive marketplace and will ensure that violators will go to jail.

On November 2, Senator Cantwell appeared on MSNBC’s Morning Meeting with Dylan Ratigan. At that time, Mr. Ratigan had just written a piece for The Business Insider, expressing his outrage about recent statements by Treasury Secretary “Turbo” Tim Geithner, supporting House bank reform legislation allowing credit default swaps to continue being traded in secret. Since Senator Cantwell had previously discussed that subject with him on October 16, Mr. Ratigan focused on Geithner. Ratigan noted Geithner’s endorsement of the proposed House “banking reform” legislation on the previous day’s broadcast of Meet The Press — despite the bill’s “massive exemptions” allowing opacity in the trading of credit default swaps. Ratigan then asked Senator Cantwell why Tim Geithner still has a job, to which she replied:

I’m not sure because David Gregory had him almost — trying to get a straight answer out of him. What the Treasury Secretary basically said was: yes, banks should take more risks and we should continue the loopholes — and that is really appalling because, right now, we know that lack of transparency has caused this problem with the U.S. economy and Wall Street is continuing, one year later, continuing the same kind of loopholes. And so if the Treasury Secretary doesn’t come down hard against these loopholes and advocate foreclosing them, then we’re going to have a tough time closing them in Congress. So the Treasury Secretary is dodging the issue.

Senator Cantwell sure isn’t dodging any issues. Beyond that, she is demonstrating that she has more cajones than any of her male counterparts in the Senate. So far, all of the publicity concerning her position on financial reform has been favorable. After all, she is boldly standing up to the lobbyists, the Congress they own and a White House that received nearly a million dollars in campaign contributions from Goldman Sachs.

Back in Senator Cantwell’s home state of Washington, The Seattle Times praised her co-sponsorship of Senate Bill 823, the Net Operating Loss Carryback Act, which has already been passed by both houses of Congress. This bill increases the corporate income tax refunds for businesses that were making money during the pre-2008 era but now operate at a loss. As the Seattle Times editorial explained:

The national unemployment rate is still rising. It has just gone double-digit for the first time in 26 years, and is at 10.2 percent.

This is not recovery.

The new law does not have taxpayers underwrite credit default swaps or any of the other alchemic creations of Wall Street investment banks. It is not more aid and comfort for the nationalized and quasi-nationalized corporate giants; it specifically exempts Fannie Mae, Freddie Mac and any company in which the Treasury has recently become an owner.

This law is for the businesses that suffer in the recession, not the ones that caused it. It is one of the few things Congress has done that reaches directly to Main Street America. It is a big deal to many local businesses, including businesses here.

Congratulations, Senator Cantwell!

To Meghan McCain and other women remaining in doubt as to whether they will ever see a female sworn in as President: Just keep watching Maria Cantwell as she continues to earn well-deserved respect.

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The Weakest Link

November 2nd, 2009 Posted in Uncategorized

Nov, 02 2009

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November 2, 2009

Everything was supposed to be getting “back to normal” by now. Since late July, we’ve been hearing that the recession is over. When the Gross Domestic Product number for the third quarter was released on Thursday, we again heard the ejaculations of enthusiasm from those insisting that the recession has ended. Investors were willing to overlook the most recent estimate that another 531,000 jobs were lost during the month of October, so the stock market got a boost. Nevertheless, as was widely reported, the Cash for Clunkers program added 1.66 percent to the 3.5 percent Gross Domestic Product annualized rate increase. Since Cash for Clunkers was a short-lived event, something else will be necessary to fill its place, stimulating economic activity. Once that sobering aspect of the story was absorbed, Friday morning’s news informed us that consumer spending had dropped for the first time in five months. The Associated Press provided this report:

Economists worry that the recovery could falter in coming months if households cut back on spending to cope with rising unemployment, heavy debt loads and tight credit conditions.

“With incomes so soft, increased spending will be a struggle,” Ian Shepherdson, chief U.S.economist at High Frequency Economics, wrote in a note to clients.

The Commerce Department said Friday that spending dropped 0.5% in September, the first decline in five months. Personal incomes were unchanged as workers contend with rising unemployment. Wages and salaries fell 0.2%, erasing a 0.2% gain in August.

Another report showed that employers face little pressure to raise pay, even as the economy recovers. The weak labor market makes it difficult for people with jobs to demand higher pay and benefits.

* * *

. . . some economists believe that consumer spending will slow sharply in the current quarter, lowering GDP growth to perhaps 1.5%. Analysts said the risk of a double-dip recession cannot be ruled out over the next year.

With unemployment as bad as it is, those who have jobs need to be mindful of the Sword of Damocles, as it hangs perilously over their heads. As the AP report indicated, employers are now in an ideal position to exploit their work force. Worse yet, as Mish pointed out:

Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers.

The war on the American consumer finally bit Wall Street in the ass on Friday when the S&P 500 index took a 2.8 percent nosedive. When mass layoffs become the magic solution to make dismal corporate earnings reports appear positive, when the consumer is treated as a chump by regulatory agencies, lobbyists and government leaders, the consumer stops fulfilling the designated role of consuming. When that happens, the economy stands still. As Renae Merle reported for The Washington Post:

“The government handed the ball off to the consumer and the consumer fell on it,” said Robert G. Smith, chairman of Smith Affiliated Capital in New York. “This is a function of there being no jobs and wages going lower.”

The sell-off on the stock market also reflected a report released Friday showing a decline in consumer sentiment this month, analysts said. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October, compared with 73.5 in September.

Rich Miller of Bloomberg News discussed the resulting apprehension experienced by investors:

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

* * *

Worldwide, investors and analysts now view the U.S. as the weak link in the global economy, with its markets seen as among the riskiest by a plurality of those surveyed. One in four respondents expects an unemployment rate of 11 percent or more a year from now, compared with a U.S. administration forecast of 9.7 percent. The jobless rate now is 9.8 percent, a 26-year high.

Even before the release of “good news” on Thursday followed by Friday’s bad news, stock analysts who base their trading decisions primarily on reading charts, could detect indications of continuing market decline, as Michael Kahn explained for Barron’s last Wednesday.

Meanwhile, the Obama administration’s response to the economic crisis continues to generate criticism from across the political spectrum while breeding dissent from within. As I said last month, the administration’s current strategy is a clear breach of candidate Obama’s campaign promise of “no more trickle-down economics”. The widespread opposition to the administration’s proposed legislation to regulate (read that: placate) large financial companies was discussed by Stephen Labaton for The New York Times:

Senior regulators and some lawmakers clashed once again with the Obama administration on Thursday, finding fault with central elements of the White House’s latest plan to unwind large financial companies when their troubles imperil the financial system.

The Times article focused on criticism of the administration’s plan, expressed by Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation. As Mr.Labaton noted, shortly after Mr. Obama was elected President, Turbo Tim Geithner began an unsuccessful campaign to have Ms. Bair replaced.

On Friday, economist James K. Galbraith was interviewed by Bill Moyers. Here’s what Professor Galbraith had to say about the Obama administration’s response to the economic crisis:

They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis, in the administration’s program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we’re back to a world in which Wall Street and the major banks are leading, and setting the path–

* * *

. . . they’ve largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.

BILL MOYERS: Well, that’s what we’re getting, because after all of the mergers, shakedowns, losses of the last year, you have five monster financial institutions really driving the system, right?

JAMES GALBRAITH: And they’re highly profitable, and they are already paying, in some cases, extraordinary bonuses. And you have an enormous problem, as the public sees very clearly that a very small number of people really have been kept afloat by public action . And yet there is no visible benefit to people who are looking for jobs or people who are looking to try and save their houses or to somehow get out of a catastrophic personal debt situation that they’re in.

This is just another illustration of how “trickle down economics” doesn’t work. President Obama knows better. He told us that he would not follow that path. Yet, here we are: a country viewed as the weak link in the global economy because the well-being of those institutions considered “too big to fail” is the paramount concern of this administration.

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Watching For Storm Clouds

October 26th, 2009 Posted in Uncategorized

Oct, 26 2009

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October 26, 2009

As the economy continues to flounder along, one need not look very far to find enthusiastic cheerleaders embracing any seemingly positive information to reinforce the belief that this catastrophic chapter in history is about to reach an end. Meanwhile, others are watching out for signs of more trouble. The recent celebrations over the return of the Dow Jones Industrial Average to the 10,000 level gave some sensible commentators the opportunity to point out that this may simply be evidence that we are experiencing an “asset bubble” which could burst at any moment.

October 21 brought the latest Quarterly Report from SIGTARP, the Special Investigator General for TARP, who is a gentleman named Neil Barofsky. Since the report is 256 pages long, it made more sense for Mr. Barofsky to submit to a few television interviews and simply explain to us, the latest results of his investigatory work. In a discussion with CNN’s Wolf Blitzer on that date, Mr. Barofsky voiced his concern about the potential consequences that could arise because those bailed-out banks, considered “too big to fail” have continued to grow, due to government-approved mergers:

“These banks that were too big to fail are now bigger,” Barofsky said. “Government has sponsored and supported several mergers that made them larger and that guarantee, that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail, which was implicit a year ago, is now explicit, we’ve said it. So if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the government has made such problems more likely.

“Potentially we could be in more danger now than we were a year ago,” he added.

In comparing where the economy is now, as opposed to this time last year, we haven’t seen much in the way of increased lending by the oversized banks. In fact, we’ve only seen more hubris and bullying on their part. Julian Delasantellis expressed it this way in his October 22 essay for the Asia Times:

Now, a year later, things have turned out exactly as expected – except that the roles are reversed. The rulemakers have not disciplined the corrupted; it’s more accurate to say that the corrupted have abased the rulemakers. If the intention was that the big investment banks would settle down into a sort of quiet, reserved suburban lifestyle, the reality has been that they’ve acted more like former gangsters placed into the US government’s witness protection program, taking over the numbers racket on the Saturday pee-wee soccer fields.

* * *

Obviously, there can’t be any inflation, or any real long-term earnings growth for consumer and business-oriented banks for that matter, as long as the economic crisis continues to destroy capital faster than Obama can ask Bernanke to print it.

These issues are of little concern to operations such as Goldman and Morgan, with their trading strategies and profit profiles essentially divorced from the real economy. But down here on planetary level, as the little league baseball fields don’t get maintained because the businesses who funded the work go out of business after having their loans called, after elderly people with chest pains have to wait longer for one of the few ambulances on station after rescue service cutbacks, life is changing, changing for the long term, and it sure isn’t pretty.

“Proprietary trading” by banks such as Goldman Sachs and JP Morgan Chase, forms an important part of their business model. This practice involves trading by those banks, on their own accounts, rather than the accounts of customers. The possibility of earning lavish bonus payments helps to incentivize risk taking by the traders working on the “prop desks” of those institutions. Gillian Tett wrote a report for the Financial Times on October 22, wherein she discussed an e-mail she received from a recently-retired banker, who stays in touch with his former colleagues — all of whom remain actively trading the markets. Ms. Tett observed that this man was “feeling deeply shocked” when he shared his observations with her:

“Forget about the events of the past 12 months … the punters are back punting as aggressively as ever,” he wrote. “Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.

“Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it,” he continued bitterly, noting that when money is virtually free — or, at least, at 0.5 per cent — traders feel stupid if they don’t leverage up.

“Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months,” he added. He finished with a despairing question: “Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”

* * *

Yet, if you talk at length to traders — or senior bankers — it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying — even as non-risky assets such as Treasuries bounce too.

Now, some western policymakers like to argue — or hope –that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals. After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the “real” economy.

On this interpretation, the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood.

* * *

So I, like my e-mail correspondent, am growing uneasy. Perhaps, the optimistic “firelighter-igniting-the-damp-wood” scenario will yet come to play; but we will probably not really know whether the optimists are correct for at least another six months.

Gillian Tett’s “give it six months” approach seems much more sober and rational than what we hear from many of the exuberant commentators appearing on television. Beyond that, she reminds us that our current situation involves a more important issue than the question of whether our economy can experience sustained growth: The continued use of leveraged risk-taking by TARP beneficiaries invites the possibility of a return to last year’s crisis-level conditions. As long as those banks know that the taxpayers will be back to bail them out again, there is every reason to assume that we are all headed for more trouble.

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Offering Solutions

October 22nd, 2009 Posted in Uncategorized

Oct, 22 2009

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October 22, 2009

Many of us are familiar with the old maxim asserting that “if you’re not part of the solution, you’re part of the problem.” During the past year we’ve been exposed to plenty of hand-wringing by info-tainers from various mainstream media outlets decrying the financial crisis and our current economic predicament. Very few of these people ever seem to offer any significant insight on such interesting topics as: what really caused the meltdown, how to prevent it from happening again, whether any laws were broken that caused this catastrophe, whether any prosecutions might be warranted or how to solve our nation’s continuing economic ills, which seem to be immune to all the attempted cures. The painful thorn in the side of Goldman Sachs, Matt Taibbi, recently raised an important question, reminding people to again scrutinize the vapid media coverage of this pressing crisis:

It’s literally amazing to me that our press corps hasn’t yet managed to draw a distinction between good news on Wall Street for companies like Goldman, and good news in reality.

* * *

In fact the dichotomy between the economic health of ordinary people and the traditional “market indicators” is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.

That quote inspired Yves Smith of Naked Capitalism to write a superb essay about how “access journalism” has created a controlled press. What follows is just a small nugget of the great analysis in that piece:

So what do we have? A media that predominantly bases its stories on what it is fed because it has to. Ever-leaner staffing, compressed news cycles, and access journalism all conspire to drive reporters to focus on the “must cover” news, which is to a large degree influenced by the parties that initiate the story. And that means they are increasingly in an echo chamber, spending so much time with the influential sources they feel they must cover that they start to be swayed by them.

* * *

The message, quite overly, is: if you are pissed, you are in a minority. The country has moved on. Things are getting better, get with the program. Now I saw the polar opposite today. There is a group of varying sizes, depending on the topic, that e-mails among itself, mainly professional investors, analysts, economists (I’m usually on the periphery but sometimes chime in). I never saw such an angry, active, and large thread about the Goldman BS fest today. Now if people who have not suffered much, and are presumably benefitting from the market recovery are furious, it isn’t hard to imagine that what looks like complacency in the heartlands may simply be contained rage looking for an outlet.

Fortunately, one television news reporter has broken the silence concerning the impact on America’s middle class, caused by Wall Street’s massive Ponzi scam and our government’s response – which he calls “corporate communism”. I’m talking about MSNBC’s Dylan Ratigan. On Wednesday’s edition of his program, Morning Meeting, he decried the fact that the taxpayers have been forced to subsidize the “parlor game” played by Goldman Sachs and other firms involved in proprietary trading on our coin. Mr. Ratigan then proceeded to offer a number of solutions available to ordinary people, who would like to fight back against those pampered institutions considered “too big to fail”. Some of these measures involve: moving accounts from one of those enshrined banks to a local bank or credit union; paying with cash whenever possible and contacting your lawmakers to insist upon financial reform.

My favorite lawmaker in the battle for financial reform is Congressman Alan Grayson, whose district happens to include Disney World. His fantastic interrogation of Federal Reserve general counsel, Scott Alvarez, about whether the Fed tries to manipulate the stock markets, was a great event. Grayson has now co-sponsored a “Financial Autopsy” amendment to the proposed Consumer Financial Protection Agency bill. This amendment is intended to accomplish the following:

– Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.
– Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.
– Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections

– The bottom line is to highlight destructive products based on if they are making people “broke”.

From his website, The Market Ticker, Karl Denninger offered his own contributions to this amendment:

This sort of “feel good” legislative amendment will of course be resisted, but it simply isn’t enough. The basic principle of equity (better said as “fairness under the law”) puts forward the premise that one cannot cheat and be allowed to keep the fruits of one’s outrageous behavior.

So while I like the direction of this amendment, I would put forward the premise that the entirety of the gains “earned” from such toxic products, when found, are clawed back and distributed to the consumers so harmed, and that to the extent this does not fully compensate for that harm such a finding should give rise to a private, civil cause of action for the consumers who are bankrupted or foreclosed.

It’s nice to know that bloggers are no longer the only voices insisting on financial reform. Ed Wallace of Business Week recently warned against the consequences of unchecked speculation on oil futures:

Is today’s stock market divorced from economic reality? Probably. It is a certainty that oil is. We know that because those in the market are still putting out the same tired and incorrect logic that they used successfully last year to push oil to $147 a barrel while demand was plummeting.

Because oil is not carrying a market price that fairly reflects economic conditions and demand inventories, overpriced energy is siphoning off funds that could be used for corporate expansion, increased consumerism and, in time, the recreation of jobs in America.

Did you think that the “Enron Loophole” was closed by the enactment of the 2008 Farm Bill? It wasn’t. The Farm Bill simply gave more authority to the Commodity Futures Trading Commission to regulate futures contracts that had been exempted by the loophole. In case you’re wondering about the person placed in charge of the Commodity Futures Trading Commission by President Obama — his name is Gary Gensler and he used to work for … You guessed it: Goldman Sachs.

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Bait And Switch

October 19th, 2009 Posted in Uncategorized

Oct, 19 2009

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October 19, 2009

On Friday, October 16, Aaron Task interviewed Elizabeth Warren for his online TV show, Tech Ticker. In case you don’t remember, Ms. Warren is the Harvard law professor, appointed to chair the Congressional Oversight Panel which has attempted to trace the money thrown into the infamous slush fund known as TARP — the Troubled Assets Relief Program. Mr. Task questioned Professor Warren as to whether, after all this time, we can expect a full accounting as to where the TARP money went. Professor Warren responded: “No. I think there is no chance that we will get a full accounting of it.” She explained the reason for this is because former Treasury Secretary Hank Paulson never asked for an explanation “on the front end” (when the TARP bailout program began) concerning what the recipients planned to do with this money, nor was any documentation of expenditures requested. As an aside, the folks at The New York Times were kind enough to put together this TARP scorecard, for keeping track of which institutions pay back the money they received. Of course, these amounts do not include all the loans, “backstopping” and other largesse provided to Wall Street by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury. For that information, we can look to this Bailout Tally Report, prepared by Nomi Prins for her book: It Takes a Pillage: Behind the Bailouts, Bonuses,and Backroom Deals from Washington to Wall Street.

During the interview with Aaron Task, Elizabeth Warren expressed particular concern over the fact that former Treasury Secretary Paulson failed to put any restrictions on the use of the TARP bailout funds prior to their dispersal, despite the explanation to the taxpayers that this money would be used to remove the “toxic assets” from the banks’ balance sheets. Worse yet, as she explained: “The toxic assets are still there, by and large” because the TARP money was used by the Wall Street banks to “make bets”. The bait-and-switch tactic used by Secretary Paulson was exposed by Professor Warren when she criticized how the banks used that money:

My biggest complaint would be: That was not how Secretary Paulsen described what was going to happen with American taxpayer dollars. . . . He said we are going to put money into the banks to increase lending — specifically to increase small business lending because that is the engine of our economy . . . I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it’s used another way.

Professor Warren also noted that nothing had been done to contain “systemic risk” after the financial crisis because those institutions requiring bailouts as they were considered “too big to fail” have grown even larger. This subject was addressed by Rolfe Winkler of Reuters, who questioned whether these institutions, such as Goldman Sachs, are really indispensable:

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses. But that ship has sailed. We socialized the risk while privatizing the profit because we were told we had no other choice: The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk? Congress is kicking around new resolution authority to help resolve failed systemically-important banks. But the goal should be reducing systemic risk to begin with. Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance. It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

* * *

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.

Elizabeth Warren’s reaction to the issue of what has been done with those profits — the huge, record-breaking bonuses paid to the people at Goldman Sachs and JP Morgan, was to describe the situation as so inappropriate as to leave her “speechless”. Fortunately this sentiment is shared by a number of people who are already taking action in the absence of any responsible government activity. The Gawker website has announced its initiation of what it calls the “Goldman Project” as a way of pushing back against this atrocity:

But what makes it eye-stabbingly, brain-searingly blood-boiling is the fact that Goldman’s employees are personally reaping the benefits of these subsidies to the tune of an average of $700,000 per staffer. Being unjustifiably wealthy in boom times is not enough — when market forces of their own creation brought their company low, they turned to the taxpayers both to rescue the firm and prop up their obscenely acquisitive lifestyles.

* * *

. . . we’re launching the Goldman Project, an ongoing attempt to track and publicize the multi-million second homes, $50,000 cars, $500 bottles of wine, and ostentatious living that we are subsidizing. And we need your help: Are you Facebook friends with a Goldmanite who just posted photos of his lavish bachelor party? Post them to our fancy new tag page, #GoldmanProject, or e-mail them to us. Are you a realtor who just sold a $4 million duplex a Goldman banker? Is your ex-boyfriend Goldman banker planning a year-end trip to Cabo to blow his bonus wad? Shoot us an e-mail. Likewise, if you catch any references to Goldman employees living large in the media, post them to #GoldmanProject to keep a running clipfile.

The folks at Gawker aren’t the only ones taking action. When the American Bankers Association holds its annual meeting in Chicago on October 25-26, it will be confronted with a (hopefully) large protest led by a coalition of labor, community and consumer groups, called the “Showdown in Chicago”. Visit their website and do whatever you can to help make this event a success. The arrogant influence peddlers in Washington need to get the message: Clean things up or get thrown out.

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Pay More Attention To That Man Behind The Curtain

October 15th, 2009 Posted in Uncategorized

Oct, 15 2009

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October 15, 2009

Reading the news these days can cause so much aggravation, I’m surprised more people haven’t pulled out all of their hair. Regardless of one’s political perspective, there is an inevitable degree of outrage experienced from revelations concerning the role of government malfeasnace in causing and reacting to the financial crisis. We have come to rely on satire to soothe our anger. (For a good laugh, be sure to read this.) Fortunately, an increasing number of commentators are not only exposing the systemic problems that created this catastrophe – they’re actually suggesting some good solutions.

Robert Scheer, editor of Truthdig, recently considered the idea that the debate over healthcare reform might just be a distraction from the more urgent need for financial reform:

The health care issue should never even have been brought up at a time when the economy is reeling and we are running such immense deficits to shore up the banks. Instead of fixing the economy by saving Americans’ homes and jobs, we are preoccupied with pie-in-the-sky rhetoric on a hot issue that should have been addressed in calmer times. It came up now because, despite all the hoary partisan posturing, it is a safer subject than the more pressing issue of what to do with Citigroup, AIG and General Motors, which the taxpayers happen to own but do not control. While Treasury Secretary Timothy Geithner plots in secret with the top bankers who got us into this mess, we are focused on the perennial circus of so-called health care reform.

There is an odd disconnect between the furious public debate over health care reform, with its emphasis on the cost of an increased government role, and the nonexistent discussion about the far more expensive and largely secretive government program to bail out Wall Street. Why the agitation over the government spending $83 billion a year on health care when at least 20 times that amount has been thrown at the creators of the ongoing financial crisis without any serious public accountability? On Wednesday, the Wall Street Journal reported that employees of the financial industry that we taxpayers saved are slated to be paid a record $140 billion this year.

Remember, taxpayers: That $140 billion is your money. The bailed-out institutions may claim to have repaid their TARP obligations, but they also received trillions in loans from the Federal Reserve — and Ben Bernanke refuses to disclose which institutions received how much.

William Greider wrote a superb essay for the October 26 issue of The Nation, emphasizing the importance of the work undertaken by the Financial Crisis Inquiry Commission, led by Phil Angelides, as well as the investigation being done by the House Committee on Oversight and Government Reform:

Even if Congress manages to act this fall, the debate will not end. Obama’s plan does not begin to get at the rot in the financial system. Wall Street’s most notorious practices continue to flourish, and if unemployment rates keep rising through 2010, the public will not set aside its anger. The Angelides investigators could put the story back on the front page.

* * *

Beyond Ponzi schemes and deceitful mortgage lending, a far larger crime may lurk at the center of the crisis — wholesale securities fraud. “Risk models” reassured unwitting investors who bought millions of bundled mortgage securities and derivatives like credit-default swaps. But as Christopher Whalen of Institutional Risk Analytics has testified, many of the models lacked real-life markets where they could be tested and verified. “Clearly, we have now many examples where a model or the pretense of a model was used as a vehicle for creating risk and hiding it,” Whalen said. “More important, however, is the role of financial models for creating opportunities for deliberate acts of securities fraud.” That’s what investigators can examine. What did the Wall Street firms know about the reliability of these models when they sold the securities? And what did they tell the buyers?

* * *

Surely the political system itself is a root cause of the financial crisis. The swollen influence of financial interests pushed Congress and presidents to repeal regulation and look the other way as reckless excesses developed. Efforts to restore a more reliable representative democracy can start with Congress. The power of money could be curbed by new rules prohibiting members of key committees from accepting contributions from the sectors they oversee. Regulatory agencies, likewise, need internal designs to protect them from capture by the industries they regulate.

The Federal Reserve, having failed in its obligations so profoundly, should be reconstituted as an accountable federal agency, shorn of the excessive secrecy and insider privileges accorded to bankers. The Constitution gives Congress, not the executive branch, the responsibility for managing money and credit. Congress must reassert this responsibility and learn how to provide adequate oversight and policy critique.

Reforming the financial system, in other words, can be the prelude to reviving representative democracy.

At The Huffington Post, Robert Borosage warned that the financial industry is waging a huge lobbying battle to derail any attempts at financial reform. Beyond that, the banking lobbyists will re-write any legislation to make it more favorable to their own objectives:

The banking lobby is nothing if not shameless. They hope to use the reforms to WEAKEN current law. They are pushing to make the federal standard the ceiling on reform, stripping the power of states to have higher standards. Basically, they are hoping to find a way to shut down the independent investigations of state attorneys general like New York’s Eliot Spitzer and Andrew Cuomo or Illinois’ Lisa Madigan.

* * *

Historically, the banks, as Senator Dick Durbin decried in disgust, “own the place.” And they’ve succeeded thus far in frustrating reform, even while pocketing literally hundreds of billions in support from taxpayers.

* * *

But this time it could be different. Backroom deals are no longer safe. Americans have been fleeced of trillions in the value of their homes and their savings because of Wall Street’s reckless excesses. Then as taxpayers, they were extorted to ante up literally trillions more to forestall economic collapse by bailing out the banking sector. Insult was added to that injury when the Federal Reserve refused to tell the Congress who got the money and on what terms.

Legislators would be well advised to understand the cozy old ways of doing business are no longer acceptable. Americans are livid and paying attention. Legislators who rely on Wall Street to finance their campaigns and then lead the effort to block or dilute reforms will discover that their constituents know what they have been up to. Organizations like my own Campaign for America’s Future, the Sunlight Foundation, Americans for Financial Reform, Huffington Post bloggers will make certain the word gets out. Legislators may discover that Wall Street’s money is a burden, not a blessing.

The most encouraging article I have seen came from Dan Gerstein of Forbes. His perspective matched my sentiments exactly. Looking through President Obama’s empty rhetoric, Mr. Gerstein helped provide direction and encouragement to those of us who are losing hope that our dysfunctional government could do anything close to addressing our nation’s financial ills:

The Changer-in-Chief long ago gave up on the idea of dismantling and remaking the crazy-quilt regulatory system that Wall Street (along with its Washington enablers) rigged for its own enrichment at everyone else’s expense.

*  * *

Instead, Team Obama opted to move around the deck chairs within the existing bureaucracy, daftly hoping this conformist approach would be enough to prevent another titanic meltdown.

*  * *

In the end, though, the key to success will be countering Wall Street’s influence and putting the politicians’ feet to the ire. Members of Congress need to know there will be consequences for sticking with the status quo.      . . . Make clear to every incumbent: Endorse our plan and we’ll give you money and public support; back the banks, and we will run ads against you telling voters you are for corrupt capitalism.

As I have said before, this is all about power. Right now, Wall Street has the political playing field to itself; it has the money, the access it buys and the fear it implies. And the public is on the outside, looking incredulous that this rigged system is still in place more than a year after it was exposed. But if the frustrated middle can organize and mobilize a focused, non-partisan revolt of the revolted — as opposed to the inchoate and polarizing tea party movement — that whole dynamic will quickly change. And so too, I’m confident, will the voting habits of our elected officials.

Fortunately, individuals like Dan Gerstein are motivating people to stand up and let our elected officials know that they work for the people and not the lobbyists. Larry Klayman, founder of Judicial Watch, has just written a new book: Whores: Why And How I Came To Fight The Establishment. The timing of the book’s release could not have been better.

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