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Plutocracy Is Crushing Democracy

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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.


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Dubious Reassurances

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There appears to be an increasing number of commentaries presented in the mainstream media lately, assuring us that “everything is just fine” or – beyond that – “things are getting better” because the Great Recession is “over”.  Anyone who feels inclined to believe those comforting commentaries should take a look at the Financial Armageddon blog and peruse some truly grim reports about how bad things really are.

On a daily basis, we are being told not to worry about Europe’s sovereign debt crisis because of the heroic efforts to keep it under control.  On the other hand, I was more impressed by the newest Weekly Market Comment by economist John Hussman of the Hussman Funds.  Be sure to read the entire essay.  Here are some of Dr. Hussman’s key points:

From my perspective, Wall Street’s “relief” about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones.  Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession.  As Lakshman Achuthan notes on the basis of ECRI’s own (and historically reliable) set of indicators, “We’ve entered a vicious cycle, and it’s too late: a recession can’t be averted.”  Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.

The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months.  Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness.  As a result, there is sometimes a “denial” phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession. While the recession evidence was in by November 2007 (see Expecting A Recession ), the economy enjoyed two additional months of payroll job growth, and new claims for unemployment trended higher in a choppy and indecisive way until well into 2008. Even after Bear Stearns failed in March 2008, the market briefly staged a rally that put it within about 10% of its bull market high.

At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.

*   *   *

A few weeks ago, I noted that Greece was likely to be promised a small amount of relief funding, essentially to buy Europe more time to prepare its banking system for a Greek default, and observed “While it’s possible that the equity markets will mount a relief rally in the event of new funding to Greece, it will be important to recognize that handing out a bit more relief would be preparatory to a default, and that would probably be reflected in a failure of Greek yields to retreat significantly on that news.”

As of Friday, the yield on 1-year Greek debt has soared to 169%. Greece will default. Europe is buying time to reduce the fallout.

As of this writing, the yield on 1-year Greek debt is now 189.82%.  How could it be possible to pay almost 200% interest on a one-year loan?

Despite all of the “good news” about America’s zombie megabanks, which were bailed out during the financial crisis (and for a while afterward) Yves Smith of Naked Capitalism has been keeping an ongoing “Bank of America Deathwatch”.  The story has gone from grim to downright creepy:

If you have any doubt that Bank of America is in trouble, this development should settle it.  I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC.  About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

*   *   *

This move reflects either criminal incompetence or abject corruption by the Fed.  Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail.  Remember the effect of the 2005 bankruptcy law revisions:  derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs.  So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral.  It’s well nigh impossible to have an orderly wind down in this scenario.  You have a derivatives counterparty land grab and an abrupt insolvency.  Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that.  During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle.  It had to get more funding from Congress.  This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.  No Congressman would dare vote against that.  This move is Machiavellian, and just plain evil.

It is the aggregate outrage caused by the rampant malefaction throughout American finance, which has motivated the protesters involved in the Occupy Wall Street movement.  Those demonstrators have found it difficult to articulate their demands because any comprehensive list of grievances they could assemble would be unwieldy.  Most important among their complaints is the notion that the failure to enforce prohibitions against financial wrongdoing will prevent restoration of a healthy economy.  The best example of this is the fact that our government continues to allow financial institutions to remain “too big to fail” – since their potential failure would be remedied by a taxpayer-funded bailout.

Hedge fund manager Barry Ritholtz articulated those objections quite well, in a recent piece supporting the State Attorneys General who are resisting the efforts by the Justice Department to coerce settlement of the States’ “fraudclosure” cases against Bank of America and others – on very generous terms:

The Rule of Law is yet another bedrock foundation of this nation.  It seems to get ignored when the criminals involved received billions in bipartisan bailout monies.

The line of bullshit being used on State AGs is that we risk an economic crisis if we prosecute these folks.

The people who claim that fail to realize that the opposite is true – the protest at Occupy Wall Street, the negative sentiment, the general economic angst – traces itself to the belief that there is no justice, that senior bankers have gotten away with economic murder, and that we have a two-tiered criminal system, one for the rich and one for the poor.

Today’s NYT notes the gloom that has descended over consumers, and they suggest it may be home prices. I think they are wrong – in my experience, the sort of generalized rage and frustration comes about when people realize the institutions they have trusted have betrayed them.  Humans deal with financial losses in a very specific way – and it’s not fury.  This is about a fundamental breakdown of the role of government, courts, and leadership in the nation.  And it all traces back to the bailouts of reckless bankers, and the refusal to hold them in any way accountable.

There will not be a fundamental economic recovery until that is recognized.

In the mean time, the quality of life for the American middle class continues to deteriorate.  We need to do more than simply hope that the misery will “trickle” upward.


 

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Another Great Idea From Ron Paul

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Congressman Ron Paul is one of the few original thinkers on Capitol Hill.  Sometimes he has great ideas, although at other times he might sound a little daft.  He recently grabbed some headlines by expressing the view that the United States “should declare bankruptcy”.  A June 28 CNN report focused on Paul’s agreement with the contention that if bankruptcy is the cure for Greece, it is also the cure for the United States.  However, as most economists will point out, the situation in Greece is not at all relevant to our situation because the United States issues its own currency and Greece is stuck with the euro, under the regime of the European Central Bank.  Anyone who can’t grasp that concept should read this posting by Cullen Roche at the Seeking Alpha website.

Nevertheless, economist Dean Baker picked up on one of Congressman Paul’s points, which – if followed through to its logical conclusion – could actually solve the debt ceiling impasse.  The remark by Ron Paul which inspired Dean Baker was a gripe about the $1.6 trillion in Treasury securities that the Federal Reserve now holds as a result of two quantitative easing programs:

“We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve,” Paul said. “We don’t, I mean, they’re nobody; why do we have to pay them off?”

In an article for The New Republic, Dr. Baker commended Dr. Paul for his creativity and agreed that having the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds as a result of quantitative easing “is actually a very reasonable way to deal with the crisis”.  Baker provided this explanation:

Last year the Fed refunded almost $80 billion to the Treasury.  In this sense, the bonds held by the Fed are literally money that the government owes to itself.

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations.  The bonds held by the Fed are assets of the Fed.  It has no obligations that it must use these assets to meet.  There is no one who loses their retirement income if the Fed doesn’t have its bonds.  In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds.  This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again.  President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases.  Maybe they could even talk a little about jobs.

Unfortunately, the next passage of Dr. Baker’s essay exposed the reason why this simple, logical solution would never become implemented:

As it stands now, the Fed plans to sell off its bond holdings over the next few years.  This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed.

And therein lies the rub:  The infamous “too-big-to-fail” banks could buy those bonds with money borrowed from the Fed at a fractional interest rate, and then collect the yield on those bonds – entirely at the expense of American taxpayers!  Not only would the American people lose money by loaning the bond purchase money to the banks almost free of charge – we would lose even more money by paying those banks interest on the money we just loaned to those same banks – nearly free of charge.  (This is nothing new.  It’s been ongoing since the inception of “zero interest rate policy” or ZIRP on December 16, 2008.)  President Obama would never allow his patrons on Wall Street to have such an opportunity “stolen” from them by the American taxpayers.  Banking industry lobbyists would start swarming all over Capitol Hill carrying briefcases filled with money if any serious effort to undertake such a plan reached the discussion stage.  At this point, you might suspect that the grifters on the Hill could have a scheme underway:  Make a few noises about following Baker’s suggestion and wait for the lobbyists to start sharing the love.

In the mean time, the rest of us will be left to suffer the consequences of our government’s failure to raise the debt ceiling.


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Taibbi Tackles A Tool

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A few weeks ago, I saw Andrew Ross Sorkin’s appearance on Real Time with Bill Maher.  At one point during the discussion, Sorkin asserted that the financial crisis of 2008 did not result from the violation of any laws.  I immediately screamed “Tool!” at the teevee.  Worse yet, because Sorkin is not an attorney, his legal opinions are not worth the electrons used to convey them.

Since that time, ARS has continued with his bankster exoneration crusade.  In the process, he has drawn criticism from such authorities as William Black.

On May 24, Robert Scheer of Truthdig posted a review of the HBO movie-adaptation of Sorkin’s book, Too Big To Fail.  Scheer’s review demonstrated how “access journalism” often creates fawning sycophants.  Scheer closed the piece with this thought:

Perhaps the main value of the book and film is the instruction they provide on the limits of mainstream journalism in the decade that led up to the meltdown. Sorkin, who rose to be a business editor at the Times, covered Wall Street deal-making in exquisite detail, relying on an access journalism that has often proved deeply flawed in traditional business news coverage. What was largely ignored as it was unfolding was the story of the unbridled power of Wall Street financiers over the political process that caused this tragedy for so many tens of millions who have lost jobs and homes.

On June 6, Sorkin wrote a piece for his Dealbook blog in defense of Goldman Sachs.  The essay seemed to be particularly focused on the vulnerability of Goldman CEO, Lloyd Blankfein, to perjury charges resulting from his testimony before the Senate Permanent Subcommittee on Investigations, chaired by Senator Carl Levin. Sorkin concluded that the evidence was “far from convincing” that Blankfein lied when he testified that Goldman “didn’t have a massive short” position against the housing market.

It’s difficult to avoid turning up on Matt Taibbi’s radar when one is carrying water for Goldman Sachs.  Taibbi immediately set about debunking Sorkin’s Goldman piece on June 7.  Taibbi did a thorough job of making it clear that Blankfien lied, using a similar analysis to what I expressed on May 19.  While focusing on Sorkin’s perspective, Taibbi made an especially strong point, reminiscent of the debate which has arisen concerning the ethics of economists in the aftermath of the film, Inside Job. Economists who publish “academic studies” on a subject don’t usually feel obligated to disclose that they are on the payrolls of companies who could benefit from that that type of support.  It appears as though Sorkin may be suffering from a similar affliction.  Consider this point from the beginning of Taibbi’s retort to Sorkin’s June 6 defense of Goldman:

The Sorkin piece reads like it was written by the bank’s marketing department, which may not be an accident. In November of last year, the New York Times announced that “Dealbook” was entering into a sponsorship agreement with a variety of companies, including … Goldman, Sachs. This is from that announcement last year:

DealBook  will also feature news and insights on deal-related topics from  Business Day’s well-known roster of leading business reporters, which  includes recent hires in addition to a veteran stable of Wall Street’s  most highly-regarded journalists.

Barclays Capital, Goldman Sachs, Sotheby’s and Tata Consultancy Services are charter advertisers for the relaunch of DealBook.

“This  is the next step in the evolution of DealBook, providing a community of  highly-engaged readers and busy executives with essential news and  insights, and keeping them plugged in to the most important news of the  day,” said Andrew Ross Sorkin, DealBook editor.

Even last year I thought it was a terrible decision by the Times to take money from Goldman in the wake of an unprecedented period of financial corruption – especially to sponsor, of all things, business reporting.

But now? This looks like a joke. In Russia in the Yeltsin years, reporters had a term for selling editorial print content to mobsters. They called it “selling jeans,” a play on the old Soviet-era black-marketeer practice of trading rabbit hats to tourists for their Levi’s. This Sorkin piece has the unmistakable look of a brand-new set of 501s to me. Pieces like this undermine the great work that reporters like Gretchen Morgenson have done in the paper in recent years.

Once again, Matt Taibbi has used his unique style to keep the spotlight on the malefaction which caused the financial crisis and the subsequent wrongdoing, as well as the failure of the mainstream media to give a damn about any of it.

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Obama Fatigue

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Since President Obama first assumed office, it hasn’t been too difficult to find harsh criticism of the new administration.  One need only tune in to the Fox News, where an awkward Presidential sneeze could be interpreted as a “secret message” to Bill Ayers or George Soros.  Nevertheless, with the passing of time, voices from across the political spectrum have joined a chorus of frustration with the Obama agenda.

On February 26, 2009 – only one month into the Obama Presidency – I voiced my suspicion about the new administration’s unwillingness to address the problem of systemic risk, inherent in allowing a privileged few banks to enjoy their “too big to fail” status:

Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers?  Will the Obama administration’s “failure of nerve” –  by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.

By September of 2009, I became convinced that Mr. Obama was suffering from a degree of hubris, which could seal his fate as a single-term President:

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history – not just because of their massive size and scope, but because they will probably fail to achieve their intended result.

Although the TARP bank bailout program was initiated during the final months of the Bush Presidency, the Obama administration’s stewardship of that program recently drew sharp criticism from Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP).  Beyond that, in his March 29 op-ed piece for The New York Times, Mr. Barofsky criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.  This promise also appears likely to go unfulfilled.  The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.  They reasonably assume that the government will rescue them again, if necessary.

*   *   *

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

*   *   *

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

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

Another unlikely critic of President Obama is the retired law school professor who blogs using the pseudonym, “George Washington”.  A recent posting at Washington’s Blog draws from a number of sources to ponder the question of whether President Obama (despite his Nobel Peace Prize) has become more brutal than President Bush.  The essay concludes with a review of Obama’s overall performance in The White House:

Whether or not Obama is worse than Bush, he’s just as bad.

While we had Bush’s “heck of a job” response to Katrina, we had Obama’s equally inept response and false assurances in connection with the Gulf oil spill, and Obama’s false assurances in connection with the Japanese nuclear crisis.

And Bush and Obama’s response to the financial crisis are virtually identical:  bail out the giant banks, let Wall Street do whatever it wants, and forget the little guy.

The American voters asked for change.  Instead, we got a different branch of the exact same Wall Street/military-industrial complex/Big Energy (BP, GE)/Big Pharma party.

Another commentator who has become increasingly critical of President Obama is Robert Reich, Secretary of Labor in the Clinton Administration.  Mr. Obama’s failure to push back against the corporatist politicians, who serve as “reverse Robin Hoods” enriching CEOs at the expense of American workers, resulted in this rebuke from Professor Reich:

President Obama and Democratic leaders should be standing up for the wages and benefits of ordinary Americans, standing up for unions, and decrying the lie that wage and benefit concessions are necessary to create jobs.  The President should be traveling to the Midwest – taking aim at Republican governors in the heartland who are hell bent on destroying the purchasing power of American workers.  But he’s doing nothing of the sort.

As attention begins to focus on the question of who will be the Republican nominee for the 2012 Presidential election campaign, Obama Fatigue is causing many people to appraise the President’s chances of defeat.  The excitement of bringing the promised “change” of 2008 has morphed into cynicism.  Many of the voters who elected Obama in 2008 might be too disgusted to bother with voting in 2012.  As a result, the idea of a Democratic or Independent challenger to Obama is receiving more consideration.  Rolling Stone’s Matt Taibbi recently provided this response to a letter inquiring about the possibility that Elizabeth Warren could make a run for the White House in 2012:

A few months ago I heard a vague rumor from someone who theoretically would know that such a thing was being contemplated, but I don’t know anything beyond that.  I wish she would run.  I’m not sure if it would ultimately be a good thing or a bad thing for Barack Obama – she could fatally wound his general-election chances by exposing his ties to Wall Street – but I think she’s exactly what this country needs. She’s totally literate on the finance issues and is completely on the side of human beings, as opposed to banks and oil companies and the like.  One thing I will say:  if she did run, she would have a lot more support from the press than she probably imagines, as there are a lot of reporters out there who are reaching the terminal-disappointment level with Obama ready to hop on the bandwagon of someone like Warren.

If Elizabeth Warren ultimately decides to make a run for The White House, Mr. Obama should do the right thing:  Stop selling the sky to people and step aside.


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Another Cartoon For The Bernank To Hate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Bad Timing By The Dimon Dog At Davos

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Last week’s World Economic Forum in Davos, Switzerland turned out to be a bad time for The Dimon Dog to stage a “righteous indignation” fit.  One would expect an investment banker to have a better sense of timing than what was demonstrated by the CEO of JPMorgan Chase.  Vito Racanelli provided this report for Barron’s:

The Davos panel, called “The Next Shock, Are We Better Prepared?” proceeded at a typically low emotional decibel level until Dimon was asked about what he thought of Americans who had directed their anger against the banks for the bailout.

Dimon visibly turned more animated, replying that “it’s not fair to lump all banks together.”  The TARP program was forced on some banks, and not all of them needed it, he said.  A number of banks helped stabilize things, noting that his bank bought the failed Bear Stearns.  The idea that all banks would have failed without government intervention isn’t right, he said defensively

Dimon clearly felt aggrieved by the question and the negative banker headlines, and went on for a while.

“I don’t lump all media together… .  There’s good and there’s bad.  There’s irresponsible and ignorant and there’s really smart media.  Well, not all bankers are the same.  I just think this constant refrain [of] ‘bankers, bankers, bankers,’ – it’s just a really unproductive and unfair way of treating people…  People should just stop doing that.”

The immediate response expressed by a number of commentators was to focus on Dimon’s efforts to obstruct financial reform.  Although Dimon had frequently paid lip service to the idea that no single institution should pose a risk to the entire financial system in the event of its own collapse, he did all he could to make sure that the Dodd-Frank “financial reform” bill did nothing to overturn the “too big to fail” doctrine.  Beyond that, the post-crisis elimination of the Financial Accounting Standards Board requirement that a bank’s assets should be “marked to market” values, was the only crutch that kept JPMorgan Chase from falling into the same scrap heap of insolvent banks as the other Federal Reserve welfare queens.

Simon Johnson (former chief economist at the International Monetary Fund) obviously had some fun writing a retort – published in the Economix blog at The New York Times to The Dimon Dog’s diatribe.  Johnson began by addressing the threat voiced by Dimon and Diamond (Robert E. Diamond of Barclay’s Bank):

The newly standard line from big global banks has two components  .  .  .

First, if you regulate us, we’ll move to other countries.  And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best.  At worst it represents a blatant attempt to shake down the public purse.

*   *   *

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ ”

*   *   *

In this context, the idea that megabanks would move to other countries is simply ludicrous.  These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there.  Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.

After Dimon’s temper tantrum, a pile-on by commentators immediately ensued.  Elinor Comlay and Matthew Goldstein of Reuters wrote an extensive report, documenting Dimon’s lobbying record and debunking a good number of public relations myths concerning Dimon’s stewardship of JPMorgan Chase:

Still, with hindsight it’s clear that Dimon’s approach to risk didn’t help him entirely avoid the financial crisis.  Even as the first rumblings of the crisis were sounding in the distance, he aggressively sought to boost Chase’s share of the U.S. mortgage business.

At the end of 2007, after JPMorgan had taken a $1.3 billion write-down on leveraged loans, Dimon told analysts the bank was planning to add as much as $20 billion in mortgages from riskier borrowers.  “We think we’d get very good spreads and … it will be a drop in the bucket for our capital ratios.”

By mid-2008, JPMorgan Chase had $95.1 billion exposure to home equity loans, almost $15 billion in subprime mortgages and a $76 billion credit card book.  Banks were not required to mark those loans at market prices, but if the loans were accounted for that way, losses could have been as painful for JPMorgan as credit derivatives were for AIG, according to former investment bank executives.

What was particularly bad about The Dimon Dog’s timing of his Davos diatribe concerned the fact that since December 2, 2010 a $6.4 billion lawsuit has been pending against JPMorgan Chase, brought by Irving H. Picard, the bankruptcy trustee responsible for recovering the losses sustained by Bernie Madoff’s Ponzi scam victims.  Did Dimon believe that the complaint would remain under seal forever?  On February 3, the complaint was unsealed by agreement of the parties, with the additional stipulation that the identities of several bank employees would remain confidential.  The New York Times provided us with some hints about how these employees were expected to testify:

On June 15, 2007, an evidently high-level risk management officer for Chase’s investment bank sent a lunchtime e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”

Even before that, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.”  And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

At The Daily Beast, Allan Dodds Frank began his report on the suit with questions that had to be fresh on everyone’s mind in the wake of the scrutiny The Dimon Dog had invited at Davos:

How much did JPMorgan CEO and Chairman Jamie Dimon know about his bank’s valued customer Bernie Madoff, and when did he know it?

These two crucial questions have been lingering below the surface for more than two years, even as the JPMorgan Chase leader cemented his reputation as the nation’s most important, most upright, and most highly regarded banker.

Not everyone at Davos was so impressed with The Dimon Dog.  Count me among those who were especially inspired by the upbraiding Dimon received from French President Nicolas Sarkozy:

“Don’t be accusatory of us,” Sarkozy snapped at Dimon at the World Economic Forum in Davos, Switzerland.

“The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.”

*   *   *
“We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense,” the Frenchman said.  “That’s what happened.”

Sarkozy also took direct aim at the bloated bonuses many bankers got despite the damage they did.

“When things don’t work, you can never find anyone responsible,” Sarkozy said.  “Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

Why don’t we have a President like that?


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There WILL Be Another Financial Crisis

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The latest Quarterly Report from SIGTARP – the Special Inspector General for the Troubled Asset Relief Program (Neil Barofsky) – was released on January 26, 2011.  The report brought a mix of good and bad news.  Among the good news was this tidbit:

Where fraud has managed to slip in, SIGTARP’s Investigations Division has already produced outstanding results in bringing to justice those who have sought to profit criminally from TARP, with 45 individuals charged civilly or criminally with fraud, of whom 13 have been criminally convicted. SIGTARP’s investigative efforts have helped prevent $555.2 million in taxpayer funds from being lost to fraud.  And with 142 ongoing investigations (including 64 into executives at financial institutions that applied for and/or received TARP funding through TARP’s Capital Purchase Program [“CPP”]), much more remains to be done.

Much of the bad news from SIGTARP stems from the never-ending problem of “moral hazard” resulting from the perpetually-increasing growth of those financial institutions, which have been “too big to fail” for too long:

In short, the continued existence of institutions that are “too big to fail” — an undeniable byproduct of former Secretary Paulson and Secretary Geithner’s use of TARP to assure the markets that during a time of crisis that they would not let such institutions fail — is a recipe for disaster.  These institutions and their leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts, and bailouts.

Worse yet, as Mr. Barofsky pointed out in a January 25 interview with the Center for Public Integrity, the system has been rigged to provide additional advantages to the TBTF banks, making it impossible for smaller institutions to compete with them:

Noting that the major financial institutions are 20 percent larger than they were before the financial crisis, Barofsky said that the financial markets simply don’t believe that the government will allow one of these biggest banks to collapse, regardless of what they say will happen.  Those big banks enjoy access to cheaper credit than smaller institutions, based on that implicit government guarantee, he said.

As evidence, he cited the ratings agency Standard & Poor’s, which recently announced its intention to add the prospect of government support into its calculation when determining a bank’s credit rating.

At 1:35 into the video clip of the Center for Public Integrity’s interview with Mr. Barofsky, he explained:

There’s going to be another financial crisis.  Of course, there is.

He went on to point out that once the next crisis begins, we will have the option of implementing the mechanisms established by the Dodd-Frank bill for breaking up insolvent banks.  The question then becomes:  Will be break up those banks or bail them out?  Barofsky suspects that the market is anticipating another round of bailouts.  He noted that “there’s a question of whether there will be the political will as well as the regulatory will to do that”.  As he pointed out on page 11 of the latest SIGTARP Quarterly Report:

As long as the relevant actors (executives, ratings agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist.

Let’s not forget that most dangerous among those problems is the encouraged and facilitated “risky behavior” by those institutions, which will bring about the next financial crisis.  This is the “Doomsday Cycle” problem discussed by Mr. Barofsky.  “The Doomsday Cycle” was the subject of a paper, written last year by economists Simon Johnson and Peter Boone.

The SIGTARP Report then focused on what has been discussed as TARP’s biggest failure:

As SIGTARP discussed in its October 2010 Quarterly Report, after two years, TARP’s Main Street goals of “increas[ing] lending,” and “promot[ing] jobs and economic growth” had been largely unmet, but it is TARP’s failure to realize its most specific Main Street goal, “preserving homeownership,” that has had perhaps the most devastating consequences.  Treasury’s central foreclosure prevention effort designed to address that goal — the Home Affordable Modification Program (“HAMP”) — has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success.  Indeed, even the “good news” of falling estimates for TARP’s cost is driven in part by the ineffectiveness of HAMP and related programs, which provide for TARP-funded grants and incentives.

As we begin fighting over the Final Report of the Financial Crisis Inquiry Commission (FCIC) — which investigated the causes of the financial crisis — it is important to be mindful of Neil Barofsky’s admonition that there will be another financial crisis.  If our government fails to prosecute the malfeasance that caused the crisis itself, that neglect — combined with the enhanced size of those “too big to fail” banks — could create a disaster we would have to characterize as “TBFAB” – Too Big For A Bailout.  What will happen at that point?


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Post-Free-Market Reality

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The problem became obvious at the onset of the financial crisis.  All of the huffing and puffing about our glorious Free Market system was a big lie.  Once the credit bubble had burst, former Treasury Secretary Hank Paulson went into panic mode – his eyes bulging outward even more than normal.  During that fateful week of September 15 2008, Paulson had 24 telephone conversations with Lloyd Blankfein, his successor CEO at Goldman Sachs.  AIG had to get bailed out at taxpayer expense.  From across the pond, the reaction was immediate.  On September 18 2008, Philip Broughton wrote an article for the Daily Mail entitled, “Free-market capitalism lies shredded … while America’s confidence is badly shaken”.  Near the outset of the piece, Broughton chronicled the ugly truth:

For years now, we have had to listen to bankers attacking Washington for imposing regulations that inhibit the free markets from making even more money.

And all the while, they took exorbitant salaries, justifying them on the grounds of their huge contribution to capitalism.

How bitterly ironic it is, then, to see these one-time freemarketeers becoming socialists overnight.

The schoolyard bullies of Wall Street have gone running to the state for help, pleading to be saved from destruction.

They deserve neither our sympathy nor the billions in taxpayer support they are now receiving.

That theme has been reverberating through commentaries ever since.

A year later, Paul Farrell of MarketWatch provided an overview of writings by Jack Bogle, Marc Faber and Thomas Moore to support his contention that “America’s Soul of Capitalism” has been lost:

You know something’s very wrong:  A year ago, too-greedy-to-fail banks were insolvent, in a near-death experience.  Now, magically, they’re back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation and skyrocketing federal debt are killing taxpayers.

Down in Australia, The Propitious Manager wrote an essay on April 4 2010, expressing his amazement that America was having so much trouble trying to stomach the idea of government-backed healthcare:

When you read President O’bama’s healthcare plan the most striking message is the failure of a free market to provide for the community. The healthcare market in the US, left unfettered to run free, just crashes into a heap of mismanagement, inefficiency and opportunism (hold on – isn’t this a familiar story).  I’ll leave you to read the script – but it isn’t a pretty picture.

*   *   *

What I like to call post free market economies, are about identifying the markets which are essential to maintaining thriving people and communities and develop the frameworks which optimize their performance.  Some require complete freedom while others require varying degrees of framework from elected governments.  Developing an increasingly sophisticated community and social framework is really the challenge of the century.  One where it doesn’t matter whether your a rubbish collector or a billionaire – if you get sick, someone will care for you and if you invest your money it will be there when you wake up in the morning.

The idea that we are now living in a post-free-market economy presents itself in a recent commentary by Veronique de Rugy for Bloomberg News, entitled “Why Businesses Can’t Stand Free Markets”.  Ms. De Rugy discussed how businesses exploit regulatory capture and use lobbyists to obtain favorable laws and regulations in order to stifle competition at the expense of consumers.  She concluded with this thought:

Let’s hope that any court ruling deals a blow to the practice of entrenched businesses using government to impose higher costs on consumers while also thwarting upstart entrepreneurs.  No one said loving free markets was easy.

On the other hand, there are many “upstart entrepreneurs” seeking government assistance to circumvent obstacles existing in the free-market system.  This has become especially apparent in the burgeoning solar power industry, where American upstarts are attempting to compete with entities which obtain government financing – not only in China but in the eurozone as well.  Martin LaMonica recently discussed this problem in an article for CNET:

Before the financial crisis, solar challengers were able to build manufacturing facilities using private money–venture capital, private equity, and hedge funds.  These sources still exist, but private investors are being pickier about how they place their bets, said Ted Sullivan, solar analyst at Lux Research.

Raising money on the public markets with an initial public offering was possible a few years ago, too, but is very difficult now, said Ethan Zindler, head of policy analysis at Bloomberg New Energy Finance.  Banks, meanwhile, are unlikely to finance the first factory for a solar company if the technology is relatively new and untested.

That leaves government programs, such as low-cost loans, and state incentives for economic development to help fill the financing gap in many cases.

*   *   *

In an effort to stimulate exports, the China Development Bank has made $40 billion in credit available to six solar companies in the past six months, said Zindler from Bloomberg New Energy Finance.  The U.S. stimulus program made billions of dollars available to stimulate clean-energy technologies, but the U.S. can’t match the amount of money China has made available through these low-cost loans, he said.

“Chinese solar companies are grinding down the cost by building plants the size the world has never seen before and deploying unbelievable amounts of capital to do it,” Zindler said.

In the U.S., the solar industry scored a victory with the passage of the tax bill last week because it included a one-year extension to a grant that replaces a tax credit subsidy.  But it’s unclear what the long-term direction on renewable energy policy is in the U.S., which creates questions over how strong demand will be for solar, Zindler said.

In our post-free-market milieu, there are many exceptions to the general rule that government assistance to business is a bad thing.  Now that people are finally facing up to the reality that many companies (some of which are Cayman Islands-based corporations) have been receiving U.S. government subsidies (of some sort) for decades, difficult decisions must be made to determine when this is appropriate and when it’s not.  American voters need to face up to the fact that many of those poseurs claiming to be champions of “American free enterprise” are nothing more than hypocritical tools for whoever is lining their pockets.  “American free enterprise” died at Maiden Lane.  Deal with it.



Geithner Kool-Aid Is All The Rage

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Treasury Secretary Tim Geithner’s “charm offensive”, began one year ago.  At that time, a number of financial bloggers were invited to the Treasury Department for an “open discussion” forum led by individual senior Treasury officials (including Turbo Tim himself).  Most of the invitees were not brainwashed to the desired extent.  I reviewed a number of postings from those in attendance – most of whom demonstrated more than a little skepticism about the entire affair.  Nevertheless, Secretary Geithner and his team held another conclave with financial bloggers on Monday, August 16, 2010.  The second meeting worked more to Geithner’s advantage.  The Treasury Secretary made a favorable impression on Alex Tabarrok, just as he had done last November with Tabarrok’s partner at Marginal Revolution, Tyler Cowen.  Steve Waldman of Interfluidity provided a candid description of his own reaction to the August 16 event.  Waldman’s commentary exposed how the desired effect was achieved:

First, let me confess right from the start, I had a great time.  I pose as an outsider and a crank.  But when summoned to the court, this jester puts on his bells.  I am very, very angry at Treasury, and the administration it serves.  But put me at a table with smart, articulate people who are willing to argue but who are otherwise pleasant towards me, and I will like them.

*   *   *

I like these people, and that renders me untrustworthy. Abstractly, I think some of them should be replaced and perhaps disgraced.  But having chatted so cordially, I’m far less likely to take up pitchforks against them.  Drawn to the Secretary’s conference room by curiosity, vanity, ambition, and conceit, I’ve been neutered a bit.

More recently, a good deal of attention has focused on a November 4 article from Bloomberg News, revealing that back on April 2, Turbo Tim paid a call on Jon Stewart.  The disclosure by Ian Katz raised quite a few eyebrows:

Geithner and Stewart, host of Comedy Central’s “The Daily Show,” held an off-the-record meeting at Stewart’s office in New York on April 2, according to Geithner’s appointments calendar, updated through August on Treasury’s website.

Since that time, we have heard nothing from Jon Stewart about his meeting with Geithner.  I expect that Stewart will continue his silence about that topic, focusing our attention, instead, on the controversy concerning a book, which should have been titled, Pedophilia For Dummies, while referring to Amazon.com as “NAMBLAzon.com”.  If he uses that joke  – remember that you saw it here, first.

The November 13 New York Times article by Yale economics professor, Robert Shiller, raises the question of whether Professor Shiller is the latest victim of the Geithner Kool-Aid.  Shiller’s essay reeks of the Obama administration’s strategy of approaching the nation’s most pressing crises as public relations concerns — a panacea for avoiding the ugly task of actually solving those problems.  The title of Shiller’s article, “Bailouts, Reframed as ‘Orderly Resolutions’” says it all:  spin means everything.  The following statement is a perfect example:

Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July.  It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers.  Now they will be called “orderly resolutions.”

Yves Smith of the Naked Capitalism website had no trouble ripping this assertion (as well as Shiller’s entire essay) to shreds:

Huh?  It’s widely acknowledged that Dodd Frank is too weak.  In the Treasury meeting with bloggers last August, Geithner didn’t argue the point much, but instead contended that big enough capital levels, which were on the way with Basel III, were the real remedy.

It’s also widely recognized that the special resolution process in Dodd Frank is a non-starter as far as the institutions that pose the greatest systemic risk are concerned, the really big international dealer banks.  A wind-up of these firms is subject to the bankruptcy proceedings of all the foreign jurisdictions in which it operates; the US can’t wave a magic wand in Dodd Frank and make this elephant in the room vanish.

In addition, no one has found a way to resolve a major trading firm without creating major disruption.

*   *   *

Shiller’s insistence that the public is so dumb as to confuse a windown with a bailout reveals his lack of connection with popular perceptions.  The reason the public is so angry with the bailouts is no one, particularly among the top brass, lost his job, and worse, the firms were singularly ungrateful, thumbing their noses at taxpayers and paying themselves record bonuses in 2009.

Bill Maher’s Real Time program of November 12 is just the most recent example of how Bill Maher and most of his guests from the entire season are Geithner Kool-Aid drinkers.  The show marked the ten-trillionth time Maher claimed that TARP was a “success” because the banks have “paid back” those government bailouts.  Bill Maher needs to invite Yves Smith on his program so that she can debunk this myth, as she did in her June 23 piece. “Geithner Yet Again Misrepresents TARP ‘Performance’”.  Ms. Smith is not the only commentator who repeatedly calls out the administration on this whopper.  Marshall Auerback and almost everyone else at the Roosevelt Institute have said the same thing.  Edward Harrison of Credit Writedowns wrote this piece for the Seeking Alpha website, in support of Aureback’s TARP critique.  Will Wilkinson’s October 8 essay in The Economist’s Democracy in America blog presented the negative responses from a number of authorities in response to the claim that TARP was a great success.  With all that has been written to dispute the glorification of TARP, one would think that the “TARP was a success” meme would fade away.  Nevertheless, the Geithner Kool-Aid is a potent brew and its effects can, in some cases, be permanent.


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