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“Why is Obama Championing Bush’s Financial Wrecking Crew?”

Posted on November 23, 2009 | 4 comments
By William K. Black

“First Published on New Deal 2.0“
Tom Frank’s book: The Wrecking Crew explains how the Bush administration destroyed effective government and damaged our social fabric and our economy. The Obama administration has chosen to reward two of the worst leaders of Bush’s crew – Geithner and Bernanke – with promotion and reappointment. Embracing the Wrecking Crew’s most destructive members has further damaged the economy and caused increasing political and moral injury to the administration.

Last week was a bad one for Geithner and Bernanke. Senator Dodd said that Bernanke’s confirmation was no longer a done deal. The House Financial Services Committee revolted against the administration, the Fed, and Chairman Barney Frank. It voted for a strong bill to audit the Fed. Senate Banking Chairman Schumer went to a conference at Columbia University – where a generation of students salivated at the prospects of Wall Street wealth – and was overwhelmed by an audience denouncing the continuing stranglehold of the finance industry over successive administrations and the Congress. Neither Barney’s blarney nor Schumer’s schmooze was any avail before an outraged public.


The administration promptly secured a column in the Washington Post claiming that the effort to fire Geithner “buoy[ed]” him because, as the subtitle to the article explained: “Even ex-Bush aides sympathetic, sources say.” The article didn’t note that Geithner is an “ex-Bush” senior official who, with his fellow “ex-Bush aides” (particularly Bernanke and Paulson) produced a chain of disasters: the bubble, an “epidemic of mortgage fraud” by lenders, the Great Recession, and the scandalous TARP and AIG bailouts. Of course they’re “sympathetic” to a fellow member of the Wrecking Crew that destroyed effective regulation and turned the nation over to Wall Street. The craziest part of the story is that the anonymous Obama administration flack that spread this anecdote believes that we should support Geithner because his fellow members of the Bush Wrecking Crew empathize with him because they too have been criticized for wrecking the economy.

The Washington Post article then offers a metaphor that serves as an apology for the Bush Wrecking Crew. The metaphor is driving over a cliff.

“Secretary Geithner has helped steer the American economy back from the brink, and is now leading the effort on financial reform,” White House spokeswoman Jen Psaki said.

Geithner pushed back against Republicans who questioned his performance, telling them, “you gave this president an economy falling off the cliff.”

“You” – how about “we”? Bush’s financial Wrecking Crew “gave this president an economy falling off the cliff.” Geithner was President of the Federal Reserve Bank of New York from October 23, 2003 until President Obama chose him as his Treasury Secretary. He was supposed to be the lead regulator of many of the largest bank holding companies. His failures as a regulator were a major cause of the “economy falling off the cliff.” Bernanke held prominent positions in the Bush administration from 2002 to the end of the administration and failed as a regulator and as an economist. Geithner and Bernanke failed to regulate even after the FBI publicly warned in September 2004 that (1) there was an “epidemic” of mortgage fraud and (2) it would lead to a financial crisis if it were not contained. Their refusal to take responsibility for the harm they did our nation as leaders of Bush’s financial Wrecking Crew adds to their unsuitability. Rewarding their perennial failures with a promotion and reappointment represents a dereliction of duty by the Obama administration.

The administration apologists praise Geithner and Bernanke for “steer[ing] the American economy back from the brink.” Greenspan, Paulson, Bernanke, and Geithner were the leaders of Bush’s financial Wrecking Crew. They were the guys blinded by their pro Wall Street ideology that drove the car 120 mph down an icy mountain road and lost control of it. They took us to the “brink” of running “off the cliff” and creating the Second Great Depression. The bizarre claim is that we should praise them because they, and Wall Street, only wrecked the economy – they haven’t (yet) utterly destroyed it. Under their metaphor, we’re supposed to cheer Geithner and Bernanke because once they finally figured out that they were careening toward the cliff they decided to sideswipe a row of trees in order to avoid going off the cliff. They wrecked the car but they walked away from the crash without a scratch. If your teenager gets drunk, speeds, crashes into a school bus (injuring dozens of kids), and flips the Ford Focus – but walks away from the crash – you don’t praise him, give him the keys to the family minivan, and have him drive the soccer team to practices. You take all the keys away from him and ground him.

The Obama administration promoted Bush’s architects of the financial disaster and demands that we hail them as heroes. President Bush was ridiculed for saying: “Brownie, you’re doing a heck of a job.” FEMA administrator Michael Brown stood by while Hurricane Katrina reduced a single large city to ruin. Geithner and Bernanke stood by while scores of large cities were devastated.

I suggest that we will build on the momentum we’ve achieved on the Fed audit by making the following issues our near term financial priorities:

1. Fire the senior leaders of Bush’s and Clinton’s financial Wrecking Crews and stop treating them as financial experts. President Obama should not reappoint Bernanke as Fed Chairman. He should dismiss Geithner and Summers and cease to take any advice from Rubin. Replace them with the Reconstruction Crew – people with a track record of getting things right and being effective economists, regulators, and prosecutors. Members of Bush’s financial Wrecking Crew run far too many regulatory agencies, often as “Actings.” They can, and should, be replaced promptly.

2. End “too big to fail.” These banks are “systemically dangerous institutions” (SDIs). They should not be allowed to grow, they should be shrunk to the point that they no longer pose systemic risk, and they should be subject to vigorous regulation while shrinking. They are too big to manage and too big to regulate. They are ticking time bombs that will cause recurrent global crises as long as they are SDIs.

3. Adopt Representative Kaptur’s proposed to provide the FBI with at least 1000 additional white-collar specialists. Senator Durbin and (then) Senator Obama made a similar proposal several years ago.

4. End the perverse executive compensation systems that reward failure and fraud. The private sector has made compensation worse since the crisis. Modern executive compensation creates a virtually perfect crime – “accounting control fraud.” Until we fix the perverse incentives of executive compensation we will have recurrent epidemics of fraud and global financial crises.
5. Kill TARP and PPIP. Use the funds to help honest homeowners that would otherwise lose their homes because of predatory loan terms.

6. Make the Federal Reserve System public. It is a largely private structure that creates intense conflicts of interest and ensures that it is controlled by the systemically dangerous institutions. We have already decided that such a structure is inherently improper. The Federal Home Loan Bank System was set up along the same institutional lines and suffered from the same conflicts of interest. Congress ordered an end to these conflicts in the 1989 FIRREA legislation. It should end private control of the Fed.

7. Defeat any proposal to make the Fed the “Uberregulator.” The Fed, for inherent institutional reasons, is unsuited to be the “systemic risk regulator.” The Fed has never cared about regulation. The Fed cares about monetary policy and (theoclassical) economic theory and research. Regulation is, at best, a tertiary concern. Its economists wrote frequently about systemic risk – but missed the obvious, massive systemic risk of the financial bubble and the epidemic of accounting control fraud. Its policies intensified rather than restricting systemic risk. Theoclassical economists have no effective theories (or policies) to deal with bubbles or epidemics of accounting control fraud. Greenspan, Bernanke, and Geithner epitomize the Fed’s inability to recognize or reduce systemic risk. Their policies consistently increased systemic risk. Greenspan didn’t believe that the Fed should act against fraud. Geithner testified before Congress that he had never been a regulator (a true statement – but one that should have gotten him fired rather than promoted). Bernanke praised the subprime loans that caused the crisis and were so often fraudulent.

8. Sever the Consumer Financial Product Agency portion from the broader (and deeply flawed) regulatory reform bills in the House and Senate and adopt it into law. Revise the broader bill to strip out its many anti-reform provisions.

9. End the waste of long-term unemployment. Anyone able and willing to work should be employed by the government as an employer of last resort and should help repair our crumbling infrastructure. Paying people to do nothing or allowing them to become homeless (the status quo) is an insane system.

10. Adopt a $250 billion revenue sharing program. American state and local governments are in economic crisis. They are slashing spending at the worst possible time when their services are most vital and when cutting spending is pro-cyclical and will delay our recovery from the Great Recession. Revenue sharing was a Republican initiative. Republicans and “Blue Dog” Democrats killed the revenue sharing provisions of the administration’s proposed Stimulus bill. That was an enormous mistake. The federal government is not like a state government (or a household). It is a sovereign government with its own currency and a central bank. It can – and should – run large deficits during deep recessions, but the states and local governments cannot. Revenue sharing is the ideal answer to the crisis and it is an answer with an impeccable conservative pedigree. State and local governments should come together and demand a program to offset the state and local cutbacks – roughly $250 billion. (The Obama administration’s claim that reducing the deficit should be a priority – at a time when unemployment has reached tragic levels – is economically illiterate. It repeats the error that FDR made when he listened to conservative economic advisors and slashed the budget deficit during the Great Depression – causing a surge in unemployment and the extension of the depression. The large federal deficits of World War II reversed the policies of his conservative economic advisors and ended the Great Depression.)

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Posted in Regulation, Uncategorized, William K. Black

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Memo to Congress: Don’t Increase the Government’s Debt Limit!

Posted on November 19, 2009 | 19 comments
By L. Randall Wray

In a piece written for CNN, Senator Evan Bayh rails against the growing federal government budget deficit. He warns that next month the Treasury will ask Congress to raise the debt limit from its current $12.1 trillion, and promises that he will vote “no”. It is time, he argues, for Congress to stand up for our nation’s future by creating a bi-partisan debt commission that would finally put an end to “unsustainable” deficit spending.

The Senator goes on:

When President George W. Bush took office in 2001, our public debt amounted to 33 percent of our economy. Today, it is 60 percent of our gross domestic product. If we do nothing, our debt is projected to swell to over 70 percent by 2019. To put those numbers in perspective: If you divided the debt equally among all Americans, every man, woman and child living in the United States today would owe more than $39,000.

I presume the Senator has got his math correct, but there is a glaring error in his English that can be corrected by substituting an “n” for an “e”: If you divided the debt equally among all Americans, every man, woman and child living in the United States today would own more than $39,000. Government debt is a private asset. You and I do not owe government debt, we own it. Indeed, the only source of net dollar-denominated financial wealth is federal government debt.

The good Senator continues, comparing his proposed debt commission with an earlier successful bi-partisan effort:

There is precedent to create this type of commission with real teeth. President Ronald Reagan created a commission, chaired by Alan Greenspan, to shore up Social Security in the early 1980s.

That commission hiked payroll taxes to transform Social Security from a “pay-as-you-go” system (payroll taxes collected were matched to current year spending) to an “advanced funded” system that accumulated “Trust Fund assets”. In truth the Trust Fund is nothing but an accounting gimmick in which one arm of government (the Treasury) owes another arm of government (Social Security), with workers and their firms saddled with payroll taxes that are a third larger than Social Security spending. Like almost everything else Alan Greenspan did, the Social Security commission was a monumental failure and its actions were completely unnecessary. All Social Security payments can be made as they come due whether the Trust Fund holds Treasury debt or not, and no matter how much “revenue” the payroll tax collects. Like the bowling alley that credits points when pins are knocked down, the Treasury cannot run out of “points” credited to the accounts of pensioners.

The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let’s support Senator Bayh’s proposal to “just say no” to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.

This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs.

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Posted in L. Randall Wray, Taxes, The Federal Government Deficit, The National Debt, Uncategorized

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Should America Kowtow to China?

Posted on November 17, 2009 | 3 comments
By Marshall Auerback
First Published on New Deal 2.0.

Do the Chinese really fund our deficit? Or is this more Neo-classical money mythology?

Another Presidential junket to Asia and another one of the usual lectures from China, decrying our “profligate ways”. Today’s Wall Street Journal reports:, “China’s top banking regulator issued a sharp critique of U.S. financial management only hours before President Barack Obama commenced his first visit to the Asian giant, highlighting economic and trade tensions that threaten to overshadow the trip.”

According to Liu Mingkang, chairman of the China Banking Regulatory Commission, a weak U.S. dollar and low U.S. interest rates had led to “massive speculation” that was inflating asset bubbles around the world. It has created “unavoidable risks for the recovery of the global economy, especially emerging economies,” Mr. Liu said. The situation is “seriously impacting global asset prices and encouraging speculation in stock and property markets.”

Well, “them’s fightin’ words”, as we say over here. And of course, the President and his advisors are supposed to accept this criticism mildly because in the words of the NY Times, the US has assumed “the role of profligate spender coming to pay his respects to his banker.”

The Times actually does believe this to be true. They refer to China’s role as America’s largest “creditor” as a “stark fact”. They do not seem to understand that simply because a country issuing debt which it creates, it does not depend on bond holders to “fund” anything. Bonds are simply a savings alternative to cash offered by the monetary authorities, as we shall seek to illustrate below.

It is less clear to us whether the Chinese actually believe this guff, or simply articulate it for public consumption. China has made a choice: for a variety of reasons, it has adopted an export-oriented growth strategy, and largely achieved this through closely managing its currency, the remnimbi, against the dollar.

One can query the choice, as many would argue that it is more economically and socially desirable for China to consume its own economic output. According to Professor Bill Mitchell, for example, “once the Chinese citizens rise up and demand more access to their own resources instead of flogging them off to the rest of the world…then the game will be up. They will stop accumulating financial assets in our currencies and we will find it harder to run [current account deficits] against them.”

But there have undoubtedly been certain benefits that have accrued to the Chinese as a consequence of this strategy. The export prices obtained by Chinese manufacturers are about 10 times as high as the prices obtained in the more competitive domestic markets, and the challenge of competing in global markets has forced Chinese manufacturers to adhere to higher quality standards. This, in turn, has improved the overall quality of Chinese products. In the words of James Galbraith:

“Is there a way for the Chinese manufacturing firm to turn a profit? Yes: the alternative to selling on the domestic market is to export. And export prices, even those paid at wholesale, must be multiples of those obtained at home. But the export market, however vast, is not unlimited, and it demands standards of quality that are not easily obtained by neophyte producers and would not ordinarily be demanded by Chinese consumers. Only a small fraction of Chinese firms can actually meet the standards. These standards must be learned and acquired by practice.” (”The Predator State, Ch. 6, “There is no such thing as free trade”, pg. 84).

What about the US government? What should it do? Should it actually respond to China’s complaints by trying to “defend the dollar”?

I hear this recommendation all of the time in the chatterplace of the financial markets, but seldom do those who fret about the dollar’s declining level actually suggest a concrete strategy to achieve the objective. In fact, it is unclear to me that there is any measure the Fed or Treasury could adopt which might support the dollar’s external value.

And why should they? Given the horrendous unemployment data, and 65% capacity utilization, it is hard to view imported inflationary pressures via a weaker dollar actually becoming a serious threat.

But wait? Don’t the Chinese (and other external creditors) “fund” our deficit? And won’t they demand a higher equilibrating interest rate in order to offset the declining value of their Treasury hoard?

Again, this displays a seriously lagging understanding of how much modern money has changed since Nixon changed finance forever by closing the Gold window in 1973. Now that we’re off the gold standard, the Chinese, and other Treasury buyers, do not “fund” anything, contrary to the completely false & misguided scare stories one reads almost daily in the press.

This claim is seldom challenged, but our friend, Warren Mosler, recently gave an excellent illustration of this fact in an interview with Mike Norman. Mosler provides a hypothetical example in which China decides to sell us a billion dollars’ worth of T-shirts. We buy a billion dollars’ worth of T-shirts from China:

“And the way we pay them is somebody pays China. And the money goes into their checking account at the Federal Reserve. Now, it’s called a reserve account because it’s the Federal Reserve, and they give it a fancy name. But it’s a checking account. So we get the T-shirts, and China gets $1 billion in their checking account. And that’s just a data entry. That’s just a one and some zeroes.

Whoever bought them gets a debit. You know, it might have been Disneyland or something. So we debit Disney’s account and then we credit China’s account.

In this situation, we’ve increased our trade deficit by $1 billion. But it’s not an imbalance. China would rather have the money than the T-shirts, or they wouldn’t have sent them. It’s voluntary. We’d rather have the T-shirts than the money, or we wouldn’t have bought them. It’s voluntary. So, when you just look at the numbers and say there’s a trade deficit, and it’s an imbalance, that’s not correct. That’s imbalance. It’s markets. That’s where all market participants are happy. Markets are cleared at that price.

Okay, so now China has two choices with what they can do with the money in their checking account. They could spend it, in which case we wouldn’t have a trade deficit, or they can put it in another account at the Federal Reserve called a Treasury security, which is nothing more than a savings account. You give them money, you get it back with interest. If it’s a bank, you give them money, you get it back with interest. That’s what a savings account is.”

The example here clearly illustrates that bonds are a savings alternative which we offer to the Chinese manufacturer, not something which actually “funds” our government’s spending choices. It demonstrates that rates are exogenously determined by our central bank, not endogenously determined by the Chinese manufacturer who chooses to park his dollars in treasuries (credit demand, by contrast, is endogenous).

Here is how the mechanics actually work: government spending and lending adds reserves to the banking system because when the government spends, it electronically credits bank accounts.

By contrast, government taxing and security sales (i.e. sales of bonds) drain (subtract) reserves from the banking system. So when the government realizes a budget deficit (as is the case today), there is a net reserve add to the banking system, WHICH BRINGS RATES LOWER (not higher). That is, government deficit spending results in net credits to member bank reserves accounts. If these net credits lead to excess reserve positions, overnight interest rates will be bid down by the member banks with excess reserves to the interest rate paid on reserves by the central bank (currently .25% in the case of the US since the Fed started to pay interest on these reserves). If the central bank has a positive target for the overnight lending rate, either the central bank must pay interest on reserves or otherwise provide an interest bearing alternative to non interest bearing reserve accounts. But this is a choice determined by our central bank, not an external creditor.

Yet we are constantly being told by the financial press that the dollar’s weakness was supposed be the factor that would “force” the Fed to raise rates, since the Chinese supposedly “fund” our deficits.

So far, that thesis hasn’t been borne out. And it won’t be, because this isn’t how things operate in a post gold-standard world.

And a second and equally salient point: what would those who fret about the dollar, have the Fed do? Should they raise rates to defend it? It is unclear that this would work. The relationship between a given level of interest rates offered by the central bank and the external value of a currency is tenuous. Consider Japan as Exhibit A. The BOJ has been offering virtually free money for 15 years and yet the yen today remains a strong currency (much to the chagrin of the likes of Toyota or Sony).

Of course, higher rates can have an offsetting beneficial income impact (what Bernanke calls the “fiscal channel”), but it does not follow that a decision to raise rates would actually elevate the value of the dollar (and the benefits of higher rates from an income perspective could just as easily be achieved via lower taxation).

The reality is that private market participants could well view the move as something akin to a panicked response by the Fed, and the decision could well trigger additional capital flight, which could weaken the value of the dollar.

So it is unclear to me what the Tsy or Fed should be doing about the dollar. My view is that this is a private portfolio preference shift and I don’t think central banks should be responding to every vicissitude of changing market preferences. The US government should simply ignore the market chatter and idle threats from the Chinese and do nothing.

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Posted in Marshall Auerback, Taxes, The Federal Government Deficit, The National Debt, Uncategorized

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When All Else Has Failed, Why Not Try Job Creation?

Posted on November 15, 2009 | 2 comments

By L. Randall Wray

The US continues to hemorrhage jobs even as some purport to see “green shoots”. All plausible projections show that unemployment will rise even if our economy begins to grow. Personally, I think those green shoots will die this winter because the stimulus package is far too small and because the financial system is going to crash again. The longer we wait to actually address the unemployment problem, the worse are the prospects for a real recovery.

In his recent piece, Paul Krugman writes:

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German- style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.


As Krugman reports, Germany has avoided massive job losses by subsidizing firms that retain workers but reduce hours worked. The EPI’s proposal follows a similar strategy. This is fine so far as it goes—in a sense it allows workers, firms, and government to share the burden of reduced output and thus reduced work hours required. That is more equitable but in my view it is not a path toward recovery. While I do agree with Krugman that greater aggregate demand stimulus is required, there is no reason to believe that would provide a sufficient supply of jobs for all who want to work.

The final sentence in the Krugman post makes far more sense: let’s create MORE jobs, MORE work hours, and MORE payroll. A new, New Deal program with a permanent and universal job guarantee that will supply as many jobs as there are job seekers. Not only will this provide jobs in the New Deal style program, but it will also save jobs and increase work hours in the rest of the economy. Why go for second or third best when the best option is available?

Winston Churchill remarked “The Americans will always do the right thing………. after they`ve exhausted all the alternatives”. Direct job creation is the right way to put the economy onto a sustainable path to recovery.

For discussion and ideas on direct job creation and full employment, go here; here; here; and here.

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Posted in L. Randall Wray, Policy and Reform, Uncategorized, Unemployment

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One To Watch

Posted on November 12, 2009 | 8 comments
By Stephanie Kelton

So far, President Obama has shown little understanding of our domestic monetary system. His pledge to cut the deficit in half by the end of his first term, together with his assertion that the federal government is “out of money”, reveal deep flaws in his understanding of key issues related to the workings of government finance. Unless he masters the basics of double-entry bookkeeping — and fast — the nation’s job numbers will remain grim, social unrest will mount, and every one of his political challengers will adopt the same battle cry in 2012: “President Obama mishandled the economy — Vote for me if you want a better tomorrow.”

Almost none of them will have a better understanding of the issues than our current president, but one candidate will, and his name is Warren Mosler. I ran across this interview yesterday and thought it was worth sharing. He is one to watch.

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Posted in The Federal Government Deficit, The National Debt, Uncategorized

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Prof. William K. Black on the Financial Crisis in the United States

Posted on November 10, 2009 | 1 comment

Our own Prof. William K. Black delivered a presentation at the Corruption Forum 2009-University of Calgary.


See also the videos below.

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Invitation to Live Webcast Seminars with UMKC Prof. L. Randall Wray

Posted on November 9, 2009 | 1 comment
Our own Prof. L. Randall Wray will make a presentation and start off a discussion on the prospects for full employment and the potential application of employment guarantee programs in USA and other countries. See below how to participate. [via the WORLD ACADEMY OF ART & SCIENCE]

e-Conference on the GLOBAL EMPLOYMENT CHALLENGE
An inquiry into the root causes and remedy for the problem of unemployment

We cordially invite you to participate in the first GEC web seminar on November 10, 2009

L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. He is also a Senior Scholar at the Levy Economics Institute of Bard College in New York. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach. He also publishes extensively in the areas of full employment policy and the monetary theory of production. With President Dimitri B. Papadimitriou, he is working to publish, or republish, the work of the late financial economist Hyman P. Minsky, and is using Minsky’s approach to analyze the current global financial crisis. He is the author of Money and Credit in Capitalist Economies, 1990, and Understanding Modern Money: The Key to Full Employment and Price Stability, 1998. He is also coeditor of, and a contributor to, Money, Financial Instability, and Stabilization Policy, 2006, and Keynes for the 21st Century: The Continuing Relevance of The General Theory, 2008.

For a complete list of Professor Wray’s publications and links to working papers, click here

Professor Wray will make a presentation and start off a discussion on the prospects for full employment and the potential application of employment guarantee programs in USA and other countries.

His presentation will be followed by panel discussion.

The entire two-hour seminar will be recorded as an audio/video webcast and hosted on the GEC conference site after the meeting.

What you need to participate:

To participate in the panel discussion – computer with webcam and skype audio or telephone access
To view and listen to the seminar – computer with headset or speakers
To listen to the seminar only – telephone uplink

If you will participate in the audio discussion by phone, please give the country code and phone number on which you want to be contacted

Send your reply to [email protected]

GEC
Program Info

GEC PROJECT TEAM
November 5, 2009

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Happy Halloween: Pay Curbs Are a Trick on The Taxpayer, Not a Treat

Posted on October 25, 2009 | Comments Off on Happy Halloween: Pay Curbs Are a Trick on The Taxpayer, Not a Treat
By Marshall Auerback

How appropriate that with Halloween just around the corner, the Fed and Treasury have announced a coordinated effort that will put the central bank at the forefront of pay regulation on the zombie firms now kept alive courtesy of US government largesse. Trick or treat for the US taxpayer?

The new pay regulations are ostensibly designed try to align the financial incentives of managers with the longer-term performance of their firms. The Federal Reserve will have direct oversight over the pay of tens of thousands of executives, bankers, and traders. The oversight is being justified as a “safety and soundness issue”, according to Fed Chairman, Ben Bernanke.

Would that the Fed and Treasury had demonstrated similar concerns about the overheating housing market, the degeneration of lending standards, the proliferation of dangerous Over The Counter (OTC) derivatives during the past 10 years, areas where more aggressive moves by the nation’s central bank and the Treasury could have done much to alleviate today’s still profound financial instability.


This measure, by contrast, reeks of bogus populism. In the words of Reuters’ columnist, Jeffrey Cane:

By making executives at seven companies wear hair-shirts, some of the populist anger over bonuses and Wall Street may be assuaged — anger that should rightly be channeled into calls to prevent banks from engaging in risky activities. There’s no reason that banks that are back-stopped by the government should be in the securities business. Taxpayers — voters — should ignore the media fascination with pay and urge that Congress heavily regulate and tax such risky activities.

As Cane acknowledges, the curbs only apply to the newest wards of the state, the likes of AIG, Chrysler, GM, Bank of America, and Citibank. The more than 700 banks and other companies that have directly benefited from the government’s largesse are not affected — even those who are minting profits from credit markets propped up by trillions of dollars of the taxpayers’ money, and who continue to benefit from government largesse as a consequence of the FDIC guarantees of their commercial paper, which substantially reduced (subsidized?) borrowing costs at a time of uniquely high financial stress. And we’re still neither proposing any kind of serious regulation, nor any kind of resolution mechanism to deal with the problem of “too big to fail” banks.

The Fed has other big ideas: Federal Reserve Chairman Ben S. Bernanke has also called on Congress to ensure that the costs of closing down large financial institutions are borne by the industry instead of taxpayers. He has called for a “credible process” for imposing losses on the shareholders and creditors, saying “any resolution costs incurred by the government should be paid through an assessment on the financial industry.” That would be the very same financial industry that has already received trillions of dollars in financial guarantees and aid by the Federal Government, wouldn’t it? The left hand giveth, and the right hand taketh away. It’s all a big shell game. Given the absence of structural changes in the industry, this will simply increase the cost of credit, so the taxpayer will end up paying again.

What’s with the Fed’s newfound populism? It’s as if Ben Bernanke has started to channel his inner Huey Long. Well, there could well be other motivations at play here.

The Federal Reserve, as we know, is now under uncomfortably high public scrutiny and its hitherto secretive actions are being subject to the greatest degree of Congressional and press scrutiny that the institution has experienced in its 96 year history. True, in the 1970s, the then Chairman of the Committee of Financial Services, Henry Reuss, sought to challenge the constitutionality of the Federal Open Market Committee’s ultimate decision making power on monetary policy, but he was denied standing, so the Supreme Court never ruled on the issue. But now, like so many other things, the Fed’s privileged status in our society is again being queried, so a healthy dose of skepticism in regard to their actions is well merited.

And what of the Obama Administration itself? It demonstrates a similar kind of cognitive dissonance evinced by the Federal Reserve. Having left open the gates of the asylum, the President and his main economic advisors profess shock, (“shock!”) that the sociopaths who run our investment banks are back to their old tricks, daring to gamble in a totally uninhibited manner with the taxpayers’ dollars Those dollars, which have been all but guaranteed by Treasury Secretary Geithner, who promised that there would be “no more Lehmans”. The very same tax dollars now being deployed to lobby against financial reforms which will mitigate the practices that created the mess in the first place. The next time these same banks are likely to leave a catastrophe far scarier than any Halloween costume. Having been duped, the President now seeks to deploy a cheap political trick, attacking an easy political target, but as usual, doing nothing concrete to ameliorate credit conditions and, indeed, will likely act to increase the cost of credit.

Just over the weekend, the President again lambasted the banks for failing to enhance credit availability. During his weekly address, the President said banks should return the favor of their recent taxpayer-financed bailout by lending more money to small businesses. As a taxpayer, I don’t recall ever granting this “favor”, but that aside, the President still demonstrates huge conceptual confusion when it comes to the economy. Under the guidance of Larry Summers and Timmy Geithner, policy has continued to preserve the interests of big financial companies, rather than implementing government programs that directly sustain employment and restore states’ finances. To make matters worse, the Obama Administration remains preoccupied with how to “fund” these expenditures, since he claims we are “running out of money”.

All of which collectively will serve to cause incomes to stagnate, personal balance sheets to deteriorate, thereby diminishing creditworthiness. Repeat after me, Mr. President: “Enhance creditworthiness and improved credit conditions will follow; personal balance sheets before bank balance sheets.” You improve aggregate demand, and incomes will rise, as will the borrowers’ capacity to borrow. All of which makes it easier for lenders to lend. It’s so simple that even a banker can figure it out.

And here is why the whole model of securitization itself precludes improving credit conditions. In the words of L. Randall Wray and Eric Tymoigne,

When a commercial bank makes a loan, the loan officer wonders “how will I get repaid”. Because the loan is illiquid and will be held to maturity, it is the ability to repay that matters—and it is most prudent to rely on income flows rather than potential seizure and forced sale of the asset at some time in the possibly distant future and in unknown market conditions. On the other hand, when an investment bank makes a loan, the loan officer wonders “how will I sell this asset”. The future matters only to the degree that it enters the value of the asset today because it will be sold immediately. (“It isn’t Working: Time for More Radical Policies” http://www.levy.org/ )

And you can’t sell any securitized asset today.

It’s Halloween at the end of this week, so it wouldn’t be right to conclude this post without a bit of Halloween imagery. Last week, I described the bankers as vampires (with full tribute to Matt Taibbi and the banks as zombies. I have also noted (as has my colleague, Anat Shenker) the tendency of many deficit terrorists (many of whom the largest beneficiary so far of taxpayer bailouts, but who still claim we “can’t afford” to help the vast majority of Americans) to deploy imagery relating to our government spending as something unnatural or unhealthy. We hear characterizations of the budget deficit as a “national cancer” (former Illinois Senator, Paul Simon – http://www.moslereconomics.com/mandatory-readings/soft-currency-economics ), or government spending as something akin to a heroin addiction (a description I heard last week at a Financial Forum in Denver, Colorado). True to my love of Hammer Film horror classics, I prefer a different image to describe our government spending. It’s a necessary blood transfusion, without which the patient (in this case, the US economy) dies.

But like any blood transfusion, you want to give it to a sick patient who has a chance to get better, not a terminally ill one (i.e. like our TBTF banks), who are being propped up by phony accounting (what we might call a life support system, where the government steadfastly refuses to pull the plug). Unfortunately, these “blood transfusions” have hitherto been misallocated. No amount of populist grandstanding by the President or the Fed can change that. The aid conferred to the banks is like using our blood to feed vampires, who in turn prey on the rest of us, rather than people who could genuinely use a transfusion to recover their (economic) health. By the same token, introducing pay restrictions on the likes of AIG, BofA, or Citi, is akin to complaining about the quality of the clothing being worn by the zombies as they rampage and munch away on the living. Happy Halloween everybody.

Comments Off on Happy Halloween: Pay Curbs Are a Trick on The Taxpayer, Not a Treat

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The Time Has Come for Direct Job Creation

Posted on October 23, 2009 | 9 comments
First Published on the New America Foundation’s blog.
According to an ILO report[15] issued before the global economic crisis hit, even though more people were working than ever before, the number of unemployed was also at an all time high of nearly 200 million. Further, “strong economic growth of the last half decade has only had a slight impact on the reduction of workers who live with their families in poverty…”, in part because the growth was fueling productivity growth (up 26% in the past decade) but was not creating many new jobs (up only 16.6%). The report concluded: “Every region has to face major labour market challenges” and that “young people have more difficulties in labour markets than adults; women do not get the same opportunities as men, the lack of decent work is still high; and the potential a population has to offer is not always used because of a lack of human capital development or a mismatch between the supply and the demand side in labour markets.” All of these statements applied equally well to the United States even at the peak of our business cycle in early 2008.

Now, of course, our labor market is in dire straits–having lost more than 6 million jobs, with official unemployment approaching 10%, and with millions more workers facing reduced hours and even reduced hourly pay. According to a New America Foundation report[16] released late last spring, if we add “marginally attached” workers, those forced to work part-time, and those who would like to work but have given up looking, the effective unemployment total is over 30 million. Add to that another 2 million incarcerated individuals–many of whom might have avoided a life of crime if they had enjoyed better economic opportunities, and it is likely that a more accurate measure of the unemployment rate would be about 20%.

These numbers are similar to those I obtained for the Clinton boom when I estimated how many potential workers remained jobless even when the economy was supposedly at full employment.[17] Labor force participation rates–the percent of working age population that is employed or unemployed–vary considerably by educational level; high school dropouts have very low participation rates, and correspondingly high incarceration rates. I calculated that as many as 26 million more people would be working if we brought labor force participation rates of all adults up to the levels enjoyed by college graduates. That number would be higher now because of lackluster job creation during the Bush years and due to the economic crisis. Thus, we can safely conclude that whether the US economy is booming or busting, it is chronically tens of millions of jobs short.

Comparing such numbers with President Obama’s promise that his policies will create, or at least preserve, three or four million jobs demonstrates that current policy is not up to the task of dealing with our labor market problems. To be sure, there is no single labor market policy that can deal with the scope of our problems. We certainly need to resolve the financial crisis and to restore economic growth. But as experience demonstrates, even relatively robust growth does not automatically create jobs.

We also have severe structural problems: some sectors, such as manufacturing, will create far too few jobs relative to the supply of workers with appropriate skills, while others, such as the FIRE sector–finance, insurance and real estate–likely should be downsized, and still others, such as nursing and trained childcare, face a chronic shortage. Finally, it could be argued that we face another kind of structural problem identified a half century ago by John Kenneth Galbraith: a relatively impoverished public sector and a bloated for-profit sector. Thus, while recognizing the multi-faceted nature of our problem, I believe that direct job creation by government would go a long way toward resolving a large part of–and probably the worst of–our unemployment problem even as it could put people to work to provide needed public sector services.

Direct job creation programs have been common in the US and around the world. Americans immediately think of the various New Deal programs such as the Works Progress Administration (which employed about 8 million), the Civilian Conservation Corps (2.75 million employed), and the National Youth Administration (over 2 million part-time jobs for students). Indeed, there have been calls for revival of jobs programs like VISTA and CETA to help provide employment of new high school and college graduates now facing unemployment due to the crisis.[18]

But what I am advocating is something both broader and permanent: a universal jobs program available through the thick and thin of the business cycle. The federal government would ensure a job offer to anyone ready and willing to work, at the established program compensation level, including wages and benefits package. To make matters simple, the program wage could be set at the current minimum wage level, and then adjusted periodically as the minimum wage is raised. The usual benefits would be provided, including vacation and sick leave, and contributions to Social Security.

Note that the program compensation package would set the minimum standard that other (private and public) employers would have to meet. In this way, public policy would effectively establish the basic wage and benefits permitted in our nation–with benefits enhanced as our capacity to provide them increases. I do not imagine that determining the level of compensation will be easy; however, a public debate that brings into the open matters concerning the minimum living standard our nation should provide to its workers is not only necessary but also would be healthy.

The federal government would not have to micromanage such a program. It would provide the funding for direct job creation, but most of the jobs could be created by state and local government and by not-for-profit organizations. There are several reasons for this, but the most important is that local communities have a better understanding of needs. The New Deal was more centralized, but many of the projects were designed to bring development to rural America: electrification, irrigation, and large construction projects. To be sure, we need infrastructure spending today, but much of that can be undertaken by state and local governments. This program would provide at least some of the labor for these projects, with wages and some materials costs paid by the federal government.

More importantly, today we face a severe shortage of public services that could be substantially relieved through employment at all levels of government plus not-for-profit community service providers. Examples include elder care and childcare, playground supervision, non-hazardous environmental clean-up and caring for public space, and low-tech improvement of energy efficiency of low-income residences. Decentralization promotes targeting of projects to meet community needs–both in terms of the kinds of programs created but also in terms of matching new jobs to the skills of unemployed people in those communities. Also note that by creating millions of decentralized public service jobs, we avoid one of the major criticisms of the stimulus package: because there were not enough “on the shelf” infrastructure-type projects, it is taking a long time to create jobs. Instead, we should allow every community service organization to add paid jobs so that they can quickly expand current operations.

As the economy begins to recover, the private sector (as well as the public sector) will begin to hire again; this will draw workers out of the program. That is a good thing; indeed, one of the major purposes of this program is to keep people working so that a pool of employable labor will be available when a downturn comes to an end. Further, the program should do what it can to upgrade the skills and training of participants, and it will provide a work history for each participant to use to obtain better and higher paying work. Experience and on-the-job training is especially important for those who tend to be left behind no matter how well the economy is doing. The program can provide an alternative path to employment for those who do not go to college and cannot get into private sector apprenticeship programs.

There are some recent real world examples of programs that are similar to the one I am proposing. When Argentina faced a severe financial, economic, and social crisis early this decade, it created the “Jefes” program in which the federal government provided funding for labor and a portion of materials costs for highly decentralized projects, most of which created community service jobs.[19] The program was targeted to poor families with children, allowing each to choose one “head of household” to participate in paid work. The program was up-and-running in a matter of four months, creating jobs for 14% of the labor force–a remarkable achievement. More recently, India has enacted the National Rural Employment Guarantee, which ensures 100 days of paid work to rural adults. While the program is limited, it does make an advance over the Jefes program: access to a job becomes a recognized human right, with the government held responsible for ensuring that right.

Indeed, the United Nations Universal Declaration of Human Rights includes the right to work, not only because it is important in its own right, but also because many of the other economic and social entitlements proclaimed to be human rights cannot be secured without paying jobs. And both history and theory strongly indicate that the only way to secure a right to work is through direct job creation by government. This is not, and should not be, a responsibility of the private sector, which employs workers only on the expectation of selling output at a profit. Even if we could somehow manage economic policy to produce a permanent state of boom, we know that will still leave tens of millions of potential workers unemployed or in part-time and underpaid work. Hence, a direct government job creation program is a necessary component of any strategy of ensuring achievement of many of the internationally recognized human rights.

[15] Global Employment Trends Brief 2007, International Labour Office; results summarized in “Global Unemployment Remains at Historic High Despite Strong Economic Growth”, ILO 25 January 2007, Geneva. See also The Employer of Last Resort Programme: Could it work for developing countries?, L. Randall Wray, Economic and Labour Market Papers, International Labour Office, Geneva, August 2007, No. 2007/5.

[16] Not Out of the Woods: A Report on the Jobless Recovery Underway, New American Contract, New America Foundation, 2009, www.newamericancontract.net.

[17] Can a Rising Tide Raise All Boats? Evidence from the Kennedy-Johnson and Clinton-era expansions, L. Randall Wray, in Jonathan M. Harris and Neva R. Goodwin (editors), New Thinking in Macroeconomics: Social, Institutional and Environmental Perspectives, Northampton, Mass: Edward Elgar, pp. 150-181.

[18] See Not Out of the Woods, referenced above.

[19] See Gender and the job guarantee: The impact of Argentina’s Jefes program on female heads of households, Pavlina Tcherneva and L. Randall Wray, CFEPS Working Paper No. 50, 2005.

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Posted in L. Randall Wray, Policy and Reform, Uncategorized, Unemployment

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The Ranking of Economic Journals

Posted on October 22, 2009 | 1 comment
In a recent Huffington Post article, Ryan Grim argued that, for economists, “publishing in top journals is, like in any discipline, the key to getting tenure.”

But who decides which journals are the considered “top,” and by what criteria? UMKC Professor Fred Lee examines the problem of ranking in this recent piece (.pdf): “The Ranking Game, Class, And Scholarship In American Mainstream Economics”

Lee argues that “instead of a scientific community dedicated to the production of scientific knowledge, we have one in which economists (and their departments) are devoted to social climbing and acquiring invidious social distinctions that are publicly endorsed via the ranking game where the production of knowledge emerges (if at all) as a unintended by-product.”

Indeed, pursuing tenure ironically requires a kind of fealty to the dominant economic ideology that is the precise opposite of the purpose of tenure, which is to protect academics who present oppositional perspectives.

Read more here and here.

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