Category Archives: L. Randall Wray

The CBO’s Misplaced Fear of a Looming Fiscal Crisis

Posted on July 29, 2010 by | 14 comments

By Eric Tymoigne

The Congressional Budget Office (CBO) has just released an 8-page brief titled “Federal Debt and the Risk of a Fiscal Crisis.” In it you will find all the traditional arguments regarding government deficits and debt: “unsustainability,” “crowding out”, bond rates rising to “unaffordable” levels because of fears that the Treasury would default or “monetize the debt,” the need to raise taxes to pay for interest servicing and government spending, the need “to restore investor’s confidence” by cutting government spending and raising taxes. This gives us an opportunity to go over those issues one more time.

  1. “growing budget deficits will cause debt to rise to unsupportable levels”

A government with a sovereign currency (i.e. one that creates its own currency by fiat, only issues securities denominated in its own currency and does not promise to convert its currency into a foreign currency under any condition) does not face any liquidity or solvency constraints. All spending and debt servicing is done by crediting the accounts of the bond holders (be they foreign or domestic) and a monetarily-sovereign government can do that at will by simply pushing a computer button to mark up the size of the bond holder’s account (see Bernanke attesting to this here).

In the US, financial market participants (forget about the hopelessly misguided international “credit ratings”) recognize this implicitly by not rating Treasuries and related government-entities bonds like Fannie and Freddie. They know that the US government will always pay because it faces no operational constraint when it comes to making payments denominated in a sovereign currency. It can, quite literally, afford to buy anything for sale in its own unit of account.


This, of course, as many of us have already stated, does not mean that the government should spend without restraint. It only means that it is incorrect to state that government will “run of out money” or “burden our grandchildren” with debt (which, after all, allows us to earn interest on a very safe security), arguments that are commonly used by those who wish to reduce government services. These arguments are not wholly without merit. That is, there may well be things that the government is currently doing that the private economy could or should be doing. But that is not the case being made by the CBO, the pundits or the politicians. They are focused on questions of “affordability” and “sustainability,” which have no place in the debate over the proper size and role for government (a debate we would prefer to have). So let us get to that debate by recognizing that there is no operational constraint – ever – for a monetarily sovereign government. Any financial commitments, be they for Social Security, Medicare, the war effort, etc., that come due today and into the infinite future can be made on time and in full. Of course, this means that there is no need for a lock box, a trust fund or any of other accounting gimmick, to help the government make payments in the future. We can simply recognize that every government payment is made through the general budget. Once this is understood, issues like Social Security, Medicare and other important problems can be analyzed properly: it is not a financial problem; it is a productivity/growth problem. Such an understanding would lead to very different policies than the one currently proposed by the CBO (see Randy’s post here).

  1. “A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers.”

First, this sentence seems to imply that government activities are unproductive (given that, following their logic, Treasury issuances “finance” government spending), which is simply wrong, just look around you in the street and your eyes will cross dozens of essential government services.

Second, the internal logic gets confusing for two reasons. One, if people are so afraid of a growing fiscal crisis, why would they buy more treasuries with their precious savings? Why not use their savings to buy bonds to fund “productive capital goods”? Using the CBO’s own logic, higher rates on government bonds would not help given that a “fiscal crisis” is expected and given that participants are supposed to allocate funds efficiently toward the most productive economic activity (and so not the government according to them). Second, we are told that “it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply.” I will get back to what the government can do in that case, but you cannot get it both ways; either financial market participants buy more government securities or they don’t.

Third, this argument drives home the crowding-out effect. I am not going to go back to the old debates between Keynes and others on this, but the bottom line is that promoting thriftiness (increasing the propensity to save out of monetary income) depresses economic activity (because monetary profits and incomes go down) and so decreases willingness to invest (i.e. to increase production capacities). In addition, by spending, the government releases funds in the private sector that can be used to fund private economic activity; there is a crowding-in, not a crowding-out. This is not theory, this is what happens in practice, higher government spending injects reserves and cash in the system, which immediately places downward pressure on short-term rates unless the Fed compensates for it by selling securities and draining reserves (which is what the Fed does on a daily basis).

  1. “if the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output.”

No, as noted many times here, all spending and servicing is done by crediting creditor’s account not by taxing (or issuing bonds). Taxes are not a funding source for monetarily-sovereign governments, they serve to reduce the purchasing power of the private sector so that more real resources can be allocated to the government without leading to inflation (again all this does not mean that the government should raise taxes and takeover the entire economy; it is just a plain statement of the effects of taxation). All interest payments on domestically-denominated government securities (we are talking about a monetarily-sovereign government) can be paid, and have been met, at all times, whatever the amount, whatever their size in the government budget.

  1. “a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates.”

If the US Treasury cannot issue bonds at the rate it likes there is a very simple solution: do not issue them. This does not alter in any way its spending capacity given that the US federal government is a monetarily-sovereign government so bond issuances are not a source of funds for the government. Think of the Federal Reserve: does it need to borrow its own Federal Reserve notes to be able to spend? No, all spending is done by issuing more notes (or, more accurately, crediting more accounts) and if the Fed ever decided borrow its own notes by issuing Fed bonds to holders of Federal Reserve notes (a pretty weird idea), a failure of the auction would not alter its spending power. The Treasury uses the Fed as an accountant (or fiscal agent) for its own economic operations; the “independence” of the Fed in making monetary policy does not alter this fact.

  1. “It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis.”

It is always possible that anything can happen, but what is the record? The record is that there is no relationship between the fiscal position of the US government and T-bond rates. Massive deficits in WWII went pari passu with record low interest rates on the whole Treasury yield curve. With the help of the central bank, the government made a point of keeping long-term rates on treasuries at about 2% for the entire war and beyond, despite massive deficits. There is a repetition of this story playing out right now, and Japan has been doing the same for more than a decade. Despite its mounting government debt, the yield on 10-year government bonds is not more than 2% as of July 2010. In the end, market rates tend to follow whatever the central bank does in terms of short-term rates, not what the fiscal position of the government is.

As we already stated on this blog before, a simple observation of how government finance operates shows that government spending injects reserves into the banking system (pressing down short-term interest rate), while the payment of taxes reduces/destroys reserves (pushing short-term rates up). The Fed has institutions that allow it to coordinate on a daily basis with the Treasury (they call each other every day) to make sure that all these government operations do not push the interest rate outside the Fed’s target range.

  1. “If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.”

That’s a repeat of the first question but with a bit of elaboration. The US government cannot default on its securities for financial reasons, it is perfectly solvent and liquid. (Sovereign governments can, as we have conceded on this blog, refuse to pay – e.g. Japan after the war – but that is because it was unwilling to repay, not because it was unable to pay.) Thus, despite Reinhart and Rogoff’s warnings, the credit history of the US government (and any monetarily-sovereign government) remains perfect. No government with a non-convertible, sovereign currency has ever bounced a check trying to make payment in its own unit of account.

The US government always pays by crediting the account of someone (i.e. “monetary creation”). If the creditor is a bank, this leads to higher reserves, if it is a non-bank institution it leads also to an increase in the money supply. It has been like this from day one of Treasury activities. It is not a choice the government can make (between increasing the money supply, taxing or issuing bonds); any spending must lead to a monetary creation; there is no alternative. Again taxes and bonds are not funding sources for the US federal government; however they have important functions. Taxes help to keep inflation in check (in addition to maintaining demand for the government’s monetary instruments). Bond sales allow the government to deficit spend without creating excessive volatility in the federal funds market. If financial market participants want more bonds, the Treasury issues more to keep bond rates high enough for its tastes; if financial market participants do not want more treasury bonds, the government does not issue to avoid raising rates. The US Treasury (and any monetarily sovereign government as long as they understand it) has total control over the rate it pays on its debts; whether the government understands this or not is another question. A monetarily sovereign government does not have to pay “market rates” in order to convince markets to hold its bonds. Indeed, it does not even have to issue securities if it does not want to. In the US, it is usually the financial institutions that beg the Treasury to issue more securities.

The recent episode of the “Supplementary Financing Program” is a very good illustration of that point. Financial market participants were crying for more Treasuries and the Fed could not keep pace. As a consequence the Treasury agreed to issue more Treasuries than expected to meet the demand and help the Fed drain reserves and thereby hit their interest rate target. According to the Federal Reserve Bank of New York (DOMESTIC OPEN MARKET OPERATIONS DURING 2008, page 28): “To help manage the balance sheet impact of the Federal Reserve’s liquidity initiatives, the Treasury announced the establishment of a temporary Supplementary Financing Program (SFP) on September 17. The program consists of a series of Treasury bills issued by Treasury, the proceeds of which are deposited in an account at the Federal Reserve, draining reserve balances from the banking sector.”

Now look how this was deformed by the Treasury (quite a few journalists and bloggers followed): “The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.” No, Mr. Treasury, this was not done for funding purpose; it was done to drain reserves from the banking system. The Fed does not need any cash from the Treasury. The Fed is the monopoly supplier of cash.

A final point regarding inflation. Inflation is a potential issue, as we have always maintained. But, there is no automatic causation from the money supply to inflation (a point Paul Krugman appears to have forgotten). Inflationary pressures depend on the state of the economy (supply and demand-side factors). Most importantly, perhaps, it depends on people’s desire to hoard vs. spend cash. Even the massive deficits during WWII, when resources were fully employed, did not lead to a spiraling out of control of inflation. Finally, it is quite possible that causation actually runs the other way around – i.e. from inflation to the money supply – given the endogeneity of the money supply, but that’s a story for another day…


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Towards a Libertarian/Austrian Modern Money Theory

Posted on July 27, 2010 by | 31 comments

By L. Randall Wray

For reasons that I cannot fathom, the most vehement critics of Modern Money Theory (MMT) are the wingnut libertarians and Austrians (and, please, I use the term wingnut with some affection for our fellow fringe travellers). Any time there is an MMT post on this blog, or over at New Deal, Naked Capitalism, or the Huff, the comments are dominated by conspiracy theorists, haters of government, goldbugs, and victims of alien probings who are certain that MMT-ers are united in their effort to ramp up government until it consumes the entire economy. So let us try to mend fences.

First, on one level, MMT is a description of the way a sovereign currency works. Love it or hate it, our sovereign government spends by crediting bank accounts. Over the past 20 years, MMT has investigated, analyzed, and documented the sordid operational details. We can lecture for hours on the balance sheet manipulations involving the Treasury, the Fed, the primary security dealers, the special depositories, and the regular private banks every time the Treasury buys a notepad from OfficeMax. We did the work, so you do not have to do it. And believe me, you do not want to do it. You can skip directly to the conclusion: “Yes, government spends by crediting bank accounts, taxes by debiting them, and sells bonds to provide an interest-earning substitute to low-earning reserves. Q.E.D.”

A few libertarians and Austrians now get this, although instead of thanking us for a job well done, they immediately attack us for explaining how things work. Now, why would they do that? Because they fear that if we tell policymakers and the general public how things work, democratic processes will inevitably blow up the government’s budget as everyone demands that wine flow freely through the nation’s drinking fountains whilst workers retire from government jobs at age 28 on generous pensions provided at the public trough. And off we go to Zimbabwe land, with hyperinflation that destroys the currency and sucks the precious body fluids from our economy.

Ok, understood. We fear inflation, too. That has always been our message, too. Indeed, “price stability” has always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability (http://www.cfeps.org/). Maybe you do not like our proposed methods of battling inflation. Fine. Show us yours. I realize that many libertarians and Austrians believe that the only foolproof method for avoiding inflation is to go back to gold. Again, fine. But don’t criticize our labor “buffer stock” scheme for its political infeasibility! Going back to the gold standard is less likely than alien abduction. (Oh, sorry, no offence intended.) Anyway, we (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation.

So it is true that there is a second level to MMT: we use our understanding of the way money works to bring rational analysis to government policy-making. Since involuntary default is, literally, impossible for a sovereign government, we quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips Washington. Can we “afford” full employment? Yes. Can we “afford” Social Security? Yes. Can we “afford” to put wine in all the drinking fountains? Yes. The problem IS NOT, CANNOT BE about affordability. It is about resources. Unemployment is easy: by definition, someone who is unemployed is available to hire. So government can put them to work. Social Security is a little more difficult: can we move enough resources to the aged (plus their dependents, and people with disabilities) so that they can enjoy a comfortable, American-style, life? On all reasonable projections of demographics and US ability to produce, the answer is yes. The projections could turn out to be wrong. But if they do, affordability still will not be the problem—it will be a resource problem. Finally, wine in drinking fountains? There probably is not enough fine wine, but we could probably fill all the drinking fountains with cheap French wine. Again, it is a resource problem and if we convert the American prairies to wine production we could probably even resolve that one.

Perhaps the most important policy pushed by most MMT-ers is the Job Guarantee/Employer of Last Resort proposal. This provides a federal-government funded job to anyone who wants to work, at a uniform, basic compensation (wages plus benefits). Our libertarian/Austrian fellow travelers seem to hate this program, again for unfathomable reasons. I suspect that they have misinterpreted this to be some kind of Big Government/Big Brother program based on a weird combination of force plus welfare. The claim is simultaneously that it “forces” everyone to work, and that it also pays everyone for not working. Actually, it is a purely voluntary program, only for those who want to work. Those who will not work cannot participate. Libertarians and Austrians ought to love it. It is not Big Brother. It is not even Big Government. The jobs do not have to be provided by government at all. No one has to take a job. It is consistent with, I think, the most cherished norms of freedom-loving libertarians and Austrians.

So to sum up:

1. MMT is consistent with any size of government. It can be a small libertarian government if you like. But it issues a sovereign floating currency. It supports the currency by imposing a tax payable in that currency.

2. Job Guarantee/Employer of Last Resort is also consistent with any size of government. If you want a big private sector and small government sector, keep taxes and government spending low. That frees up resources to be used by the big private sector. But you will need the JG/ELR to take up the labor resources the private sector cannot fully employ.

3. JG/ELR can be as decentralized as you want. I think there are massive incentive problems if you have federal government pay wages of for-profit firms. So I would have federal government pay the wages in the program but have the jobs actually created and managed by: not-for-profits, local government, maybe state government, maybe only as a final last resort the federal government. Argentina experimented with cooperatives and they looked to me to be highly successful.

4. The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment.

5. How can the belief that all ought to work, and contribute to society, rather than lay about and collect welfare be called socialism?

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May the Biggest Loser Win: Euroland’s Race to the Bottom

Posted on July 26, 2010 by | 3 comments


By L. Randall Wray

As part of the EU/IMF plan to resolve Greece’s debt crisis and to make its  economy more competitive, the government announced a couple of weeks ago plans to revamp labor relations laws and social security entitlements. The minimum monthly wage for new entrants into the labor market will be decreased from 700 euros to 560 euros, and workers will be required to have 40 years of employment to receive a full pension (which has also been subject to significant reductions). And companies would face far fewer restrictions with regard to layoffs and layofff compensations–which have been cut in half. The strategy is obvious: Greece wants to win the race to the bottom in the Eurozone, that is, to win competitive advantage by having the region’s lowest and meanest living standards. That, of course, will now be an even tougher race to win, with the recent entry of Estonia into the Eurozone.

Even in the best of times, this would be a dangerous strategy. Given that all members of the Eurozone have removed trade and capital barriers and adopted a common currency, there is no possibility of gaining advantage through the normal methods of currency devaluation or by tacking tariffs onto imports. This means that trade surpluses can be achieved only by lowering costs and increasing labor productivity. Costs are cut by slashing wages and benefits; productivity is increased by working employees harder—downsizing the labor force, longer hours, shorter vacations, and postponed retirement. But every nation will adopt the same strategy. Matters are made worse by the deep global crisis. Markets for exports are depressed and tourism is down. Meanwhile, governments are cutting spending—especially in those areas that could actually help increase productivity and enhance competitiveness: public infrastructure investment and education. Lower wages and retail sales, and a smaller workforce result in collapsing government tax revenue—fueling a vicious cycle of spending cuts but falling tax revenue so that budget deficits cannot be reduced.
To be sure, Greece has had its problems. Its labor costs have grown significantly over the past decade, much faster than those of Germany and other Eurozone nations. But the notion that workers in Greece have been enjoying the fruits of an overly generous welfare state is belied by the facts. (See here) In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem generous by US standards but are modest by European standards. On average, for 1998-2007 Greece spent only €3530 per capita on social protection benefits–slightly less than Spain’s spending and only €700 more than Portugal’s, which has one of the lowest levels in all of the Eurozone. By contrast, Germany and France spent more than double the Greek level, while the original Eurozone 12 level averaged €6251.78. Even Ireland, which has one of the most neoliberal economies in the euro area, spent more on social protection than the supposedly profligate Greeks.

Greece is also supposed to suffer from inefficiency and cronyism in its government—so its administrative costs should be higher than those of more disciplined governments such as the German and French. But this is obviously not the case as the table below demonstrates. Even spending on pensions, which is the main target of the neoliberals, is lower than in other European countries.

Table 2 shows total social spending of select Eurozone countries as a per cent of GDP. Through 2005, Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.

Greece has one of the most unequal distributions of income in Europe, and a very high level of poverty, as the following table shows. Again, the evidence is not consistent with the picture presented in the media of an overly generous welfare state.

The proposed cuts will simply widen the gap between living standards in Greece versus those in the wealthiest Eurozone nations.

This is a race to the bottom that can only be won by the biggest loser. It is bizarre that the EU and the IMF are promoting such a contest since it is completely inconsistent with the longer-run strategy of convergence across Euroland. Indeed, it will ultimately destroy the union.

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Goldman Vampire Squid Gets Bitch Slapped: JP Morgan Bitch Slaps the Dow; and Geithner Tries to Bitch Slap Elizabeth Warren

Posted on July 15, 2010 by | 14 comments

By L. Randall Wray

Ok here were three pieces of news today. First, Goldman Sachs was fined $550 Million for duping customers. We do not need to recap the charges in detail. Goldman helped hedge fund manager John Paulson pick toxic waste sure to go bad for collateralized debt obligations (CDOs) that Goldman would sell to its own patsy clients. Goldman and Paulson then bet against the clients. Since Paulson had picked “assets” guaranteed to go bad, it was a sure bet that Paulson and Goldman would win and that Goldman’s clients would lose. Oh, and by the way, although Goldman let Paulson meet the patsies, Goldman never told the patsies that Paulson arranged the deals and would win when they failed. Business as usual on Wall Street. In the SEC’s settlement, Goldman agreed that this was “incomplete information”—ie the patsies might have liked to know that Goldman and Paulson worked together to ensure the bets were rigged and the patsies would lose. Duh. For Goldman it was a tiny slap on the wrist—it still controls the Obama administration, with its moles, Timmy Geithner and Larry Summers still in charge of fiscal policy, thus prepared to funnel whatever money is necessary to prop up their firm—and the fine amounts to just 14 days of Goldman’s earnings. Time to celebrate—which Goldman did, as its stock rallied on the news that it had been found to have screwed its customers. Is there a better reason to party?

Round two. JP Morgan announced that its profits rose by 76%. Funny thing is that in all banking categories, JP Morgan’s results were horrendous: it lost deposits, it made fewer loans, and even its fees fell by 68%. So how could a bank manage to profit on such dismal results? Well in the old days it was called window dressing—banks would move one little chunk of gold among themselves to show that they were credit worthy. In Morgan’s case, the profits supposedly came from “trading”. In reality they mostly came from reducing “loan loss reserves”. In other words, Morgan decided it had set aside too many reserves against all the bad loans it made over the past decade. After all, borrowers will almost certainly start to make payments on all their debt over the next few months and years, won’t they? Sure, homeowners are massively underwater, and losing their jobs, and cutting back spending, but recovery is just around the corner. Right. Looks like 1933 all over again.

Ok, bitch slapping number three. Our favorite Timmy has weighed in on Elizabeth Warren. Lest readers need any reminder, Warren is the lone sensible voice within the Obama administration. There is, with no exaggeration at all, no other administration official who deserves her or his job more than Warren does. If—and this is a big if—the US survives the current crisis, there is no one who deserves more accolades than Warren. Heck, half the men (and perhaps the same percent of women) in the country have already proposed marriage to her. Yet, Timmy Geithner (let me repeat that: Timmy! Geithner!) the most incompetent and conflicted public official since “heck-uv-a-job” Brownie has dared to oppose Ms. Warren to lead the new Consumer Financial Protection Bureau.

Actually I agree with Timmy. Elizabeth Warren ought to be gunning for Timmy’s job. Fire Geithner. Now. Elizabeth Warren for Treasury Secretary! And in 2012, Warren for President. We should settle for no less. And Obama clearly does not want that job, anyway. Sorry folks, the audacity of hope can only carry us so far. Time for a new face in the White House. Elizabeth is our man, or woman.

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FLUFFING LARRY: WHY IS THE WASHINGTON POST LIONIZING SUMMERS?

Posted on June 15, 2010 by | 6 comments


By L. Randall Wray

Larry Summers is no hero. Probably only Bob Rubin and Alan Greenspan played a more important role in promoting the deregulations and lax oversight that helped to create this crisis. And Summers has continually got it wrong in dealing with the crisis his bad judgment helped to create. Rather than bailing out Mainstream he bails out Wall Street. Rather than creating jobs for the unemployed he does his best to keep the crooks in charge of the biggest banks. Rather than pushing for a thorough overhaul of our financial system he still frets about “heavy handed” re-regulation.

So why is the WASHINGTON POST’s  E.J. Dionne fluffing Larry? Yesterday, he published a fawning piece, promoting Larry as the newest “maestro” on the block. (Remember when Greenspan was proclaimed to be the maestro who had successfully navigated the economy through the dot-com collapse and recession?) In the “adult film” industry, the fluffer helps to get the stars “in the mood”. Dionne claims that Larry, who rescued our economy from the precipice of another great depression, is now performing his “careful and unapologetic rendition of the two-handed economist act”, arguing that while we must eventually eliminate the government budget deficit, we must not do it now. Lord, make me chaste, but not just yet. In a remarkable bit of spin, Dionne claims Larry is “nothing if not careful”. Right. Like the mad bull in a china shop. Remember when Larry said we ought to use developing nations as our toxic waste dumps. Or when as president of Harvard he claimed that women just do not have the right genes to do science. Yes, as Dionne says, Larry is always “pragmatic”. What kind of mood is Dionne trying to put Larry in with such fluff?

Look, Larry is correct that trying to cut the budget deficit now is crazy. As NEP economists argue, however, we do not need “two handed” arguments. Deficit cutting whether now or in the future is not a legitimate goal of public policy for a sovereign nation. Deficits are (mostly) endogenously determined by the performance of the economy. They add to private sector income and to net financial wealth. So, yes, Summers and Dionne are correct that the deficit will come down when (if) the economy recovers. But whatever happens to the deficit should be considered to be a “non-event”, not worthy of notice. This is not a two-handed balancing act—deficits now, necessary austerity later.

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THE GREAT DEPRESSION AND THE REVOLUTION OF 2017

Posted on May 24, 2010 by | 30 comments

L. RANDALL WRAY

WASHINGTON, 7 NOVEMBER 2017*. Yesterday Speaker of the House Dennis Kucinich was sworn in as President, replacing President Jeb Bush, who had fled to Riyadh, Saudi Arabia, aboard Air Force One seeking asylum in his father’s well guarded compound on the grounds of the Bin Laden family’s palace. Vice President Dick Cheney, who has been in a coma since August after suffering his fifteenth heart attack, was declared incompetent. President Kucinich immediately announced a wide-ranging package of policies designed to bring an end to the Great Depression, which began with the global financial crisis of 2007. He called for calm and pleaded with leaders of the Revolutionary Tea Party Army that has encircled Washington to call off the attack that had been planned for today, the 100th anniversary of the Bolshevik revolution. Commandant Dick Armey said he is willing to meet for a discussion of a ceasefire so long as his militia can take their weapons home.

President Kucinich apparently ordered the Marines to invade Goldman Sachs headquarters in Manhattan early this morning. While there were some reports of small arms fire, most of the 6000 employees were reportedly removed without struggle and are on their way to various jails and prisons in the greater New York area. CEO Timothy Geithner was captured at La Guardia, attempting to board a private jet said to be headed for Riyadh. An anonymous source claimed that Geithner complained that President Bush had left him behind after promising protection. President Kucinich announced that Geithner would be charged with fraud, racketeering, and tax evasion. The case dates back to 2012 but had been put on hold when former President Sarah Palin ordered the attorney general’s office to stop its investigation of the Treasury Secretary. President Kucinich said that Goldman, the last remaining bank in America, would be nationalized. He assured depositors that the bank would reopen next Monday under management of a team of presidential appointees led by William Black. All insured deposits will be protected, but it is believed that other claims will not be honored. FBI agents have reportedly moved to seize all assets of current and former Goldman employees. Warrants for the arrest of former Treasury Secretaries Paulson, Rubin, and Summers were also issued.

President Kucinich’s package of policies includes universal and comprehensive debt cancellation. Under the plan, all private debts will be declared null and void. The implications are not immediately clear since delinquency rates have already reached 95% on most categories of debt. Several economists said that the new President was only validating reality, but others argued that it gave legal protection to squatters who have refused to leave their foreclosed homes over the past decade. The global movement for the “Year of Jubilee” had been pushing for such debt relief since the crisis began.

The policy proposals, which have been dubbed “New Deal 2.0”, also include a universal job guarantee that would provide work and wages for the nation’s estimated 75 million unemployed. The plan seems to follow a proposal that then-Representative Kucinich had introduced into the House in 2011. Funding for the program would be provided by Washington, but projects would be created and managed at the local level. At the time, Kucinich had argued that the program would “take workers as they are and where they are”, providing a living wage to participants and useful public services and infrastructure to their communities. When asked how the government would pay for the program, Representative Kucinich had said at the time “by crediting bank accounts, of course—that’s the only way a sovereign government ever spends.” However, his bill had failed to get out of committee; it was revealed that large campaign contributions were subsequently made by hedge fund manager Pete Peterson to all committee members who had opposed the legislation—and although he was never accused of wrong-doing, it was long suspected that there might have been a connection.

President Kucinich also announced a new “Marshall Plan” for war-ravaged Europe, which has descended into near anarchy since the EU collapsed in late 2010. He called on the Italian Red Brigade army to end its siege of Berlin. He promised to begin an airlift of food for Europe’s starving millions, to be followed by industrial products to help European nations to begin to produce for domestic consumption. He called for an end to fiscal austerity and argued that since each nation had adopted its own currency with the collapse of the euro, each now had the ability to “spend by crediting bank accounts.” Hence, “whatever is technologically feasible is financially feasible.”

Wall Street rallied on the news, with Nasdaq reaching a new high of nearly 250 and the Dow hitting 1150—the highest levels seen since the Great Crash of October 2011. The dollar also rose on the news, to $52 per Chinese RMB. Optimism spread to Japanese markets, with the yen remaining close to 132 per dollar.

In his statement, President Kucinich said that the long “nightmare” was coming to an end. He struck a conciliatory tone when he responded to a question about the actions of the administration of President Obama in the early years of the Great Depression, which many believe to have set the stage for the Great Crash. “Look, President Obama as well as his successors followed the advice of economists—who continually called for more fiscal austerity, much like the misguided physicians used to bleed patients to death. They were, and still are, clueless. I promise you that I will ban all economists from my administration. I will not seek, nor will I follow, advice from economists.” After a decade of suffering over the course of the second Great Depression, the nation breathed a collective sigh of relief.

The President pointed to the experiences of China, India and Botswana, the only nations to escape the Great Depression. He recalled that just a decade ago, US GDP and the standard of living of the average American were many times higher than those in any of these nations. Indeed, Botswana was widely derided for its policies, which had generated hyperinflation. Yet, each of these countries had adopted a job guarantee and had developed programs that achieved full employment with wage and price stability. And while unemployment rose dramatically all around the globe, these three nations enjoyed full employment and rising living standards—indeed, all three have surpassed the US median real household income level. President Kucinich said that Botswana has offered to send advisors to help get America’s fiscal and monetary policy back on track. He proclaimed that the days of misguided fiscal austerity are over, and promised to “spend whatever it takes to get our nation’s workers and factories operating at full capacity.”

In related news, a handful of economists have declared their support for President Kucinich’s policies. Among them is former Fed Chairman Alan Greenspan, who had recanted his belief in free market economics early in the depression. Over the years he has moved ever further to the left as he embraced reforms ranging from socialized medicine to abolition of private ownership of the means of production. While some economists have dismissed Greenspan’s public statements as the rants of “a senile old man” others have noted that the statements have become remarkably cogent in contrast to the testimonies he used to provide as Chairman. An early disciple of Ayn Rand, Greenspan’s recent testimonies now include obscure quotes from Marx, Lenin, and Rosa Luxemburg. He has also been calling for the elimination of the Fed, arguing that monetary policy and fiscal policy should be consolidated in the Treasury Department.

*Disclaimer: Some of the events reported here have not been fact-checked**.

**Disclaimer: Actually, none of the events reported here has yet occurred, although some are quite likely.

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PAUL SAMUELSON ON DEFICIT MYTHS

Posted on April 30, 2010 by | 26 comments

TIME TO DROP THAT OLD-TIME RELIGION

By L. Randall Wray

On Wednesday April 28 several New Economic Perspective bloggers participated in a 1960s style “teach-in” in Washington DC to explode some of the myths about Federal Government deficits. Our event was timed to counter the Pete Peterson-funded extravaganza that promoted all of the fallacies used to stoke hysteria and fear of deficits. You can find more information about our event, as well as our power point presentations (here).

Right before the event, we also issued a joint piece examining the nine worst myths, posted at both New Deal 2.0 (here) and at the Huffington Post (here). The flurry and fury of comments to our piece was amazing, nay, shocking. I think these comments demonstrate just how successful the billions of dollars spent in Peterson’s campaign have been at promulgating dangerous falsehoods over the past two decades. Indeed, the level of commentary is notable both for the vitriol and for its sheer ignorance. One wonders whether civil and informed discussion on the topic of money is even possible.

I was reminded of a conversation I once had with the late and great Robert Heilbroner about my book, “Understanding Modern Money”. He warned me that the book was going to scare the living daylights out of readers (actually he used more colorful language—but it was a private conversation, not a public blog fit for family viewing). He went on to explain that money is the scariest thing for most people, sure to result in heated and angry discussion. It is also complex, something everyone talks about but few understand. Hence, it is a topic that must be carefully addressed, and with plenty of reassurances that one is not propounding anything too unsettling. It is also a subject that accumulates more than its fair share of cranks—indeed, “monetary cranks” actually earned an entry in the New Palgrave dictionary of economics. (By the way, most of the “cranks” discussed in that entry actually were less “cranky” than someone like Milton Friedman or Friedrich von Hayek—but that is a topic for another time.) For that reason, new ways of looking at money will (rightly, sometimes) be suspiciously treated.

The reaction to our post on the nine myths also reminded me of an interview Nobel winner Paul Samuelson gave to Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995”). There Samuelson said:

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”
In other words, the need to balance the budget over some time period determined by the movements of celestial objects, or over the course of a business cycle is a myth, an old-fashioned religion. But that superstition is seen as necessary because if everyone realizes that government is not actually constrained by the necessity of balanced budgets, then it might spend “out of control”, taking too large a percent of the nation’s resources. Samuelson sees merit in that view.

It is difficult not to agree with him. But what if the religious belief in budget balance makes it impossible to spend on the necessary scale to achieve the public purpose? In the same film James Buchanan argues that the budget ought to be balanced except in wartime—and while he does not explicitly endorse Samuelson’s argument that this is nothing but a useful myth, he does imply that there is no financial/economic/solvency reason for balancing the budget. Rather, it is to keep government in check, to ensure it does not grow and absorb too many of the nation’s resources. Ironically, Buchanan’s willingness to deficit-spend in wartime seems to imply that the US ought to almost always run deficits since we are almost always at war with someone. Hence, he seems to advocate nearly permanent budget deficits—no doubt unintentionally. Many might question that position on the argument that if it is OK to run deficits to destroy one’s enemy then it surely makes sense to run deficits to build a strong nation. Indeed, older readers of this blog will remember that our nation got interstate hiways on the argument that this is good for national defense, and that many of us got through college on “national defense student loans”. But that is not really the point I am driving at in this blog.

What I am arguing is that discussion of money and budget deficits has simply reached a state in which it has become impossible to address real world problems. I have always thought that honesty is the best policy—even if the truth is scary—but I am in the education business, not in politics or marketing or religion. But even if we concede Samuelson’s point, that old-time deficit religion is not now useful—even if it might have served a useful purpose in the past.

Yes, government must be constrained. That is what elections and budgeting and accounting and accountability are all about. We need more democracy, more understanding, and more transparency. Politicians need to listen to Main Street—not just Wall Street—before deciding where and how much to spend. They need to be controlled by a budgeting process—whose purpose is not to balance the budget, ensuring tax revenues match spending outgo, but rather to give us some idea of the size of the programs (hence, what percent of our nation’s resources will be devoted to their projects) and, equally important, to hold our leaders and project managers accountable. When managers run over budget, it does not threaten our government’s solvency but it should threaten its credibility. Fraud and over-reach are always a threat where government’s spending is unconstrained. And, yes, too much government spending generates competition over resources, bottle-necks, and even excessive aggregate demand, all of which can generate inflation.
We don’t need myths. We need more democracy, more understanding, and more transparency. We do need to constrain our leaders—but not through dysfunctional superstitions.

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19th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies: After the Crisis: Planning a New Financial Structure

Posted on April 19, 2010 by | 1 comment

After many requests from media and academics and Wall Street practitioners, we are posting L.Randall Wray’s presentation at the 19th Annual Hyman P. Minsky Conference (Session 7. International Financial Fragility) held at the Ford Foundation.

To download the ppt file click here.


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GOLDMAN SACHS VAMPIRE SQUID GETS HANDCUFFED

Posted on April 17, 2010 by | 12 comments


L. Randall Wray

In a startling turn of events, the SEC announced a civil fraud lawsuit against Goldman Sachs. I use the word startling because a) the SEC has done virtually nothing in the way of enforcement for years, managing to sleep through every bubble and bust in recent memory, and b) Government Sachs has been presumed to be above the law since it took over Washington during the Clinton years. Of course, there is nothing startling about bad behavior at Goldman—that is its business model. The only thing that separates Goldman on that score from all other Wall Street financial institutions is its audacity to claim that it channels God as it screws its customers. But when the government is your handmaiden, why not be audacious?

The details of the SEC’s case will be familiar to anyone who knows about Magnetar. This hedge fund sought the very worst subprime mortgage backed securities (MBS) to package as collateralized debt obligations (CDO). The firm nearly single-handedly kept the subprime market afloat after investors started to worry about Liar and NINJA loans, since Magnetar was offering to take the very worst tranches—making it possible to sell the higher-rated tranches to other more skittish buyers. And Magnetar was quite good at identifying trash: According to an analysis commissioned by ProPublica, 96% of the CDO deals arranged by Magnetar were in default by the end of 2008 (versus “only” 68% of comparable CDOs). The CDOs were then sold-on to investors, who ultimately lost big time. Meanwhile, Magnetar used credit default swaps (CDS) to bet that the garbage CDOs they were selling would go bad. Actually, that is not a bet. If you can manage to put together deals that go bad 96% of the time, betting on bad is as close to a sure thing as a financial market will ever find. So, in reality, it was just pick pocketing customers—in other words, a looting.

Well, Magnetar was a hedge fund, and as they say, the clients of hedge funds are “big boys” who are supposed to be sophisticated and sufficiently rich that they can afford to lose. Goldman Sachs, by contrast, is a 140 year old firm that operates a revolving door to keep the US Treasury and the NY Fed well-stocked with its alumni. As Matt Taibi has argued, Goldman has been behind virtually every financial crisis the US has experienced since the Civil War. In John Kenneth Galbraith’s “The Great Crash”, a chapter that documents Goldman’s contributions to the Great Depression is titled “In Goldman We Trust”. As the instigator of crises, it has truly earned its reputation. And it has been publicly traded since 1999—an unusual hedge fund, indeed. Furthermore, Treasury Secretary Geithner handed it a bank charter to ensure it would have cheap access to funds during the financial crisis. This gave it added respectability and profitability—one of the chosen few anointed by government to speculate with Treasury funds. So, why did Goldman use its venerable reputation to loot its customers?

Before 1999, Goldman (like the other investment banks) was a partnership—run by future Treasury Secretary Hank Paulson. The trouble with that arrangement is that it is impossible to directly benefit from a run-up of the stock market. Sure, Goldman could earn fees by arranging initial public offerings for Pets-Dot-Com start-ups, and it could trade stocks for others or for its own account. This did offer the opportunity to exploit inside information, or to monkey around with the timing of trades, or to push the dogs onto clients. But in the euphoric irrational exuberance of the late 1990s that looked like chump change. How could Goldman’s management get a bigger share of the action?
Flashback to the 1929 stock market boom, when Goldman faced the same dilemma. Since the famous firms like Goldman Sachs were partnerships, they did not issue stock; hence they put together investment trusts that would purport to hold valuable equities in other firms (often in other affiliates, which sometimes held no stocks other than those in Wall Street trusts) and then sell shares in these trusts to a gullible public. Effectively, trusts were an early form of mutual fund, with the “mother” investment house investing a small amount of capital in their offspring, highly leveraged using other people’s money. Goldman and others would then whip up a speculative fever in shares, reaping capital gains through the magic of leverage. However, trust investments amounted to little more than pyramid schemes—there was very little in the way of real production or income associated with all this trading in paper. Indeed, the “real” economy was already long past its peak—there were no “fundamentals” to drive the Wall Street boom. It was just a Charles Ponzi-Bernie Madoff scam. Inevitably, Goldman’s gambit collapsed and a “debt deflation” began as everyone tried to sell out of their positions in stocks—causing prices to collapse. Spending on the “real economy” suffered and we were off to the Great Depression. Sound familiar?

So in 1999 Goldman and the other partnerships went public to enjoy the advantages of stock issue in a boom. Top management was rewarded with stocks—leading to the same pump-and-dump incentives that drove the 1929 boom. To be sure, traders like Robert Rubin (another Treasury secretary) had already come to dominate firms like Goldman. Traders necessarily take a short view—you are only as good as your last trade. More importantly, traders take a zero-sum view of deals: there will be a winner and a loser, with Goldman pocketing fees for bringing the two sides together. Better yet, Goldman would take one of the two sides—the winning side, of course–and pocket the fees and collect the winnings. You might wonder why anyone would voluntarily become Goldman’s client, knowing that the deal was ultimately zero-sum and that Goldman would have the winning hand? No doubt there were some clients with an outsized view of their own competence or luck; but most customers were wrongly swayed by Goldman’s reputation that was being exploited by hired management. The purpose of a good reputation is to exploit it. That is what my colleague, Bill Black, calls control fraud.
Note that before it went public, only 28% of Goldman’s revenues came from trading and investing activities. That is now about 80% of revenue. While many think of Goldman as a bank, it is really just a huge hedge fund, albeit a very special one that happens to hold a Timmy Geithner-granted bank charter—giving it access to the Fed’s discount window and to FDIC insurance. That, in turn, lets it borrow at near-zero interest rates. Indeed, in 2009 it spent only a little over $5 billion to borrow, versus $26 billion in interest expenses in 2008—a $21 billion subsidy thanks to Goldman’s understudy, Treasury Secretary Geithner. It was (until Friday) also widely believed to be “backstopped” by the government—under no circumstances would it be allowed to fail, nor would it be restrained or prosecuted—keeping its stock price up. That is now somewhat in doubt, causing prices to plummet. Of course, the FDIC subsidy is only a small part of the funding provided by government—we also need to include the $12.9 billion it got from the AIG bail-out, and a government guarantee of $30 billion of its debt. Oh, and Goldman’s new $2 billion headquarters in Manhattan? Financed by $1.65 billion of tax free Liberty Bonds (interest savings of $175 million) plus $66 million of employment and energy subsidies. And it helps to have your people run three successive administrations, of course.
Unprecedented and unprecedentedly useful if one needs to maintain reputation in order to run a control fraud.
In the particular case prosecuted by the SEC, Goldman created synthetic CDOs that placed bets on toxic waste MBSs. A synthetic CDO does not actually hold any mortgage securities—it is simply a pure bet on a bunch of MBSs. The purchaser is betting that those MBSs will not go bad, but there is an embedded CDS that allows the other side to bet that the MBSs will fall in value, in which case the CDS “insurance” pays off. Note that the underlying mortgages do not need to go into default or even fall into delinquency. To make sure that those who “short” the CDO (those holding the CDS) get paid sooner rather than later, all that is required is a downgrade by credit rating agencies. The trick, then, is to find a bunch of MBSs that appear to be over-rated and place a bet they will be downgraded. Synergies abound! The propensity of credit raters to give high ratings to junk assets is well-known, indeed assured by paying them to do so. Since the underlying junk is actually, well, junk, downgrades are also assured. Betting against the worst junk you can find is a good deal—if you can find a sucker to take the bet.
The theory behind shorting is that it lets you hedge risky assets in your portfolio, and it aids in price discovery. The first requires that you’ve actually got the asset you are shorting, the second relies on the now thoroughly discredited belief in the efficacy of markets. In truth, these markets are highly manipulated by insiders, subject to speculative fever, and mostly over-the-counter. That means that initial prices are set by sellers. Even in the case of MBSs—that actually have mortgages as collateral—buyers usually do not have access to essential data on the loans that will provide income flows. Once we get to tranches of MBSs, to CDOs, squared and cubed, and on to synthetic CDOs we have leveraged and layered those underlying mortgages to a degree that it is pure fantasy to believe that markets can efficiently price them. Indeed, that was the reason for credit ratings, monoline insurance, and credit default swaps. CDSs that allow bets on synthetics that are themselves bets on MBSs held by others serve no social purpose whatsoever—they are neither hedges nor price discovery mechanisms.

The most famous shorter of MBSs is John Paulson, who approached Goldman to see if the firm could create some toxic synthetic CDOs that he could bet against. Of course, that would require that Goldman could find chump clients willing to buy junk CDOs—a task for which Goldman was well-placed. According to the SEC, Goldman allowed Paulson to increase the probability of success by allowing him to suggest particularly trashy securities to include in the CDOs. Goldman arranged 25 such deals, named Abacus, totaling about $11 billion. Out of 500 CDOs analyzed by UBS, only two did worse than Goldman’s Abacus. Just how toxic were these CDOs? Only 5 months after creating one of these Abacus CDOs, the ratings of 84% of the underlying mortgages had been downgraded. By betting against them, Goldman and Paulson won—Paulson pocketed $1 billion on the Abacus deals; he made a total of $5.7 billion shorting mortgage-based instruments in a span of two years. This is not genius work—84% to 96% of CDOs that are designed to fail will fail.
Paulson has not been accused of fraud—while he is accused of helping to select the toxic waste, he has not been accused of misleading investors in the CDOs he bet against. Goldman, on the other hand, never told investors that the firm was creating these CDOs specifically to meet the demands of Paulson for an instrument to allow him to bet them. The truly surprising thing is that Goldman’s patsies actually met with Paulson as the deals were assembled—but Goldman never informed them that Paulson was the shorter of the CDOs they were buying! The contempt that Goldman shows for clients truly knows no bounds. Goldman’s defense so far amounts to little more than the argument that a) these were big boys; and b) Goldman also lost money on the deals because it held a lot of the Abacus CDOs. In other words, Goldman is not only dishonest, but it is also incompetent. If that is not exploitation of reputation by Goldman’s management, I do not know what would qualify.

By the way, remember the AIG bail-out, of which $12.9 billion was passed-through to Goldman? AIG provided the CDSs that allowed Goldman and Paulson to short Abacus CDOs. So AIG was also duped, as was Uncle Sam—although that “sting” required the help of the New York Fed’s Timmy Geithner. I would not take Goldman’s claim that it lost money on these deals too seriously. It must be remembered that when Hank Paulson ran Goldman, it was bullish on real estate; through 2006 it was accumulating MBSs and CDOs—including early Abacus CDOs. It then slowly dawned on Goldman that it was horribly exposed to toxic waste. At that point it started shorting the market, including the Abacus CDOs it held and was still creating. Thus, while it might be true that Goldman could not completely hedge its positions so that it got caught holding junk, that was not for lack of trying to push all risks onto its clients. The market crashed before Goldman found a sufficient supply of suckers to allow it to short everything it held. Even vampire squids get caught holding garbage.
Some have argued that the SEC’s case is weak. It needs to show not only that Goldman misled investors, but also that this was materially significant in creating their losses. Would they have forgone the deals if they had known that Paulson was shorting their asset? We do not know—the SEC will have to make the case. Besides, Goldman does this to all its clients—so the SEC will have to make the case that clients could have been misled, whilst knowing that Goldman screws all its clients. After all, Goldman hid Greece’s debt, then bet against the debt—another fairly certain bet since debt ratings would fall if the hidden debt was ever discovered. Goldman took on US states as clients (including California and New Jersey and 9 other states), earning fees for placing their debts, and then encouraged other clients to bet against state debt—using its knowledge of the precariousness of state finances to market the instruments that facilitated the shorts. Did Goldman do anything illegal? We do not yet know. Reprehensible? Yes. Normal business practice.

To be fair, Goldman is not alone—all of this appears to be normal business procedure. In early spring 2010 a court-appointed investigator issued his report on the failure of Lehman. Lehman engaged in a variety of “actionable” practices (potentially prosecutable as crimes). Interestingly, it hid debt using practices similar to those employed by Goldman to hide Greek debt. The investigator also showed how the prices by Lehman on its assets were set—and subject to rather arbitrary procedures that could result in widely varying values. But most importantly, the top management as well as Lehman’s accounting firm (Ernst&Young) signed off on what the investigator said was “materially misleading” accounting. That is a go-to-jail crime if proven. The question is why would a top accounting firm as well as Lehman’s CEO, Richard Fuld, risk prison in the post-Enron era (similar accounting fraud brought down Enron’s accounting firm, and resulted in Sarbanes-Oxley legislation that requires a company’s CEO to sign off on company accounts)? There are two answers. First, it is possible that fraud is so wide-spread that no accounting firm could retain top clients without agreeing to overlook it. Second, fraud may be so pervasive and enforcement and prosecution thought to be so lax that CEOs and accounting firms have no fear. I think that both answers are correct.

To determine whether Goldman and other firms engaged in fraud will require close examination of the books, internal documents, and emails. Perhaps the SEC has finally fired the first shot at the Wall Street firms that aided and abetted the creation of the conditions that led up to the financial collapse. More importantly, that first shot might have driven a bit of fear into the financial institutions that have been trying to carry-on with business as usual. And, finally, perhaps the SEC might induce the Obama administration to stand-up to Goldman.

It is probably not too early for Goldman management and alumni to begin packing bags for extended stays in our nation’s finest penitentiaries. More than 1000 top management at thrifts served real jail time in the aftermath of the Savings and Loan fiasco. This current scandal is many orders of magnitude greater—probably tens of thousands of managers and traders and government officials were involved in fraud. We may need dozens of new prisons to contain them.

Meanwhile, the Obama administration should immediately revoke Goldman’s bank charter. Even if the firm is completely cleared of illegal activities, it is not a bank. There is no justification for provision of deposit insurance for a firm that specializes in betting against its clients. Its business model is at best based on deception, if not outright fraud. It serves no useful purpose; it does not do God’s work. Government should also relieve itself of all Goldman alumni—no administration that is full of Goldman’s people can retain the trust of the American public. President Obama should start his house cleaning with the Treasury department. Yes, Rubin and his hired hand Summers and protégé Geithner (and his hired hand Mark Patterson, Goldman’s lobbyist who became chief of staff of the Treasury) and Hank Paulson must be banned from Washington; and Rattner (former NYTimes reporter who tried to bribe pensions funds when he worked for the Quadrangle Group—who served as Obama’s “car czar” and is now likely to face lawsuits), and Lewis Sachs (senior advisor to Treasury, who helped Tricadia to make bets identical to those made by Magnetar and Goldman), and Stephen Friedman (Goldman senior partner who served as chairman of the NYFed), and NY Fed president Dudley (former chief US economist at Goldman) must all be sent home. Actually, anyone who ever worked for a financial institution must be banned from Washington until we can reform and downsize and drive a stake through the heart of Wall Street’s vampires.

And why not use the powers of eminent domain to take back Goldman’s shiny new government-subsidized headquarters to serve as the offices for 6000 newly hired federal government white collar criminologists tasked with the mission to pursue Wall Street’s fraud from the Manhattan citadel of the mighty vampire squid? If Obama is serious about reform, that would be a first step.

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Tell your representative to leave Social Security alone

Posted on March 25, 2010 by | 9 comments


SOCIAL SECURITY CANNOT GO INSOLVENT
By L. Randall Wray
Ok, here is the dumbest headline the NYTimes has run in recent days:

Social Security Payouts to Exceed Revenue This Year
By MARY WILLIAMS WALSH

The system is expected to pay out more in benefits this year than it receives in payroll taxes, a tipping point toward insolvency.

Social Security is a federal government program. Government pays Social Security benefits by crediting bank accounts. It can continue to do this even if payroll taxes fall to zero. The payment is an entry on the balance sheet of the Social Security recipient’s bank. Please write your representative and tell her or him to stop this nonsense right now.

Just as Wall Street went after healthcare, you can be sure that it is now going after Social Security. They hype is just starting. It comes in waves—whenever Wall Street loses a bundle, it looks to government bail-outs. What happened after the dot.com bust? Wall Street got President Bush to talk about an ownership society, proposing to dismantle Social Security to give households “ownership” over their own personal retirement accounts. The nonsense was obvious at the time: Wall Street had a big hole to fill, so it wanted households to “invest” payroll tax receipts in Wall Street managed accounts. That way, the same bozos who had just wiped out private savings by inducing gullible households to invest in pets.com would be able to wipe out retirements investing in other Wall Street schemes. Wall Street lost that round.

But now it is back. Wall Street’s latest excesses managed to destroy the economy. Those who lost their jobs or who had to take paycuts are paying less in FICA taxes. Hence, Social Security’s “revenues” are lower. That is a big boon to Wall Street—which will now whip up hysteria about Social Security’s looming bankruptcy. This is to direct attention away from the true insolvencies—which is all of the major private banks. It is also designed to scare the population about Social Security: will I ever get my Social Security pension?
Make no mistake about this. Unless voters tell their representatives to keep their dirty hands off Social Security, the Democrats and Republicans will work out a “compromise” to turn it over to Wall Street—just as they did with health insurance “reform” in the HIBOB (health insurer’s bail out bill). This is priority number one for Wall Street now, since it has lost trillions of dollars and is massively insolvent. It needs more government bail-out and it wants your Social Security.

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