Category Archives: Uncategorized

$50 Billion in Infrastructure Spending: A drop in the Bucket

Posted on September 7, 2010 by admin | 9 comments

The White House released the following statement regarding its new recovery plan: “The President today laid out a bold vision for renewing and expanding our transportation infrastructure – in a plan that combines a long-term vision for the future with new investments. A significant portion of the new investments would be front-loaded in the first year.”

This front load is worth $50 billion…a lot of money…but an insignificant amount compared to the size of what is needed. It is not a bold vision it is a very timid vision. Don’t believe me? Ask the American Society of Civil Engineers. In its 2009 Infrastructure Report Card, it gave a D average to US infrastructures and recommended $2.2 trillion of dollars of spending over the next 5 years. And that is just to bring current infrastructures back to good condition; trillions more are needed to respond to growing needs.

Money is not a problem for the federal government, all this could be started tomorrow like we have done to finance wars, bail outs the financial sector and other wasteful items. We did it before, when the country had a truly bold vision and was much less wealthy, and we could do it again. Besides current infrastructures, we need to start to use our underused resources (especially labor) to address the future needs of our aging population and our environmental problems: education, infrastructure, social networks, technology, energy, food production, and many others sectors need help.

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Posted in Eric Tymoigne, Uncategorized

Tagged Eric Tymoigne, Fiscal Policy

“Control Fraud” Crushes Kabul: And the New York Times needs to Correct its Correction

Posted on September 6, 2010 by admin | 2 comments

By William K. Black**
The New York Times, in a story entitled “Afghanistan Tries to Help Nation’s Biggest Bank” issued the following correction:

Correction: September 4, 2010
An earlier version of this article, citing American and Afghan officials, erroneously stated that the United States would contribute money to help the Kabul Bank. American officials say the United States is providing technical assistance but no funds for the bank.

The problem is that the “earlier version” was correct – the correction is incorrect. Kabul Bank has been revealed to be a “control fraud.” Control frauds occur when those that control a seemingly legitimate entity use it as a “weapon” to defraud. Control frauds cause greater financial losses than all other forms of property crime – combined. Control frauds can also cause immense damage to a nation because they are run by financial elites that curry favor from political elites. The result is that they are often able to loot “their” banks for years with impunity. They also degrade the integrity of the entire system.

Kabul Bank is a typical example of a crude variant of control fraud at a major bank. Systems of crony capitalism, such as Afghanistan, inherently create an intensely “criminogenic” environment that produces epidemics of control fraud in the public, private, and non-profit sectors. Kabul Bank, like the (originally Pakistani) Bank of Credit and Commerce International (BCCI) – better known to regulators as the “Bank of Crooks and Criminals International” is reported to have helped everyone – corrupt Afghani government officials, corrupt business leaders, and the Taliban laundering its drug profits to, in part, buy weapons. Like BCCI, Kabul Bank’s managers’ reported frauds and self-dealing blew up the bank by causing massive losses. (If you believe that Kabul Bank is the only bank like this in Afghanistan you are consuming too much of Afghanistan’s leading export.)

The CIA tells us that Afghanistan raised roughly $1 billion in revenues last year and expended $3.3 billion. The shortfall, of course, was funded by us (the West, principally the U.S.). Indeed, that understates the case because Afghanistan raised the $1 billion in revenues primarily through customs duties and the U.S. and other Western nations indirectly or directly funded most of those customs duties. We know certain facts. Afghanistan has no deposit insurance system. Its government has no financial responsibility for bailing out Kabul Bank’s depositors. Nevertheless, Afghanistan’s government has announced it will bail out the depositors. The funds to bail out the depositors will come – indirectly, but surely – largely from the United States Treasury. The New York Times’ initial article correctly stated that the U.S. will bail out Kabul Bank’s depositors. Someone obviously demanded a “correction.” Whoever that person was lied to the New York Times with the goal of getting the newspaper to lie to its readers. That lie succeeded. It is time for the New York Times to correct its correction and defeat this effort to mislead the public. The U.S. taxpayers are about to bail out the depositors of a fraudulent Afghan bank.

**Bill Black is also a white-collar criminologist and former financial regulator. He is the author of The Best Way to Rob a Bank is to Own One.

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Is the Economy as Broke as Lehman Was? The Angelides Committee Sidesteps the Mortgage Fraud Issue

Posted on September 3, 2010 by admin | 2 comments

By Michael Hudson (via Counterpunch, where it appeared first)

What is the difference between today’s economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the “real” economy locked in debt deflation?

Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer “negative equity” but not qualify for the help that the officials they elect gave to Wall Street’s winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?

There was disagreement last Wednesday at the Financial Crisis Inquiry Commission hearings now plodding along through its post mortem on the causes of Wall Street’s autumn 2008 collapse and ensuing bailout. Federal Reserve economists argue that the economy – and Wall Street firms apart from Lehman – merely had a liquidity problem, a temporary failure to find buyers for its junk mortgages. By contrast, Lehman had a more deep-seated “balance sheet” problem: negative equity. A taxpayer bailout would have been an utter waste, not recoverable.

Only a “liquidity problem,” or a balance sheet problem of negative equity?

Lehman CEO Dick Fuld is bitter. He claims that Lehman was unfairly singled out. After all, the Fed lent $29 billion to help JPMorgan Chase buy out Bear Stearns the preceding spring. In the wake of Lehman’s failure it seemed to gain the courage to say, “Never again,” and avoided new collapses by bailing out A.I.G. – saving all its counterparties from having to take a loss.

Was this not a giveaway? Mr. Fuld implied. Why couldn’t the Fed and Treasury do for Lehman what they did with other Wall Street investment firms and stock brokers: let it reclassify itself as a bank so it could pawn off its junk mortgages at the Fed’s discount window for 100 cents on the dollar, sticking taxpayers with the loss? (And by the way, will these firms ever be asked to buy back these mortgages at the price they borrowed against from the government? Or will they be allowed to walk away from their debts in a Wall Street version of “jingle mail”?)

This is the soap opera that Americans should be watching, if only it weren’t conducted in the foreign language of jargon and euphemism. At issue is whether Lehman’s crisis was merely a temporary “liquidity problem,” that time would have cleaned up much like BP’s oil spill in the Gulf; or, did the firm suffer a more deep-seated “balance sheet problem” (negative equity), as Federal Reserve Chairman Ben Bernanke claims – a junk balance sheet, composed of assets that not only had no buyers at the time, but had no visible likelihood of recovering their market price even after the $13 trillion the Treasury and Federal Reserve have spent to bail out Wall Street.

Insisting that Lehman should have shared in Washington’s $13 trillion giveaway, Mr. Fuld testified that his firm was just as savable as Countrywide or A.I.G. – or Fannie Mae for that matter. Lehman was perversely singled out, he claims. Was it not indeed as savable as the Fed and Treasury claim the U.S. real estate sector is? Like over-mortgaged homeowners, all it needed was enough time to finish selling off its portfolio, given enough loan support to tide it over.

The problem, of course, is that the securities that Lehman hoped to pawn off were fraudulent junk. American homeowners are victims, not crooks. Wall Street bailed out crooks at Countrywide and its cohorts. The credit-rating agency Fitch has found financial fraud in every mortgage package it has examined. And these are the packages that have made Wall Street rich and powerful enough to gain Washington bailouts to establish them as a new ruling class, bailouts to use for buying up Washington politicians and lawmakers, and for buying out the popular press to tell people how necessary Wall Street financial practice is to “support” the economy and “create wealth.”

Could any other daytime telecast have a more typecast villain than Mr. Fuld? A novelist would be hard-put to better personify greed, arrogantly playing bridge with his boss while Lehman burned. Yet his testimony has a certain logic. If the negative equity suffered by a quarter of U.S. homeowners can be saved, as the Fed claims it can, where should the line be drawn?

Or to put this question the other way around, why are ten million American homeowners being treated like Lehman, if the Fed believes that they are as savable as Countrywide and A.I.G.?

Huge sums are at stake, because the bailout has left little for Social Security, and nothing to bail out the insolvent states and cities, or for more stimuli to pull the national economy out of depression.

Most relevant in Mr. Fuld’s self-pitying defense before the Angelides Committee is not what he said about his own firm, but his accusation that the Fed and Treasury rescued the rest of Wall Street. Weren’t other firms just as bad? Why was Lehman singled out?

The Fed’s witnesses gave a devastating reply. They drew a clear distinction between a temporary “liquidity problem” and outright negative net worth – the “balance-sheet problem” of insufficient assets to cover one’s debts. Lehman was so badly managed, the Fed claimed – so reckless and arrogant in its belief that it could cheat its customers by selling junk at a huge markup – that it could not have been rescued except by an outright taxpayer giveaway. As the Fed’s Chief Counsel, Scott Alvarez, put matters: “I think that if the Federal Reserve had lent to Lehman … in the way that some people think without adequate collateral … this hearing and all other hearings would have only been about how we had wasted the taxpayers’ money – and I don’t expect we would have been repaid.” Like downtown Los Angeles, there was
no “there” there.

Included in the hearings’ evidence is an exasperated e-mail sent by Treasury Secretary Hank Paulson’s chief of staff, Jim Wilkinson, on Sept. 9, 2008: “I just can’t stomach us bailing out lehman. Will be horrible in the press.” Five days later, on Sept. 14, he added that unless a private buyer could be found (e.g., as JPMorgan Chase stepped forward to buy Bear Stearns), “No way govt money is coming in … also just did a call with the WH [White House] and usg [U.S. Government] is united behind no money … I think we are headed for winddown.”

Lehman’s problem was not just temporary illiquidity. It had a fatal balance-sheet problem: Its assets were not worth anywhere near what it owed. So with poetic justice, it was in the same position as the subprime borrowers whose junk mortgages it had underwritten and sold to investors gullible enough to believe Moody’s and Standard and Poor’s AAA ratings. This fraudulent junk was supposed to be as safe as a U.S. Treasury bond. But it turned out to be only as safe as Social Security and state pension promises are in today’s “Big fish eat little fish” world.

Yet Mr. Fuld is correct in pointing out that not only Bear Stearns and A.I.G., but also Morgan Stanley and Goldman Sachs would have failed without state support. So the question remains: Why bail out these firms (and their counterparties!) but not Lehman?

This is too narrow a scope to pose the proper question. What needs to be discussed is the result of Washington arranging for Wall Street to repay its TARP, A.I.G. and other bailout money – including that of Fannie Mae and Freddie Mac – by “earning its way out of debt” at the “real” economy’s expense. Why has Washington refused to write down the bad debts of homeowners, states and cities, and companies facing bankruptcy unless they annul their pension promises to their employees? Why is Washington is treating the American economy like it treated Lehman and telling it to “Drop dead”?

The explanation is that a double standard exists. The wealthy get bailed out – the creditors, not the debtors. And even the fraudsters, not their victims.

Sidestepping the Fraud Issue:
Bailing out fraudsters instead of saving America’s economic base

Recent federal bankruptcy proceedings have exposed Lehman’s deceptive off-balance-sheet accounting gimmicks such as Repo 105 to conceal its true position. No fraud charges have yet been levied, but this is the invisible elephant in the Washington committee rooms. “Everyone was doing it,” so that makes it legal – or what is the same thing these days, non-prosecutable in practice. To prosecute would be to disrupt the financial system – and it is Fed doctrine that the economy cannot survive without a financial system enabled to “earn its way out of debt” by raking off the needed wealth from the rest of the economy?

So the Fed, the Treasury and the Justice Department have merely taken the timid baby step of pointing out that Lehman suffered from such bad management that no firm was willing to buy it out. Barclay’s was interested, but Mr. Fuld was so greedy that he found its offer not rich enough for his taste. So he ended up with nothing. It is a classic morality tale. But evidently not fraud.

The fraud issue lies as far outside the scope of the financial committee meetings as does the question of how the economy should cope with its unpayably high mortgage, state and local debts in the face of its inadequately funded pension obligations. Fed Chairman Bernanke testified on Thursday, Sept. 2, that “the market” itself breeds what most people would call fraud. Widening the market for home ownership necessarily involves lowering loan standards, he explained. But as the Lehman failure illustrates, where should we draw the line between “illiquidity” and insolvency on the one hand, and higher risk and outright fraud?

The Fed argues that the economy cannot recover without a solvent financial system. But what about that large part of the financial system based on fraud? Would the economy fall apart without it – without mortgage fraud, without deceptive packaging of junk mortgages, and for that matter without computerized gambling on derivatives? What of the credit-ratings agencies whose AAA writings were as much up for sale as the conscience and honesty of politicians on the Senate and House Banking Committees? Do we really need them?

And does the economy need more credit (that is, debt)? Or does it need jobs? Does it need to un-tax the banks and give tax-favoritism to Wall Street (“capital gains” tax rates) to enable it to earn its way out of debt at the expense of the production-and-consumption economy?

The question that Washington financial committees should be asking (and economics textbooks should be posing) is whether wider home ownership is really dependent on easier and looser lending standards. After all, the effect of easy credit is to enable borrowers to bid up housing prices. Is this really how to make the U.S. economy more competitive – given the fact that industrial labor now typically pays 40% of its wage income for housing?

Or, does the Fed’s easy-money policy deregulation of oversight open the way for asset-price inflation that puts home ownership even further out of reach – except at the price of running up a lifetime of debt to the banks that write the loans on their keyboard at steep markups over their cost of funding from the compliant Fed?

Qui bono?

Who is to benefit from the Fed’s easy money policy – consumers and homeowners, or Wall Street? This is the broad issue that should be discussed. What would have happened without the bailout? (Remember, Republican Congressmen opposed it – before that fatal Friday when Maverick John McCain rushed back to Washington and said he would not debate Mr. Obama that evening unless Congress approved the bailout of is Wall Street backers.) What if debtors had been bailed out by a write-down of bad debts, instead of the lenders who had made bad loans and the large institutions that bought them?

The bailout has saddled taxpayers not only with $13 trillion that now must be sacrificed by the economy at large (but not by Wall Street), but with the cost of a decade-long depression resulting from keeping the bad debt on the books. This is what rightly should be deemed criminal.

Defenders of Wall Street insist that there was no alternative. And the committee hearings are carefully only listening to such people, because these are very respectable hearings. They are writing mythology, almost as if they are crafting a new religion. In this new ethic, Wall Street financial institutions – “credit creators,” that is, debt creators – are supposed to fund industry, not strip assets or make bad loans. Without rich people, who would “create jobs”? Such is the self-serving logic of Wall Street. For them, Wall Street is the economy. The wealth of a nation is worth whatever banks will lend, by collateralizing the economic surplus for debt service.

What the Angelides Commission really should focus on is whether this is true or false. That would make it a soap opera worth watching. The Fed so far has stonewalled attempts to discover just who was bailed out in autumn 2008? But most important of all is, what dynamic was bailed out? What class of people?

The answer would seem to be, financial firms employing and serving the nation’s wealthiest 1%? Any and all fraudsters among their ranks? (There has not been a single prosecution, as Bill Black reminds us.) Or the remaining 99% of the population – their bank deposits and indeed, their jobs themselves?

Academic textbooks pretend that the economy is all about production and consumption – factories producing the things their workers buy. The distribution of wealth does not appear, nor is it regularly tracked in statistics. But in Washington and at the hearings, the economy seems to be all about lending and debt, all about balance sheets.

I believe that the beneficiaries were fraudsters, and that the system cannot be saved. Trying to save it by keeping the debts in place – and letting Wall Street banks “work their way out of debt” at the U.S. economy’s expense – threatens to lock the economy in a chronic debt deflation and depression.

At issue is the concept of capital. Does money that is made by short-term, computer-driven financial trades qualify as “capital formation” and hence deserving of tax breaks? Are the billions of dollars of “earnings” reported by Wall Street speculators to be taxed at the low 15% “capital gains” rate? That is only a fraction of the income-tax rate that most workers pay – on top of which is piled the 11% FICA wage withholding for Social Security and Medicare that all workers have to pay on their salaries up to the cut-off point of about $102,000. (This cut-off frees from this tax the tens of millions of dollars that hedge fund traders pay themselves.) Or should these trading gains – a zero-sum activity where one party’s gain is, by definition, another’s loss (usually one’s customers) – be taxed more highly than poverty-level income of workers?

A short while ago the Blackstone hedge fund’s co-founder, Stephen Schwarzman, characterized the attempt to tax short-term arbitrage trading gains at the same rate that wage-earners pay as analogous to Adolph Hitler’s invasion of Poland in 1939. It is a class war against fraudsters and criminals – an unfair war as serious as World War II. In Mr. Schwarzman’s inspired vision the Democrats are re-enacting the role of Adolph Hitler by mounting a fiscal blitzkrieg to force billionaires to pay as high a tax rate as workers. Are not Wall Street firms doing “God’s work,” after all, as Goldman Sachs chairman Lloyd Blankfein, put it last fall? And if they are, then are not those who would tax or criticize Wall Street “God-killers”?

If religion can be turned on its head like this – where the Invisible Hand of Wall Street (invisible to the Justice Department, at least) is elevated to a faux-Deist moral philosophy – is it any surprise that economic orthodoxy and formerly progressive tax policy is succumbing? The rentiers are fighting back – against the Enlightenment, against Progressive Era tax policy, and against hopes for U.S. economic recovery. Given today’s florid emotionalism when it comes to discussing Wall Street finances, it hardly is surprising that the Angelides hearings do not dare venture into such territory as to ask whether the bottom 90% of the U.S. economy might need to be bailed out with debt relief just as Wall Street’s elites were.

Yesterday (Thursday), Fed Chairman Bernanke tried to put the financial flow of funds that led up to the crisis in perspective. In his testimony before the Financial Crisis Inquiry Commission he described a self-feeding process that actually started with the U.S. balance-of-payments deficit that made foreigners so flush with dollars. They understandably wanted yields higher than the Treasury was paying, as the Fed was flooding the economy with credit to keep asset prices afloat to save the banks from having to take loan write-downs and admit that debt creation was not really the same thing as Alan Greenspan euphemized in calling it “wealth creation.” So foreign financial institutions became a large but overly trusting market for packaged junk mortgages.

“The market made us do it.”

When asked just who was pushing the great explosion of mortgage lending, Mr. Bernanke pointed to the mortgage packagers – Wall Street profiting from the commissions and rake-offs it was making by pretending that the loans were not bad. However, he reminded his audience, there also had to be popular demand for housing. People were panicked. They worried that if they did not buy a home back in 2005, they could not afford to buy in the future. And they were cajoled with financial televangelists assuring them that they would always enjoy the option of selling at a profit. But Mr. Bernanke said nothing about fraud in all this. To widen the market for home ownership, banks had to write more mortgages, and this required lowering their standards.

So they did it all for us, for “the people” – and the backers of Fannie Mae and Freddy Mac who egged them on.

Where does “lowering loan standards” turn into outright fraud? Has that simply become part of “the market”? This is what the commission seems to fear to address. But it is getting late – already we are in September, and the report is scheduled for December. So is this really going to be “it”? This would be like a soap opera ending in the middle of the desert, with the main protagonists stranded. This seems to be where the Commission is leaving the U.S. economy as it waits for the recommendations of the Joint Commission to Roll Back Social Security, or whatever the name of Mr. Obama’s Republicanized Democratic commission is more formally called. The result is more like the cliffhanger of a serial, leaving the viewer to try and imagine how the protagonist – in this case, the economy – will ever manage to be saved.

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Tagged Michael Hudson

BOEHNER GETS ONE RIGHT: FIRE OBAMA’S ECONOMICS TEAM

Posted on August 25, 2010 by admin | 6 comments

L. RANDALL WRAY

In a surprising turn of events, Representative Boehner finally got something right: Obama’s entire economics team has got to go. Many have already jumped ship, but unfortunately the worst members remain—including Timmy Geithner and Larry Summers. The sooner they are fired, the better.

Rep Boehner usually spends his time attacking seniors, people with disabilities, dependent children and widows and others on Social Security. He wants to cut their benefits—taking away their livelihood. here

However, he has finally found another issue: Obama’s economics team doesn’t care about job creation. here So far, nearly three years into the worst depression since the Great Depression, they’ve yet to turn any serious attention to Main Street. The health of Wall Street still consumes almost all of their time—and almost all government funds. Trillions for Wall Street, not even peanuts for Americans losing their jobs and homes. No one, except a highly compensated Wall Street trader, could possibly disagree with Boehner. Fire Timmy and Larry and the rest of the Government Sachs team.

But he’s only half right. According to Boehner, the problem with Obama’s team is that none of them has ever met a payroll. They do not know how to run a business. Hence, he claims, they do not know how to create jobs. What we need is a good, pro-business economics team that will cut taxes and slash regulations. Maybe bust a few unions and get rid of jobs-killing minimum wage laws. Loosen worker safety protection. Eliminate welfare (and Social Security) to increase the work incentive. It is the same old-same old—the Republican “Party of No” platform of the past three decades.

No, that is not the problem with the Obama team. Rather, it was bought and paid for by Wall Street. It is not interested in creating jobs because that is not the mission Wall Street provided. The only hope is to bring in a new team that is not beholden to Government Sachs. No one with any connection to Wall Street firms ought to be allowed in Treasury.

Putting Wall Street people on the economics teams raises two conflicts: a conflict of mission and a conflict of interest. Wall Street has no “dog in the hunt” when it comes to the health of the economy—it just wants to skim 40% off the top, inserting ever more finance into every activity, whether that is health insurance, “peasant” insurance, or “death settlements”. (see here , here , and here) Thus, the mission of Goldman alumni in Treasury is to increase Wall Street’s share. And the conflicts of interest are obvious—top officials at Treasury plan to return to Wall Street, rewarded with high paying financial sector jobs. It is no wonder that Timmy’s team could care less about job creation.

Further, formulating good fiscal policy that promotes job creation requires no experience at meeting a payroll. Running Treasury is not like running a for-profit firm. Government is not a giant business. It must operate in the public interest—not in the interest of a firm, or even necessarily in the narrow interests of firms, more generally. What might appear to be a pro-business policy might actually hurt business at the national level. Sure, firms hate regulations, decent wages and working conditions, and taxes. Many probably would support Boehner’s race to the bottom efforts—trying to lower wages and benefits to compete with the meanest labor conditions on the planet. But at the aggregate level, that policy is self-defeating, as Henry Ford recognized, because it destroys the domestic market for our nation’s output. It would only ensure a prolonged and deeper depression. Putting a business-friendly team into Treasury is probably the worst thing we could do for American business. It is precisely what President Hoover did, and we know how that turned out. The Party of No wants to do it again. Now, just what is that definition of insanity? Oh, right—try the same old policies that failed in the past.

Indeed, the private sector is not going to lead us out of this depression, anyway. Real recovery is going to require government initiative, starting with job creation by government. And we will need direct job creation, with government paying the wages and benefits for perhaps 12 million new jobs. here This ain’t rocket science. We’ve got perhaps 25 million people who want jobs (or more hours) and we’ve got billions of hours of work that needs to be done. Government can play match maker. Match 12 million workers to tasks that need to get done. That will create demand for private sector output, which will create more jobs.

So the private sector does have a role to play, but the Party of No’s platform of cutting wages and benefits and regulations is not the answer. Rather, an immediate payroll tax holiday will benefit both workers and firms, lowering the costs of retaining existing workers and of hiring new ones—while boosting consumption out of higher take-home pay. As government employment increases, that will generate the demand required to get Main Street back on track.

So, the problem is not that Geithner’s team does not know how to meet a payroll. Instead, the real tragedy is that the economics team has been running policy that is against the public interest. Policy has been operated in Wall Street’s interest, helping it to meet the payrolls of Goldman and other bloodsucking vampire squids. That is the true scandal, and that is why the Obama economics team must go. This is not a partisan issue. It is a national priority.

Oh, and while we are at it, hire Elizabeth Warren. here That, too, should not be a partisan issue. It is a national imperative. If necessary, make it a recess appointment. The Party of No voted against consumer protection. It is steadfastly on the side of predatory lending. Why should it have any say over who will do the protecting of consumers against the predators?

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FREDDIE MISHKIN DOES ICELAND: YOU’VE GOT TO TRUST THOSE CENTRAL BANKS

Posted on August 24, 2010 by admin | 9 comments

L. Randall Wray

Another one in the category of “you just can’t make this up”. Recall that Fred Mishkin was on the Fed’s Board of Governors when the global financial system bombed. Now watch this:

http://d.yimg.com/nl/movies/site/player.swf

For Mishkin’s report on Iceland, go here. For Tyler Durden’s commentary on the report and the video, go here.

If you are an academic, his performance makes you want to curl up under a table. If you are not in academics, it might make you want to take a baseball bat to the pointy-headed intellectuals at the nation’s “elite” universities. To be sure, what Columbia University’s Mishkin did to Iceland is no worse than what economics professors at Harvard—hey, Larry Summers, that includes you—have been doing to countries all over the world. The “research” they are paid to do is not research at all—it is marketing. In the case of Iceland, Freddie was paid by the Chamber of Commerce to do a fluff job—and he fluffed the heck out of Iceland. I wonder what the good people now suffering in Iceland would like to do with him.

One could give him a bit of slack—after all, why would anyone expect that Freddie knew anything at all about Iceland. His research method was to “talk to people” and to “trust the central bank”. That he didn’t see a financial collapse coming right around the corner isn’t, I guess, too surprising. Besides, if you are paid well to not see a crisis coming, you probably will not look too hard. Still, his squirming video takes the cake—even more fun than Geithner’s performances in front of Congress. Oh, right, his doctoring of his CV to change the title of his paper from “Stability” to “Instability” is a “typo”. And, right, he cannot remember how much he was paid as fluffer, but it is in the “public record”. Give us a break.

Actually, I had seen Mishkin squirm like that before. At the very beginning of the US financial crisis (April 2007)—when most still did not see it coming—Mishkin as member of the BOG gave a dinner speech. There was no indication in his speech that he “saw it coming”—he predicted moderate growth, emphasized some strong data in housing as well as low unemployment, and said the Fed would keep its interest rate target at 5.25. While it is hard to believe now, the Fed and most of the press was still worried about inflation at that time—even though anyone who was paying attention could see the economy was beginning to collapse into what would obviously be the worst crisis since the Great Depression. Still, commodities prices were being driven by a speculative boom coming mostly from pension funds—a story for another day. So Freddie was peppered with questions from the media present asking whether the Fed would be able to prevent an inflationary burst. Mishkin’s response was eerily similar to the response he gave in the video—you’ve got to trust the central bank. Do not worry, the Fed has ample ammunition to kill inflation.

When he returned to our table, we grilled him a bit more on that topic, and some of us also argued that the real danger facing the US was a financial crisis and deflation—not inflation. Let me interject that I liked Mishkin. He was a pleasant conversationalist, not at all arrogant, and even somewhat self-effacing. But when he gave his pat answer, “don’t worry, we are the Fed and we know what we are doing”, Jamie Galbraith pressed him for details: what are you going to do about inflation? And, if you raise interest rates now, when debt loads are so high, won’t that cause a wave of delinquencies on mortgages and consumer debt? That’s when we saw the same transformation you just witnessed in the video—from an easy, affable, confidence to sheer horror. Mishkin had been found out and was looking for the exits.

I must say that it was never clear exactly what that horror was. At the time I did not believe that Mishkin’s heart was in the inflation story. Surely he could not have believed, then, that the real danger was inflation. He’d been coached at the Fed about what he ought to say—and the Fed was riding the inflation story to divert attention away from the real danger. The Fed needed to keep the speculative bubbles going as long as possible—an election was around the corner and Republicans needed help. I was sure that he was actually afraid that we were right: the economy was going bust. And the Fed had nothing up its sleeve to prevent Armageddon.

Shortly thereafter, Mishkin left the Fed (August 2008—the second-shortest term ever served). That looked suspicious—and although I never tried to find out why, it fit with my interpretation that he knew what was coming, and so like Greenspan jumped the sinking ship before the Fed would be exposed as the impotent Wizard of Oz behind the curtain.

However, since then, Greenspan has publicly admitted that he had been clueless. His whole approach to economics was dangerously wrong. He never saw nothing coming. And after viewing this video, I am not so sure Mishkin had any clue, either.

Maybe his term at the Fed, like his research for Iceland, was nothing but marketing, too.
Columbia professor? Check.
NBER researcher? Check.
FDIC researcher? Check.
Highly paid consultant for international research? Check.
Vice President of NYFed? Check.
Former BOG member? Check.
Top selling money and banking textbook author? You betcha.

All he needed was a few months at the helm of the central bank, something he could add to the textbook blurb, to ramp up those sales.

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Posted in L. Randall Wray, Uncategorized

Tagged Federal Reserve, Financial crisis, International Finance, L. Randall Wray

GEITHNER DOTH PROTEST TOO MUCH: Does Timmy Work for Goldman Sachs?

Posted on August 20, 2010 by admin | 9 comments

L. Randall Wray

You cannot make this stuff up. Timmy and his staff have gone into overdrive, denying that he has ever been employed by Goldman Sachs. The damage control began when NYC Mayor Michael Bloomberg said Geithner used to work at Goldman. here.

Look, Bloomberg’s the Mayor of Wall Street, and a guy who knew his way around Wall Street before he became a politician. He ought to know which Treasury Secretaries work for Wall Street’s most powerful bank. To be more specific: Bob, Hank, and Timmy—they are the team from Government Sachs and they are at Treasury to run government in Wall Street’s interests.

Timmy and his staff are trying to carefully parse words: it all depends on what one means when one says that Timmy worked for Goldman. If you mean by work “on Goldman’s payroll”, then technically Timmy’s employment at Goldman is yet to come. It is future tense: Timmy “will work” for Goldman. He’ll take a top management position on Wall Street when and if President Obama ever wakes up to the scandal going on at Treasury.

Until then, Timmy is just carrying water for Goldman, funneling Uncle Sam’s money to the firm in the biggest wheelbarrows he can find. He’s not “working for” Goldman—just watching out for the firm’s interests—since he is not yet technically on the payroll.

Timmy has been fighting the perception that he worked for Goldman since his career in “public service” began, working in the Reagan administration. Most of his career has been in Treasury, where he worked for Treasury Secretary Rubin, and at the NYFed where he worked closely with Treasury Secretary Paulson—both of whom had been on Goldman’s payroll.

Even Rahm Emanuel’s wife remarked at a dinner party that Timmy must look forward to returning to Goldman.

Why does everyone think Timmy worked for Goldman? Because he did, and he does. Like a good CEO, he is taking his pay in deferred compensation. When he retires from “public service”, he will go to Wall Street and he will be richly rewarded for his many years of service.

Look, Timmy, the careful parsing of words just doesn’t work. Ask Bill Clinton, who famously tried this tack, after he had said in reference to Monica “there’s nothing going on between us”:

“It depends on what the meaning of the word ‘is’ is. If the–if he–if ‘is’ means is and never has been, that is not–that is one thing. If it means there is none, that was a completely true statement….Now, if someone had asked me on that day, are you having any kind of sexual relations with Ms. Lewinsky, that is, asked me a question in the present tense, I would have said no. And it would have been completely true.”

So, Timmy, is there anything going on between you and Goldman?

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Tagged Uncategorized

Does stimulus work? Marshall Auerback on Deficit Hysteria

Posted on August 19, 2010 by admin | 3 comments

Watch it here.

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Posted in Marshall Auerback, Uncategorized

Tagged Marshall Auerback

The Wingnuts go after Fannie and Freddie

Posted on August 19, 2010 by admin | 18 comments

By L. Randall Wray

In recent weeks the wingnut right wing ideologues have made a lot of headway in their goal of gutting Social Security. Well-funded by hedge fund manager Pete Peterson as well as right wing Washington think tanks, they have promoted the preposterous notion that our wealthy and productive economy cannot afford to take care of our elders. Now they have turned their sights on Fannie and Freddie. They argue that it is time to cut Uncle Sam out of the home mortgage market. Just as he has no role to play in providing decent pensions to our retired population, he should not help make homeownership affordable for most Americans. “Free markets” can do it all so much better than Uncle Sam can do.

Give me a break. These are the same bozos that are promoting home foreclosure and happily cheering the biggest transfer of wealth to Wall Street that the US has ever seen. Without Fannie and Freddie there would be no home financing or refinancing going on right now. Oh, right, free markets did such a good job with the subprime mortgage market, creating a global financial crisis that rivals the Great Crash of 1929. Hey, let’s reward them by getting government out of the mortgage markets so that Pete Peterson can run the whole shebang for the benefit of Wall Street. That, of course, is the real goal. Wall Street wants to get back to predatory lending as quickly as possible, and hates the competition from a newly missioned Fannie and Freddie—which have turned away from the practices that assisted rapacious private lenders from 2004 to 2008. Better close them down because Wall Street hates competition.

And, yes, let’s reduce Social Security benefits and raise payroll taxes, squeezing our seniors so that they have no choice but to let Pete Peterson charge them exorbitant fees to manage their miniscule life savings. Government is running out of keystrokes and won’t be able to afford to credit retiree bank accounts fifty years from now. Better slash Social Security now.

Ain’t it all just so convenient for the Pete Petersons of the world? Shift the blame, no matter how ridiculous the claims. Our current problems are caused by runaway Fannie and Freddie and Social Security—providing safety nets that our homeowners and seniors abused, taking advantage of poor little defenseless Goldmans and Morgans and Citibanks. That was the cause of the crisis! If we had just had more free market abuse of consumers, everything would have just been fine. Besides, government is broke. We’ve got to tighten the purse strings. Running out of cash, you know. No more keystrokes to credit bank accounts.

How about a reality check? Fannie and Freddie made no subprime loans. Indeed, they originated no loans at all. Yes, they offered insurance on privately originated mortgages, and yes, they lowered their standards. This has been carefully studied, and all analysts have reached the conclusion that Fannie and Freddie got into trouble because they catered to “free” market demands that they either insure the kinds of toxic mortgages markets wanted to provide or that they become irrelevant. The free markets wanted to do Liar loans and NINJA loans, making loans that borrowers could never service. The old fuddy duddies Fannie and Freddie would never have agreed to guarantee this trash, so they were partially privatized, with big gun, high paid CEOs hired. And just like magic, they started behaving like a Goldman or a Countrywide—maximizing CEO pay while damning the firms. Yes, that is the free market solution and my colleague Bill Black calls it control fraud. Fannie became a control fraud, just like all the big boy private financial institutions. Peterson’s solution? Promote control frauds by freeing markets.

The thing that the wingnuts cannot explain is why Fannie and Freddie—which had a history that goes back to the mid 1960s – did not encounter significant problems until they were directed by Congress to replicate a market-oriented strategy. And the wingnuts cannot explain why defaults on home mortgages were so rare until the “free markets” took over the mortgage sector. Heck, Fannie and Freddie even survived the savings and loan fiasco of the 1980s, when thrifts were “freed” to pursue free market maximization that resulted in suicide for the whole industry. It was only after 2004 when Fannie and Freddie were directed to cater to control frauds like Countrywide that they got into trouble.

Make no mistake. The wingnuts are likely to win these battles. President Obama will not put up a fight—he’s already bought the Peterson story, hook, line and sinker. Social Security is a done deal. It is going to be “reformed”. That is, it will be handed over to Pete Peterson, who will manage it right down the rat hole where all the private pensions are going. Wall Street will gamble away all the funds, whilst enriching itself with management fees. And Fannie and Freddie will be shut down so that Wall Street will have free reign in the housing market. Homeownership rates will plummet. Predatory mortgages will be the rule. Wealth will trickle up. Democratic Party coffers will be replenished. Obama will declare Social Security and Fannie and Freddie to be reformed—just like the healthcare system.

The only possible hope is that financial markets completely collapse in the next three to four months. That would discredit Pete Peterson and the wingnuts at his think tanks. It would make it possible to stop the right wing stampede and the collective amnesia about the last three years—that is, about the global financial crisis caused by free market wingnuts. Resumption of the crisis could discredit the crazy troglodyte thinking promoted at Chicago and Washington think tanks.

What is the free market path to homeownership? A subprime crisis.

What is the free market path to private pensions? Across the board collapse of commodities, real estate, and equities markets.

What is the free market alternative to Social Security? An impoverished elderly population.

What is the free market alternative to Medicare? High priced health insurance that most elderly people cannot afford.

Not to worry, all these reductions of government interference into the finely oiled free market machine will help to enrich Pete Peterson and the other funders of the wingnut think tanks.

Ok, how about a politically feasible alternative? We all know that Pete Peterson’s well-funded effort has convinced most policy makers that the federal government has run out of money, so cannot afford costly Social Security or government guarantees of mortgages. Any federal spending must be offset by tax hikes or spending cuts. Pete Peterson’s minions are fond of “infinite horizon” calculations that show that “government entitlements” will lead to shortfalls of tens of trillions of dollars. It is all nonsense, but it guides all policy making.

So here is a proposal consistent with such calculations. Let us raise Social Security benefits today to help seniors through the current depression. Let’s have a payroll tax holiday—stop collecting the taxes from employers and employees to put more pay into the hands of workers and to reduce the costs of employing them. Let us provide debt relief to homeowners so that they can keep their homes. Let us create a jobs program to put 12 million people back to work (the number of jobs created by New Deal programs).

To please the deficit hysteria crowd we will need to offset all of this spending. So let us propose that beginning in 2050 all seniors above age 65 will be ground to produce soylent green burgers, with a proviso that implementation can be postponed by majority vote of the population annually from 2050 on. For budgetary purposes, the future savings to Social Security and Medicare can be counted today, eliminating Peterson’s infinite horizon unfunded entitlements. Voters in 2050 and thereafter can decide whether they want those burgers—year-by-year so that infinite horizon forecasts will remain favorable. Each year voters will decide whether they want to eat seniors or feed them for one more year.

Personally, I don’t eat mammals, but I won’t be voting in 2050. Now, reptiles are an entirely different matter, and only discretion prevents me from naming a few that could be candidates for reptilian burgers. Bloodsucking vampire squid cakes, anyone?

Heck, no matter what we do today, it will be voters in 2050 that will decide the fate of seniors in 2050. That is what scares the Beetlejuice out of Pete Peterson—he’s afraid that American compassion and reason will triumph, hence the scaremongering to convince voters that retiring babyboomers expecting government to credit their bank accounts using keystrokes represents the biggest threat facing America today. And that is why the wingnuts think it is so important to start cutting benefits and raising payroll taxes today—to eliminate America’s most popular government program so that no one will have any alternative to Wall Street management of pensions. Yes it is unimaginatively silly—the agenda of simpletons who have no understanding of balance sheets or of sovereign currencies or of anything else that is important to the issues of Social Security or government guarantees of home mortgages. Unfortunately, these are the most dangerous kind of simpleton—with billions of dollars to throw around to get their way.

Remember Thatcher’s motto: TINA = there is no alternative to free markets. The wingnuts have learned these lessons well. Remove any alternative to Wall Street’s complete control over all aspects of life. Then TINA will be true.

I do not want to be accused of being unfair to wingnuts. There is certainly room for debate on the necessity of reforming Social Security and government guarantees of mortgages (and student loans, and small business loans, and farm loans, and veteran’s loans). One can coherently—even if repugnantly—argue that government should play no role in helping to provide seniors with a decent living standard. Declaring that any senior who is not sufficiently lucky, industrious, and foresighted to provide for her own retirement ought to live out a miserable old age is an opinion that deserves to be debated. But declaring that government simply cannot afford current law Social Security benefits it just plain ignorant—it is a position that deserves no attention. Siding with Wall Street against government protection of homeowners might be an unpopular position but it is, again, worthy of debate. Yet claiming that Fannie and Freddie as originally constituted would have contributed in an important way to the global financial crisis does not merit consideration. It is not even worthy of Fox News. It is beyond stupid. It is an outright misrepresentation of the facts.

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

Tagged Financial crisis, L. Randall Wray, New financial structure, Policy and Reform, The Financial Bailout

Happy Birthday Social Security! A Refresher Course in Macroeconomics For Laurence Kotlikoff

Posted on August 16, 2010 by admin | 8 comments

By Yeva Nersisyan

No day goes by without some deficit hawk trying to spread fear among ordinary Americans about the looming fiscal crisis. One gets the impression that the hawks are competing with one another to see who can come up with the scariest scenario. And it seems to be working. A recent USA Today/Gallup poll found that 64% of those surveyed in the poll disapprove of president Obama’s handling of the federal budget deficit. But Obama’s discretionary stimulus has been very small relative to the magnitude of the crisis we are in, and as discussed here most of the deficit was due to automatic stabilizers. Hence Obama’s policies have little to do with the rising deficit, and public disapproval of his policy demonstrates how misinformed the public is on the issues of federal deficit and debt.

A recent piece from one Boston University Economics professor, Laurence Kotlikoff, published in Bloomberg, was too outrageous to leave uncommented. Most of the deficit hawks seem to be united around the same agenda: getting rid of the very modest safety net that the U.S. government provides to its population. After making a bold claim that the U.S. is bankrupt here is what he has to say:

What it [the U.S.] can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

The authority that he uses to support his claim that the U.S. is bankrupt is nothing other than the I.M.F (and you thought that the I.M.F is rethinking its position on economic policy!). But what exactly does he mean by “simplifying” the tax, health-care and retirement systems? The only thing that comes to mind is downsizing – cut, cut and cut. How else would you achieve the 14% permanent fiscal adjustment that he thinks is needed? According to Kotlikoff, not only will this help put the fiscal house in order but it will also “revitalize the economy”. Moreover, these programs could still be able to achieve their “legitimate purposes at much lower cost”. What could be better?

This is the most extreme deficit hawk position that one encounters. There is a legitimate concern about a double-dip recession in the U.S. Household balance sheets are no better than they were before the crisis. Household debt stands at 122% of personal disposable income. The unemployment rate is high and is expected to stay high for the foreseeable future. In this situation the U.S. consumer can by no means be expected to pull the economy out of the hole. U.S. corporations, facing uncertainty about the strength of consumer demand, aren’t hiring despite sitting on huge piles of cash. Just what exactly will fill the aggregate spending gap when the government withdraws its spending and how cutting entitlements will “revitalize the economy” is a mystery to me. And probably to Kotlikoff too, since he makes no attempt to offer explanation in this article.

According to the IMF closing the fiscal gap will require a “permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” (“The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.”) This is the preferred definition of the fiscal gap promulgated by infinite horizon deficit warriors like Kotlikoff. In their world, an adjustment in the government’s fiscal balance from a 9% deficit to a 5% surplus (i.e. 14% adjustment) will take place without any negative effects on the rest of the economy. In the real world, however, we cannot have an adjustment in government’s financial balance without simultaneously having an adjustment in the non-government sector’s financial balance. A 14% of GDP fiscal adjustment means that the non-government sector’s financial balance will also adjust by the same amount, only in the other direction. For example, households could adjust their budgets to run huge deficits to allow the government to tighten its fiscal stance.

So what are our options according to Kotlikoff? To achieve this fiscal adjustment we will need nothing less than doubling of all of our taxes. “Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit”. (Of course doubling taxes is not something that he seems to be in favor of. This is just used to demonstrate how enormous the “hole” is). But one year will not do it. The U.S government will need to run a 5% surplus for many years to come to pay for scheduled expenses down the road.

Since the official deficit and debt numbers don’t look scary enough Kotlikoff offers us his own calculations. You see, the federal debt held by the public stands only at 53% of GDP and is expected to climb up to only about 68% in 2011. Compared to other developed nations this is a relatively low number. One could look at Japan and say: “Well, they have managed not to go bankrupt with a 200% Debt-to-GDP ratio so why would the U.S. be in trouble with a much lower level of debt?” Kotlikoff will then tell you that the fiscal gap is “more than 15 times the official debt”, a whopping $202 trillion. When baby boomers fully retire and collect all of their oversized benefits we will have an annual bill of $4 Trillion in today’s dollars. And if after all of this you still have any doubts then Kotlikoff will point you to the direction of Greece (I won’t go into that in this blog but you can read here on why the U.S. is not like Greece). Who wouldn’t be scared?

The alarming situation we are in, according to the deficit hysteria crowd, is the result of the government running a Ponzi scheme for 6 decades as it has been taking resources from the young and giving them to the old. If their point is that we are taking real resources from the young and giving them to the old, then yes, that’s what we are doing. And that’s what every society is doing, has always done, and will always be doing unless you want to let the elderly population die of hunger. Ditto for infants—the lazy do-nothings expect us, the working age population, to take care of them! Why can’t those lazy infants and elderly people pull their own weight?

But if it is all about real resources, the debate shifts to a completely different dimension. Will we have enough resources so that baby boomers can get a decent standard of living when they retire? Will the economy be able to produce enough to sustain its non-working members—young and old? This is the real issue and it cannot be solved by cutting government spending nor by raising taxes today. Nor can it even be resolved by ramping up financial saving today—that would only lead to more dollars chasing scarce resources tomorrow.

What matters is our capacity to produce goods and services in the future. If we want to be able to produce more in the future we need to invest more in education, technologies and infrastructure today. But if Kotlikoff thinks that we are redistributing “financial resources” from the young to the old (and I suspect that’s what he believes) then this is a false concern as explained below.

First of all, as discussed in many posts on this blog, the government is the monopoly issuer of the country’s currency and hence it cannot go bankrupt. It doesn’t need tax or bond revenues to spend; it simply spends by crediting bank accounts which ultimately amounts to creating new currency (cash or deposits in commercial banks). It then sells government securities to drain any excess reserves that the banking system might receive as a result of government spending. This is done to help the Fed hit its interest rate target. And even if the government wanted to, it couldn’t spend your tax money. Why? Because just as government spending creates new money, taxing destroys money. Government cannot spend that which doesn’t exist.

Both government bonds and currency are liabilities of the Federal government (Treasury and Fed), its IOUs. There is only one difference between the two – bonds pay higher interest than reserves. The government pays interest on bonds to offer an interest earning alternative to reserves. To get us to accept the currency, it imposes taxes on us. If currency is government’s IOU why would government need to borrow its own IOUs in order to spend? Furthermore, there is no balance sheet operation that allows one to borrow one’s own IOUs. When the government sells bonds, it simply exchanges one type of IOU for the other – this is not borrowing. When you deliver government’s IOUs to it to pay your taxes, it simply extinguishes your tax liability, just like you deliver bank deposits (bank IOUs) to a bank to discharge your obligations (bank loans) to it. If you could issue IOUs that were as acceptable as government IOUs, i.e. if everything was for sale in your IOUs, what kind of crazy idea would it be for you to borrow them back in order to spend?

The second problem with Kotlikoff’s argument is his presumption that government can somehow run fiscal surpluses for years on end. As explained in many posts on this blog government’s fiscal surplus means that the non-government sector is running a deficit. In other words, the government is injecting less income into the private sector (through its spending) then it is draining out of it (through taxation). Assuming a 4% of GDP trade deficit (although it could shrink if the government cuts spending), the negative adjustment in private sector (firms and households) balances desired by Kotlikoff will be in the amount of 9% of GDP (5% government surplus + 4% current account deficit/foreign sector surplus). The private sector will be dissaving at a rate of 9% of GDP per year. Can this go on forever or for many years as the IMF says it should?

In Kotlikoff’s world, where this somehow will have only positive effects, it can. But in the real world this is operationally impossible. For one thing, the private sector cannot indefinitely run a deficit without facing solvency problems – it is a user of the currency not the issuer. More importantly, a persistent federal budget surplus is impossible for a sovereign currency issuer like the US because the funds used to pay taxes ultimately come from government spending. If it continuously withdraws more funds from the economy then it’s injecting into the economy then at some point the private sector’s previously accumulated hoards of government IOUs will be depleted. People will simply be unable to pay their taxes.

Deficit hawks such as Dr. Kotlikoff simply shift the public debate from pressing issues such as high unemployment to false concerns about fiscal solvency and debt sustainability. They devise numbers which are meaningless for a nation operating with a sovereign currency, and use these to misinform and scare ordinary people. They are the reason why the very people who benefit from successful government programs (such as Social Security) undermine their own economic well-being by electing deficit hawks to Congress.

The academic experts calling for deficit reduction are irresponsible to say the least. They feel they can say anything without being held accountable for the impact of their ideas on the lives of people. We should devise some standard of accountability for professional economists, maybe similar to what we have for doctors. This would definitely throw some water on the deficit hysteria fire.