Audit the Fed

by Dollars and Sense

[FYI--May 1st came and went and our blog didn't explode as Blogger suggested it would, but I still haven't managed to migrate it to either WordPress or an authorized Blogger format. So it is turning out to be pretty difficult to create new posts...]

Sen. Bernie Sanders has proposed an amendment to the financial reform bill that would allow the Fed to be audited. Our friends at BanksterUSA are promoting the amendment; their site can help you send a letter or email to your senator asking him/her to vote in favor of the amendment. Here's what they say about the amendment:

Senator Bernie Sanders is rallying the troops again for his amendment to the Senate financial reform bill to audit the Federal Reserve. While the Treasury Department is posting TARP bailout recipients and amounts on their web page, the Fed is quietly disbursing trillions more, but is not telling us who is getting the money or why. Sanders' bill parallels the Ron Paul-Alan Grayson language from the House bill. Now if Senate leaders would only put the amendment to a vote, we might find out where this money is going and what taxpayers are receiving in collateral.

For more info about Bankster's campaign, click here.

Meanwhile, Politico posted an article today that mentions Sanders' amendment and identifies it as part of a push by "the left" to shape financial reform. (I don't really like their use of the term "the left"--I mean, Sanders counts as on "the left," I suppose, but who else in the Senate really does? Maybe leftish...) Anyhow, here's part of the article:

Left sees chance to beef up bank bill

By EAMON JAVERS & CARRIE BUDOFF BROWN | 5/3/10 4:53 AM EDT

Sensing the political wind at their backs, activist groups on the left are planning a push this week to shape the Wall Street reform bill on the Senate floor—and they're hoping that fraud charges and a criminal investigation of Goldman Sachs will give them the momentum they need.

It's a sign of how the debate has shifted since Republicans last week allowed the bill to come to the floor—dramatically increasing the chances a Wall Street reform bill will pass this year.

While the early part of the debate was framed by the standoff between GOP senators and the Democratic majority, the debate now becomes as much a tussle between centrists and the left over how the bill will be shaped. The Obama administration is watching the left's moves warily, hoping to use the populist push to its advantage on some fronts and blunt it on others.

As the left maps out strategy, its focus is on amendments designed to wring secrecy and excessive risk from the system, two of the main problems that helped send the world's economy reeling in 2008. Liberals want to bring complex investment trades called derivatives into the light, expand the Securities and Exchange Commission's authority over billions of dollars in private equity trades and force brokers to be more upfront with their clients about risks.

"It's probably going to be a stronger bill than any of us imagined when we got into this," said Roger Hickey, co-director of the left-leaning Campaign for America's Future. "The biggest anger among everybody—including the tea party people—is that the bankers got away with ripping off the bureaucrats in Washington."

Senate Banking Committee Chairman Chris Dodd (D-Conn.) has told senators he'd like them to file any amendments to the bill by Monday to set up a shaking-out period in which hundreds of ideas will be considered.

The liberal bloc will face an uphill climb winning passage of any of these amendments—but the left hopes the onslaught can change the terms of the debate. And they acknowledge some are so-called messaging amendments designed more to make a political point than to win votes on the Senate floor, including efforts to ban Wall Street investment banks from trading with their own funds and to restrict the size and borrowing of major financial firms.

On the left, for example, Democratic Sens. Ted Kaufman of Delaware and Sherrod Brown of Ohio have written an amendment that would prevent banks from becoming too big to fail by placing strict limits on their size. That's one of the amendments that liberal backers say might not succeed, but it will attract a lot of attention. Under the proposal, banks would be prohibited from holding more than 10 percent of the country's total insured deposits and required to adhere to strict limits on the amount of debt they can issue.

As Doug Henwood, editor of the Left Business Observer (hi, Doug!) pointed out on lbo-talk, the White House doesn't want the "left" to push too far. This is from later in the Politico article:

Still, the White House is watching and has made clear it won't let Democrats go too far.

"Having the bill shift a little bit to the left or [be] tougher on the banks and on derivatives could be a good thing," a senior administration official said. "But we're going to resist stuff that we feel is interference with monetary policy." One measure that the administration will push back against, the official said, is a proposal to audit the Fed, which has attracted support from a disparate group of members of Congress.

Read the full article.

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Charter Cities

by Dollars and Sense

An NPR interview with Stanford economist Paul Romer today caught my ear. He was talking about his “charter cities” project. The idea is to have rich well-governed countries create new cities on empty land either domestic or foreign by establishing the governing rules and institutions, then inviting people from poor, ill-governed countries to move there. Investment will flow in and enterprise will flourish, giving the migrants an opportunity for a better life.

Here is one of Romer’s hypothetical examples:

In a treaty that Australia could sign with Indonesia, Australia would set aside an uninhabited city-sized piece of its own territory. An official appointed by the Australian prime minister would apply Australian law and administer Australian institutions, with some modifications agreed to in consultation with the government of Indonesia.

People from Indonesia, many of them lower-skilled workers, could come live as temporary or permanent residents in this zone, but would remain citizens of Indonesia. A portion of their labor income could be taxed and return to the government in Indonesia. Levels of free public services and welfare support would be comparable to those in Indonesia. As citizens of Indonesia, the Indonesian inhabitants of the city would have no claim on residency or citizenship in Australia proper. They would be subject to the same immigration controls whether entering Australia from this zone or from Indonesia.

Highly skilled workers from all over the world would be welcomed as well, but would be subject to the same immigration controls they would face from their home countries. Australian citizens and firms would be able to pass freely between Australia proper and the new charter city.

The point he stresses is that poverty results from bad rules within a country—not from, say, international trade regimes, military force, the machinations of domestic elites, etc. etc. Naturally, the rules Romer suggests the well-governed countries would establish for their charter cities are all about “free” markets. For instance, he claims the reason many Haitians do not have electricity is because the law there gives public-sector utilities a monopoly; a charter city for Haitians (in Brazil, he suggests) would allow private corporations to provide electricity and thus solve the problem.

Not sure this is such a new idea. The Australia/Indonesia example above sounds suspiciously like a good old “free-trade zone,” for example, the FTZ we reported on back in 2002 in Haiti, where Dominican Republic textile companies could benefit from cheap Haitian labor without even having to let any Haitians into the DR.

Read more about Romer’s plan here.

Labels: Australia, charter city, free trade, free-trade zone, Haiti, Indonesia, Paul Romer

 

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4/29/2010 02:27:00 PM

 

Can Invading a Small Third-World Country Stimulate the Economy?

by Polly Cleveland

Reviewing Reinhart and Rogoff's This Time is Different in the May 13 issue of the NY Review of Books, Paul Krugman and Robin Wells assert that, "…history can offer some evidence on the extent to which Keynesian policies work as advertised." After brief comments on work by the IMF and others, they proceed:

"An even better test comes from comparing experiences during the 1930s. At the time, nobody was following Keynesian policies in any deliberate way -- contrary to legend, the New Deal was deeply cautious about deficit spending until the coming of World War II. There were, however, a number of countries that sharply increased military spending well in advance of the war, in effect delivering Keynesian stimulus as an accidental byproduct. Did these countries exit the Depression sooner than their less aggressive counterparts? Yes, they did. For example, the surge in military spending associated with Italy's invasion of Abyssinia was followed by rapid growth in the Italian economy and a return to full employment."

WHAT? If this is the best case to be made for "Keynesian" economics (as opposed to what Keynes might have meant in his General Theory)--then it's past time to look for a new paradigm.

But let's assume Krugman and Wells are serious. What's the evidence, what's the logic and what's the alternative?

Start with Italy. If Italy really did recover quickly, crediting the Abyssinian invasion (1935-36) is still just a post hoc argument--no proof of causation. Besides, Mussolini was a very busy man--building new infrastructure, reorganizing Italy's notoriously corrupt and ineffective government along fascist lines, even supposedly making the trains run on time. Maybe Il Duce did some good for the Italian economy. But then we don't really know, as he tightly controlled the news and the statistics.

The "Keynesian" logic, as best I can explain it, holds that a crash makes people too frightened to spend money. Instead, they all try to save. This creates a downward spiral, in which lack of demand for goods leads to more decline, and more decline leads to more fear and more futile efforts to save. If the government steps in, borrowing and spending--no matter on what--that will reverse the downward spiral and restore the economy to normal.

An alternative paradigm runs as follows:

In ordinary economic times, businesses invest by combining labor, natural resources and capital equipment to produce goods and services. These goods and services then are consumed by the owners of the labor, resources and equipment, completing the little circle shown in Chapter One of every macro textbook. Money flows around the circle in the opposite direction, as businesses pay the owners, allowing them to buy the output. Public services and infrastructure--like schools and sewers--enhance production.

If something interferes with production, then there's less to consume. The shortfall must be rationed, --directly by rationing coupons, or indirectly by inflation, or by cutting off credit to marginal businesses, which in turn lay off workers. It's that simple.

What might interfere with production? Obviously natural disasters, like floods, earthquakes or volcanoes, or manmade disasters, like wars or oil spills--disrupt production. Less obviously, bad public investments like bridges and highways to nowhere also disrupt production; workers, resource and capital owners get paid--but the process creates no goods for them to buy. Military spending likewise fails to deliver the goods to compensate the producers. That's why nations at war institute rationing--to prevent inflation.

Even less obviously, bubbles disrupt production. As in the recent housing bubble, land appreciation makes homeowners feel they're getting richer so they don't need to save and invest. Simultaneously, housing and related industries build too much housing--with the same effect on the economy as bridges to nowhere or stockpiles of useless weapons. There's a shortage of goods people want, and that shortage must be rationed somehow.

When Wile E. Coyote runs off a cliff, he doesn't fall until he looks down. A housing bubble bursts when investors begin to look down, as in 2007, and recognize the growing mismatch between expectations and supplies. By the time the crisis hits, the damage has been done. (It's now conventional to blame the crisis on machinations of Madoff or Goldman, but the bubble made those machinations profitable, and hid them for years.)

So if invading a small third world country won't stimulate the economy, what will?

The "Keynesian" paradigm completely disregards the quality of government spending, borrowing and taxation. We need policies now to get production back on track. Priority should go to supporting small business, which provides the most employment and production per dollar invested. That means at the least making credit available and mitigating that great job-killer, the payroll tax supporting Social Security. (See my prior pieces on "Deficit Hawk, Progressive Style.")

Hey Paul and Robin, time to ditch the "Keynesian" paradigm and start over!

 

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4/29/2010 07:45:00 AM

 

Who's Afraid of Debt and Deficits?

by Dollars and Sense

We just posted material from the May/June, 2010 issue of Dollars & Sense, including Marty Wolfson's article on myths of the deficit, and the table of contents of the issue. Enjoy!

Here's the editorial note for the issue:

The Big Bad Deficit
Sarah Palin held a Tea Party on the Boston Common across from the Dollars &
Sense office on April 14th, the day before Tax Day. As the local media noted, the
turnout was underwhelming, and many of those who showed up seemed to be
gawkers—Boston residents wondering who on earth these Tea Partiers are.

Tea Partiers are among those who are exercised about the federal deficit and
the national debt, but who exactly loses sleep over federal budget policy? In any
case, these folks don't seem to care about many of the biggest contributors to debt
and deficit, like Bush's tax cuts for the rich, or massive military spending (though the
Ron Paul fans among them may worry about the latter).

On the other hand, deficit hawks are good at exploiting the generalized anxiety
about the economy, telling stories about the big bad deficit that seem like common
sense but fall apart on closer inspection. Marty Wolfson (p. 7) dismantles two of the
key myths that lead people to suppose that it is more important for the government
to reduce the deficit now, rather than do what might actually alleviate people's economic
woes, e.g. spending money to create jobs.

Outside of the United States, Greece has become the poster child for deficits and
debt run wild. Mike Epitropoulos (p. 9) helps untangle a situation in which ordinary people
are being asked to pay for the deeds of a corrupt public sector that has been unwilling
to tax the rich. And Arthur MacEwan (p. 31) explains the class politics behind the
pressure that "the bond market”" exerts on the government in Greece and elsewhere.

National debts and deficits are tied into the international trade system, and in particular
to a kind of deficit that we should be wary of. As Katherine Sciacchitano explains
(p. 13), the U.S. trade deficit sends dollars spewing out into the world economy
to return not as demand for U.S. products, but as fuel for stock market and housing
bubbles. Forging an alternative global system "will be the work of generations."

Also in this issue: health care reform and redistribution, bankruptcy and impunity
at ASARCO, the true (military) costs of oil, and more!

And here's info about a "Counter-Conference" and teach-in about "fiscal sustainability," which is to counter this "Fiscal Summit" populated with deficit hawks. Hat-tip to LP for this.

A Teach-In Counter-Conference on Fiscal Sustainability
Submitted by joe on Wed, 2010-04-14 16:53

On April 28, 2010, the Peter G. Peterson Foundation is sponsoring a "Fiscal Summit" in Washington, DC. The purpose of the Conference, which is scheduled for the day after the first meeting of the President's recently constituted National Commission on Fiscal Responsibility and Reform (By the way, where the Conference is happening is a mystery not cleared up on the PGPF web site), and which includes many notables, is:

". . . to further a national dialogue on solving America's fiscal challenges through several moderated discussions with leaders on the issue from across the political spectrum. . . .

Robert Kuttner's comment on the Peterson-sponsored Conference is:

"This is billed as a 'national dialogue on solving America's fiscal challenges,' but spare me. This is a propaganda event. For the most part, the featured speakers follow the Peterson line. John Podesta, the closest thing to a liberal playing a headliner role, accepts that there is a serious deficit problem, but would entertain a value-added tax as part of the remedy. But the speakers' list is clearly stacked and there is no one to Podesta's left."

And for good measure, the left-right paradigm is not even very applicable here at all, because everyone listed In the PGPF's announcement, whether "liberal" or conservative, shares the neo-liberal assumption that Government spending in the United States is operationally constrained by the ability to tax or to borrow money from non-Government sources. Given this false assumption, all the participants in this so-called "national dialogue" will share the assumption that fiscal sustainability has something to do with Government deficits, debts, and the ratio of debt held by the public to GDP. There will be disagreements among them about how long the Government has to bring deficits down over time, or to moderate the trend toward increasing debt, or about what a "responsible" ratio of debt held by the public to GDP ought to be. But none will entertain or discuss the idea that deficits, debts, and debt to GDP ratios are inappropriate tests of fiscal sustainability, irrelevant measures of the degree of fiscal challenges we face, and, in fact, nothing more than a by-product of the real fiscal challenges facing us, namely achieving renewed economic growth and full employment. So, this Conference will take "off the table" any ideas about what fiscal sustainability, that don't center around a neo-liberal definition of this idea.

That's just intolerable. What is badly needed is an immediate answer to the President's Commission and the Peterson Conference. Our answer is entitled the Fiscal Sustainability Teach-In Counter-conference. We plan to hold it in Washington DC, on April 28, 2010, from 8:00 AM to 4 PM, at The Marvin Center of The George Washington University, Room 310, The Elliott Room and to make it a free event open to the public. Please get there early since the seating capacity of the room is 90.

The purpose of our conference and teach-in is to look at fiscal sustainability relative to public purpose, including full employment, and also to teach the new economic paradigm of Modern Monetary Theory (MMT) and its application to fiscal sustainability. We want to propagate an alternative message about what fiscal sustainability means, and to do that in the mainstream mass media, and in the blogosphere, on the same day as the Peterson Foundation Conference. Here is our tentative program schedule, topics and presenters as of 04/20/10.

Please make your plans to come to this Teach-In Counter-Conference. You will learn why the thinking and austerity posture of the deficit hawks is the single biggest threat to the American economy since the policies of Herbert Hoover himself, and why the new economic paradigm of Modern Monetary Theory provides a much better guide to our economic crisis than the "seven deadly innocent frauds," (the frauds themselves, not the linked book which is, itself an introduction to MMT) and other neo-liberal economic myths.

For more information, click here.

Labels: balance of trade, deficit, deficit hawks, Greek debt crisis, trade deficit

 

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4/24/2010 04:52:00 PM

 

Follow Up on Poterba on Capital Markets

by Dollars and Sense

In my most recent blog post, about last night's event at the American Academy of Arts & Sciences, I said I'd wanted to ask James Poterba, the President of the National Bureau of Economic Research, a follow-up question, and that I'd let readers know if I heard back from him by email.

Well--I'm getting a somewhat better impression of him; he got right back to me. Here's my email and his response:

Dear Prof. Poterba,

I greatly enjoyed your remarks, and John S. Reed's remarks, at the American Academy of Arts & Sciences yesterday evening.

In response to the suggestion from a member of the audience that the federal government could do more to alleviate the "social costs" of the downturn (especially of long-term unemployment), e.g. by investing directly in certain industries, you said that it is hard for government to pick winners, and that "markets do a better job of allocating resources." (I believe I am quoting you verbatim.)

The question I'd hoped to ask--and your remark made me want to ask it even more urgently!--was this: Do you think that financial markets and financial institutions have done a good job of allocating capital over the past couple of decades? And my follow-up question would be: if you think that they have done a *good* job, what on earth would count as doing a bad job?

Best,

Chris Sturr, co-editor, /Dollars & Sense/ magazine

And his response:

Dear Chris -
I am glad that you enjoyed the session last evening. I do believe, as I said last night, that capital markets such as those in the US do, and have done, a reasonably good job of allocating capital. I don't know of any better mechanism. All best wishes.
Jim

So I have a good impression of him for getting back to me so quickly, but I still find it pretty astonishing and disturbing that the financial crisis and recession don't seem to have shaken his market fundamentalism one bit.

—CS

Labels: capital markets, financial crisis, James Poterba, recession

 

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4/16/2010 04:08:00 PM 0 comments links to this post

 

An Evening with Fancy Bankers

by Dollars and Sense

Chris Sturr, D&S co-editor, here.

A few weeks ago I received an invitation to attend the "1,954th Stated Meeting" of the American Academy of Arts & Sciences, on the topic of "Prospects for the Economy." The featured speakers were supposed to be John S. Reed, former Chair and CEO of Citigroup and former chair of the New York Stock Exchange; and E. Gerald Corrigan, Managing Director at Goldman Sachs Bank USA (the holding company of Goldman Sachs) and former Prez. and CEO of the Federal Reserve Bank of New York. They were to be introduced by James M. Poterba, Professor of Economics at MIT and President of the National Bureau of Economic Research (and also a member of the NBER committee that dates the business cycles).

The event happened last night. As it turned out, Corrigan couldn't make it, supposedly because he was "stuck on the tarmac" at a NYC airport, but one wonders whether his absence had something to do with the SEC filing suit against Goldman Sachs today.

The Academy, which dates back to 1780, included George Washington, Thomas Jefferson, Alexander Hamilton, and Benjamin Franklin as early members, and has included 200 Nobel laureates as members, according to Wikipedia. The vaguely Japanese-style headquarters is on a wooded campus of several acres in Cambridge, right on the border of Somerville, about a fifteen minute walk from Harvard Yard.

As soon as I got the invitation and accepted via email, I sent an email around to D&S folks to see what I should ask the "fancy bankers," if I got a chance to ask a question. D&S collective member, author, and economist Alejandro Reuss provided the suggestion I liked best. He thought I should ask thme: "Do you think financial markets and financial institutions have done a good job of allocating capital over the last couple of decades? If so, what on earth would count as not doing a good job?" Unfortunately, I didn't get a chance to ask my question in person, but I may get an answer to it yet.

The crowd was overwhelmingly white—I saw no black people whatsoever, and of three non-black non-white people, two were serving snacks and wine. Maybe 20% of the audience were women, and among audience members I think there might have been three or four people younger than me (and at 43 I'm not all that young); the median age might have been 60. There seemed to be lots of important people.

Here's what happened: Milling around the snacks, I met a nice older gent, a George T., who is an investment adviser in Belmont, a relatively ritzy suburb of Boston. He confessed that even though he is a life-long Republican, he is pretty disgusted with the results of banking deregulation. We chatted during the reception and sat together during the talk. (At the end of which he whisked me up front to introduce me to Louis W. Cabot, Chair of Cabot-Wellington LLC and Interim Chair of the Board of the Academy, and I think former head of the Brookings Institution, who had officiated at the whole event.)

I got a better impression of John S. Reed, whom I'd been prepared to dislike, than I did of James Poterba. Reed gave a short talk on the economic crisis and the recession. He downplayed the role of declines in consumer expenditures and personal disposable income in the downturn, claiming that both of these had already returned to where they were at their previous peak (which is hard to believe--I'm going to try to get my hands on the charts in his slides to confirm his numbers). And he downplayed the role of the subprime crisis per se, saying that the banking system was so over-leveraged that if the mortgage crisis hadn't precipitated the financial crisis, something else would have. He identified the precipitous withdrawal of business investment in the wake of the financial crisis as what most accounted for the downturn, and he also cited (but slighted, as a couple of audience members pointed out) the massive jobs downturn.

He said he was "fundamentally optimistic"; he predicted a "V-shaped" recovery, given that consumer demand is strong (contrary to "conventional wisdom"), exports are doing well, and he expects that business investment will pick up rapidly over the next couple of quarters. (As audience members pointed out, here's where his slighting of long-term unemployment is problematic: can the recovery be considered "V-shaped" if unemployment says near 10% for as long as it is likely to, and long-term unemployment continues to be a problem? He wondered aloud why this was "conventional wisdom," but he also didn't really seem to care--massive joblessness didn't seem to dampen his optimism.)

His two caveats were (a) that the Fed would have to be very careful extricating itself from the the monetary stimulus (e.g. super-low interest rates) it has set up (and the same would be true with governments globally); and (b) that he thought we could definitely expect a dollar shock, making it difficult for the U.S. to issue debt, over the next five years. Could it happen in the next five months? Who can say? he said. He likened the coming dollar shock to an earthquake in an earthquake-prone region: it is "predictable but not forecastable." [Keep your eyes out for a feature article on the dollar and the U.S. trade deficit in our May/June issue.]

What made me like the guy more than I thought I would? He said fairly forcefully that the criticism bankers were facing was justified, and he said they should be held accountable (though he didn't say how--confiscation of their wealth or imprisonment are probably not what he would recommend, alas). And in response to a question about what kind of (re-)regulation was warranted, he made some pretty interesting remarks. He admitted first of all--pretty explosively, I think!--that people shouldn't believe anything bank executives say in Congressional testimony, since they have a fiduciary responsibility to take stands that are good for their stockholders. (Did he really mean to say that the bank executives' fiduciary responsibility required them to perjure themselves?) Since he's a former bank executive, he is free to say what he actually believes, which is that the banks should be re-regulated, starting with capital requirements (not allowing banks to reach the levels of leverage they did before the current crisis); and he said he is in a strong financial consumer protection agency, because banks had been taking advantage of vulnerable and ignorant consumers for too long. (I guess it is easy enough to take these stances when you're essentially retired.)

What turned me off about Poterba? Mostly his responses to one pretty pointed question about industrial policy and the "social costs" of the mass unemployment that has come with the rapid business disinvestment Reed discussed. Shouldn't the federal government follow Europe's lead in addressing these social costs via direct investment in industry, as Europe had in Airbus and in the auto industry? an audience member asked. Reed acknowledged that there were social costs to unemployment. But when Poterba addressed them, all he could come up with was that long-term unemployment degrades people's job skills. He really seemed clueless about what's bad--for people and communities, not "the economy," or even simply for people's long-term earning power--about mass, long-term unemployment.

And in response to the idea of direct government investment in industries, he said that this was a problem, because governments have a hard time picking winners, whereas "markets do a better job of allocating resources."

So much for learning anything from the current economic crisis. Even Alan Greenspan seems to have learned more than James Poterba, for all he said last night.

The session ended before I was able to ask Alejandro's question, but I think Poterba gave his answer. I did email him the question—I will let you know if I hear back from him.

—CS

Labels: AAAS, E. Gerald Corrigan, financial crisis, Goldman Sachs, industrial policy, James Poterba, John S. Reed, recession

 

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4/16/2010 02:32:00 PM

 

Breaking News: SEC Sues Goldman Sachs

by Dollars and Sense

Just posted to the NYT website:

U.S. Accuses Goldman Sachs of Fraud

By LOUISE STORY and GRETCHEN MORGENSON
Published: April 16, 2010

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against—the ones he believed were most likely to lose value—and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

"The product was new and complex, but the deception and conflicts are old and simple," Robert Khuzami, the director of the S.E.C.'s division of enforcement, said in a statement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Mr. Paulson is not being named in the lawsuit. In the half-hour after the suit was announced, Goldman Sachs's stock fell by more than 10 percent.

Read the full article.

Labels: Accounting fraud, Goldman Sachs, mortgage backed securities, SEC, subprime crisis

 

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4/16/2010 10:39:00 AM

 

Several Items: Greece, Taxes, Bond Market

by Dollars and Sense

Today's items:

(1) Taxes: Since it's tax day, it's time to dispel some of the myths around taxation. For this purpose I like Mark Engler's recent post over at Dissent's "Arguing the World" blog, busting the myth of "Tax Freedom Day." Here is part of his post:

Military spending accounts for over half of our federal tax dollars after you add up the allocations for the Department of Defense, war appropriations, military components of other arms of the government, and debt from previous military ventures. This means that, unless they want to rethink the nature of their holiday, the “Tax Freedom” people should be spending January and most of February joining the picket lines of the War Tax Resisters.

Last I checked, the Tea Partiers weren’t interested in reeling in military spending. So what else is on the list? Well, the next big budget items are Social Security, Medicare, and Medicaid. While some on the far right want to privatize or eliminate them, these programs tend to be very popular with most Americans—so much so that fear-mongering about a government takeover of Medicare became a paradox-laden Tea Party talking point. Medicare, Medicaid, and Social Security total around 39 percent of the total federal budget. So once we take those off the table, we’re up above 80 percent of the federal budget that’s going untouched.

Are the Tax Freedom Day people celebrating freedom from functional national highways and bridges that don’t collapse? If not, that’s another $73 billion in taxes we can agree to keep.

Should there be a public response to public health hazards like the Swine Flu? Unless you believe that the rich should be vaccinated and the poor should go ahead and suffer the epidemic (a recipe for festering ever more virulent diseases), then you support some type of national public health system, which means funding the Center for Disease Control and related agencies.

Disaster relief? Unless you think people caught in floods and earthquakes should fend for themselves, keeping FEMA will shave another day or so off the “Tax Freedom” concept.

National parks? Some whack jobs might want to sell off Yellowstone and Yosemite. But red-blooded, Ken-Burns-loving Americans, not such much.

The list goes on. Keep in mind that Tax Freedom Day is not just about federal taxes, but also about state and local taxes. A lot of these go to services like garbage collection, local police, schools, and firefighting.

Read the whole post.

And David Leonhardt's column in yesterday's NYT targets the "47%" myth (which I'd never heard about—guess I don't listen to the right right-wing radio shows?), according to which 47% of Americans supposedly don't pay any taxes, unfairly burdening the remaining hardworking folks. Here's a sample:

The 47 percent number is not wrong. The stimulus programs of the last two years—the first one signed by President George W. Bush, the second and larger one by President Obama—have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here—federal and income—are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and investment taxes, among others. And, of course, people pay state and local taxes, too.

Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47.

On taxes, also check out United for a Fair Economy's Tax Pledge, which has been getting some attention in the national media.

(2) The Greek Debt Crisis: The spotlight on Greece and its debt crisis intensified this week, as European leaders finally agreed to a rescue package.

Yesterday we posted a comment by Mike-Frank Epitropoulos on the Greek debt crisis; Mike argues that Greece has become a demonstration project for other European countries with "overly" militant populations. Here's the beginning:

There has been an avalanche of coverage on Greece's economic situation in the past few months. Most of the coverage rightly attempts to diagnose the underlying problems of Greece’s dual deficits of the public sector and its national debt, and how this might affect the value of the euro and the integrity of the Euro Zone. But, as anyone who has followed this story knows, Greece is not alone in this precarious situation. They are lumped into a group of EU countries that have been labeled the "PIIGS"—Portugal, Ireland, Italy, Greece, and Spain. Additionally, it is known that some of the other countries have worse problems and are larger than Greece, which could have even greater negative impact on the EU and the value of the euro. So, why the focus on Greece?

Click here for Mike's analysis. Our May/June issue will also include an explanation of the kind of "pressure from the bond market" that the Greek government is facing. (On this topic, in connection with Greece and the financial crisis more broadly, see Kevin Gallagher's recent Guardian piece, The Tyranny of the Bond Market.)

Labels: bond market, David Leonhardt, Greece, Greek debt crisis, Kevin Gallagher, Mark Engler, Tax Freedom Day, taxes

 

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4/15/2010 11:48:00 AM

 

Several Items: Citigroup/stimulus, TBTF, Quakes

by Dollars and Sense

I will continue to post in digest form (multiple items) for a while—no luck on migrating the blog just yet. Soon, though. Here are this week's items:

(1) From Dean Baker (hat-tip to Mike Prokosch, who says, "CEPR outdoes itself here"):

Profits on Citigroup Stock: Can They Be the Basis for Financing Stimulus?

April 2010, Dean Baker

Last month the government announced plans to sell the stock it obtained in November of 2008 as part of its bailout package of Citigroup. The media jumped on the fact that, at the stock's current market value, the government stands to earn an $8 billion profit on this stock. This profit was widely touted as evidence of the success of the bailout. In reality, the government's profit on Citigroup stock was primarily the result of its own willingness to back up Citigroup. The increase in Citigroup’s stock price was largely driven by investors’ realization that the government would not let Citigroup fail. [Read the rest (pdf).]

(2) From Robert Reich, from a while back on his blog, but still salient (hat-tip to L.F.):

Break Up The Banks

Robert Reich | Monday, April 5, 2010

A fight is brewing in Washington—or, at the least, it ought to be brewing—over whether to put limits on the size of financial entities in order that none becomes "too big to fail" in a future financial crisis.

Some background: The big banks that got federal bailouts, as well as their supporters in the Administration and on the Hill, repeatedly say much of the cost of the giant taxpayer-funded bailout has already been repaid to the federal government by the banks that were bailed out. Hence, the actual cost of the bailout, they argue, is a small fraction of the $700 billion Congress appropriated.

True, but the apologists for the bailout leave out one gargantuan cost—the damage to the economy, which we're still living with (witness the latest unemployment figures). Leave it to the Brits to calculate this. Andrew Haldane, Bank of England’s Financial Stability Director, figures the financial crisis brought on by irresponsible bankers and regulators has cost the world economy about $4 trillion so far.

So while the bailout itself is gradually being repaid (don't hold your breath until AIG and GM repay, by the way), the cost of the failures that made the bailout necessary totals vast multiples of that. [Read the rest of the post.]

(3) Mark Engler on free trade and quakes (starting with Bill Clinton's mea culpa, which we mentioned a couple of days ago); hat-tip to Mark E. ;) :

"Free" Trade Makes Earthquakes Worse
Mark Engler | April 7, 2010 2:00 pm

Here's something you don't see every day: One of the most influential promoters of market fundamentalist "free trade" policies admitting that he screwed up big time—and that as a consequence people in Haiti are starving. Amazingly, that's just what happened in the lead-up to last week's International Donor's Conference on Haiti.

Earlier in March, Bill Clinton—currently honing his elder statesman chops by working on Haiti disaster relief—made a remarkable apology for the failure of policies he once championed. His statement was put in context in an excellent article by Associated Press reporter Jonathan Katz entitled, "With Cheap Food Imports, Haiti Can't Feed Itself." The article hasn't received nearly the attention it deserves, so if you missed it when it first came out, do check it out. [Check out the rest of Mark's post.]

That's all I've got for now--may post something on the weekend.

Labels: bailout, bill clinton, Citigroup, Dean Baker, earthquake, economic stimulus, Haiti, Mark Engler, Robert Reich

 

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4/09/2010 04:39:00 PM 0 comments links to this post

 

Several Items: Medicare, Haiti, Taxes, Tea Baggers

by Dollars and Sense

While Blogger continues to screw up our blog, and until we can migrate to WordPress, I may start posting multiple items in one post to save myself the trouble of all the work-arounds I need to do otherwise. Here are some items that I've been meaning to post this week:

• Our last post was about Obama's bad choices for his debt commission—people who want to loot Social Security. But there is apparently some good news: We have it on good authority—my sister, who is a physician assistant and medical director at a network of rural health centers in West Virginia—that Obama's pick to head the Centers for Medicaid and Medicare Services, Donald Berwick, is a very good choice. She said she was "giddy" when she heard the news. Berwick is a professor at Harvard Med School and also heads the Institute for Healthcare Improvement in Cambridge, Mass.


• Second item, by Ruth Messinger, at Huffington Post (hat-tip to TM): Bill Clinton issuing a mea culpa about the effects of his trade policies on Haiti. Ugh. Here's a sample:
  

  As many of us have been paying close attention to the long-awaited passage of health care reform last week, it was easy to miss something else that was absolutely extraordinary. Former President Bill Clinton said at a recent Senate hearing that he regrets the impact in Haiti of the free trade policies that became a hallmark of his presidency.
  

  "It may have been good for some of my farmers in Arkansas, but it has not worked. It was a mistake," Clinton said this month. "I had to live everyday with the consequences of the loss of capacity to produce a rice crop in Haiti to feed those people because of what I did; nobody else."

  
  Read the full article. (On this topic see our recent article by Marie Kennedy and Chris Tilly, Haiti's Fault Lines: Made in the U.S.A.)


• Third item: Glenn Greenwald article from Salon, via Common Dreams: Mike McConnell, the WaPo, and the Dangers of Sleazy Corporatism, about the executive vice president of Booz Allen Hamilton, creepy defense/intelligence/security contractor that figures prominently in one of the features in our current issue, Synergy in Security, by Tom Barry. Hat-tip to Mike P. (Incidentally, if you live in the Boston area, you hear that Booz Allen is an underwriter for one of our local public radio stations, WBUR. Maybe they fund NPR across the country? Another reason not to listen.)


• Fourth: new web gizmos and charts: from the National Priorities Project, an Interactive Tax Chart Tool in anticpation of Tax Day 2010 (speaking of which--is everyone ready to go out on Tax Day to interact with, and counter, the Tea Baggers? More on this below...); and the Wall Street Bailout Cost table, which is a project of the Real Economy Project, which is a project of the Center for Media and Democracy. Seriously, this table is really useful, and I commend them for putting it together--we tried last year to put together something similar, and found it nearly impossible to keep it up to date.


• Last but not least: A nice blog post by Mark Engler: (Over)Counting the Tea Parties. Mark, occasional D&S author and Left Forum pal, manages to pin down some ideas about the Tea Baggers (as I prefer to call them, as a sly homage to a term from John Waters' film Pecker) that I'd had but hadn't been able to quantify as he does here. On this topic, though: on Wednesday I was lucky enough to meet Medea Benjamin of CodePink. She was speaking at Encuentro 5, the fabulous left meeting space in Boston's Chinatown. One of the main reasons I stopped by was to (finally) give her a copy of our Economic Crisis Reader, since she appears on the cover, with Timothy Geithner (she's on the left, holding the sign that says "GIVE US OUR $ BACK"). (We picked pink for the cover in honor of CodePink.) But I was thrilled to hear her talk--she really has her head screwed on right about left activism. Besides her incredible optimism, what impressed me most about her was that she said she's been going to as many Tea Bagger events as she can, and that she takes the time to talk to the folks there, find out where they're coming from. Of course many of the views they have are wacky or repellent, but she said (as I've suspected) that many of them have views that aren't so far from folks on the left. So: I urge people to get out there with signs and open minds on April 15th to talk to the Tea Baggers and show them that there's a left alternative. (In Boston the big Tea Bagger day will be April 14; apparently Sarah Palin will be stopping by the Boston Common (right outside the D&S offices--coincidence?--for a rally on her way to the big national Tea Bagger tax day protest in D.C. on the 15th. Come one come all!

—CS

Labels: bailout, Donald Berwick, Haiti, Sarah Palin, Tea Baggers

 

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4/02/2010 02:46:00 PM 0 comments links to this post

 

Social Security Looters

by Dollars and Sense

We received this comment from Matthew Skomarovsky of LittleSis, the "involuntary Facebook of powerful Americans" (if you haven't check out LittleSis, you should do so asap):

"Props as always to D&S for not letting this slip under the radar. Far too little attention has been given to how well the Social Security looters have positioned themselves in 2010.

"Here's a close look at Obama's recent appointments to the Debt Commission, and what it suggests about his administration's approach to Social Security:"

Obama Packs Debt Commission with Social Security Looters
Obama has filled his new 'debt commission' with Wall Street insiders determined to gut Social Security.
Matthew Skomarovsky | March 28, 2010

A decade of wars, tax cuts for the wealthy, and the fallout from Wall Street's housing bubble have almost tripled U.S. public debt since 2001, from $5 trillion to $14 trillion. Big, scary numbers like this, along with carefully timed downgrade warnings from Wall Street's obedient rating agencies and continuing worries about the financial collapse of Greece, Portugal and other nations have changed the political climate in Washington, breathing new life into decades-old schemes to slash Social Security and Medicare entitlements.

And defending Social Security does indeed sound like yesterday's issue—a fight the people won when they defeated Bush's attempt to privatize the system in 2005. Our Social Security program is currently solvent through 2037, while millions of Americans are unemployed, millions more are losing their homes, and still millions more are struggling to meet soaring health insurance costs after watching their retirement accounts dwindle in the financial collapse. Would the entitlement wolves—primarily Wall Street executives who stand to reap billions from Social Security privatization—really have the gall to go after Social Security now? In a word, yes.

Check out the full article on AlterNet or LittleSis.

Labels: Barack Obama, LittleSis, Matthew Skomarovsky, pensions, privatization, Social Security

 

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3/29/2010 02:05:00 PM 0 comments links to this post

 

Drumbeats on Social Security

by Dollars and Sense

The New York Times had something of a scare-mongering front-page article on Social Security the other day. The new reason for concern, the Times suggested, is that payout is expected to exceed pay-in this year. But as Dean Baker pointed out on his Beat the Press blog, "this fact makes absolutely no difference for the program since it holds more than $2.5 trillion in government bonds." Dean goes on:

In spite of the statements by the experts cited in the article, the second paragraph told readers that this event marked: "an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office." Nothing in the article or in the structure of the program suggests that there is any importance whatsoever to this threshold.

Read the full post, in which Dean responds to challenges from commenters.

Meanwhile, the Times included a discussion of Social Security in its online feature, Room for Debate, albeit under the question-begging headline "Simple Steps to Fix Social Security"; the Times seems to welcome debate among experts on Social Security, as long as they agree that it is broken!

Economist Teresa Ghilarducci, who has written about pensions for Dollars & Sense ("When Bad Things Happen to Good Pensions," from our May/June 2005 issue), didn't take the Times' bait. The headline to her contribution to the debate states simply that "The Program Isn't Broken." The adjustment she recommends is the same one John Miller recommended in our March/April 2008 issue (Go Ahead and Lift the Cap), which is to raise the cap on taxable earnings from 85% to 100%:

Because baby boomers pay more payroll tax than the system is paying out in benefits, boomers have saved for their own retirement most of their working years. They may have run up their credit cards, but they saved through the Social Security system. These excess payroll taxes bought special-issue government bonds that always paid above the market rate for risk-free government noncallable bonds; these bonds were created especially for the Social Security taxpayers.

Gradually increase the taxable earnings base from 85 percent of earnings to 100 percent.

In 2016, we are going to cash them out like every retired person does with their retirement money. When a person cashes out their pension fund it is not called "a problem" and neither is redeeming the assets in the Social Security system a problem.

In another 25 or so years, the system will not have enough money in the system to pay full benefits. Now that would be a problem. And there are two types of fixes: cut benefits or raise revenue. Given that pensions have collapsed and are not getting better any time soon and more old people are going to be poor, benefit cuts are off the table.

Since most of the earnings growth in the last two decades went to the top paid people, those earning much more than the Social Security taxable salary of $106,800 the system lost revenue. A quick fix is to gradually increase the taxable earnings base from current coverage of just 85 percent of earnings to 100 percent by 2045. That would solve the entire predicted Social Security deficit for 75 years. Done.

Well done, Teresa.

More on the coming drumbeat to mess with Social Security over at AlterNet: Alan Greenspan and the New York Times Are Gunning for Your Social Security, by Zach Carter.

For more background, see Ellen Frank, John Miller, and Doug Orr on Social Security in the D&S archives. 

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3/28/2010 11:51:00 AM 0 comments links to this post

 

Health Care Reform: A Victory for the Little Guy?

by Dollars and Sense

David Leonhardt, the New York Times economics reporter, has a cover story in today's paper, In Health Bill, Obama Attacks Wealth Inequality, that depicts the new health care reform law as the first great social legislation in a generation. It is big, and it is social legislation, and it is true that it will be funded partly by raising taxes on higher-income folks. But it is hard to view it as the challenge to inequality that Leonhardt thinks it is--or that Obama & Co. (least of all Larry Summers, whom Leonhardt mentions in a positive light in the article) intended it as such.

As a counterpoint to Leonhardt's argument, here's something from the great, relatively new blog from the good folks at the University of Missouri at Kansas City's econ dept, New Economic Perspectives. This guest post is from Robert Prasch of Middlebury College.

Think The Democrats Just Scored One for the Little Guy? Think Again.

By Robert E. Prasch | Tuesday, March 23, 2010
Professor of Economics
Middlebury College

As a resident of Massachusetts, where the backlash is already well underway, I thought I should add a comment. Let's begin by considering the origins of "Obamacare". It comes from Massachusetts. It was passed early in Gov. Patrick's reign because during the campaign it was already in debate as it was Gov. Mitt Romney's proposal. Now, one might wonder where the conservative, free market, head of Bain Consulting governor might go finding a healthcare plan? Well, he got it from the Heritage Foundation. And why did they have such a plan? Well, they developed its broad outlines during the 1993-4 years as the Republican ANSWER to Hillary's effort. So, that is our new federal plan -- it is a warmed over version of the Heritage Plan. This, I submit, might explain a few things. (1) It was Obama's idea all along to "triangulate" the Republicans on this issue, and (2) why many of them are really very bummed out that their leadership did not take up the chance to show "bi-partisanship" on this issue (see David Frum on this).

Now, I tend to be skeptical of Heritage Foundation health-care plans. For several reasons:

(1) By design, costs are not contained, neither is health care reformed. This means that "affordability" does not come from controlling costs, but by shifting them. Shift to whom? A hallmark of the Heritage/Romney plan is that no change of the distribution of income is to occur with the financing of this plan. NONE. Rather, funding is to be from three sources --- those with supposedly "Cadillac" plans, those who have "opted out' because of the laughably high cost of coverage relative to their own risks, and to the state general fund. (2), In light of state budget shortfalls, it is no surprise that the latter source is declining quickly, and tens of thousands of Mass residents have ALREADY lost their subsidies (this trend will certainly occur on Capitol Hill over the next several years as 'deficit mania" kicks in). So, get this, as your income declines and your house is repossessed, the cost of your health care rises with higher premiums AND lower subsidies. But, make no mistake, even as the subsidies decline, the mandate will stay -- why should the big companies give up this huge windfall of unchecked access to the wages of the low paid?

(3) I also wish to warn against the 'NPR version' of the story that this bill "gives" health care for those without. Nothing is given, it is a MANDATE. Now, while the original 'vision' of the bill had subsidies, these are fading rapidly. So, now we have a dramatically underfunded mandate. Solving the lack of insurance by mandating the poor to buy it is, to be blunt, Dickensian. Obama himself stated it very well during the campaign "It is like solving homelessness with a mandate that those living on the streets buy a house". Those who are poor understand this point, and resent it. True, there are some young people who are in good health and, understanding statistics and rapacious health care insurance firms, "choose" not to get health insurance (as I did for several years in my 20s as the teaching assistantship I got from DU during my years studying for my MA could not cover my living expenses AND health insurance), yet the bulk of non-buyers are people who have found that with little in the way of family funds, other priorities (rent, car repairs, food, school fees, etc.) are a greater priority.

So, now the Democrats have taken it upon themselves to decide the priorities of millions of our poorest citizens. Thus, thanks to the Democrats, non-negotiable required fees from the insurance industry will be several multiples of the current income taxes of the lowest paid. This is sticker shock at its worse. Even Republicans know that the money will go to rapacious, soulless, insurance companies under the careful guidance of the IRS (here in MA, we have several extra highly-complex pages on an already long tax form where we have to prove that we have insurance). Stated simply, the Democrats have decided to go into the business of being the "enforcers" of the big insurance firms. This is NOT a good place to be in an election year. This is ESPECIALLY not a good place to be when you are already presenting yourself to voters, as Obama seems committed to do, as the die-hard supporter of the big banks that foreclosed on people's homes and blew up their economy.

With such a context, along comes someone who calls himself a "regular guy" with a pickup truck (he failed to mention that he has five homes, one in Aruba, but the truck was in all the ads), and he takes Kennedy's seat in Mass. In MASSACHUSETTS! Only one year after Obama wins this state by 20 points! Wow. This, folks, is what a backlash looks like, and it is enormous. Turning the wages of the working classes over to the insurance companies, without recourse or mercy, is not going to win this state, and it will not win in many others. If the Democrats lose any less than 35 house seats this election I will be amazed. And, note my wording, the Republicans did not, and will not, win them. No, the Democrats have decided to lose these seats. Amazing.

Sorry about bringing the bad news. But this bill is a disaster, and it is worse than nothing, as it will destroy the incomes of those it purports to help along with the Democratic Party. It is especially bad since a public option was always an option, I do not believe the D.C. spin on this for even a minute. Just as Obama never wanted to renegotiate NAFTA or leave Iraq, it was clear from the outset that the White House never wanted a public option, which explains why Rahm said so early last summer. Why? Because the big insurance companies did not want it, so Rahm did not want it. End of issue.

Read the original post.

Labels: David Leonhardt, health care, health care reform, Lawrence Summers, Obama administration, UMKC

 

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3/24/2010 02:29:00 PM 0 comments links to this post

 

Obamacare: "Asprin for Cancer" (PNHP)

by Dollars and Sense

It has become an annual Left Forum tradition for some D&S folks to meet up with D&S friends over dinner in the East Village, and this year one of the main topics of conversation was, of course, health care reform. No one at the table liked the bill, so the discussion was about whether it would be better or worse if the bill passed.

On the bus ride home, D&S collective member and frequent blogger Larry P. wondered out loud what Steffie Woolhandler and David Himmelstein and other single-payer advocates think about the bill and the likelihood that it would pass. So I was happy to find out about this statement from Physicians for a National Health Plan, co-signed by Woolhandler and Himmelstein:

Pro-single-payer doctors: Health bill leaves 23 million uninsured
A false promise of reform

For Immediate Release | March 22, 2010

As much as we would like to join the celebration of the House's passage of the health bill last night, in good conscience we cannot. We take no comfort in seeing aspirin dispensed for the treatment of cancer.

Instead of eliminating the root of the problem--the profit-driven, private health insurance industry--this costly new legislation will enrich and further entrench these firms. The bill would require millions of Americans to buy private insurers' defective products, and turn over to them vast amounts of public money.

The hype surrounding the new health bill is belied by the facts:

* About 23 million people will remain uninsured nine years out. That figure translates into an estimated 23,000 unnecessary deaths annually and an incalculable toll of suffering.
* Millions of middle-income people will be pressured to buy commercial health insurance policies costing up to 9.5 percent of their income but covering an average of only 70 percent of their medical expenses, potentially leaving them vulnerable to financial ruin if they become seriously ill. Many will find such policies too expensive to afford or, if they do buy them, too expensive to use because of the high co-pays and deductibles.
* Insurance firms will be handed at least $447 billion in taxpayer money to subsidize the purchase of their shoddy products. This money will enhance their financial and political power, and with it their ability to block future reform.
* The bill will drain about $40 billion from Medicare payments to safety-net hospitals, threatening the care of the tens of millions who will remain uninsured.
* People with employer-based coverage will be locked into their plan's limited network of providers, face ever-rising costs and erosion of their health benefits. Many, even most, will eventually face steep taxes on their benefits as the cost of insurance grows.
* Health care costs will continue to skyrocket, as the experience with the Massachusetts plan (after which this bill is patterned) amply demonstrates.
* The much-vaunted insurance regulations - e.g. ending denials on the basis of pre-existing conditions - are riddled with loopholes, thanks to the central role that insurers played in crafting the legislation. Older people can be charged up to three times more than their younger counterparts, and large companies with a predominantly female workforce can be charged higher gender-based rates at least until 2017.
* Women's reproductive rights will be further eroded, thanks to the burdensome segregation of insurance funds for abortion and for all other medical services.

It didn't have to be like this. Whatever salutary measures are contained in this bill, e.g. additional funding for community health centers, could have been enacted on a stand-alone basis.

Similarly, the expansion of Medicaid - a woefully underfunded program that provides substandard care for the poor - could have been done separately, along with an increase in federal appropriations to upgrade its quality.

But instead the Congress and the Obama administration have saddled Americans with an expensive package of onerous individual mandates, new taxes on workers' health plans, countless sweetheart deals with the insurers and Big Pharma, and a perpetuation of the fragmented, dysfunctional, and unsustainable system that is taking such a heavy toll on our health and economy today.

This bill's passage reflects political considerations, not sound health policy. As physicians, we cannot accept this inversion of priorities. We seek evidence-based remedies that will truly help our patients, not placebos.

A genuine remedy is in plain sight. Sooner rather than later, our nation will have to adopt a single-payer national health insurance program, an improved Medicare for all. Only a single-payer plan can assure truly universal, comprehensive and affordable care to all.

By replacing the private insurers with a streamlined system of public financing, our nation could save $400 billion annually in unnecessary, wasteful administrative costs. That's enough to cover all the uninsured and to upgrade everyone else's coverage without having to increase overall U.S. health spending by one penny.

Moreover, only a single-payer system offers effective tools for cost control like bulk purchasing, negotiated fees, global hospital budgeting and capital planning.

Polls show nearly two-thirds of the public supports such an approach, and a recent survey shows 59 percent of U.S. physicians support government action to establish national health insurance. All that is required to achieve it is the political will.

The major provisions of the present bill do not go into effect until 2014. Although we will be counseled to "wait and see" how this reform plays out, we cannot wait, nor can our patients. The stakes are too high.

We pledge to continue our work for the only equitable, financially responsible and humane remedy for our health care mess: single-payer national health insurance, an expanded and improved Medicare for All.
Oliver Fein, M.D.
President

Garrett Adams, M.D.
President-elect

Claudia Fegan, M.D.
Past President

Margaret Flowers, M.D.
Congressional Fellow

David Himmelstein, M.D.
Co-founder

Steffie Woolhandler, M.D.
Co-founder

Quentin Young, M.D.
National Coordinator

Don McCanne, M.D.
Senior Health Policy Fellow

******

Physicians for a National Health Program (www.pnhp.org) is an organization of 17,000 doctors who support single-payer national health insurance. To speak with a physician/spokesperson in your area, visit www.pnhp.org/stateactions or call (312) 782-6006.

Two other tidbits on health care: First, the spin about the aftermath of the health care debate seems to be that the Republicans have overplayed their hands, what with all the hate-mongering and fear-mongering all along, with a definite crescendo at the final hour. Here's (some of) what Politico had to say:

GOP weighs costs of losing ugly
By: Glenn Thrush and Marin Cogan| March 23, 2010 05:05 AM EDT

The only thing worse than winning ugly is losing uglier.

The Democrats' ungainly march toward a victory on health care reform Sunday night provoked a graceless response from angry House Republicans, who shouted insults across the chamber, encouraged outbursts from the galleries, brandished "Kill the bill" placards from the Speaker's Balcony and, apparently, left veiled threats of electoral retribution on the benches of undecided Democrats.

And that all came before Texas Republican Rep. Randy Neugebauer shouted "baby killer!" as anti-abortion Rep. Bart Stupak (D-Mich.) spoke on the House floor.

That incident followed an even uglier series of events outside the chamber Saturday, when tea party protesters reportedly shouted the N-word at civil rights hero Rep. John Lewis (D-Ga.), spit on Rep. Emanuel Cleaver (D-Mo.) and hurled an anti-gay insult at Rep. Barney Frank (D-Mass.).

While House Minority Leader John Boehner (R-Ohio) was quick to criticize the racial and anti-gay outbursts and to distance himself from Neugebauer's shout, he made no apologies for the feisty floor debate or the overall tone of the health care opposition.

"My impression is that Rep. Boehner was satisfied with the tone of the debate, which focused on the serious factual arguments against the Democrats' job-killing government takeover bill," said Boehner spokesman Michael Steel.

Other Republicans weren't so sure.

"It was like a mob at times," lamented one House Republican, speaking on the condition of anonymity. "It wasn't good for us. ... Remember, it took years [for Democrats] to recover from the bad publicity the anti-Vietnam protests generated."

In an interview for POLITICO's "Health Care Diagnosis" video series, Rep. Paul Ryan (R-Wis.) called the "baby killer" outburst "horrible" but said the issues Democrats are pursuing are "so polarizing that they're really bringing out emotions and the darker sides of people on both sides."

Still, Ryan made it clear he would have preferred a less emotional approach over the weekend.

"In our conference [Sunday] before the vote, a lot of us said, 'Look—no screaming, no shouting, no yelling, no nyah-nyah-nyah. If they pass this thing, be somber be glum,'" Ryan said. "I said look, 'We've got to be adults about this. This is a serious situation; this isn't something that we politicize. . . . Yes, in basketball games you hear things like this. We don't do that. We're grown-ups.'"

Neugebauer's outburst, which echoed the infamous "You lie!" shout by Rep. Joe Wilson (R-S.C.), had Republicans worried about the impact on "persuadables"—independents skeptical about President Barack Obama but leery of the GOP's increasingly conservative tilt.

The incident also undermined attempts by Republicans to project the image of a sober, less combative party willing to meet Obama halfway. And it prompted a salvo of rebuke from Democrats, who spent much of their post-passage Monday accusing the other party of violating the chamber's decorum and coarsening debate.

Read the whole post.

A recent CNN poll seems to bear out the idea that the Republicans, by siding with the vituperative Tea Baggers, are not on the side of the public. According to the poll, 39% favor the bill, while 59% oppose it; but the breakdown showing why people oppose it is instructive: 39% favor; 43% oppose because it's "too liberal"; 13% oppose because it's "not liberal enough". So that means that a majority of Americans polled by CNN are in favor of health care reform at least as "socialist" as Obamacare.

So what we have is a crappy bill that is coercive and a give-away to the insurance companies, and may entrench their power. But a majority of Americans still seem to want (real) universal health care, and if you want to put an optimistic spin on it, you can take heart in the fact that the success of this bill may put the Democrats on a better footing than they have seemed to be recently. Whether we like what they do with the momentum (real financial reform, with an independent financial consumer protection agency and effective regulation? real comprehensive immigration reform, vs. some guestworker nonsense?) remains to be seen. The best-case scenario might be if this legislative victory emboldens left challengers in the 2010 congressional elections, to push incumbents to move to the left (whereas a week ago it seemed likely that the Republicans' momentum would push them all to the right).

Labels: Barack Obama, health care, health care reform, Physicians for a National Health Program, socialism, Tea Partiers

 

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3/23/2010 03:53:00 PM 0 comments links to this post

 

D&S @ Left Forum

by Dollars and Sense

Come visit the D&S exhibit table at the 2010 Left Forum, Pace University, New York City, this weekend—March 19-21. Meet D&S blogger extraordinaire Larry Peterson and D&S co-editor Chris Sturr; former book editor and D&S stalwart Amy Offner will be helping staff the table.

Visit the conference website to find out what other excitement awaits you at this year's event, which will feature the Rev. Jesse Jackson, Jr. and Noam Chomsky as plenary speakers.

Labels: Amy Offner, Chris Sturr, Jesse Jackson, Larry Peterson, Left Forum, Noam Chomsky

 

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3/18/2010 09:42:00 PM 0 comments links to this post

 

Black and Spitzer on Lehman Fraud

by Dollars and Sense

More on the scandal that is brewing in connection with the last months of Lehman Bros.: Today's New York Times business section has an article, At Lehman, Watchdogs Saw It All, that goes further in suggesting complicity on the part of the NY Fed, under the leadership of one Timothy Geithner, in Lehman's efforts to disguise the depth of its problems.

Here's an interesting piece from Bill Black, former banking regular and occasional D&S author, and Eliot Spitzer, disgraced former governor of New York (has he been rehabilitated? or are there some topics that we just trust him on?); they are calling for an investigation of the Lehman revelations. It is from the Roosevelt Institute's New Deal 2.0 project; hat-tip to LP for bringing my attention to this.

Time for Truth: Three Card Monte is for Suckers

Tuesday, 03/16/2010 - 12:50 pm by Eliot Spitzer and William Black

Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman’s accounting deception and the release of relevant emails and internal documents.

In December, we argued the urgent need to make public A.I.G.'s emails and "key internal accounting documents and financial models." A.I.G.'s schemes were at the center of the economic meltdown. Three months later, a year-long report by court-appointed bank examiner Anton Valukas makes it abundantly clear why such investigations are critical to the recovery of our financial system. Every time someone takes a serious look, a new scandal emerges.

The damning 2,200-page report, released last Friday, examines the reasons behind Lehman's failure in September 2008. It reveals on and off balance-sheet accounting practices the firm's managers used to deceive the public about Lehman's true financial condition. Our investigations have shown for years that accounting is the "weapon of choice" for financial deception. Valukas's findings reveal how Lehman used $50 billion in "repo" loans to fool investors into thinking that it was on sound financial footing. As our December co-author Frank Partnoy recently explained as part of a major report of the Roosevelt Institute, "Make Markets Be Markets", such abusive off-balance accounting was and is endemic. It was a major cause of the financial crisis, and it will lead to future crises.

According to emails described in the report, CEO Richard Fuld and other senior Lehman executives were aware of the games being played and yet signed off on quarterly and annual reports. Lehman's auditor Ernst & Young knew and kept quiet.

The Valukas report also exposes the dysfunctional relationship between the country's main regulatory bodies and the systemically dangerous institutions (SDIs) they are supposed to be policing. The NY Fed, the regulatory agency led by then FRBNY President Geithner, has a clear statutory mission to promote the safety and soundness of the banking system and compliance with the law. Yet it stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a "three card monte routine" (p. 1470). The report states:

"The FRBNY discounted the value of Lehman's pool to account for these collateral transfers. However, the FRBNY did not request that Lehman exclude this collateral from its reported liquidity pool. In the words of one of the FRBNY's on-site monitors: 'how Lehman reports its liquidity is between Lehman, the SEC, and the world'" (p. 1472).

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

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

The Fed wanted to maintain a fiction that toxic mortgage products were simply misunderstood assets, so it allowed Lehman to maintain the false pretense of its accounting. We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values: "According to Paulson, Lehman had liquidity problems and no hard assets against which to lend" (p. 1530). We know from Valukas' interview of Geithner (p. 1502):

The challenge for the government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in "collateral damage" by demonstrating weakness and exposing "air" in the marks.

Or, in plain English, the Fed didn't want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the "marks") were inflated with worthless hot air. Lehman claimed its toxic assets were worth "par" (no losses) (p. 1159), but Citicorp called them "bottom of the barrel" and "junk" (p. 1218). JPMorgan concluded: "the emperor had no clothes" (p. 1140). The FRBNY acted shamefully in covering up Lehman's inflated asset values and liquidity. It constructed three, progressively weaker, stress tests — Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Need we tell you the results?

We believe that the Valukas report cries out for an immediate Congressional investigation. As we did with A.I.G., we demand the release of the e-mails and internal documents from the New York Fed and Lehman executives that pertain to analyses of Lehman's financial soundness. What downside can there possibly be in making these records available for public analysis and scrutiny?

Three years since the collapse of the secondary market in toxic mortgage product, we have yet to see significant prosecutions of the kind of fraud exposed in the Valukas report. The SDIs, with Bernanke's open support, exorted the accounting standards board (FASB) to change the rules so that banks no longer need to recognize their losses. This has made the SDIs appear profitable and allows them to pay their executives massive, unearned bonuses based on fictional profits.

If we are to prevent another, potentially more devastating financial crisis, we must understand what happened and who knew what. Many SDIs are hiding debt and losses and presenting deceptive portraits of their soundness. We must stop the three card monte accounting practices that create the potential and reality of fundamental misrepresentation.

A.I.G.'s CEO, its board of directors, and the trustees that are supposed to represent the interests of the American people have failed to respond to our December letter calling on them to release to the public the AIG documents that would be the treasure trove (along with other SDI documents) that would allow our nation to uncover and end the gamesmanship that caused this financial crisis and will bring us recurrent crises. We call on them to act.

Eliot Spitzer is a former attorney general and governor of New York.

Roosevelt Institute Braintruster William Black is a professor of economics and law at the University of Missouri-Kansas City.

Read the original article.

Labels: AIG, Eliot Sptizer, Ernst and Young, Lehman Brothers, William K. Black

 

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3/16/2010 05:59:00 PM 0 comments links to this post

 

Synergy in Security

by Dollars and Sense

An article in yesterday's New York Times, Contractors Tied to Effort to Track and Kill Militants, traces the efforts of a Department of Defense official, Michael D. Furlong, to set up a network of private security contractors, some of them former CIA agents and Special Forces operatives, to "track and kill suspected militants" in Afghanistan and Pakistan:

While it has been widely reported that the C.I.A. and the military are attacking operatives of Al Qaeda and others through unmanned, remote-controlled drone strikes, some American officials say they became troubled that Mr. Furlong seemed to be running an off-the-books spy operation. The officials say they are not sure who condoned and supervised his work.

While this kind of "off-the-books spy operation" may count as beyond the pale for today's U.S. military, the use of private security contractors is becoming more and more commonplace, to the extent that, as Tom Barry argues in his feature article in the current issue of Dollars & Sense, the military-industrial complex "has morphed into a new type of public-private partnership—one that spans military, intelligence, and homeland-security contracting, and might be better called a 'national security complex.'"

We've just posted Tom's article to the website; read it here.

Labels: Afghanistan, Afghanistan war, CIA, Homeland Security, militarism, private security contractors, Tom Barry, U.S. military

 

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3/16/2010 05:30:00 PM 0 comments links to this post

 

Lehman: The Art of the 'Sale'

by Dollars and Sense

Friday saw the release of a mammoth official report on the demise of the late, lamented Lehman Brothers. Written by Anton Valukas, a court-appointed Chicago securities lawyer, the over 2,000 page report, which was based on a staggering 350 billion pages of documentation [hard to believe the "billions," but that's what's been reported], claims that practices designed by the megabank whose travails nearly took down the global financial system in September, 2008, "ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation." Specifically, the report documents the use of a maneuver known as "repo 105" to disguise the fact that Lehman was supporting its own balance sheet, recently loaded up with subprime mortgages that were rapidly falling in value, with, well, almost nothing.

The way this deception worked involved a part of the finance industry that has become increasingly important over the years, but remains opaque to most people. The "repo," or "repurchase" market involves the transfer of bank assets, like bonds, to other financial firms, like broker-dealers, for extremely short periods of time (often just a few days), in return for cash. The securities, then, function as a sort of collateral. The banks, after the short period of time has elapsed, are required to take the collateral back, and pay a usually nominal amount by way of interest. In this way, the banks get ready cash, and the firms that take the securities are free to use the securities for potentially profitable short sales or to just to collect the interest.

In this case, however, Lehman tried to disguise what looked like repo transactions--to the tune of up to $50 billion a quarter--as a sale of securities. Funny kind of sale: they were "selling" something they were obligated to take back within days. And they were paying far above the rate of interest customary in such transactions. For "repo 105", for instance, Lehman was paying 5%; on "repo 108", 8%.

And why would Lehman do this? Well, repos remain on the bank's balance sheet. Lehman, as mentioned before, had, in the months running up to the crisis, piled into subprime loans. So this massive expansion of assets on the balance sheet was supposed to be offset by a similar build-up of equity, or of funds which might cover potential losses on the assets. Knowing that raising so much equity was impossible, Lehman asserted that the repo transactions were in fact sales, which, of course, constituted a permanent transfer of assets, and, therefore did not require booking on the balance sheet. But Lehman was not only taking these assets back in a few days, it was paying exorbitant amounts of money to offload the assets right at the time when they were supposed to be booked for quarterly results. It was as if a drug dealer sublet an apartment in which s/he had stowed away a a boatload far below the market rate, right when the landlord was supposed to come calling. Of course, this leads to the questions as to why so many of Lehman's counterparties were willing to go along with such unusual offers.

But it was worse than this. Ernst & Young, the accounting firm, signed off on Lehman's books, and, moreover, a venerable City of London law firm, Linklaters, was asked for advice on the legality of these little transactions. Funny that Lehman didn't even bother to ask for legal advice from any other law firm, especially in the Wall Street firm's own country, the USA, and that it let its European office do the dirty work. Then again, it was AIG's London office that was responsible for that firm's fate. Regulatory arbitrage, and the financial liberalization that enables it, is and remains a powerful force in financial markets, indeed.

Lehman did this three quarters in a row: in 4Q 2007 to the tune of $38.6 billion, in 1Q 2008 for $49.1 billion, and for $50.4 billion in 2Q.

Saturday's NYTimes had two articles on the Lehman revelations: one recounted many of the details above; the other added another wrinkle—the role of the New York Fed. The articles says that the Valukas report "raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse." It seems that the Fed was the main institution The paragraphs explaining the Fed's involvement bears quoting in full:

...it was that month [March 2008] that the Fed started a spwecial lending program open to Wall Street banks like Lehman that could not [otherwise] borrow directly from it [the Fed]. The Fed also lowered its standards for the kinds of collateral that it would accept against such short-term loans.

Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

Read the full article.

CLO means "collateralized loan obligation", and is the corporate cousin of the collateralized debt obligations that served to repackage mortgages during the subprime debacle. CLOs are--or were, during the boom-times, an important source of finance for mergers and acquisitions. What happened here was that Lehman was swapping nose-diving corporate loans (the M&A had all but dried up) with the Fed for hard Federally-backed cash in repo. It was trading cash for trash. And you were paying the potential difference.

This has been a rapid and brief overview, but the main lesson from this is that, only a few short years after Enron, similar devices, far from being discouraged by the convictions in that case, were being employed on a far-larger scale, and using a government vehicle designed explicitly to save the offending firm from its own abuses. Financial reform, nonexistent in the last administration, and always half-hearted under the present one, had seemingly come to a kind of dormancy akin to that applying to healthcare reform in the weeks up to the publication of this report. If this doesn't force us to demand a complete and utter makeover of financial regulation, it is difficult to say what could. Is our broken economy so dependent on the distorted exaggerations of fictitious finance that we will sit back and allow the very same abuses that slapped us in the face a few years ago to knock us unconscious again and again? Perhaps the final word today should be that of a veteran Wall Streeter, who said: "I almost threw up when I read the report. It makes me sick of this industry." If they can't endure it anymore, can we?

Labels: anton valukas, Ernst and Young, Federal Reserve, federal reserve bank of new york, financial crisis bailout, financial reform, Lehman Brothers, linklaters, repurchase agreements

 

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3/14/2010 04:53:00 PM 0 comments links to this post

 

(Repost from March 9:) Items on Greece

by Dollars and Sense

A couple of items on Greece: First, Mike-Frank Epitropoulos, who is working on an article for us on the Greek debt/default situation, sent us this image. The German magazine Focus ran a cover story headlined "Cheats in the Euro Family," with an image of the Venus de Milo giving (the rest of Europe) the finger. The Greeks were outraged, with one newspaper, Eleftheros Typos, saying that Europe is "threatened by financial naziism," according to the Wall Street Journal's blog The Source. And then there was the magazine cover response. I can't find a translation of the headline, and my Greek is rusty (and was always archaic anyhow).


Then there's this juicy piece from last Friday's Financial Times. The FT's headline writers couldn't resist the term "Greek drama," but the photo that went with this article in the print edition was especially nice: a view of the sun-drenched rooftop restaurant at the Hotel Grande Bretagne in Athens, with the Parthenon in the background; it was not just a gratuitous shot of the Acropolis—this was actually where the hedge-fund managers met to plot their speculative exploits.

Funds' role in Greek drama examined

By Sam Jones, Hedge Fund Correspondent

Published: March 5 2010 02:00 | Last updated: March 5 2010 02:00

On January 28, a cloudy, drizzly day in Athens, Goldman Sachs played host to a hotchpotch group of 10 clients at the Grande Bretagne, a palatial belle epoque hotel overlooking Syntagma square and the old royal palace, now the home of the Vouli, the Greek parliament.At dinner on the rooftop—with an unimpeded panorama of the Acropolis as the backdrop—the clients; ten bankers, asset managers and hedge fund analysts, ruminated on the future of the Greek economy—and of course, how to make money from it.Events since—a vicious collapse of confidence in the Greek debt market—have made some of those present, millions. But there has been a price. The dinner and the two-day schedule of meetings it bisected, is now one of a handful of events at the centre of a growing political backlash against some of the biggest and most powerful traders in the debt markets. Hedge funds and more broadly financial 'speculators' are finding themselves under attack from politicians and regulators on both sides of the Atlantic, who accuse them—including some of those Goldman chaperoned around Athens in late January—of exacerbating the Greek credit crisis in an effort to spin a quick buck.

Read the rest of the article.

Labels: Acropolis, Athens, Greece, hedge funds, sovereign debt, speculation

 

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3/11/2010 03:12:00 PM 4 comments links to this post

 

(Repost from Feb. 25:) Goldman Sachs and Greece

by Dollars and Sense

Dear blog readers: This is a restored version of one of the posts, from Feb. 25, that we lost when our blog got !@#$%&ed up in the past couple of days. I have figured out how to fix the half-dozen posts that were broken, and how to post new ones, but it involves a laborious fix (posting; going onto our server; downloading the resulting html file; deleting a string of javascript code that is somehow being generated now but wasn't a week ago; re-uploading the html file). If anyone's an expert on blogger or wants to help us (pro bono?) migrate our blog to some better blogging software (e.g. WordPress would be my preference), give us a shout.

Today's New York Times has two stories about Greece: one on the front page about how banks, including some that helped the Greek government hide its bad debt, are now using credit default swaps to bet that Greece will default on its debt (thereby making this more likely to happen); and another, on p. A13, about the massive protests against budget cuts in Greece, including the country's second 24-hour general strike in two weeks. (In the second article, an accompanying photo appears to show tens or hundreds of thousands of protesters, but is accompanied by a caption mentioning "thousands" of protesters.)

We have been meaning to do a post about an interesting item posted to Naked Capitalism earlier this week, by fund manager Marshall Auerback and L. Randall Wray, from the UMKC economics department (one of the main heterodox departments in the United States):

Memo to Greece: Make War, Not Love, With Goldman Sachs

By Marshall Auerback, a fund manager and investment strategist and L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City | February 22, 2010

In recent weeks there has been much discussion about what to do about Greece. These questions become all the more relevant as the country attempts to float a multibillion-euro bond issue later this week. The Financial Times has called this fund-raising a critical test of Greece's credibility in financial markets as it battles with a spiraling debt crisis and strikes. (http://www.ft.com/cms/s/0/463b205e-1d93-11df-a893-00144feab49a.html ) The "credibility" of the financial markets is an important consideration in a country which has functionally ceded its sovereign ability to create currency, and thus remains dependent on the vagaries of the very banking institutions which helped create the mess in the first place.

Maybe Greece should secede from the European Union and default on its euro debt? Or go hat-in-hand to the International Monetary Fund (IMF) to beg for loans while promising to clean up its act? Or to the stronger Euro nations, hoping for charitable acts of forgiveness? Unfortunately, all of these options are going to mean a lot of pain and suffering for an economy that is already sinking rapidly.

And it is questionable whether any of them provide long term viable answers. Polls show that given the perception of fiscal excesses of Greece and the other countries on the periphery, the public in Germany opposes a bailout of these countries at its expense by a significant margin. Periphery countries such as Ireland that have already undertaken harsh austerity measures also oppose the notion of a bailout, despite—nay, because of–the tremendous pain already inflicted on their own respective economies (in Ireland's case, the banks are probably insolvent as well). The IMF route is also problematic, given that Greece probably doesn't qualify under normal IMF standards, and many euro zone nations would find this unpalatable from an ideological standpoint, as it would mean ceding control of EU macro policy to an external international institution with strong US influence.

The Wall Street Journal recently highlighted an article by Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece and other struggling Euronations would "massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed to the onset of the Great Depression in the 1930s" (http://online.wsj.com/article/SB10001424052748703525704575061172926967984.html ). Where we disagree with Johnson and Boone is the suggestion that the IMF be brought in to craft a solution. Any help from this organization will come with tight strings attached—indeed, with a noose around Greece's neck. Germany and France would be crazy to commit their scarce euros to a bail-out of Greece since they face both internal threats from their own taxpayers and external threats from financial vampires who are looking for yet another nation to attack.

Here's a more appropriate action: declare war on Goldman Sachs and other global financial firms that created this mess. Send the troops, the planes, the tanks, and the ships. Attack every outpost of the saboteurs on European soil. Blockade the airports and ports. Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel. Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.

Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe's tens of millions of unemployed workers.
We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street's fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.
Some might believe the term "banksters" is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn't Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that they would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the "control fraud", perpetrated by the financial institution's management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.

Lest anyone believe that Goldman's executives were somehow unaware of bad deals done by rogue traders, William Cohan (http://opinionator.blogs.nytimes.com/2010/02/18/the-great-goldman-sachs-fire-sale-of-2008) reports that top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman's stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman's co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner's NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the "savvy businessmen" that President Obama believes to be in charge of Wall Street firms like Goldman.

From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece's debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.

But it gets even worse: An article by the German newspaper, FAZ, ("Die Fieberkurve der griechischen Schuldenkrise", Feb. 20, 2010) strongly indicates that AIG, everybody's favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation here).

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece's credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn't expect any action coming out of Washington). Since the economic collapse is causing all Euronations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euroland to stop the vampires now.

With Washington unlikely to do anything to constrain Goldman, it looks like the European Union, which is launching a major audit, just might banish the bank from dealing in government debt. The problem is that CDS markets are essentially unregulated so such a ban will not prevent Wall Street from bringing down more countries—because they do not have to hold debt in order to bet against it using CDSs. These kinds of derivatives have already brought down an entire continent – Asia – in the late 1990s (see here), and yet authorities are still standing by and basically doing nothing when CDSs are being used again to speculatively attack Euroland. The absence of sanctions last year, when we had a chance to deal with this problem once and for all, has simply induced even more outrageous and fundamentally anti-social behavior. It has pitted neighbor against neighbor—with, for example, Germany and Greece lobbing insults at one another (Greece has requested reparations for WWII damages; Germany has complained about subsidizing what it perceives to be excessive social spending in Greece).

Of course, as far as Greece goes, the claim now is that these types of off balance sheet transactions in which Goldman and others engaged were not strictly "illegal" under EU law. But these are precisely the kinds of "shadow banking transactions" that almost brought down the global financial system 18 months ago. Literally a year after the Lehman bankruptcy – MONTHS after Goldman itself was saved from total ruin, it was again engaging in these kinds of deals.

And it wasn't exactly a low-level functionary or "rogue trader" who was carrying out these transactions on behalf of Goldman. Gary Cohn is Lloyd "We're doing God's work" Blankfein's number 2 man. So it's hard to believe that St. Lloyd did not sanction the activities as well in advance of collecting his "modest" $9m bonus for last year's work.

If these are examples of Obama's "savvy businessmen", then heaven help the global economy. The transaction highlighted, if reported that way in the private sector, would be accounting fraud. Fraud – "Go to jail, do not pass Go" fraud. That senior bankers had no problem in structuring/recommending/selling such deals to cash-strapped governments should probably not surprise us at this point. However, it would be interesting to know if the prop trading desks of those same investment banks, purely by coincidence of course, then took long CDS (short the credit) positions in the credit of the countries doing the hidden swaps. A proper legal investigation by the EU could reveal this and certainly help to uncover much of the financial chicanery which has done so much destruction to the global economy over the past several years.

In this country, we have had a "war on terror" and a "war on drugs" and yet we refuse to declare war on these financial weapons of mass destruction. We all remember Jimmy Carter's "MEOW"—the attempt to attack creeping inflation that was said to sap the strength of the US economy in the late 1970s. But Europe—and indeed the entire globe—faces a much more dangerous and immediate threat from Wall Street's banksters. They created this mess and are not only profiting from it, but are actively preventing recovery. They are causing unemployment, starvation, destruction of lives, and even violence and terrorism across the world. They are certainly more dangerous than the inflation of the 1970s, and arguably have disrupted more lives than Osama bin Laden—whose actions led the US to undertake military actions in at least three countries. That should provide ample justification for Greece's declaration of figurative war on Manhattan.

However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece's national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!

Dimitri Papadimitriou has recently made what we consider to be an important plea for moderation of the hysteria about Greece's debt. Writing in the Financial Times, he complained that

The plethora of articles in your pages and others, some arguing in favour and other against a bail-out, contribute to market confusion and drive the country's financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government's ability to achieve its deficit goals ever more difficult.

Indeed, we suspect that the same financial firms that helped to get Greece into its predicament are profiting from—and stoking the fires of—the hysteria. He goes on, "what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary".

Greece, Euroland in general, and the rest of the world all need a holiday from the manipulation and destruction of our economies by Wall Street firms that profit from speculative bubbles, from burying firms, households, and governments under mountains and debt, and even from the crises that they create. Governments all over the globe should use all legal means at their disposal to ferret out the bad faith and even fraudulent deals that global financial behemoths are foisting on us.

Read the original post.

Labels: blogger, Credit Default Swaps, Goldman Sachs, Greece

 

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3/11/2010 02:36:00 PM 0 comments links to this post

 

Unemployment at 9.7%; Links on Jobs

by Dollars and Sense

The Bureau of Labor Statistics released the jobs numbers for February this morning; find the Employment Situation Summary here.

I apologize for not keeping up with the blog for the last few days—we have been busy rushing the March/April issue of Dollars & Sense to the printers (late, but by less than usual for us!).

I have just posted an article from the new issue on military Keynesianism; and here is the editorial note for the issue, whose theme is Guns (i.e., military spending) vs. Butter (i.e., spending on jobs):

Word is out about how bad the long-term unemployment situation is likely to be. The cover story in the current issue of the Atlantic Monthly, How a New Jobless Era Will Transform America, declares, plausibly, that "a whole generation of young adults is likely to see its life chances permanently diminished by this recession."

A recent working paper from the National Bureau of Economic Research, the same outfit that calls the start- and end-dates of recessions, found that people who come of age during a recession "tend to support more government redistribution, but they have less confidence in public institutions," and tend to believe "that success in life depends more on luck than on effort." In other words, people who grow up in a recession are more likely to wind up in depression.

In a New York Times article on long-term unemployment, Allen Sinai, chief economist for Decision Economics, gave a glimpse into how economic elites tend to think about unemployment: "American business is about maximizing shareholder value. You basically don't want workers." He continued, "You hire less, and you try to find capital equipment to replace them." Our vision of a future economy—one without bosses—somehow seems more sustainable than one without workers.

There is an alternative to a jobless future: government policies that support full employment, including direct job-creation by the federal government. How would this be funded? There are lots of options, including a tax on financial transactions (which John Miller assesses in this issue's Up Against the Wall Street Journal), restoring tax rates to the progressive levels of the mid-20th century, and slashing our bloated military and "security" budgets. Now is the time to push for (many) fewer guns and (much) more butter.

Labels: military Keynesianism, military spending, unemployment

 

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3/05/2010 01:44:00 PM 1 comments links to this post