1 Boring Old Man

Can America be saved?

So I read this:

Boehner said Americans want government to practice the same financial restraint they have been forced to exercise: “It’s time for government to tighten their belts and show the American people that we ‘get’ it.”

and I wonder if this country can handle the crisis we’re in. Remember, John Boehner is, in effect, the second-most influential member of the GDP (after Rush Limbaugh). And while Democrats hold a majority, it’s not enough of a majority to make the minority party irrelevant. So the fact that Boehner’s idea of economics is completely insane matters.

What’s insane about Boehner’s remark? He’s talking about the current economic crisis as if it were a harvest failure — as if we faced a shortage of goods, so that the more you consume the less is left for me. In reality — even most conservatives understand this, when they think about it — we’re in a world desperately short of demand. If you consume more, that’s GOOD for me, because it helps create jobs and raise incomes. It’s in my personal disinterest to have you tighten your belt — and that’s just as true if you’re “the government” as if you’re my neighbor.

Plus, who is “the government”? It’s basically us, you know — the government spends money providing services to the public. Demanding that the government tighten its belt means demanding that we, the taxpayers, get less of those services. Why is this a good thing, even aside from the state of the economy? Again, this is what the leaders of a powerful, if minority, party think. Can this country be saved?

• Fiscal responsibility: "Those Democrats are ‘big spenders’."
• Deficit spending: Running up the national debt.

A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than other investment funds and also pays a performance fee to its investment manager.

• limited range of investors: special investors
• permitted by regulators to undertake a wider range of activities than other investment funds: special permissions
• pays a performance fee to its investment manager: special managers

A hedge fund is any investment fund used by rich people to get much richer at the expense of the rest of us by operating in secret off the radar.

 

Do Americans Want to Nationalize the Banks?

Five ThirtyEight

March 9, 2009

A Newsweek poll released over the weekend suggests that Americans may be more amendable than previously believed to the idea of a government takeover of major banks. The specific question posed by the survey asked was as follows:

Temporary nationalization is another way for the federal government to deal with large banks in danger of failing. This is where the government takes over a failing bank, cleans its balance sheets, and then quickly sells it off. In general, which do YOU think is the better way to deal with failing banks…

• 29  Government financial aid WITHOUT any government
  control of the bank, OR
• 56  Nationalization, where the government takes
  temporary control?
• 11  Neither/Other
• 4     Don’t know

As you can see, when the question is presented in this way, a majority of Americans prefer temporary nationalization to additional government bailouts. But let’s be clear about what the poll does and does not say. First of all, the poll did not ask its respondents how comfortable they are with bank nationalization in the abstract. Instead, it asked how they feel about nationalization vis-à-vis bailouts. This is an important distinction.

Secondly, the poll’s wording is somewhat sympathetic toward the idea of nationalization; "cleans its balance sheets, and then quickly sells it off" sounds almost … easy … much easier than nationalization would be in practice…

Nevertheless, given that the poll did use the n-word [alternate phrasing such as ‘takeover’ polls much better, and that the n-word was preferred to bailouts by almost 2:1, I think this can be taken as a significant finding. The key question, perhaps, is whether there is some sort of solution other than either nationalization or bailouts (or perhaps some combination thereof). Are these really the only two choices that we have?

I don’t want to render a categorical answer to that question, but the answer is probably ‘yes’. Although there are different flavors of nationalization, and different flavors of bailout, essentially all realistic solutions to the bailout crisis could be classified under one of those two headings. As Yves Smith compellingly explains, for instance, the ‘good bank’ / ‘bad bank’ solution probably requires nationalization first…

How about just letting the banks fail, as Senator Richard Shelby, the Ranking Republican Member on the Senate banking committee suggested that we do? Bzzt. Banks don’t just disappear in this country when they become insolvent. Instead, the government steps in, protects the depositors up to the $250,000 FDIC limit, sells off what assets it can, and then gives the proceeds from those asset sales away in a particular order … depositors who were over the $250K limit get the rest of their money back first, then creditors do, then debtholders, then, finally, stockholders… The government, by the way, doesn’t wait for a bank to actually fail before doing this; it steps in almost literally in the dark of night  once such a failure appears inevitable or substantially likely. So ‘letting the banks fail’ is tantamount to nationalization anyway… albeit perhaps a more chaotic version of it.

Where I break from the liberal crowd, however, is in thinking that the Administration is avoiding nationalization because of a lack of political willpower, or some kind of phobia about being accused of socialism. On the contrary, as the Newsweek poll suggests, nationalization is probably the path of least resistance insofar as the politics of everything goes. So why isn’t the Administration simply nationalizing Citi and BoA now?

Most likely because they’re buying time. They’re buying time to do any number of things:

1. ‘Stress test’ the banks to see just how bad the problems are and just which ones are candidates for nationalization;
2. Determine whether any alternatives to nationalization are still viable for the sick banks, perhaps involving existing TARP funds and "only" another hundred billion or two in taxpayer monies;
3. Figuring out how to nationalize the banks, if and when such a step is deemed to be necessary, and,
4. Getting Treasury fully staffed up, which it isn’t yet.

Perhaps the Administration is holding out hope that there will be some sort of spontaneous recovery in the financial condition of the banks — and perhaps that hope is completely naive — but I don’t think this is what is driving the policy decision. The four reasons that I provided above are sufficient to explain the obfuscation and the delays. And remember, the Administration can’t really talk about nationalization until and unless it is ready to nationalize, since merely talking about nationalization would tend to make that outcome inevitable. If (when?) a decision is made to nationalize Citi or BoA, we shouldn’t expect a lot of advance warning.

– Nate Silver

Taking a Depression Seriously
New York Times
By DAVID BROOKS
March 9, 2009

The Democratic response to the economic crisis has its problems, but let’s face it, the current Republican response is totally misguided. The House minority leader, John Boehner, has called for a federal spending freeze for the rest of the year. In other words, after a decade of profligacy, the Republicans have decided to demand a rigid fiscal straitjacket at the one moment in the past 70 years when it is completely inappropriate.

The G.O.P. leaders have adopted a posture that allows the Democrats to make all the proposals while all the Republicans can say is “no.” They’ve apparently decided that it’s easier to repeat the familiar talking points than actually think through a response to the extraordinary crisis at hand.

If the Republicans wanted to do the country some good, they’d embrace an entirely different approach.

First, they’d take the current economic crisis more seriously than the Democrats. The Obama budget projects that the recession will be mild this year and the economy will come surging back in 2010. Democrats apparently think that dealing with the crisis is a part-time job, which leaves the afternoons free to work on long-range plans to reform education, health care, energy and a dozen smaller things. Democrats are counting on a quick recovery to help pay for these long-term projects.

Republicans could point out that this crisis is not just an opportunity to do other things. It’s a bloomin’ emergency. Robert Barro of Harvard estimates that there is a 30 percent chance of a depression. Warren Buffett says economic activity “has fallen off a cliff” and is not coming back soon…

This is an amazing article! The author parses the various forces in the financial meltdown and concludes convincingly that it was the unregulated Derivatives Market and its abuse that was at the center of the storm.  He then has a really sensible idea about what to do about it – get the money back from the people who stole it. What a concept! It’s a worthy read.

An Historic Defining Moment
by Turkana

1. Paul Krugman says President Obama is not being aggressive enough, in trying to repair the economy. Disturbingly so.
2. The supposed fix of the financial system is a sham. Mary already linked this important Village Voice article. At Daily Kos, diarist bobswern also weighed in.
3. In a truly extraordinary post, dday makes a compelling case that the real answer may lie in that which is unspeakable. Barbara Ehrenreich concurs.
4. In an also extraordinary post, my friend the Moonbat elucidates the real danger.

Yes, We Did Plan for Mumbai-Style Attacks in the U.S.
Why the latest assault on Bush antiterror strategy could make us less safe.
Wall Street Journal
By JOHN YOO

Suppose al Qaeda branched out from crashing airliners into American cities. Using small arms, explosives, or biological, chemical or nuclear weapons they could seize control of apartment buildings, stadiums, ships, trains or buses. As in the November 2008 Mumbai attacks, texting and mobile email would make it easy to coordinate simultaneous assaults in a single city.

In the weeks after the Sept. 11, 2001, strikes on New York City and Washington, D.C., these were hypotheticals no more. They became real scenarios for which responsible civilian and military leaders had to plan. The possibility of such attacks raised difficult, fundamental questions of constitutional law, because they might require domestic military operations against an enemy for the first time since the Civil War. Could our armed forces monitor traffic in a city where terrorists were preparing to strike, search for cells using surveillance technology, or use force against a hijacked vessel or building?

In these extraordinary circumstances, while our military put al Qaeda on the run, it was the duty of the government to plan for worst-case scenarios – even if, thankfully, those circumstances never materialized. This was not reckless. It was prudent and responsible. While government officials worked tirelessly to prevent the next attack, lawyers, of which I was one, provided advice on unprecedented questions under the most severe time pressures.

Judging from the media coverage of Justice Department memos from those days — released this week by the Obama administration — this careful contingency planning amounted to a secret plot to overthrow the Constitution and strip Americans of their rights. As the New York Times has it, Bush lawyers "rush into sweeping away this country’s most cherished rights." "Irresponsible," harrumphed former Clinton administration Justice Department officials.

According to these critics, the overthrow of constitutional government in the United States began with a 37-page memo, confidentially issued on Oct. 23, 2001, which concluded that the September 11 attacks triggered the government’s war powers and allowed the president to use force to counter force…

The government faced another fundamental question, which we addressed in our memo. Does the Fourth Amendment’s requirement of a search warrant based on probable cause regulate the use of the military against terrorists on our soil…

Imposing Fourth Amendment standards on military action would have made the Civil War unwinnable – combat occurred wholly on U.S. territory and enemy soldiers were American citizens. The military does not have the time to obtain warrants before soldiers fire upon enemy targets and personnel; the battlefield does not provide the luxury to collect evidence needed to meet probable cause standards in civilian courts…

In releasing these memos, the Obama administration may be attempting to appease its antiwar base – which won’t bother to read the memos in full – or trying to look good for the chattering classes. But if the administration chooses to seriously pursue those officials who were charged with preparing for the unthinkable, today’s intelligence and military officials will no doubt hesitate to fully prepare for those contingencies in the future. President Obama has said he wants to "look forward" rather than "backwards." If so, he should not restore risk aversion as the guiding principle of our counterterrorism strategy.

Next, Scott Horton reports on the upcoming OPR report detailing John Yoo and Steven Bradbury’s unethical conduct in craft OLC memos to justify torture. The report, apparently, focuses on contacts between the White House and OLC.

Sources at the department who have examined [the OPR] report state that it echoes some of the harshest criticisms that have appeared in the academic literature, but the report’s real bombshell, they say, will be its detailed disclosure of Yoo’s dealings with the White House in connection with the preparation of the memos. It is widely suspected that the Yoo memos were requested as after-the-fact legal cover for draconian policies that were already in place (“CYA memos”). If the Justice Department internal probe concludes this is the case, that could have clear consequences for the current debate surrounding the Bush administration’s accountability for torture.

Earlier reports had mentioned some surprise among observers that investigators had included the contents of emails, which makes me wonder whether the White House’s so-far success at eliminating emails from other periods–like September-October 2003–when they were breaking the law didn’t extend as far back as 2001 and 2002.That is, I wonder whether the surprise had as much to do with the fact that OPR managed to get emails between the White House and Yoo, as with the emails themselves.

And where does John Yoo get off saying, "In releasing these memos, the Obama administration may be attempting to appease its antiwar base – which won’t bother to read the memos in full – or trying to look good for the chattering classes."? John Yoo is apparently a full service opinion generator. He interprets the Constitution, directs policy, and pontificates on Presidential motives. Perhaps the DoJ isn’t run by Obama like it was run by Bu$hCo when he was there – and Obama himself had nothing to do with releasing those Memos. Maybe Eric Holder released the Memos because the American government is only secret for reasons of national security, and not to protect John Yoo’s ass.

Behind the Curve
New York Times
By PAUL KRUGMAN
March 8, 2009

President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told, especially by TV news, during the run-up to the stimulus vote. Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious. Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast. Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least…

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies? On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring. “Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of…

… the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery … well, you get the picture.

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along? Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed…

The broader public, by contrast, favors strong action. According to a recent Newsweek poll, a majority of voters supports the stimulus, and, more surprisingly, a plurality believes that additional spending will be necessary. But will that support still be there, say, six months from now? Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed. But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked. O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up…

… but when it comes back for more money, will Congress go along? Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed…

Krugman sees the Republican position as immutable and convincing. And he sees his position as correct – the solution is more Stimulus money. I disagree with him on both counts, though I also agree we haven’t done enough. Krugman and Obama are both still relying on the "private sector." I see the "private sector" as a vacuum cleaner sucking up money with very little interest in the big picture. I believe we’re going to have to have a great big "Job Corps" – sooner or later [and maybe a "Bank Corps"]. I don’t trust the "private sector" that got us into this mess to be able to get us out of it…

The Madoff Case: A Timeline Wall Street Journal March 6, 2009 Dec. 11, 2008 — Mr. Madoff is arrested and charged with criminal securities fraud. A criminal complaint filed against him in Manhattan states that he confessed to his two sons, both employees at his firm, Bernard L. Madoff Investment Securities LLC, that he had been running a "giant Ponzi scheme." Dec. 15 — A federal judge orders the U.S. operations of Mr. Madoff’s firm to be liquidated. Fresh details of victims emerge. The alleged fraud wrecked the investments of thousands of individuals, public pensions, charitable foundations and university endowments. Jan. 8, 2009 — The U.S. attorney’s office in Manhattan revokes Mr. Madoff’s bail after it becomes known that he mailed valuable jewelry, watches and other heirlooms to relatives and friends shortly after his arrest and in apparent violation of a court-ordered asset freeze in a separate but related case. Jan. 9 — Mr. Madoff’s lawyers agree to give federal prosecutors until mid-February to bring an indictment in the criminal case. Jan. 12 — A federal judge rules that Mr. Madoff can remain free. He is placed on 24-hour home detention, and a private security company is hired to monitor the entrances to his Upper East Side apartment. Jan. 21 — A federal judge denies another bid by prosecutors to jail Mr. Madoff. U.S. District Judge Lawrence M. McKenna in Manhattan declines to overturn a magistrate judge’s ruling on Jan. 19 extending bail for Mr. Madoff. Feb. 4 — A list of thousands of people who either were identified as customers in Mr. Madoff’s records or who identified themselves as customers is released as part of his firm’s bankruptcy-court proceedings. Feb. 10 — The SEC and Mr. Madoff reach partial deal that prevents him from working in the financial industry again, but leaves for later a decision on what fine he must pay. The settlement must be approved by a judge. March 2 — Mr. Madoff and his lawyers say his $7 million Manhattan penthouse, plus $62 million in assets, should be kept from investors because they are in the name of his wife, Ruth Madoff, and are not connected to any alleged fraud. March 3 — Mr. Madoff heads to court, agrees to give up the rights to his investment business, company artwork and entertainment tickets. March 6 — Mr. Madoff decides to waive a grand jury indictment and is expected to face new charges by prosecutors within a week. [Review the list of victims]

I still find this case strangely disquieting. His stone face in the photographs is hard to get behind – a mask. Throughout his career, he always walked on the shady side of Wall Street, but nothing I’ve read really explains this man. In this video, he seems to be describing himself.

• "In today’s regulatory environment, it’s virtually impossible to violate the rules."
• "It’s impossible for a violation to go undetected, certainly not for a long period of time."
• "When you look at the level of the infractions, they’re relatively small."

• "You have to understand – Wall Street is one big turf war."
• "The basic concept of Wall Street… It’s a for profit enterprise."
• "Today, the big money that’s made on Wall Street is basically made by taking risks."
• "Everyone said, I might as well risk my own capital and trade…"

• "So there’s always this friction that goes on between the regulating side of the industry and the practitioners…"
• "Okay, where do you draw the line?"
• "They [regulators] tend to look at the industry as if you’re making a profit, there’s something wrong. Intellectually, they know that shouldn’t be."

We all are awed with his lack of empathy for his investors, the charities. We wondered what was going on when he tried to mail valuables to his friends or give bonuses to his employees. We couldn’t believe that he’s claiming that his wife’s ownership of the Manhattan Apartment and a Bank Account of $62,000,000 had nothing to do with his crimes.

Because he wears tasteful suits and is on the Boards of Charities, we have trouble getting our minds around the fact that Bernard Madoff is simply a garden variety crook who cares as little for his victims as the muggers in Central Park. I once encountered a man who had spent years in prison for armed robberies. He was straight at the time, but he said, "My real profession is armed robbery. I’m just out of work right now." He also said, "You people are lucky that people like me are so damned dumb. When I plan a job, it never ever occurs to me that I’ll get caught. I guess I think I’m so smart that I’ll pull it off." I asked about the victims of his crimes. He said, "Oh, I never think about them. It’s about the cops. That’s the game."

I started with penny stocks, then I got into being a market-maker. The competition is tough, so I developed one of the first computerized networks to get the quotes out there. It was what we used to start NASDAQ. It was the only way to compete with the big guys who had seats on the NYSE. But it’s really hard to make any money trading stocks anymore. The overhead eats up the profits. You have to lowball your pricing to get the business. And the regulators… no matter where you turn they want paper like a bunch of bureaucrats. They just don’t get it that this is a for profit business. Every time I found a gimmick to bring in the business, they were standing in my way. So, I’d cut my profits to get the volume I needed, and someone else would jump in doing the same thing, or the regulators would question what I was doing, wanting more, asking questions. It was a nightmare.

I could see that the guys that were making money did it by investing their own capital and managing other people’s money. But those rich investors wanted to pay low fees and have consistent profits. You can’t take the risks you have to take to satisfy them without occasionally taking a massive hit – then they pull out and go somewhere else. Regulators, greedy investors, competition, overhead costs – what’s a fellow to do? The only way I could find to get ahead was to give the investors what they wanted and avoid the regulators. So my Ponzi Scheme was a way to stay competative without risking my client’s money. Anyway, what the clients wanted was a good return on their investment. They didn’t really care about the principle. So I gave them their returns – consistently – and kept very little for myself, relatively speaking. Everybody moves the line a little bit, just like I did. The damned Academics and the Regulators think we ought to do this business and not make a profit. That’s just ridiculous…

It will take several more readings to metabolize it all, but on a first pass through, it is a classical greek tragedy. The roots of its tragic end are apparent as the story builds. The financial industry feels constrained by the restrictions of the rules and regulations left over from Roosevelt’s New Deal. The regulations that saved the day and restored the market begin to be eroded and are gradually portrayed as unnecessary fetters standing in the way of growth and prosperity "in the emerging global market." The regulatory agencies are seen as excessively stern fathers unwilling to allow the young turks their time in the sun. And as each chunk is removed from the regulatory structure, it is heralded as a breakthrough – and the prosperity is palpable.

The Over-the-Counter OTC Derivative model gains a foothold in the early 1990’s when the outgoing Commodity Futures Trade Commission casually allows some OTC derivative trading. As that market blossoms, unobserved by any regulatory agency, various people warn that it is dangerous and may lead to collapse, but others in higher places seem assured that things will be fine. This trading blossoms and the big financiers join in this market [which amounts to little more than a Casino]. The temperatures rises, but the reassurances keep coming that things are fine. Financial bubbles come and go, and the instances of fraud increase.

Pundits who should know better begin to say things like "the fundamentals are strong" and "the economy is robust" or "resilient," while traders become increasingly adept at heavy leveraging, hedging, and risk taking. Until the eleventh hour, government officials and most of the financial sector continues to be reassuring. Like the Ponzi Schemes, everything works fine so long as the markets are booming. Capital is replaced with paper based on mortgages and unsecured insurance in the form of other Derivatives. Since Derivatives are not really based on anything real, the day comes when one too many investors in this virtual economy balks and tries to collect real assets from the system, and down comes the whole house of cards.

August 11, 1987 – Alan Greenspan was sworn in as Chairman of the Federal Reserve. As reported recently in the NYT:

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.