1 Boring Old Man

[If you too become obsessed with Deregulation, selise has the definitive timeline]

Which Idiot Decided to Repeal Glass-Steagall?
Oxdown Gazette [FDL]
By: selise
February 22, 2009

From Stiglitz’s 2003 book, The Roaring Nineties:

For more than half a century, commercial banking, which takes deposits from households and firm and makes conventional loans, had been separated from investment banking, which helps firms issue new bonds and shares. The same company could not lend money and also sell securities, in other words. The Glass-Steagall Act, which barred this, was one of the reforms put in place by the administration of Franklin Roosevelt, in response to the wave of bank failures that had followed the Great Crash of 1929. But the ideas behind Glass-Steagall went back even further, to Teddy Roosevelt and his efforts to break up the big trusts, the large firms that wielded such economic power. TR and the Progressives of the early twentieth century were alarmed not only about the concentration of economic power but about its impact on the political process. When enterprises become too big, and interconnections too tight, there is a risk that the quality of economic decisions deteriorates, and the "too big to fail" problem rears its ugly head. Expecting to be bailed out of trouble, managers become emboldened to take risks that they might otherwise shun. In the Great Depression, when many banks were on the ropes, it was, in effect, the public that bore the risk, while the bank got the reward. When banks failed, the taxpayers paid the price through publicly funded bailouts.

The Glass-Steagall Act of 1933 addressed a very real problem. Investment banks push stocks, and if a company whose stock they have pushed needs cash, it becomes very tempting to make the loan. The U.S. system worked in part because under Glass-Steagall the banks provided a source of independent judgments on the creditworthiness of businesses. When a "full-service" bank makes most of its money by selling equities and bonds or arranging "deals," issuing loans becomes almost ancillary—a sideline…

With Glass-Steagall, the United States rejected the course followed by other nations, such as Japan and Germany, that did not separate commercial and investment banking—I believe to our evident benefit. But American banks themselves saw Glass-Steagall as reducing their opportunities for making profits and not surprisingly began to insist that the rules separating commercial and investment banking had become passé. In an age of free-floating capital and giant multi-national companies, they argued, banks had to be integrated, to make advantage of what are called "economies of scope"—the benefits that businesses can reap by working in many different areas at once. Global competition was too intense for bank concentration to be a serious worry [though in fact, many borrowers, especially small and medium-siaze firms, have access only to a few potential lenders], and Glass-Steagall supposedly put American banks at a disadvantage.

In the mid-nineties, the banks mounted a concerted campaign to have Glass-Steagall repealed. The conditions were favorable. Prosperity made the notion of bank failure seem very remote [though the S&L crisis of the eighties ought to have been a caution]…

• The Federal Deposit Insurance Corporation [FDIC]: In order to put a stop to the destructive runs on Banks, the Federal Government got into the Insurance business, insuring Savings Accounts in case of Bank failure.
• The Separation and Regulation of Commercial and Investment Banks: This is the part known as regulation. Hearings disclosed obvious conflicts of interest when Banks invest money from their vast holdings in Savings Accounts. So, the Bill imposed strong restrictions on investing by these banks [Commercial Banks]. Likewise, the behavior of Banks that were involved in investing were also heavily regulated. It also limited Bank Mergers. The design here was clear, In the boom before the Crash, Banks had loaned money to people to put in the Market and had invested their assets as well. Glass-Stegall imposed restrictions to stop speculators from using other people’s money. Bank size [merger] was also regulated

 

_{the idiots deciding…}

Top U.S., European Banks Got $50 Billion in AIG Aid
Wall Street Journal
By SERENA NG and CARRICK MOLLENKAMP

The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant. Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Some banks that were paid by AIG after it was bailed out by the government Goldman Sachs Deutsche Bank Merrill Lynch Société Générale Calyon Barclays Rabobank Danske HSBC Royal Bank of Scotland Banco Santander Morgan Stanley Wachovia Bank of America Lloyds Banking Group Source: WSJ research

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA. More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document…

Lawmakers Want Names

The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG. But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions…

Banks and other financial companies were trading partners of AIG’s financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

More Problems

Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets. Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks. AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements. The concern has been that if AIG defaulted, banks that made use of the insurer’s business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.

I find this statement remarkable, "Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG." Anyone in the galaxy not already wary of doing business with AIG ought to be committed on the spot. My suspicion is that AIG is trying to isolate AIG-FP from the remainder of it’s other businesses and keep itself going [recall this]. It feels a bit like Madoff trying to claim that his wife’s Manhattan Apartment and $62,000,000.00 Bank Account has nothing to do with his Ponzi Central Investment Firm.

Bleak House
Talking Points Memo
By Josh Marshall
March 7, 2009

In Washington over the last two months, the debate was over whether the Stimulus Bill was too large. But the math – that is to say, expected fall in aggregate demand compared with offsetting stimulus spending – suggested a completely different problem. Namely, that it was too small, probably offsetting a half or less than half of the demand sucked out of the economy by the collapse of the housing bubble. And as the Washington Post reports on tomorrow’s front page, the verdict seems to be in: yep, it was too small [Job Losses Could Drown Stimulus].

There are many different metrics to use to get to this judgment. But a key one is that the Obama budget, which came out at the end of last month, assumed an average unemployment rate of 8.1% during 2009. Presumably, that was the assumption behind the Stimulus math too. But since we now know that the unemployment rate spiked to 8.1% in February that prediction seems unrealistically optimistic – perhaps by a long shot.

All of which is to say that the monthly economic data are rapidly catching up with the pessimists’ assumption about kind of steep and lasting recession we have in store. Nor is it only the size of the Stimulus Bill that is implicated in these changing numbers. Because if the administration has been assuming less bleak unemployment rates than we’re likely to see, then the tax revenues that the budget is based on won’t come in and ‘stress tests’ they’re running the banks through probably aren’t stressful enough.

Jobs & Economy Tanking, Feldstein Calls for Second Stimulus;
So Republicans Obstruct Spending Bill
Firedoglake
By: Scarecrow
March 6, 2009

The US jobless rate just reached 8.1 percent, the highest in 24 years. Republican economist Martin Feldstein, the guy the Republicans quoted during the stimulus bill debate, has joined the chorus of those calling for another large stimulus bill.

Meanwhile, determined to be seen as both irrelevant and irresponsible, Senate Republicans held up the Ominibus Budget Bill yesterday because … it had too much spending for near-term projects. Feldstein can read the numbers, and they’re all bad; today’s jobs report says things are getting worse. Feldstein notes Americans have just suffered a $12 trillion loss of wealth, so "the US economy faces a US$750 billion shortfall of demand." He then adds:

Although the recently enacted two-year stimulus package includes a total of US$800 billion of tax reductions and increased government spending, it would be wrong to think that this will add anything close to US$400 billion a year to GDP in each of the next two years. Most of the tax reductions will be saved by households, rather than used to finance additional spending.

Moreover, a substantial part of the spending will be spread over the following decade. And some of the government spending in the stimulus package will replace other outlays that would have occurred anyway. An optimistic estimate of the direct increase in annual demand from the stimulus package is about US$300 billion in each of the next two years.

The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of US$450 billion in each of the next two years causing serious second-round effects. As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending.

But Senate Republicans aren’t listening to their own experts. They’re focused on 2 percent of the Budget Bill, trying to paint a picture that specific projects Congress asked for, things that can be done this year, are inherently wasteful. But their real targets are increases like this:

The big increases — among them a 21 percent boost for a popular program that feeds infants and poor women and a 10 percent hike for housing vouchers for the poor — represent a clear win for Democrats who spent most of the past decade battling with President George W. Bush over money for domestic programs.

Feldstein agrees the spending should be targeted for stimulative effect:

A second fiscal stimulus package is therefore likely. However, it will need to be much better targeted at increasing demand in order to avoid adding more to the national debt than the rise in domestic spending. Similarly, the tax changes in such a stimulus package should provide incentives to increase spending by households and businesses.

Republicans could start climbing out their self-imposed dungeon by offering to forego their own member’s "wasteful spending" and substitute more effective spending or tax "incentives to increase spending" if the Democrats would meet them half way. But they’d rather obstruct the whole process and express mock outrage on Fox News.

1. More Stimulus Spending, More Bank Bailouts
2. Nationalize the Banks, WPA/CCC Programs

George W. Bush’s Disposable Constitution
By Scott Horton

^{Yesterday the Obama Administration released a series of nine previously secret legal opinions crafted by the Office of Legal Counsel to enhance the presidential powers of George W. Bush. Perhaps the most astonishing of these memos was one crafted by University of California at Berkeley law professor John Yoo. He concluded that in wartime, the President was freed from the constraints of the Bill of Rights with respect to anything he chose to label as a counterterrorism operations inside the United States.}

^{Here’s Neil Lewis’s summary in the New York Times:}

^{“The law has recognized that force (including deadly force) may be legitimately used in self-defense,” Mr. Yoo and Mr. Delahunty wrote to Mr. Gonzales. Therefore any objections based on the Fourth Amendment’s ban on unreasonable searches are swept away, they said, since any possible privacy offense resulting from such a search is a lesser matter than any injury from deadly force. The Oct. 23 memorandum also said that “First Amendment speech and press rights may also be subordinated to the overriding need to wage war successfully.” It added that “the current campaign against terrorism may require even broader exercises of federal power domestically.”}

^{John Yoo’s Constitution is unlike any other I have ever seen. It seems to consist of one clause: appointing the President as commander-in-chief. The rest of the Constitution was apparently printed in disappearing ink.}

^{We need to know how the memo was used. Bradbury suggests it was not much relied upon; I don’t believe that for a second. Moreover Bradbury’s decision to wait to the very end before repealing it suggests that someone in the Bush hierarchy was keen on having it.}

^{It’s pretty clear that it served several purposes. Clearly it was designed to authorize sweeping warrantless surveillance by military agencies such as the Defense Intelligence Agency and the National Security Agency. Using special new surveillance programs that required the collaboration of telecommunications and Internet service providers, these agencies were sweeping through the emails, IMs, faxes, and phone calls of tens of millions of Americans. Clearly such unlawful surveillance occurred. But the language of the memos suggest that much more was afoot, including the deployment of military units and military police powers on American soil. These memos suggest that John Yoo found a way to treat the Posse Comitatus Act as suspended.}

^{These memos gave the President the ability to authorize the torture of persons held at secret overseas sites. And they dealt in great detail with the plight of Jose Padilla, an American citizen seized at O’Hare Airport. Padilla was accused of being involved in a plot to make and detonate a “dirty bomb,” but at trial it turned out that the Bush Administration had no evidence to stand behind its sensational accusations. Evidently it was just fine to hold Padilla incommunicado, deny him access to counsel and torture him–in the view of the Bush OLC lawyers, that is.}

^{Among these memos was one for the files from Steven Bradbury, whom the Senate refused to confirm to run OLC, but who continued as a squatter in the position through the end of the Bush Administration. In his memo, the self-styled OLC head rejected a series of John Yoo-authored memos, noting the painfully obvious reasons why they were incorrect (for instance, Yoo’s penchant for misquoting the Constitution). He did this on January 15, 2009—as he was clearing his desk and preparing to hunt for a new job…}

^{We may not have realized it at the time, but in the period from late 2001-January 19, 2009, this country was a dictatorship. The constitutional rights we learned about in high school civics were suspended. That was thanks to secret memos crafted deep inside the Justice Department that effectively trashed the Constitution. What we know now is likely the least of it.}

^{The pages of my blog and a thousand others are filled with the drama of the Bush Administration. Unjust War, Torture, Politicization, Corruption, Secrecy, Power-Mongering – the list has seemed endless. But, in the end, for all of their destructive dramatics, it may well be that their greatest injury to America will be "what hasn’t been" in their two terms of office. Obsessed with foreign conquest and Neoconservative monomaniacal ideology, they’ve essentially ignored most other aspects of the job of running America. When problems arose in the economy, they’ve lowered interest rates, or cut taxes, or given rebates – putting a Band-Aid® in place when what was needed was a thorough physical exam and maybe an MRI. They’ve ignored the National Debt, the Trade Deficit, the Banking practices, Loan regulation, the Oil Market, Global Warming, etc. We learned in 1929 that unbridled Capitalism requires monitoring and regulation. The business-friendly Republicans have eroded the regulatory forces in our government since they were enacted back then. "Deregulation" has been a subtle campaign slogan until the Bush Administration, when it became a roar.}

^{In this Administration, these noisy, dramatic people have ignored so many important aspects of our economy – probably more out of incompetence and support for their greedy contributors than from malice – that our economy is tanking under the weight of ignored warning signs and ignorance [A person who ignore things is an "ignorant."]. That’s what I’m getting at with all this talk of the most important thing being "what isn’t." The tragedy of the Bush years, the September 11th attack on New York, will be dwarfed by the tragedy they’ve created with their unjust war. But I expect that, when it’s all said and done, even their absurd war will pale in the face of the consequences of their ignoring everything else – their legacy of "negation."}

Gingrich talks openly about running in 2012

WASHINGTON (CNN) – Newt Gingrich is talking out loud about a possible run for the White House in 2012. “Calista and I will look seriously, and we’ll probably get our family totally engaged, including our two grandchildren, probably in January 2011, and we’ll look seriously at whether or not we think its necessary to do it,” Gingrich told reporters in Ashland, Virginia last night, according to the Richmond Times-Dispatch.

“And if we think it’s necessary we’ll probably do it,” he said. “And if it isn’t necessary we probably won’t do it.” The former House Speaker told the New York Times magazine something similar in a profile published over the weekend. “I think I’m closer to Benjamin Franklin than to George Washington,” Gingrich told the magazine. “I’m a contributor to my country and to my times. If it turns out that there’s a moment when it makes sense to run, then I’ll run. But if I end up never being able to run, then it won’t devastate me.”

Gingrich briefly flirted with the idea of running for president in 2007, telling supporters that if he could raise $30 million in a three-week period he would enter the race, but ultimately decided against entering the race.

The Art of Looting and Tunneling
the left coaster
by eriposte

As the search for AIG’s counterparties continues, it’s worth remembering what AIG and the rest of the Too Big to Fail^TM gang did in the last few years. For that we turn to the abstract (emphasis mine) of the 1994 paper by George Akerlof and Paul Romer:

Looting: The Economic Underworld of Bankruptcy for Profit

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust. 

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds. 

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Sounds like a good description of what we’ve seen play out more recently, although the "underworld" operated quite openly. Simon Johnson at Baseline Scenario observes that given the current trajectory of the Obama Treasury department, the looting will be followed by tunneling – "borderline legal/illegal smuggling of value out of businesses". He concludes:

Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way – mostly from Europe but also potentially from Asia.
The course of policy is set.  For at least the next 18 months, we know what to expect on the banking front.  Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches [I’ve asked].  The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails. The road to economic hell is paved with good intentions and bad banks.

Now tell me the bad news.

Senators Ask Who Got Money From A.I.G.
New York Times
By MARY WILLIAMS WALSH
March 5, 2009

Trying to draw a line in the sand, a Senate panel told the vice chairman of the Federal Reserve to identify all the parties made whole by the bailout of the American International Group or forget about coming back to ask Congress for more rescue money. “You will get the biggest no you ever got,” Senator Jim Bunning, Republican of Kentucky, warned Donald L. Kohn, vice chairman of the Fed board of governors, in a hearing on Thursday. “I will hold up the bill.”

The hearing, led by Senator Christopher Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee, was called to examine the regulatory patchwork that had allowed huge risks to build up at A.I.G. Since the insurance conglomerate’s near collapse in September, the federal government has committed $160 billion to keep it afloat.

Tens of billions of those dollars have merely passed through A.I.G. to its derivatives trading partners, shielding them from losses. The Fed has refused to provide the names of those financial institutions, and senator after senator, Democrat and Republican, said that was an outrage. “We need to know who benefited, and we’re going to find out,” said Senator Richard C. Shelby, Republican of Alabama and the ranking member of the committee. “The Fed can be secretive for a while but not forever.”

Mr. Kohn said the Fed believed that the only hope of recovering the taxpayers’ money was to get A.I.G. back on its feet, doing business as usual — and that meant respecting its customers’ privacy…

Under our new improved system, the lending institution sold the loans to larger institutions who repackaged them as mortgage backed securities, ranked them according to some [arbitrary] level of risk and sold them as Securities called CDOs [Collateralized Debt Obligation], passing on the risk with the asset. Even larger financial institutions bought the CDOs and insured them against loss by purchasing Credit Default Swaps – a quaisi-Insurance that assumed the risk. A major seller of the Credit Default Swaps was AIG-FP [American International Group – Financial Products]. They sold these quaisi-Insurance Products on the Unregulated Derivatives Market using AIG‘s AAA Rating and neglected to have any Capital to back up their quaisi-Insurance since they thought they’d never have to payoff anybody.

So, since the bigger financial Institutions could hedge their risks with CDSs, they bought CDOs like crazy. And since the financial institutions could sell their risk as CDOs, they bought Mortgages like crazy. And since the lending institutionscould sell their risk, they gave loans to anyone who wanted them. And since the property buyers could get a loan in a heart beat, they bought property they couldn’t really afford getting absurd sub-Prime Loans with balloon payoffs. Property values escalated to the sellers delight, creating a financial bubble – easy loans, corrupted CDOs, unsecured CDSs. The fraud in the system operated at every level as the risk rode up the chain. Then one day… 

The Big Dither
New York Times
By PAUL KRUGMAN
March 5, 2009

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.” Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators. Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away…

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more. The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially. But would it be enough to make the banking system healthy? No…

… officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable. But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

^{Chicken Little may be right this time. "The sky is falling." As America’s economy plunges rapidly toward Great Depression II, consumer and investor confidence rush downward at an even faster rate. No one has produced the economic plan that stirs people from their increasing gloom. This includes Barack Obama’s touted economic brain trust and the Federal Reserve. The astute Nobel Laureate and New York Times columnist Paul Krugman underscored the problem when he asked on February 20: "Who’ll stop the pain?" New economic reports show the extent of the devastating decline. Foreclosures and unemployment keep rising. The gross domestic product dropped 6.2 percent in the last quarter of 2008, the worst since the first quarter of 1982. Although the authors can offer no sure-fire economic plan, we think a mistake was made when the perceived urgency of determining what to do in the future swept aside the crucial prior question: How did the U.S. get into this mess in the first place? The haste likely arose because of the belief that the answer was clear. It’s the economy, Stupid.}

^{After all, economists of different political persuasions agree that powerful economic forces, not the previous president’s policies and management or the political environment, dominate how the economy does. Princeton economist Alan Blinder observed in George W. Bush’s case: "The main culprit has not been the government but the marketplace." Even if economic forces generally are dominant, Bush’s misbegotten policies of tax cuts for the rich and draconian deregulation had a prominent place in sending the economy into a free fall. The full explanation, however, turns out to be more complex. It starts with the Republican political ideology that embraced antigovernmentism and free-market fundamentalism. When the two were joined together, a philosophy of governance emerged that postulated: Federal government institutions are the problem; free-market capitalism, the solution. George W. Bush moved to stay the dead hand of government with tax cuts for the rich and massive deregulation. But his ideological concepts proved wanting. They yielded a lethal mix of gross mismanagement and wrongheaded policies that weakened the nation’s economy and the governing institutions that must be in working order if new policies are to succeed.}

^{Republican Economic Policy
Advocates of free-market fundamentalism believe without reservation that government regulations hinder businesses and individuals. Red tape prevents entrepreneurs from pursuing a course of action that will restore economic growth and prosperity and return America to its rightful place as the exemplar of capitalism. For the true believers, market discipline in an unfettered free market–not Washington bureaucrats–is the optimum means of effective control. The Bush administration pushed deregulation to the point of no regulation. American financial institutions bundled together good and bad mortgages and sold these toxic packages both at home and abroad to create chaos in domestic and international financial markets. Despite doling out hundreds of billions of dollars to prop up major financial institutions, Bush still left Obama the worst economic mess since Herbert Hoover. Bush’s failed regulatory policy is a primary factor in a worldwide financial crisis of Great Depression proportions. Bad presidential policy, not economic forces outside Bush’s control, ends up as the main culprit.}

^{Another key tenet of Republican ideology holds that 1) only people with high incomes will save the benefits from tax cuts and increase capital investment, and 2) the added investment will stimulate the economy and bring the economy to a higher permanent level of growth. Although the Bush tax cuts disproportionately favored the top income earners, both gross domestic product and capital investment growth rates were much below the average for earlier presidencies. Nothing ‘trickled down’. Only the top 1 percent experienced extraordinary income growth. The middle class ended up in the worst straits since the 1930s with flat incomes, much diminished housing values, far higher debt, rapidly rising unemployment, and limited credit. Bush’s income tax cuts produced an unmitigated disaster for tens of millions of low- and middle-income Americans. Critics of the 2001 and 2003 tax cuts kept predicting deleterious outcomes to no avail. They were right. The Republican theory was dead wrong and needs an immediate burial.}

^{Governing Institutions and Governing
The Bush presidency exercised the poorest quality of governance in modern American history. It is hardly a surprise in that the Bush administration distrusted the federal institutions of governance. In May 2006, New York Times columnist David Brooks, a moderate Republican, made the apt point that the Bush White House could not or would not govern because Bush was "often openly hostile" to the governance institutions created by the Constitution. The hostility led the administration to concentrate power in a small, secretive White House clique in order to keep the rest of the executive branch weak and to bully or ignore Congress and the courts. This approach greatly enhanced control. However, it played havoc with governance and the institutions established by the Constitution to govern. Bush’s use of information and argument stands as a sure sign of the administration’s gross misgovernance. Deception and secrecy became the main weapons in a continuing propaganda campaign to sell and defend administration policies to the American public. The Bush administration was ready to concoct false data and use it in spurious arguments to attack valid evidence refuting their false claims. Republican members of Congress and the party’s other political leaders followed suit in using the same tactics and arguments as Bush. They still are refusing to recognize the failure of their bankrupt ideology and continue to propose the same Bush tax cuts that did not stimulate the economy efficiently.}

^{President Obama struggles to stop the free fall that is the biggest economic threat to the United States since the Great Depression, while the Republican Party engages in petty partisan histrionics and lock-step intransigence. This behavior is a clear barrier to reasoned policies in this critical time. Both the party in power and the opposition must reach mutual concessions that result in an agreed upon plan of action. Republican Party irresponsibility threatens to block any viable strategy to combat the continuing economic decline. Yet it is not just the Republican behavior that makes Congress the most dysfunctional institution the Obama administration faces. Congressional Democrats join the Republicans in making constructive change more difficult. Take the case of America’s badly deteriorated infrastructure that is a major blockage to full economic recovery because it reduces the nation’s competitiveness. At a recent meeting of the National Governors Association, the financier Felix Rohatyn, a long-time advocate of increased infrastructure spending, stressed the historic role of the federal government in investing in infrastructure for the long run. But Rohatyn pointed to the difficulty of funding the most needed efforts because Congress members in both parties do not want to lessen their influence over the selection of projects that bring them political rewards. New York Times columnist Bob Herbert drew on Rohatyn’s remarks on infrastructure to observe: "There is something weirdly self-defeating about having a need as clear-cut as the need to move beyond a deteriorating 20th-century physical plant, and being unable to do it because of the wasteful, inefficient and outmoded 20th-century way of doing politics and government."}

^{Obama’s Tasks
In looking at President Obama’s formidable challenges in preventing Great Depression II, it is useful to set out the authors’ final argument: Powerful economics forces alone did not bring down the American economy. George W. Bush’s ideologically-driven policies and gross misgovernance and the dysfunctional politics during his presidency were also major factors and must be taken into account in building Obama’s strategy for a sustained recovery. A key task for President Obama is to convince Americans that free-market fundamentalism has totally failed and must be abandoned. He has to show Americans why a larger, vibrant, competent public sector must be reconstructed in order to restore prosperity.}

^{Bipartisanship will not succeed until the Republicans are ready to engage in fruitful mutual compromise and offer ideas that actually have a chance of working. Constructive partisan action based on analysis rather than harebrained beliefs offers the best chance for the United States to escape Great Depression II. The Republican Party must be turned from its dysfunctional path to destruction and fulfill its role as a responsible party seeking policies consonant with American constitutional government. Our argument is not that the Obama’s new stimulus package and his budget proposals are going in the wrong direction. Much of what the administration had done deserves praise. Yet the biggest challenges lie ahead and will not be met unless Obama can sell the necessity of fundamental institutional changes and the sacrifices that must be made in fixing the economy.}

In the U.S., we had a system of checks and balances to protect us from these polar opposites, but it has never risen to resolve the questions of governance that might’ve been more smoothly dealt with had we not been so entangled with the Euroasian turmoils. That "free-market fundamentalism has totally failed" is inevitable. As this article clearly points out, the results of economic anarchy will always be the same. There are general societal needs that can only be met by government: a legal system; a health care system; energy management; infrastructure. Individuals out to make money for themselves will never provide these basic services. In addition, the parameters of financial institution must be regulated, just as we must have a legal system. Human individual greed is just part of the mix of humanity. It cannot operate without parameters to prevent crime and fraud. That’s just that.