The Aeration Zone: A liberal breath of fresh air
Contributors (otherwise known as "The Aerheads"):
Walldon in New Jersey ----
Marketingace in Pennsylvania ---- Simoneyezd in Ontario
ChiTom in Illinois -- KISSweb in Illinois -- HoundDog in Kansas City -- The Binger in Ohio
Thursday, March 26, 2009
Sunday, March 22, 2009
The Real AIG ScandalIt's not the bonuses
By Eliot SpitzerPosted Tuesday, March 17, 2009, at 10:41 AM ET
American International Group Inc., Manhattan, N.Y., office. Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.
Why weren't the counterparties immediately and fully disclosed?
Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.
Saturday, March 21, 2009
Q: what about the gold standard
So the following is not my idea, nor do I agree with it-- though there may be a point in discussing it. And since a number of the writers/readers here are money & finance people, Scatablog seems a good forum.
Fire away! (My feelings are not on the line here.) I will forward replies, in print, to my father. Thank you.
Please spread the word. Comments welcome.
- It is unconstitutional for the federal government to print money not backed by gold. The Constitution's insistence upon backing currency with gold and silver was a reaction to the Continental Congress's issuance of dollar notes without such backing (see the phrase, "not worth a Continental"). So the Constitution stipulated that paper money was to be backed by specific amount of gold. It was FDR who took us off the gold standard, a typical Communist grab, and now the dollar has no backing behind it.
- US paper currency money is therefore now worthless and will only regain value when it is again backed by precious metal. Only way to solve current financial crisis is to return to the gold (and silver) standard for our national currency. This will greatly calm the financial markets.
Friday, March 20, 2009
Stream of Consciousness [updated]
“Eventually all things merge into one, and a river runs through it.”Norman McLean, “A River Runs through It”
A number of things came together for me today during a quick drive downtown listening to NPR and then a read of this morning’s NYT. Are they really connected? Well, I think so.
- Item: heard on NPR that the CBO estimates an even larger budget deficit than Obama’s budget anticipates. (see: http://news.yahoo.com/s/nm/20090320/pl_nm/us_obama_budget_deficit_4)
Immediate interpretation on the radio: can Pres. Obama & Congress do all that they want? Republicans and some "moderate" Democrats are expected to push back.
My immediate reaction: here we have the fruit of the recent years’ Republican/conservative/libertarian goal to "starve" government by tax cuts. And so now, we can’t afford to address the recession or the auto industry or healthcare or. . . . At least, so goes the argument.
Of course, the rich got much richer over those same recent years: and now, thanks to AIG, we see how. I really do not wish any AIG employees harm, but apparently they feel they need—and can afford— private security guards. Should they (not just AIG execs) become richer still?
Welcome to the Banana Republic of
- Item: NYT report today on stories from the Israeli army of wanton killings in recent
- [Update item: see the charming story about Israeli army T-shirts celebrating the death of pregnant Palestinian women and their fetuses (Haaretz via Huffingtonpost): murder-themed T-shirts, one more America cultural export. Thank you, Rush.]
My immediate reaction: anger, and a re-emergence of my initial anger at the special violence of the Israeli attack back when it happened—phosphorous munitions and so forth.
But then I thought about
Then there was the Israeli political scientist quoted at the end of the NYT article: “the army believes that a weak spot of Israeli deterrence is its strong commitment not to kill civilians, and there has grown the sense that it might have to temporarily overcome that weakness in order to restore deterrence.” A bit chilling: chillingly fascist.
- Items: separate NYT stories about (a) polar bears (and other wildlife) endangered by loss of Arctic ice caps, and (b) Bangladeshi efforts to raise low-lying areas against rising sea levels. (Oh, yes, and yet another article on (c) disappearing species of American birds-- esp. in Hawaii.)
What do I need to say, beyond pointing out that a Michael Steele still wants to play games on this subject of global warming and cooling?
- Item: David Brooks’ NYT column today, “Perverse Cosmic Myopia”.
He seems to call Obama back to the immediate issue of the “collapsing world financial system”, and away from more “complicated” problems of healthcare, energy, and so forth. Then he criticizes European leaders who are insisting on “global architecture to regulate finance”.
Mr. Brooks (may I call you "David"?), the definition of “myopia”, when used metaphorically, is: “Lack of discernment or long-range perspective in thinking or planning." Pardon me, but the “perverse myopia” is your own as much as anybody's!
What is the river running through it all? A culture of wanton privilege, presumption, and self-absorption. This is the issue of the AIG bonuses, and, costlier still, former Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson’s work on behalf of AIG in such a way that his former firm is the single largest beneficiary! And nobody is calling for hearings and trials on that, yet. How many Goldman Sachs bonuses have
The river is bi-partisan, unfortunately. Yet Paulson needs to be made accountable, so that we can really address the issues of integrity (moral and corporate) in the financial industry; so do the former President and Vice President and hundreds of others, before we can speak effectively to the brutality of
One thing David (that's "Mr. Brooks," to the rest of you) said rightly was the last thing he said: “We don’t have to wonder any more [about how it was that past world leaders could have been so myopic at one time or another]. We get to watch the cosmic myopia replay itself in our own times.”
Been a while
I had to take a long break from blogging, as it had become compulsive. I'm probably not cured, but I had to write one up today (next post).
It's probably too long. Sorry, Mom.
Wednesday, March 18, 2009
AIG: nice work if you can get it
That's a total of $313 million, but get this. That $313 million was going to be distributed, according to said Retention Plan, to 400 AIG executives. That's an average of $783,000 for each of those 400 executives. That's just the bonus, not the base salary, which according to the plan was intended to be about 60% of total compensation.
In other words, the average base for those 400 executives was in the neighborhood of $1.2 million, meaning, of course, that the combined amount on average for those 400 crack financial hotshots would be probably just a little less than a cool $2 million. That's for one year of doing – well, whatever the hell it was they were doing to put the company and the world economy at an unacceptable risk level. As the late Illinois Senator Everett Dirksen said it (more or less), $2 million here and $2 million there, pretty soon you're talking about real money! How many beachfront mansions are there in the Hamptons?
For not making objectives – to put it charitably – the bonus will only be about $550,000 instead of $783,000, and the total only about $1.75 million instead of almost $2 million. That's only fair, of course, since these are tough times. I wonder how many of them will grumble about creeping socialism if Obama succeeds in taxing the taxable amounts above $250,000 (after exemptions, adjustments and deductions) at 39.6% instead of 35%?
Sunday, March 15, 2009
After 9/11, I haven't written about this yet, but the Central Intelligence Agency was very deeply involved in domestic activities against people they thought to be enemies of the state. Without any legal authority for it. They haven't been called on it yet. That does happen.
"Right now, today, there was a story in the New York Times that if you read it carefully mentioned something known as the Joint Special Operations Command -- JSOC it's called. It is a special wing of our special operations community that is set up independently. They do not report to anybody, except in the Bush-Cheney days, they reported directly to the Cheney office. They did not report to the chairman of the joint chiefs of staff or to Mr. [Robert] Gates, the secretary of defense. They reported directly to him. ...
"Congress has no oversight of it. It's an executive assassination ring essentially, and it's been going on and on and on. Just today in the Times there was a story that its leaders, a three star admiral named [William H.] McRaven, ordered a stop to it because there were so many collateral deaths.
"Under President Bush's authority, they've been going into countries, not talking to the ambassador or the CIA station chief, and finding people on a list and executing them and leaving. That's been going on, in the name of all of us.
"It's complicated because the guys doing it are not murderers, and yet they are committing what we would normally call murder. It's a very complicated issue. Because they are young men that went into the Special Forces. The Delta Forces you've heard about. Navy Seal teams. Highly specialized.
"In many cases, they were the best and the brightest. Really, no exaggerations. Really fine guys that went in to do the kind of necessary jobs that they think you need to do to protect America. And then they find themselves torturing people.
"I've had people say to me -- five years ago, I had one say: 'What do you call it when you interrogate somebody and you leave them bleeding and they don't get any medical committee and two days later he dies. Is that murder? What happens if I get before a committee?'
"But they're not gonna get before a committee."
Hersh, the best-known investigative reporter of his generation, writes about these kinds of issues for The New Yorker. He has written often about JSOC, including, last July that:
"Under the Bush Administration's interpretation of the law, clandestine military activities, unlike covert C.I.A. operations, do not need to be depicted in a Finding, because the President has a constitutional right to command combat forces in the field without congressional interference."
• And the Bush-Cheney years. (Said Hersh: "The contempt for Congress in the Bush-Cheney White House was extaordinary." Said Mondale of his successor, Cheney and his inner circle: "they ran a government within the government." Hersh added: "Eight or nine neoconservatives took over our country." Mondale said that the precedents of abuse of vice presidential power by Cheney would remain "like a loaded pistol that you leave on the dining room table.")
And he added that both the press and the public let down their guard in the aftermath of 9/11.
"The major newspapers joined the [Bush] team," Hersh said. Top editors passed the message to investigative reporters not to "pick holes" in what Bush was doing. Violations of the Bill of Rights happened in the plain sight of the public. It it was not only tolerated, but Bush was re-elected.
Laws reforming the FBI and CIA in the aftermath of the Church Committee, were supposed to fix the problem so that "we would never have these problems again in the lifetime of anyone alive at the time, but of course we did."
Saturday, March 14, 2009
Media as GOP Propaganda Machine
This is ridiculous. The media has been obsessing about President Obama's plan to roll back the Bush tax cuts for the wealthiest Americans-from 35% to 39.6%-even asking if that makes him a socialist.1
But do you know what tax rate the wealthiest Americans paid on the top portion of their earnings at the end of Ronald Reagan's first term? 50%.
Under Richard Nixon? 70%. Under Dwight Eisenhower? 91%! Shocking, right?
And for all the whining about rolling back Bush's irresponsible tax cuts, the truth is that Obama's plan cuts taxes for 95% of working Americans. Further, it closes huge tax loopholes for oil companies, hedge funds and corporations that ship jobs overseas so that we can invest in the priorities that will get our economy back on track.2
Why should Hedge fund managers who help create the current economic mess only pay at 15% capital gain tax rates.
Or as multibillionaire Warren Buffet says " His secretary shouldn't pay taxes at a higher rate than he does".
And why did George Bush give the top 39.5% bracket 50% more of a tax cut than the rest of us in reducing this top 39.5 % bracket to 35%, 4.5% decrease while all the rest of us got a 3% decrease i.e. 50% less percentage wise.
And why should the CEO of GM Rick Wagner make $15 million in 2007 ($7500/ hour) losing multibillions of dollars for GM while the CEO of Toyota makes $950,000/yr. and earned billions for his company. The same question for toxic waste Bank CEOs.
We saw a great chart in The Washington Monthly3 that shows just how absurd Republican complaints about Obama's budget are. Check it out and pass it on:
Daniel Mintz, MoveOn.org Political Action
1. "A socialist? Obama calls back to insist no," The International Herald Tribune, March 8, 2009
2. "Tax Cuts," The New York Times, February 26, 2009
3. "Soaking the Rich (Redux)," The Washington Monthly, March 8, 2009
Friday, March 13, 2009
Letter to the House Speaker
Soon you will be turning to the critical issues of reforming health care and our energy infrastructure. Progressive Democrats of America (PDA) has particular ideas about healthcare reform, and we have desired outcomes for an alternative energy economy, but the purpose of this letter is to endorse Congressman Barney Frank's call for a 25% cut in the military budget.
In particular, we would like to cut the military budget and use the monies saved for healthcare reform and alternative energy research.
Half the world's spending on war, and preparations for war, is currently done by the United States. That's too much.
Half of our discretionary budget, as you well know, goes to war and preparations for war. That's too much.
Now is the time to return to the dreams of our Founders, to provide for the general welfare and build a more perfect Union--rather than a future of sprawling overseas bases, thousands of nuclear weapons, and a militarized outer space.
Let's end the occupation of Iraq. Remembering the lessons of LBJ, let's not get more heavily involved in another war in Afghanistan. And now that we have a new Obama Administration grounded in the real world, isn't it time to reprioritize our national budget, and make some serious cuts in our out-of-control military spending?
Let's spend the money on the almost 50 million Americans without any health coverage. Or spend that money on driving down the price of wind energy and solar energy, or building an electricity grid that can deliver clean power to everyone, so that never again are we tempted to go to war for Mid-east oil.
Are the American people better off providing healthcare to all of our citizens, or spending hundreds of billions of dollars over the coming decade building the proposed F-35 Joint Strike Fighter? A fighter, by the way, intended for use against enemy air forces that do not exist.
Are the American people better off catching up on windmill and solar technology, or buying 458 V-22 Osprey helicopters at the current price of $110 million apiece? (Keep in mind that this is a weapons program that even Dick Cheney once wanted to end.)
Are the American people better off weatherizing homes to make them energy efficient training inner-city young people to do the weatherizing jobs, or spending more money on the DDG-1000 Zumwalt Class Destroyer or the SSN-744 Virginia Class Submarine, two expensive weapons systems still searching for a purpose?
We believe most of the rest of the Pentagon's “wish list” is not affordable right now, including ballistic-missile defense, Future Combat Systems, and the proposed 28 new Presidential helicopters.
And if you need any more examples of unnecessary spending, we suggest taking a look at the excellent Unified Security Budget put out by the Foreign Policy in Focus group at the Institute for Policy Studies (IPS). IPS has identified many projects that are no longer needed, or never were needed, which can be cut from the military budget without risking our security.
It's not just the money--it's the fact that spending money on overdue domestic needs greatly increases the number of new jobs created! According to a 2007 study conducted by economists at the University of Massachusetts-Amherst, we create 8,500 jobs for every $1 billion in military spending, which is less than half to two-thirds the number of jobs created by investing in critical domestic infrastructure. For example, $1 billion invested in mass transit creates 19,800 jobs (more than twice as many); $1 billion invested in education leads to 17,700 jobs (twice as many); $1 billion invested in health care creates 12,900 jobs; or invested in construction projects like home weatherization creates 12,800 jobs (1.5 times as many).
History demonstrates clearly that nations can overreach militarily, and when they do their economies pay a heavy price. After eight years of throwing money at the military, and essentially doubling our military spending (both overt and covert) the United States of America has reached a point of no return-either we cut the military budget, or it will drag our economy down.
The alternative is to make cuts in the military budget, stopping or preventing expensive weapons programs, which do not work or have no strategic rationale since the Soviet Union collapsed, or will make us less safe rather than more, and then to put those dollars to work in providing healthcare, weatherizing homes, building mass transit, or erecting windmills, all of which create more new jobs per dollar spent.
We know you have many tough choices to make, given the economic weaknesses with which the Bush/Cheney Administration and Wall Street have burdened America. We believe that this economic crisis provides us with the opportunity to change our priorities, to make history.
Your leadership can change the direction of our nation. The time to redirect our budgetary spending from warfare to healthcare, from weaponry to windmills, is during this crisis. As the famous saying goes, If not now, when?
And if you are bold, we'll gladly do what we can to help build a better future.
Thank you for your attention to this matter,
Progressive Democrats of America
Wednesday, March 11, 2009
A Rant at the GOP
I used to be one of you. As recently as 2000 I worked to get Senator McCain elected in that year's primary. (McCain and Gen. Tommy Franks wrote glowing endorsements regarding my book about military service, AWOL.). I have a file of handwritten thank you notes from Presidents Ford, Reagan, Bush I and II. In the 1970s and early 80s I hung out with Jack Kemp and bought into his "supply side" myth and even wrote a book he endorsed pushing his ideas.) There's more, but take it from me; my parents (evangelical leaders Francis and Edith Schaeffer) and I were about as tight with -- and useful to -- the Republican Party as anyone. We played a big part creating the Religious Right.
In the mid 1980s I left the Religious Right, after I realized just how very anti-American they are, (the theme I explore in my book Crazy For God). They wanted America to fail in order to prove they were right about America's "moral decline." Soon after McCain lost in 2000 I re-registered as an independent in disgust with W. Bush. But I still respected many Republicans.. Not today.
How can anyone who loves our country support the Republicans now? Barry Goldwater, William F. Buckley and Ronald Reagan defined the modern conservatism that used to be what the Republican Party I belonged to was about. Today no actual conservative can be a Republican. Reagan would despise today's wholly negative Republican Party. And can you picture the gentlemanly and always polite Ronald Reagan, endorsing a radio hate-jock slob who crudely mocked a man with Parkinson's and who now says he wants an American president to fail?!
With people like Limbaugh as the loudmouth image of the Republican Party -- you need no enemies. But something far more serious has happened than an image problem: the Republican Party has become the party of obstruction at just the time when all Americans should be pulling together for the good of our country. Instead, Republicans are today's fifth column sabotaging American renewal.
President Obama has been in office barely 45 days and the Republican Party has the nerve to blame him for the economic and military cataclysm he inherited. I say economic and military cataclysm because without the needless war in Iraq you all backed we would not be in the economic mess we're in today. If that money had been spent here at home on renovating our infrastructure, taking us toward a green economy, putting our health-care system in order we'd be a very different situation.
As the father of a Marine who served in George W. Bush's misbegotten wars let me say this: if President Obama's strategy to repair our economy, infrastructure and healthcare fails that will put our troops at far greater risk because the world will become a far more dangerous place. So for all you flag-waving Republicans who are trying to undermine the President at home -- if you succeed more of our troops will be killed abroad.
When your new leader Rush Limbaugh calls for President Obama to fail he's calling for more flag-draped coffins. Limbaugh is the new "Hanoi Jane."
For the party that created our crisis's of misbegotten war, mismanaged economy, the lack of regulation of our banking industry, handing our country to rich crooks... to obstruct the one person who is trying to repair the damage is obscene.
Just imagine where America would be today if the 14 to 20 million voters -- "the rube base" who slavishly follow the likes of Limbaugh -- had not voted as a block year after year thus empowering the Republican fiasco. We would have a regulated banking industry and would have avoided our current financial crisis; some 4000 of our killed military men and women would be alive; over to 35,000 wounded Americans would be whole; we would have been leaders in the environmental movement; we would be in the middle of a green technology boom fueling a huge expansion of our economy and stopping our dependence on foreign oil, and our health-care system would be reformed.
After Obama was elected, you Republican leaders had a unique last chance to send a patriotic message of unity to the world -- and to all Americans. You could have backed our president's economic recovery plan. Since we all know that half of our problem is one of lost confidence and perception, nothing would have done more to calm the markets and project resolve and confidence than if you had been big enough to take Obama's offered hand and had work with him -- even if you disagreed ideologically. You had the chance to put our country first.. You utterly failed to rise to the occasion.
The worsening economic situation is your fault and your fault alone. The Republicans created this mess through 8 years of backing the worst president in our history and now, because you put partisan ideology ahead of the good of our country, you have blown your last chance to redeem yourselves. You deserve the banishment to the political wilderness that awaits all traitors.
Frank Schaeffer is the author of CRAZY FOR GOD-How I Grew Up As One Of The Elect, Helped Found The Religious Right, And Lived To Take All (Or Almost All) Of It Back Now in paperback.
Tuesday, March 10, 2009
White Collar Crime of Mega Buck Proportion
We have the crime of manslaughter when somebody through their negligence but not intent causes the death of a person. An 18 year old is serving 2 yrs. for vehicle man slaughter because he was driving a car while DUI in which one of his passengers died. Shall we conside the equivalent of financial slaughter for these 'smart' CEOs and financial engineers negligence? Would anyone like to add the Bush Administration as unindicted co-conspirators?
Geithner Fiddles, U.S. Banking System Burns
By David M. Smick
Tuesday, March 10, 2009; A13
Today's Washington Post op-ed
Pity Barack Obama's economic advisers. The blogs are now demanding their scalps, and Treasury Secretary Tim Geithner and his colleagues face a nasty dilemma: There are no solutions to the banking crisis without extraordinary political and financial risks. Thus, they have adopted a three-pronged approach, delay, delay, delay, in the hope that somebody comes up with a breakthrough.
Here's the problem: Today's true market value of the U.S. banks' toxic assets (that ugly stuff that needs to be removed from bank balance sheets before the economy can recover) amounts to between 5 and 30 cents on the dollar. To remain solvent, however, the banks say they need a valuation of 50 to 60 cents on the dollar. Translation: as much as another $2 trillion taxpayer bailout.
That kind of expensive solution could send the president's approval rating into a nose dive. Consider: $2 trillion is about two-thirds of the tax revenue the federal government collects each year.
The logical alternative -- talk show hosts' solution du jour -- is to temporarily restructure or nationalize the banks and leave taxpayers alone. Remove the toxic assets, replace management and cut the too-big-to-fail financial dinosaurs into smaller, nimbler entities. Then reprivatize these smaller banks and let the recovery begin.
Oh, if it were that simple. I suspect Obama's advisers would like nothing more than to dismantle an irresponsible firm such as Citigroup. They are afraid to do so, for one reason: All the big banks are connected to a potentially lethal web of paper insurance instruments called credit default swaps. These paper derivatives have become our financial system's new master.
The theory holds that dismantling a big bank could unravel this paper market, with catastrophic global financial consequences. Or not. Nobody knows, because the market for these unregulated financial derivatives, amounting potentially to over $40 trillion (by comparison, global gross domestic product is now not much more than $60 trillion), is the financial equivalent of uncharted waters.
Geithner has reason to be terrified. He was part of the Henry Paulson-led team that underestimated the devastating global-contagion effect of the collapse of Lehman Brothers. Geithner won't make the mistake of underestimation again.
Geithner also knows that the mood in Congress has changed. Were a global financial brush fire to break out as a result of bank restructuring or nationalization, today's populist Congress might just let it burn. Congressional anger is likely to intensify when policymakers realize that credit default swaps demand a stream of premium payments like a life insurance policy, not just a payment due at termination. And recent signs indicate that firms such as Citigroup, in recycling their taxpayer bailout funding, may have helped other financial firms, including some in Europe, meet these payment obligations.
In addition, Geithner worries that because the troubled insurance giant American International Group (AIG) is a conduit for the banks' use of credit default swaps, a collapse of AIG (as an unintended consequence of dismantling the big banks) could be catastrophic. AIG's more than 300 million terrified holders of insurance-related investments and pension funds, who have investments totaling $20 trillion (U.S. GDP is $14 trillion), could suddenly rush for redemptions -- the equivalent of a run on a bank. Geithner would face a worldwide insurance collapse to accompany his global banking collapse.
Or again, maybe not. Nobody knows.
Here's another likely Geithner fear -- that Congress forces the banks' bondholders to take a hit. Why not? Like 50 cents on the dollar or less. So far, only stockholders have lost out because of the banking crisis. One reason for the fragility in the credit default swap market of late is that markets fear that bank bondholders, who today are protected even before U.S. taxpayers, could soon see their status change. The worry is that if even bondholders are put at risk, U.S. and foreign investors alike would stop financing all corporate America. The administration says that won't happen, but market participants believe (probably correctly) that this White House can't control Congress.
So our Treasury secretary has no choice but to talk of bank stress-testing and other tactics to buy time before the big bank bailout. Notice that the president's budget already contains a contingency fund of up to $750 billion for a future bank bailout -- a politically shrewd number that roughly matches the size of the Paulson bailout. The true cost is likely to be two or three times as much, unless some last-minute intellectual breakthrough -- a tax holiday for derivatives? -- arises.
The Obama team needs to remember that we got into this mess because of a lack of financial transparency. It's time to tell the American people what the stock market already knows: that the path to recovery will probably be expensive and politically unpopular, perhaps explosively so. This dire situation could take us all down, which is why Obama should name a proven, world-class problem-solver who is not from Wall Street as his bank workout czar. James Baker, the former Republican secretary of state and Treasury secretary, comes to mind. Other possibilities: former Democratic senators Bill Bradley or George Mitchell. Perhaps the White House should name a team.
In the end, at least one thing is certain: Our present position is unsustainable. The longer we delay fixing the banks, the faster the economy deleverages, the more credit dries up, the further the stock market falls, the higher the ultimate bank bailout price tag for the American taxpayer, and the more we risk falling into a financial black hole from which escape could take decades.
David M. Smick is a global financial strategist and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy."
Monday, March 09, 2009
Geithner has to go
Administration officials say they are postponing their plan to produce a detailed road map for overhauling the nation’s financial regulatory system by April, in time for the Group of 20 meeting in London. Though officials say they will still develop basic principles in time for the meeting, the plan will not include much detail.
Treasury officials are also still scrambling to decide details of their plan to buy up as much as $1 trillion in toxic assets from the nation’s banks, one month after being widely criticized for presenting a plan that lacked any specifics on how it would work.
Analysts say it is far too early to know if Mr. Geithner and his team will be effective. But some worry that political and financial constraints have made them reluctant to grapple with the full magnitude of the crisis.
Many financial experts estimate that the nation’s banks are holding as much as $2 trillion in troubled assets, most of it tied to mortgages. By contrast, the Treasury has less than $300 billion left in the financial rescue plan that Congress reluctantly approved last year.
To avoid asking Congress for more money, Mr. Geithner has been trying to stretch government money by working with private investors, the Federal Reserve and government-controlled companies like Fannie Mae and Freddie Mac, the mortgage giants. But that has introduced other tough policy issues, many of which remain unresolved.
Sunday, March 08, 2009
Sign of the times
I'd rather buy a Detroit house for $1.00 than a share of Citibank for $0.50.
And then there's General Electric ...
If you haven't got it yet, you'd better sit back and fasten your seat belt. We're going down the tubes while Geithner sucks his eggs. And, we're not coming back within any of our lifetimes. This is as permanent as it gets. Get used to it. We will soon be living in caves again -- better find one fast, they're going quickly!
Thursday, March 05, 2009
Jon Stewart eviscerates the CNBC business "experts"
Tuesday, March 03, 2009
Republicans just can't help themselves, can they?
OK, here are the facts. Between January 1929 and January 1933, the Hoover years, gross domestic product in constant dollars dropped 27%. Between January 1933 and January 1937, FDR's first administration, GDP rose 43%. Between January 1937 and January 1941, Roosevelt's second administration with heavy government expenditure getting ready for war, grew another 33% – despite a 3% decline in the first year of his second term generally attributed to Roosevelt mistakenly deciding he needed to put on the breaks after his first term and moderate spending. From 1933 through 1944, with sequential economic stimulus programs from the New Deal and the war build-up, GDP in real dollars grew almost 100% – i.e., doubled.
So which is better, an actual 27% decline in GDP in four years (Republicans), or growth of 43% in the first four years of te New Deal (Democrats)? Quick, quick, we need an answer.
Monday, March 02, 2009
Past is Prologue: Repeating history lessons ignored
The economy bottomed in 1932-3 with no clear GNPr bottom. It bobbled around. Financially, the low was the collapse of the banking system in February 1933. Bank suspensions went to 3471 and Roosevelt’s first action after inauguration on March 4, 1933 was to close all banks – the “bank holiday.” When found to be sounds they were reopened. There were no “bailouts” such as in 2008-09 (and no credit default swaps CDS, collateralized debt obligations CDO, mortgage backed secutities MBS, falsely Aaa rated CDOs, CLOs, the zoo of exotics, and “toxic waste”). The Bank Act of June 1933 (sometimes called Glass-Steagall for its provision which separated commercial banking from investment banking) and the Securities Exchange Acts of 1933-34 (founding the SEC which stopped naked short selling and put in the “uptick” rule and was responsible for accurate financial reporting – issues that now exist in 2009) put a “straight jacket” on the financial industry. Note: a series of bank acts in 1980, 1982 etc took the jacket off culminating in the 1999 Graham Lench Bliley Act repealing Glass Steagall.
Due to the chaos of the bank collapse 1Q1933 is not used as an analytical starting point for the recovery. And because banking statistics of 2Q1933 are compromised by a Federal Reserve Bulletin footnote that only licensed bank statistics are reported, 3Q1933 is used as the base for the analysis of the depression recovery which from 3Q1933 to 3Q1937 had a real GNP growth rate of 9.47% and brought the unemployment rate down to 14% from 25%.
The first stage in the recovery is the initial brisk recovery featuring a substantial rise in the bank excess reserve ratio (re rising) and public dishoarding (e falling). The second setback stage features the doubling of reserve requirements and the recession of 1937-1938. The third stage from 2Q1938 to 2Q1940 features a resumption of double digit growth despite even higher excess reserves. While banks were hoarding excess reserves until leveling off in 1H1936, the public was dishoarding. So, in a rough sense the two effects cancelled. The lesson here is that the economy can grow even if the banks hoard. The dishoarding by the public cancelled the hoarding of the banks. Given that there is massive bank hoarding in 2008, perhaps it can be cancelled by expanding the Cp portion-currency held by the public of the monetary base to counter the frozen reserves. The increase in excess reserves in 1933, 1934, and 1935 were of major concern to the Fed.. Perceiving the excess reserves as a threat to its control and to unleash inflation the Fed wanted to eliminate this threat by raising reserve requirements which would reclassify excess reserves as required.
A problem was that reserve requirements had been fixed by the 1917 Amendment to the Federal Reserve Act at 7% for country banks , 10% for reserve city banks, and 13% for central reserve city banks (also 3% on time deposits). To get the legal power to change reserve requirements the Fed needed a new law. Accordingly the Fed lobbied for the power to change reserve requirements to regain monetary control and got the power to double the 7, 10, 13 limits to 14, 20, 26% in the Banking Act of August 23, 1935.
Why the banks increased their excess reserve is because banks had been made wary by bank runs, the Fed’s failure to do its job as lender of last resort, and unsure about the then temporary FDIC (made permanent in the Bank Act of Aug 23,1935), banks found a way to self insure against potential trouble spaces - accumulate excess reserves. Other potential reasons are low interest rates, low loan demand, low deposit growth, inadequate capital (a 2008-09 problem), and increased fear of default (also a 2008-09 problem). Fearing loss of control of money and credit the Fed pulled on the string. In July 1936 the Fed raised rr by 50% and to the 100% increase limit in two more stages in 1Q and 2Q1937. In our next installment, we'll demonstrate what a disaster that was.