Sunday, April 12, 2009

Obama's Potential Wall Street Downfall

April 12, 2009, 11:00 a.m. (with thanks to Sherman Johnson and Stephen Phillips for the cited articles); April 14, 2009, 8:00 (addition of Noam Chomsky's "Democracy Now!" interview, April 13, and Simon Johnson's BBC interview)

The Pebble in My Shoe
(brought to you by*)

I have a pebble in my shoe.

Talk about "a good walk spoiled" -- the characterization of golf widely attributed to Mark Twain (though scholars are unable to confirm he ever said it).

President Obama and Wall Street
"It is the extent to which he has selected, put in place, and supported the decisions of, an economic team that even the most casual observer would have to conclude is far more interested in bailing out their super-wealthy buddies on Wall Street than the suffering millions on Main Street."
It's the uncomfortable feeling I have in my otherwise joyous springtime walk with our President, Barack Obama.

On the one hand, I'm still thrilled by the man -- and his wife. He's "brilliant" -- in both the academic and the Irish sense of the word. His ability to win back from the world the respect for America that we once enjoyed. His willingness and ability to reach out to everyone from Congressional Republicans to Iran -- whether or not his gestures are returned in kind. His very full schedule of events and public appearances -- many of which have to have been first-time experiences for him -- and virtually all of which have been error-free hits. His mastery of the English language and skill in stringing it into complete sentences. His judgment. His continuing ability to inspire us, notwithstanding a global economic collapse and two self-defeating wars. His "cool."

He's caused me to reflect back on my own first presidential appointment as Maritime Administrator when I was 29, after my first experience at being called to the Oval Office by the President of the United States. Immediately on my desk was the need to design and launch a world tour for the world's first nuclear-powered merchant ship -- ultimately providing my first encounter with royalty: the kings of Norway, Denmark and Sweden. The first international conference I ever attended (a secret NATO group) required my chairing the sessions. My only prior contact with higher education was limited to my own degrees and experience as a young law professor at UC Berkeley; now I found myself responsible for a four-year college, the Kings Point Maritime Academy. My first congressional testimony was only weeks before, at my own Senate confirmation hearings. The list of firsts continued on for many weeks.

All of that was as nothing compared to Obama's first three months, but it does give me some capacity for empathy -- and awe.

He has so much ability, so much potential. If only we had a Senate and House made up of men and women worthy of his leadership. If only our corporate and other institutional leaders were willing to put the country's best interests ahead of their own personal financial enrichment.

But along with all that admiration and awe is that irritating little pebble in my shoe.

It is the extent to which he has selected, put in place, and supported the decisions of, an economic team that even the most casual observer would have to conclude is far more interested in bailing out their super-wealthy buddies on Wall Street than the suffering millions on Main Street -- with a price tag, not incidentally, in the trillions of taxpayer dollars put on my great granddaughter's credit card.

I've written about this at length, as the list of links to prior blog entries at the bottom of today's entry bears witness.

But it's clearly not just me. There is a rising tide of cynicism throughout our country on this score, from all positions on the political spectrum, that causes me concern that it could end up drowning all that wonderful potential with which Obama arrived at the White House in January.

Nobel Prize-winning Economist Paul Krugman

Nobel Prize winning economist and New York Times columnist Paul Krugman is among those who think the Administration has been taking us down the wrong economic road -- to the profit of those who caused the problems, and the loss of America's taxpayers. As he puts it, in excerpts from the first of the three examples I quote below,
"the financial industry still has a lot of friends in high places."
Indeed, it does.
[M]y sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.
Paul Krugman, "Making Banking Boring," New York Times, April 10, 2009.

Noam Chomsky

If you haven't heard of retired MIT professor Noam Chomsky it's probably because you've been listening and watching America's mainstream media.

The New York Times has said of Chomsky, "Judged in terms of the power, range, novelty and influence of his thought, Noam Chomsky is arguably the most important intellectual alive today." Wikipedia reports, "Chomsky was voted the leading living public intellectual in The 2005 Global Intellectuals Poll conducted by the British magazine Prospect. He reacted, saying 'I don't pay a lot of attention to polls.' In a list compiled by the magazine New Statesman in 2006, he was voted seventh in the list of 'Heroes of our time.'" "Noam Chomsky," Wikipedia.

In Amy Goodman's "Democracy Now!" interview April 13, 2009, she described him as "one of the most important dissident intellectuals of our time . . . a world-renowned linguist, philosopher, social critic, and Institute Professor Emeritus at the Massachusetts Institute of Technology. Among his many books over the past few decades are Hegemony or Survival: America’s Quest for Global Dominance, Manufacturing Consent: The Political Economy of the Mass Media, Profit over People: Neoliberalism and Global Order, and Human Rights and American Foreign Policy. There’s a great collection of his work, just out now, edited by Anthony Arnove, called The Essential Chomsky." "Noam Chomsky on the Global Economic Crisis, Healthcare, US Foreign Policy and Resistance to American Empire," Democracy Now!, April 13, 2009.

Odd, wouldn't you say, that such an individual is not at least consulted by Washington's most powerful, not at least given a seat at the table, not testifying before Congress, that he is not a regular participant in the Sunday morning talk shows?

The link immediately above will take you to a video of Goodman's interview with Noam Chomsky. After watching it you'll have some understanding of why we have to rely on Amy Goodman to bring us those who have an alternative view of our life, politics and economy. Chomsky demonstrates his usual calm, understated, straight-forward explanation of what's going on, pulling together into a single, understandable world view, supported with both historical and current references, explaining why you and I are right to be angry and cynical, and why Obama's so far at odds with reasonable, centrist populism.

If you'd prefer to read a transcript it's also provided there.

Here's an excerpt:
Actually, the business press just had some interesting things to say about this. Bloomberg News, you know, main business press, had an article in which they reviewed the records of the people who Obama invited to his economic summit. I think it must have been last November or December. They just reviewed the record. I think there were a couple dozen of them. People on the—you know, people like, say, Stiglitz, Krugman, they were never even allowed close to it, let alone anyone from the left or labor and so on, given token representation. So they went through the records, and they concluded that these people should not be invited to fix up the economy. Most of them should be getting subpoenas because of their record of accounting fraud, malpractice and so on, and helping bring about the current crisis.
You may disagree with Chomsky's take on things. Many do. But you owe it to yourself to at least listen to what he's saying -- especially his dramatically different alternative scenarios for America's future if our financial oligarchy is successful in continuing in power (an understanding consistent with that of Simon Johnson, below). And if you still disagree with him you need to ask those two basic questions: "What do you mean? And, How do you know?" What are the historical and current references that support your view over his?

Former IMF Economist Simon Johnson
"The finance industry has effectively captured our government . . .. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform."
The May 2009 edition of The Atlantic contains a particularly insightful article by a former chief economist for the International Monetary Fund who sees similarities between causes of third world countries' economic collapse and that of the United States: Simon Johnson, "The Quiet Coup."

Substantial excerpts from that article (though a small portion of its total content) are set forth below. You can also listen to Simon Johnson's 6-minute BBC interview.

Here is The Atlantic editors' summary of the piece:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Simon Johnson, "The Quiet Coup," The Atlantic, May 2009. Needless to say, the entire article is well worth a read. The parallels to our economy are scary. Meanwhile, here are some excerpts:
Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense . . .. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

Squeezing the oligarchs . . . is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. . . .

[V]arious policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. . . .

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. . . .

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
. . . [T]he principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. . . .

[I]t was never clear (and still isn’t) what combination of interests was being served, and how. . . . This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. . . . Many observers suspected that the purpose [of the original Paulson plan] was to overpay for those [toxic] assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. . . . [T]he convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official . . . (and a Goldman alum) told Congress . . . [the price] makes sense for the investors and . . . for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. . . .

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary. . . .

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. . . .

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank . . .. Under these conditions, cleaning up bank balance sheets is impossible. . . .

[A] government-managed bankruptcy procedure . . . would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse. . . .

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. . . .

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. . . .

Anything that is too big to fail is too big to exist. . . .

The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting. . . .

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Attorney Sean Olender
"To 'fix' all these problems . . . the Obama administration [has] chosen people (or their accomplices) who stole from the public.
Finally, here are excerpts from an article by Sean Olender, a San Jose writer and attorney, from the San Francisco Chronicle:
President Obama must stop the bailouts and start the prosecutions. It's time to focus on anti-poverty programs to protect the growing unemployed from hunger and homelessness. Stealth payments to billionaire bondholders must cease immediately. . . .

Debt became America's growth industry.

The scheme collapsed because Americans' wages weren't sufficient to pay the interest on existing debts. The only way out of this is to tighten our belts and pay down debt, the opposite of what our bank-owned government is advising.

The administration and the banks keep talking about a credit crisis, but there isn't one. . . . If you want a mortgage and can afford to pay it back, you can borrow at low rates today. . . . But most Americans don't want more debt because it is a debilitating path to poverty. The average American family already pays 14 percent of annual income in interest to banks. . . .

The endlessly recycled plan to buy "troubled" assets . . . seeks for taxpayers to buy worthless assets at high prices to absorb rich investors' losses. That's it. . . . There is no goal beyond that . . . : keep rich people from taking losses. . . .

Imagine the president saying, "Debt is the lifeblood of our economy. We desperately need to get more American families deeper in debt." That's what he means, and that's what these bailouts hope to do. . . .

Imagine you bet $500,000 on a stock and it dropped to $20,000. If you owned Treasury Secretary Tim Geithner, he'd get on TV and explain that if the government didn't buy your shares for $500,000, the economy would suffer because you couldn't invest anymore. He'd say the "free market" isn't pricing the stock "right," and we have to "help" the market with taxpayer money to make sure you get the "right" price. . . .

Worsening economic figures are being used to confirm that more bailouts are needed rather than that previous ones might be failing. The logic is much like medieval blood letting: The patient died because we didn't drain enough of his blood.

The promise of more bailouts also keeps everyone from doing what's necessary. Millions of houses sit empty, open to vandalism and destruction, while millions of Americans live in cars or on the street. Our tax money is given to banks and speculators to hold houses empty. . . .

[T]he bailout did nothing to stop foreclosures from going through the roof. . . .

To "fix" all these problems . . . the Obama administration [has] chosen people (or their accomplices) who stole from the public. That's why no one has been prosecuted. Would former Treasury Secretary and Goldman Sachs chief Henry Paulson have pressured for an investigation of Goldman Sachs? Right.

As president of the Federal Reserve Bank of New York, current Treasury Secretary Geithner had a front-row seat during the run-up to the crisis and watched for years while pushing a "no regulation" policy. Why? At that time his friends were winning their bets and making a lot of money.

Why didn't Bush or Obama pick Brooksley Born (the Commodity Futures Trading Commission chair who tried to regulate credit default swaps) or Harry Markopolos (the whistle-blower in the Madoff scandal) to serve as treasury secretary or chairman of the SEC? Because Born and Markopolos are technically competent and possess integrity. Banks would tolerate neither quality in an administration official. . . .

The solution is law enforcement, not handouts. On Jan. 31, 2009, Santa Barbara police held a 53-year-old homeless man on $20,000 bail for shoplifting $7.69 worth of soup and bread. Yet Bush did not move to prosecute a single executive at any of these banks, and Obama likewise doesn't want to be "vengeful" by investigating the crimes of investment bankers.

If the government feels lenient, can't it let alone families camping in a vacant lot in Sacramento, or homeless people stealing bread? . . .

Here are some resources:

-- "Facts and Myths about the Financial Crisis of 2008" by Patrick Kehoe and V.V. Chari. Published by the Federal Reserve Bank of Minneapolis,

-- Lists of the banks, and how much bailout funds each has received under the Troubled Assets Relief Program (TARP).

-- Insightful economic analysis by Mish Shedlock at his blog, "Mish's Global Economic Trend Analysis. [And see his "Bernanke's Scorecard Revisited," April 11, 2009.]

Sean Olender, "'Bailout psychology' destroying the economy," San Francisco Chronicle, April 5, 2009, mp. H-2.

Pete Seeger

And lest you think this is some kind of a new phenomenon, listen to Pete Seeger's "Banks of Marble" musical explanation of the last time we were robbed big time:

And remember Paul Krugman's warning, quoted above, that if we don't get out from under Wall Street's influence we're going to be back in the dumpster again: "Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come."

Nicholas Johnson

Finally, I'll conclude with links to a number of the blog entries I've written over the past eight months -- most of which include today's theme.

Related Blog Entries on Global Economy and Bailouts

Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers,"
February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009

Nicholas Johnson, "Don't Buy Stuff," March 6, 2009

Nicholas Johnson, "The Story of Stuff," March 16, 2009

Nicholas Johnson, "What a Mess," March 19, 20, 2009

Nicholas Johnson, "Punishment to Fit Financial Crimes," March 23, 2009

Nicholas Johnson, "Don't Trust the 'Experts,'" April 9, 2009

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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