October 23, 2009, 7:40 a.m.
Today's blog entry is another in a series devoted to Iowa's budget crisis and its impact on the University of Iowa. Prior entries included:
"How Many Administrators Does It Take? Administrators are Multiplying & Sucking Us Dry," July 16, 2009
"A University's Strategic Communication; A Modest Proposal to the Regents' University Presidents," October 7, 2009
"Iowa's Budget Cuts and the University; Economic Collapse Tests Moral Values," October 9, 2009.
"How to Cut Iowa's Budget; Fairness, Justice and Leadership by Example," October 15, 2009.
"UI Budget: Waivers Wave Goodbye to Savings; Consistency, Hobgoblins and Waivers," October 19, 2009
Barofsky: "Anger, cynicism and distrust [an] unnecessary cost of TARP"
(brought to you by FromDC2Iowa.blogspot.com*)
Iowa Governor Culver's axe has begun to fall. Jennifer Jacobs, "1,300 state jobs at risk in proposed cuts," Des Moines Register, October 22, 2009 ("Iowans could see fewer troopers on highways, less treatment for addictions, fewer prison guards, delays in new dental coverage for children, less child abuse prevention work, longer waits for state tax refunds, less aid for college and dozens of other impacts if the governor approves budget cuts his agency directors presented to him. State corrections and human services workers would see the brunt of the layoffs. Those departments account for nearly 600 of about 793 layoffs proposed statewide.").
Next Wednesday the Board of Regents will announce with a little more specificity how the three Regents' universities should respond to the Governor's order that they, too, are expected to further cut their state appropriations by another 10%. See Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.
What an awful, and thankless, responsibility. History records no occasion when a budget cutter's decision was greeted with a standing ovation. Usually the recipients' reactions are just the opposite. No applause; little understanding; just "anger, cynicism and distrust."
These are the public reactions the Department of the Treasury's Special Inspector General, Neil Barofsky, says the Treasury's handling of the TARP program have produced: "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP."
But note that while Barofsky acknowledges the public's "anger, cynicism and distrust," he says that reaction was not a necessary cost, and that it could have been avoided if the government officials involved had behaved differently.
It's a model Iowa's budget cutters would do well to study -- in order to avoid that reaction here, on the part of Iowans generally, and those associated with its universities in particular.
But first an update on another scandal and advice to Iowans on how not to do government programs, whether of largess or of budget cutting.
Wednesday I wrote about another example of Congress handing over taxpayers' money to generous campaign contributors from another sector of our economy -- the developers, contractors, home builders, real estate brokers and mortgage bankers. In addition to the trillions of dollars they already get, they are now pushing to expand and extend their version of "cash for clunkers" (without the need to come up with the clunkers): an $8000 grateful taxpayers contribution for each house sold (which they wish to expand from first time home buyers to all buyers, and from $8000 to $15,000). (Needless to say, there's no provision in this program to help those who are providing the houses through bankruptcy, foreclosure, and their willingness to live on the street.) "Housing for the Wealthy, Unemployment for the Poor," October 21, 2009.
Yesterday we learn of yet one more reason to oppose this program (a program that most economists agree is loony from their perspective as well). It turns out it's been riddled with fraud. Jackie Calmes, "Fraud Reported in Program to Help New Homebuyers," New York Times, October 22, 2009 ("Just as Congressional leaders are calling to extend a popular tax credit for first-time homebuyers, government investigators are reporting new findings that point to widespread fraud in the program. A previously undisclosed report from the Treasury Department’s inspector general said that as of Sept. 30, the Internal Revenue Service had identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations. In late July, the I.R.S. announced its first successful prosecution.").
That same Wednesday (October 21) PBS' "Frontline" revealed what those now advising the President were doing to beat back the calls for regulation during the 1990s, efforts that played a major role in creating our current economic crisis -- in the midst of which their Wall Street friends and former colleagues at Goldman Sachs are continuing to earn billions in bonuses.
"The Warning," PBS Frontline, October 21, 2009 ("'We didn't truly know the dangers of the market, because it was a dark market,' says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. 'They were totally opposed to it,' Born says. 'That puzzled me. What was it that was in this market that had to be hidden?' . . . Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. 'Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,' ["Frontline" producer Michael] Kirk says. 'Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.' Now, with many of the same men who shut down Born in key positions in the Obama administration, 'The Warning' reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one. 'It'll happen again if we don't take the appropriate steps,' Born warns. 'There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.'" From the "Introduction."). If you missed it, you can watch streaming video of the program from the "Frontline" site.
On October 5 the New York Times reported:
The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks. . . . A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.
The report also provides new insight into the way the Treasury allocated billions of dollars to nine of Wall Street’s largest players.
Louise Story, "Report on Bailouts Says Treasury Misled Public," New York Times, October 5, 2009, p. B2.
[Photo Credit: Larry Downing/Reuters; Time; "TARP recipients testify before the House Financial Services Committee on Feb. 11. From left: Goldman Sachs' Lloyd Blankfein, JPMorgan Chase's Jamie Dimon, Bank of New York's Robert Kelly, Bank of America's Ken Lewis and State Street's Ronald Logue."]
Jim Kuhnhenn, "Watchdog: Bailout Helped, but At a Cost," Associated Press/Time, October 21, 2009 ("[Treasury Special Inspector General Neil] Barofsky said [in his latest quarterly TARP report that] the Troubled Asset Relief Program has come at great cost to taxpayers, to the integrity of the financial system and to the public's perception of the federal government. 'Despite the aspects of TARP that could reasonably be viewed as a substantial success,' he wrote, "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP.' . . . The integrity of the industry: Many firms considered "too big to fail" last year, and thus in need of government assistance, are even bigger now. 'Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,' the report states."). (Time has also kindly provided us with "25 People to Blame for the Financial Crisis," Time.)
So now we have "Frontline" passing along former CFTC chief Brooksley Born's warning that "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience," and Neil Barofsky warning that "Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior."
And how is the Obama Administration and Congress -- Democrats and Republicans alike -- responding to this urgent need that their most generous campaign contributors be more effectively regulated in the public interest? With a wink and a nod and an outstretched hand.
As the Wall Street Journal reports,
Some of the biggest Wall Street firms are back in the political-spending game after hunkering down while they were getting government bailout funds. Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley and other large financial-services firms stepped up their political donations in September to members of Congress . . ..Most Wall Street firms stopped making donations to lawmakers when they were receiving government funds, and many lawmakers stopped accepting them. But now . . . they are making campaign donations again. At the same time, they are increasing their spending on lobbying . . ..
For the details on who has given how much see Brody Mullins and T.W. Farnam, "Wall Street Steps Up Political Donations, Lobbying; Firms Boost Outlays Amid Debate on Financial-Services Overhaul, After Slowing Spending While Getting Bailout Cash," Wall Street Journal, October 23, 2009.
Sadly, this includes as well the President of the United States, Barack Obama, who even personally went to New York earlier this week for another $30,400-a-plate fund raiser. David D. Kirkpatrick, "Wall St. Giants Reluctant to Donate to Democrats," New York Times, October 20, 2009, p. A1.
Ironically, the "reluctance" to which that headline refers is the Wall Street executives "fear of getting caught in the public rage over the perception that Wall Street titans profiting from their government bailout may use their winnings to give back to Washington in return. And the timing of the event, as the industry lobbies against proposals for tighter regulations to address the underlying causes of last year’s meltdown on Wall Street, has only added to the worry over public appearances."
This is not the most laudatory basis for reluctance, perhaps, but at least it's better than that of a President who seems to be either unaware of or unconcerned about "the public rage over the perception" -- what Barofsky identifies as the unnecessary public "anger, cynicism and mistrust" fomented by such fund raisers.
This is probably enough reference to stories for a blog entry. But here are a few more for those interested in pursuing this, The Crime of Two Centuries, before turning to the lessons for Iowa's budget cutters.
U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program. . . . including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today. . . .
Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs. . . .
Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”
As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report. . . .
The Treasury has spent $441 billion of TARP funds so far and has allocated $202.1 billion more for other spending, according to Barofsky. In the nine months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, he said. . . .
Barofsky said the TARP inspector general’s office has 35 ongoing criminal and civil investigations that include suspected accounting, securities and mortgage fraud; insider trading; and tax investigations related to the abuse of TARP programs.
Dawn Kopecki and Catherine Dodge, "U.S. Rescue May Reach $23.7 Trillion, Barofsky Says," Bloomberg, July 20, 2009.
"Watchdog: Treasury and Fed Failed in AIG Oversight," Associated Press/New York Times, October 14, 2009 ("Treasury Secretary Timothy Geithner is 'ultimately responsible' for regulators' failure to rein in massive bonus payments at American International Group because he led the agencies that provided AIG's lifelines, according to a bailout watchdog. Geithner was president of the Federal Reserve Bank of New York before taking over at Treasury in January. He has said he did not learn until March about the $1.75 billion in bonuses and other compensation promised to AIG employees. But Geithner's subordinates at the New York Fed learned of the payments in November, according to Neil Barofsky, the special inspector general for the $700 billion financial bailout.").
Pallavi Gogoi, "TARP report slams lack of transparency," USA Today, October 20, 2009 ("In a scathing report out Wednesday, a government watchdog blasts the Treasury Department for its handling of a $700 billion bailout program and for not adopting all of its earlier recommendations [and] Treasury's failure to provide more details about the use of TARP funds . . ..").
"Bailout watchdog Barofsky: Too early to say how much of $700B will be refunded to taxpayers," Associated Press/Baltimore Sun, October 21, 2009.
"U.S. 'unlikely' to recoup aid to banks; TARP watchdog's report is also critical of secrecy," Bloomberg/Washington Post, October 22, 2009.
William A. Barnett, "Who’s Looking at the Fed’s Books?" New York Times, October 21, 2009 October 22, 2009, p. A35.
And the meat-less, dry bone thrown the public's way turns out to be little more than public relations window dressing in front of what looks very much like same-old, same-old in the back rooms. Joe Nocera, "Pay Cuts, but Little Headway in What Matters Most," New York Times, October 23, 2009, p. B1. (They don't affect many people; for those they do affect, it only impacts their salaries for November and December of this year, then they can be renegotiated; stock options are exempted, so there's no limit to that continuing source of income, so long as they hold them for two to five years -- which they'd do anyway to ride up the price; and they can make more if things improve for their company, regardless of what they personally had to do with that. As the headline puts it, there's "little headway in what matters most."). See also, Editorial, "Symbolic Cuts Need to Set Tone for Real Cuts," Iowa City Press-Citizen, October 23, 2009 (regarding Governor Chet Culver's self-imposed salary cut).
As for Iowa's budget cutting, it's important for us to keep it in context. Take a look at this report prepared by one of the other Nicholas Johnsons (in addition to this one a couple of the others are the law professor at Fordham, and the literal rocket scientist). Nicholas Johnson, Phil Oliff, and Jeremy Koulish, "An Update on State Budget Cuts; At Least 41 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm," October 20, 2009 (with a link to the full report in pdf).
One of the consequences of the Washington-Wall Street Axis, described above, is that it really is tough all over. Those SOBs have harmed every single American -- except for themselves, their friends and colleagues, and others in the top 1% of the wealthiest. Iowa is even in some ways, such as unemployment, better off than many.
In terms of the universities all Iowans, not just the Board of Regents, Iowa Legislature, and the universities' presidents, need to do some serious and heavy thinking about the role of "public education."
I've written about this before, and undoubtedly will again. Here's a summary:
o A century ago or more the American people and their elected officials decided that a fourth- or eighth-grade education was not enough for our kids. If nothing else, our economy and our military required a minimum of 12 years of schooling (what is popularly referred to as "K-12"). We agreed this was so important that it would be provided free to all at taxpayers' expense, because we all benefitted.
o It is not a stretch to say that if K-12 was essential a century ago, K-16 (that is, a college education; or its equivalent for those in the trades, something similar to the German system) is equally essential for today's economy and military -- not to mention the "life, liberty and pursuit of happiness" of our citizenry and their self-governing democracy. This is also sufficiently important that it should be paid for by all.
o The GI Bill after World War II brought returning veterans to the University of Iowa and other colleges and universities throughout America, at little or no cost to the students, but with an economic return many times over for our post-War economy and the American people.
o An economic downturn is precisely the time when it makes sense to increase the number of citizens getting additional education. (a) Rockwell and other corporations are pleading with educators to help create a better educated workforce. What better time to do it than when there are fewer jobs available? (b) Isn't laying out money for public education better than laying out the same amount of money for unemployment compensation? (c) If we're looking for long term economic growth, and not just short term fixes, there's no better investment than education.
o As recently as 1981 the State of Iowa paid 77.4% of the cost of an Iowan's university education; the student, and his or her parents, paid 20.8%. Today that has dropped for the State from 77.4% to 42.8%, and increased for the student from 20.8% to 51.3%. (See the Register story and chart, below.)
o One can argue over the most appropriate allocation of the costs of education between those who benefit directly (the students, and to some extent their parents) and indirectly (every American taxpayer). But whatever that most appropriate relationship is thought to be, what is the rationale for the enormous disparity between the relationship for K-12 (0% for students; 100% for taxpayers) and the 13-16 of K-16 (51.3% for students; 42.8% for taxpayers)? Would we ever consider, as a budget cutting measure, going back to the days of K-8 -- providing free public education through junior high, and then charging parents 51.3% of the actual cost of providing high school education? Think about it.
For the Register's chart, and story, see Gunnar Olson and B.A. Morelli, "Tuition now top funding source for regents universities," Des Moines Register, October 23, 2009 (including a chart showing the relative percentage of costs covered by tuition vs. appropriations increasing from 20.8% vs. 77.4% in 1981 to 51.3% vs. 42.8% in 2010). And see the news this morning that Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.
I sympathize with you, Iowa's budget cutters. Yours is not an enviable task. But you can learn from the errors of Washington, and try to avoid them.
Be fair and just in your judgments. Be rational, and fulsome in your explanations. Be transparent and open in your process.
And keep in mind Barofsky's observation that the public's "anger, cynicism and distrust" -- while warranted and understandable -- is a dangerous thing, with long lasting consequences, and that it is, above all "unnecessary."
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* 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
# # #
March 23, 2009, 8:20 a.m.
Punishing Thieves in Suits:
Piano Wire or Stocks?
(brought to you by FromDC2Iowa.blogspot.com*)
As I've repeatedly conceded, I don't claim expertise as an economist. On the other hand, I've also urged that our instincts and intuition are entitled to more weight than we're modestly inclined to accord them. Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008.
Clearly, Tim Geithner, Ben Bernanke and Larry Summers do know something about economics.
Equally clearly the New York Times staff of editorial writers and columnists are not necessarily among the nation's top economists -- although one did win the Nobel Prize in economics, which is not something those three can claim .
Nonetheless, it was reassuring in terms of my "trust your instincts" theory that so much of what appeared in the Times over the weekend echoed analyses and concerns I've expressed over the last six months in the blog entries linked below.
For example, while I'd prefer to let the market sort this out, rather than simply throw taxpayers' dollars at bankers, if we are going to bail out those who have brought us this disaster I'd rather it be used to purchase the banks ("nationalization") rather than their so-called "toxic assets."
On Saturday the Times editorialized:
This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization.
Thursday morning [March 19] I wrote:
And if it makes no sense to try to revive the auto economy by giving billions to auto executives [when consumers would rather save their money than buy cars], it makes even less sense to try to revive an entire economy by transferring trillions of taxpayer dollars to bankers. Here again, the problem is not that businesses and consumers don't have the opportunity to run up even more debt. The problem is that they have the wisdom not to want to do so, especially at this time. ["What a Mess," March 19, 2009.]
Saturday's editorial continues:
On Wednesday [March 18], it [the Fed] announced that it would buy hundreds of billions of dollars more [of mortgage-backed securities] and as much as $300 billion of Treasury bonds. . . . Unfortunately, there is no guarantee that this will work. With unemployment rising, debt loads high and household wealth falling, consumers may be reluctant to resume spending anytime soon, no matter how low rates and prices go. And even if consumers and businesses want to borrow, banks — stung by their own losses — may not be willing to lend.
I have repeatedly noted that the multi-trillion-dollar transfer of taxpayers' money to the banking and financial community has emphasized only the benefits of a rational benefit-cost analysis. There are potential downsides of this approach as well -- most notably, inflation -- and that the Administration and Congress have, at a minimum, an obligation to evaluate, and then share with the American people, those costs and risks.
The Times editorial went on:
To buy up securities, the Fed creates money. To provide fiscal stimulus, Congress borrows money. The more money that is created and borrowed, the greater the risk of future inflation and higher interest rates. . . . [A] forthright acknowledgment of the risks is necessary to keep policy makers from venturing too far into dangerous territory.rates.
Editorial, "The Fed Does Battle, Again," New York Times, March 21, 2009.
By this morning [Monday, March 23] at least four, count 'em four, Times columnists, card-carrying members of the "liberal media," were expressing something far shy of enthusiasm for President Obama.
Paul Krugman (that Nobel Prize winner) writes of his "Financial Policy Despair":
If the reports [of the Administration's bank rescue plan] are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.
I have expressed concern about the Administration and Fed secrecy regarding what the banks and AIG have done with the money we gave them. Krugman notes that,
the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.
From the outset I've expressed concern about the President's close ties to the financial community, that community's financial contributions to him and members of Congress, the role of Goldman Sachs and Geithner's selection of the firm's lobbyist, no less, as his chief of staff, and the seeming obliviousness of the lot of them to the public feelings about corporate excesses.
Krugman comments:
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.
In "What A Mess" I wrote:
[E]ven the world's best and most honorable bankers couldn't solve this problem with that much money. Trickle down doesn't work. In addition to common sense, intuition, and long history, we now have the lack of results from the most recent six months of trying.
Paul Krugman shares this conclusion:
But the real problem with this plan is that it won’t work. . . . And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
Paul Krugman, "Financial Policy Despair," New York Times, March 23, 2009.
On Sunday [March 22] Tom Friedman bemoaned the consequences of what he called "politics worse than usual":
There don’t seem to be any adults at the top — nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. . . . Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail — no matter how reckless. From bankers we hear about contracts too sacred to break — no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” . . . [Meanwhile,] our country, alas, is not too big to fail.
Thomas L. Friedman, "Are We Home Alone?" New York Times, March 22, 2009.
Maureen Dowd shares my concern about the consequences of the close ties between the Administration, AIG and Wall Street. She thinks "we need less smooth jazz and more martial brass" and, inspired by Michelle Obama's declaration that the President (and their daughters) are going to be pulling weeds in her new White House garden "whether they like it or not," believes "the wrong Obama is in the Oval."
[T]he fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And that’s because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives’ pay and perks too much, if they make the negotiations with those who siphoned our 401(k)’s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. . . .
The shafters of the universe have been treated with such kid gloves that they remain obnoxiously oblivious. Vikram “Pandit the Bandit” at Citigroup, which received $50 billion in bailout money, is . . . spending $10 million to renovate his Park Avenue offices . . .
Fannie Mae . . . brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco. Freddie Mac . . . has yet to disclose its planned bonuses. . . .
Treasury Secretary Tim Geithner, who grew up as a Republican . . . sees things from the point of view of that wellspring of masters of the universe, Goldman Sachs. (His Treasury chief of staff was a Goldman lobbyist, who fought then-Senator Obama’s attempt to curb executive compensation — just as Geithner has done within the administration.) . . .
Virtually unnoticed amid the bonus imbroglio was A.I.G.’s grudging disclosure that it had funneled $93 billion — more than half its federal money to date — to its high-flying insurees, including Goldman Sachs . . .. Yet as Goldman sneers at the federal money at the front door, it’s taking delivery of billions in no-strings federal money through the back door. . . .
The issue is how much we must pay to preserve financial stability over all, not how much one company promised to pay. At this point, A.I.G. seems to be the only party paying face value on toxic derivatives.
Maureen Dowd, "Toxic R Us," New York Times, March 22, 2009.
Frank Rich used some very tough language to hit on a number of the issues that I have written about, many of which are identified above. He also mentions an issue (the legality of much of what was done) that I've often described in these words: "the problem is not just that corporations violate the law, the much more serious problem is that they are writing the law."
A charming visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger . . . his presidency and, worse, our economy will be paralyzed. . . .
The White House seemed utterly blindsided by the public’s revulsion at the moneyed insiders’ culture illuminated by [former Senator Tom] Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster.
Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy. . . .
[AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.
Summers was even more highhanded in addressing the “retention bonuses” . . ..
[M]ost Americans don’t know how A.I.G. brought the world’s financial system to near-ruin or what credit-default swaps are. They may not even know what A.I.G. stands for. But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle.
They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Street’s bonus babies. . . .
Since Americans get the big picture of this inequitable system, that grotesque reality dwarfs any fine print. That’s why it doesn’t matter that the disputed bonuses at A.I.G. amount to less than one-tenth of one percent of its bailout. . . .
What made Jon Stewart’s takedown of Jim Cramer resonate was less his specific brief against CNBC’s cheerleading for bad stocks than his larger indictment of the gaping economic inequality that defined the bubble . . . [the] “two markets”. . ..
No one is more commanding on this subject than our president. . . . But rhetoric won’t tamp down the anger out there, and neither will calculated displays of presidential “outrage.” . . .
Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable . . . actually answering the questions that officials like Geithner and Summers routinely duck.
Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. . . . [W]hy Goldman, which declared that its potential losses with A.I.G. were “immaterial,” nonetheless got the largest-known A.I.G. handout of taxpayers’ cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the “retention” jackpots. . . . And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?
[I]t's hard to imagine taxpayers shelling out billions for a second bank bailout unless there’s a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee. . . .
[W]hy . . . has there been . . . so much evasiveness so far? The answer, I fear, is that too many of the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it. . . .
The “dirty little secret,” Obama told Leno on Thursday, is that “most of the stuff that got us into trouble was perfectly legal.” An even dirtier secret is that a prime mover in keeping that stuff legal was Summers [of whom his mentor, Robert Rubin] wrote in his 2003 memoir . . . underestimated how the risk of derivatives might multiply “under extraordinary circumstances.”
Given that Summers worked for a secretive hedge fund, D. E. Shaw, . . . you have to wonder how he can now sell the administration’s plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders’ club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G.
Frank Rich, "Has a 'Katrina Moment' Arrived?" New York Times, March 22, 2009.
To remove any possible question I want to repeat that with which I began. I suffer no illusion that anyone -- members of Congress, the Obama Administration, or New York Times' columnists -- are even reading this blog, let alone influenced by it. Nor do I believe that I've come up with insights over the past six months or so that had not occurred to others. Indeed, that's exactly my point.
If I, and thousands of other bloggers, can come up with these insights and analysis drawing on nothing much beyond intuition, why oh why cannot our elected and appointed officials do as well?
So what should we do with these folks who've brought the world to this economic disaster?
At dinner last evening talk turned to appropriate punishments for those who are coming to taxpayers for multi-trillion-dollar bailouts necessitated by a 40% (give or take) decline in home values and stock prices brought on by their own incompetence and greed.
Nicholas Night, who hails from Bisbee, Arizona ("the town too high to care" -- a response to Tombstone's claim to be "the town too tough to die"), made reference to AIG Ed Liddy's concern regarding threats he's received from those who believe piano wire should be put around the necks of the most guilty of AIG executives. Bisbee is something of a music town, and Nick observed that there are now so many electronic keyboards in use that there may well be a shortage of piano wire -- at least in Bisbee.
So what he next proposed is that they be put in stocks. No, not the kind they're already in, the stocks of profiteers; the stocks the Puritans put folks in, with criminals' heads, arms and legs sticking through and locked down. Guards would be provided to protect them, so that nothing more damaging than tomatoes and rotten eggs would be thrown.
After being freed from the stocks they, and indeed all white collar criminals in Nick's proposal, would then be required to pay back in full whatever losses they'd caused or thefts they'd pulled off. They would have to earn that money selling ice cream bars by driving a truck through neighborhoods primarily occupied by persons of a different color from themselves. And these customers could pick a 38-second excerpt from a song that the perps would have to listen to over-and-over, constantly, until the debt was paid.
It's possible you had to be there, but I think Night is on to something. If Obama is going to continue to refuse to prosecute and imprison them the least we can do is identify who they are and do some form or another of public shaming.
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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
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* 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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January 14, 2009, 8:10 a.m.
"Fool Me Twice, Shame on Me"
(Brought to you by FromDC2Iowa.blogspot.com*)
We're going to look back on the current rush to provide the second $350 billion to the banking industry as a tragic, tragic, mistake. Mark my words.
And not just my words, but those of the World Economic Forum -- an organization of some of the, as the name suggests, world's most influential economists and corporate CEOs -- the very folks you'd expect to be enthusiastic about gifts of billions from grateful taxpayers.
Don't get me wrong. I'm not going to delight in saying "I told you so" sometime on down the road. My most fervent wish is that I'll be saying "well, I sure got that one backwards." But I fear I'm right.
The following assertions are those of someone who is neither ideologue nor academic economist. I'm just an ordinary citizen taxpayer, hopefully with some common sense and a small dollop of cynicism, who tries to learn from experience. Like Will Rogers, "all I know is what I read in the papers;" it's just that my newspaper reading isn't limited to American papers.
This is not an argument for the proposition that a trillion-plus bailout of the banking, financial, investment and real estate mortgage industries would never be beneficial at some time, under some circumstances, for some individuals and businesses -- only that it is very, very wrong to do it at this time, under these circumstances, for these individuals and businesses.
Why?
1. They caused the problem. It seems fairly clear that our dire economic circumstances are the result of individuals' decisions -- whether the consequence of abysmal ignorance or cynical and selfish greed. They are not the result of "acts of God," only the acts of executives who thought themselves to be God. That makes them undeserving of bailouts. But who cares about that if by giving these undeserving millionaires hundreds of billions of dollars our economy turns around, the currently unemployed get jobs, and evicted former homeowners are back in their houses?
2. It didn't work. Many, including this blog, predicted that the $700 billion bailout wouldn't produce jobs, put folks back in their homes, and boost the economy. Those were just guesses, even if those who offered those warnings turned out to be right. Now there are more than guesses. There is data; the results of the first $350 billion are known. Unemployment is up; the economy has continued to spiral down. Knowing that it didn't work the first time, why would we try it a second.
3. The recipients have proven they aren't trustworthy. Sure, the Congress and Treasury Secretary Henry Paulson screwed up big time. But the recipients knew what the money was for, and it wasn't for squirreling away to increase reserves, buying other banks, dividends, and executive bonuses. Having created the problem by putting their own selfish greed ahead of the public interest, we should not be surprised that, given the opportunity, they would be inclined to keep the money rather than let those billions of dollars slip through their fingers and "trickle down" to their desperate neighbors. But OK, so they fooled us once. Now why are we setting ourselves up to be fooled again? Are these really the best guys to trust with another addition to a national debt we're leaving to our grandchildren?
(For details regarding how banks are using taxpayers' money in fact, as distinguished from theory and intention -- along with criticisms similar to my own and those of the World Economic Forum regarding the bailout approach -- see the excerpts from a story in today's [January 14] New York Times at the bottom of this blog entry: "In Michigan, Bank Lends Little of Its Bailout Funds.")
4. Stop digging. "When you find yourself in a hole the first thing to do is to stop digging." Our economic problem is, in large measure, irresponsible levels of debt -- multi-trillion-dollar national debt, mortgages, student loans and credit card balances beyond our means. And just why is it that additional debt is the solution to our debt problem?
5. Conditions first, money second. Even if this were a wise and warranted strategy, and the recipients who let us down in the past were now paragons of virtue, what's the rush? "If you don't give me $350 billion by tomorrow the economy will collapse." We fell for that once. "Show me the money?" -- No, not until you show me the details, the business plan. What is it about economists and financiers and their three-page proposals for near-trillion-dollar expenditures? (Yes, like Henry Paulson, Larry Summers is also offering a three-page letter of explanation.) Who's getting this money? What are they required to do with it? What oversight will be provided? What if (again) they violate the conditions? What is a reasonable prediction, scenario, as to what is going to happen as a result of this additional national debt?
6. Exit strategy. President-elect Obama "intends to agree to Pentagon plans to send up to 30,000 more US troops to Afghanistan in order to gain time to review the conflict" -- rather than learning from the Russian experience there, and focus on designing an exit strategy. AFP, "Obama to review Afghan strategy, approve troop increase," January 13, 2009. Unfortunately, his current approach to the coming economic depression also lacks an "exit strategy" -- that is to say, a long term plan, reasonably rational on its face, that takes us beyond the current one more bailout at a time approach. Where are we headed? What are we doing and why? What is our long term strategy and how reasonable are we in thinking it will work? I don't get this from Obama, his team, or our congressional leaders.
Now here's the news, along with the World Economic Forum's concerns:
President-elect Barack Obama worked Capitol Hill, trying to persuade Democratic senators not to block a request for the last $350 billion of the bailout funds and assuring them that he is willing to use his veto power if they do so. . . . "[T]he bulk" of the remaining TARP rescue funds would be used to invest in banks and other financial institutions . . .. Many Senate Republicans, meanwhile, continued to insist that Obama's team has provided too few details about how they would use the money. Many said they are seeking a written statement detailing Obama's intentions that goes beyond the three-page letter submitted to congressional leaders Monday by Obama economic adviser Lawrence H. Summers. . . . "Members need to know how the Obama administration is going to carry out this bill -- and we need to know not just statements of principle, but what they are willing to bind themselves morally to do," said Brad Sherman (D-Calif.).
Obama is making personal calls to Democrats and Republicans to urge them to release the money, and Democratic leaders were confident that he would prevail on a matter he told them he considers the "first vote" of his administration.
Neil Irwin and David Cho, "Fed Backs Obama's Bailout Request," Washington Post, January 14, 2009, p. A1.
To the extent there are any details, they are not encouraging. The AP reports, "Frank's bill would require $40 billion to $100 billion of the bailout money to be spent on mitigating foreclosures [$40 billion is scarcely 10% of the funds] and . . . require the Treasury Department to use nonbailout resources to increase demand for home purchases [even though, while appealing to realtors and bankers, purchasing a home now is the furthest thing from the minds of those who've just been thrown out of the home they thought they had]." (comments added) AP, "Highlights of New Bailout Proposals," January 13, 2009.
And, "Bank executives will get to fly their company jets after all. Financial institutions that get assistance through the $700-billion Troubled Asset Relief Program had faced a provision that recipients of the money would be prohibited from owning or leasing private aircraft. But Kansas is one of the nation's centers of aircraft manufacturing, and state lawmakers complained . . .. So yesterday, Barney Frank (D-Mass.), head of the House Financial Services Committee and the author of the bill, lifted the jet ban." AP, "Ban on Private Jets Lifted from Bailout Program," Newsday, January 14, 2009.
Meanwhile, the prestigious World Economic Forum is warning that government spending, and lack of long range planning, not only contains the possibility of doing little or no good, it may even "backfire" and end up doing considerable harm:
The World Economic Forum took a grim view of prospects for the world economy this year in a report released Tuesday, warning that government spending to counter the financial crisis could backfire. . . .
But the crux of the report was a prediction that "massive" government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future.
Although it has been widely advocated, such spending is set to fuel big deficits in several major economies including Australia, Britain, France and the United States, WEF's "Global Risks 2009" report said.
"One of the biggest risks is that short-term crisis fighting may induce businesses and governments to lose the long term perspective on risk," said one of the contributors, Daniel Hofmann, chief economist for insurer Zurich Financial Services.
Agence France-Presse, "World Economic Forum Warns Government Bailouts Could Backfire," ABS CBN News, January 13, 2008.
Although I cannot yet find a copy of the organization's Global Risks 2009 report online, it has been providing similar warnings for years. See Global Risks 2008: A Global Risk Network Report, World Economic Forum, January 2008, and the earlier reports from January 2007 and 2006.
I hold out little hope that the industries containing some of America's most generous campaign contributors will not get their $350 billion -- and even less that it will do much good for those 305 million Americans who have taken the losses, and are bearing the hardship of the consequences of their selfish, irresponsible greed.
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Excerpts from "In Michigan, Bank Lends Little of Its Bailout Funds":
The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank [Independent Bank of Michigan] . . ..
But Independent . . . is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. . . .
This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy. . . .
As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention. . . .
Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.
“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”
Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.
“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry. “They can continue on their merry ways.” In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers. . . .
Some lawmakers have criticized the Treasury for allowing banks to use the government’s bailout money to acquire rival banks. . . .
“A lot of the money is already out there and the inspector general needs to get up to speed on how banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We need to make sure we get this money back and the only way we can do that is with strong oversight on how this money is spent.” . . .
Mr. [Eric D. Hovde] Hovde, the hedge fund investor who says he believes the bailout program is putting off judgment day for many banks, said his fear was that many of the banks would burn through their federal money only to face a squeeze again. And they will never have made the extra loans that the Treasury had hoped would jump-start the economy.
Eric Lipton and Ron Nixon, "In Michigan, Bank Lends Little of Its Bailout Funds," New York Times, January 14, 2009.
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* 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.
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