. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.
Showing posts with label President-elect Barack Obama. Show all posts
Showing posts with label President-elect Barack Obama. Show all posts
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.
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.
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.
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.
* 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.
How Could We Have Seen Economic Disaster Coming? Let Me Count the Ways (Brought to you by FromDC2Iowa.blogspot.com*)
Curious as to how we got into this financial mess -- or, otherwise put, just how many signs there were that it was coming, signs that were ignored by our public officials and the MBA-educated CEOs who have left their crime scenes with millions in tow?
There is much to admire and be thankful for in our soon-to-be President Obama, but a willingness to prosecute -- even to investigate, and document -- the serious, even unconstitutional, wrongdoing of others is not among his virtues.
I haven't been enthusiastic about the prospect of bringing impeachment proceedings against President Bush -- though I think they would be justified. However, I do think at a minimum we need an itemization, and documentation, by some official body (presumably a congressional committee) of the Bush administration's mistakes, from the unwise to the unconstitutional, if we are to avoid leaving the impression that the American people and their congress find the Bushies' decisions and behavior over the past 8 years to have been either desirable or acceptable.
President-elect Obama seems to be of a different view, whether the offenses were those in the Bush administration or the financial community.
Last Sunday (January 11) he had this to say with regard to the former:
STEPHANOPOULOS: The most popular question on your own website is related to this. On change.gov it comes from Bob Fertik of New York City and he asks, "Will you appoint a special prosecutor ideally Patrick Fitzgerald to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping."
OBAMA: We're still evaluating how we're going to approach the whole issue of interrogations, detentions, and so forth. And obviously we're going to be looking at past practices and I don't believe that anybody is above the law. On the other hand I also have a belief that we need to look forward as opposed to looking backwards. . . .
Three days earlier, in his George Mason University stimulus package address, he took a similar approach to financial community abuses with his reluctance to "point fingers": "[E]very day we wait or point fingers or drag our feet, more Americans will lose their jobs, more families will lose their savings, more dreams will be deferred and denied, and our nation will sink deeper into a crisis that at some point we may not be able to reverse." CQ Transcripts Wire, "Obama Delivers Remarks On Economy,"Washington Post, January 8, 2009.
As Paul Krugman has observed:
I’m sorry, but if we don’t have an inquest into what happened during the Bush years — and nearly everyone has taken Mr. Obama’s remarks to mean that we won’t — this means that those who hold power are indeed above the law because they don’t face any consequences if they abuse their power. Let’s be clear what we’re talking about here. It’s not just torture and illegal wiretapping . . ..
As I often point out to my law students and others, there are really two legal systems (in addition to the two represented by one for the rich and one for the poor). There is the one that relates to those law violations of which most Americans are aware: you can't steal stuff from other people's houses, drive faster than the speed limit, and so forth. But in fact some of the most severe penalties are handed out for violations of the second legal system, the rules we impose regarding the operation of the first legal system: not showing up for a court date, lying to officials or on the witness stand (perjury).
Remember Martha Stewart? Her "crime" was not so much that she sold stock on the basis of "insider" information as that she lied about having done so. She said that the stock was sold by her broker at $60 a share because of a prior stop-loss order that it be sold if it dropped to that price.
So I am not about to come to Ms. Stewart's defense.
Nonetheless, I think the financial dimensions of what she did, and the penalty she received, can fairly be compared with those of bankers and Wall Street traders during the last couple of years.
[S]he and her former stockbroker, Mr. Bacanovic, were convicted of conspiring to hide the reasons behind her ImClone trade, which netted her about $227,000 [the difference between what she paid for the stock and what she sold it for]. . . . "To believe that I would sell, to avoid a loss of less than $45,000 [how much less she would have received had she sold it later], and thus jeopardize my life, my career and the well-being of hundreds of others, my cherished colleagues and partners, is very, very wrong" [she said at one point].
So what was her punishment for this $45,000 saving -- five months in prison (plus an additional five months of home confinement)!
Can you imagine her getting off scot free if she'd said to the judge, following Obama's logic, "Your honor, we need to look forward as opposed to looking backwards"?
Why is it appropriate for the law to be "looking backwards" at Stewart's $45,000 "crime" (presumably impacting only indirectly, and minimally, other investors), but that it should only "look forward" when it comes to a near-$10 trillion theft of taxpayers' money (as authorized by Congress, Bush, Paulson, Bernanke, and soon to be recommended by Obama)?
A President Obama need not be personally involved in the potential prosecution of former Bush administration officials or bankers who have violated the constitution or the law; that's what the Department of Justice and his new Attorney General are for. But for the former law professor that he is to say that "I don't believe that anybody is above the law" while simultaneously refusing to engage in "looking backward" at those who have behaved as if they were, is at best a little disingenuous.
Can officials and CEOs fairly claim they didn't see this tsunami of economic disaster coming? I don't think so.
Here then are but the first three pages -- 2003 through June 2007 -- of Jason Cox's 87-page itemization of all the events and reasons why their pleas of ignorance ring hollow.
· June 2003: o Greenspan lowers Fed’s key rate to 1%, the lowest in 45 years http://www.bloomberg.com/apps/news?pid=20601087&sid=aclMlgBb3taQ&refer=home
· 2006: o Lenders make $640 billion in subprime loans o 20% of all mortgage lending was subprime http://money.cnn.com/2007/04/02/news/companies/new_century_bankruptcy/
· May 5, 2006: o In possibly the first casualty of the looming subprime crisis, Kirkland, Washington based Merit Financial Inc. files for bankruptcy and closes its doors, firing all but 80 of its 410 employees, kept to wind down the business. o Chief financial officer, Ryan Kidd, said that Merit’s marketplace had declined about 40% and sales were not bringing in enough revenue to support the overhead of running the company. http://seattlepi.nwsource.com/business/269154_merit05.html
· August 26, 2006: o Defaults on subprime mortgages start to occur much earlier in the mortgage process. o Investors and analysts believe this trend could be the result of lax underwriting quality or a sign of a weakening mortgage credit market. http://www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/Subprime_Mortgage_Lenders_Seeing_Early_Payment_Defaults.pdf
· January 3, 2007: o Ownit Mortgage Solutions Inc. files for Chapter 11. o Owed Merrill Lynch around $93 million when filing. http://www.californiabankruptcylawyerblog.com/2007/01/californiabased_ownit_mortgage.html
· February 5, 2007: o Mortgage Lenders Network USA Inc. files for Chapter 11. o 15th largest subprime lender with $3.3 billion in loans funded in third quarter 2006. http://www.boston.com/news/local/connecticut/articles/2007/02/05/mortgage_lenders_network_files_for_ch_11_bankruptcy_protection/
· February 7, 2007: o HSBC, a large London based bank, issues a warning that an earlier statement about its Mortgage Services operations will be much worse than current market estimates. o HSBS blames this drop on the increased delinquencies of US subprime mortgages and the inability to refinance because of falling equity prices. o The release said that the aggregate loan impairment charges and credit risk provisions could be 20% higher than the earlier statement. http://www.hsbc.com/1/2/newsroom/news/news-archive-2007/hsbc-trading-update-us-mortgage-services
· February 10, 2007: o The Group of Seven Finance Ministers meet in Essen, Germany to discuss worldwide financial problems. o One of the main concerns is the lack of regulation of hedge funds. Germany says this could be a source of systematic risk for the financial system where the US believed market discipline is the best way to address the issue. o Henry Paulson noted that the US residential housing market had been cooling over the last year but appears to have stabilized. http://www.ft.com/cms/s/0/3db4a4e4-b650-11db-9eea-0000779e2340.html http://www.ustreas.gov/press/releases/hp255.htm
· February 13, 2007: o ResMae Mortgage Corp. files for Chapter 11. o Credit Suisse Group buys $19.1 million in assets in auction. o ResMae made $7.7 billion in subprime loans in 2006 making it 26th in subprime lending. http://www.bloomberg.com/apps/news?pid=20601087&sid=arsKNQcbPcxc&refer=home
· March 2007: o New Century Financial announces it will stop making loans and needs emergency financing to survive. o Stock price goes from $15 at the beginning of March to $3.21 when announcement is made. http://www.nytimes.com/2007/03/11/business/11mortgage.html?pagewanted=3&_r=1
· March 20, 2007: o People’s Choice Home Loan files for Chapter 11. http://www.bloomberg.com/apps/news?pid=20601087&sid=atkiRNcdlZ8M&refer=home
· April 3, 2007: o New Century Financial files for Chapter 11. o Cuts 54% of its workforce or 3,200 jobs o Largest subprime lender in US. o Delisted from the NYSE o Defaults on $8.4 billion in loan repayments o New Century made $51.6 billion in subprime loans in 2006 making it 2nd in subprime lending http://money.cnn.com/2007/04/02/news/companies/new_century_bankruptcy/
· April 12, 2007: o SouthStar Funding LLC files for Chapter 7. o Another subprime lender http://www.reuters.com/article/gc06/idUSN1236927220070412
· June 7, 2007: o In a letter to investors, Bear Stearns suspends redemption rights for a hedge fund heavily invested in the subprime debt market because of liquidity problems. o The fund had lost 23% of its value since January 2007 including almost 19% in April alone. http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm
· June 22, 2007: o Bear Stearns agrees to a plan to loan $3.2 billion to one of its hedge funds. o The lack of liquidity at the hedge fund is blamed on the bad bets that were placed on the US subprime mortgage market. http://www.ft.com/cms/s/0/d7936764-f1d5-11dc-9b45-0000779fd2ac.html
· June 27, 2007: o SEC Chairman, Christopher Cox, testifies to Congress that the SEC has opened 12 enforcement investigations into collateralized debt obligation (CDO) practices. o This was in response to questions from Congress about the transparency of CDOs http://www.reuters.com/article/bondsNews/idUSWAT00779720070626 http://www1.cchwallstreet.com/ws-portal/content/news/container.jsp?fn=07-02-07
Of course, if this history merely moves you to sympathy for those who've made off with your share of the taxpayers' money, you can always "Sponsor An Executive":
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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.
President-elect Obama is going to tell us about his near-$1 trillion "stimulus package" today. All of us who care about our country's future and who have been following the news will be hanging on the details -- as a result of which our attention may be successfully diverted from "step one."
And what is "step one"?
My father used to tell the story of a Kansas farmer, a neighbor he knew, whose child asked him for some money, to which the farmer replied, "What did you do with the last nickel I gave you?"
In our case we as taxpayers have handed over far more than a nickel -- and we don't even know how much. We've heard about the $700 billion we've given to the guys who stole their way into our present financial disaster. But ten times that amount of our money seems to have slipped through Bernanke's fingers to the same guys: $7.7 trillion.
Now we're being asked for another trillion dollars.
As citizens of a nation with well north of $60 trillion in unfunded mandates and debt, that's the equivalent of a $200,000 credit card debt for every man, woman and child in the country.
Before we add another trillion to our national debt shouldn't we ask, "What did you do with the last trillion we gave you?"
And who was Ferdinand Pecora? Here are some excerpts from Chernow's op ed column:
Barack Obama has assigned a top priority to financial reform when the new Congress assembles today. If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.
For inspiration, Congress should turn to the electrifying hearings of the Senate Banking and Currency Committee, held in the waning months of the Hoover presidency and the early days of the New Deal. In historical shorthand, these hearings have taken their name from the committee counsel, Ferdinand Pecora, a former assistant district attorney from New York who, starting in January 1933, was chief counsel for the investigation. Under Pecora’s expert and often withering questioning, the Senate committee unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash.
. . .
Whatever their failings, the Pecora hearings laid the groundwork for financial reform legislation. By the time they ended in May 1934, they had generated 12,000 printed pages of testimony, collected in several thick volumes. These documents have served generations of historians. Our national narrative of stock market mayhem in the 1920s is largely composed of characters and anecdotes gleaned from their pages.
Pecora not only documented a litany of abuses, but also paved the way for remedial legislation. The Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934 — all addressed abuses exposed by Pecora. It was only poetic justice when Roosevelt tapped him as a commissioner of the newborn Securities and Exchange Commission.
Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence.
Lewis and Einhorn name names, times and offenses. Here (without those details) is an excerpt that gives a sense of the tone:
Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance. . . .
These oligopolies [Moody’s and Standard & Poor’s], which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. . . .
It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street. . . .
Say what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers. . . .
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones.
There are those, including Obama, who urge that "finger pointing" is not useful. Strongly of this view are those toward whom the fingers would be pointed -- and who are numbered among the most generous contributors to senators, representatives, and presidential candidates.
By contrast, I agree with Ron Chernow, Michael Lewis and David Einhorn. I think more than a little finger pointing is exactly what we need, for the reasons they outline. I think the American people are entitled to know how this happened -- step by step, greedy offender by greedy offender. I think we're entitled to know what the laws were, who violated them, and to watch their trials and their walk into prison.
And I damn sure think we're entitled to know what Federal Reserve Board Chair Ben Bernanke refuses to tell us (and Bloomberg, which is suing to find out under the Freedom of Information Act, seeks to find out) regarding the $7.7 trillion of our money he's given to his friends, who they were, how much he gave each, what he got in return, how much that was worth, and what are the likely dimensions of the ultimate losses to the American people as a result of his generosity.
I'm not alleging anything about President-elect Obama's motives. How could I possibly know everything he's feeling and thinking? But the effect of his "no finger pointing," and professed urgency behind another trillion-dollar giveaway, could very well end up being the same as if it was his purpose to divert attention on those whose greed, and whose failure to regulate, brought this disaster upon us.
And that would indeed be a dual disaster -- politically for him, and economically for all of us along with most of the world's developed nations.
Related Blog Entries on Global Economy and Bailouts
* 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.
Eartha Kitt. A stunning Hollywood friend with some 800 performances to her credit told me of an experience she had at an audition. After reading for the part the director told her, "Miss, I'm sorry, but we're looking for someone older, this character is supposed to be a woman in her mid-forties." "Look at me again," she replied, "this is what 45 looks like."
As we remember our last half-century's fascination with and admiration of Eartha Kitt, and mourn her Christmas-day death, it can inspire us all to watch her performance earlier this very year of "Ain't Misbehaving" and realize that "This is what 81 can look-- and sound -- like."
Talk about living one's life like the stage direction "Walk on; dance off"! This was one classy lady who just barely walked on this Earth as a young girl, but was perfectly capable of "dancing" off as Eartha at the end. May we all aspire to as much.
Slide the bar to 3:15 through the video, which is where her performance begins.
Pastor Rick Warren. President-elect Obama created a bit of a stir with his selection of Pastor Rick Warren to give the invocation at Obama's inauguration January 20th. Alexander Mooney, "Obama's Inaugural Choice Sparks Outrage," CNN, December 18, 2008 ("Prominent liberal groups and gay rights proponents criticized President-elect Barack Obama Wednesday for choosing evangelical pastor Rick Warren to deliver the invocation at the presidential inauguration next month."). This was primarily because of Warren's support last month of California's "Proposition 8" ban on gay marriage.
But while I've not always succeeded, I have tried to remember just how complex humans are, that we are as a general semanticist once observed "the only animal species able to talk ourselves into difficulties that would not otherwise exist," and that the odds of finding others who agree with you over the broad sweep of all the hundreds of things we could find to disagree about is far less than winning the lottery. (As readers of this blog have discovered, I even find myself disagreeing with myself from time to time.)
In the case of Mike Huckabee, we disagree about virtually everything up to and including evolution. And yet, among right wing conservatives I found him one of the least mean-spirited and divisive of the bunch. As he said on at least one occasion, "I'm a conservative, all right, I'm just not angry about it." See, Nicholas Johnson, "It's Huckabee," July 24, 2007.
I'm always on the lookout for a world leader who will speak to humanity's need to address the issues of war and peace, and poverty and materialism. For some of his years (1978 to 2005) that was, for me, Pope John Paul II -- notwithstanding my disagreement with his positions on women in the church, celibacy, abortion and contraception, among other things.
So I was willing to give Pastor Rick Warren some leeway. After all, I knew little about him, was not one of his flock of 100,000, had never been to his Orange County Saddleback Church, and had never really even heard him speak.
And then, yesterday evening, Christmas, I happened to turn to C-SPAN as it was rebroadcasting his talk to the Muslim Public Affairs Council's convention in Long Beach December 20, and I suddenly saw why he and the President-elect have the relationship they seem to have.
I challenge anyone to truly watch and listen to what this man was saying on that occasion and not come away with admiration for him and hope for our future. (Snippets of examples: "I love Muslims. I also happen to love Hindus and Jews and Buddhists. . . . We don't have to see eye to eye to walk hand in hand. . . . Al-Qaeda no more represents Islam than the Klu Klux Klan represents Christianity. . . . Religious congregations are the only set of organizations on earth that can successfully combat the five global illnesses of spiritual emptiness, corrupt leadership, disease pandemics, dire poverty, and illiteracy, and we must actively and directly cooperate with mosques to get the job done.")
As the AP's Rachel Zoll reports,
On paper, Warren might look like any other religious traditionalist. He is the son of a Southern Baptist pastor, graduate of a Southern Baptist seminary, and his megachurch in Orange County is part of the conservative denomination.
But Warren holds a different worldview than his roots suggest.
He has spoken out against the use of torture to combat terrorism. He has joined the fight against global warming and, encouraged by his wife, has put his prestige and money behind helping people with AIDS . . . at a time when a notable number of conservative Christians still consider the virus a punishment from God.
“If you want to save a life, I don’t care what your background is and I don’t care what your political party is . . . [T]hese humanitarian issues transcend politics, or ethnic or religious beliefs.”
While many religious conservatives openly condemn Islam as inherently evil, Warren reaches out to the American Muslim community.
Pastor Rick Warren is to the religious community what President Barack Obama is to the political community -- someone to calm (even if not walk upon) the waters, to reach out to all, to focus on working together to solve the problems confronting humankind, to urge that we put aside the differences in our religious rhetoric to concentrate on the similarities in our perceptions of reality and need.
Moreover, both recognize the power of their personal example -- Obama with his diet, exercise, weight control, physical fitness, and value he places on intelligence and education (see, e.g., Eli Saslow, "As Duties Weigh Obama Down, His Faith in Fitness Only Increases,"Washington Post, December 25, 2008, p. A1); Warren with his good works and a shunning of conspicuous consumption (tithing 90% and living on 10%) that could have come right out of my book, Test Pattern for Living, or that of my son Gregory's Put Your Life on a Diet.
I disagree with what seem now to be some of Obama's economic and policy positions, and a great deal more of Pastor Warren's theological positions.
But I deeply admire and applaud their ability to overlook their differences, and their ability to see why it is essential for our country that they -- and you and I -- demonstrate our ability to do so. As the AP's Rachel Zoll notes, "It is no surprise that he and Obama have become friendly. Each tries to operate outside a strict liberal-conservative divide, and has risked angering his supporters to do so." Rachel Zoll, "Rick Warren's Biggest Critics: Other Evangelicals," Associated Press/Houston Chronicle, December 26, 2008.
From Eartha Kitt's spirit to Pastor Rick Warren's new definitions of spirituality we have much to celebrate and be thankful for this holiday season for many of the world's religions and all of the world's peoples.
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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.
Change? Pocket Change, Maybe But the Reality is Worse than the Stinking Citigroup Deal Because It's Only Symptomatic
The Citigroup deal stinks to high heaven.
[Photo credit: Washington Post; "In this 1999 photo, then-Treasury Secretary Robert Rubin, right, addresses the media with Citigroup co-chairmen and co-CEOs Sandy Weill, center, and John Reed. Rubin joined Citigroup management after resigning as Treasury chief."]
What is indisputable is that all of the decisions that have led to Citi's recent troubles were taken while Rubin was chairman of the executive committee, and made by executives with whom he worked closely. He defended them repeatedly and unequivocally, and as a director, he approved compensation packages that rewarded them (and himself) handsomely for judgments that proved disastrous.
Now, the government has been forced to save Citi by investing $45 billion in new capital and by putting a floor under its losses. By any measure, it is a sweetheart deal for shareholders, who will suffer minimal dilution of their shares. Most startling of all, however, is that Rubin and other directors and top executives have been allowed to remain at the helm. You have to wonder how much more money this crew would have to lose before the Treasury and the Fed would demand their resignations -- $100 billion? $200 billion? $1 trillion? Why weren't they dispatched as were the executives at Fannie Mae, Freddie Mac and AIG?
The ultimate irony is that just as Rubin & Co. were being bailed out at Citi by the Bush administration, President-elect Obama was announcing a new economic team drawn almost entirely from Rubin's acolytes.
That's not to take anything away from the qualifications of Tim Geithner, the new nominee for Treasury secretary, who owes his appointment as president to the New York Fed to Rubin's aggressive lobbying; or Larry Summers, who was Rubin's deputy secretary at the Treasury and whose appointment as president of Harvard was championed by Rubin as a member of the university's government board; or Peter Orszag, the soon-to-be-named nominee for budget director, who was hired by Rubin to head a Democratic think tank on economic policy that he founded.
No doubt about it -- it's a fabulous team. But perhaps the next time Obama thinks about assembling his group of wise men to give advice on the economic crisis, he might at least have the good sense to leave Rubin out of the mix. At a minimum, it's a glaring conflict of interest. More significantly, it sends a terrible signal about accountability and corporate governance.
So what brought on our current, ever-increasing economic collapse? Many things, including either a greed bordering on criminality, or exceptional ignorance, on the part of leading financial CEOs and regulators. But what made it all possible was the repeal of a structural/regulatory protection that wiser heads put in place following the 20th Century's Great Depression: banks were forbidden to get into the investment business. It was called the Glass-Steagall Act.
Pearlstein reports:
The combination of Citibank with Salomon Smith Barney under the bright red umbrella of Travelers Insurance was accepted with a regulatory wink and nod by the Federal Reserve until Fed Chairman Alan Greenspan could persuade Congress to make it legal. The hurdle was the Glass-Steagall Act, put in place during the Great Depression to prevent another market crash like that of 1929. Now that another market crash has required the government to rescue a commercial bank done in by its investment banking subsidiary, there will certainly be those who wonder whether the New Dealers didn't have it right all along. . . .
As Treasury secretary, Rubin joined with Greenspan in supporting Citi's campaign to repeal Glass-Steagall.
And:
While it was [Sandy] Weill who created the modern Citi, it was his handpicked and hapless successor, Chuck Prince, who steered the company into the ditch. . . .
[W]hen he resigned from the Treasury in 1999, Rubin accepted Weill's offer to become what amounted to vice chairman of Citi, where he has quietly worked the back channels to Washington and other international capitals while serving as strategic counselor to the chief executive and the board of directors.
Rubin has been cagey about defining his role at Citigroup -- and at one point he got caught making a phone call to the Bush Treasury in a bid to help out Enron, a Citi client, during its death throes.
The bailout of Citigroup, which put the government at risk of hundreds of billions of dollars of losses, was set in motion by three men whose professional lives have long been intertwined.
Treasury Secretary Henry M. Paulson Jr.; Citigroup board member Robert E. Rubin; and Timothy F. Geithner, the president of the Federal Reserve Bank of New York, have for years followed one another in and out of jobs in government and industry. Their close relationships helped pave the way for one of the largest and most dramatic government interventions to date in the financial crisis. . . .
Once Citigroup's stock price plunged 60 percent last week, Rubin, an old colleague from Goldman Sachs, told Paulson in phone calls that the government had to act, according to industry sources familiar with their discussions.
Geithner, too, shared a close relationship with the pair. He worked for Rubin at the Treasury Department in the 1990s and now is President-elect Barack Obama's nominee to follow Paulson as Treasury secretary.
As Citigroup's lead regulator, Geithner was deeply involved in the rescue of the firm, participating in meetings and conference calls with Paulson through the weekend. . . .
The government is guaranteeing a total of $306 billion of Citigroup's assets against losses greater than $29 billion. In exchange, it is requiring the firm to hand over $7 billion worth of preferred stock, essentially paying the government an insurance premium. . . .
Regulators also prohibited Citigroup from paying dividends to common shareholders of more than a penny a share in the coming three years and required a dividend payment of 8 percent on the government's preferred stock -- higher than the 5 percent dividends that it required of institutions that took rescue money from the Treasury Department over the past few weeks.
The Treasury also has the option of buying warrants in Citigroup if the firm's shares recover. If that happens, the government would end up owning slightly less than 8 percent of the bank's shares.
"It strikes me as unbelievably generous," said a former Fed official who has been in touch with Citigroup. "I'm sure it will be controversial. . . ." . . .
Rubin called Paulson several times to make the case for intervention on behalf of Citigroup and the banking system as a whole, said two sources familiar with the conversations.
In an interview, Rubin explained his involvement by saying that, since arriving at Citigroup in 1999, he has had "a dual role of providing strategic advice or managerial advice and also to work with clients. And that's what I've done."
"I had operating responsibilities for 33 years. And I simply didn't want any operating responsibility, and that's been the case since I've been here," he said.
On Friday, Citigroup approached the Treasury and the Fed with a plan of its own, essentially asking the government to take on the risk of hundreds of billions of dollars in troubled assets on its books, but with little compensation for the government. . . .
[T]hey [federal regulators] could have enacted a highly punitive complete bailout, like that of American International Group, requiring terms that strongly punish existing shareholders and give the government control of the Citigroup board, as well as firing the chief executive. They rejected that approach, preferring to try to give the existing Citigroup leadership team time to work through their problems. . . .
The New York Times editorializes:
Both men [Larry Summers and Tim Geithner], however, have played central roles in policies that helped provoke today’s financial crisis. Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multibillion-dollar bailout of Citigroup.
Given that history, the question that most needs answering is not whether Mr. Geithner and Mr. Summers are men of talent — obviously they are — but whether they have learned from their mistakes, and if so, what. . . .
As treasury secretary in 2000, Mr. Summers championed the law that deregulated derivatives, the financial instruments — a k a toxic assets — that have spread the financial losses from reckless lending around the globe. He refused to heed the critics who warned of dangers to come.
That law, still on the books, reinforced the false belief that markets would self-regulate. And it gave the Bush administration cover to ignore the ever-spiraling risks posed by derivatives and inadequate supervision.
Mr. Summers now will advise a president who has promised to impose rational and essential regulations on chaotic financial markets. What has he learned?
At the New York Fed, Mr. Geithner has been one of the ringmasters of this year’s serial bailouts. His involvement includes the as-yet-unexplained flip-flop in September when a read-my-lips, no-new-bailouts policy allowed Lehman Brothers to go under — only to be followed less than two days later by the even costlier bailout of the American International Group and last weekend by the bailout of Citigroup.
Citigroup Only Symptom The Citigroup deal stinks. That's for sure, and by now well documented. But that's not the most important point. It's merely symptomatic of what's going on and who's doing it.
Obama to Govern From "Corporate Right" Candidate Obama may have tried to woo us and wow us with a rhetoric designed to make many of us think he would govern as a progressive populist. But when called on it he replied, accurately, that he never said so explicitly and that indeed his past history should have alerted us to the fact he would likely govern from the corporate center-right.
We Are to be Ruled by the Eastern Establishment's Elite Much of the nation's power, however measured, is to be found in a corridor running south from Boston, along Interstate 95, and the Amtrak line, to Washington. That's where you'll find a goodly number of our most prestigious colleges and universities, corporate headquarters, wealthiest Americans, most powerful politicians, most influential media, military brass, manufacturing, those who make or influence foreign policy, and the financial community. That is where you'll find much of America's "elite," or "Establishment" (what C. Wright Mills titled his book as The Power Elite) -- in the descriptive, rather than the pejorative, sense of the word.
For President-Elect Obama (Columbia undergrad; Harvard law) to "go east, young man" as he looks for some of the 7,000 individuals to whom he will give presidential appointments is both naturally to be expected and to some extent commendable. But he has, so far, overdone it a wee bit. As David Brooks observed, after analyzing the schools attended by his appointees, "If a foreign enemy attacks the United States during the Harvard-Yale game any time over the next four years, we’re screwed." David Brooks, "The Insider's Crusade,"New York Times, November 21, 2008.
Nowhere is this more of an incestuous problem, as the two excerpted items, above, demonstrate than in his choice of an economic team.
"What Did You Do With the Last Nickle I Gave You?" My father told the story of a farmer in the area of Kansas where he grew up. Sitting on the porch with him one afternoon, the farmer's young boy approached them and asked his father for a nickle, to which the farmer responded, "What did you do with the last nickle I gave you?"
That's kind of how I feel about Citibank.
I didn't support the initial auto industry bailout plan for a variety of reasons, not the least of which was the failure to provide anything resembling a business plan demonstrating how the $25 billion would be used, and why it could reasonably be believed to be the answer to their problems. Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008.
But Congress ultimately came around to that view and is now demanding something like what I was asking for.
What's the Citigroup story? Was a business plan demanded before the initial $25 billion bailout? If it was, it obviously wasn't a very good one; if it wasn't, it should have been. Was one demanded before this weekend's additional $20 billion -- and $300-billion-plus taxpayer guarantee of the bank's worthless loans?
Shouldn't the banks and Wall Street cronies at least be held to the same standards as the auto industry?
"What did they do with the last 500 billion nickles we gave them?"
Massive Debt's Costs and Consequences I have yet to see or read of anyone from the President-Elect, through his advisers, or members of Congress, provide a thorough overview of the downside of ever-escalating debt by the trillions. In addition to the $55 trillion in unfunded obligations, "The Debt Clock" reports that, as of the morning of November 25 our current national debt is at least $10.7 trillion. I say "at least" because I'm not sure it includes the $1-plus trillion we know the government has recently put on our credit cards, or the $2 trillion the Fed has added to that without telling anyone, or the additional $300 billion provided yesterday to Citigroup.
I'm not saying we shouldn't have run up this debt -- though my instinct is that we shouldn't have, and certainly not without exacting more conditions from the recipients and returns to the taxpayers. All I'm urging at the moment is that we are entitled to be able to confront, squarely and honestly, the fact that this is not free money, that there are consequences of running up such a debt whether for nations or individuals, and that we need to know some independent experts' predictions of what some of those consequences could turn out to be.
What's Your Share? Assume we have something like 120 million families or living units in America. (I'm going to use 100 million to make the math easier.) Assume all accumulated debt ($55 trillion, plus $11 trillion, plus, plus) is near $70 trillion headed for $100 trillion. The interest on $100 trillion, at 5%, is $5 trillion a year. Your family's share? How's $50,000 a year -- just for the interest alone -- sound? Your family's share of the entire debt? About $1,000,000. So what's happening is that these folks who've come from, and will be returning to, the Wall Street financial community, have decided to give you responsibility for paying off the mortgage on a one-million-dollar home -- but one you'll never get to see or live in (not incidentally because they're already living in it).
[Update: It turns out the nation's -- our, my, share of -- debt increases by the hour. Jeff Zeleny and Jack Healy, "U.S. Unveils $800 Billion Credit Program,"New York Times, November 25, 2008 ("The United States government unveiled $800 billion worth of new loan programs and debt purchases on Tuesday, hoping another massive infusion of cash would smooth troubled credit markets . . ..").]
Priorities Note that this economic team from Wall Street is advising the President-Elect, as they've already advised President Bush, that the top priority in times of economic distress is to rescue Wall Street and the banks. That's understandable. Indeed, they may even believe what they're saying.
But it's like "the six blind men and the elephant." Ask farmers and the solution is price supports. Ask auto executives and it's a "bridge loan" for the auto industry. Ask trade unions and it's a "living wage," more favorable laws for union organizing, a jobs program, and extended unemployment compensation. Ask the working poor cleaning hotels and hospitals, or those working for less than the minimum wage in restaurants, and they'll say food stamps and help with rent and utility bills.
President-Elect Obama has chosen to ask Wall Street executives.
Franklin Roosevelt and Abraham Lincoln are not the only politicians and presidents to whom our new President-Elect can look for guidance and example.
The 18th Century political philosopher Edmund Burke is another. As he put it, "Society is indeed a contract [that] becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."
Those who are dead not only paid cash, they were thereby able to leave money for their children. Those who are living have substituted consumption and debt for frugality and savings. To leave only that debt, with substantially more to come, to "those who are to be born" is not a partnership of which we can be proud.
The High Price of Peremptory Firing: Jones sues for $2.25 million
Phillip Jones, 68, was dismissed as vice president for student services Sept. 23 by UI president Sally Mason. In his [$2.25 million wrongful termination] claim to the Iowa Board of Appeals, Jones claims the firing was inappropriate and that it caused emotional distress and damaged his personal and professional integrity. . . .
"The wrongful termination of Dr. Phillip E. Jones has caused him irreparable harm," his claim states. "He was placed in a false light in the professional community by the allegations adopted from the Stolar report and redistributed by the (Iowa state) Board of Regents and (UI) President (Sally) Mason." . . .
The claim . . . identifies more than $680,000 in professional losses. It states that from Sept. 24 to June 30, 2009, Jones would lose more than $180,000 in earnings, UI contributions, health insurance, flexible spending account, accumulation of vacation payout and other incidentals.
The claim also identifies $500,000 in potential earnings losses, saying Jones planned to retire from UI and work as a higher education consultant.
The Answer to Global Economic Collapse Looking for the answer to the global economic depression toward which we seem to be headed with ever-greater acceleration?
"Look North, young man, look north."
["'Go west, young man' [was] a favorite saying of the nineteenth-century journalist Horace Greeley, referring to opportunities on the frontier. Another writer, John Soule, apparently originated it." The New Dictionary of Cultural Literacy, 3rd ed., 2002.]
It turns out that delivery of basic health care to an entire nation's population at reasonable cost is not the only thing Canada has to teach us.
Let's hope our new Secretary of the Treasury designate,Timothy F. Geithner, currently president of the Federal Reserve Bank of New York [Jackie Calmes, "For Treasury, Geithner Said to Be Choice," New York Times, November 21, 2008] -- the mere rumor and announcement of whom boosted stock market measures by 5 to 6 percent -- who has plenty of credentials of his own, is willing to listen to one of the youngest financial regulators of the G-7 and G-20, Mark Carney, Governor of the Bank of Canada.
If he wants to literally listen, I'd recommend Carney's participation in the BBC's current "The Interview" program -- being Internet-broadcast as I write this (I listened to it being broadcast live earlier), but soon to be available for streaming or download. If Geithner wants to read what he's written, I'd recommend Carney's recent talk in London to the Canada-United Kingdom Chamber of Commerce, Mark Carney, "Building Continuous Markets," November 19, 2008.
Carney avoids sounding either critical of his peers, or unduly self-promotional. But facts are facts, and he doesn't hide them. Here is an excerpted paragraph describing Canada's current position:
Canada's experience is instructive. While Canada's financial system has been affected by the crisis in global financial markets, the impact has been significantly less than in many other major economies, not least because Canada is further along than others in implementing the G-7 Action Plan. Canada starts with financial institutions that are healthier than their international peers. Not merely have losses on structured products of Canadian banks been modest, but more importantly, their absolute leverage is markedly lower. As a simple illustration, major Canadian banks have an average asset-to-capital multiple of 18 on a consolidated basis, which is slightly below the regulatory maximum of 20. The comparable figure for U.S. investment banks is over 25. For . . . some major global banks, it is over 40. While foreign banks are in the process of moving towards Canadian levels, our banks obviously face no such pressures. In addition, the quality of Tier 1 capital of Canadian banks is among the strongest in the world.
There is no "executive summary" or "take-away" from his remarks that encapsulates all of his observations and suggestions. You need to read it all. But as we all spiral down during the next two to five years I suspect he will continue to be someone whose words are very much worth your time.
Auto Bailout: "Show Me the . . . Plan"
On November 19 I offered an "open letter" to my Senators and Congressional representative. I identified five categories of questions for which I requested their response. Not incidentally, that blog entry has now been sent to the three of them (as recommended by a reader who included that suggestion in a comment); if and when I get responses I'll include them in that blog entry.
The last of the questions was: "Where on the Internet can I find the business plan that you are presumably relying upon that documents, precisely, how this $25 billion is to be used, and how, why and when it will solve these three companies' problems, revive the industry, and why it will eliminate any need for them to regularly return to you for more taxpayer money?" Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008.
Two days later the New York Times reports that apparently the same question has now occurred to Congress -- days after they signed on the line their support for the $25 billion bailout, plan or no plan. Speaker Nancy Pelosi is now quoted as saying, "Until we can see a plan where the auto industry is held accountable and a plan for viability on how they go into the future — until we see the plan, until they show us the plan, we cannot show them the money.” Majority Leader Harry Reid adds, "The executives of the auto companies have not been able to convince Congress or the American people that this government bailout will be its last.” David M. Herszenhorn, "Detroit’s Bid for Aid Fails — For Now,"New York Times, November 21, 2008.
That being the case, there are serious potential conflict of interest issues surrounding her husband's activities.
The Obama transition team is focused on the wide array of Mr. Clinton’s postpresidential activities, some details of which have not been made public. This list includes the identity of most of the donors to his foundation, the source of some of his speaking fees — he has earned as much as $425,000 for a one-hour speech — and his work for the billionaire investor Ronald W. Burkle.
The vetting of Mr. Clinton’s myriad philanthropic and business dealings is “complicated, and it may be the complications that are causing hesitation on both sides,” said Abner J. Mikva, one of Mr. Obama’s closest supporters and a White House counsel during the Clinton administration. “There would have to be full disclosure as to who all were contributors to his library and foundation. I think they’d have to be made public.” . . .
“It’s not just what he does or says — it’s the fact that the foundation is involved with foreign countries, some of which might well be in conflict with U.S. policy,” Mr. Mikva said. “It’s more than a legal problem — there are ethical problems and appearance problems.”
Nor is that the only potential cabinet appointment raising such issues.
President-elect Barack Obama’s selection of former Senator Tom Daschle for secretary of health and human services posed new questions on Wednesday about how broadly the new administration would apply Mr. Obama’s campaign promises to limit potential conflicts of interest among his appointees. . . .
Former Senator and Majority Leader Tom Daschle's "firm represents dozens of [health care] concerns including pharmaceutical companies, health care providers, and trade groups for nurses and nursing homes" and notes that it "has the significant advantage of including two former U.S. Senate majority leaders — Senators Bob Dole and Tom Daschle." Daschle also serves on the board of the Mayo Clinic, which "is itself a major health care provider, research institution, and recipient of grants from the National Institutes of Health." Moreover, Daschle's "wife, Linda Daschle, is a prominent lobbyist for aerospace and military concerns."
Et tu, NPR?Gardiner Harris, "Radio Host Has Drug Company Ties,"New York Times, November 21, 2008: "An influential psychiatrist [Dr. Frederick K. Goodwin, a former director of the National Institute of Mental Health] who served as the host of public radio’s popular 'The Infinite Mind' program earned at least $1.3 million between 2000 and 2007 giving marketing lectures for drug makers, income not mentioned on the program. . . . In October, [Senator] Grassley revealed that Dr. Charles B. Nemeroff of Emory University, one of the nation’s most influential psychiatric researchers, earned more than $2.8 million in consulting arrangements with drug makers from 2000 to 2007, failed to report at least $1.2 million of that income to his university and violated federal research rules.
How to Manipulate Media
And while we're on the subject of the media, for a very inside and insightful explanation of how celebrities control what we think of them, and how and why the media goes along, take a look at Brooks Barnes, "Angelina Jolie's Carefully Orchestrated Image," <i>New York Times, November 20, 2008.
November 14, 2008, 10:45 a.m., 3:20 p.m.; November 15, 2008, 10:20 a.m. (video of Peter Schiff's prescient predictions during last couple of years); November 16, 2008, 11:00 a.m. (Sunday Register's consistent editorial; bottom of blog entry)
"Workers of the World Unite You Have Nothing You Need Use But Your Brains"
Forgive the distant play on "workers of the world unite, you have nothing to lose but your chains;" the point is that the observations of workers and all the rest of us are worth something when evaluating the judgments of the "experts."
On balance, I'm a proponent of a meritocracy, expertise, graduate and post-graduate education, and looking to scientists and experts rather than ideologues for solutions to public policy challenges.
But it's also reassuring when ordinary folks like myself, relying on instincts, intuition and such limited information and understanding as we possess, can come to the same conclusions ultimately adopted by the experts.
(And I won't even note the instances when the "experts" prove to be not all that expert -- except to provide you the following video look-back on how Fox's "experts" trashed the prescient predictions of Peter Schiff.)
That amateur's instincts can often prove right is fortunate for a blogger like myself, since I enjoy expressing opinions on dozens of public policy topics for which I have neither formal educational training nor the expertise of "experience."
But there may be a lesson here for the experts as well. In a variation on "when the people will lead their leaders will follow," when the public says "the emperor has no clothes" it might well behoove the experts to at least take a second look at their naked proposals.
So it is with the coming global economic collapse.
Please note that my point is precisely the opposite of "we're smarter than the experts." My point is that even though many of us are not smarter than the experts, even though we don't have the educational credentials or experience that they do, doesn't mean that we aren't capable -- drawing on what we do have -- of coming up with positions and understandings that ultimately prove to be correct.
When I wrote the op ed column, "Ten Questions for Bush Before War" in February of 2003 (along with many similar analyses at that time), I wasn't the only "non-expert" who was able to predict, pretty much step-by-step, the disasters for America that would result from our invasion and occupation of Iraq.
When Secretary Paulson announced his three-page $700 billion bank bailout plan many noted that if we were going to go down that road we should at least give the taxpayers some equity in return for being bilked, rather than just buy up the banks' securitized worthless mortgages. I was among them: Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan; Senate Bill: Wrong Plan, Favoring Wrong People, at the Wrong Time," October 2, 2008. Now even Paulson has reversed course and acknowledged we were right.
Today's issue involves the automobile industry bailout being pushed by the Democratic Party leadership -- President-elect Obama, Speaker Pelosi, and Senate Majority Leader Reid. Indeed, apparently Obama made this among his top priorities during the limited time he had with President Bush (who has opposed the idea) during their visit. Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("The labor movement spent, according to Financial Week, a whopping $385 million to elect Obama and other Democrats last week. Nobody writes such large checks without expecting something: now it's payback time.").
GM's problems are fundamental and have been for decades.
Management has been unimaginative, resistant to change, and bureaucratized beyond belief. It has opposed progress of all kinds: seat belts, air bags, and bumpers that might withstand a crash at more than two miles per hour; small cars when customers wanted them and foreign car manufacturers were gaining an increasing share of our domestic market by providing them; efforts to reduce greenhouse gases and climate change; their lobbying for tariff protections rather than confronting competition in an open marketplace; dragging their feet on hybrids and alternative fuel vehicles or even improving the gas mileage of conventional vehicles; continuing to manufacture trucks and SUVs in the face of rising gas prices. See, Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("Detroit's problems aren't caused by a one-time slump. They can't be fixed by another infusion of cash. One cause is that union labor and legacy costs are too high and make the so-called Big Three companies uncompetitive. Another is that their profitability is tied to large, heavy trucks and SUVs that Americans no longer want to buy, at least in such large numbers. That's just common sense.").
The company has permitted itself to assume liabilities (for employees' health care and pension plans among other things) far beyond its ability to pay. And now it's burning through cash at a rate that will bring it to bankruptcy by early next year. Sales of internal combustion vehicles are down dramatically around the world -- but far more so for GM than for those made at American plants by American workers by Toyota, Honda, BMW, and Kia. "Sales of cars and auto parts plunged 23.4 percent from last year, . . . and 31.9 percent in October . . . the lowest recorded in 25 years and analysts predict the market will remain weak into 2009." Jack Healy, "A Record Decline in October’s Retail Sales,"New York Times, November 14, 2008; Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("Honda kept its focus on smaller cars such as the Civic and Accord, and saw its sales continue to increase this summer while GM, Ford, and Chrysler have slid.").
And today we learn European insurers are now refusing to provide insurance to suppliers of the Big Three.
There would seem to be little justification for a bailout -- nor does there seem to be a realistic business plan in place regarding what the money will be used for, what it will accomplish (especially in this economy), where it will get us and when and why.
To the extent the earlier, special $25 billion taxpayer gift is to be used for re-tooling and design of new, more "green" vehicles, (a) is that a business the taxpayers really want to get in? (b) isn't the market (e.g., Toyota) responding to that desire? (c) if not, is there a point to doing it if customers won't buy the cars (e.g., how many Volts will sell at $40,000 a copy?) (d) if we want any private institution to undertake such research, why on earth would we pick GM -- whose executives have had decades to provide this response and have fought doing so? (e) even if some GM employees had the ability to pull this off, what is the likelihood the company will be able to do in the next few months what it has been unwilling to do for years? and (f) if it takes three years to bring a car from design to showroom, how is that going to save a company that is less than six months from bankruptcy?
So what, exactly, is going to be done with the near-$100 billion the Democrats want to give the (formerly) "Big Three" besides continuing excessive executive compensation and payments to shareholders? Workers are going to continue to be laid off -- which won't make it any easier for them to buy cars (a principle that Henry Ford understood in setting his workers' wages in the early 20th Century). There's little point in the few who will be retained making cars for dealers who are closing their showrooms and don't want the inventory, or potential customers who have lost their jobs and can't pay their mortgages.
And this morning one of my favorite conservatives (because he's smart, rational, and rarely ideological or mean spirited), David Brooks, sums up the situation as well as anyone. David Brooks, "Bailout to Nowhere,"New York Times, November 14, 2008. Here are some excerpts:
Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.
But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. . . .
It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. . . .
It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state. . . .
G.M. and Chrysler . . . are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. . . .
There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. . . .
In short, a bailout will . . . just postpone things. . . .
[T]he most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what. . . .
Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.
There you have it.
We have a mechanism in place to deal with the auto industry's problem: Chapter 11 bankruptcy reorganization. It's clearly a preferable "least-worst solution" to bailouts. Some corporate executives will be out of work, but they deserve to be -- indeed must be if the companies' prospects are to improve. Shareholders will suffer a loss -- but their stock has already declined some 90% in value, so it's not like Chapter 11 is their biggest problem. "Shares in American automakers, the Ford Motor Company and General Motors, have fallen to multi-decade lows as the companies reported billions in losses." Jack Healy, "A Record Decline in October’s Retail Sales,"New York Times, November 14, 2008.
Economic support should go to workers, not named, pre-existing corporations. (That means jobs programs, unemployment compensation, food stamps, healthcare and retraining programs.) The corporations' physical assets aren't going anywhere. As Brooks points out, they can (and will) continue to be operated either in Chapter 11, or by whatever other companies may acquire them at market value. (As a sidenote, our largest local mall, Coral Ridge, will probably be in Chapter 11 by early 2009; the theater, big box stores, restaurants and skating rink will continue to operate -- or, if not, they will be reacting to their own economic conditions, not those of the mall owner.)
See, Amitai Etzioni, "Bail Out the Workers, Not the Plants," The Huffington Post, November 11, 2008; Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("The better solution is a simple one: Allow automakers to declare bankruptcy. Contrary to popular belief, that will not mean the end of a company such as GM, which has indicated it may run out of cash by the end of this year. Under Chapter 11, a bankruptcy judge will weigh the different interests of GM's creditors, labor unions, shareholders, and so on, and the resulting company will emerge leaner and stronger. Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric probably don't even know that those companies once filed for Chapter 11."). Micheline Maynard, "G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout,"New York Times, November 12, 2008 ("But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.").
"Under it [Chapter 11], creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.
So why, exactly, is the Treasury substituting government bailouts for chapter 11? . . . Wall Street's major banks and insurance giant AIG . . . [don't] have to be bailed out. They could be reorganized under bankruptcy protection. . . .
And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.
It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.
As a final, not insignificant comment note that this ill-considered, seeming capitulation to the auto industry and UAW is not an example of "reaching across the aisle" to serve the interests of Obama's oft-heralded "United States of America" (as distinguished from our "Red States" and "Blue States"). Whatever the red state Republicans' motives may be, they are opposed to this idea. (Not incidentally, they give many of the same reasons for their opposition as the rest of us.) Coupled with Obama's earlier support for the original $700 billion bailout, and his prior vote supporting immunity for the telephone companies that spied on us in violation of law, it does not bode well for the new Administration's ability to offer "change" (beyond freeing up stem cell research) to a "broken" Washington, subservient to corporate power.
The U.S. unemployment rate hit a 14-year high of 6.5 percent last week. The fear of losing a job is compounded by the difficulty in finding another if you're laid off. . . .
Iowa State University economist and professor emeritus [Neil Harl] said it's not out of the realm of possibility that the United States could see unemployment rates [of] some 25 percent . . . and "there's nothing to indicate [employment rates] are going to improve." . . .
What has been tried so far hasn't worked so well.
Tax cuts pushed by the Bush administration didn't trickle down to create sustained job growth. Rebate checks didn't sufficiently stimulate the economy. Recent investment-bank bailouts haven't done enough to boost lending.
It's time for a better, bolder strategy. President-elect Barack Obama should make job creation his No. 1 priority. . . . Spending dollars to create jobs benefits workers directly and boosts the overall economy. . . .
The federal government could quickly infuse money into states to fund projects that are already planned -- including roads, bridges, sewers, parks and trails. That would create jobs for unemployed Americans, [send] money rippling through the economy [and] this country would get more of its infrastructure updated [strengthening] the economy against global competition for years to come. . . .
In the summer of 1932, Franklin D. Roosevelt . . . began putting the country to work through the Works Progress Administration.
Within a few years, millions of Americans were working to build infrastructure -- improvements that are still around today. . . .
Create jobs. Boost consumer confidence. Put the country on track for a brighter economic future.
It makes more sense than pouring more billions into bailouts.
