Fix income inequality with $10 million loans!

Fix income inequality with $10 million loans for everyone!
Sheila Bair
April 13, 2012
http://www.washingtonpost.com/opinions/fix-income-inequality-with-10-million-loans-for-everyone/2012/04/13/gIQATUQAFT_story.html

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough. It can hold our Portuguese debt as collateral just to make sure.

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

Come to think of it, by getting rid of work, we can eliminate a lot of government programs. For instance, who needs unemployment benefits and job retraining when everyone has joined the investor class? And forget the trade deficit. Heck, we want those foreign workers to keep providing us with goods and services.

We can stop worrying about education, too. Who needs to understand the value of pi or the history of civilization when all you have to do to make a living is order up a few trades? Let the kids stay home with us. They can play video games while we pop bonbons and watch the soaps and talk shows. The liberals will love this plan because it reduces income inequality; the conservatives will love it because it promotes family time.

I’m really excited! This is the best American financial innovation since liar loans and pick-a-payment mortgages. I can’t wait to get my super PAC started to help candidates who support this important cause. I think I will call my proposal the “Get Rid of Employment and Education Directive.”

Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923?

That couldn’t happen here. This is America. Why should hedge funds and big financial institutions get all the goodies?

Look out 1 percent, here we come.

outlook@washpost.com

Sheila Bair is a former chairman of the Federal Deposit Insurance Corp. and a regular contributor to Fortune Magazine.

Volcker defends ban on proprietary trading in comments to regulators

Former Fed Chair Volcker defends ban on proprietary trading in comments to regulators
February 13, 2012http://www.washingtonpost.com/business/industries/former-fed-chair-volcker-defends-ban-on-proprietary-trading-in-comments-to-regulators/2012/02/13/gIQArIwVBR_story.html

WASHINGTON — Former Federal Reserve Chairman Paul Volcker on Monday issued a broad defense of a federal rule bearing his name that would prohibit banks from trading for their own profit.

Commercial banks backed by government deposit insurance shouldn’t be able to engage in speculative trading, Volcker said in a letter supporting the so-called Volcker rule.

“Proprietary trading is not an essential commercial bank service that justifies taxpayer support,” he wrote.

The letter was sent to the five regulatory agencies that have approved a draft version of the rule, including the Federal Reserve and the Securities and Exchange Commission.

The rule is expected to be finalized by summer. Banks will then have until July 2014 to comply.

Congress directed regulators to draft the rule under the 2010 financial overhaul. It was a response to bets banks had placed on mortgage-backed securities, which hastened the financial crisis and led to taxpayer-funded bailouts.

Wall Street executives have opposed the rule. They say it would limit trading on behalf of customers and put them at a disadvantage with non-U.S. banks, which aren’t subject to the ban.

Banks, financial services trade groups and individuals have submitted hundreds of comments in opposition. Monday was the deadline for comments.

Tim Ryan, a lobbyist for the securities industry, called the rule “unworkable” and said it will slow economic growth.

The industry says the rule will reduce trading volumes, or the “liquidity” of stocks, bonds and other instruments. Banks won’t be able to trade with their own money and will likely cut back on trading for their customers to avoid running afoul of the rule. Lower trading will reduce demand for stocks and other securities, cutting into their prices.

Members of Congress from both parties have echoed the industry’s criticism. About 120 members of the House signed a letter asking regulators to drop the current proposal and draft an entirely new rule.

Volcker disagreed. He noted that excessive liquidity can increase risk by encouraging more trading.

“The restrictions... are not at all likely to have an effect on liquidity inconsistent with the public interest,” Volcker wrote.

Regarding the industry’s concerns about competition from overseas, Volcker wrote that they seem “superficial at best.” The rule’s bar on trading could make U.S. banks more appealing to many customers, he wrote.

Volcker indicated that small banks should be subject to less scrutiny under the rule. The vast majority of proprietary trading is done by a handful of large banks, he noted.

“At the end of the day, I feel confident that the restrictions imposed by the ‘Volcker Rule’ can be reasonably and effectively administered,” he wrote.

11 Facts You Need To Know About The Nation’s Biggest Banks

Pat Garofalo
Oct 7, 2011
http://thinkprogress.org/economy/2011/10/07/338887/1-facts-biggest-banks

The Occupy Wall Street protests that began in New York City more than three weeks ago have now spread across the country. The choice of Wall Street as the focal point for the protests — as even Federal Reserve Chairman Ben Bernanke said — makes sense due to the big bank malfeasance that led to the Great Recession.

While the Dodd-Frank financial reform law did a lot to ensure that a repeat of the 2008 financial crisis won’t occur — through regulation of derivatives, a new consumer protection agency, and new powers for the government to dismantle failing banks — the biggest banks still have a firm grip on the financial system, even more so than before the 2008 financial crisis. Here are eleven facts that you need to know about the nation’s biggest banks:

– Bank profits are highest since before the recession…: According to the Federal Deposit Insurance Corp., bank profits in the first quarter of this year were “the best for the industry since the $36.8 billion earned in the second quarter of 2007.” JP Morgan Chase is currently pulling in record profits.

– …even as the banks plan thousands of layoffs: Banks, including Bank of America, Barclays, Goldman Sachs, and Credit Suisse, are planning to lay off tens of thousands of workers.

– Banks make nearly one-third of total corporate profits: The financial sector accounts for about 30 percent of total corporate profits, which is actually down from before the financial crisis, when they made closer to 40 percent.

– Since 2008, the biggest banks have gotten bigger: Due to the failure of small competitors and mergers facilitated during the 2008 crisis, the nation’s biggest banks — including Bank of America, JP Morgan Chase, and Wells Fargo — are now bigger than they were pre-recession. Pre-crisis, the four biggest banks held 32 percent of total deposits; now they hold nearly 40 percent.

– The four biggest banks issue 50 percent of mortgages and 66 percent of credit cards: Bank of America, JP Morgan Chase, Wells Fargo and Citigroup issue one out of every two mortgages and nearly two out of every three credit cards in America.

– The 10 biggest banks hold 60 percent of bank assets: In the 1980s, the 10 biggest banks controlled 22 percent of total bank assets. Today, they control 60 percent.

– The six biggest banks hold assets equal to 63 percent of the country’s GDP: In 1995, the six biggest banks in the country held assets equal to about 17 percent of the country’s Gross Domestic Product. Now their assets equal 63 percent of GDP.

– The five biggest banks hold 95 percent of derivatives: Nearly the entire market in derivatives — the credit instruments that helped blow up some of the nation’s biggest banks as well as mega-insurer AIG — is dominated by just five firms: JP Morgan Chase, Goldman Sachs, Bank of America, Citibank, and Wells Fargo.

– Banks cost households nearly $20 trillion in wealth: Almost $20 trillion in wealth was destroyed by the Great Recession, and total family wealth is still down “$12.8 trillion (in 2011 dollars) from June 2007 — its last peak.”

– Big banks don’t lend to small businesses: The New Rules Project notes that the country’s 20 biggest banks “devote only 18 percent of their commercial loan portfolios to small business.”

– Big banks paid 5,000 bonuses of at least $1 million in 2008: According to the New York Attorney General’s office, “nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008.”

In the last few decades, regulations on the biggest banks have been systematically eliminated, while those banks engineered more and more ways to both rip off customers and turn ever-more complex trading instruments into ever-higher profits. It makes perfect sense, then, that a movement calling for an economy that works for everyone would center its efforts on an industry that exemplifies the opposite.

How Is Credit Created?

From WashingtonsBlog.com:
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth...

Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.

This angle of the banking system has actually been discussed for many years by leading experts:

“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.”
- 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics”

“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.“
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman

Indeed, the Fed is pushing to eliminate all reserve requirements. If banks can lend without having any reserves, then agreeing to extend credit obviously comes before having the reserves...

We Don’t Need the Giant Banks To Do It

If private banks can create credit out of thin air – without actually having excess reserves – then the government could do so as well. In other words, if banks don’t need to have extra money lying around before they can make loans, then states and local governments don’t either...

Moreover, as the Congressional Research Service confirms, the government has been loaning vast sums to the biggest banks at practically no interest, and then borrowing the money back from the banks at much higher interest.

Why do we need to spend huge sums of money to have the banks loans our own money back to us?

Indeed, a new report from Demos – a non-partisan public policy organization – in conjunction with the Center for State Innovation, issued a report in April looking at the potential for “partnership banks” across the country, including 11 states already considering such legislation...

Partnership Banks can raise revenue for states without raising taxes, and increase loans to small businesses precisely when Wall Street banks have cut back on lending and raised public borrowing costs. A Partnership Bank would act as a “banker’s bank” to in-state community banks and provide the state government with both banking services at fair terms and an annual multi-million dollar dividend.

If modeled on the successful Bank of North Dakota, Partnership Banks in other states would:

* Create new jobs and spur economic growth. Partnership Banks are participation lenders, meaning they partner—never compete—with local banks to drive lending through local banks to small businesses. If Washington State had a fully-operational Partnership Bank capitalized at $100 million during the Great Recession, it would have supported $2.6 billion in new lending and helped to create 8,212 new small business jobs. A proposed Oregon bank could help community banks expand lending by $1.3 billion and help small business create 5,391 new Oregon jobs in its first three to five years. All of this would be accom- plished at a profit, which Partnership Banks should share with the state.

* Generate new revenues for states directly, through annual bank dividend payments, and indirectly by creating jobs and spurring local economic growth…

* Lower debt costs for local governments. Like the Bank of North Dakota, Partnership Banks can get access to low-cost funds from the regional Federal Home Loan Banks. The banks can pass savings on to local governments when they buy debt for infrastructure investments. The banks can also provide Letters of Credit for tax-exempt bonds at lower interest rates.

* Strengthen local banks even out credit cycles, and preserve real competition in local credit markets. There have been no bank failures in North Dakota during the financial crisis. BND’s charter is clear that its goal is to “be helpful to and to assist in the development of [North Dakota banks]… and not, in any manner, to destroy or to be harmful to existing financial institutions.” By purchasing local bank stock, partnering with them on large loans and providing other sup- port, Partnership Banks would strengthen small banks in an era when federal policy encourages bank consolidation.

* Build up small businesses. Surveys by the Main Street Alliance in Oregon and Washington show at least 75 percent support among small business owners. In markets increasingly dominated by large corporations and the banks that fund them, Partnership Banks would increase lending capabilities at the smaller banks that provide the majority of small business loans in America.
These various proposals would “move general revenue deposits out of the Wall Street banks that dominate the banking business today, and use them to capitalize a new local public structure with a mission to grow the local economy.”

Let’s Give the Giant Banks Some Competition

Some people are understandably skeptical of state banks. Specifically, they don’t trust state politicians to exercise fiscal constraint, or they think that states with their own public banks would spend money on frivolous projects.

I understand and respect both concerns.

But as financial writer Yves Smith notes, state banks – even if imperfect – would at least give some competition to the too big to fails which have driven our economy into a ditch, and which are state-supported anyway:

The most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks...

Before readers argue that this is tantamount to socialism, that would be better than what we have now. As we noted in an earlier post “Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?“:

Big finance has an unlimited credit line with governments around the globe. “Most subsidized industry in the world” is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended…

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.


Right now, we have much of the banking sector operating so as to privatize gains and socialize losses. We might as well socialize the gains, as North Dakota does...

The Giant Banks Are ALREADY State-Sponsored … So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies?
June 13, 2011
http://www.washingtonsblog.com/2011/06/the-giant-banks-are-already-state-sponsored-so-why-not-create-public-banks-to-at-least-share-the-gains-help-out-main-street-and-grow-our-local-economies.html

Bad policy decisions could push the US into a 'lost decade'

Bad policy decisions could push the US into a 'lost decade' and put the eurozone into recession, warns IMF
Philip Aldrick, Economics Editor
20 Sep 2011
http://www.telegraph.co.uk/finance/financialcrisis/8777693/Bad-policy-decisions-could-push-the-US-into-a-lost-decade-and-put-the-eurozone-into-recession-warns-IMF.html

Cutting its global forecasts sharply, the world's economic watchdog said the global economy had entered a "dangerous new phase" and urged policymakers to tread a careful line between aggressive deficit reduction and growth. Central banks should stand ready to restart the printing presses to aid the recovery, it added in its twice-yearly World Economic Outlook.

"The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks," Olivier Blanchard, the IMF's chief economist, said. "Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt. Fear of the unknown is high."

Europe's leaders came under scathing criticism over the escalating debt crisis. "Europe must get its act together," Mr Blanchard said, adding that there was "widespread perception policymakers are one step behind the action". Urging a speedy implementation of the July 21 agreement to bolster the single currency area's €440bn bail-out fund, he said: "The eurozone is a major source of worry. This is a call to arms."

The warning came as Portugal's prime minister Pedro Passos Coelho said his country may need fresh aid if Greek defaults.

"In the case of a default of Greece, this aid could be necessary and it is important that our partners are convinced that it is worth helping Portugal, and in this case, Ireland, too," he said.

Weaker than expected growth in the US, the persistence of Europe's "sovereign debt and banking sector problems", high oil prices and the Japanese tsunami conspired to dramatically worsen the outlook since June. Global growth for this year has been revised down from 4.5pc to 4pc in the past three months – led by a one percentage point downward revision in US growth for this year to 1.5pc.

The UK was downgraded sharply, from June's 1.5pc prediction to just 1.1pc for this year and from 2.3pc to 1.6pc for 2012. Canada and much of Europe saw even bigger downgrades.

However, the forecasts were based on the assumption that President Barack Obama's $447bn jobs plan is approved and the eurozone crisis is resolved with no more than the small voluntary default on Greek debt already agreed. A worse outcome is a "distinct possibility", the IMF warned.

Under the IMF's "downside scenario" – a "shock" to European banks' capital, higher bad debts in the US and Asia, and slower US growth – "the US and the euro area would fall back into recession, with output in 2012 more than 3pc below projections".

Such a devastating hit would drag the UK back into recession, as the US and the Euro area are Britain's major trading partners. "It would be very difficult to see why the UK should be exempt from that as we don't have any ammunition to withstand it," Jürgen Michels, European economist at Citi, said.

Departing from its previous deficit-cutting mantra, the IMF stressed that countries must be careful not to choke off the recovery by cutting too hard too fast. Even the UK should consider back-ending George Osborne's £110bn austerity plan, by delaying spending cuts, if growth turns out to be "substantially" less than the 1.1pc expected this year, the IMF said.

"Countries with more fiscal space could choose a more back-loaded profile should the macroeconomic environment deteriorate substantially," it said. "In the systemically-important advanced economies, activity and confidence are still fragile. If fiscal consolidation were suddenly stepped up further at the expense of the disposable income of people with a high marginal propensity to consume, these economies could be thrown back into stagnation."

In the US, the IMF warned, if income tax relief and unemployment benefit are not extended and if Capitol Hill cannot agree a longer-term strategy for dealing with the $14.3 trillion public debt, "the result could be a lost decade for growth".

In Europe, policymakers must deal with the mushrooming banking crisis by "injecting new capital and restructuring weak but viable banks while closing others". If banks cannot raise funds privately, politicians "must make the case for injecting public funds". Allowing banks time to shrink their loan books would only further damage the recovery by prolonging the credit crunch, Mr Blanchard warned.

To keep the global ship afloat, the IMF called on central banks – particularly the Federal Reserve in the US – to restart money printing and keep interest rates low for longer. "Unconventional policies should continue until there is a durable reduction in financial stress," it said.

$1.2 Trillion to Banks, You 0

Robert Oak
Sun, 08/21/2011
http://www.economicpopulist.org/content/12-trillion-banks-you-0

Bloomberg News has researched a bombshell story, the Federal Reserve gave $1.2 trillion in secret loans to banks during the financial crisis, from August 2007 until April 2010. This is in addition to the TARP bail outs which was publicly known.

The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance under the seven programs tallied by Bloomberg -- was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

The top three banks at peaking borrowing are: Morgan Stanley, $107.3 billion, Citigroup took $99.5 billion, Bank of America $91.4 billion, or a total of $298.2 billion. Gets worse, foreign banks amounted to half the loans.

Half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

Bloomberg had filed a Freedom of Information act in 2008 to find out the details on these loans. They finally won to be presented with 21,000 transactions and massive amounts of data to crunch.

Think about it, while people are foreclosed on with no help in sight and none reall to this day, we had another secret bailout happening to the tune of $1.2 trillion, with half of it bailing out banks not even incorporated in this nation.

The Market Has Spoken: Austerity Is Bad for Business

http://globalresearch.ca/index.php?context=va&aid=25916
Ellen Brown
Global Research, August 6, 2011
Web of Debt

It used to be that when the Fed Chairman spoke, the market listened; but the Chairman has lost his mystique. Now when the market speaks, politicians listen. Hopefully they heard what the market just said: government cutbacks are bad for business. The government needs to spend more, not less. Fortunately, there are viable ways to do this while still balancing the budget.

On Thursday, August 4, the Dow Jones Industrial Average fell 512 points, the biggest stock market drop since the collapse of September 2008.

Why? Weren't the markets supposed to rebound after the debt ceiling agreement was reached on Monday, avoiding U.S. default and a downgrade of U.S. debt?

So we were told, but the market apparently understands what politicians don't: the debt deal is a death deal for the economy.

Reducing government spending by $2.2 trillion over a decade, as Congress just agreed to do, will kill any hopes of economic recovery. We're looking at a double-dip recession.

The figure is actually more than $2.2 trillion. As Jack Rasmus pointed out on Truthout on August 4th:

Economists estimate the "multiplier" from government spending at about 1.5. That means for every $1 cut in government spending, about $1.5 dollars are taken out of the economy. The first year of cuts are therefore $375 billion to $400 billion in terms of their economic effect. Ironically, that's about equal to the spending increase from Obama's 2009 initial stimulus package. In other words, we are about to extract from the economy - now showing multiple signs of weakening badly - the original spending stimulus of 2009!

As others have pointed out, that magnitude of spending contraction will result in 1.5 million to 2 million more jobs lost. That's also about all the jobs created since the trough of the recession in June 2009. In other words, the job market will be thrown back two years as well.


We're not moving forward. We're moving backward. The hand-wringing is all about the "debt crisis," but the national debt is not what has stalled the economy, and the crisis was not created by Social Security or Medicare, which are being set up to take the fall. It was created by Wall Street, which has squeezed trillions in bailout money from the government and the taxpayers; and by the military, which has squeezed trillions more for an amorphous and unending "War on Terror." But the hits are slated to fall on the so-called "entitlements" - a social safety net that we the people are actually entitled to, because we paid for them with taxes.

The Problem Is Not Debt But a Shrinking Money Supply

The markets are not reacting to a "debt crisis." They do not look at charts ten years out. They look at present indicators of jobs and sales, which have turned persistently negative. Jobs and sales are both dependent on "demand," which means getting money into the pockets of consumers; and the money supply today has shrunk.


We don't see this shrinkage because it is primarily in the "shadow banking system," the thing that collapsed in 2008. The shadow banking system used to be reflected in M3, but the Fed no longer reports it. In July 2010, however, the New York Fed posted on its website a staff report titled "Shadow Banking." It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion - actually larger than the traditional banking system. In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system.

Only about $2 trillion of this shrinkage has been replaced with the Fed's quantitative easing programs, leaving a $3 trillion hole to be filled; and only the government is in a position to fill it. We have been sold the idea that there is a "debt crisis" when there is really a liquidity crisis. Paying down the federal debt when money is already scarce just makes matters worse. Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.

Most of our money now comes into the world as debt, which is created on the books of banks and lent into the economy. If there were no debt, there would be no money to run the economy; and today, private debt has collapsed. Encouraged by Fed policy, banks have tightened up lending and are sitting on their money, shrinking the circulating money supply and the economy.

Creative Ways to Balance the Budget

The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year. The only real danger posed by a growing federal debt is the interest burden, but that has not been a problem yet. The Congressional Budget Office reported in December 2010:

[A] sharp drop in interest rates has held down the amount of interest that the government pays on [the national] debt. In 2010, net interest outlays totaled $197 billion, or 1.4 percent of GDP--a smaller share of GDP than they accounted for during most of the past decade.


The interest burden will increase if the federal debt continues to grow, but that problem can be solved by mandating the Federal Reserve to buy the government's debt. The Fed rebates its profits to the government after deducting its costs, making the money nearly interest-free. The Fed is already doing this with its quantitative easing programs and now holds nearly $1.7 trillion in federal securities.

If Congress must maintain its debt ceiling, there are other ways to balance the budget and avoid a growing debt. Ron Paul has brought a creative bill that would eliminate the $1.7 trillion deficit simply by having the Fed tear up its federal securities. No creditors would be harmed, since the money was generated with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.

The Trillion Dollar Coin Alternative

The most direct solution to the debt problem is for the government to fund its budget with government-issued money. One alternative would be for the Treasury to issue U.S. Notes, as was done in the Civil War by President Lincoln.

Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins. Congress has the Constitutional power to "coin money," and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.

This idea is now getting some attention from economists. According to a July 29th article in the Johnsville News titled "Coin Trick: The Trillion Dollar Coin":

The idea just started to get serious traction the last few days as the debt stalemate has grown more intense and partisan. Yale constitutional law professor Jack Balkin floated it as an option in a CNN op-ed yesterday (July 28th).

Today the idea has gone mainstream. It is covered by NY Magazine, CNBC, and The Economist. Even Nobel economist Paul Krugman of the NY Times has weighed in. Annie Lowrey of Slate discusses it as one of several gimmicks the government could use to resolve the debt-ceiling debacle. Krugman added:

These things [like coin seigniorage] sound ridiculous - but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?


The debt ceiling itself was a legal trick, a form of extortion based on a century-old statute that conflicts with the Constitution. However, said the Johnsville News article, "coin seigniorage is not a scam. It is legal . . . . This plan looks like it might be Obama's ace in the hole . . . ."

The article cites Warren Mosler, founder of MMT (Modern Monetary Theory), who reviewed the idea in a January 20th blog post and concluded it would work operationally.

Scott Fullwiler, associate professor of economics at Wartburg College, also did a comprehensive analysis and concluded that the trillion dollar coin alternative was unlikely to result in inflation. Comparing it to Ron Paul's plan, he wrote:

This option is much like Ron Paul's proposal-actually identical in terms of the effect on the debt ceiling and the Treasury-except that his proposal would destroy all of the Fed's capital (and then some), which is a potential problem politically . . . though not operationally, and which the Fed is therefore very unlikely to agree to.


On the inflation question, just because the Treasury has money in its account doesn't mean it can spend the funds. It needs the usual Congressional approval. To keep a lid on spending, Congress just needs to be instructed in basic economics. They can spend on goods and services up to full employment without creating price inflation (since supply and demand will rise together). After that, they need to tax -- not to fund the budget, but to pull excess money back in and avoid driving up prices.

Spending More While Borrowing Less

In an economic downturn, the government needs to spend more, not less, as history shows. This can be done while still balancing the budget, simply by taking back the government's Constitutional power to issue money.

The budget crisis is an artificial one, and the current "solution" will only guarantee a deeper recession and more widespread suffering. Rather than obsessing over deficits and debt, the government needs to turn its focus to jobs, sales and quality of life.
------------------------
Ellen Brown is president of the Public Banking Institute and the author of eleven books. She developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, she turns those skills to an analysis of the Federal Reserve and "the money trust." Her websites are http://WebofDebt.com and http://PublicBankingInstitute.org.

Ellen Brown is a frequent contributor to Global Research.

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QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

http://www.nakedcapitalism.com/2011/07/scott-fullwiller-qe3-treasury-style%E2%80%94go-around-not-over-the-debt-ceiling-limit.html
Monday, July 11, 2011
Scott Fullwiler, Associate Professor of Economics at Wartburg College
Cross posted from New Economic Perspectives
http://neweconomicperspectives.blogspot.com/

Cullen Roche’s excellent post at Pragmatic Capitalism explains that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum ones). Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets. As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.”

The following is a description of how the process would work and the implications for monetary operations:

1. The Treasury mints a $1 trillion coin, or whatever amount is desired.

2. The Treasury deposits the coin into the Treasury’s account at the Fed. The Fed’s assets (coin) and liabilities (Treasury’s account) increase by the same amount. As Beowulf notes later in a comment to the same post from Cullen, were the Fed to resist, the Federal Reserve Act clearly states that “wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” The Fed is legally an agency operating at the pleasure of the government, not vice versa. Regardless, the actions I describe here and below by the Treasury in no way interfere with the normal operations of monetary policy (explained in various places below).

3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin. The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed.

4. Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%. Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year.

5. The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed. But since the Treasury’s account is on the Fed’s balance sheet, there is no operational difference. That is, this is effectively “QE3, Treasury Style.” As with QE2, no net financial assets have been created for the non-government sector. The net effect, like QE2, is to reduce the term structure of US debt held by private investors, as bonds have been replaced with reserve balances.

6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown. Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago.

7. Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%. Again, this is not inflationary. There are three points to make in explaining why.

First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a treasury security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no “taking money from one person to give it to another” zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and are known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income or dissaving, as opposed to additional spending out of additional income. The commonly held view that “more money” necessarily creates spending confuses “more money” with “more income.” QE—whether “Fed style” or “Treasury style”—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, “money” doesn’t spend itself. Further, by definition, spending more out of existing income is a re-leveraging of private sector balance sheets. This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE. The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector. (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.)

Addendum: From points 6 and 7, QE3, Treasury Style can only be as inflationary as QE2 (which is to say, not at all, aside from indirect, temporary effects of commodities speculators who believed QE2 would be inflationary), since operationally it’s the exact same thing in terms of the effect on the non-government sector’s financial position. Anybody arguing that QE Treasury Style would be inflationary must explain why QE2 wasn’t inflationary. Neoclassical economists are currently saying “interest on reserves” is why QE2 didn’t work, but QE Treasury style similarly requires interest on reserves or the Fed to drain reserve balances with time deposits offered to banks if the Fed is to hit an overnight target. In other words, there’s no such thing as QE Fed Style or Treasury Style without interest on reserves (or, alternatively, time deposits).

8. The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired. This simple asset swap demonstrates that the self-imposed constraints of the debt-ceiling, counting Treasury securities held by the Fed against the debt ceiling, and forbidding the Fed from “lending” to the Treasury directly are just that—self-imposed—and are not operational constraints at all. The only constraint is in the flawed understanding of the monetary system that is standard today among the macroeconomists writing textbooks and advising policymakers, or acting as policymakers themselves. From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales.

9. Just as the Fed is the monopoly supplier of reserve balances, the Treasury is the monopoly supplier of coins. Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients. Deficits would increase the quantity of reserve balances circulating and currently earning 0.25%. As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit. But even selling bonds isn’t operationally necessary if the Fed pays interest on reserve balances at a rate equal to its target rate. On the other hand, if the Fed set the rate on reserve balances below its target and the Treasury no issuing bonds, the Fed could issue its own time deposits (with Congress’ blessing) to drain reserve balances created by a deficit. Whether the Fed’s target rate were set above the rate paid on reserve balances or equal to it, effective interest on the national debt clearly would be a monetary policy variable (as interest paid on reserve balances or on time deposits by the Fed reduces the Fed’s profits returned to the Treasury), as it at the very worst can be even under current operating procedures.

10. This approach to dealing with the debt ceiling is far better than the recent proposal by Ron Paul, as again it lifts the veil on current monetary operations and recognizes the currency-issuing status of the US federal government. Instead, Paul proposes that the Fed destroy its holdings of Treasury securities. What’s strange about the proposal is that it shows that Paul either doesn’t understand monetary operations or is trying to have it both ways. Destroying the securities requires reducing the Fed’s capital by the same amount. Given the Fed’s miniscule level of capital (because, again, it has virtually no retained earnings after transferring them all to the Treasury each year), its capital would be way into negative territory. This isn’t a problem operationally, given that the Fed is the monopoly supplier of reserve balances. But recall that Paul was one of those protesting Credit Easing and QE1 the loudest, claiming that these would surely destroy the Fed’s capital and leave it insolvent. (Again, this is only relevant operationally under a gold standard or similar monetary arrangement—Paul and others like him want to analyze the US national debt and the Fed as if a gold standard existed, and then claim that a going on the gold standard is the solution to all of our problems, but I digress.) So, effectively Paul’s proposal would leave the Fed in a state of (in his view) “insolvency”—perhaps he does know what he’s doing and his debt ceiling proposal is just part of his grand plan to “end the Fed.” Otherwise, it would have been simpler to simply propose exempting the Treasury securities held by the Fed from counting toward the debt ceiling.

Lastly, giving credit where it is due, I want to again recognize the efforts of both Joe Firestone and Beowulf in researching and explaining the legal basis for and operational implications of the Treasury’s Constitutional authority to mint its own coin(s). This post benefits significantly from their important, original work.

Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, twice?

Stephen Gandel
Tuesday, July 5, 2011
http://curiouscapitalist.blogs.time.com/2011/07/05/debt-ceiling-could-ron-pauls-plan-save-us-from-disaster-twice

Is Congressman Ron Paul our savior?

The Republican, and libertarian, who is running for President, again, in the past few days has been floating a plan that has the potential to end the debt ceiling standoff, for now, and eliminate the growing possibility that the U.S. government could have to default on its debt, which could cause disastrous economic consequences. Even better, in Ron Paul's plan Republicans and Democrats wouldn't have to come to some compromise about taxes or spending cuts. In fact, they wouldn't even have to vote to raise the debt ceiling, at least not for a year, perhaps more. And that's not all. Paul's plan would not only solve the debt ceiling problem, it also might eliminate any harmful after shocks the Federal Reserve's QE2 program could have on the economy.

Not possible, you say. Well at least one left-leaning economist, Dean Baker, thinks the plan has promise. Here's why:

Paul's plan starts with the Federal Reserve. In the last year or two the Fed has been buying up U.S. Treasury bonds in an effort to lower interest rates and boost the economy. The most recent round of that buying has been dubbed QE2, and has come under a good deal of criticism, though most economists agree that it was a generally helpful policy. The result is that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90% of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total Federal debt at $14.3 trillion.

Paul's plan: Get the Fed and the Treasury to rip up that debt. It's fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed. A trillion and a half dollars is currently about what spending is expected to exceed tax revenue in 2011. And the deficit is expected to dramatically shrink in 2013 and beyond. So cut the debt by $1.7 trillion and you could run the government as is for at least the next year, and perhaps into 2013. By pushing the debate past the presidential election cycle you might be able to get some of the politics out of coming to a smart solution. What's more, under the current scenario, the Federal Reserve would eventually have to sell that debt back into the market. That could cause interest rates to rise. Rip up the debt and you don't have to worry about what the added selling pressure of the Fed would do to the market.

There are of course a number of catches. First of all, the Fed probably couldn't sell off all of its Treasury holdings. Some of the interest, say 10%, it gets from those bonds it holds onto the Fed uses to fund its operations. The Consumer Financial Protection Bureau, for instance, by way of Dodd-Frank, specifically gets funded from the interest that the Fed collects on the U.S. Treasury debt it owns. Second, even in good times, the Fed always holds a significant amount of Treasuries, if not as much as it has now. The Fed had about $700 billion in late 2007, just before the financial crisis began to unfold. Take that as a baseline, the Fed would only be able to retire about $1 trillion in U.S. debt. That would probably put us in the same debt debate situation we are in now sometime next summer or early fall, which is the heart of presidential election season, potentially making the debate even more politically charged than it is now. Lastly, that government debt that the Fed owns is back by bank reserves. They are technically excess reserves. But eliminate the debt and those reserves go away, too, which could lead to less lending by the banks.

But the biggest potential draw back is this: It just looks bad. It looks like we don't live up to our obligations. Of course, government finances, especially those of an economy as big as ours are hard to grasp. As much as Sarah Palin and the rest of the Tea Party would like to think, the government doesn't have to balance its checkbook in the way that individuals have to. But nonetheless, if the government regularly used the Fed to create money to buy up its debt rather than paying it off, it seems wrong. The optics are bad. "It smacks of the third world," says Allan Meltzer, a Fed historian. "It's what Zimbabwe would do."

Drawbacks aside, if the Democrats and the Republicans can't get to a compromise by July 22nd, I think the Fed option is a viable one. It's definitely better than defaulting. And it is probably better than massive cutbacks in government spending that could potentially send us right back into a recession anyway. The optics of a government unable to come to a compromise are bad already.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel.

The economic recovery turns 2: Feel better yet?

By PAUL WISEMAN, AP Economics Writer
7-2-11
http://www.google.com/hostednews/ap/article/ALeqM5gk1sa6lAz7bGy-54dEGeclKolZUg?docId=522f7d3a88ad4491976218e78a005581

WASHINGTON (AP) — This is one anniversary few feel like celebrating.

Two years after economists say the Great Recession ended, the recovery has been the weakest and most lopsided of any since the 1930s.

After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven't kept up with prices at the grocery store and gas station. The economy's meager gains are going mostly to the wealthiest.

Workers' wages and benefits make up 57.5 percent of the economy, an all-time low. Until the mid-2000s, that figure had been remarkably stable — about 64 percent through boom and bust alike.

Executive pay is included in this figure, but rank-and-file workers are far more dependent on regular wages and benefits. A big chunk of the economy's gains has gone to investors in the form of higher corporate profits.

"The spoils have really gone to capital, to the shareholders," says David Rosenberg, chief economist at Gluskin Sheff + Associates in Toronto.

Corporate profits are up by almost half since the recession ended in June 2009. In the first two years after the recessions of 1991 and 2001, profits rose 11 percent and 28 percent, respectively.

And an Associated Press analysis found that the typical CEO of a major company earned $9 million last year, up a fourth from 2009.

Driven by higher profits, the Dow Jones industrial average has staged a breathtaking 90 percent rally since bottoming at 6,547 on March 9, 2009. Those stock market gains go disproportionately to the wealthiest 10 percent of Americans, who own more than 80 percent of outstanding stock, according to an analysis by Edward Wolff, an economist at Bard College.

But if the Great Recession is long gone from Wall Street and corporate boardrooms, it lingers on Main Street:

— Unemployment has never been so high — 9.1 percent — this long after any recession since World War II. At the same point after the previous three recessions, unemployment averaged just 6.8 percent.

— The average worker's hourly wages, after accounting for inflation, were 1.6 percent lower in May than a year earlier. Rising gasoline and food prices have devoured any pay raises for most Americans.

— The jobs that are being created pay less than the ones that vanished in the recession. Higher-paying jobs in the private sector, the ones that pay roughly $19 to $31 an hour, made up 40 percent of the jobs lost from January 2008 to February 2010 but only 27 percent of the jobs created since then.

Kathleen Terry is one of those who had to settle for less. Before the recession, she spent 16 years working as a mortgage processor in Southern California, earning as much as $6,500 in a good month, a pace of about $78,000 a year.

But her employer was buried in the housing crash. She found herself out of work for two and a half years. As her savings dwindled, the single mother had to move into a motel with her three daughters.

They got by on welfare and help from their church and friends. Terry started taking a 90-minute bus ride to job training courses. Eventually, she found work as a secretary in the Riverside County, Calif., employment office. She likes the job, but earns just $27,000 a year. "It's a humbling experience," she says.

Hard times have made Americans more dependent than ever on social programs, which accounted for a record 18 percent of personal income in the last three months of 2010 before coming down a bit this year. Almost 45 million Americans are on food stamps, another record.

Ordinary Americans are suffering because of the way the economy ran into trouble and how companies responded when the Great Recession hit.

Soaring housing prices in the mid-2000s made millions of Americans feel wealthier than they were. They borrowed against the inflated equity in their homes or traded up to bigger, more expensive houses. Their debts as a percentage of their annual after-tax income rose to a record 135 percent in 2007.

Then housing prices started tumbling, helping cause a financial crisis in the fall of 2008. A recession that had begun in December 2007 turned into the deepest downturn since the Great Depression.

Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics analyzed eight centuries of financial disasters around the world for their 2009 book "This Time Is Different." They found that severe financial crises create deep recessions and stunt the recoveries that follow.

This recovery "is absolutely following the script," Rogoff says.

Federal Reserve numbers crunched by Haver Analytics suggest that Americans have a long way to go before their finances will be strong enough to support robust spending: Despite cutting what they owe the past three years, the average household's debts equal 119 percent of annual after-tax income. At the same point after the 1981-82 recession, debts were at 66 percent; after the 1990-91 recession, 85 percent; and after the 2001 recession, 114 percent.

Because the labor market remains so weak, most workers can't demand bigger raises or look for better jobs.

"In an economic cycle that is turning up, a labor market that is healthy and vibrant, you'd see a large number of people quitting their jobs," says Gluskin Sheff economist Rosenberg. "They quit because the grass is greener somewhere else."

Instead, workers are toughing it out, thankful they have jobs at all. Just 1.7 million workers have quit their job each month this year, down from 2.8 million a month in 2007.

The toll of all this shows in consumer confidence, a measure of how good people feel about the economy. According to the Conference Board's index, it's at 58.5. Healthy is more like 90. By this point after the past three recessions, it was an average of 87.

How gloomy are Americans? A USA Today/Gallup poll eight weeks ago found that 55 percent think the recession continues, even if the experts say it's been over for two years. That includes the 29 percent who go even further — they say it feels more like a depression.

HBO’s Too Big to Fail: Propaganda aimed at the US population

By Charles Bogle
1 June 2011
Directed by Curtis Hanson, written by Peter Gould and Andrew Ross Sorkin, from a book by Andrew Ross Sorkin
http://wsws.org/articles/2011/jun2011/toob-j01.shtml

In an interview, the Wall Street Journal asked Paula Weinstein, executive producer of HBO’s Too Big to Fail, about the problem she faced in creating a suspenseful drama about the 2008 financial crisis that “wasn’t too esoteric” for a general audience.

Her reply indicates some of the problems with this production: “Everyone in the country suffered from it [the financial crisis], so we treated it like a thriller, like it was a regular movie.”

The movie features a fine cast, and a few of the actors have been given characters with a degree of dimensionality. However, the filmmakers’ decision to make a “regular movie,” i.e., a formulaic one, results in the type of stale story of a valiant individual saving the US from an evil power (in this case, certain predatory elements on Wall Street) so prevalent in American political movies. Not only is the story stale in this case, it is also untrue.

Most damaging to the television film’s credibility and ability to grapple critically with the epochal 2008 crisis was the choice of former US Treasury Secretary Henry Paulson as the individual in question. In sum, Too Big to Fail is propaganda for the population presented from an upper-middle class liberal perspective.

Too Big to Fail focuses on Paulson (William Hurt) as he and other top financial figures (both within and without the Bush administration) respond to the September 2008 crash. Initially, they are certain the problem will be contained within the subprime mortgage market, but as stocks plummet and rumors spread of major investment firms failing, the White House and Wall Street clash over who should save the banking system: the government or the private sector.

Paulson’s efforts to maneuver Wall Street into saving investment bank Lehman Brothers fail, and the threatened collapses of Freddie Mac and Fannie Mae and the insurance firm AIG result in credit lines freezing. At the same time, in this version of events, Paulson experiences an internal conflict between his belief that government should not interfere with the private sector and the need to go to Congress for bailout money.

The conflict appears to be resolved when Paulson and Federal Reserve Board Chairman Ben Bernanke (Paul Giamatti) convince the major investment banks to buy 20 percent of AIG assets (the Fed will buy the other 80 percent) and successfully push the $700 billion cash injection, or TARP (Troubled Asset Relief Program), through Congress and into the banks. However, the film’s conclusion makes that resolution problematic.

As Lehman Brothers CEO Dick Fuld, James Woods portrays an individual transformed from an arrogant, self-centered tyrant into someone painfully aware that he is being “played” by much larger social forces. Three close-ups, the last one just before Fuld agrees to Lehman’s bankruptcy filing, express this transformation most convincingly.

Hurt’s Henry Paulson in the HBO production is basically a decent man faced with navigating America (and the world) through a crisis of catastrophic proportions. To those outside his immediate circle, he presents a resolute, no-nonsense persona; but to those closest to him, Bernanke and especially his wife, Wendy (Kathy Baker), Paulson expresses self-doubt and even feelings of helplessness. Hurt avoids the theatrics often found in such characters, and his Paulson is the more human for that.

The other main characters are largely one-dimensional, sometimes to the point of becoming invisible. Giamatti’s Bernanke displays none of the haughty, smartest-guy-in-the-room demeanor seen and heard at congressional hearings and on Sunday news programs. Instead, he is invariably deferential, wise but humble, and always concerned with preserving democracy.

Warren Buffet (Ed Asner) is a grandfatherly figure in one brief scene, he answers a call from Paulson while entertaining his grandchildren at an ice cream parlor. Billy Crudup’s Timothy Geithner is hardly a presence, mostly attached as he is to cellphones and MacBooks.

Making Paulson the heroic center of Too Big to Fail reveals a great deal. First of all, the filmmakers (director Curtis Hanson and writer Peter Gould) demonstrate a willingness to overlook a considerable amount of “anti-heroic” behavior in the Paulson biography before 2008. Throughout the movie, Paulson is played as a stand-up guy virtually incapable of backing away from a problem or opponent. At one point, his wife pleads, “You can’t take all this on by yourself.” “It’s my job,” he reminds her stoically.

Were it not for Hurt’s understated characterization, this scene would be almost comical. The real Paulson used connections to both leave the Nixon White House during the Watergate scandal unscathed (Paulson was an office assistant to John Ehrlichman, who spent 10 months in prison for his role in the crime) and gain a position at Goldman Sachs in 1974. Then, after being named chief operating officer at Goldman Sachs, Paulson orchestrated what amounted to a coup, according to the New York Times, to force out his co-chairman, Jon Corzine, and take the position of CEO.

Paulson, one of the most powerful figures in banking in the US, acted in the 2008 crisis and beyond exclusively from the point of view of rescuing the financial system on behalf of the American ruling elite. The central concern of both the Bush and Obama administrations has been saving the bankers whose practices led the world economy to the edge of the abyss and making sure the working population paid for this process. (That HBO’s Too Big to Fail ultimately originates with the New York Times’ Andrew Ross Sorkin, an apologist for the financial aristocracy and defender of social inequality, comes as no surprise.)

Too Big to Fail’s depiction of Paulson as a selfless government official strains credulity, to say the least. A brief reference to the enormous amounts of money he made while Goldman Sachs CEO is countered by a Paulson assistant with, “He sold all of his shares before becoming Secretary of the Treasury”! In fact, Paulson was required by law to sell his shares but was allowed to do so tax-free. He made $200 million in the bargain.

Ignored entirely is the role played by Goldman Sachs and Paulson in triggering a crisis that continues to devastate millions globally.

Of course, artists interpret historical figures, but the interpretation must begin with an objective, critical reckoning of the whole person. How much more interesting and valuable would Too Big to Fail have been had its makers done so and explored the social forces driving Paulson’s machinations?

The filmmakers’ upper middle class perspective ensures that no such exploration will occur. Turning the real Paulson into a courageous figure directs the viewer’s attention away from the White House’s complicity in the crisis and toward the secretary of the Treasury as a savior.

The movie portrays Paulson’s (and the White House’s) decision to bail out the banks as unavoidable. At the conclusion, Bernanke and Paulson have one of their frequent meetings. The Fed chairman turns plaintively to Paulson and says, “I just hope that they [the banks] do what we ask them to. I hope they lend it [the money] out.” Paulson replies assuredly, “Of course they will.”

We are asked to believe that without the intervention of Paulson and the godlike Bernanke, a few greedy individuals would have caused unimaginable consequences. We are further asked to believe that what has followed has been solely the result of these individuals not keeping their promise. We deserve a good deal more than this piece of shallow propaganda.

The Mistake of 2010

PAUL KRUGMAN
June 2, 2011
http://www.nytimes.com/2011/06/03/opinion/03krugman.html

Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that aborted an ongoing economic recovery and prolonged the Great Depression. As Gauti Eggertsson, the post’s author (with whom I have done research) points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?

Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data.

To be sure, things could be worse — and there’s a strong chance that they will, indeed, get worse.

Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. In particular, the effects of the stimulus would start fading out in 2010 — and given the fact that financial crises are usually followed by prolonged slumps, it was unlikely that the economy would have a vigorous self-sustaining recovery under way by then.

By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow an overwhelming consensus emerged among policy makers and pundits that nothing more should be done to create jobs, that, on the contrary, there should be a turn toward fiscal austerity.

This consensus was fed by scare stories about an imminent loss of market confidence in U.S. debt. Every uptick in interest rates was interpreted as a sign that the “bond vigilantes” were on the attack, and this interpretation was often reported as a fact, not as a dubious hypothesis.

For example, in March 2010, The Wall Street Journal published an article titled “Debt Fears Send Rates Up,” reporting that long-term U.S. interest rates had risen and asserting — without offering any evidence — that this rise, to about 3.9 percent, reflected concerns about the budget deficit. In reality, it probably reflected several months of decent jobs numbers, which temporarily raised optimism about recovery.

But never mind. Somehow it became conventional wisdom that the deficit, not unemployment, was Public Enemy No. 1 — a conventional wisdom both reflected in and reinforced by a dramatic shift in news coverage away from unemployment and toward deficit concerns. Job creation effectively dropped off the agenda.

So, here we are, in the middle of 2011. How are things going?

Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. Long-term interest rates have fluctuated with optimism or pessimism about the economy; a recent spate of bad news has sent them down to about 3 percent, not far from historic lows.

And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. Yes, there has been some job creation — but at a pace barely keeping up with population growth. The percentage of American adults with jobs, which plunged between 2007 and 2009, has barely budged since then. And the latest numbers suggest that even this modest, inadequate job growth is sputtering out.

So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.

Yet worse things may soon happen.

On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.

Meanwhile, a loud chorus is demanding that the Fed and its counterparts abroad raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out, the rise in consumer price inflation over the past few months — which is already showing signs of tailing off — reflected temporary factors, and underlying inflation remains low. And smart economists like Mr. Eggerstsson understand this. But the European Central Bank is already raising rates, and the Fed is under pressure to do the same. Further attempts to help the economy expand seem out of the question.

So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.

Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.

A version of this op-ed appeared in print on June 3, 2011, on page A23 of the New York edition with the headline: The Mistake Of 2010.

Coming Summer 2012: $6 Gas

From CNBC.com:
A dollar plumbing three-year lows is hitting Americans squarely in the gas tank, and one economist thinks it could drive prices as high as $6 a gallon or more by summertime under the right conditions.

With the greenback coming under increased pressure from Federal Reserve policies and investor appetite for more risk, there seems little direction but up for commodity prices, in particular energy and metals.

Weakness in the US currency feeds upward pressure on commodities, which are priced in dollars and thus come at a discount on the foreign markets.

One result has been a surge higher in gasoline prices to nearly $4 a gallon before the summer driving season even starts, a trend that economists say will be aggravated as demand increases and the summer storm season threatens to disrupt oil supplies.

"All we have to have is a couple badly placed hurricanes which could constrain some of the refinery output capacity in some key locations," says Richard Hastings, strategist at Global Hunter Securities in Charlotte, N.C. "If you get weakness in the dollar concurrent with the strong driving season concurrent with the impact of one or two hurricanes in the wrong place, prices could go up in a quasi-exponential manner."

Using a model that combines "subtle rates of change" with movements in the dollar index and commodity prices, Hastings figures the low dollar is responsible for about one-third, or $1.31, of the total gas-at-the-pump cost. Regular unleaded Wednesday was $3.84 a gallon nationwide, according to AAA...

Hastings projects the dollar index to test 72 at some point—another 3 percent drop—while Peter Cardillo, chief economist at Avalon Partners in New York, sees the dollar dropping to the 73.50 level.

"The global economy is quite strong, and the weak dollar is basically fueling even higher energy prices. That's not transitory," Cardillo says. "Gas prices in the Northeast are over $4 a gallon. How could anyone say that's not a burden?"

$6 Gas? Could Happen if Dollar Keeps Getting Weaker
Jeff Cox
Wednesday, 20 Apr 2011
http://www.cnbc.com/id/42683030

Obama’s FY 2012 Budget Is A Tool Of Class War

Paul Craig Roberts
Friday, February 18, 2011

Obama’s new budget is a continuation of Wall Street’s class war against the poor and middle class. Wall Street wasn’t through with us when the banksters sold their fraudulent derivatives into our pension funds, wrecked Americans’ job prospects and retirement plans, secured a $700 billion bailout at taxpayers’ expense while foreclosing on the homes of millions of Americans, and loaded up the Federal Reserve’s balance sheet with several trillion dollars of junk financial paper in exchange for newly created money to shore up the banks’ balance sheets. The effect of the Federal Reserve’s “quantitative easing” on inflation, interest rates, and the dollar’s foreign exchange value are yet to hit. When they do, Americans will get a lesson in poverty.

Now the ruling oligarchies have struck again, this time through the federal budget. The U.S. government has a huge military/security budget. It is as large as the budgets of the rest of the world combined. The Pentagon, CIA, and Homeland Security budgets account for the $1.1 trillion federal deficit that the Obama administration forecasts for fiscal year 2012. This massive deficit spending serves only one purpose–the enrichment of the private companies that serve the military/security complex. These companies, along with those on Wall Street, are who elect the U.S. government.

The U.S. has no enemies except those that the U.S. creates by bombing and invading other countries and by overthrowing foreign leaders and installing American puppets in their place.

China does not conduct naval exercises off the California coast, but the U.S. conducts war games in the China Sea off China’s coast. Russia does not mass troops on Europe’s borders, but the U.S. places missiles on Russia’s borders. The U.S. is determined to create as many enemies as possible in order to continue its bleeding of the American population to feed the ravenous military/security complex.

The U.S. government actually spends $56 billion a year, that is, $56,000 million, in order that American air travelers can be porno-scanned and sexually groped so that firms represented by former Homeland Security Secretary Michael Chertoff can make large profits selling the scanning equipment.

With a perpetual budget deficit driven by the military/security complex’s desire for profits, the real cause of America’s enormous budget deficit is off-limits for discussion.

The U.S. Secretary of War-Mongering, Robert Gates, declared: “We shrink from our global security responsibilities at our peril.” The military brass warns of cutting any of the billions of aid to Israel and Egypt, two functionaries for its Middle East “policy.”

But what are “our” global security responsibilities? Where did they come from? Why would America be at peril if America stopped bombing and invading other countries and interfering in their internal affairs? The perils America faces are all self-created.

The answer to this question used to be that otherwise we would be murdered in our beds by “the worldwide communist conspiracy.” Today the answer is that we will be murdered in our airplanes, train stations, and shopping centers by “Muslim terrorists” and by a newly created imaginary threat–“domestic extremists,” that is, war protesters and environmentalists.

The U.S. military/security complex is capable of creating any number of false flag events in order to make these threats seem real to a public whose intelligence is limited to TV, shopping mall experiences, and football games.

So Americans are stuck with enormous budget deficits that the Federal Reserve must finance by printing new money, money that sooner or later will destroy the purchasing power of the dollar and its role as world reserve currency. When the dollar goes, American power goes.

For the ruling oligarchies, the question is: how to save their power.

Their answer is: make the people pay.

And that is what their latest puppet, President Obama, is doing.

With the U.S. in the worst recession since the Great Depression, a great recession that John Williams and Gerald Celente, along with myself, have said is deepening, the “Obama budget” takes aim at support programs for the poor and out-of-work. The American elites are transforming themselves into idiots as they seek to replicate in America the conditions that have led to the overthrows of similarly corrupt elites in Tunisia and Egypt and mounting challenges to U.S. puppet governments elsewhere.

All we need is a few million more Americans with nothing to lose in order to bring the disturbances in the Middle East home to America.

With the U.S. military bogged down in wars abroad, an American revolution would have the best chance of success.

American politicians have to fund Israel as the money returns in campaign contributions.

The U.S. government must fund the Egyptian military if there is to be any hope of turning the next Egyptian government into another American puppet that will serve Israel by continuing the blockade of the Palestinians herded into the Gaza ghetto.

These goals are far more important to the American elite than Pell Grants that enable poor Americans to obtain an education, or clean water, or community block grants, or the low income energy assistance program (cut by the amount that U.S. taxpayers are forced to give to Israel).

There are also $7,700 million of cuts in Medicaid and other health programs over the next five years.

Given the magnitude of the U.S. budget deficit, these sums are a pittance. The cuts will have no effect on U.S. Treasury financing needs. They will put no brakes on the Federal Reserve’s need to print money in order to keep the U.S. government in operation.

These cuts serve one purpose: to further the Republican Party’s myth that America is in economic trouble because of the poor: The poor are shiftless. They won’t work. The only reason unemployment is high is that the poor had rather be on welfare.

A new addition to the welfare myth is that recent middle class college graduates won’t take the jobs offered them, because their parents have too much money, and the kids like living at home without having to do anything. A spoiled generation, they come out of university refusing any job that doesn’t start out as CEO of a Fortune 500 company. The reason that engineering graduates do not get job interviews is that they do not want them.

What all this leads to is an assault on “entitlements”, which means Social Security and Medicare. The elites have programmed, through their control of the media, a large part of the population, especially those who think of themselves as conservatives, to conflate “entitlements” with welfare. America is going to hell not because of foreign wars that serve no American purpose, but because people, who have paid 15% of their payroll all their lives for old age pensions and medical care, want “handouts” in their retirement years. Why do these selfish people think that working Americans should be forced through payroll taxes to pay for the pensions and medical care of the retirees? Why didn’t the retirees consume less and prepare for their own retirement?

The elite’s line, and that of their hired spokespersons in “think tanks” and universities, is that America is in trouble because of its retirees.

Too many Americans have been brainwashed to believe that America is in trouble because of its poor and its retirees. America is not in trouble because it coerces a dwindling number of taxpayers to support the military/security complex’s enormous profits, American puppet governments abroad, and Israel.

The American elite’s solution for America’s problems is not merely to foreclose on the homes of Americans whose jobs were sent offshore, but to add to the numbers of distressed Americans with nothing to lose the sick and the dispossessed retirees, and the university graduates who cannot find jobs that have been sent to China and India.

Of all the countries in the world, none need a revolution as bad as the United States, country ruled by a handful of selfish oligarchs who have more income and wealth than can be spent in a lifetime.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand.

Federal Reserve Bank President calls for Wall Street banks to be broken up

Kansas City Federal Reserve Bank President Thomas Hoenig calls for Wall Street banks to be broken up
A member of the US Federal Reserve has called for Wall Street's financial giants to be broken up to avoid another another crisis.
Andrew Trotman
23 Feb 2011
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8344309/Kansas-City-Federal-Reserve-Bank-President-Thomas-Hoenig-calls-for-Wall-Street-banks-to-be-broken-up.html

“I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the US economy,” Kansas City Federal Reserve Bank President Thomas Hoenig said.

“They must be broken up. We must make sure that large financial organizations are not in position to hold the US economy hostage. We must not allow organisations operating under the safety net to pursue high-risk activities and we cannot let large organisations put our financial system at risk.”

Mr Hoenig also argues that the most sweeping overhaul of US financial regulation since the Great Depression won’t prevent the largest banks from taking excessive risks and increasing market share.

“In my view, it is even worse than before the crisis,” he said. “As well-intentioned as the Dodd-Frank Act may be, it will not improve outcome.

The Dodd-Frank Act created a resolution authority to unwind the largest financial institutions. It also adopted the Volcker rule, which aims at reducing the odds that banks will make risky investments and put their federally-insured deposits at risk.

The Fed chief called for "Glass Steagall-type" provisions - referring to post-Depression prohibitions that forbade deposit-taking commercial banks from engaging in the riskier activities normally confined to the investment sector.

Obamanomics

One Blog that doesn't get the credit it deserves is Washington's Blog, found at http://georgewashington2.blogspot.com/. A collection of articles that focus on economic issues written by authors with pen names, the general argument is that the economics embraced by our political and media establishment "represent the interests of the people as opposed to the big banks, major corporations, and the military-industrial complex." Hard to argue with that.

In a January 13th post, Washington made the strong case against what The Konformist has warned is really a plot to destroy public worker unions:

Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.

"We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."

Congress has also discontinued the Build American Bond program, which was significant in temporarily financing California and other states' budgets...

That's unfortunate, given that many states and big cities are in a dire financial situation, and given that Keynesian economists say that aid to the states is one of the best forms of stimulus...

Unfortunately, as I will demonstrate below, virtually the entire government economic policy is to throw trillions of dollars at the biggest banks.


GW then blasts the Wall Street Bailouts (starting with TARP) in a deserved dismissive tone:

The $700 billion dollar TARP bailout was a massive bait-and-switch. The government said it was doing it to soak up toxic assets, and then switched to saying it was needed to free up lending. It didn't do that either. Indeed, the Fed doesn't want the banks to lend.

As I wrote in March 2009:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

* Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes

* A lot of the bailout money is going to the failing companies' shareholders

* Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives"

* The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)

* And as the New York Times notes, "Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners".


The Blog then notes: "But the TARP bailout is peanuts compared to the numerous other bailouts the government has given to the giant banks.

Government Says No to Helping States and Main Street, While Continuing to Throw Trillions at the Giant Banks
Thursday, January 13, 2011
http://www.georgewashington2.blogspot.com/2011/01/government-says-no-to-helping-states.html

For what it's worth, here's the Center on Budget and Policy Priorities analysis of the budget problems on the state and local levels:

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

The large operating deficits that most states are projecting for the 2012 fiscal year, which they have to close before the fiscal year begins (on July 1 in most states), are caused largely by the weak economy. State revenues have stabilized after record losses but remain 12 percent below pre-recession levels, and localities also are experiencing diminished revenues. At the same time that revenues have declined, the need for public services has increased due to the rise in poverty and unemployment. Over the past three years, states and localities have used a combination of reserve funds and federal stimulus funds, along with budget cuts and tax increases, to close these recession-induced deficits. While these deficits have caused severe problems and states and localities are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers.

Unlike the projected operating deficits for fiscal year 2012, which require near-term solutions to meet states’ and localities’ balanced-budget requirements, longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance — discussed more fully below — can be addressed over the next several decades. It is not appropriate to add these longer-term costs to projected operating deficits. Nor should the size and implications of these longer-term costs be exaggerated, as some recent discussions have done. Such mistakes can lead to inappropriate policy prescriptions.

Misunderstandings Regarding State Debt, Pensions, and Retiree Health Costs Create Unnecessary Alarm
Misconceptions Also Divert Attention from Needed Structural Reforms
Iris J. Lav and Elizabeth McNichol
January 20, 2011
http://www.cbpp.org/cms/index.cfm?fa=view&id=3372

In September 2009, the Washington's Blog pointed out the strategy of pouring money to lenders (i.e. banks) is decidedly inferior to helping out borrowers (i.e. businesses and consumers):

Following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? ...

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression...

Steve Keen Out-Thinks Larry Summers
Saturday, September 19, 2009
http://www.georgewashington2.blogspot.com/2009/09/steve-keen-out-thinks-larry-summers.html

Dave Dayen of FireDogLake.com does a great analysis of the payroll tax cut deal made by Team Obama, pointing out the ignored fact that the payroll tax replaces Making Work Pay:

Making Work Pay was a flat $400 for every worker, but the benefit phased out for workers making over roughly $95,000 a year. That meant it was targeted directly to people who would spend it and offered a pretty nice benefit. By contrast, the payroll tax cut applies to every worker in America, as Geithner says. Bill Gates will get a payroll tax cut. Alex Rodriguez will get a payroll tax cut. Paris Hilton will get a payroll tax cut. Because the payroll tax itself caps out currently at $106,800, the tax cut for Gates, Rodriguez, Hilton and anyone else making that number is $2,136. But that’s $2,136 more than they got under Making Work Pay. I’ll leave it toy you to determine whether that’s something they need, and something which will work to stimulate the economy.

By contrast, at the low end of the scale, the “benefit” from the payroll tax cut ends up worse than the benefit from Making Work Pay. Making Work Pay was a flat benefit of $400; with the payroll tax cut it’s a percentage of income. So any individual making under $20,000 a year or family making under $40,000 a year will see less of a benefit under the payroll tax cut. That comes out to roughly 50 million workers, or close to 1 in 3, using Geithner’s numbers.

So you have this crazy circumstance where the payroll tax cut ends up a worse deal for low-income workers, who would spend the money, and a better deal for high-income workers, who probably won’t.

It’s true that the payroll tax cut comes out to $110 billion in tax relief for 2011, roughly $50 million more than Making Work Pay on an annual basis. But it’s woefully targeted. And the phony use of “average tax cut” promulgated by Geithner belies the fact that it’s a worse deal for 1 in 3 workers.


And this critique is besides the concern the payroll tax cut may be a Trojan horse to destroy social security...

Sin of Omission by Geithner in Chest-Thumping over Tax Cut Deal
David Dayen
Saturday January 15, 2011
http://news.firedoglake.com/2011/01/15/sin-of-omission-by-geithner-in-chest-thumping-over-tax-cut-deal

Matt Stoller, former Senior Policy Advisor for Alan Grayson, puts this in a context of the last 40 years at NakedCapitalism.com:

Since the 1970s, Democratic elites have focused on breaking public sector unions and financializing the economy. Carter, not Reagan, started the defense build-up. Carter, not Reagan, lifted usury caps. Carter, not Reagan, first cut capital gains taxes. Clinton, not Bush, passed NAFTA. It isn’t the base of the Democratic party that did this, but then, voters in America have never had a lot of power because they are too disorganized. And there wasn’t a substantial grassroots movement to challenge this, either.

Obama continues this trend. It isn’t that he’s not fighting, he fights like hell for what he wants. He whipped incredibly aggressively for TARP, he has passed emergency war funding (breaking a campaign promise) several times, and nearly broke the arms of feckless liberals in the process. I mean, when Bernie Sanders did the filiBernie, Obama flirted with Bernie’s potential 2012 GOP challenger. Obama just wants policies that cement the status of a aristocratic class, with crumbs for everyone else (Republican elites disagree in that they hate anyone but elites getting crumbs). And he will fight for them.

There is simply no basis for arguing that Democratic elites are pursuing poor strategy anymore. They are achieving an enormous amount of leverage within the party. Consider the following. Despite Obama violating every core tenet of what might have been considered the Democratic Party platform, from supporting foreclosures to destroying civil liberties to torturing political dissidents to wrecking unions, Obama has no viable primary challenger. Moreover, no Senate Democratic incumbent lost a primary challenge in 2010, despite a horrible governing posture. Now THAT is a successful strategy, it minimized the losses of the Democratic elite and kept them firmly in control of the party. Thus, the political debate remains confined to what neoliberals want to talk about. It’s a good strategy, it’s just you are the one the strategy is being played on.

Understanding the Strategy of the Democratic Power Class
Matt Stoller
Thursday, January 13, 2011
http://www.nakedcapitalism.com/2011/01/matt-stoller-understanding-the-strategy-of-the-democratic-power-class.html

Of course, criticisms of Carter and Clinton are completely deserved, but there are some major differences here. One, when Obama was elected, he was facing the worst economic crisis in the USA since the Great Depression, and thus a more left wing policy of helping the poor, the working class and the middle class not only was the correct economic remedy, it was a politically popular one winnable if Obama cared to fight for it. Two, the economic betrayals made by Obama put his economic policy decidedly to the right of Ronald Reagan, no matter what the GOP mouthpieces may scream, and has arguably radically shifted the frame of debate even further than George W. Bush could have ever dreamed. This was my major concern over Obama during the 2008 election, that he was backed by Wall Streeters who hoped his cult of narcissism would be substitute for a real New Deal II. As the battle to bankrupt states and destroy public unions heats up, it would be fair to say "Mission Accomplished"...