Monday, October 31, 2011

Born to be a birther, or, Birther till I die!

This third-string squad of colorful right-wing nutjobs and cranks, including serial racial profiler Sheriff Joe Arpaio and serial Supreme Court rejectee Orly Taitz, are teasing us that they're about to go "Geraldo" with a really big revelation about Obama's citizenship that will blow the lid off this whole thing.

I don't even know why I'm dignifying this nonsense with a re-post, but... something about this quixotic quest of theirs has passed from unbelievable to infuriating to laughable to passe and now to... a study in human beings' perseverance to regard a lie as the truth, no matter what.  And there's something strangely poignant in their complete disregard for how stupid they look to others in doing so.  They don't care.  They're just going to keep at this thing until... like in the real "Cold Case" show, some bit of evidence turns up 30 years later, like Obama's real Kenyan passport, or his straight-A childhood report card from his radical Muslim madrasah, and they'll be able to yank Obama out of his old folks' home and deport him to Sweden to join Roman Maronie.  

By Luke Johnson 
October 28, 2011 | Huffington Post

Friday, October 28, 2011

TARP wasn't 'paid back,' not by a long shot

So it turns out that TARP loans weren't "paid back," we should be owed about $300 billion in risk premiums for the year 2009 alone, and this is not to mention the $16 trillion in Fed bailouts for the international TBTF banks. TARP was absolutely free money.

TARP wasn't really even a loan, it was a gift, it was a sick joke on U.S. taxpayers, because the bailed-out banks can pay off their TARP loans with even more government loans at zero-percent interest. (Remember how the GOP went ballistic when GM tried a similar trick to pay off some of its TARP loan?) The bailed-out banks have in turn used this borrowed money to fund their trades, which only have to earn more than 0.0% return to net them a profit. In fact, it gets worse, because often the banks have turned around and used those borrowed funds to... buy risk-free U.S. treasuries, which means they loaned their government loan money back to the government at a guaranteed higher rate of interest. But it's even worse still: the banks have been leveraging their trades, "borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets."

Stealing isn't enough vice for these sleazebags -- they have to gamble, too!

Any small-time crook of average intelligence could be explained this scam in a matter of an hour and then become a successful present-day Wall Street CEO. I mean, how could you not make stacks of cash with a scam as perfectly foolproof as this?

(Well, nearly foolproof. There is one remote pitfall: If the banks' unlimited ATM machine, the U.S. Government, is severely downgraded and defaults on its debt. Then the banks would be pretty screwed... which is why they've been giving U.S. politicians and the unwashed electorate sanctimonious lectures about the need to get our fiscal house in order, i.e. gut Social Security, Medicare, Medicaid, unemployment insurance, and government-sponsored health care, so that their scam can continue indefinitely.)

"We've got to re-think the relationship between taxpayers and financial institutions," said Prof. Ed Kane of Boston College, "Taxpayers are essentially implicit stockholders. And they're in for the worst part of the ride." The downside, that is. While the banks get all the upside -- all the profit. This is moral hazard, big time. Not to mention colossally unjust corporate socialism on a scale never before seen on Earth.

This is further evidence that the Occupy protests, despite their shortcomings like the occasional errant turd, have chosen absolutely the correct target, while erstwhile bailout opponents in the Tea Parties have, sadly, taken their eyes off the ball. The TPs now blame the attempted cure (fiscal stimulus) for the illness caused by the financial crisis and aggravated by the bank bailouts which continue to distort the real economy while denying desperately needed credit to firms and households.

Uploaded by INETeconomics
August 23, 2011 | YouTube

Thursday, October 27, 2011

'We are the 1 percent': 147 firms own 40% of global wealth

Gee, I'm relieved to hear that 1 percent of transnational corporations (TNCs) control the world not thanks to a global conspiracy, but thanks to nature.

And it's comforting to hear that the top 25 TNCs includes many global financial institutions, such as Barclays, Bank of America, Credit Suisse, Deutsche Bank, JPMorgan Chase, Meryll Lynch, Morgan Stanley, UBS, Societe Generale, and Goldman Sachs, which are all officially Too Big Too Fail -- and all recipients of the $16 trillion Fed bailout (see page 131).

Run wild and free, TNCs, like you were born to do! OWS, stop opposing nature!

Seriously though, the problem here is not necessarily industry concentration, but rather interconnectedness that, in a case like the 2007-08 financial crisis, could lead to a systemic collapse. As Nassim Taleb notes, nature loves "robustness," meaning, through evolution, biological systems favor backups & redundancies which don't necessarily lend themselves to optimal efficiency, but are quite effective at preventing system failure.

In our new global economy the establishment of transnational anti-monopoly rules is a timely idea, but we must figure out how to implement them in practice.

By Andy Coghlan and Debora MacKenzie
October 24, 2011 | New Scientist

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).

"Reality is so complex, we must move away from dogma, whether it's conspiracy theories or free-market," says James Glattfelder. "Our analysis is reality-based."

Previous studies have found that a few TNCs own large chunks of the world's economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy - whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.

Concentration of power is not good or bad in itself, says the Zurich team, but the core's tight interconnections could be. As the world learned in 2008, such networks are unstable. "If one [company] suffers distress," says Glattfelder, "this propagates."

"It's disconcerting to see how connected things really are," agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

Yaneer Bar-Yam, head of the New England Complex Systems Institute (NECSI), warns that the analysis assumes ownership equates to control, which is not always true. Most company shares are held by fund managers who may or may not control what the companies they part-own actually do. The impact of this on the system's behaviour, he says, requires more analysis.

Crucially, by identifying the architecture of global economic power, the analysis could help make it more stable. By finding the vulnerable aspects of the system, economists can suggest measures to prevent future collapses spreading through the entire economy. Glattfelder says we may need global anti-trust rules, which now exist only at national level, to limit over-connection among TNCs. Sugihara says the analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage this risk.

One thing won't chime with some of the protesters' claims: the super-entity is unlikely to be the intentional result of a conspiracy to rule the world. "Such structures are common in nature," says Sugihara.

Newcomers to any network connect preferentially to highly connected members. TNCs buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth, says Dan Braha of NECSI: in similar models, money flows towards the most highly connected members. The Zurich study, says Sugihara, "is strong evidence that simple rules governing TNCs give rise spontaneously to highly connected groups". Or as Braha puts it: "The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy."

So, the super-entity may not result from conspiracy. The real question, says the Zurich team, is whether it can exert concerted political power. Driffill feels 147 is too many to sustain collusion. Braha suspects they will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest.

Wednesday, October 26, 2011

MB360: Here is the One Percent

The top One Percent of Americans are those who earn $1 million or more in gross adjusted income per year.

Meanwhile the median annual income per American worker is $26,250.

And 75 percent of total income tax is being paid by households earning $500,000 or less per year.

These stats put things in perspective, don't they? Looks like OWS is right on the mark.

Posted by mybudget360 | October 26, 2011

This weekend I spent time digging through IRS and Social Security data to get a better perspective on working and middle class Americans. I find it amazing that in a consumer driven economy, meaning we live to spend in some respect that the media never even bothers to focus on household incomes. Even on self branded "business" programs with fancy watermarks which tout their major expertise on knowing about Americans they fail to do any analysis on income. Need we even point out their missing of the biggest economic recession in our recent history? This silence as you know is purposeful. The media is largely beholden to advertisers and it might be perceived as a downer to tell the public how far back they have gone in the last decade on the income treadmill. It is understandable although not acceptable that large television outlets do not discuss wages and income but what about the respectable press? Where is there voice? Either way, as we dig into the data it is understandable why so few even bother to cover this unsavory topic.

Tax return data by income levels

First, let us gather a glimpse of actual household tax filing information:

tax return breakdown by income levels

Source: IRS

With all the discussion about the 99 percent I think you have many people that are largely off on what they assume is the one percent. The media is largely to blame and I have even seen business outlets interview people that claim to make $100,000 and are afraid of being taxed because they are in the one percent. Uh, not exactly.
Let us examine the data:

66 percent of tax returns show an adjusted gross income of $50,000 or less
31 percent of tax returns show an adjusted gross income between $50,000 and $100,000

So with these two groups, you are covering 97 percent of all households. Now keep in mind we are looking at adjusted gross income so actual wages will be higher, but not by much.

"So what does it take to be in the top one percent? You will need an adjusted gross income of $1,000,000 or more."

Even folks with an AGI between $200,000 and $500,000 don't fall in this category. Of course Wall Street investment bankers want to make people believe that even with a $100,000 household income that somehow if investment banks were regulated that they will lose their entire life savings (this is actually already happening with housing and the casino known as Wall Street).

Let us dig deeper into the tax data.

Tax returns broken down further

tax returns by adjusted gross income

Out of roughly 140 million tax returns in the latest data, 92 million had AGI of less than $50,000. Couple this with Social Security data which is based on raw W2 income and we find that the typical American worker is pulling in $26,000 a year. Is this giving you a better perspective of wages in the United States?

It isn't the case that those at the very top are increasing in number in a sizeable level, it is that the few at the top are getting wealthier and wealthier because of a:

-1. System favoring lobbying even if it is negative for the overall economy (which it is)
-2. A system where Wall Street speculators pay less on their taxes than regular households
-3. A government for the banks and run by the banks
-4. A financial system focused on short term profits instead of long term sustainability
-5. A system that bails out the wealthy and forces the losses on the public

This is unfortunately the way the system is tilted at the moment. You have high frequency trading that is all about making a quick buck on mini trends. What about charging a surcharge on every transaction? Let the hedge funds go wild but they will need to pay for it. The poor buy and hold investor stands no chances against these Wall Street gamblers.

The burden of student loan debt

Hopefully this gives you a better perspective on the tax side of the equation. Contrary to how some big business shows portray the working class, 75 percent of total income tax is being paid by households making $500,000 or less. Of course the perception is that millionaire households are carrying the largest burden here which is not true.

It is hard to get data on how many people are carrying student loan debt. I think I may have accidentally stumbled on a great measure for this. Since you can deduct student loan interest why not see how many people are claiming this on their tax returns?

tax returns with student loan deduction

Source: IRS

Now the above may understate the number of students in debt because it looks like one tax return may have two people claiming the deduction but only showing up as one (for one tax return). This is stunning data. In 2000 roughly 4,000,000 were claiming the student loan deduction. By 2009 this number was nearly 10,000,000! I'm sure once we get IRS data for 2010 we will see this figure surpass 10,000,000. This just highlights the fact that with rising education costs and declining household incomes, more and more Americans are simply financing their education. Why else would those claiming the student loan deduction surge nearly 150 percent in a decade?

The disappearing middle class

Another troubling data point was found in the Social Security data showing an entire decade of wiped out wage growth:

median pay and wages

Source: Social Security, Reuters

Since the recession hit in 2007 actual pay has been decimated. The median per worker wage for Americans fell from roughly $27,000 in 2007 to $26,250 in 2010. This is in nominal terms so inflation is eating away even more and more at the middle class as the Federal Reserve continues to bail out the banking sector.

It is rather clear why the press doesn't want to cover this. They want to keep people spending and believing in the financial system even though it is completely rigged. Why bring this up? Yet as we reach peak debt situations around the world we have tough decisions to make.

57% of Ohioans favor repealing GOP's anti-labor law

It's not long now till the Nov. 8 referendum when Ohioans will have the chance to strike this law down. No republic stuff this time, just direct democracy!

October 25, 2011 | Quinnipiac University

Tuesday, October 25, 2011

Grayson gets standing-O as spokesman for OWS

Here's a partial transcript:

Grayson: Let me tell what they're talking about. They're complaining about the fact that Wall Street wrecked the economy three years ago, and nobody's been held responsible for that. Not a single person has been indicted or convicted, for destroying 20 percent of our national net worth, accumulated over two centuries. They're upset about the fact that Wall Street has iron control over the economic policies of this country, and that one party is a wholly-owned subsidiary of Wall Street, and the other party caters to them as well. That's the truth of the matter, as you [Bill] have said before. And . . . .

P.J. O'Rourke: Get the man a bongo drum, they've found their spokesman!

Grayson: If I . . .

P.J. O'Rourke: Get your shoes off, get a bongo drum, forget where to go to the bathroom, and it's yours.

Grayson: If I am the spokesman for all the people who think we should NOT have 24 million people in this country who can't find a full-time job; that we should NOT have 50 million people who can't see a doctor when they're sick; that we should NOT have 47 million people of this country who need government help to feed themselves; and that we should NOT have 15 million families who owe more on their mortgage than the value of home, OK, I'll be that spokesman.

That's my man! If Obama talked like that -- and believed it -- he'd win 70 percent of the vote in the next election.

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October 8, 2011 | YouTube

Frank Rich: 'Inchoate class war' won't be solved by '12 elections

Many are criticizing OWS for not having a clearer diagnosis of America's problems, and a ready batch of proposed solutions. But that's unfair. The OWS movement was started and continues to be fueled mainly by the young, who can't be expected to know everything. But that doesn't mean they know nothing. Here's their advantage: these young people still retain their acute adolescent sensitivity to unfairness.

For instance, what many of us have come to sigh and take for granted, as just the way of American capitalism -- that big bankers grow rich during the good times, and even richer in bad times -- OWS sees as fundamentally unjust, and a symptom of something deeply wrong with our country. They may not have the experience or erudition to say exactly what is wrong, but they recognize colossal injustice when they see it.

They recognize the unfairness of a system which told them all their lives, "Education is the key to employment and the American dream," and yet they are graduating with huge student loan debt and few job prospects.

They recognize as a baldfaced lie that America is "bankrupt" thanks to "welfare" and therefore cannot offer mortgage relief, student debt relief, invest in infrastructure, or stimulate jobs, and yet America can somehow find $4 trillion for wars in Iraq in Afghanistan, and $16 trillion for bank bailouts (or 111% of U.S. GDP in 2010).

(Indeed, let's pause and remind ourselves that for today's college freshmen, America has been at war half their lives. Since the time they started to perceive the outside world they have known only global terrorism, "the long war," "support our troops," and indefinite U.S. occupation. How that formative experience will affect them throughout their lives no one can tell....)

Pundits like Frank Rich say "the class war has begun." No. It started at least 30 years ago. OWS is just an acknowledgment of hostilities. In their own way the Tea Parties were also an acknowledgment, but they chose to target the wrong elites as Frank Rich points out; or, as I would say, they were right to recognize Washington as the problem, but the TPs were stubbornly blind in ignoring corporate donations and lobbyists as Washington's puppet masters.

OWS may not last through the cold winter, but Americans' "inchoate" class anger isn't going anywhere. The 2012 elections don't promise to resolve anything -- they promise only to be the most depressing political contest in my lifetime. The sad truth is that both Democrat and Republican leaders want OWS to disappear, because that's what their masters want.

And the very classlessness of our society makes the conflict more volatile, not less.
By Frank Rich
October 23, 2011 | New York Magazine


Try as polite company keeps trying to ignore it, that war has been building in this country and abroad for much of this decade and has been waged in earnest in America since the fall of 2008. But the crisp agenda demanded of Occupy Wall Street will not be forthcoming. The inchoateness of our particular class war is central to its meaning. America is not Tahrir Square or the riot-scarred precincts of North London, where everyone knows at birth who is in which class and why. We pride ourselves on being a "classless" democracy. We abhor ideology. When Americans left and right, young and old, express anger at an overclass, they don't necessarily agree about who's on which side of that class divide. The often confusing fluidity of class definitions, especially in an America as polarized as ours is now, may make our home­grown class war more volatile, not less.


Back in 1931, even Hoover worried that "timid people, black with despair" had "lost faith in the American system" and might be susceptible to the kind of revolutions that had become a spreading peril abroad. When Roosevelt took office, he had the confidence that his leadership could overcome that level of despair and head off radicals on the left or right. In 2011, the despair is again black, and faith in the system is shaky, but it would be hard to describe the atmosphere at Zuccotti Park or a tea-party rally as prerevolutionary. The anger of the class war across the spectrum seems fatalistic more than incendiary. No wonder. Everyone just assumes the fix is in for the highest bidder, no matter what. Take—please!—the latest bipartisan Beltway panacea: the congressional supercommittee charged by the president and GOP leaders to hammer out the deficit-reduction compromise they couldn't do on their own. The Washington Post recently discovered that nearly 100 of the registered lobbyists no doubt charged with besieging the committee to protect the interests of the financial, defense, and health-care industries are former employees of its dozen members. Indeed, six of those members (three from each party) currently have former lobbyists on their staffs.


Elections are supposed to resolve conflicts in a great democracy, but our next one will not. The elites will face off against the elites to a standoff, and the issues animating the class war in both parties won't even be on the table. The structural crises in our economy, our government, and our culture defy any of the glib solutions proposed by current Democrats or Republicans; the quixotic third-party movements being hatched by well-heeled do-gooders are vanity productions. The two powerful forces that extricated America from the Great Depression—the courageous leadership and reformist zeal of Roosevelt, the mobilization for World War II—are not on offer this time. Our class war will rage on without winners indefinitely, with all sides stewing in their own juices, until—when? No one knows. The reckoning with capitalism's failures over the past three decades, both in America and the globe beyond, may well be on hold until the top one percent becomes persuaded that its own economic fate is tied to the other 99 percent's. Which is to say things may have to get worse before they get better.

Over the short term, meanwhile, the Democratic Establishment is no doubt wishing that Occupy Wall Street will melt away with the winter snows, much as its Republican counterpart hopes that the leaderless tea party will wither if Romney nails down the nomination. But even in the unlikely event that these wishes come true, it is not likely to be the end of the story. Though the Bonus Army was driven out of Washington in the similarly fraught election year of 1932, the newsreels they left behind turned out to be previews of coming attractions for the long decade still to come.

Monday, October 24, 2011

Krugman: GOP's jobs plan is to pollute more

Unfortunately, as Krugman noted elsewhere: "Today's American right doesn't believe in [negative] externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science."

Oh, and the eventual GOP nominee Mitt Romney is flip-flopping once again.

By Paul Krugman
October 20, 2011 | New York Times

Last month President Obama finally unveiled a serious economic stimulus plan — far short of what I'd like to see, but a step in the right direction. Republicans, predictably, have blocked it. But the new plan, combined with the Occupy Wall Street demonstrations, seems to have shifted the national conversation. We are, suddenly, focused on what we should have been talking about all along: jobs.

So what is the G.O.P. jobs plan? The answer, in large part, is to allow more pollution. So what you need to know is that weakening environmental regulations would do little to create jobs and would make us both poorer and sicker.

Now it would be wrong to say that all Republicans see increased pollution as the answer to unemployment. Herman Cain says that the unemployed are responsible for their own plight — a claim that, at Tuesday's presidential debate, was met with wild applause.

Both Rick Perry and Mitt Romney have, however, put weakened environmental protection at the core of their economic proposals, as have Senate Republicans. Mr. Perry has put out a specific number — 1.2 million jobs — that appears to be based on a study released by the American Petroleum Institute, a trade association, claiming favorable employment effects from removing restrictions on oil and gas extraction. The same study lies behind the claims of Senate Republicans.

But does this oil-industry-backed study actually make a serious case for weaker environmental protection as a job-creation strategy? No.

Part of the problem is that the study relies heavily on an assumed "multiplier" effect, in which every new job in energy leads indirectly to the creation of 2.5 jobs elsewhere. Republicans, you may recall, were scornful of claims that government aid that helps avoid layoffs of schoolteachers also indirectly helps save jobs in the private sector. But I guess the laws of economics change when it's an oil company rather than a school district doing the hiring.

Moreover, even if you take the study's claims at face value, it offers little reason to believe that dirtier air and water can solve our current employment crisis. All the big numbers in the report are projections for late this decade. The report predicts fewer than 200,000 jobs next year, and fewer than 700,000 even by 2015.

You might want to compare these numbers with a couple of other numbers: the 14 million Americans currently unemployed, and the one million to two million jobs that independent estimates suggest the Obama plan would create, not in the distant future, but in 2012.

More pollution, then, isn't the route to full employment. But is there a longer-term economic case for less environmental protection? No. Serious economic analysis actually says that we need more protection, not less.

The important thing to understand is that the case for pollution control isn't based on some kind of aesthetic distaste for industrial society. Pollution does real, measurable damage, especially to human health.

And policy makers should take that damage into account. We need more politicians like the courageous governor who supported environmental controls on a coal-fired power plant, despite warnings that the plant might be closed, because "I will not create jobs or hold jobs that kill people."

Actually, that was Mitt Romney, back in 2003 — the same politician who now demands that we use more coal.

How big are these damages? A new study by researchers at Yale and Middlebury College brings together data from a variety of sources to put a dollar value on the environmental damage various industries inflict. The estimates are far from comprehensive, since they only consider air pollution, and they make no effort to address longer-term issues such as climate change. Even so, the results are stunning.

For it turns out that there are a number of industries inflicting environmental damage that's worth more than the sum of the wages they pay and the profits they earn — which means, in effect, that they destroy value rather than create it. High on the list, by the way, is coal-fired electricity generation, which the Mitt Romney-that-was used to stand up to.

As the study's authors say, finding that an industry inflicts large environmental damage compared with its apparent economic return doesn't necessarily mean that the industry should be shut down. What it means, instead, is that "the regulated levels of emissions from the industry are too high." That is, environmental regulations aren't strict enough.

Republicans, of course, have strong incentives to claim otherwise: the big value-destroying industries are concentrated in the energy and natural resources sector, which overwhelmingly donates to the G.O.P. But the reality is that more pollution wouldn't solve our jobs problem. All it would do is make us poorer and sicker.

Another bailed-out Wall St. crook gets off with a wrist slap

Yeah, those poor dumb Wall Street guys had no idea their mortgage-backed securities (MBS) were crap. They weren't greedy, just dumb.


Here's how the NYT described Citigroup's crime:

"... this week the Securities and Exchange Commission unveiled its latest charges involving mortgage-backed securities. In what may be a new low for conduct by a major Wall Street firm in the walk-up to the financial crisis, Citigroup settled charges (without admitting or denying guilt) that it defrauded investors by creating a package of mortgage-backed securities for which it selected a pool of mortgages likely to default, bet against the security for the bank's benefit by shorting it and then foisted it off on unwitting investors without disclosing any of this.

"According to the S.E.C., one trader characterized this particular security in an all-too-candid e-mail as 'possibly the best short EVER!'"

To add insult to injury, Citigroup has been the biggest recipient of special Fed bailouts: more than $2.5 billion!

And in case you think Citigroup is an isolated case, remember that Goldman Sachs and J.P. Morgan (who received over $800 billion and $390 billion on bailout funds, respectively) already settled with the SEC on similar charges of selling their investors assets and then betting against (shorting) those same assets. Unfortunately those settlements totaled only $700 million, chump change for these bailed-out TBTF banks.

Moreover, not a single Wall Street CEO has gone to jail yet, nor even been fined or reprimanded. The crooks are still in charge. There's no accountability... even though corporations are people.

So... if OWS doesn't work, we're just going to have to try something else....

By Daniel Wagner and Marcy Gordon
October 19, 2011 | Associated Press

OWS camps care for local homeless

I guess the Occupy protests ARE different than the Tea Parties. After all, the TPs would never set up camps to feed, clothe, and heal the homeless like OWS does.

"Personal responsibility" not the "provide for the general welfare" is the TPs' mantra.

Just keep this in mind though next time you hear a report about a "drunk" or "violent" OWS protester: it could very well be a local homeless person who was allowed to join the protests.

October 22, 2011 | Associated Press

Sunday, October 23, 2011

Fed's zero-interest policy has consequences

The Fed thinks it's wonderful American households are de-leveraging. With their zero interest-rate policy the Fed is clearly trying to induce Americans to pay down debt and/or spend, since ordinary savings earn no return.

However the Fed's Duke neglected to mention that U.S. student loan debt has reached nearly $1 trillion, with default rates at for-profit colleges rivaling sub-prime loans. All those poor students -- many of them U.S. troops -- believed the hype that "education is the key" to employment, and now they're in high water.

By Sarah Hutchins
October 22, 2011 | Reuters

Households' caution about taking on debt and spending will stand them in good stead when the economic recovery becomes more robust, a top Federal Reserve official said on Saturday.

Fed Governor Elizabeth Duke did not comment on the outlook for the economy or the monetary policy in a speech about financial planning.

Household debt-to-income ratios skyrocketed during 2001-2007, but households cut debt and spending significantly during the financial crisis that began in 2007, Duke said.

The declines in spending and borrowing reflect the weak economy, but also a greater aversion to debt and a desire to hold down debt levels.

"Going forward, as income and asset values recover, these improvements in the aggregate household position should be felt by more and more U.S. households.," she said.

The Fed cut benchmark interest rates to near zero almost three years ago and has bought $2.3 trillion in bonds to boost economic growth.

Recent data suggest the economy may have escaped slipping back into recession over the summer, but Fed officials will debate further steps to lower a high unemployment rate at their next meeting November 1-2.

Thursday, October 20, 2011

OWS, that hurts: U.S. labor lost $500 billion since 1990

By Peter Orszag
October 19, 2011 | Bloomberg

In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of "Kaldor's stylized facts," articulated half a century ago by the Cambridge economist Nicholas Kaldor.

Recent experience betrays this lesson. Over the past two decades -- and especially since about 2000 -- the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries.

Labor share normally bounces around over the business cycle, but given how long the decline has lasted, it can't be dismissed as cyclical. And this partly explains the kind of anger and frustration that is fueling the Occupy Wall Street movement worldwide.

The numbers involved are substantial: In 1990, about 63 percent of business income in the U.S. took the form of wages and other types of labor compensation, according to data compiled by the Bureau of Labor Statistics. By 2005, that figure had dropped to 61 percent. And by the middle of this year, it had fallen to 58 percent. (Similar declines have occurred in other data sets, but are milder when the analysis includes the government, rather than only the private sector.)

The difference from 1990 to today -- about 5 percentage points or so of private-sector income -- amounts to more than $500 billion a year. In other words, if labor's share hadn't fallen, labor income would be $500 billion higher this year.

Worldwide Decline

Similar decreases have been occurring in other countries. In Germany and France, the labor share fell about 4 percent from 1995 to today, and it dropped about 6 percent in Australia and Japan during the same period. As Francisco Rodriguez and Arjun Jayadev wrote in a November 2010 paper for the United Nations, the labor share across the globe has "been subject to a consistent decline over the last two decades, contrary to the (earlier) received wisdom of a constant labor share across most regions in the world."

Why the drop? Part of the reason is that the advanced economies have been shifting toward certain types of services and advanced manufacturing that have lower shares of labor income. But that explains only a small part of the decline. Even within such sectors, the share has been falling substantially. What's causing that?

The two primary drivers are globalization and technological change. From 1980 to 2005, as the world became more integrated, the effective labor supply available on a global basis expanded by 100 percent to 300 percent (depending on how the estimates are done). That increased competition has pushed labor compensation down in the industrialized economies.

The effects of technological change are more subtle. As automation reduces the demand for workers, the labor share initially falls, but in time, as people adjust their skills to suit the new technology, the effect is often reversed.

In a 2007 paper for the International Monetary Fund, Florence Jaumotte and Irina Tytell tried to parse the various causes of the declining labor share. In the U.S., the U.K., Australia and Canada, the economists concluded, labor globalization and technological change played roughly equal roles, and crucial ones at that. In European countries and Japan, technological change was more significant than labor globalization. Other factors --including unions and privatization trends -- have been found to be influential, but labor globalization and technological change loom as the dominant forces.

Further Decline Ahead

Over the next decade, the global pool of labor is likely to expand rapidly for many reasons -- as more workers in China obtain advanced educations and migrate to the coastal cities, for example.

(Interestingly, the labor share has also been declining significantly in China. Part of that appears to be a statistical error, and the remainder reflects an ongoing shift from agriculture to manufacturing. The early stage of that process often involves a decline in labor share, which is then followed by an increase as the development process continues.)

The labor share in the U.S. will probably bounce up and down as the economy slowly recovers. Unless we are somehow going to cut ourselves off from the world, though, we face the prospect of a continued downward trend in the labor share. The trite response to this reality is to call for more education and better training for workers, and more investments in research and development as well as infrastructure. It's true that all such actions would help. But they take time, and even then they would probably only take some of the edge off the decline, not fundamentally reverse it.

No wonder the frustrated Wall Street protesters lack any specific proposals for change: We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.

(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

World Bank: U.S. a great place for doing business

At the same time that corporations and right-wing politicians' argue that "job-killing regulations" are to blame for America's current economic malaise, the USA has moved up in the annual Doing Business rankings by the World Bank -- from 5th place to 4th.

As last year, only tiny islands managed to be more business-friendly than the good ole US of A.

Looks like somebody doesn't know what the hell they're talking about.

The World Bank Group
October 20, 2011

Wednesday, October 19, 2011

Study: Lobbying boosts firms' bottom line

On the one hand the conclusion of this study is kind of, well, "Duh," but on the other hand it should give us pause to consider if this really the best way for our democracy to work.

Although the analysis by Strategas of companies' federal lobbying and their profits from this investment leaves out banks because their lobbying spending is too small relative to their total assets, another study found that those banks *who spent heavily on federal lobbying got more bailout funds.

( *I employ the animate personal pronoun "who" instead of "which" because we all know that corporations -- including banks -- are people.)

Indeed, I was tickled by this remark from the stoutly laissez-faire Economist magazine: "it seems remarkable that companies would do anything but lobby," based on their return on investment from lobbying.

Moreover, this study is quantitative evidence that the Occupy Wall Street movement is closer to the mark than the Tea Parties, which seem to have lost their mojo, at least with the American people.

People like Rep. Eric Cantor have argued the reason the Tea Parties are OK, and OWS is out of bounds, is that the TPs address the government with their grievances, they don't go after private businesses and private citizens like OWS does. But Cantor is missing the point. Many of the protesters, and certainly yours truly, have pointed out it's the corrupt nexus of government policy and corporate lobbying that is to blame for many of our nation's troubles, and the record inequality we face.

What was a national problem has become a national crisis: the U.S. government is now a captive client of corporate donors. And since financial firms are the biggest donors to, and beneficiaries of, the U.S. government, Wall Street is the correct target and symbol of Americans' growing discontent.

Ask what your country can do for you
October 1, 2011 | The Economist

MUCH as some businesses whine about government intrusion, others do pretty well out of it. An index based on the amount of lobbying that American firms do has outperformed the broader market since its creation in 2008; data going back to 1998 show that it has done better over the longer term, too.

The index is produced by Strategas, an investment-research firm. A first effort, to rank firms on the amount they spend on lobbying, was no use: it just corresponded with the largest firms. Strategas now looks at the intensity of lobbying—expenditure as a percentage of assets—to create an index of 50 firms that is revised quarterly.

In aggregate the results have been stunning, comparable to the returns of the most blistering hedge fund. The index has outperformed the S&P500 by 11% a year since 2002 (see chart). There have been bumps along the way: the index fell sharply in 2008 and again this summer, when debt-ceiling brinkmanship raised the prospect of government austerity. But at other times, it seems remarkable that companies would do anything but lobby. A particularly vivid example was in 2004, when an aggressive corporate campaign prompted Congress to grant a one-off tax holiday for American companies to repatriate foreign earnings. The outright return on lobbying costs, according to one of the various studies that served as inspiration for the Strategas index, was $220 for each $1 spent.

Firms that qualify for the index tend to be under the government's cosh. Tobacco companies are routinely threatened with every tax and sales restriction going, and are perennial fixtures on the list. So too are defence contractors. This year witnessed the entry into the index of several private-education providers, an area that has been under scrutiny by the administration of Barack Obama, as well as medical firms worried about the myriad loose ends to be tied up in Mr Obama's health-care plan.

Banks do not make the list because their balance-sheets are so leveraged that lobbying expenditures are small as a percentage of assets. That omission probably flatters the index in recent years but harms it in earlier ones. Finance still makes an appearance, most recently through Federated Investors (a provider of money-market funds) and the two ratings agencies (Moody's and McGraw-Hill, the parent of Standard & Poor's). Other index members include Monster Worldwide, a jobs website; Brown-Forman, maker of Jack Daniel's whiskey; and CBS, a broadcaster.

Various laws have been proposed or enacted to curtail lobbying, with limited success. The most effective answer may be the most straightforward: cut government spending. Strategas has just developed an index for that unlikely eventuality, allowing investors to short firms that derive the greatest proportion of their sales from federal-government contracts.

Monday, October 17, 2011

For the last time: Fannie did NOT cause financial disaster

Gee, I'm sure this well-researched article will put an end to the false belief that the FMs caused the financial crisis, which has become an article of faith among many, especially on the Right.

I'm doubly sure that those who refute this article will come back with statistics or studies or something checkable to support their false claim that the FMs/GSEs caused the financial crisis.

Yep, I'm absolutely sure, because we're all reasonable, fact-based thinkers.

By Jeff Madrick and Frank Partnoy
October 27, 2011 | New York Review of Books

Amid the current financial turmoil, the causes of the crisis that just preceded it—the bursting of the housing bubble—are being badly distorted. Some analysts, including the authors of the book under review [Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, by Gretchen Morgenson and Joshua Rosner], are arguing that the housing and financial crises of 2007 and 2008 were the direct result of federal guarantees of mortgages, a program first created in the 1930s, and therefore less so the result of the aggressive creation of mortgages by private business than has been widely reported.

In particular, the authors accuse two quasi-public but profit-making companies, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), of adding risks to the mortgage markets that resulted in disaster. Much the same criticism has been made by Peter Wallison, a fellow of the American Enterprise Institute, who wrote an angry dissent to the findings of the Financial Crisis Inquiry Commission (FCIC), which was appointed by Congress to investigate the causes of the crash. Contrary to Wallison, the nine other members of the commission, including three others appointed by Republicans, concluded that Fannie and Freddie were not the main causes of the crisis.

Along with many other experts, the nine members pointed to considerable evidence that, despite large losses, these government-sponsored enterprises (GSEs), as they are known, bought or guaranteed too few highly risky loans, and did so too late in the 2000s, to cause the crisis. But in their new book, Reckless Endangerment, the New York Times reporter Gretchen Morgenson and mortgage securities analyst Joshua Rosner try to revive the issue of their responsibility.

The book boldly and passionately asserts that the risk-taking of Fannie Mae and Freddie Mac was a major element in causing the housing bubble. In particular, the authors blame the crisis on the goals set by the Clinton administration in the early 1990s to make lending "affordable" to more middle- and low-income home buyers. These goals were raised several times over the next dozen years so as to include more people, with the result that loans became cheaper. The authors write, "The homeownership drive helped to plunge the nation into the worst economic crisis since the Great Depression." They add, "How Clinton's calamitous Homeownership Strategy was born, nurtured, and finally came to blow up the American economy is a story of greed and good intentions, corporate corruption and government support."

This bold claim, however, is not substantiated by persuasive analysis or by any hard evidence in the book. The GSEs did generate large losses, but their bad investments in housing loans followed rather than led the crisis; most of those investments involved purchases or guarantees made well after the subprime and housing bubbles had been expanded by private loans and were almost about to burst.

Even then, the GSEs' overall purchases and guarantees were much less risky than Wall Street's: their default rates were one fourth to one fifth those of Wall Street and other private financial firms, a fact not made clear by the authors. A further review of other literature shows that Clinton's goals to increase "affordable lending" had little to do with the risks the GSEs took. The FCIC, for example, argued that in several years these goals were largely met by the GSEs' standard loans with traditional down payments.

Although they were set up originally by the federal government, the GSEs have been private companies for roughly the last forty years. They are traded on the stock market and were on a hunt for profits like much of Wall Street, in part because their executives' bonuses were linked to earnings per share. Even so, by comparison with other companies they restrained their risk. Private firms on Wall Street and mortgage companies across the nation, uncontrolled by adequate federal regulation, unambiguously caused the crisis as they expanded in the 2000s. They were the ones who "came to blow up the American economy."

This is not to say that the GSEs' way of doing business was sensible or that their losses—up to $230 billion—can be justified. The hybrid business model of a quasi-public but profit-making company, whose bonds were treated in the financial markets as if they were guaranteed by the federal government, was likely to lead to abuse and careless investment. Financial markets assumed that the GSEs were relatively safe partly because they were regulated by a federal agency, the Office of the Federal Housing Enterprise Oversight (OFHEO) and were subject to a web of rules. They also had a long record of backing safe mortgages. The authors describe well how, beginning in the 1990s, Fannie in particular betrayed its responsibilities. It aggressively minimized federal regulation of its activities and it fought off attempts to tax its profits, partly through extravagant favors to influential lawmakers. This is a story that needed telling. Reform of the GSEs should be an urgent part of a new federal housing agenda.

But the book's unjustified thesis that Fannie and Freddie were major causes of the financial crisis is being used by politicians and pundits to soften criticism of private business and by lobbyists and others who would water down the new regulations passed by Congress under the Dodd-Frank Act. The book is also being exploited by those who believe the federal government should have little if anything to do with support for the mortgage market, a view we find unfounded.

Reviving the housing market was a high priority for Franklin Delano Roosevelt when he took office in 1933. In 1934, he created the Federal Housing Administration, which guaranteed mortgage payments, and provided insurance for savers' deposits in the thrift institutions that then were the nation's leading mortgage writers. He had also created a government bank, the Home Owners' Loan Corporation, to make new loans to distressed home owners and buy bad mortgages from failing financial institutions. Finally, in 1938, he established Fannie Mae to guarantee mortgages that met adequate standards or buy them outright from private financial institutions; it issued its own debt to major investors to support its practices. The goal was to maintain a stable mortgage market with reasonable borrowing rates in all regions of the country.

For roughly fifty years, Fannie Mae did its job. Home ownership rates rose from about 40 percent in the 1920s to about 60 percent and, in contrast to earlier, far more volatile history, the mortgage market was mostly stable. Freddie Mac was created in 1970 as a private company to package mortgages into securities that could be sold to institutional investors like pension funds.

That the GSEs were private began to draw increasing criticism as they grew larger. The implied federal guarantee of the debt of these private, profit-making companies, which lowered their borrowing rates, made it easier for them to grow and make new and riskier loans. Some urged that the GSEs be fully privatized and stripped of any advantage they might have because of federal regulation. Wall Street and mortgage firms wanted for themselves the business Fannie and Freddie were doing, including the packaging of mortgages into securities.

In the early 1990s, Congress recognized that Fannie and Freddie, which were growing rapidly, required closer regulation. President Clinton and Congress also were eager to channel more loans to lower-income Americans. Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which established a new agency to oversee the GSEs and set affordable lending goals.

From the beginning, the new oversight agency—OFHEO—was weak. And this is essentially where Reckless Endangerment begins, with sordid details about how James Johnson, Fannie's chief executive and an influential Democratic insider, fended off control by OFHEO during its first seven years. Johnson established an expensive twelve-person lobbying office, gave campaign money to powerful politicians, and made contributions to the favorite charities of influential congressmen. He opened local development offices in congressional districts as a public relations campaign to show how congressmen were helping their local constituents get mortgages.

By means of such measures, Johnson won congressional support and repeatedly resisted attempts by a handful in Congress to rein Fannie in, as did his successor in 1999, Franklin Raines, President Clinton's former budget director. Perhaps most important, Johnson tied his own CEO bonuses and those of other executives to the earnings of the company.

Morgenson and Rosner make a strong if one-sided case against Johnson. We never hear from any of his defenders, and he refused, the authors write, to be interviewed. But as they make clear, Johnson, partly by his egregious self-promotion, made Fannie virtually untouchable politically. Above all, he exploited the Fannie mandate to lend to lower-income Americans in order to expand the company's reach, and in the process increase both its earnings and his personal wealth.

They also note that Democrats ranging from Congressman Barney Frank, who got his partner a job with Fannie, to former Clinton adviser Lanny Davis were strong supporters of Fannie Mae. William Daley, a high-level adviser to President Obama, was on Fannie's board. They cite Republicans who were Fannie supporters or executives as well, including Newt Gingrich, Senator Christopher Bond, and Robert Zoellick, legal counsel of Fannie and currently head of the World Bank.

The authors make no serious charges of outright fraudulent corruption on the part of these people, however. The one potential exception is Angelo Mozilo, the flamboyant head of Countrywide Financial, the nation's largest mortgage originator, who offered beneficial mortgage rates to some influential politicians. But the authors add nothing new here. The "friends of Mozilo," who got cut-rate VIP loans, included Johnson, Senators Chris Dodd and Kent Conrad, and the late Ambassador Richard Holbrooke, among others. But while Mozilo did favors for them, Morgenson and Rosner cite no specific favors returned to Mozilo by Dodd, Conrad, Holbrooke, or the others mentioned.

In these and other cases, the authors tar with a broad brush. They write that they conducted interviews over more than a decade and amassed a "mountain of notes," but many sources quoted are anonymous and the book does not cite references in footnotes so there is no way to assess many of their assertions. They almost never deal with counterarguments to their many claims, if only to show them wrong.

They make some odd errors as well, such as stating that Walter Mondale was "sitting out" the 1980 presidential election, when as vice president he ran again as Jimmy Carter's running mate. Their scathing criticism of a Federal Reserve Bank of Boston study published in 1992, which demonstrated prejudice against minorities in the distribution of mortgages in the Boston area, is an especially disturbing example of their one-sided reporting. They assert that this study, which they say influenced Congress's adoption of affordable lending goals, was deeply flawed. They mock the primary author of the study, the economist Alicia Munnell, and state that the Boston Fed made "a fool of itself."

But they don't point out that the Boston Fed's study was later subject to a stringent peer-review process and was published in 1996 in the respected American Economic Review. Indeed, few research papers have been as closely scrutinized. The published results, which corrected some methodological errors, showed persuasively that there was in fact a bias in the mortgage markets. In 1998, another peer-reviewed paper—also ignored by the authors—analyzed the criticisms of the Boston Fed study, as well as other research on mortgage bias, and concluded that the study was fundamentally correct. "The bottom line is that the results related to race are extremely robust," wrote the author.

The one claim that Morgenson and Rosner depend upon most for their extreme conclusions about Fannie and Freddie is especially poorly documented. Fannie, they write, started influencing the private sector in damaging ways beginning in the 1990s, when the GSEs reduced the down payments required for mortgages in order to help poorer Americans acquire housing loans. Fannie's lower standards "set the tone for private-sector lenders across the nation." In support, they cite two quotes from one unidentified former Fannie executive. They offer no empirical evidence, or even telling illustrations or anecdotes. A more recent paper by economist Edward Pinto offers more supposedly illustrative anecdotes about reduced down payments but remains unpersuasive. In fact, the loans guaranteed by Fannie in those years were always privately insured.

But the key point—which is largely missing from Reckless Endangerment —is that private lenders made far riskier loans than GSEs bought or guaranteed, especially during the 1990s, when subprimes issued to borrowers with low income and poor credit were relatively new. You will not read in Reckless Endangerment that the GSEs bought very few subprimes in these years. Rather than leading the way, Fannie's market share of the low-income home buyers fell behind private industry's far riskier lending to poorer home owners and others.

The increased risk-taking of the GSEs during the 1990s, far more modest than what was to come in the 2000s in the private sector, had no bearing on the financial crisis of 2007 and 2008. The authors make it seem as if it did, however. They write:

Clinton's public-private partnership was ramping up…. To meet the goals Fannie and Freddie had to buy riskier mortgages, such as those defined as subprime….

Some $160 billion in subprime mortgages would be underwritten in 1999, up from $40 billion five years earlier. And in another four years, that figure would jump to $332 billion.

Many of those loans wound up in Fannie's and Freddie's portfolios. By 2008, some $1.6 trillion of toxic mortgages, or almost half of those that were written, were purchased or guaranteed by Fannie and Freddie.

As noted, the GSEs bought very few subprimes in the 1990s. But it might especially surprise the inexpert reader to know that the GSEs did not own almost half of the "toxic mortgages" written by private companies, a remarkable exaggeration on the part of the authors. As usual, no source for the estimate is given, but it is likely based on the analysis of Pinto, who was a former Fannie official and is a colleague of Wallison's at the American Enterprise Institute. To make the claim, Pinto radically redefined what qualified a mortgage to be subprime or an Alt-A, for which mortgage-holders were often not required to document their income, rejecting the conventional and widely accepted definitions. In his analysis, almost any mortgage held by Fannie and Freddie with modest above-average risk was categorized, to use Morgenson and Rosner's term, as "toxic."

If so, one would presume the delinquency rates suffered by the GSEs during the crisis would have been very high. But David Min, an analyst with the Center for American Progress, shows that the after-crisis delinquency rates on the large additional portion of GSE mortgages that Pinto claimed were high risk, and that was termed "toxic" by Morgenson and Rosner, was roughly 10 percent, far lower than the 25 to 30 percent default rate of true subprimes. In fact, the rate of delinquencies for all GSE securities in 2004 was 4.3 percent, compared to a delinquency rate in private industry of 15.1 percent of mortgages. In 2005, the GSE rate was 7.8 percent compared to 28.7 percent, and in 2006 and 2007, the rates reached 13.2 and 14.9 percent in the GSEs and 45.1 and 42.3 percent in the private market. None of these figures are cited in Reckless Endangerment. In fact, losses as a proportion of mortgages guaranteed or bought by the GSEs were far lower than in private industry.

When Wall Street was taking more and more risk in the 2000s, as the housing bubble expanded, the GSEs were, relatively speaking, sitting it out. Johnson had left Fannie at the end of 1998 with a $21 million pay package, joining the board of Goldman Sachs and eventually running the Brookings Institution and becoming a key adviser to Senator John Kerry in his run for the presidency. But serious accounting irregularities under Raines, perhaps initiated under Johnson, left Fannie subject to immense pressure years later to get its books straightened out. Overall mortgage debt grew by 11.9 percent a year from 2003 to 2007, but the amount funded by the GSEs grew by only 7.6 percent a year. The GSE market share fell from over 50 percent to 40 percent.6

The GSEs did buy subprime mortgages in the 2000s, but contrary to the impression given by Morgenson and Rosner, their purchases were always a distinct minority of those sold by Wall Street. As Jason Thomas and Robert Van Order of George Washington University further point out, the subprimes the GSEs bought in these years were from the safer triple-A tranches of basic mortgage-backed securities, i.e., the highest quality of groups of mortgages rated by their risk of default. The GSEs never bought the far riskier collateralized debt obligations (CDOs) that were also rated triple-A and were the main source of the financial crisis. (The triple-A classifications of some of those CDOs were conferred on them very dubiously by the credit-rating agencies, Standard & Poor's and Moody's.) It turned out that subprimes accounted for only 5 percent of the GSEs' ultimate losses, according to Thomas and Van Order.

Some, like Alan Greenspan, argued that the GSEs' purchases of subprimes, nevertheless, helped hold down mortgage rates and therefore pushed up demand for housing and housing prices. But Thomas and Van Order strongly dispute that as well, showing that there was so much demand for the healthier triple-A tranches the GSEs bought that the purchases of subprimes made virtually no difference.

What then caused the losses of up to $230 billion by the GSEs that required the Treasury to put them into conservatorship in September 2008—they are now run by the Federal Housing Finance Agency—and a federal bailout of up to $150 billion in capital? It had little to do with pursuit of the original goals of "affordable lending." The GSEs were far more concerned to maximize their profits than to meet these goals; they were borrowing at low rates to buy high-paying mortgage securities once their accounting irregularities were behind them. For example, they started aggressively buying Alt-A loans that did not generally meet affordable lending goals because they were made to higher-income individuals. This was irresponsible. Most disturbing about the GSEs, they refused to maintain adequate capital as a cushion against losses, despite demands from their own regulators that they do so.

The GSEs never took nearly the risks that the private market took. Still, when housing prices collapsed so sharply, even modestly risky and traditionally safe mortgages produced losses. The risky lending was not driven by the affordable lending goals; nor did it cause the crisis. Thomas and Van Order write convincingly that the downfall of the GSEs "was quick, primarily due to mortgages originated in 2006 and 2007. It…was mostly associated with purchases of risky-but-not-subprime mortgages and insufficient capital to cover the decline in property values."

After devoting roughly two thirds of their book to Johnson and the GSEs, Morgenson and Rosner comment, "Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street." The assertion is jarring, coming so late in the book and after so much blame has been leveled at the GSEs. The authors do not really try to prove their point. They do not seriously address the derivatives market—the highly leveraged securities based on other securities that were at the core of excessive risk-taking. They mostly present a random collection of examples of wrongdoing, and their points have largely been made elsewhere.

But they add some useful details. Earlier in the book, they tell very well the story of NovaStar Financial, a mortgage originator that began doing business in the 1990s and exploited home owners still more in the 2000s. The company's history can serve as a quintessential example of regulatory failure. Respected Wall Street firms fed NovaStar and other dubious mortgage-writing companies with more money than they could wisely use. The authors also show how Goldman Sachs supplied mortgage money to Fremont, which they call "one of the nation's most wanton mortgage originators." Goldman, however, was only one of the pack, and many Wall Street investment banks owned their own aggressive mortgage originators.

The authors, moreover, explain clearly how the prices of collateralized debt obligations were driven up by credit-rating agencies. They show how some banks used off-balance-sheet accounting that permitted them to stuff risky assets into hidden "Special Purpose Vehicles," or SPVs. But here they mix up SPVs with more complex "Structured Investment Vehicles," or SIVs, which resemble CDOs but have shorter-term debt. Both the book and its index mislabel SIVs as "Special Investment Vehicles." They incorrectly write that Citigroup's large losses were due to problems in their SIVs. The big bank's losses actually came from the highly rated parts of CDOs they retained as well tens of billions of dollars of guarantees they made to those who bought the CDOs they underwrote, known as liquidity puts.

Clearly, the GSEs must be reformed and, if they are allowed to have the advantage of a presumed government guarantee, their practices and profits must be controlled and limited. A federal presence in the mortgage market is required to maintain liquidity and adequate access for home buyers. As for poorer families, a system of mortgages based on affordable lending goals is not necessarily the most efficient way to enable them to purchase homes. Direct vouchers might be a better alternative. Finally, there is the larger and more controversial question of whether many people, and the financial system itself, might be better off if more homes were rented, not bought.

But these are different debates than the one this book has provoked. Contrary to many commentators on Reckless Endangerment, and to its chief claims, it was Wall Street, not the GSEs, that fundamentally caused the 2007–2008 crisis, which was driven not merely by a headlong pursuit of easy profit but also by ethically dubious practices. Morgenson and Rosner discuss a handful of these practices and raise appropriate questions about why Wall Street participants were not criminally prosecuted. We will turn our attention to this important issue in a second article.

—This is the first of two articles.

Thursday, October 13, 2011

DC Johnston: Orwellian tax talk

Reading this just makes me angry and sad, because as Johnston points out, the Stupid and the Avaricious usually win. Stupid people want to believe, and avaricious people want to convince them, that we can cut everybody's taxes and create more revenue and thousands of jobs, just like children want to believe in Santa Claus and the Tooth Fairy.

Get this through your heads, folks: Tax collections are down 31.5 percent compared to 2001, after adjusting for inflation. That's your budget deficit.

We, our children and grandchildren are victims of Republicans' fetish for cutting taxes at all costs.

To restore fiscal sanity, federal taxes on the rich -- especially the top 1 percent -- have to go up, and it's not a matter of class warfare, or even fairness at this point -- it's simple math. Nobody else has any money. Raising taxes on the 47 percent who, after credits and deductions, pays no federal income tax would significantly increase the nation's misery but not its tax collections.

By David Cay Johnston
October 11, 2011 | Reuters

Political tax talk is becoming Orwellian: Secrecy is Democracy. Auditors Reduce Collections. Tax Cheats Will Be Caught With Fewer Auditors.

Let's start in Kansas, where the Lawrence Journal-World broke the news on Sunday that economist Arthur Laffer, father of curve-on-a-napkin tax policy, is advising the state on a new tax structure. The news is not so much that Laffer is getting $75,000 of taxpayer money, but that Governor Samuel Brownback wants advice only from business leaders; no wage earners allowed behind these officially closed doors.

In Albany, state tax authorities issued a statement asserting they already were pursuing the real estate tax cheats I wrote about last week. Never mind the statistics and lack of public enforcement actions. Maintaining this facade will be more difficult going forward as 300 newly pink-slipped auditors turn a drip of leaks into a stream.

Will Governor Andrew Cuomo, who wants to be president and has declared his eternal allegiance to lowering taxes on the richest New Yorkers, keep looking the other way? Will Lieutenant Governor Bob Duffy, who wants to be governor, mimic the boss? How long will only the little people of New York feel the full force of tax law enforcement under these two Democrats?

That question is a bit more pointed for Eric Schneiderman, the New York attorney general.

Assemblyman William Colton, an eight termer from Brooklyn, sent fellow Democrat Schneiderman a letter, and a copy of my column, asking for action. Will Schneiderman insist he can only act with Cuomo's cooperation, as his office hinted last week? Or will Schneiderman add a sharp edge to his carefully polished image as a tough law enforcer?

In Washington the mantra that spending, not revenue, is the problem was repeated endlessly last week. The idea that cutting tax rates, especially at the top, will pave a path to renewed prosperity is promoted by just about everyone in national politics except President Barack Obama and the few Capitol Hill Democrats who do not fear liberal as a political epithet.

Fact is, falling revenue is a problem. In fiscal 2011, which ended on Sept. 30, federal income tax revenues were smaller than in 2001, a recession year when the George W. Bush tax cuts began.

In fiscal 2001 the individual income tax brought in $994.3 billion and in just-ended fiscal 2011 it brought in an estimated $956 billion. That's 4 percent less money before taking into account 10 years of inflation.

Per capita the federal income tax brought in 31.5 percent less in real terms in 2011 than in 2001.


The dominant political response to the fall in tax revenues? More tax cuts.

Bipartisan support is building for reducing corporate tax rates by at least 10 percentage points, from 35 percent to 25 percent or less. So is support for allowing repatriation of profits for companies that shifted them overseas to reduce taxes. The last time Congress did that, in 2004, it was sold with a promise it would create 660,000 jobs. Instead the benefiting companies fired more than 100,000 workers, several studies have shown.

There is also a bipartisan plan to further reduce already enfeebled tax law enforcement. The Senate plans to cut the IRS budget by $450 million, the House of Representatives by $600 million, meaning firing thousands of auditors.

Fewer auditors will not benefit the vast majority, whose taxes are taken out of their paychecks before they get their money. But it will give aid and comfort to high-end tax cheats, who rely on complexity, secret offshore accounts and lack of political will to chase them.

If cutting the government revenue department makes sense, then why not go whole hog and get rid of the IRS? That is what Herman Cain, a top rival for the Republican nomination, promises if voters send him to the Oval Office.

Cain's 9-9-9 tax plan would scrap the current tax code and replace it with 9 percent levies on corporate profits, on income and on spending. The already rich would only be taxed on their spending since capital income would be tax-free, part of the little known flat tax premise that labor should be taxed, but taxing returns to capital discourages saving.

Under Cain's plan, employers could not deduct the cost of wages paid to workers, not exactly a job creation scheme. Edward Kleinbard, the former chief of the Congressional Joint Committee on Taxation, said the Cain plan is effectively a 27 percent payroll tax.

Cain's plan also imposes a one-time 9 percent tax on existing wealth, which may surprise his wealthy friends. He also would double-tax interest income, though, as Kleinbard noted, that must be a mistake.

Under Cain's plan workers would have far less to spend after taxes. Cain insists that critics don't understand. But as the chart illustrates, rich investors would pay less, helping their wealth snowball. The Cain campaign did not return calls seeking more information.

Give Cain credit though. Unlike Governor Brownback he is operating in the open. Unlike Cuomo, Duffy and Schneiderman, he is out front.

Unlike Orwell's Winston Smith, no one from the Ministry of Love will turn you in for beatings until you accept that 2+2=5. The oligarchs and their elected enablers are just trying to convince you that tax deals made in secret are democratic, lower tax rates mean more tax revenue and that the ministries of tax are doing all they can to find the cheats.

Wednesday, October 12, 2011

The 99 Percent v. the 53 Percent

More U.S. households have become exempt from federal income tax because they earn too little income, and because Bush lowered their taxes.

So this "53 Percent" movement is basically blaming poor people for being too poor, and Democrats for Republicans' tax cuts. Makes no sense. But when do they ever?

In response to Occupy Wall Street, some conservatives are blasting the 47 percent of Americans who don't pay federal taxes. Do they have a point?
By Annie Lowrey
October 11, 2011 | Slate

The slogan doesn't exactly sing: "We are the 53 percent!" But this new campaign, a conservative answer to Occupy Wall Street, has some verve. The 53 Percenters are responding to We Are the 99 Percent, an inequality-focused online Tumblr designed to shame—or at least call out—the top 1 percent of earners who are taking bigger and bigger pieces of the pie.

The 53 percent say everyone should stop moaning, quit pointing fingers at Wall Street, and pay their damn taxes. (The name refers to the fact that only 53 percent of households pay federal income tax these days.) The brainchild of Erick Erickson of, the 53 Tumblr features comments like: "I don't blame Wall Street. Suck it up you whiners. I am the 53 percent subsidizing you so you can hang out on Wall Street and complain." (That's from Erickson's inaugural post, by the way.)

Rhetorical fervor aside, the 53 Percent campaign does raise an interesting question: What is going on with that other 47 percent? Why are so few people paying income taxes? For the answer to that question, we turn to the nonpartisan Tax Policy Center, which released a study on the subject this July. (The TPC also put out the initial report with the 53 percent number.)

The short answer is: deductions and poverty. About half of households within that 47 percent do not end up paying federal income tax because they qualify for enough breaks to cancel their tax obligations out. Of that group, 44 percent are claiming tax benefits for the elderly, like an exemption for Social Security payments. And 30.4 percent are claiming credits for "children and the working poor," like the child-care tax credit. The remainder get breaks for investment income, spending on education, itemized deductions, and a mish-mash of other things. When combined, it's all enough to cancel out their income tax requirements.

In short, it is not that they are not paying their taxes. It is that the country's tax structure lets them off the hook. Indeed, you can draw a straight line between the Bush tax cuts and the growing number of households exempted from income tax. For instance, the 2001 cuts, extended under the Obama administration, doubled the child tax credit from $500 to $1,000 and expanded eligibility for the Earned Income Tax Credit among married taxpayers. Additionally, the Bush tax cuts lowered income taxes in every bracket, making it easier for a household's liability to get fully offset by deductions and credits. And on top of all that, the stimulus bill introduced a host of further tax cuts.

That covers about half of the households that don't pay any federal income taxes. The other half of households are just too poor to pay them. The Tax Policy Center provides a handy example: A couple with two children earning less than $26,400 per year pays no income tax if it takes standard deductions and common exemptions, for instance. "The basic structure of the income tax simply exempts subsistence levels of income from tax," TPC's Roberton Williams writes.

That pool of too-poor households has grown much bigger because of the recession and its aftermath: Average incomes have kept on declining even though the recession has officially ended, and millions of households have lost one or both of their wage-earners. Households are earning about 10 percent less than they did in 2007. About 12 percent of families live in poverty. That means a lot of folks simply aren't eligible for income tax.

So what of the claim that the 53 percent are subsidizing the 99 percent? Well, just because 47 percent of households do not pay federal income tax does not mean that they do not pay any federal taxes. Indeed, almost everyone pays some: There are federal taxes for Social Security and Medicare, on gas, alcohol, and cigarettes. Plus, there are also state and local taxes, and property taxes. You'd have to be freegan to escape paying any tax at all.