Tuesday, December 27, 2011

Taibbi: Obama CHOOSES not to prosecute Wall St. fraud

By Matt Taibbi
December 20, 2011 | Rolling Stone

How German automakers double U.S. production AND wages

Great quote:

"So, if I believed what the neo-liberals are arguing, we [Germany] would have to be bankrupt, but apparently this is not the case. Despite high wages... despite our possibility to influence companies, the economy is working well in Germany."

I can tell you, collaborative work by management and labor is definitely not what is taught in U.S. business schools, nor is it the practice, obviously. Tellingly, BMW and Mercedes plants in the U.S. pay much worse wages and probably produce lower-quality cars, because even German producers in the U.S. succumb to America's race-to-the-bottom industrial ethos.

Oxford study: The rich get their way in U.S. politics -- DUH!

I know this isn't a personal anecdote from an older Midwesterner or a Marine veteran that "tells it like it is," but for those of you who still put some stock in, well, facts and stuff, check out this Oxford study [emphasis mine]:

"Using an original data set of almost two thousand survey questions on proposed [U.S. government] policy changes between 1981 and 2002, I find a moderately strong relationship between what the public wants and what the government does, albeit with a strong bias toward the status quo. But I also find that when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of poor or middle-income Americans. The vast discrepancy I find in government responsiveness to citizens with different incomes stands in stark contrast to the ideal of political equality that Americans hold dear. Although perfect political equality is an unrealistic goal, representational biases of this magnitude call into question the very democratic character of our society."

And I find that these findings stand in stark contrast to libertard-teabag propaganda about how poorer Americans keep voting themselves greater and greater benefits all the time from the Big Government swine trough, allegedly putting the integrity of our democratic system in danger. But of course, anecdotally, we already knew that line was b.s. In fact it's the rich who get what they want in our pay-to-play political system.

Here's how the author Gilens sums up the facts:

"There has never been a democratic society in which citizens' influence over government policy was unrelated to their financial resources. In this sense, the difference between democracy and plutocracy is one of degree. But by this same token, a government that is democratic in form but is in practice only responsive to its most affluent citizens is a democracy in name only.

"Most middle-income Americans think that public officials do not care much about the preferences of 'people like me.' Sadly, the results presented above suggest they may be right. Whether or not elected officials and other decision makers 'care' about middle-class Americans, influence over actual policy outcomes appears to be reserved almost exclusively for those at the top of the income distribution."

By Martin Gilens
Public Opinion Quarterly

Thursday, December 15, 2011

Stiglitz: What caused the 'Great Slump' & how to fix it

My favorite bearded liberal Nobel economist has a new slant on what caused the Great Depression -- and our present "Great Slump," which my other favorite bearded liberal Nobel economist, Paul Krugman, is already calling a Depression.

This is definitely worth reading in full.

Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the "real" economy, from industry to service, or risk a tragic replay of 80 years ago.

By Joseph E. Stiglitz
January 2012 | Vanity Fair

It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.

We knew the crisis was serious back in 2008. And we thought we knew who the "bad guys" were—the nation's big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn't do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.

The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn't really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: "Don't put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don't force them to use the money to lend. Such conditions will upset our delicate markets." In the end, bank managers looked out for themselves and did what they are accustomed to doing.

Even when we fully repair the banking system, we'll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn't returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And "zero" doesn't really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here's the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.

The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to "where it was" does nothing to address the underlying problems.

The trauma we're experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn't succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it's difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It's a problem rooted in the kinds of jobs we have, the kind we need, and the kind we're losing, and rooted as well in the kind of workers we want and the kind we don't know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy's underlying weakness. The breakdown of the banking system didn't culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown "Hoovervilles" were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a "good thing"—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn't pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren't spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn't, as any increased output kept forcing prices down.

Given the magnitude of the decline in farm income, it's no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.

The Agriculture Adjustment Act, F.D.R.'s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.

Government spending unintentionally solved the economy's underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like "industrial policy," but that's what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression's doomed farmers.

The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.

Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn't true during the Depression, and it isn't true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.

Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.

Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America's conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.

Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.

The private sector by itself won't, and can't, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

The second conclusion is this: If we expect to maintain any semblance of "normality," we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it's an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What's needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.

That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

2.5 million youngsters can thank Obama

December 14, 2011 | AP

Wednesday, December 14, 2011

No debating it: In education, class matters

In statistics, this is a slam-dunk correlation:

Data from the National Assessment of Educational Progress show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.

But I know you conservatives and "school choice" folks eschew statistics and prefer anecdotes about that one charter school, or some movie about over-achieving minority students, when it comes to U.S. education policy.

It's too bad our public and private schools don't teach statistics to over-achieving white kids....

By Helen F. Ladd and Edward B. Fiske
December 11, 2011 | New York Times

Sunday, December 11, 2011

Drumroll, please: And the new Fed bailout total is....

... $29.6 trillion and counting. Lovely. Viva el capitalismo!

Please remember this $ figure the next time you or one of our crotchety conservative friends feels the urge to complain about the Solyndra loan guarantee ($500 million), Detroit-automotive bailouts ($65 billion), or extended unemployment benefits ($60 billion). If you have any sense of consistency, fairness, humanity or just basic arithmetic, then please stop your bitching and join up with others who acknowledge the sad truth that Wall Street runs our government and our central bank for its own benefit.

By Barry Ritholtz
December 9, 2011 | Ritholtz.com

There is a fascinating new study coming out of the Levy Economics Institute of Bard College. Its titled "$29,000,000,000,000: A Detailed Look at the Fed's Bail-out by Funding Facility and Recipient" by James Felkerson. The study looks at the lending, guarantees, facilities and spending of the Federal Reserve.

The researchers took all of the individual transactions across all facilities created to deal with the crisis, to figure out how much the Fed committed as a response to the crisis. This includes direct lending, asset purchases and all other assistance. (It does not include indirect costs such as rising price of goods due to inflation, weak dollar, etc.)

The net total? As of November 10, 2011, it was $29,616.4 billion dollars — (or 29 and a half trillion, if you prefer that nomenclature). Three facilities—CBLS, PDCF, and TAF— are responsible for the lion's share — 71.1% of all Federal Reserve assistance ($22,826.8 billion).

One comment about some of the folks pushing back against this massive total: Yes, there is a big difference between a $100 lent for 3 days, and a $100 lent overnight rolled over 2 more times. And there is an enormous difference when temporary overnight lending lasts for three years.

Overnight lending, by its definition, is temporary, short term, lower risk, modest impact. It exists to allow slightly over-extended banks to meet their reserve requirements. But rolling overnight lending repeatedly for 3 years is none of those things. And it makes a mockery of these same reserve requirements, and the protective purposes they are supposed to serve.

The amount of overnight lending reflects how broken our financial system really is. A well capitalized, moderately leverage system does not require this massive liquidity from a central bank — interbank lending should be sufficient. What the data reveals is that the financial sector remains dangerously under-capitalized and overleveraged.

[Oh, p-shaw. Leverage is great! Leverage is the best! How else can you make loads of cash without work or increased productivity? This Ritholtz guy obviously doesn't understand high finance.... - J]

To pretend these were merely minor overnight loans, rolled over once or twice, is foolish, dangerous nonsense.

Cumulative facility totals, in billions

Source: Federal Reserve

FacilityTotalPercent of total
Term Auction Facility$3,818.4112.89%
Central Bank Liquidity Swaps10,057.4(1.96) 33.96
Single Tranche Open Market Operation8552.89
Terms Securities Lending Facility and Term Options Program2,005.76.77
Bear Stearns Bridge Loan 12.90.04
Maiden Lane I28.82(12.98)0.10
Primary Dealer Credit Facility8,950.9930.22
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 217.450.73
Commercial Paper Funding Facility737.072.49
Term Asset-Backed Securities Loan Facility71.09(.794)0.24
Agency Mortgage-Backed Security Purchase Program 1,850.14(849.26)6.25
AIG Revolving Credit Facility140.316 0.47
AIG Securities Borrowing Facility802.3162.71
Maiden Lane II 19.5(9.33)0.07
Maiden Lane III24.3(18.15)0.08
AIA/ ALICO250.08
Totals$29,616.4 100.0%

By L. Randall Wray
December 9, 2011 | Economonitor

URL: http://www.economonitor.com/lrwray/2011/12/09/bernanke's-obfuscation-continues-the-fed's-29-trillion-bail-out-of-wall-street/

Monday, December 5, 2011

CBS investigates: Why no prosecutions of Wall St.?

All of you who think the FMs caused the mortgage crisis, you need to read this. Countrywide and Citibank both engaged in deliberate mortgage fraud. No regulator in the world can prevent the kind of fraud they perpetrated -- regulators can only prosecute them when it's uncovered. It has been uncovered. Whistleblowers from both companies are ready to testify. Yet the Justice Department hasn't opened a criminal investigation and made charges. Why not?

Is it because politicians -- including Obama -- are in the bankers' pocket? Or are federal prosecutors just afraid they'll be outgunned by dozens of high-priced lawyers? Whatever the excuse, it's not good enough. We put executives behind bars for S&L fraud, and that was mild compared to this. We need criminal cases and CEOs and CFOs behind bars, and we can do it using the 2002 Sarbanes Oxley Act.

December 4, 2011 | CBS News

VC millionaire: Raise taxes on 1% to help true job creators

Hear hear!

By Nick Hanauer
December 1, 2011 | Bloomberg Businessweek

It is a tenet of American economic beliefs, and an article of faith for Republicans that is seldom contested by Democrats: If taxes are raised on the rich, job creation will stop.

Trouble is, sometimes the things that we know to be true are dead wrong. For the larger part of human history, for example, people were sure that the sun circles the Earth and that we are at the center of the universe. It doesn't, and we aren't. The conventional wisdom that the rich and businesses are our nation's "job creators" is every bit as false.

I'm a very rich person. As an entrepreneur and venture capitalist, I've started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc.

Even so, I've never been a "job creator." I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

That's why I can say with confidence that rich people don't create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

Theory of Evolution

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it's the other way around.

It is unquestionably true that without entrepreneurs and investors, you can't have a dynamic and growing capitalist economy. But it's equally true that without consumers, you can't have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.

That's why our current policies are so upside down. When the American middle class defends a tax system in which the lion's share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that's what has been happening in the U.S. for the last 30 years.

Since 1980, the share of the nation's income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

It's true that we do spend a lot more than the average family. Yet the one truly expensive line item in our budget is our airplane (which, by the way, was manufactured in France by Dassault Aviation SA), and those annual costs are mostly for fuel (from the Middle East). It's just crazy to believe that any of this is more beneficial to our economy than hiring more teachers or police officers or investing in our infrastructure.

More Shoppers Needed

I can't buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can't buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It's worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.

It is mathematically impossible to invest enough in our economy and our country to sustain the middle class (our customers) without taxing the top 1 percent at reasonable levels again. Shifting the burden from the 99 percent to the 1 percent is the surest and best way to get our consumer-based economy rolling again.

Significant tax increases on the about $1.5 trillion in collective income of those of us in the top 1 percent could create hundreds of billions of dollars to invest in our economy, rather than letting it pile up in a few bank accounts like a huge clot in our nation's economic circulatory system.

Consider, for example, that a puny 3 percent surtax on incomes above $1 million would be enough to maintain and expand the current payroll tax cut beyond December, preventing a $1,000 increase on the average worker's taxes at the worst possible time for the economy. With a few more pennies on the dollar, we could invest in rebuilding schools and infrastructure. And even if we imposed a millionaires' surtax and rolled back the Bush- era tax cuts for those at the top, the taxes on the richest Americans would still be historically low, and their incomes would still be astronomically high.

We've had it backward for the last 30 years. Rich businesspeople like me don't create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That's why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let's give a break to the true job creators. Let's tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let's remember that capitalists without customers are out of business.

(Nick Hanauer is a founder of Second Avenue Partners, a venture capital company in Seattle specializing in early state startups and emerging technology. He has helped launch more than 20 companies, including aQuantive Inc. and Amazon.com, and is the co-author of two books, "The True Patriot" and "The Gardens of Democracy.")

Sunday, December 4, 2011

Will GOP make hard cuts to troops' pay & benefits?

I wonder if those same folks on the right who want to gut "bloated" union-employee benefits want to employ the same dull scalpel to the Pentagon's pension & benefits budget?

Consider this: the average enlisted soldier retires at 43; the average officer at 47 -- and then they collect pension & health benefits for the rest of their lives, regardless of income or ability to work. That is a "Cadillac" benefits plan if I've ever heard of one.

December 4, 2011 | All Things Considered on NPR

Bean counters at the Pentagon are working long hours to figure out how to cut close to a trillion dollars from the Department of Defense budget over the next 10 years.

Those were the Pentagon's marching orders after the congressional supercommittee failed to come up with a plan to slash the country's deficit. Pentagon officials are looking at cutting weapons programs, troop levels and possibly even some base closures.

Part of the defense budget usually protected from budget cuts is personnel costs: mainly health care and retirement benefits. While Defense Secretary Leon Panetta has said everything's on the table, cutting benefits for troops is not an easy sell.

Bryan McGrath served in the U.S. Navy for 21 years, part of that time commanding the USS Bulkeley, a naval destroyer. Like many officers, he had enlisted in ROTC in college and figured he'd serve four years, get school paid for and be done.

"The problem was within those first four years, I came to absolutely love what I was doing," McGrath tells weekends on All Things Considered guest host Rachel Martin. "There was no reason to leave."

The Cost Of Benefits

It's easy to listen to someone like McGrath and think the military should be doing everything possible to recruit people like him, and then take care of them after they retire. But McGrath is the first to tell you that his military benefits — his $3,000 pension, and his health care — are costing his country too much money.

"My health care costs me the equivalent of approximately one triple latte a week, about $20 a month," he says. "My view — and this is my view only – is that my 21 years of service [is] rolled up into a great big love of country, and I think my country is in trouble."

Military retiree benefits cost the Pentagon $50 billion a year. That's more than next year's entire budget for the Department of Homeland Security. There are 1.9 million military retirees drawing pay and benefits, compared to 1.5 million in the active duty force. In 2010, then-Defense Secretary Robert Gates said those costs are "eating the Defense Department alive."

(To be clear, veterans are those who have served in the military; they receive benefits from the Department of Veterans Affairs. Military retirees are those who serve 20 years or more — it is their benefits that are often seen as unsustainable.)

"Military retirees who are working age ... for a family plan you pay $460 a year, [and] that covers you and all of your dependents," says Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments in Washington, D.C. "And if you're single, it's $230 a year."

When military retirees reach age 65 and are eligible to go on Medicare, they gets something called TRICARE, a Medicare supplemental insurance plan, Harrison says. It covers everything Medicare doesn't cover. The cost: It's free. In addition to that, retirees also receive pensions. Depending on the rank of the retiree, the pension can be a couple thousand dollars a month or more.

To understand why these benefits are so expensive, you have to think about when military retirees start collecting them. Unlike private sector employees, who don't receive entitlements like Social Security and Medicare until they are 65 years old, military retirees generally begin collecting benefits in their 40s. The average age of officers when they retire is 47, Harrison says. The average age of enlisted soldiers when they retire is 43.

"They're paying retirement benefits to people who are 90 [or] even 100 years old right now, who served a couple of generations ago," he says.

A Sensitive Issue

The cost of military retiree benefits, and the possibility of cutting them, is something no one in Washington wants to talk much about. Arnold Punaro is an exception.

Punaro served as a major general in the Marine Corps and is part of an agency that advises the Pentagon on budget issues. He says the line he often uses to talk about the issue is that, "General Motors didn't start out as a health care company that occasionally builds an automobile."

"We can't let these trends continue so that the [Department of Defense] turns into a benefits company that occasionally kills a terrorist," Punaro tells NPR's Martin.

People at the Pentagon know that the issue is a huge problem, Punaro says, but the problem is finding someone willing to take up the fight. Though he is eligible for military health benefits, Punaro says he chooses not to use a system he criticizes and currently pays "a small fortune" for his health care. What concerns Punaro is that the cost of retiree benefits weakening the current and future military.

"I am very concerned that as current trends continue, this country will not have the strong military it needs 20 years from now, because all of the money is going to go to pay people that are no longer serving," he says.

Punaro says it's not a new problem.

Harrison of the CSBA says military benefits have been growing, unchecked, since the end of the draft in 1973. At the time, there was a sense troops needed to be compensated better, Harrison says. The problem is the way it was done.

"They didn't try to understand how they could get the best value for every dollar of compensation they added," he says. "They basically just spread the benefits all across the board."

Harrison's fear in the current budget environment is that the opposite will occur and that cuts will be made haphazardly.

"If you're smart about it, you can mitigate, even in some cases completely eliminate, any adverse effects on your force in terms of recruiting and retention," he says.

Potential Changes

The Obama administration has suggested retirees pay about $200 a year more for their health care, which the administration says could save $6.7 billion.

Some also suggest that, instead of a pension plan, soldiers should pay into a retirement plan, like a 401(k). But Panetta recently told a group of U.S. service members that he wouldn't support a change like that.

"You're asked to put your lives on the line. You're asked to go into battle. You're asked to be able to fight for America. You're asked to deploy time and time again. Nobody ought to compare what the military is doing to the civilian sector," Panetta said.

Retired Navy Cmdr. Bryan McGrath says that's true, but protecting military benefits shouldn't undercut the military's ability to do what it was created to do: fight and win wars.

"I would submit that support for the troops starts with the notion that our position of world leadership costs something," McGrath says. "Right now, personnel costs [and] personnel entitlements — including those that come to me — are impacting our ability to put the best force on the field and I think that's something that we as a nation need to think very deeply about as we go forward."

Krugman: Europe is cautionary tale for U.S., but not how you think

We in the U.S. have a bit of time to see how austerity and high interest rates help Europe's economy before we ourselves go into full austerity mode, but so far the effects in Europe have been dire. Soon to be catastrophic.

In the U.S. we also have too many who irrationally fear the inflation bogeyman -- primarily those who are living comfortably and don't want to see the value of any of their assets fall on some distant and undefined future date. We cannot let them rule the present day.

By Paul Krugman
December 1, 2011 | New York Times

Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely.

True, market pressure lifted a bit on Wednesday after central banks made a splashy announcement about expanded credit lines (which will, in fact, make hardly any real difference). But even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis.

How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you're very likely to find some pundit declaring that if America doesn't slash spending we'll end up like Greece. Greeeeeece!

But the truth is nearly the opposite. Although Europe's leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.

The story so far: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe's case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?

For the most part, by the way, this lending went to the private sector, not to governments. Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.

Then the bubble burst. Private spending in the debtor nations fell sharply. And the question European leaders should have been asking was how to keep those spending cuts from causing a Europe-wide downturn.

Instead, however, they responded to the inevitable, recession-driven rise in deficits by demanding that all governments — not just those of the debtor nations — slash spending and raise taxes. Warnings that this would deepen the slump were waved away. "The idea that austerity measures could trigger stagnation is incorrect," declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because "confidence-inspiring policies will foster and not hamper economic recovery."

But the confidence fairy was a no-show.

Wait, there's more. During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.

But to close the gap through rising prices in the north, policy makers would have to accept temporarily higher inflation for the euro area as a whole. And they've made it clear that they won't. Last April, in fact, the European Central Bank began raising interest rates, even though it was obvious to most observers that underlying inflation was, if anything, too low.

And it's probably no coincidence that April was also when the euro crisis entered its new, dire phase. Never mind Greece, whose economy is to Europe roughly as greater Miami is to the United States. At this point, markets have lost faith in the euro as a whole, driving up interest rates even for countries like Austria and Finland, hardly known for profligacy. And it's not hard to see why. The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.

I hope, for our sake as well as theirs, that the Europeans will change course before it's too late. But, to be honest, I don't believe they will. In fact, what's much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

So the next time you hear someone claiming that if we don't slash spending we'll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we'll turn into Europe. In fact, we're well on our way.

Friday, December 2, 2011

Journalists suddenly disorderly at OWS, must be arrested for their own safety

I know the right wing has been trying, with some success, to portray OWS protestors as violent and disruptive, but since when did so many U.S. journalists turn disorderly?!

Journalists have been arrested on flimsy pretexts not only in New York, LA, Chicago and DC, but also in places like Boston, Nashville, Rochester, Richmond, Milwaukee, Oakland, Atlanta and Chapel Hill. Many say they were only taking photos or interviews, and their press passes were visible. (You can read many of their stories here.)

Police actions at OWS protests against journalists are like something out of Russia or the Arab Spring uprisings, where police -- and their political bosses -- simply do not want any record of their violent crackdowns in the media.

Anyway, all you "strict constitutionalists" and Framer-lovers out there should be concerned with how protesters and journalists have been treated at OWS, even if you don't agree with their politics. Otherwise you are hypocrites and opportunists. This baloney about arresting people who are on public spaces in order to protect them from "unsanitary" or "unsafe" conditions, or to encourage commerce in the area, is absurd, esp. when our "protectors" are blasting them with pepper spray, and denying them food, water, or toilets while they are locked up for hours in cages and paddy wagons.

There is nothing in the The First Amendment which allows government to abridge "the right of the people peaceably to assemble" because they are smelly, offensive to your sensibilities, or discourage somebody from shopping nearby. A protest by definition is not a cuddle fest; it's supposed to make somebody in power uncomfortable.

By Josh Stearns
December 2, 2011 | Storify

B Corporations: The synthesis of Adam Smith?

By Kyle Westaway
December 1, 2011 | HBR Blog Network

Despite the recent crackdowns in New York and Los Angeles, it's not surprising that the Occupy Wall Street movement has exploded into 900 chapters. The Occupy movement — as well as The Tea Party — are both "mad as hell" about the current state of affairs. Both sides share a general dissatisfaction with our current capitalist system. The left wants to end capitalism. The right says if we could just get the government out of the way, then the capitalist system would work.

I think both groups' conception of capitalism is off the mark. To gain some clarity, we need to consult Adam Smith.

Adam Smith, the father of modern economics, was the first to assert the concept of free market capitalism. In his most popular work The Wealth of Nations he wrote about the oft-quoted "invisible hand." But in his first work, The Theory of Moral Sentiments — which he considered his most meaningful contribution — he writes about our duty to fellow members of society. Pundits on either end of the political spectrum quote whichever work suits their argument. Predictably, the right quotes Wealth of Nations and the left quotes The Theory of Moral Sentiments. Given the gap between modern capitalism and the morals-based approach from his first book, one can't help but wonder if Smith was an intellectual schizophrenic, essentially promoting two competing theories.

I don't think he was. In fact, I see his two preeminent works amounting to a unified theory, a blueprint for a more stable and sustainable version of capitalism; a conscious capitalism. The Wealth of Nations presupposed actors in the capitalist system operating on the moral framework he laid out in the Theory of Moral Sentiments. The free market has no conscience of its own: it is made up of billions of people transacting. Though Smith asserts that each of these people are guided by their self interest, he presupposes that each of the actors in the marketplace are guided by some internal morality and an awareness of one's place within the broader context of his community — locally and globally.

The current version of capitalism is not the one envisioned by Smith at all. He was seeking to create a system defined by efficient allocation of resources driven by self-interest, but guided by self-restraint. This is conscious capitalism.

The current version of capitalism's guidance from self-interest in the corporate world is evidenced in the legal duty to maximize shareholder value, which opens directors up to a lawsuit from their shareholders if they make a decision that fails to make the highest possible profit for their shareholders. Thus, the duty to maximize shareholder value handcuffs directors that want to make decisions that seek to create benefit for people and planet as well as financial returns.

There is debate whether this duty exists, but it is such a dominant perception among directors that it is the practical reality. In order for corporations to be free from the shackles of maximizing shareholder value, the fiduciary duties must be broadened.

Fortunately, many state legislatures in the United States are seeing the need for a new legal structure that embraces conscious capitalism by broadening the fiduciary duty from maximizing shareholder value to maximizing stakeholder value — the legal mandate to take make decisions that pursue not only a positive benefit on the bottom line of the shareholders, but also the community, environment, employees and suppliers. This broadening of fiduciary duty is a fundamental shift at the very core of the corporation. This new type of corporation that embraces conscious capitalism by broadening fiduciary duty is known as a Benefit Corporation.

The Benefit Corporation embodies the theories of both The Wealth Nations and the Theory of Moral Sentiments, and ushers in a version of conscious capitalism that promotes both self-interest and the benefit of society. Adam Smith would be proud.

Sirota: U.S. Muslims more loyal than Evangelicals

They used to say the same thing about Catholics: when JFK was elected, non-Catholics were worried he'd take orders from the Pope in Rome. Nowadays it's Muslims' turn.

By David Sirota
November 29, 2011 | AlterNet

If you have the stomach to listen to enough right-wing talk radio, or troll enough right-wing websites, you inevitably come upon fear-mongering about the Unassimilated Muslim. Essentially, this caricature suggests that Muslims in America are more loyal to their religion than to the United States, that such allegedly traitorous loyalties prove that Muslims refuse to assimilate into our nation and that Muslims are therefore a national security threat.

Earlier this year, a Gallup poll illustrated just how apocryphal this story really is. It found that Muslim Americans are one of the most — if not the single most — loyal religious group to the United States. Now, comes the flip side from the Pew Research Center's stunning findings about other religious groups in America (emphasis mine):

American Christians are more likely than their Western European counterparts to think of themselves first in terms of their religion rather than their nationality; 46 percent of Christians in the U.S. see themselves primarily as Christians and the same number consider themselves Americans first. In contrast, majorities of Christians in France (90 percent), Germany (70 percent), Britain (63 percent) and Spain (53 percent) identify primarily with their nationality rather than their religion. Among Christians in the U.S., white evangelicals are especially inclined to identify first with their faith; 70 percent in this group see themselves first as Christians rather than as Americans, while 22 percent say they are primarily American.

If, as Islamophobes argue, refusing to assimilate is defined as expressing loyalty to a religion before loyalty to country, then this data suggests it is evangelical Christians who are very resistant to assimilation. And yet, few would cite these findings to argue that Christians pose a serious threat to America's national security. Why the double standard?

Because Christianity is seen as the dominant culture in America — indeed, Christianity and America are often portrayed as being nearly synonymous, meaning expressing loyalty to the former is seen as the equivalent to expressing loyalty to the latter. In this view, there is no such thing as separation between the Christian church and the American state — and every other culture and religion is expected to assimilate to Christianity. To do otherwise is to be accused of waging a "War on Christmas" — or worse, to be accused of being a disloyal to America and therefore a national security threat.

Of course, a genuinely pluralistic America is one where — regardless of the religion in question — we see no conflict between loyalties to a religion and loyalties to country. In this ideal America, those who identify as Muslims first are no more or less "un-American" than Christians who do the same (personally, this is the way I see things).

But if our politics and culture are going to continue to make extrapolative judgments about citizens' patriotic loyalties based on their religious affiliations, then such judgments should at least be universal — and not so obviously selective or brazenly xenophobic.

Why the Right embraces wacky outsider Cain yet distrusts Obama

You're free to read this entire article about why conservatives the world over look to right-wing populists to reinvigorate their cause, and, ironically, to uphold privilege and hierarchy for the few, but I found this part really interesting, it lit up an "Oh, yeah, of course!" flashbulb of recognition in my mind that this was just so obviously true:

"'I think to the right-wing, Obama's rise to power was a little too, in a weird way, too traditional,' Robin said. 'He did all the right things. He worked hard, he studied hard, he went to the right schools. And he kind of did the march through the institutions. And I know there are some conservatives who credit that to affirmative action, and all the rest of it. But I think there's actually a deeper suspicion of it, which is that he's actually mimicking too much the ways of power.'

"This may help to explain the persistence of exotic paranoid fantasies about Obama on the right—birtherism, claims that he's a secret Muslim, a socialist, a terrorist, some sort of 'sleeper,' etc. The more Obama conforms to traditional prescriptions, the more they suspect him, seeking for the 'real truth', the 'real birth certificate', and so on.

"'Someone like Cain is actually more appealing to them because he's outside of—he doesn't have a traditional path to power. He's a self-made man.' Robin explained. 'He comes up through the marketplace, which is the only thing—the marketplace and the battlefield—is the only places that they really trust as being the sorting mechanisms of greatness.'"

Forgive me if this observation was apparent to you a long time ago....

Rightwing populism is an integral part of the conservative project, and it requires "outsider" figures of various sorts, no matter how wacky they may be.
By Paul Rosenberg
November 30, 2011 | AlterNet

Study: Financial industry's value overestimated

November 30, 2011 | Reuters

Banks' contribution to the economy may be hugely overstated, underscoring anger about the scale of taxpayer rescues and resultant government cutbacks, but a sharp retreat of banking worldwide looks painful for all and needs calibrating.

As sovereign debts and austerity bite across the West, spurring popular protest over rising inequality and malfunctioning capitalism, governments have been under pressure to act tough on the outsized and risky banking that was deemed too big to fail.

With everyone now on the hook for shoring up those banks and severe economic hardship being felt across the North Atlantic countries, the debate about "socially useless" aspects of banking has been intense.

Since 2007, the regulatory backlash has included forcing banks to build higher capital buffers; separating retail banking from global investment finance; curbing excessive pay; and taxing transactions and speculative activity.

But one eye-catching angle on the reassessment came from Bank of England economists this month.

In a paper for the VoxEU think tank, the Bank's executive director for Financial Stability, Andrew Haldane, and economist Vasileios Madouros claimed British and U.S. national accounts have significantly overestimated the "value added" provided by financial services firms before and since the crisis began.

The essence of their argument is that in calculating gross domestic product, government statisticians give far too much weight to banking activity that merely involves creating and bearing risk in lending and asset holdings.

Under the current system, the paper points out that the value added ascribed to U.S. financial intermediaries was as much as $1.2 trillion last year -- some 8 percent of GDP and a fourfold increase in its share of GDP since World War Two. In Britain the equivalent in 2009 was even higher at 10 percent.

To justify those huge gains, the economists argue that the productivity of bank capital and staff would need to have soared too -- in part justifying the huge rises in pay and bonuses. But the precipitous collapse of many of these banks in 2007 and 2008 questions whether the scale of those efficiency gains was anything more but smoke and mirrors.

"High pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector," Haldane and Madouros wrote, insisting that risk taking such as credit expansion to complex products leveraged by short-term borrowings does not amount to value added.

But national accounts blur the distinction between this unproductive "risk bearing" and productive "risk management," where banks provide valuable services of broking, credit screening or intermediation that helps firms and households grow, save and invest.

As a result, the gigantic balance sheet expansion of global banks in the decade prior the credit crisis was wrongly accounted for as increased value added. Households investing in a bond or taking out a mortgage, for example, also bear credit and liquidity risk but this is not seen as value added in GDP.

"If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare," Haldane and Madoura concluded.

The paper cites studies that showed adjusting accounts for this error would reduce the estimated economic output of euro zone banks by up to 40 percent. And applying that to UK banks would have cut their 2009 contribution to GDP from 10 percent to as low as six percent -- or an error of some 55 billion pounds.

A bigger distortion is that the hundreds of billions of dollars of public subsidies or bailouts to ailing banks meant many of these firms didn't even have to bear the very risks incorrectly flattering their output, productivity and pay.

"Instead it has been borne by society. That is why GDP today lies below its pre-crisis level. And it is why government balance sheets, relative to GDP, are set to double as a result of the crisis in many countries," Haldane and Madouros said.


The calculations go some way to quantifying how far out of kilter banking was from the real economy. But it also shows that resolving the "too big to fail" dilemma that forced the bailouts will also involve some reversal of the balance sheet explosion.

The problem right now is that banking retreat is unleashing a double-whammy on an already austerity-squeezed global economy.

Uncertainty about the future shape of banking and another world downturn mean new capital for banks is scarce, forcing them to cut lending to meet more stringent capital ratios, such as the 9 percent base required of euro zone banks by mid-2012.

European banks alone are expected to ditch up to 3 trillion euros of loans next year to meet new capital rules.

U.S. investment banking giants too are cutting back assets and activities and openly talking about a secular downsizing of the industry [ID:nN1E7AE1WW]. And the world's ten largest banks involved in capital markets are estimated to have have lost about $250 billion of market capitalization since March.

Though wary of being deflected by banking lobbies into abandoning reforms, policymakers are recognizing that too much, too soon could dangerous.

Bank of England governor Mervyn King said on Monday euro bank deleveraging was already showing signs of a credit crunch.

"These are enormous challenges and it will not be easy to get through this," he said. "There will I think need to be a significant amount of rationalization of debts and credits in the world before we are finally to emerge from the end of this."

Finding a way to let the air out of the balloon slowly may be the big challenge of 2012 and beyond.

Thursday, December 1, 2011

Spitzer: Punish the Fed, Wall St. for misleading us

Tea Partyers and slash-the-debt types on the right will greet this news with a yawn. "What about Solyndra!" they'll reply. $500 million vs. $7 trillion. They just don't get it. They're dupes.

Meanwhile, OWS has its heart in the right place but its head who knows where, and doesn't give a hoot about parties or elections, so we can't count on them.

The remaining adults in the room are either silent or crazy. It takes a lot of audacity to be hopeful these days....

The government and the big banks deceived the public about their $7 trillion secret loan program. They should be punished.
By Eliot Spitzer
November 30, 2011 | Slate

Imagine you walked into a bank, applied for a personal line of credit, and filled out all the paperwork claiming to have no debts and an income of $200,000 per year. The bank, based on these representations, extended you the line of credit. Then, three years later, after fighting disclosure all the way, you were forced by a court to tell the truth: At the time you made the statements to the bank, you actually were unemployed, you had a $1 million mortgage on your house on which you had failed to make payments for six months, and you hadn't paid even the minimum on your credit-card bills for three months. Do you think the bank would just say: Never mind, don't worry about it? Of course not. Whether or not you had paid back the personal line of credit, three FBI agents would be at your door within hours.

Yet this is exactly what the major American banks have done to the public. During the deepest, darkest period of the financial cataclysm, the CEOs of major banks maintained in statements to the public, to the market at large, and to their own shareholders that the banks were in good financial shape, didn't want to take TARP funds, and that the regulatory framework governing our banking system should not be altered. Trust us, they said. Yet, unknown to the public and the Congress, these same banks had been borrowing massive amounts from the government to remain afloat. The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told. This was not TARP: This was secret Fed lending. And although it has since been repaid, it is clear why the banks didn't want us to know about it: They didn't want to admit the magnitude of their financial distress.

The banks' claims of financial stability and solvency appear at a minimum to have been misleading—and may have been worse. Misleading statements and deception of this sort would ordinarily put a small-market player or borrower on the wrong end of a criminal investigation.

So where are the inquiries into the false statements made by the bank CEOs? And where are the inquiries about the Fed and Treasury officials who stood by silently as bank representatives made claims that were false, misleading, or worse?

Only now, because of superb analysis done by Bloomberg reporters—who litigated against the Fed and the banks for years to get the information—are we getting a full picture of the Fed and Treasury lending. The reporters also calculated that recipient banks and other borrowers benefited by approximately $13 billion simply by taking advantage of the "spread" between their cost of capital in these almost interest-free loans and their ability to lend the capital.

In addition to the secrecy, what is appalling is that these loans were made with no strings attached, no conditions, and no negotiation to achieve any broader public purpose. Even if one accepts the notion that the stability of the financial system could not be sacrificed, those who dispensed trillions of dollars to private parties made no apparent effort to impose even minimal obligations to condition the loans on the structural reforms needed to prevent another crisis, made no effort to require that those responsible for creating the crisis be relieved of their jobs, took zero steps towards the genuine mortgage-reform that is so necessary to begin a process of economic renewal. The dollars lent were simply a free bridge loan so the banks could push onto others the responsibility for the banks' own risk-taking.

If ever there was an event to justify the darkest, most conspiratorial view held by many that the alliance of big money on Wall Street and big government produces nothing but secret deals that profit insiders—this is it.

So what to do? The revelations of the secret loan program may provide the opportunity for Occupy Wall Street to suggest a few concrete steps that would be difficult to oppose.

First: Demand a hearing where the bank executives have to answer questions—under oath—about the actual negotiations, or lack thereof, that led to these loans; about the actual condition of each of the borrowing banks and whether that condition differed from the public statements made by the banks at the time.

Second: Require the recipient banks to use this previously undisclosed gift—the profit they made by investing this almost interest-free money—to write down the value of mortgages of those who are underwater. The loans to the banks were meant to solve a short-term liquidity problem, not be a source of profits to fund bonuses. Take back the profits and put them to a public use.

Third: Require the government officials responsible for authorizing these loans to explain why there was no effort made to condition these loans on changes in policy that would protect the public going forward.

Fourth: Ask congress to examine every filing and statement made to Congress by the banks about their financial condition and their indebtedness to see if any misrepresentations were made in an effort to hide these trillions of dollars of loans. Misleading Congress can be a felony, and willful deception of the Congress to hide the magnitude of the public bailouts should not go unprosecuted.

Finally: Demand that politicians return all contributions made by the institutions that got hidden loans. Pressure the politicians who continue to feed from the trough of Wall Street, even as they know all too well how the banks and others have gamed the system and the public.

Forbes: 'Every day is Black Friday' in housing sector

"Any sort of self-sustaining [housing sector] recovery, at this point, appears unfathomable."

The U.S. economy won't recover until housing recovers; and housing won't recover until the U.S. economy recovers. It's a perfect Catch-22!

So when's the last time you heard a single national-level politician offer an idea how to address this, the #1 problem our economy is facing right now? If they were waiting for the Fed's low interest rates to save us, they should have given up a year ago.

You know, I could almost respect a mean but frank right-winger who said, "Screw homeowners, banks and markets, let this foreclosure backlog work itself out," who would then be honest that this process could take years, maybe a decade, and in the meantime the U.S. economy would drag and unemployment would be high, no matter what else happened. But where is such an honest ideologue these days? No, instead the free-marketers and tea-party types want to blame our poor economy on excess federal regulation, Obamacare (which has yet to really take effect), and not enough oil drilling and coal mining. And nobody -- not the MSM or the Democrats -- are calling them on it.

The ones who haven't gone mute have gone insane!

'Every Day Is Black Friday' In Housing As Prices Tank, Case-Shiller Shows

By Agustino Fontevecchia

November 29, 2011 | Forbes

URL: http://www.forbes.com/sites/afontevecchia/2011/11/29/every-day-is-black-friday-in-housing-as-prices-tank-case-shiller-shows/

OWS is the 'rotten fruit of Obamaism'

I'm not sure you old tea-party types sitting at home in the 'burbs watching FOX and listening to ClearChannel really understand the sentiments driving the OWS protests. If you think this is about getting out the vote for Dems in 2012, re-living the hippy '60s, union funding, or George Soros's diabolical organizing, you're just not getting it. So here you go:

Of course, the sense of possibility that progressives might win was what fueled the election of Obama. And their frustration is what has created the context for OWS—and raises the specter that it might alter the landscape the president must traverse next year in dramatic and unpredictable ways.

"Obama didn't build a movement, he built an electoral machine," says Marom. "If he had built a movement, he would not be where he is right now. But the fact that he was elected, that so many people came out in the streets for him, that people cried when he won, was an expression of the fact that they wanted what they thought he was, which is an alternative. He wasn't it. He can't deliver it. This political system can't deliver it. This economy can't deliver it. But there are millions of people who genuinely want it. That's amazing and inspiring to people like us, who are just, like, 'Okay. This is for real.' "

As an avowed liberal-progressive, I'm still not sure I like OWS, because I'm not sure all their energy will come to anything; and meanwhile there are real winnable battles being fought, and the stakes are high. There are big elections coming up, and Republicans and faux Democrats are vulnerable. But votes and elections just aren't what OWS is about. That's their prerogative. I just hope they know what they're doing.


In 2008, Barack Obama lit a fire among young activists. Next year, Occupy Wall Street could consume him.

By John Heilemann

November 27, 2011 | New York Magazine

URL: http://nymag.com/print/?/news/politics/occupy-wall-street-2011-12/