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The Era of No Accountability

We are living in the Era of No Accountability.  We read or hear about it every day in the newspapers or internet.  It is rampant in politics (lies regarding Iraq War)  but it is particularly troubling in the financial sector.  So, while people are suffering from high unemployment and losing their homes, those who created this crisis escape from accountability.

The financial sector ignited the global financial crisis with their excessive risk taking, poor lending standards and general disregard for responsible business/investment practices.  Of course, being “too big to fail” did contribute this crisis and that was a result of decades of de-regulation.  But those who are responsible for the global financial crisis have not been held to account for their actions in any shape or form.  If anything, they were ‘rewarded’ with trillions of dollars of taxpayer money. 

1)  “Too Big to Fail” Financial Conglomerates still exist and are some cases getting even bigger through purchases of other struggling banks.  There are no plans by the Obama Administration or serious legislative proposals to break them up.

2)  Huge bonuses continue.  Ken Lewis, former of CEO of Bank of America, retired with $83 million.  This after: 1) receiving $45 billion bailout and 2) possibly lying about Bank of America’s purchase of Merrill Lynch.  But Lewis is not alone, bonuses were still flowing across Wall Street despite $12 trillion taxpayer bailout.  The bonuses never stopped - Dick Fuld, CEO of now bankrupt Lehman Brothers, crashes his company and gets $22 million bonus in the process. 

3)  Credit Rating Agencies.  This is a big one.  Companies, like Moody’s Investment Services, were paid by securities issuers to issue credit ratings on the securities.  A very lucrative business for Credit Rating Agencies and an inherent conflict of interest - would you pay for a service if they are going to rip on your product?  Moody’s and S&P were glorified investment promoters.  Their credit ratings on many occasions were inflated and possibly misleading.  Unfortunately, too many investors (even experienced ones) relied heavily on these credit ratings. 

McClatchy News did a story back in October 2009 about Moody’s: How Moody’s sold its ratings.  This story didn’t get enough attention.  In it were some serious allegations made by former employees. Two of the same former employees quoted in the above story testified in a Congressional Hearing on the credit rating agencies: “Credit Rating Agencies and the Next Financial Crisis”, where they reiterated their allegations on the record and under oath. 

We are now hearing about pension funds and various state attorney generals suing the Credit Rating Agencies but these are civil lawsuits and are very difficult because the Credit Rating Agencies are using the “Freedom of Speech” as a defense.  But where are the criminal investigations particularly by the U.S. Attorney General’s Office?  Certainly these allegation raise the specter of mail/wire fraud under RICO Act or some other criminal fraud statute. 

Again, NO ACCOUNTABILITY.

It Doesn’t Have to be This Way

Quite frankly it’s unacceptable.  This morning we learned that the economy lost 36,000 jobs in February and the Unemployment Rate is 9.7%.  And what kind of response do we get from Washington: a token response of $18 billion “Jobs Bill”.  This “Jobs Bill” is a joke.  We need “overwhelming force” to address this Jobs Crisis.

Here are some more numbers to chew on (HT Calculated Risk)

The economy has lost almost 3.3 million jobs over the last year, and 8.43 million jobs since the beginning of the current employment recession.

(emphasis added)

But the long-term job prospects are not any better.  This from the President’s own Office of Management and Budget projects the following Unemployment Rate:

2010   9.8%
2011   8.6%
2012   7.7%
2013   6.8%
2014   5.9%
2015   5.6%

First, President Obama can kiss his re-election hopes good-bye if unemployment is that high in 2011-2012.  Second, it is absolutely pathetic that this Administration would accept such horrible unemployment rate projections without offering much much stronger solutions.  They could do something about it but unfortunately won’t because this President lacks the courage and leadership to do it.

A Jobs Crisis like this one requires “overwhelming force” to be used.  We are in the hole - 8.43 million jobs.  The effectiveness of the weak and poorly designed American Reinvestment and Recovery Act of 2009 is wearing off and the $15 billion Jobs Bill currently in Congress is too weak as well.  We need something much stronger.

The deficit be damned.  We are facing significant long term consequences and social costs with high long term unemployment.  Now is not the time to be worried about the deficit.  With the private sector not producing jobs that leaves one sector left to fill the huge void - government sector.  Think about this: private sector is pulling back - cutting costs & jobs then have the government sector do the same (it already is happening at state and municipal level).  What do you think will happen?  This is NOT rocket science.

We need the following:

1)  Full payroll tax holiday - both employer and employee (new and existing) until economy starts growing;

2)  A cash infusion to state’s - $150 billion - to be distributed on a per capita basis; and

3)  A direct jobs program, followed by a Job Guarantee.

Good luck.

Further reading sources: Warren Mosler’s Proposals

 

 

 

 

 

All Debt is NOT the Same

This story will explain the differences in debt.  This is necessary because too many Wall Street talking heads and economists are equating U.S. Treasury Securities (federal debt) to all other types of debt including debt issued by Greece and other EU countries.  It’s not the same. 

PRIVATE SECTOR DEBT

1)  Households/Families (Debt is Evil for Families)

Mortgage debt - this is debt that is secured by or “borrowed against” the real property - home and land.  The actual mortgage document which is recorded with applicable local governmental authority represents that lenders interest in the real property

Credit card debt - this debt (vicious) is typically unsecured meaning the line of credit is not extended against any property - real or personal.

Auto loans - typically this loan is secured by the automobile. 

2)  Corporations/businesses

Commercial paper and notes - typically short term in nature and used to finance short term cash needs.

Bonds - long term debt typically used to finance capital projects.

Asset backed securities - debt that secured by a pool of assets such as mortgages or some other asset that offers a stream of cash

Corporate/business debt can be unsecured and secured.  There can be various layers of “claims” or priorities to payment on debt.  Corporate/business can be very straight forward or very complicated.

GOVERNMENT SECTOR DEBT

1) Municipal, state and local agencies - typically these entities issue debt in the form of long-term bonds that are either “general obligation” or “revenue”.  “General obligation” bonds means that the payment of the bonds is backed by the credit and taxing authority of the entity.  “Revenue” bonds means payment of bonds is backed by a certain revenue source such water/sewer fees or toll road revenue.

2) U.S. Treasury Securities - U.S. Treasury Department issues Treasury Bills (1 year or less), Treasury Notes (2 to 10 years) and Treasury Bonds (20 and 30 years).  The payment of these debt instruments is backed by the “full faith and credit” of the U.S. Federal Government

WHAT’S THE DIFFERENCE?

Private Sector vs. U.S. Federal Government - The reason why the debt is different is that private sector debt has limitations on sources of payment - meaning limited resources.  If the private sector exhausts those resources or has negative “net worth” (liabilities are greater than assets) it will be declared insolvent and may be forced into bankruptcy.  Federal government does not have such a limitation and NO ONE can force the federal government into bankruptcy.  In fact, there is no legal procedure for bankruptcy of federal government - it’s just not possible.

Municipal & state Sector vs. U.S. Federal Government - Similar to above.  Municipal and states have limited resources and there is a bankruptcy procedure for municipal bodies - Chapter 9 of U.S. Bankruptcy Code.

U.S. Federal Government vs. Greece, Spain or most EU Countries - the difference is huge.  U.S. has a monopoly over issuance of currency.  EU countries do NOT - they belong to a “monetary union” - based on the Euro (except for England which still has its own currency) and the issuance of Euro is determined by the European Central Bank.  The other major difference is that U.S. issues debt in its own currency (dollar) and again because of the “monetary union” Greece, Spain, Ireland and Portugal do not have such benefit.

All debt is not the same.  Any one who is claiming otherwise either is clueless as to how our financial system functions, a neoliberal/conservative economist (but are also clueless) or has a financial position in some securities that they are trying to protect (ie. - short selling U.S. Treasury futures or owns sovereign debt credit default swaps). 

Good luck. 

Economic Stimulus Works

The heads of neoliberal/conservative economists and politicians are exploding all across the country because contrary to what they preached fiscal policy - government spending and tax policy - can help economic growth.  The American Recovery and Reinvestment Act of 2009 (ARRA), despite its poor design and lack of size because of politics, still helped preserve jobs and help the economy.  It’s time to extend fiscal policy to achieve full employment for our economy.

Senator Judd Gregg trotted out this whiny statement regarding the economic stimulus in an interview with Financial Times:

The facts are wrong.  I can understand how a Keynesian would make that argument.  I find them absurd on their face.

 
LOL. Senator Gregg and other conservatives will whine like this but will not provide any evidence to the contrary.  But it’s not just Keynesians that are making the argument that ARRA helped the economy.  A majority of economist surveyed by USA Today said that ARRA helped the economy when it needed it. The Congressional Budget Office even estimated that in 4th quarter 2009 ARRA had the following impact:

• Raised real GDP by between 1.5 percent and 3.5 percent,


• Lowered the unemployment rate by between 0.5 percentage points and 1.1 percentage points,


• Increased the number of people employed by between 1.0 million and 2.1 million,
and

• Increased the number of full-time-equivalent jobs by 1.4 million to 3.0 million compared with what those amounts would have been otherwise.

Oh, BTW, the least effective aspects of ARRA according to CBO report: tax credits for first-time homebuyers and tax cuts for higher-income people.

Just think if the ARRA was designed properly and its goal was Full Employment instead of just to get something done.  What would a better designed economic stimulus look like.  First, no money for tax cuts - there is not a lot “bang for the buck” with them.  Second, more money on infrastructure investment - especially new schools.  Third, a Direct Jobs Program like the New Deal Era WPA and CCC which would lead to a Job Guarantee Program.  An economic stimulus plan along these lines would eliminate the need to ask for more like Democrats are doing now with this new “Jobs Bill”. 

And as for the federal budget deficit - economic growth does wonders for people’s concern about the budget deficit.  The biggest thing affecting the budget deficit right now is the lack of tax revenue.  We can address this with FULL EMPLOYMENT economic policies. 

Good luck. 

Obama the Chicken-hearted

When I voted for President Obama, I was hoping that my generation would experience what great leadership in the White House was like.  Past generations had - FDR, Kennedy and even Johnson (as it relates to civil rights).  But my hopes for such an experience are DEAD.  Instead, what we have a president quicker to compromise in the interest of getting “something” done instead of fighting for principals.  First instance was the President’s pathetic handling of the health care reform debate and now, his compromising on the Consumer Financial Protection Agency (CFPA). 

As a little review: this is what the Consumer Financial Protection Agency (CFPA) should be. 

Today (2/25), there are reports in the media (here and here)that the Obama Administration is ready to ‘compromise’ on the CFPA and not insist that CFPA be an independent agency and instead make it part of another department or another agency.  Financial conglomerates/lobbyists will be very happy with that because it makes it much easier to render CFPA ineffective.  This is what Elizabeth Warren, a long-time advocate for CFPA said:

“The CFPA is the heart of what makes regulatory reform work,” Warren said in an interview with the Huffington Post. “The consumer credit market is where the biggest abuses were. It is where families will be most directly affected and it is where the American people will see change. CFPA is how to make clear that regulatory reform is for them, and that it isn’t a game among insiders.

“We just can’t pass a regulatory reform bill that acquiesces to the industry on every front and where everything is so watered down that nobody has to take a hard vote,” she said.

“It’s not ok to weaken the agency so much that, while everyone can vote yes and pretend to support consumers’ right to a fair deal, nothing really changes. I want a strong agency, and if there’s not going to be a strong agency, then I at least want to see an up-or-down vote on it. Let’s see a vote.”

The “compromise” the Obama Administration is considering would weaken the CFPA to the point that “nothing really changes”. 

But this has become a very disturbing pattern on the part of this White House.  It either, campaigns on, talks about, or proposes ‘progressive’ or ‘populist’ ideas but when push comes shove - forget about it.  This administration won’t fight for what they talk about - instead we see more “compromise”. 

Examples:

1)  2009 Stimulus - Christina Romer, Chairwoman of President’s Council of Economic Advisers, advised back in November-December 2008 that it would take $1.2 trillion in stimulus to have an effect on economy.  Guess what, Obama proposes and much smaller stimulus bill then compromises even further by agreeing to more tax cuts (least bang for buck) than job creating programs such as infrastructure building.  Oh, BTW, it looks like we are getting a second stimulus - in the form of a “jobs bill”.  Why didn’t they did it right the first time?

2)  Health care reform - Obama campaigns on public option (despite what he says now) then during the spring and summer sends all kinds of mix messages about whether he still supports public option or even is willing to fight for health care reform meanwhile a vocal minority grows more influential.  Today, Obama is not willing to fight for the public option and instead is willing to FORCE (by law) working class families to buy over priced and expensive private health insurance.

3)  Financial regulatory reform - besides CFPA, as a means to appear like it was not favoring Wall Street too much - it proposes the “Volcker Rule” - very late in the game.  It was all show - now comes word that it will even “compromise” on that proposal. 

These are three huge agenda items - all with significant ‘compromises’ to them.  He is certainly not doing anything to help us with these compromises.  Question: is there anything this Administration is not willing to compromise on? 

Good luck.

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