Stagnation, Stagflation, Stalemate?

June 15, 2009

Stagnation, Stagflation, Stalemate…or
Reform, Reconstruction, Renewal?

Dear Citizens and Elected Officials:

Listening to the economic commentary, and spin, since the end of March, 2009, has carried me back to fond memories of a Peter Sellers movie from the late 1970’s: Being There. Directed by Hal Ashby and co-starring Shirley MacLaine, it’s a tale of a suddenly homeless gardener in Washington, DC, whose simple answers to profound policy questions delight a confused and troubled establishment. As the audience and Ms. MacLaine discover, unlike most of the Beltway insiders, Chauncey Gardiner’s humble wisdom is entirely drawn from the only two sources of information he has known: tending plants and watching television. So well before today’s official optimists were straining to see hopeful signs in the murky economic data, Chauncey was there to confidently announce that “…in the spring there will be new growth.” In the movie, it’s enough to place him at the elbow of the president; in the harsh realities of late spring, 2009, those green shoots have to contend with Nouriel Roubini’s “Yellow Weeds,” a long and insightful essay the NYU business school professor and consultant posted on May 19th on his RGE.com website, perhaps the best summary I’ve seen on a very complex and troubling economic landscape.

Doubtless Dr. Roubini wrote his long article to help make sense out the conflicting interpretations of just where we are in the economic crisis, and the resulting eye strain caused by looking for those tiny new sprouts. To the average citizen casually scanning the economic news, it is even more confusing. For example, on May 28, the New York Times carried an article with the heading “U.S. Manufacturing Orders Rose Sharply in April,” by Jack Healy. The opening sentence read “Demand for big-ticket manufactured goods soared by the largest amount in 16 months the government said.” But if one read on a bit further, the increase in orders for durables rose just 1.9% (only 1% if the military was excluded), following a drop of 2.1 percent in March. Yet a little further on, the article was still veering away from its own heading:“‘The absolute worst is over, but what we have now is still quite bad,’ Ian Sheperdson, chief United States economist at High Frequency Economics, wrote in a research note.” Checking in over at Bloomberg.com, we find exactly the same statistics as in the Times article, but the heading reads “U.S. Durable goods Orders Near Lowest Level in 13 Years,” (by Courtney Schlisserman and Shobhana Chandra).

Readers can also drawn upon a number of videos from a New Yorker magazine “Summit” symposium (“The Next 100 Days”) held on May 5th, featuring, among many, Robert Kuttner, Naomi Klein, economists Douglas Holtz-Eakins, Robert Shiller and the “bottom up libertarian” Nassim N. Taleb, author of The Black Swan. Taleb seems bent on delightfully disturbing everyone’s intellectual equilibrium, especially Shiller’s, in this video (“….economists have proven themselves to be collectively incompetent, like doctors in the 19th century…” at http://www.newyorker.com/online/blogs/newsdesk/summit/ (Editors Note: this link gives you all the videos in vertical order; Taleb/Shiller is the 8th one down).

In much the same spirit, The New York Review of Books (finally), held a provocative symposium on April 30th with the transcript appearing in their June 11th print edition, featuring: George Soros, Dr. Roubini, Paul Krugman, Bill Bradley, Niall Ferguson and Robin Wells (the co-author with Krugman of Economics), and moderated by Jeff Madrick, a recipient of the same economic “posts” that you receive. Ferguson, a historian of economic ideas, war, and empire at Harvard, has just written a book about the history of money and finance, and he is raising the warning flags on interest rates/inflation, public debt levels, sovereign defaults (that’s when a nation defaults on its bond debts) and devaluations, and more broadly, challenging the resurgence of Keynesianism with the specter of its repeating the stagflation (simultaneously high unemployment and inflation) of the 1970’s. He’s coming from the right side of the political spectrum and I read in his challenges the early rumbles of major policy clashes ahead for the Obama administration, and the groundwork for the revival of the Republican Right. We’re going to take a closer look at the Roubini article and the debate from the NY Review of Books, but it was hard to miss the passion barometer displayed here: the most assertive debaters, Taleb and Ferguson, are coming from the libertarian and conservative side of the economic spectrum, and it’s indicative of something that’s plagued progressives, and bothered this writer, especially on economics: they just don’t have the passion that the Right does. With Federal Reserve Chairman Bernanke signaling to Congress on June 3rd that a long term plan on the federal deficit and debt is necessary to “reassure markets,” a formal confirmation notice of the themes surfacing in these commentaries has been delivered.

Ironically, this could have the effect of putting progressive economic remedies on the defensive before they have even gained traction. That’s because the old conservative intellectual order has been most dramatically dented in the weakest policy area of progressive thought: its lack of depth on political economy and a comprehensive alternative vision to the market worshipping model that has dominated since the mid-1970’s. So it’s not just a coincidence that I remembered a movie from the tail-end of the decade of progressivism’s growing economic confusion that preceded the rise of Reagan.

With the major American stock indexes up dramatically since their March 9th lows (the S&P’s 500 up almost 40%, the Dow nearly 30%), a rally booming in many commodity markets, including oil, which has jumped from a $32.70 per barrel low this February to $72 on June 13, and consumer and business sentiment polls showing greater optimism, the key questions become: are these indicators signaling an improvement in economic fundamentals, or are they significant bear market rallies, driven in part by “shorts” covering their wrong bets that the market will keep dropping, and heavy speculative plays in the commodity arenas, as short and medium term professional investors exit the increasingly uncertain and low-yielding U.S. government bond markets for higher returns?

Because we have a lot of policy ground and Congressional action (and inaction) to cover, this post is divided into two parts. Part I gets to what I think my readers want to know right away: where are we and where is the economy going? Part II is devoted to some of the important economic bills Congress worked on and pays particular attention to what our Maryland delegation has – or hasn’t been doing, especially Majority Leader Steny Hoyer, who gave a major address on “Entitlement and Health Care Reform” on May 6th. We also look at what Senator Bernie Sanders has been up to and introduce our readers to two major reports on the financial crisis from non-profit investigative organizations. We also start asking some hopefully troubling questions about where all the prosecutions are for the subprime systematic abuses, following once again the trail of white-collar crime specialist William K. Black and his early April appearance on Bill Moyer’s Journal. We call our readers attention to an explosive New York Times article about the City of Baltimore’s court case against Wells Fargo Bank. In it, two former Wells Fargo employees allege that there was systematic targeting of black communities in Prince Georges County, Baltimore and southeast Washington, DC. It’s at the very end of Part II, just in case you’ve got to see that link first. For some time now, I’ve been expecting revelations like this one to appear. But I’ve got to say, even with this sense of expectation, this one is eye-opening.

PART ONE

Where Is The Economy Now and Where Are We Headed?

Any assessment of where we stand in June, 2009 and where we are going for the rest of 2009 and 2010 starts with a clear appreciation of where we have just been. Remember, the U.S. GDP (Gross Domestic Product) fell at a rate of 6.3% in the last quarter of 2008, and at a recently revised rate of 5.7% in the first quarter of 2009. These were powerful downdrafts, magnitudes of decline that haven’t been seen since the recessions of 1958, when GDP contracted at a rate of 10.4 %( 1st quarter) and 1982, which saw a 6.4% drop in the1st quarter. But this is not just a more severe, ordinary recession. It is worldwide, and the U.S.’s debt and trade imbalances, and its potential political stalemates, make the situation far more serious.

Two economists who have tracked the current world-wide drop and compared it to the Great Depression years of 1929 and 1930 drew a lot of attention in the early spring. The areas that they are tracking are industrial production, stock indexes and world trade, significant barometers where comparative data exists going back to cover the Great Depression era.

Their conclusion, which appeared on April 6, was that “…the world is currently undergoing an economic shock as every bit as big as the Great Depressions shock of 1929-1930. Looking at just the US leads one to overlook how alarming the current situation is even in comparison with 1920-1930. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.” The two economists, Barry Eichengreen, from the University of California at Berkeley and Kevin H. O’Rourke of Trinity College, Dublin, have just updated their April report on June 4. (At http://www.voxeu.org/index.php?q=node/3421)

To give added weight to this view, which is going to be important, as we will see, in blunting the already launched attack from the political and economic Right (and now the center), which will want to limit federal debt, deficits and fiscal spending just as soon as they can – we should keep in our minds the words of George Soros at that April 30th NY Review of Books conference: “…the financial system as we know it actually collapsed. After the bankruptcy of Lehman Brothers on September 15, the financial system really ceased to function. It had to be put on artificial life support. At the same time, the financial shock had a tremendous effect on the real economy, and the real economy went into a free fall, and that was global.” Yes, the banks passed their “stress tests,” such as they were at the beginning of May, mocked by commentators such as William K. Black and Michael Lewis (author of Liar’s Poker, and interviewed on CNN at
http://www.cnn.com/video/#/video/us/2009/06/07/gps.michael.lewis.int.cnn), and questioned more subtly by Elizabeth Warren, the chair of the Congressional Oversight Panel, and they are now lining up to give back some of the federal money they were ordered to take, but there is no indication that they are willing to rip out all the other “life support” tubes running from the Federal Reserve to so many of the appendages of the financial system. When you add up the $ value flowing through all the tubes, you come up with figures in the neighborhood of $12.5 trillion dollars. Not all that is going to end of up on the debt side of the public ledger, of course, but take it as an indicative chart on how sick the patient was – and remains, despite all the spin.

From Dr. Doom to Dr. Realist
So once again, we return to Nouriel Roubini, for his commanding oversight of the broad range of economic indicators and directional signals, looking to his long essay first published on May 19th at his RGE Monitor site at http://www.rgemonitor.com/roubini-monitor/256792/ and sprawlingly entitled “Green Shoots or Yellow Weeds? A Trifecta of risks to the early bottoming out of the recession and short-term economic recovery and to the medium-term actual and potential growth prospects of the global economy.” To go along with Dr. Roubini’s newly found sense of humor, he is insisting he is no longer Dr. Doom, but rather Dr. Realist.

Roubini is again setting himself apart from the mainstream, and in May/June of 2009, the argument is, in minor mode, over just when the recession might end, and in major mode, what type of recovery we might see. Careful readers will remember from our earlier postings that economists often talk about the graphic shape of a recession, whether it will have a “V,” “U” or even, from some Scottish economists, whether it might have a “square root shape” – meaning a dip, partial recovery, and then flat-lining. So here’s how to translate these shapes into understanding. Visualize an Algebra II graph from your high school days, with the vertical or “y” axis the Gross Domestic Product or GDP of the economy, and the horizontal or “x” axis the time frame in months and years moving from left to right across the page. Everyone was hoping for a sharp, compact “V” shaped recession: sharp plunge, brief stay at the bottom, and then rapid ascent or recovery. That’s out the window entirely. The official recession started way back in December of 2007, which means that, as of this month, June of 2009, we are already in the 19th month of the recession. So we know it has a U shape, and that we are somewhere near the bottom of the U, and perhaps even beginning to climb our way up and out. Paul Krugman sent twitters of joy through the markets with his observation at a conference on June 8th that the recession could be over by September. Roubini doesn’t see it ending until the end of 2009, so we are quibbling over a few months here. Economist Gary Shilling thinks the recession could last through 2010, and he sounds very much like Roubini in seeing the potential for a couple of quarters of positive GDP growth, which Shilling sees as consistent with the historical record of past recessions: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJB2wEVI.t0k But the more important question is the depth and nature of the recovery, and whether we could have a relapse into a “W” shaped recession, which Roubini sees as distinctly possible, the shape on that graph of course tracing a climb up the GDP “growth” axis and then a “relapse” slide down again. So what are the grounds for his cautions on the recovery? (He says the chances of another Great Depression have been greatly reduced, but not entirely eliminated, and I would agree with that assessment and I will explain why later in this analysis).

Not on my Balance Sheet
The core ground for Roubini’s reservations is that the private sector (banks and corporations) has not really delevered from the great overhang of debt, and instead has transferred these debts, especially the banks, to the public balance sheet, both Treasury and the Federal Reserve. This “socialization of private losses” is the grand public policy choice that was made in lieu of a FDIC type receivership of the insolvent banks that was the focus of our writing back in February and March, and so much debate over the shape of “Bailout II.” So this choice, Roubini says, “…creates – down the line – another dangerous debt and solvency problem, this time for the sovereign, with risks of a more severe financial crisis…once a refinancing crisis occurs and/or the ability by the sovereign to borrow more is curtailed.” And here, by “sovereign,” Roubini is talking about a nation’s official debt issuances: for the US, Treasury notes and bonds. There have been public hints of how this might unfold in the recent talk of ratings agencies downgrading the UK’s bonds and debt ratings, and longer term speculation of a downgrade for the US. There is great irony in this: the very same private ratings agencies which blessed those toxic mortgage backed securities a “AAA” are now, without having been reformed (Congress hasn’t touched this issue, although they are up for examination with the new Commission of Inquiry – see Part II) presuming to pronounce judgement upon the solvency of governments scrambling to save the world’s financial system…this is a remarkable paradox to ponder…

The Paradox of Thrift: To Save or Not?
And then there is another paradox looming, what Roubini calls “the paradox of thrift.” At the very time governmental Keynesian fiscal policy is directed to creating jobs and keeping consumers spending, the debt-shackled citizens and private corporations are pulling back and saving for the first time in nearly a decade. This is a major shift and on the order of 4-5% of income. It’s one of the things we definitely want to encourage in the long run to correct our domestic imbalances, but not now, in the short run, where it is running counter to both fiscal and monetary policy attempts to stimulate purchasing and investing.

Roubini goes on to list 10 structural factors and risks to medium and long term recovery. There is concern about the pressures that large public debts may exert on long term interest rates (tending to push them up and therefore also to push up mortgage interest rates, something we have been seeing in early June, though the causes are more complex than just rising federal debt, and they are still quite below historical averages), although that will be a more likely problem 2-3 years down the road. The private banking system’s top layer is also sitting on all that liquidity the Fed has been pushing in their direction, but not lending it out, so it may seek returns in the most promising speculative areas – right now, likely to be in commodity futures, such as oil. (Some commentators thing Fed. Chrmn. Bernanke has something else in mind). Roubini is seeing price spikes here that are beyond what one would expect based on where we are in global recovery cycle (it has not bottomed out yet in much of the globe, and the IMF recently increased its contraction estimate to a minus 3% world GDP for 2009). And then there are the very difficult shifts in public policy that central banks must undertake over the next 1-3 years; shifts out of stimulative policies to ones that head-off a possible inflation cycle.

Miller Time? Try: Jubilee Time
That’s a lot to ponder, but it seems that the central problem is the private debt overhang, including those at the household/consumer level. Roubini expects housing prices in the US to fall another 15-20%, and despite all the publicity given to the Obama administration’s attempts to slow the foreclosure crisis in housing, its policies are simply too little, too late (with the banks in charge of Congressional policy, and blunting mortgage writedowns, even ones limited to bankruptcy proceedings). This writer has often thought to himself, following this line of reasoning on the great debt overhang: he’s thinking of credit card debt, some 12 % of mortgage holders behind or in foreclosure and nearly 25% of residential mortgages underwater - that what we need is a bit, maybe more than a bit, of the Old Testament’s Jubilee debt forgiveness approach. Sound far fetched? Not really. Hard-headed Niall Ferguson, whom we already have mentioned and will write about some more below, devotes some space to what the book of Leviticus has to say in his new work The Ascent of Money. Just try Googling the concept “Jubilee” and you’ll end up at a posting like the one I found at Efinancialblog.com at http://www.efinancialblog.com/history-money-debt-vanquished/

“‘And they frankly own the Place…’”
Professor Roubini has, however, a bit more secular version of Jubilee in mind. Instead of pushing all the debt onto the public balance sheet, Roubini says that “if there is too much debt and too little equity in an economy, a sector by sector conversion of debt (unsecured claims of creditors and bondholders) into equity is the right and efficient solution that allows agents buried under a debt overhang to start to spend and invest again.” For example, for that nearly 25% of the nation’s mortgage holders who are underwater, the value of their mortgages could be written down and warrants issued to the mortgage holders so that they would be assured of capturing the value of any future appreciations in price when the house is put back on the market. We are not there yet. And we have a few hurdles to clear , including Senator Durbin’s reminder about banks: “And the banks - hard to believe in a time when we’re facing a banking crisis that many of the banks created, are still the most powerful lobby on Capitol Hill. And they frankly own the place.” At:http://www.huffingtonpost.com/2009/04/29/dick-durbin-banks-frankly_n_193010.html )

Bracing for the BRICs
While trying to answer my own questions on these difficult economic calls, I came across a very good essay by a Brazilian economist, Andre Lara Resende on Willem Buiter’s blog “Mavercon” at the Financial Times. It supports Professor Roubini’s emphasis on the impact of private indebtedness on recovery, as well as his worries about the eventual fate of the American dollar as the world’s main currency reserve. Resende’s essay deserves wide reading on a number of counts.
(At http://blogs.ft.com/maverecon/2009/06/after-the-crisis-macro-imbalance-c... )

First, it’s good for Americans to hear a perspective outside of our own country and the Euro zone, and Brazil is a growing economic power, one of the ascending BRICs (Brazil, Russia, India, China). Second, you can hear, even in the polite and restrained tones of Dr. Resende, the pain and resentments that Globalization and the old IMF “Washington Consensus” proscriptions have imprinted upon the policy memories of those in emerging market countries. Third, in addition to focusing on the impact of high private indebtedness on recovery hopes in the US – and on our recovery strategies - he reminds us that one of the root causes of the financial crisis is the massive structural imbalance in world trade, centered upon the surpluses run up by the main exporters – China, Japan (and Germany) and other Asian nations, and the US, running the largest trade deficit. He paints this trade picture in a way that American citizens don’t usually see, unless you’ve been following the criticisms of the IMF. That institution’s policies towards emerging markets – those countries who don’t have one of the world reserve currencies (of course the dollar, but he includes the yen, the Euro, the pound and the Swiss franc) forced them into an ultra-conservative financial stance: export driven, their domestic spending limited by the size of their positive trade balances, and with the additional burden of hoarding foreign currency reserves to get them through the times when the always nervous foreign investors started leaning towards the exits. In brief, these “emerging market” nations were forced to neglect their pressing domestic needs and the cultivation of their own internal markets. China is perhaps the best example, and is only now contemplating cultivating that market – and we don’t know to what extent yet it will take the plunge and sustain it – in the face of very clear messages that the US can’t continue to be the buyer of first and last resort for all those Chinese exports.

Debt and Depression: Now and Then
So that’s the international stage that Resende sets for us. But he also has some unusual things to say about the nature of the Great Depression and how the US handled it. He says what sets that great calamity apart from today’s crisis is that by 1933, after nearly four years of deep trauma, the large private debts which characterized the 1920’s had been nearly liquidated; he concedes the monetarist argument that government policy was disastrously wrong early on in not loosening up enough – lowering interest rates, providing the assistance to the banks that Chairman Bernanke has in 2008-2009 – but the disaster cleared away debt and that allowed the later fiscal policy, jobs and income from public investments, to help pull the economy up from the depths. But today, we’re not clearing away the private debts, and we’re even more loaded down with them: “…in 1929, the total of American debt was 300% of GDP; it reached almost 360% of GDP at the end of 2008, after staying between 130% and 160% from the beginning of the fifties to the end of the eighties.” Like Roubini, he sees the shifting of private debt from the banking sector to the public debt ledger, which doesn’t solve the basic dilemma: “As long as households and firms continue to bear the brunt of excessive debt, they will try to reduce expenditures and increase savings… After the Great Depression, in the early thirties, there was a lack of demand because there was no economic activity and no income. Today, the lack of demand is the result of the exceptionally high rate of savings required to bring private debt to reasonable levels. These are very different situations.”

So he is also raising the paradox of thrift which Roubini has, and the irony that citizens are being urged to spend, and the government is deficit spending, after we are trying to break the cycle of a debt-fueled overspending…So in effect we are torn between spending and saving…but if our ability to spend is limited…we are going to have stagnation for a couple of years, or more, until the debts are reduced…

Now it is important to appreciate the overall logic of Resende’s piece here. We’ll hear again shortly, in the NY Review of Books debate, the dilemma of needing to spend and invest more in the short run to keep the economy from collapsing, but needing to save more in the long term to put US public and private finances on a more sustainable footing. I happen to think that while Resende has captured an important truth on the differences between the 1930’s and today, he overstates his case against the effectiveness of public investing and spending under these circumstances. True, we don’t have 30% unemployment, but we do have something like 16% if you include the official 9.4%, plus those not counted who have stopped looking, and those who have only part-time work but want full time. And we have a private speculative empire in trouble, built on the increasingly unpaid debt instruments of these 16% in deep trouble – and that’s arguably a trickier, more vicious cycle for finance than we saw in the 1930’s. So Resende parts company with those progressive economists like James K. Galbraith, who want to see a much more robust public jobs creation program

(See Galbraith’s excellent “No Return to Normal” at
http://www.washingtonmonthly.com/features/2009/0903.galbraith.html ). Yet Resende is forced to concede that increased public spending and investment will speed up the rate at which debt is reduced, which is no small concession under our circumstance. Editors Note: Just to clarify, I lean strongly towards what Galbraith has written here, going beyond what the Obama administration has put on the table.

Just Who Will Supply the Missing Demand?
So our Brazilian economist poses the question: who can and should spend more if the US consumer is trapped…and can’t? Well, we can export more, that’s one of the best ways to stimulate the US economy, and if the leading economic powers change their old “Washington Consensus” policies towards the emerging world, then we will have more markets for our exports as emerging market consumers become more willing to spend.

Another answer to this question of stagnant American demand, is provided by author David M. Smick, who wrote an Op-Ed in the Washington Post on May 24th entitled “The Money in our Mattresses” urging politicians to remember that our most affluent citizens are our nation’s best consumers, so we better not tax them or scapegoat them or they’ll sulk and teach us all a lesson, “that Washington’s latest political fad of class warfare is on a collision course with the goal of economic recovery.” At
(http://www.washingtonpost.com/wp-dyn/content/article/2009/05/22/AR200905...

Resende has one more great paradox of economic policy in store for his readers, and we’re going to hear about it from many others sources in the coming months. The best course of US action for that great structural trade balance as well as the deficient domestic demand is to have a controlled inflation and a depreciation of the dollar – directions that are implicit from the policies choices made by Fed. Reserve Chairman Ben Bernanke to head off a Great Depression II (the large increases in public debt/deficits). But there is a definite price to pay internationally for the US: “…its credibility as issuer of a reserve-currency is inevitably stained…It is thus understandable that China, the largest holder of American public debt bonds, does not feel comfortable and proposes the creation of a supra-national reserve-currency.” Resende concedes that we are not there yet, ready to accept a multi-national “basket of currencies” issued by a “supra-national” authority (the IMF or from a new entity?), but that is where we are headed. The problems of international trade and finance are simply too great to be settled by anything resembling the current status quo.

The Rise of Simon Johnson
Before we move on to the grand ideological fireworks on display at that NY Review of Books panel, I would be derelict in my duties if I passed over without commentary the rise of Simon Johnson this spring as an economic polemicist of the first order. Because he was the chief economist at the IMF in 2007-2008 and has had extensive experience in emerging markets and their crises since the late 1990’s, it would seem to be the place here, next to Professor Resende’s work, to highlight the delicious edge these experiences supply to Johnson’s work. To this writer, it’s not exactly clear where Johnson stood on the “Washington Consensus’s” cruel and hypocritical policies towards those emerging markets, where in times of capital and currency crises leading to recessions, the traditional counter-cyclical policies that the US has adopted in our crises, were denied to the weaker economies, and pro-cyclical ones demanded as the price for IMF assistance: open your capital markets further, cut government spending, balance the budget…stop subsidizing bread, fuel and electricity costs for the poor …and so on…Resende didn’t miss the opportunity to point out one of the main hypocrisies: the scale of the trade deficit currently run by the US “would have provoked the collapse of any other currency” and indeed the IMF would have imposed the bitter medicine on us – if we weren’t the top dog. But I digress. Simon Johnson’s essay, “The Quiet Coup,” published by The Atlantic magazine in their May 2009 edition, gets its sharpest and subtlest edge by drawing extended parallels (and parables) between the political behavior of America’s Wall Street firms and our government and the behaviors of the oligopolies in the Ukraine, Russia, Indonesia, Thailand and Korea…these would be the same emerging market countries blamed by the author Thomas Friedman for their lack of transparency and insidious “insiderism.” To put it bluntly, in the Washington-Wall Street relationship since the 1980’s the US has assumed some of the characteristics of a banana republic, a phrase we’re going to hear again later, in Part II, to describe the descent of NY State politics.

To add a further ideological twist to the Johnson writings and biography, he also works for the Peterson Institute, the one whose founder is actively trying to reign in American economic rights, which he calls entitlements, and he also teaches at the MIT Sloan School of Business Management. So I guess if you’re going to compare Wall Street excess and power to oligarchs in Russia, and the past situations in Argentina, it helps to have items like these in your resume. I suspect that his line of reasoning had to make the Obama administration very uncomfortable. Here are some links for you to get a sense of who Johnson is. I’m including a tape so you can see how smooth Professor Johnson is in his style and delivery, just like a Beltway insider, but who then…just doesn’t display any gratitude for all we’ve given him as he turns around and smacks Wall Street and Washington with the policy equivalent of a three-day old dead mackerel… talk about immigration quotas, who let this Brit in? He’s a smart-one all right; notice how he insists he’s right in the middle of the political spectrum…a spectrum which was, before the stress tests, ganging up from all sides against our derivative driven magicians on The Street.
http://www.pbs.org/moyers/journal/04242009/profile.html (Bill Moyers Journal, April 24th.)

http://www.theatlantic.com/doc/200905/imf-advice (Magazine article)

http://baselinescenario.com/ (His website for running commentary).

The Economic Showdown in Manhattan

One of the advantages of not trying to write an economic post every week or two is that this author gets the benefit of seeing which events, and stories, really have legs, and which are apt to fade away, outflanked by subsequent events. The forum sponsored by the New York Review of Books on April 30, 2009, at the Metropolitan Museum of Art, is one of those rare dialogues whose range of commentators and breadth of topics (“The Crisis and How to Deal With It,” which appeared in the June 11th print edition of the NY Review…) serve as a genuine glimpse into the “shape of things to come.” I won’t entirely re-introduce the participants, since we mentioned them in our introduction; so now it’s time to zero in on the heart of the disputes which surfaced, opening up old wounds from the 1970’s, and giving us all a preview of the political/economic stalemate that is very likely to emerge over the next few months.

Niall Ferguson, the combative economic historian at Harvard (and Scot from Glasgow), got the fireworks going when he declared that while he supported the Fed’s use of Friedmanite monetary policy, he thought it was directly at odds with Keynesian fiscal policy, on the grounds that one policy field sought to drive down interest rates, while “the effect of the Keynesian policy must be to drive interest rates up.” He also, in his opening statement, anticipates a “messy divorce” between the partners making up “Chimerica,” that tension filled America-China economic relationship. The massive U.S. bond purchases necessary to keep the combination monetary/fiscal policies of the Fed/Obama administration going will drive down the prices and increase the interest rates (yields), of US government securities, thus acting to choke off a housing recovery and making other forms of investment more expensive. And indeed, the business press is finding evidence for those worries, and also for the push towards a new international currency, supporting our Brazilian economist’s views, and pushed by the BRICs prior to their mid-June conference in Yekaterinburg, Russia. (See the Bloomberg.com article “El-Erian Says Summit Shows ‘Rebalancing’ as BRICS buy IMF Bonds” at
http://www.bloomberg.com/apps/news?pid=20601087&sid=atucH58_sh8s

This Ferguson charge of monetary and fiscal policy at odds with each other was strongly refuted by both Paul Krugman and Nouriel Roubini, who maintained that both were needed, and simultaneously, to address the crisis. Krugman stated that inflation was not a worry now in a world awash in savings and excess production capacity. The problem was that given the financial crisis there were no private sector forces to channel the world’s excess savings into productive investment, other than that supplied by the government. Krugman concedes that the only vector that would drive up interest rates is “that people may grow dubious about the financial solvency of governments.” That observation is supported by Roubini, who, echoing what he wrote in the long essay we covered above, said that because we’re not converting debt into equity in a systematic way, “‘we’re piling public debt on top of private debt to socialize the losses; and at some point the back of some governments balance sheet is going to break, and if that happens, it’s going to be a disaster.’”

There is general agreement between Roubini, Krugman and Soros that what the US has done, in general, has been the correct short run policy to avert a second Great Depression. But then they part company. Soros, as readers of his latest book will know (The New Paradigm for Financial Markets), is very sensitive to competing theories carried around in major market player’s heads – paradigms in their head, if you would prefer. He stresses the speed with which they can shift in those heads: from a deflationary one to an inflationary one, and he cautions that the Federal Reserve will have to make a very tough call as to when to raise interest rates. But Soros goes further. He sees this as a rocky, unstable transition: “‘The pressure for interest rates to rise will be very, very strong, and the rise in interest rates could choke off the recovery. And so we are facing a period of stop-go, or stagflation similar to but more severe than what we faced in the Seventies. But that is a favorable outcome compared to what would have happened if we hadn’t done what we are doing.’” Roubini too has these worries, as to when the Feds monetary policy will have to reverse course – and he places that in the medium term. He doesn’t see the stagflation that Soros does though. Instead, his uncertainty is expressed in two basic questions: “‘Can we grow in a more sustainable way? And what are going to be the sectors of the economy that give us sustainable, long-term growth?’”

Are we “…going to get the 1970’s for fear of the 1930’s?”
Paul Krugman then follows Roubini in outlining the changes he hopes to see, both to relieve the crisis and to build a better society in its wake, while the harsh lessons are still fresh in everyone’s minds: reduce the scope and power of the financial sector and improve the social safety net, especially through health care reform. This Roubini-Krugman progressive slant is too much for Niall Ferguson though. He’s “depressed” by what he’s just heard, but comes out swinging, the embodiment of the conservative (and libertarian?) counterattack, foreshadowed in its essentials:

We are now contemplating a massive expansion of the state to substitute for the private sector because that’s the only thing Paul thinks will deliver growth…But what else are we going to do? We’re going to print money. Almost limitlessly…And when we’re done with that, we’re going to raise taxes. What a fabulous package we have in store for us. You know, back in late 2007, I was asked what my big concern was, and I said, ‘My concern is that we’re going to get the 1970’s for fear of the 1930’s.’ It’s very easy to forget, in your iron indignation at the failure of the market, where the true mainsprings of economic growth lie. The lesson of economic history is very clear. Economic growth…come(s) from the private sector, not from the state.”

Who’s teaching the History Here?
Really, Professor Ferguson? For someone who has written prodigiously about military matters, that is really quite a statement on where all the growth comes from. This writer has for a long time thought that the “military Keynesianism” that the late John Kenneth Galbraith wrote so extensively about has been one of the greatest ideological sleights of hand ever pulled off by the Right (and intellectual self-deception), enabling them to make assertions as you just have, while public spending and investment pours in by the trillions, aided by the greatest cover story ever told – that’s its all for national defense, rather than being a solid piece of evidence that Keynes was more right than wrong. I could also visit the history of American conservatism’s greatest “hothouse of anti-government fever” – the American West and Southwest – Goldwater and Reagan territory, that is, and show you billions in federal irrigation and power projects (and defense contracts) that have been the very foundation of these regions economic growth since the late 1930’s. Your comment also sent me browsing again to one of the early books of the conservative “Old Testament,” Brent Bozell’s –err, I mean Barry Goldwater’s The Conscience of a Conservative (1960), especially that very brief chapter “Freedom for the Farmer,” which rails against federal price supports but never mentions the “from here to eternity” list of other federal aid programs to Ag, and of course, never mentions the word irrigation, much less federal taxpayer and Bureau of Reclamation supported irrigation. The “movement” did get around to “Goldwater’s” dream, in about 1996, when it went “free market theoretical,” removing the Ag price supports, one of the quickest, cleanest policy disasters ever, proving, I think, rather clearly, that American farmers have long been secretly reading from Karl Polanyi’s book, not Barry Goldwater’s. Once they get to stare at those market forces directly, when the prices they get for their crops can’t meet the interest on their production costs, much less pay the mortgage…they’re then as fond of market chill as French peasants in 1788. But don’t get me started on this…

Stalemate: Stranded on the Shoals of Debt?
And this is where this writer’s view, and the term “stalemate,” enters the picture. Brazilian Resende sees stagnation, due to a dragging debt overhang; Soros sees stagflation as long term debt holders worry about being caught with low-yield bonds in a rising interest rate expectations cycle, but steadier investment options fail to emerge. The stalemate I see is a term of political economy really, as the American Congress – Republican Right, Blue Dog Democrats, and maybe Steny Hoyer – make the debt the make or break issue – without being able to raise sufficient revenue – progressively raised revenue, it should be stressed – and without adequately supporting the long term investment directions that President Obama is correctly, if too cautiously, steering us toward (although not on a scale and magnitude sufficient to keep the economy growing). Robert Reich has already chimed in on this score, asking the right questions and putting the issue of long-term investments in the center of the debt/deficit discussion, and reminding everyone that these “d” words always have a broader context, are not absolute numbers standing by themselves. He raises the political question directly too: why is John Podesta’s “liberal” think tank (Center for American Progress) leaning this way and the NY Times’ David Leonhardt too; conservative Republicans we expect to take this approach, not these folks. (Well Robert, let me tell you about…but then again, you lived thorough the old Clinton formula, with a ring-side seat for a while, didn’t you?)
(At http://www.salon.com/opinion/feature/2009/06/11/deficits/index.html)

Sleeping in the Arms of the China Dragon
The same debt shadows darken the outlook in the Bloomberg article noted above, the one where Russia, China and Brazil are cited as shifting $70 billion of their central bank reserves into the IMF’s multicurrency bonds. In that same article we find out that Illinois Republican Mark Kirk, the co-chairman of the congressional U.S.-China Working Group, sent a letter with three other Republicans to “Bernanke urging him to stop buying Treasury debt.” Besides raising inflation fears, Kirk said the Fed policy needed to stop “so that this BRIC conversation goes nowhere.” (“El-Erian Says Summit Shows ‘Rebalancing’ as BRICS Buy IMF Bonds, by Joshua Goodman and Michael Forsythe, June 11, 2009).

The Revenue Roots of Stalemate
My sense of the rising chances for a critical political stalemate in Congress has its roots in the fundamentals of contested ideological ground: the long-standing disputes between the left and right in this country over the relative weight of the public versus the private sector, especially in matters of infrastructure and investment planning (and staring right at us in the current debates about Global Warming legislation and national health insurance), the ability to raise adequate revenue, the manner in which revenue is raised, the degree and effectiveness of regulation, the unwillingness to pursue genuine full employment (and related arguments about inflation), and what level of debt might be necessary to get us out of crisis and make the course corrections in long term investments…That’s why I was very glad to see Robin Wells, the only woman on the panel, raise the issue of public revenue in the grand debate (she was a co-author of the textbook, Economics), and link it to the broader international economic currents which have gotten us in so much trouble: “During the Reagan years, we experienced chronic fiscal deficits, and we began to abdicate our responsibility to raise tax revenue that could sustainably finance government. In order to do that, we had to borrow, and who did we borrow from? We borrowed from countries that were running persistent trade surpluses…”

The American political economy is still deeply burdened by the ferociousness of the Right’s anti-tax stance, which the current crisis has not shaken; indeed, it has given it short-run reinforcement with the common sense notion that you shouldn’t raise taxes in the middle of a terrible recession/near depression. But the Right allegedly hates deficits/debt as much as tax increases(except when they run them up)…so around we go: don’t raise taxes, cut “entitlements,” and shrink government (which of course means layoffs, or further diminished demand in deflationary times)…this dynamic is beginning to blur the distinction between what we need for stimulus in the short run (most likely, another stimulus bill) and the longer term fiscal reforms to address deficits and the size of long term debt: hence “Pay as You Go” has resurfaced in Congressional discussions. And we shouldn’t underestimate the often unspoken driver behind “cap and trade” in the current Global Warming bill moving through Congress: it’s all going to be done without a tax increase (presumably the private sector invents its own “painless” form of price “signal” to move us away from carbon and not pass the increased costs of technological change on to consumers, abetted by the “hangover” spell of certain national environmental groups with the old magic of Wall Street finance: I understand that derivatives, including credit default swaps in carbon trading are back in the bill…I can’t wait…)

Some on the left speak as if the Right has been completely routed, but that is far from the case politically, whatever the fate of conservative economics in the depths of academe. While it is true the great crisis has given the left a short-run tactical advantage as Keynesian economics makes a comeback and the Right has no short run answer to plunging demand and investment other than monetary policy – beyond that - it’s “let the ‘creative destruction’ rip” (aka know as free-fall “liquidation”), foolishly confident that there never could be a re-run of the Great Depression (the astonishing scope and breadth of the Fed interventions as well the drop in world-wide production and trade ought to convince anyone of how real the danger was, and still is…). The Right and center will ride the debt/deficit worries to head-off any truly substantive change of direction in the American economy, aided by the growing international uncertainty over those American Treasury bonds and our currency’s value. You can see this line of push-back in Representative Kirk’s letter noted above.
The US and China: Hat in Hand, or Go it Alone?
So should the progressive economic reform in the US be held in bondage to the worries of the foreign holders our debt instruments, and the willingness of conservatives like Rep. Kirk to dampen domestic reform fires and placate the old, unsustainable “Chimerica” relationship? (I invite readers to “Google the question: How conservative is Illinois Republican Mark Kirk?” to quickly fill you in on his biography.) For an answer, and alternatives to the way this grand tension between domestic reform and the international financial “conventions” might play out, I went back to a chapter from James K. Galbraith’s 2008 book, The Predator State. Fittingly, it’s the one entitled “Paying for It,” the very last chapter. Here’s something for you to ponder as this crisis continues to unfold:

Here is the key question: What would be the impact on the dollar of a major change in American policy…toward domestic full employment and infrastructure renewal, and toward renewed technological leadership in the areas most needed by the world, such as climate change? Could and would the world react to this by extending to this country the financial backing required to pull off the transition? We do not know for sure. The world might turn against us. Perhaps it has already done so. In that case, the option – perhaps under those conditions, the only viable option – of closing the U.S. economy until our underlying technological and competitive position has been restored would have to be considered. But it is also possible, and perhaps more likely, that the word has not turned against us yet. And in that there is the vastly easier, infinitely more promising path of asking the world, once again, to hold our bonds while we launch ourselves on the path of international reconstruction and renewal.

The Specter of Speculative Avalanche
Now neither this writer nor the American public know what Secretary of the Treasury Timothy Geithner said behind closed doors to the Chinese on his late May, early June visit, the one where Chinese students laughed at his plea for faith in our debt. And the consideration pointing to more trouble than Galbraith sees, is also one being ignored by most of the other economic commentators. They forget just how speculative the world’s financial system is, even after the harsh lessons of the past two years. Based on all I’ve read and learned during that time period, a panic run against US Treasury bonds, or against holding our currency, could be set off, not by conscious choice of foreign governments, but by an inadvertent forced selling of these holdings by some major private player having to raise cash… such a move could easily be misinterpreted as to intent, and who was selling…and set off that infamous “avalanche” from chaos theory, where everyone rushes to dump because the cost and of being the last holder of a rapidly depreciating asset is just too scary to contemplate. So one hopes that at the Fed, and at the Treasury, there is a contingency plan where the US will fund its own debt, with the help of its citizens, much as we did in World War II, as we begin to undertake the vast job of rebuilding a once great economy. (Mike Whitney, writing at Counterpunch.org, has another possibility in mind: the banks’ great unspent reserves, approaching a trillion dollars and apparently not being loaned out, will be employed to buy all those Treasury bonds, once the spread reaches 4% thanks to rising interest rates. At http://www.counterpunch.org/whitney06122009.html ).

The Shape of Things to Come
So in the near future, this observer is siding with stagnation and stalemate as the outcome as he assesses all the forces in play. Ironically, it may have been the very successes of Ben Bernanke and the Obama team in forestalling a complete collapse, that has left us in the economic version of no-man’s land, as the power of the Right’s (with help from the center) old ideas strangles a more robust and decisive resolution to the crises on the grounds of mounting debt and foreign abandonment fears. Dean Baker is scathing in his rebuttals of all these green shoots with his June 3rd Counterpunch article “Reporters with Pom-Poms: Cheerleading the Recovery,”
At http://www.counterpunch.org/baker06032009.html. Yet all that cheerleading is having the effect of emboldening the Right’s argument that there is nothing special about this crisis, that it’s just another recession which the private sector is perfectly capable of resolving on its own usual, brutal terms.

And to get to those much better words – Reform, Reconstruction, Renewal – and their economic meanings in the current crisis, this observer would also have to discount the amazing and disturbing political spectacles now unfolding on both coasts, in two huge states, economic nation states in reality, with great budget deficits, and hung up on all the old political economy shoals we have outlined above. I’m referring, of course to California, and now New York. Funny how consideration of California’s plight has disappeared from the “green shoots” discussions: how many state lay-offs are pending to balance the budget after voters rejected tax increases in the referendum questions?

There’s a prophetic picture (SteveYeater/AP Images) introducing Paul Krugman’s “eulogy” of Milton Friedman, the symbolic patron of so many of our economic troubles today, in the February 15, 2007 issue of the New York Review of Books. (Page 27: “Who Was Milton Friedman?”) It could have been a still from Being There, 1979. Standing before the Great Bear flag of California, new Governor Arnold Schwarzenegger is flashing a too confident media grin, his arm around a diminutive Milton Friedman, who comes up only to Arnold’s armpit, and who is gazing off to the (far?) right, somewhere offstage; this revealing moment, at the “honeymoon” phase of the political marriage between libertarians and the Right, took place in Sacramento, on October 24, 2004, “at a meeting of California’s Council of Economic Advisors.” The subsequent history of that state’s economy speaks eloquently to the sour fruits issuing forth from this union.

The New York story is almost too bizarre for the nation’s fragile political psyche to handle just now, juxtaposed alongside of the recent political violence in Kansas and Washington, DC. The New York Times ran an editorial calling it “Albany’s Madhouse.” The details are both revolting and revealing about the reality of political “stalemate.” It seems that tax increases on the wealthy have provoked a billionaire, would-be state power-broker, Tom Golisano, to take his anger out on Democrats by encouraging several of their state senators to defect to the Republican side, ending in lock-outs, shut-downs and litigation in court. Former New York Mayor Ed Koch is quoted as saying that “‘I think we’re seeing a meltdown…I believe it’s not only disgraceful, but it makes New York look like a banana republic.’” Is it a coincidence then, that on both coasts, major state powers are collapsing in a political stalemate centered on raising revenue to meet balanced budget laws at a time when these laws make absolutely no economic sense? No, it’s a sign of things to come before we find a solid path to those better words, standing in for a better United States.

See the two articles at:
(http://www.nytimes.com/2009/06/10/opinion/10wed1.html
http://www.nytimes.com/2009/06/14/nyregion/14democracy.html?hp )

Part II

This portion of the post was written just in the wake of General Motors filing for bankruptcy on June 1st, and its disappearance, along with Citigroup, from the 30 firms which constitute the Dow Jones “Industrial” Average, gives it an inescapable symbolism for the economic state of our nation.

The Banks Pass…Several Tests
Earlier in May, the great debate about the solvency of our largest banks and the proposals for their further bailouts reached an anti-climax as they were found by the Treasury Department to need only $75 billion or so of additional capital, (for now), and they were able to raise most of it by various accounting maneuvers and selling additional shares of common stock. We’ll take a look at some of the sharpest commentary on the tests, whatever one thinks of them. The banks, however, passed another test with flying colors: the ongoing political clout test.

The bank lobbies flexed strongly on April 30th to prevent the passage of “cram-down” amendments to S-896, the “Helping Families Save Their Home Act.” What that means is that bankruptcy judges were not given congressional authority to write down the size of the mortgages, even for those which exceeded the value of the house, the “upside down” ones, and despite other narrowing parameters attached in favor of the mortgage lenders. The amendment, sponsored by Senator Durbin, could attract only 45 of the 60 votes needed. (Both of Maryland’s Senators did vote for it, to their credit.)

When 15% is not Enough
In one of the Senate’s more daring progressive initiatives, Vermont’s Bernie Sanders’ attempt to limit credit card interest rates to 15% (“to establish a national consumer credit usury rate”) failed on May 13 by a 33 to 60 vote. His proposal, which would have amended “The Credit Cardholders Bill of Rights of 2009” in a way that gets directly at the heart of the vast field of privileges for lenders embedded in the American debt system, deserves further consideration. Perhaps the limit should have been expressed as a set cap range over a given benchmark rate that would be just as protective of consumers but not arbitrary as to what banks are paying for their borrowing (of course they’re getting very, very low rates from the Fed under current circumstances.). Senator Sanders’ office told me that they did propose that approach, but it didn’t seem to make the banks any happier. The votes on this were fascinating. Senators Schumer and Gillibrand from New York voted for it, as did Senator Dodd and Maryland’s Ben Cardin (Senator Mikulski did not vote). Our favorite “populist” Democrat from Connecticut, Joe Lieberman, voted with the banks as did his populist buddy, John McCain. The entire Republican Senate lost their sometimes “populist” zeal on this one, and voted with the banks, Iowa’s Senator Grassley being the sole exception. The rest of the bill gave consumers at least greater passing decency of terms and notifications, while still avoiding the central question of the blatant usury raised by Sanders. President Obama signed the bill on May 20th. (Editors note: The original Senate bill behind the vote was S.582, introduced on March 14; it drew only six sponsors - our Maryland Senators were not on the list. On the House side, Rep. Maurice Hinchey’s (D, NY) H.R. 1640 did only a little better with 14 co-sponsors, none from Maryland. Given this insubstantial momentum, it’s amazing Senator Sanders was able to bring the measure for a full Senate vote as an amendment. There was no such happy outcome on the House side.)

Spotlight on the Fed
Senator Sanders work is just beginning. He’s the Senate sponsor of S-604, the Federal Reserve Transparency Act, which would require the Government Accountability Office, the GAO, to audit the Federal Reserve. Economist Dean Baker writes in his May 26th, opinion piece in The Guardian/UK, “Waterboard the Fed?” that we have a somewhat reluctant paper trail under the Treasury’s TARP, but “no public paper trail for the Fed’s loans, even though it has more than three times as much money outstanding as does the Treasury through the Tarp…” (full op-ed at http://www.guardian.co.uk/commentisfree/cifamerica/2009/may/25/federal-r... ). As of June 14th, Senator Sanders has one Senate co-sponsor. Meanwhile, on the house side, H.R. 1207, sponsored by Rep. Ron Paul of Texas, has picked up 224 co-sponsors, including Maryland Democrats Donna Edwards (D-4) and Frank Kratovil(D- 1), showing the unusual left-right tilt of the bill backers. Baker notes the absence of any Democratic house leaders on the bill. What’s going on here?

Steny, We Hardly Knew ‘Ya
Well, maybe one part of the answer is that at least one key Democrat, House Majority
Leader Steny Hoyer, was busy signaling he’s very much open to that grand compromise on “entitlements,” especially Social Security, that has progressives so worried. He did so in a May 6th keynote address to the “Bipartisan Policy Center Forum” which you can read for yourself here at http://democraticleader.house.gov/in_the_news/statements_and_speeches/in... .

He was hit pretty hard by the co-director of the Campaign for America’s Future Robert Borosage’s “Wrong Way Steny” editorial just two days later (at http://www.ourfuture.org/blog-entry/2009051908/wrong-way-steny ). Now, a month later in June, the issue of the national debt is being shoved on the front burner again by the Federal Reserve Chairman, so we better pay some attention to what Hoyer is up to.

I’ve read his two page address carefully, several times, and while the exact nature of what he would support in changes to Social Security is not entirely clear, the values context of the whole speech makes me worry even more. He indicates that we could raise the retirement age, raise revenue (although he doesn’t use the term “raising the cap” on wages as Obama did in his campaigning), “restrain the growth of benefits, particularly for higher-income workers, while we strengthen the safety net for lower-income workers.” Now this seems to send some conflicting signals; even though it is true that folks are living longer, the word “unemployment” does not occur in the address at all, and yet it makes no sense to raise the retirement age in an looming era of great unemployment. On the progressive end of ideas Professor Galbraith has suggested lowering the age of Medicare eligibility to 55. When Hoyer goes to listing those responsible for the great debt crisis (the lesson of the economic crisis: “this is what debt does” - he places consumers first for “recklessness,” then Wall Street and then the federal government. When he lists the causes that might be served if we can reign in debt and not have to pay the big interest charges for financing, it’s national defense that gets listed first. He praises the now missing “personal trust” which led to deals like that between Reagan and Tip O’Neil in 1986 to reform Social Security: no mention of just how regressive that tax increase was on working people – and downright cruel following in the wake of Reagan’s tax cuts for business, the wealthy and the great increases in defense spending.

When Democracy Isn’t Good Enough
And then he clearly leans toward an “extraordinary process” to get to the reforms: the Fiscal Future Commission, which is actually a bill (S-1056, 2 co-sponsors, and H.R. 1557, which has 68, mostly Republicans, including MD’s Roscoe Bartlett (D-6) and Democrat Frank Kratovik (D-1). Given that we as a society don’t hold those in positions of authority responsible for much of anything that goes badly wrong – just who got fired or demoted for 9/11, for the prison and torture abuses, for the great subprime calamity, for the deregulatory decisions that far more than consumers’ excesses allowed this calamity to grow to the vast scale it has…for the China policies that have led to the unsustainable trade imbalance…and possible eclipse of the dollar…so now when we are going to have to formulate a plan to balance the books in two to three years, it will be the little folks on Social Security paying more than their share of the bill? I urge Majority Leader Hoyer to go back over his assessments of responsibility and causality on this great issue of debt. I didn’t notice his name among the co-sponsors on the bill to limit usury rates for credit card issuers (H.R. 1640) – those cards being the greatest private debt inducing instruments ever invented.

A Financial Inquiry Commission, After all
While there is much to be concerned about in what is emerging from Congress in the wake of the great financial crisis, American citizens will get their chance at a Pecora type (1932-1934) investigative commission to examine its origins and causes. With passage of the Fraud Enforcement and Recovery Act of 2009, signed by President Obama, there will be $5 million allocated for a 10 member Financial Crisis Inquiry Commission, with 6 members appointed by the Congressional majority and 4 by the minority. It will have subpoena powers and must submit its report by December 15, 2010. Robert Kuttner likes the sweep of its enumerated functions, and so do I. You can see them spelled in his brief article which appeared on the Huffington Post on May 31st at http://www.huffingtonpost.com/robert-kuttner/a-real-pecora-commission_b_...
Kuttner has nominated his choices for Chair: Paul Sarbanes, the retired Maryland Senator who co-authored the tough Sarbanes-Oxley corporate accounting requirements, or Harvey Goldschmid, a former SEC commissioner who teaches law at Columbia. I think Kevin Phillips or George Soros should also be considered. I’m more than happy to report this good news, and despite the not so friendly “signing statement” from President Obama reminding us that he might invoke “executive privilege” when the Commission comes knocking at his door (or Larry Summers’ or Tim Geithner’s…?)….we’ll keep you posted on the appointments and the mood surrounding its getting up and running.

Sold Out
Readers who want to warm up for some of the crucial ground the Commission is going to cover have two good places to start. The first appeared in March, 2009, co-sponsored by Essential Information (a Ralph Nader organization founded in 1982) and the Consumer Education Foundation: Sold Out: How Wall Street and Washington Betrayed America. Although the report is 231 pages long, the actual text covering the “12 Deregulatory Steps to Financial Meltdown” is just 97, and they’re very readable. While I don’t intend to go over it in great detail here, I do want to remind my readers that the report does call our attention to a person whom I certainly hope the formal Financial Crisis Inquiry Commission pays very close attention to: that would be the former Comptroller of the Currency, John D. Hawke, Jr., whom the report says “ In 2003… announced that he was preempting state predatory lending laws…Hawke argued that national banks were not engaged in predatory lending on any scale of consequence; that federal regulation was sufficient; and that federal guidance on predatory lending…provided additional and satisfactory guarantee for consumers.” Adding another layer of interest for our readers, and perhaps the Commission itself, was Eliot Spitzer’s column in the Washington Post on Feb. 14, 2008, almost exactly one month (March 12, 2008) before he resigned as Governor of the State of New York. The title of Spitzer’s Op-Ed was: “Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States From Stepping in to Help Consumers.” (at
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR200802...)

The Generosity of Finance
The second half of the report is devoted to a compilation of financial contributions and lobbying activities and relies heavily on data from The Center for Responsive Politics. The impressive cumulative data for the years 1998-2008 is summarized bluntly in the Introduction and Call to Arms by Harvey Rosenfield of the Consumer Education Foundation. Over this decade, “…Wall Street showered Washington with over $1.7 billion in what are prettily described as ‘campaign contributions.’” The more broadly defined Money Industry (Securities firms, Commercial Banks, Insurance Companies and Accounting Firms…) spent another “$3.4 billion on lobbyists whose job it was to press for deregulation…” So that’s a very impressive $5.1 billion spent for influence in a decade. Candidate Obama was not slighted in the least. Here’s the rough story for 2008 contributions to the President: Bear Stearns: $60,503; Goldman Sachs: $884,907; Lehman Bros.: $288,538; Merrill Lynch: $264,720; Morgan Stanley: $425,502; Bank of America: $230,552; Citigroup: $543,430; JPMorgan Chase&Co: $559,210; Bill Neil: $35.00.

Sold Out can be found online and downloaded in PDF format from http://www.wallstreetwatch.org/soldoutreport.htm

Subprime and Its Enablers
The second report, issued on May 6th, is more narrowly focused, looking closely at the linkages between the subprime loan originators and the “processors.” It was produced by the Center for Public Integrity and is called Who’s Behind the Financial Meltdown? The Top 25 Subprime Lenders and Their Wall Street Backers. The basis for their findings comes from an extensive computer analysis of some 7.2 million “high interest” or subprime loans, made from 2005-2007. Here are some of the highlights from their findings:

At least 21 of the top 25 subprime lenders were financed by banks that received bailout money – through direct ownership, credit agreements, or huge purchases of loans for securitization…twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy…Eleven of the lenders on the list have made payments to settle claims of widespread lending abuses. Four of those have received bank bailout funds…

In the section called “Predatory Lending: A Decade of Warnings,” you’ll come across two early whistle blowers, new to me, who testified in front of Congress, as early as 1998: William Brennan, from Atlanta Legal Aid, who saw the house of cards coming for investors, and Jodi Bernstein, from the Bureau of Consumer Protection at the FTC, who saw the connection between high profits on mortgage backed securities and growing Wall Street tolerance of “questionable lending practices.” Here’s where you can read the report on line, with plenty of sophisticated graphics: http://www.publicintegrity.org/investigations/economic_meltdown/

William Black Tries to Lay Down the Law
Something else in the report caught my attention, and I want to share it with my readers because it is linked, in my mind, at least, with a curious case of “disappearance,” that of William E. Black, the law professor and white collar crime theoretician who also has great practical experience, stemming from his “prosecutorial” role in the Savings and Loan crisis of the late 1980’s and 1990’s. Readers may remember that he was looking closely at the extraordinary level of fraud in the actual mortgage loan folders that had been retro-actively examined by one of the ratings agencies, and the implications for both those agencies and the firms which sold the securities constructed out of the mortgage loans. We called this posting to your attention in the March 29 essay A Fireside Chat on the Cusp of History (“The Two Documents Everyone Should Read to Better Understand the Crisis,” from the Huffington Post on February 25th)) and apparently some significant others were also paying attention to what William Black was saying, because less than a week after A Fireside Chat…went out to you, there was Professor Black on Bill Moyers’ Journal, Friday, April 3rd, at http://www.pbs.org/moyers/journal/04032009/watch.html. The print lead-in on the website gives us a hint of trouble to come: “With the nation wondering how to hold the bankers accountable, Bill Moyers sits down with…” It’s a fascinating interview, just under 30 minutes. What Black is laying out for viewers is legally startling, invoking laws that he says are not being applied, and in brief, ending up with a view about 180 degrees opposite from the approach being taken by the Obama administration. He followed that up with a scathing critique of the stress tests of the banks in the New York Times on May 6th, which you can read here at http://roomfordebate.blogs.nytimes.com/2009/05/06/grading-the-banks-stre... .

Elizabeth Warren, Chair of TARP Oversight Panel, delivered a different interpretation of the stress tests, slightly more generous. Testifying on Tuesday, June 9th, before Vice-Chair of the Joint Economic Committee Carolyn Maloney of New York, here’s what Warren had to say. She said her Panel “embraces” the tests, even if they couldn’t independently verify the results – apparently no one has been able to do that. Treasury assured her that the “off balance sheet troubles” were brought onto the regular balance sheets, but again, no independent verification. She said the current unemployment numbers were already beyond those used in the tests, and that they should be extended and repeated for the years 2011-2013, especially to capture the losses from commercial real estate loans and securities.

We’ll Tell You When the Price is Right
Two months before the stress tests results were made public in the beginning of May, something else happened which has had a significant impact on a number of the troubled banks’ balance sheets. For more than two years, banking industry lobbyists have been working to ease “mark-to-market” accounting rules which had held the assets to quarterly evaluations of what they would be worth under actual market conditions, and the price at the latest sales. Needless to say, this was hurting the institutions with toxic assets, where there were no or very low prices for their mortgage backed bonds, and other crisis dented instruments. Congress got the message from banks loud and clear, and delivered it in a remarkably blunt manner during a public hearing on March 12. The recipient was Financial Accounting Standards Board Chairman Robert Herz. Poor Mr. Herz. House Financial Services subcommittee Chairman Paul Kanjorski, the Pennsylvania Democrat whom we quoted at the 75th anniversary New Deal celebration in April of 2008, said this to Mr. Herz, who looked liked a man about to be sentenced: “ ‘You do understand the message that we’re sending?..’” “‘Yes, I absolutely do, sir,’” was the reply from poor Mr. Herz. Isn’t it remarkable how decisive Congress can be at times when the policy they’re “dictating” runs in favor of the big donor interests? Can you imagine a similar dictation tone being directed at the health care industry powers? Former SEC chairman Arthur Levitt was disturbed enough to write an Op-Ed in the Washington Post opposing the changes, and had this to say to Bloomberg.com reporters Ian Katz and Jesse Westbrook: “ ‘What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters.’” How much was it worth to the banks to allow them to use “internal models instead of market prices and allowing them to take into account the cash flow of securities?” Robert Willens, with a lot of tax and accounting experience on Wall Street under his belt and with his own firm in New York, says it “could boost bank industry earnings by 20 percent.” Some “companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University …” See the article “Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes,” at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awSxPMGzDW38

The Strange “Disappearance of William K. Black
FASB Chairman Herz wasn’t the only one who appeared to have a tough time at the hands of the powers that be. A strange thing happened to William K. Black after his nationally prominent exposure on Bill Moyers. He “disappeared;” not literally, of course, but his next prominent public appearance seems to have been a lecture on banking fraud in Iceland, a nation which certainly needs to hear from him…with all their banking troubles, but come on…isn’t John Podesta going to invite him to give a talk at his think tank in DC? Apparently not. If you “Google” William K. Black, May or June 2009, you won’t find very much after that Moyers appearance.

So still staying on this trail, it was the following passage in the report, Who’s Behind the Financial Meltdown that caught my attention, thinking about Bill Black’s comments and his “disappearance:” “Countrywide, No. 1 on the Center’s list, signed off in 2008 on the mother of all predatory lending settlements. After being sued by 11 states, the company agreed to provide more than $8.6 billion of home loan and foreclosure relief. The Center contacted an attorney for former Countrywide CEO Angelo Mozilo, but did not receive a response.”

Settlements? Where are the Indictments?
The key word here is “settlements.” I’m reading more and more about settlements from subprime lending, but not about indictments from more serious systemic crime investigations, the type William K. Black is talking about. We know from the summer of 2008 that “the FBI says it has 21 open investigations into possible large-scale fraud related to the subprime meltdown…among other possible targets...are investment firms that sold billions in securities backed by shaky subprime mortgages and credit rating agencies that gave high marks to the now worthless securities and failed to protect investors.” (see Richard B. Schmitt’s Los Angeles Times article here http://articles.latimes.com/2008/aug/25/business/fi-mortgagefraud25?pg=3 ).

We also know that a federal grand jury in Los Angles was looking into Countrywide, New Century and IndyMac…but there has been little or nothing about where that proceeding stands since the coverage in the summer of 2008. Angelo Mozilo and two other former Countrywide executives have been accused of fraud and insider trading of Countrywide’s shares by the SEC very recently, in a civil action (see the Wall Street Journal article from June 5th here http://online.wsj.com/article/SB124414278536586095.html ). That’s the first signal that things may be about to change since the big FBI/Justice Department raids from June of 2008, headlined in a CNN article which screamed “Mortgage fraud inquiry nets hundreds.” The basic problem with the big raids and headlines was revealed only in the concluding sentence of the brief article: “Officials indicated the suspects were involved mostly in small-scale schemes.” (at http://money.cnn.com/2008/06/19/real_estate/mortgage_fraud/index.htm )

Baltimore Sues Wells Fargo Bank
On June 7, The New York Times carried a very explosive story about the City of Baltimore’s suit against Wells Fargo Bank, with the allegations being backed up by two former Wells Fargo employees that have made eye-catching charges about the nature of the targeting operations aimed at predominantly black communities, including in Prince Georges County, Baltimore and southeast Washington, DC. (at http://www.nytimes.com/2009/06/07/us/07baltimore.html). Interestingly enough, the suit was first filed in January 2008.

Postscript: In thinking about the themes of this essay, of “progressive” directions petering out into economic stagnation and stalemate, it’s hard not to think about the left’s lack of passion compared to the prodigious and armed intensity on the Right. Certainly centrists must consider this phenomenon with relief. The last thing the Obama folks want to see is a unified progressive-populist wave of passion in matters economic. Yet what we’re talking about is constructive anger, a passion of sufficient intensity to put people in the streets, and real pressure on Congress and the administration. So the question is: why isn’t there more passion on the left? It’s something we’ll be writing about in future editions. It deserves more attention. Until then…

The very best to my readers,

Bill Neil
Rockville, MD
w.neil@att.net

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future