OurFuture.org Blogs: Robert Johnson

Congress' Choice: Real Derivatives Reform Or Another Wall Street Earthquake

Robert Johnson — Wed, 18 Nov 2009 09:35:48 -0800

This post is an excerpt of testimony presented to the Senate Agriculture Committee on November 18, 2009 in a hearing on legislation reforming regulation of financial markets. The testimony was presented on behalf of Americans for Financial Reform.

When they are properly designed, financial markets play a fundamental role in the resource allocation for our society. Well-functioning markets are an important means to achieve our societal goals. Financial markets, when functioning correctly, serve to aggregate savings and allocate them to productive uses. Financial markets also serve to allocate risk to entities that bear it most comfortably. The system we had in place in recent years, and the one that is still in place as we meet today, has revealed profound flaws.

The Senate Agricultural Committee has, in its history, seen the benefits the derivatives markets can create when they are transparent, have safeguards against manipulation, and restrict excesses of speculation. These markets can provide a powerful resource allocation tool, provide a mechanism to distribute risk and at the same time need not prey upon the resources of civil society.

At the same time, the recent history of unregulated credit default swaps following the passage Commodities Futures Modernization Act that culminated in the failure and bailout of AIG illuminates the danger of potential legislation that does not adhere to basic principles of sound market structure.

Efforts to repair these market structures in light of the diagnosis of the crisis that began in 2007 should, in my view address the elements that caused the crisis. I would suggest that study of the crisis reveals that at the core we have four problems:

1) Excessive leverage
2) Opacity and complexity rather than transparency and simplicity
3) That ability to buy insurance without an insurable risk
4) A misalignment of incentives where the private incentive to take risk exceeds the social desire to bear risk.

Certain types of derivative instruments, their market structures and the associated regulatory structures, have contributed to all of these problems. It is time, in light of experience, for a thorough redesign of these market systems to enhance the real potential of derivative instruments and the repair the obvious flaws in structure have caused so much harm.

Derivative Reform The Centerpiece

Over-the-counter derivatives reforms are, in my view, the centerpiece of the financial reforms that are necessary to address the flaws of our financial system that were revealed by the crisis that began in 2007-8. Derivative instruments are pervasive and their regulation is intimately intertwined with the health of the financial system. The experience of AIG and their exposure to unregulated credit default swaps (CDS) is the most glaring example of the reckless nature of an unregulated derivatives market. CDS buyers in the so-called shadow banking system felt that their purchased protection was a substitute for bank shareholder capital. Yet the writers of the CDS protection, in the case of AIG, did not appear to, and were not required to, set aside adequate capital. As a result, the taxpayer’s capital was extracted to support the counterparties of AIG such as Goldman Sachs and a number of foreign banks who did not pay into any kind of guarantee pool for insurance. This web of connections was considered too dangerous to let fail and it was an example of the hazards of unregulated OTC derivative market breakdown.

The AIG debacle is an important structural episode to learn from, but it is not the only one. Derivatives regulation is not a subject to be treated in isolation. OTC derivative reform impacts all of our financial system’s vital interconnections. It is the very fabric of our financial system.

I believe that the most important dimension of all of the needed financial reforms is the precise intersection between Too Big to Fail financial institutions and OTC unregulated derivatives. This intersection is the equivalent of the San Andreas Fault of our financial system. We are in a new era where the size of the capital markets, and their derivative instruments are a dominant dimension of the intermediation of credit. Derivatives transparency is essential to the safety and soundness of our financial system as a whole and it is essential to the protection of the public treasury. Without OTC derivatives reform enhanced resolution powers for dealing with insolvent institutions could well be rendered impotent and future crises in the credit allocation system will likely be longer and deeper than is necessary.

In recent letters and testimony some end users have emphasized the impact on jobs and the competitiveness of their firms if they were to lose access to customized derivatives and be forced to rely solely upon standardized contracts.

We have a financial architecture in place governing derivatives that has failed profoundly. The bailout costs, lost output around the world, and breathtaking rise in unemployment are the result of that financial failure. When an end user talks about how changing practices in the derivatives market will end up costing jobs at his firm one has to place this in that context. If a dysfunctional derivatives market has led to over use of derivatives throughout the system and has made them too cheap to use because provision for the integrity of the system was not built into the costs, then it is imperative to improve that system architecture and force the end use to incur the costs they rightfully represent that they will experience. The resulting system, fortified and more transparent and well regulated, would reduce the likelihood, and magnitude, of a recurrence of a financial calamity. Not only would society be better off with lower unemployment, but the end user in question would likely experience less disruption to demand for his/her product and not be forced to lay off as many employees in the event of a disruption. Reform would increase jobs and stability of employment in his/her own sector in the larger scheme of things.

We have, in recent years, had a financial system where the private incentive to take risks exceeds the social value of those risky actions. We have subsidized financial speculation indirectly and underpriced insurance by not setting up proper market structures, particularly in the aftermath of the Commodities Futures Modernization Act. When a subsidy is diminished, those who benefit from it are forced to adjust, profits are curtailed, and employment diminished at the margin. Those effects are important to understand, but they do not constitute a reason to refrain from repairing a broken system. Society and the end users are each likely to be better off when the system’s integrity is repaired. The kind of disruptions to commerce we have recently experienced are enormous, dreadful and unnecessary.

In 1970 the automotive industry was at the apex of the world economy. Yet for many years thereafter, as the automotive industry struggled to adjust to the new realities of global commerce, executives from the Big Three spared no effort of time, money or energy to plead with Congress to relax social policy requirements regarding fuel emission standards rather than devoting their energy and resources to R&D directed at improving their products. The result was that together, the auto industry and Congress produced a failure that is all too evident today.

Today Wall Street and the City of London sit at the apex of the economy, not unlike the automotive companies did nearly 40 years ago. It is my hope that our nation will resist “helping” Wall Street adjust in the destructive way they enabled the auto industry to avoid modernization. Wall Street spent many years in public discourse thwarting and resisting the appeals for protection from the declining manufacturing sector. Is it too much to ask them now to practice what they have preached to other sectors of the economy repeatedly? I am confident in the intelligence and vitality of the men and women who work on Wall Street today. They are very able and do not need “Wall Street Protectionism” to survive and to thrive. Would it not be better to inspire them, particularly in light of this crisis, to adapt to a more vital market system rather than to acquiesce to their demands perpetuate a system that protects their profits at the risk of exposing society to a danger to the integrity of our financial system that has caused so much hardship in the present and recent past?

Resisting the demands of Wall Street firms on OTC derivatives reform is easy to agree to, in principle, and difficult to accomplish in practice. Market structures with integrity are a public good. As University of Chicago Professor Luigi Zingales has written recently, “most lobbying is pro-business, in the sense that it promotes interests of existing business, not pro-market, in the sense of fostering truly free and open competition.”

The San Andreas Fault Of the Economy

Wall Street’s leaders cannot control their urge to seek protection despite the fact that it is demeaning to their reputations. Yet the members of this Committee and your counterparts in the Senate are responsible for resisting their demands for the good of society. I do believe that this is no minor matter. The financial security and strength of our nation is in the balance. Confidence in the U.S. dollar as the world’s foremost reserve currency depends upon the integrity of our financial system.

I believe that the intersection between the OTC derivatives market and the large financial institutions is the financial equivalent of the San Andreas fault. Yet there is one difference. The San Andreas fault is a natural occurrence that we must all cope with to mitigate the consequences of an earthquake. It is beyond our power as people to eliminate. The current state of OTC derivatives regulation and its relation to the guarantees of large financial institutions are a man-made fault that is the product of past human errors financial legislation and regulation. It has been revealed by catastrophic events to have devastating consequences. It has produced an avoidable earthquake. That earthquake and its consequences need not be repeated. One can only imagine the consequences for the reputation of those public officials who would choose to act to codify into law this fault line and expose our society to a repetition of the financial crisis that has devastated the world in recent months.

To avoid reform would be harmful enough. We know the fault lines of past human error regarding the regulation of OTC derivatives continue to threaten us. But to affirm the status quo with new legislation that codifies these structural flaws and deems them to be healthy would be far worse. This is not about just leaving a few crumbs on the table for big financial institutions and asking the rest of us to pay a little more. This is about the representative government of our society choosing to affirm a dangerous financial structure that could explosively harm us all again just after we experienced a severe and unnecessary crisis that resulted from these very failures of design.

It would be both dangerous and demoralizing for America and the world if our legislators choose to take that path forward in deference to the parochial desires of a few firms in the financial sector or end users who are clamoring to preserve a subsidy of their risk-mitigation methods.

Robert A. Johnson is director of economic policy at The Roosevelt Institute.

Opening Night in Chicago: Senator Durbin Denounces Unfairness, Calls for Reform

Robert Johnson — Mon, 26 Oct 2009 09:16:27 -0700

"There were times when I thought I couldn't last for long
But now I think I'm able to carry on
It's been a long, been a long time coming
But I know a change is gonna come, oh yes it will"

-Sam Cooke: A Change is Gonna Come

Opening night at the Showdown in Chicago. Senator Durbin from Illinois gave a rousing speech about unfairness, bailouts, credit care usury and bonus audacity. He emphasized the need to be respectful but unyielding in our demands for balanced reform. He spoke of how each marcher is there and represents the pain and hopes of individuals who were abused by foreclosure, subprime treachery and more. The only surprising element was the muted applause in Chicago for the president of the United States. Only on the third time that Durbin referenced the name Obama to arouse the crowd did he get the applause he was looking for.

Sheila Bair, FDIC chairperson, will address the crowd tomorrow. That is great to see. After watching the great episode on PBS Frontline entitled "The Warning" about OTC derivatives, I am beginning to wonder if the essential reform we should be seeking is to have only women regulate finance. Imagine if Janet Yellin had run the Fed, Elizabeth Warren ran the CFPA, Sheila Bair stayed in place at the FDIC and Brookley Born had stayed to run the CFTC. (Though Gary Gensler is doing great work at the CFTC now) They are all highly competent and god knows we would be better off. Every one of these people is first rate competent and does not seem to be missing the capacity of judgment that so many of the men have lacked in the last 20 years.

The question most asked here is "how long can this go on? Bailouts for the ones who created the mess, bankers acting like they earned it, foreclosures and bankruptcies and unemployment rising, and the Congressional Committees pretending to reform the financial regulatory system while they load up on money from the financial lobbyists.

My answer is that no one knows how long. We know that it will change. We will not see a nation that lives on 30 percent credit card rates. We will not see Wall Street wages forever at a 40 percent premium to wages throughout the economy adjusted for skill and experience. We will not pretend that only financial repackagers work hard and are deserving.

The question is when and how, not if, it will change. What hangs in the balance is how much blood will be spilt, disruption needs to occur, homes will be lost, jobs will be lost and municipal functions will be closed down before our political system becomes responsive. We are seeing an ugly chapter in our country, one that Herman Melville in his poem Clarel foresaw as a dark age of democracy. As one of our great theologians once exclaimed,

But today, because we have so cruelly separated freedom from virtue, because we define freedom in a morally inferior way, our country is stalled in what Herman Melville call the "Dark Ages of Democracy," a time when as he predicted, the New Jerusalem would turn into Babylon, and Americans would feel "the arrest of hope's advance." (William Sloane Coffin)

I am grateful that the Showdown in Chicago is happening. What I wish is that professional financiers and economists would join Dean Baker, Bob Kuttner and myself here. This is not left and right, this is right and wrong. Financiers and economists can all see that something is terribly wrong with the financial system. We have embarked on an era of Wall Street Protectionism. Government cronyism conferring gifts upon the Too Big to Fail. While they are not in Chicago the voices of Paul Volcker, George Soros, Mervyn King, and even Alan Greenspan are speaking out. I am grateful for their efforts and courage. Others with financial experience and expertise can see that the market system is being abused. It is time to give up on rational apathy, as Mancur Olson called it in Logic of Collective Action and contribute to the solution.

A series of demands need to be formulated as the pressure rises.

My first cut would look like this:

Bailouts and TBTF

You get bailed out and the public dilutes your equity and top management compensation evaporates. Letters of resignation are given to the authorities. No negotiated terms. Mandatory equity dilution. If you get rescued the public owns some upside. No crony deals between Fed or Treasury officials and management. Anything less is taxpayer abuse.

Foreclosure Modification

Recognize reality. Principal reductions. Burden sharing. 20 percent is less than the costs of foreclosure.

Usury and Credit

As the Industrial Areas Foundation says, 10 percent is enough.

Derivatives Reform

Simple transparent and exchange traded. Regulated capital levels on exchanges.

The efforts that will be required to overcome this Babylon might as well get started here and now. It is my hope that there will be showdowns in Cleveland, Detroit, Miami, Denver, Oakland and more. Things will change. Finance has seen its peak. The question is when and how the change will occur.

This post originally appeared in New Deal 2.0.

Squandered Honeymoon: How Botched Bailouts Hamper Healthcare Reform

Robert Johnson — Fri, 28 Aug 2009 06:50:29 -0700

We live in an era where the effectiveness of government has been denigrated for more than 30 years. The echo chamber of the right, particularly since the election of Ronald Reagan, has sought to intimidate anyone who let the romantic notion into their head that government can help. They even denigrate the New Deal, like it was a bad dream rather than a series of programs that helped many people, and may have saved capitalism from itself.

With the romance of government trampled, the void in social theory was filled by the romance of markets. The free market fundamentalists vehemently promoted the notion that markets were not just a means to achieve social goals. To their way of thinking, social goals themselves would have to be designed to curry favor with the "wisdom" of the market.

In the years from Reagan to Bush II, we experienced "Capitalism Unleashed," as the late Andrew Glyn titled his fine treatment of this period of history. Distribution of income and wealth became more concentrated at the top; productivity growth and profit soared; wages were flat; and finally, outsourcing, foreign direct investment and the stress of bringing labor-intensive, low-wage countries like China into the world economy caused severe adjustment pain. Yet none of this stress really shook the romance out of free market fundamentalism. The pain was temporary, and better times would surely come, they said.

That all changed with the Financial Crisis of 2007.

Entering A World of Pain

The real economic spillovers and side effects of Wall Street-leverage and rocket-science concoctions brought the curtain down on the romance with the unfettered free market. This was a mess that did not need to happen. It was a calamity that will cost the world economy trillions of dollars.

This is the stage that President Obama walked onto when he made his run and was elected to the White House. Government romance had been pounded out of the hearts of Americans for decades. Yet now free market fantasies were in tatters. For Obama, seeds of opportunity were contained in the crisis.

What was remarkable about Obama was his seemingly magical ability to inspire us all to suspend our cynicism about civic engagement and government and give things a new try. Sure, he had help from the dreadful examples of his predecessor's work on Katrina, Iraq, torture and the TARP bailout. Yet he pulled it off, and the idea of a strong leader steering us through a crisis brought visions of FDR into the minds of many.

We took comfort in the notion that "the best and brightest" would be taking over. The Administration promised bold actions on many fronts, including stimulus, climate change, financial regulation, bailout policy and healthcare.

Just after the inauguration, many in the markets felt that a bold financial plan would be announced. It would be something strong--something like what the team of Summers and Geithner had recommended in the 1990s to the Asian developing countries and Japan. Hopes were high that the return of the dynamic duo to government service would lead to immediate action to restructure the banks and bold steps to regulate the capital markets. All of this would be needed to clear away the financial wreckage and get capital flowing again.

Botching the Bailout

Instead, we got nothing on inauguration day. We got a plan-to-have-a-plan in early February, followed by the announcement of PPIP and infinite forbearance through an intravenous-drip system of capital injections so that the behemoth banks, their executives, their stockholders--and most profoundly, their unsecured creditors-could hold onto their money. We got that, coupled with the announcement of AIG bonuses. As a final insult, we heard Administration officials waxing on about the sanctity of contracts while the autoworkers' benefits and pensions were being restructured. The public was rightly enraged.

At the time, I argued that failure to restructure these too-big-to-fail banks would be costly in three ways. 1) Budget costs; 2) The enhanced risk of a future crisis by leaving the too-big-to-fail firms to repeat their feats (heads they win, tails the taxpayer loses); and 3) The impact on Obama's ability to inspire people to believe in the good government could do.

In the realm of budget costs, proper restructuring of the unsecured debt of Citigroup and BofA, among others, would have obviated the need to increase public debt. As we all now know, the deficit hawks--apparently vacationing underwater from October to March when the bailouts were constructed--came back in full force. The result? Future programs would have to be curtailed and the future economy might have to be burdened with taxes so that bondholders who made foolish risky bets that included no government guarantees could get their money back.

A second cost would be that these large, unresolved zombie institutions would remain in the market. They could rightly be considered as off-balance-sheet contingent liabilities for the future. In other words, they were the seed corn of a future crisis and another future costly bailout. We missed the chance to break them up and diminish this possible danger.

Wasting the Crisis

The whispers around the Treasury and White House suggested there were legal difficulties associated with inadequate "resolution powers." We heard murmurs about the complexity of derivatives books and the dangers to the real economy of trying to close the large financial holding companies. No one wanted another "Lehman."

In the end, we saw no effort to pass emergency legislation to make it easier to handle these Too-Big-and- Complicated-to-Resolve institutions. That alone raised suspicions that our public servants might not be, first and foremost, working to defend the taxpayers. Yet to be fair to the Administration, they faced daunting hurdles. Congress was not going to execute emergency legislation in front of a bank lobby that was unlikely to stand by and watch their stockholdings zeroed out and their executives become more vulnerable to firing.

Other insiders with a more international orientation whispered about the fragile nature of the foreign exchange value of the dollar. They hinted that government takeover of major brand-name institutions and write downs of bank debt would damage the confidence of the foreign investor who held "conjectural guarantees" that the U.S. would support all elements of its financial system.

It is often said: to run an international empire one has to "waive the rules in order to rule the waves."

The rules were waived; the bank creditors won. Witness the bond king Bill Gross of Pimco--perhaps the most gutsy gambler on conjectural guarantees-enjoying his new $23 million dollar home in California while the taxpayers have inherited a cadre of shameless financiers and experts telling us that we have to cut entitlements to stabilize our public finances.

You've Lost that Loving Feeling

We're now beginning to understand the details. In the first major act of this financial farce, the question was raised: will Wall Street rule Washington or will the White House govern finance? The White House whiffed. As Simon Johnson's characterization of Wall Street's oligarchs touched a nerve, Obama even tried to use his magical oratory gifts to reframe strength as the act of resisting the temptation to settle scores with financiers rather than finding the spine to stand up on behalf of the general interest. No one really bought it.

The Administration's exercise in government risk-management-of choosing forbearance with the big banks over this risk of "another Lehman"-- made sense in isolation. What it missed was an awareness of the historic context and opportunity. Free markets had profoundly failed. Government had been given another chance by the electorate that was inspired by candidate Obama. A chance to do some good for the general interest and regain the reputation of a productive public sector after thirty years of disparagement. Yet by refusing to stand up to the oligarchs and set proper boundaries in defense of society, they fed the cynics and dissipated the magic that Obama had created for real change. The Administration seemed closer to Jamie (Dimon) and Goldman Sachs than to us. The lesson: if you fail to defend society once, people lose faith. The loss of faith carries a high price, and we're paying that price now in the arena of healthcare reform.

We Gotta Get Out of This Place

This is not Monday morning quarterbacking. I spoke at the time in many public forums about the risk of missing this chance to inspire respect for public service that would result from pandering to finance. Martin Wolf of the Financial Times wrote about it vigorously. He could see the dangers clearly. On February 10, 2009 he said in print:

Has Barack Obama's presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

Loss of faith in government limits what we can achieve together. Obama created space for the suspension of cynicism about government after thirty years of denigration. This was of tremendous potential value, but the administration blew it in the first major act. The Chicago School, which fanned the flames of the romance of markets, can certainly now divert attention from their failings and point to the work of Chicago Nobel Prize winner George Stigler on regulatory capture, and say "I told you so" to the romantic liberals whose faith in the capacity of government to respond to market failures has been shattered.

As Paul Krugman said recently in his New York Times column,

I don't know if administration officials realize just how much damage they've done themselves with their kid-gloves treatment of the financial industry, just how badly the spectacle of government supported institutions paying giant bonuses is playing. But I've had many conversations with people who voted for Mr. Obama, yet dismiss the stimulus as a total waste of money. When I press them, it turns out that they're really angry about the bailouts rather than the stimulus...

Somebody Got to Help Me, I Can't Help Myself

The financial sector issues have receded into the background for a time. But the residue of anger and distrust has not, as we're now seeing with healthcare. At a logical level, the nature of the debate seems crazy. Blue Dogs wrap themselves in the mantle of "budget discipline" while opposing the things that would cut federal expenditures on healthcare costs. Seniors are screaming at senators and congressman to keep the government away from their Medicare (a government program.)

These are the facts:

- We pay twice as much for healthcare as citizens of other countries, yet we have poor measured relative performance.
- The Administration rather meekly supports a public option while, having rejected the single payer plans in the pregame ceremonies.
- The radical right and the insurance industry have turned on the public option, invoking comparisons to Freddie Mac and Fannie Mae.
- Pundits on the right like Greg Mankiw paint visions of an unfair competition between a competitive private sector insurance industry and a GSE-like public option entity that could unfairly dip into the taxpayer and drive the private firms out of business. (Leave aside for the moment that Mankiw's vision is somewhat silly in an oligopolistic market place where what would be disciplined is the excess profits arising from the monopoly power of insurance companies vis a vis the population.)

Yet let's be fair and not get confused by the confusion. Anyone who saw the handouts to Wall Street started by Paulson/Bush and continued by Geither/Obama has substantial basis for doubting that a public insurance company would operate on an actuarialy fair basis and not hit the taxpayer with a backdoor bill after driving out the private competition. This is what happens when we lose faith. Put simply, after the financial bailouts, few believe that the Obama Administration will act as a fair referee. Why trust someone to enforce proper boundaries in one highly visible context when they have failed to do so in another realm?

The Administration's credibility and ability to inspire has been damaged by their actions in the bailout arena. We are back to the place where we can envision good policies but no one trusts that our government can deliver and execute them. The public option suffers as a result. The Administration acts surprised --they rightly sense they have lost control of the process and are now back to beating up the left for making the public option their Waterloo. Connect the dots, ladies and gentleman of the Administration, You blew finance, so you lost control of healthcare.

In the most recent issue of Rolling Stone, Matt Taibbi, who wrote quite favorably about Obama during the campaign, renders the following verdict on the US political system after the failure of the healthcare reforms.

The bad news is our failed health care system won't get fixed, because it exists entirely within the confines of yet another failed system: The political entity known as the United States of America.

That verdict is a depressing one. Yet I sense many would agree with it. We all know that our health care system has failed. (See Bill Moyers' Journal Friday August 28th airing of Money Driven Medicine based on Maggie Mahar's fine book of the same name to see just how broken it is, and how no bill currently on the table will even get close to fixing it.) In the aftermath of the financial crisis and the early Obama experience, we have a shattered society with little faith in markets or in the capacity of government to make us better off. Experts, particularly in finance, have let us down. We view politicians as salesmen for bad causes rather than leaders. We did not need to be here. Obama could have done better. He had our attention.

Our president is now in a place, as Martha Reeves once sang, with Nowhere to Run and Nowhere to Hide. Having fumbled on finance, Obama has to show the American people why we elected him, or be at risk of losing his job. He could have relied on the people that he inspired to elect him. Instead he was cautious and did business as usual inside the Beltway. He took care of industry groups. Now it will be harder for him to inspire all of us.

Trust has diminished. A crisis was wasted. It is sad that in a very short time we are a long, long way from hope we can believe in.

This piece was originally published on New Deal 2.0

Wall Street Economics

Robert Johnson — Fri, 06 Mar 2009 07:08:05 -0800

Young Chuck, moved to Texas and bought a donkey from a farmer for $100.

The farmer agreed to deliver the donkey the next day. The next day he drove up and said, "Sorry son, but I have some bad news. The donkey died."

Chuck replied, "Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "Ok, then, just bring me the dead donkey."

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead donkey!"

Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $898.00."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Chuck now works for Morgan Stanley in their OTC Default Derivative Department.

Zap The Zombies, Stop The Bleeding

Robert Johnson — Thu, 05 Mar 2009 09:13:26 -0800

Bill Moyers interviewed economist and Campaign for America's Future board member Robert Johnson for the February 27 edition of Bill Moyers' Journal. Here is an excerpt of that interview. The video and full transcript of that interview are on the Bill Moyers' Journal page at PBS.org.

BILL MOYERS: Given what we know is happening around the world, are you scared?

ROBERT JOHNSON: Yes I am.

BILL MOYERS: What scares you the most?

ROBERT JOHNSON: That everybody will stand and watch and cater to past patterns of power. The banking system has been the dominant sector in our society and in our politics, which is heavily money driven, for a very long time. As they falter, we could stagnate, catering to their needs disproportionately while the system sinks.

BILL MOYERS: This week, a term came into play that I hadn't heard before. People refer to Citibank, Citigroup, as zombie banks. What's a zombie bank?

ROBERT JOHNSON: A zombie bank is a bank that's insolvent that's allowed to continue its activity. It's allowed to go on living as a dead financial entity.

BILL MOYERS: And what's the threat to the financial system of a zombie bank?

ROBERT JOHNSON: That the zombie will continue to lose more, and the taxpayer, kind of off the government's budget, will continue to experience larger and larger burden of future losses.

BILL MOYERS: So are these negotiations going on this week between Treasury and Citigroup crucial to this process?

ROBERT JOHNSON: I think they're crucial to the process. I also think, if you're going to allow them to act as zombies, then the regulators need to be really fierce. To curtail the activities within the bank while it's motoring along, hoping for a rebound.

BILL MOYERS: This is what puzzles me. I mean, Citigroup executives who got that bank into this ditch, seem to have as much authority in dealing with the government, the Treasury, as the Treasury has in dealing with them. Does that seem right to you?

ROBERT JOHNSON: It doesn't seem right, but it does seem real. When one looks at websites, like OpenSecrets.org, and looks at the scale of campaign contributions that come from Wall Street, one understands why Wall Street, how do I say -- when they talk, people listen.

On the other side of that issue, the flood lights are so bright now we're talking about $700 billion for TARP. Obama has asked for another $750 billion in the budget this week for the banks.

We're talking a trillion and a half dollars. People can't do sneaky things on the side as easily. Because the scrutiny, the watchdogs have now arrived. They understand this is a colossal problem. So I do think there's more scope for good public policy because it's such a large and deep crisis.

BILL MOYERS: What have you learned this week about the Obama plan that encourages you?

ROBERT JOHNSON: What encourages me is they're talking about very profound changes in financial regulation. I have yet to see the details. But Mr. Obama made a statement, a couple days ago, that was very, very concrete about: the old rules don't work.

He also spoke about what you might call free market fundamentalism. Unfettered, unregulated markets as one pole, and what you might call administrative socialism as another pole. We've got to end up somewhere in the middle. Where the market's dynamism and flexibility is honored, but where you have real regulation and real enforcement. It's been a long time since the president has talked like that. So I think that's a hopeful sign.

But the question is, as this man stands at the crossroads, as a very young president, will he exert the will to implement what, say, his heart tells him when he gets it?

BILL MOYERS: What do you mean crossroads?

ROBERT JOHNSON: The crossroads right now is that we could have a society become despondent. People who think that proper reforms, and proper business restructuring, are just romantic notions. And what Obama needs to do now is not talk, he needs to deliver the goods. He needs to deliver the goods plain and simple where people will regain their trust.

BILL MOYERS: How do we stop the bleeding?

ROBERT JOHNSON: People talk of nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. How you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks.

BILL MOYERS: Exactly what does it mean to nationalize the banks?

ROBERT JOHNSON: Well, what I think they need to do is inspect them thoroughly, examine, mark down the assets to a conservative level that protects the taxpayer. See the resulting deficit on the balance sheet, which is the hole.

Then the government injects the capital. People continue to operate the banks. People who continue to work there then perhaps sign new contracts with the government. And the government just becomes the stockholder until such time that they sell the stock back to the market and get paid back a little bit for all the lost support that they're creating for these banks.

BILL MOYERS: So what's the objection to that from the people you talk to who don't like it?

ROBERT JOHNSON: One is people feel the government would make a mess of running things. I actually don't agree with that.

BILL MOYERS: Well, FEMA's a pretty unsettling model.

ROBERT JOHNSON: Yes, it is. But I would say you could work with Tim Geithner, who's quite a competent man, working with the existing Citibank management, with just a different set of stockholders. The one danger you have, when you keep these banks open, when they're insolvent, is they have a temptation to very risky activity.

Sort of like a quarterback throwing the Hail Mary pass. The losses on an interception accrue to the taxpayers. And the touchdown is kept by the stockholders. So if they take excessive risk in those times they can actually endanger the stockholders further. The plan that Geithner and the White House, the Obama administration, is adopting right now, which I will call intravenous drip capitalization, is one of forbearance. Meaning, don't realize the losses on the balance sheet now. Don't account for everything in a prompt way. Don't truncate the losses, but allow them to go on. And the danger is the ditch could get deeper and deeper.

BILL MOYERS: What's the most discouraging thing you've seen about the Obama plan?

ROBERT JOHNSON: I think the capital assistance program is warehousing zombie banks and running the risk of the taxpayer over the next one or two years, will experience much larger losses.

BILL MOYERS: The capital assistance program. That is?

ROBERT JOHNSON: That's the bailout, the drip intravenous capital injections.

BILL MOYERS: For which he's asking, in his budget this week, for another $750 billion.

ROBERT JOHNSON: That's right. And I do think, perhaps, the reason they went with the intravenous program, is they were fearful, given the way the well was poisoned by Henry Paulson's TARP plan, that Congress won't give him any more money. But they're foreshadowing that the scope of the problem is enormous.

Perhaps the only difference between Secretary Geithner and myself might be that he knew after negotiations, he couldn't get all the money he needed. So he has to go on the drip until he builds a consensus, and then can do the more profound restructuring.

BILL MOYERS: And you're saying that the drip is too slow, too risky, too dangerous, and that what we need is immediate surgery?

ROBERT JOHNSON: Well, I guess if the heart of the economy are the four or five major banks, you do need a transplant.

BILL MOYERS: And so the government would step in and do what?

ROBERT JOHNSON: I would ask for letters of resignation from the top executives of all the major banks. I would not do a case by case restructuring. I would take the largest group all in and say, "I want everybody's letter for resignation."

You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in a bank holiday, would examine the depth of the hole in those balance sheets.

Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.

So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, 'cause they aren't afraid of each other.

BILL MOYERS: You're saying that the blade should fall, on the management of these banks, and the shareholders who went along with this excessive risk taking, because they wanted the big returns. The blade should fall on them. Get them out of the way. Government restructures. And then offers the banks back into the market and new investors come in.

ROBERT JOHNSON: That's correct.

BILL MOYERS: So the people pay the price who bet wrong, right?

ROBERT JOHNSON: That's correct. I think that's very fair. I think that's how markets are constructed.

William Grieder on Finance and Washington

Robert Johnson — Mon, 04 Aug 2008 07:43:27 -0700

William Greider's newest piece for the Nation goes directly and simply to the politics of U.S. financial policy in a crisis. Throughout his career, Bill has bored into and through the questions of how are economy, and political economy operate. He has cast his eagle eye on nearly every aspect of the realm where economics and politics meet.

From The Economic Education of David Stockman on budget priorities, to Secrets of the Temple on the essence of the Federal Reserve System, to Who Will Tell the People, on the industry that creates a porous boundary between the property rights of our body politic and those of individuals and corporations and the media that covers up for them, to One World Ready or Not about the none too subtle grind of a process where the scope of the market is larger than the domain of the sovereign, Greider has explored and debunked and illuminated the world in which we live.

And his most recent book, The Soul of Capitalism, turned a corner and asked what kind of world do we want to live in. This brave endeavor, by creating contrast, showed how far off course our economic system has gone.

Naive rationale says that market systems i.e. the economy , is a MEANS to achieve social goals. and finance is a MEANS to support commerce. Greider's work has underscored that the servant's servant has become the master's master.

Greider's work, in unmasking of free market myths, and illuminating the corruption of political actors in Washington D.C., gives nourishment to social critics on both the left and right.

I have known Bill for many years and have learned a tremendous amount from him both substantively and in the realm of emotion and carving out one's life purpose. I have seen him abused by economists and journalists, only to see the abusers turn and start to mouth his arguments as though they were their own, shortly thereafter, without attribution. I have experienced his tenacity, even when he wondered aloud if anyone was listening.

Yet what I have learned most from Bill Greider is that a man or woman who tells the world what they see with their eyes and feel in their heart is one who has lived a meaningful life. There are so many people across the political spectrum who have been encouraged and fortified by his voice. Many more than he knows.

His is a voice that has stood strong and alone. His is a voice that has been valuable at every step of the journey. Bill Greider's voice has never been more needed than now, when the eggshell veneer of all the economic dogma of market fundamentalism is crashing along with the financial firms at its core. After all, we have to put this economy and society back together again and the risks of an authoritarian reaction are not small in crisis times.

His piece below is an agenda. A vision. A beacon, like a lighthouse that calls the mariner home from a stormy sea. After all these years of unyielding reporting and crying out we can pray that our society will emerge and see the purpose of economy and politics through the lens that Bill Greider has provided. He is a guiding light.

RAJ

Economic Free Fall?
By William Greider

Washington can act with breathtaking urgency when the right people want something done. In this case, the people are Wall Street's titans, who are scared witless at the prospect of their historic implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven't seen "bipartisan cooperation" like this since Washington decided to invade Iraq.

In their haste to do anything the financial guys seem to want, Congress and the lame-duck President are, I fear, sowing far more profound troubles for the country. First, while throwing our money at Wall Street, government is neglecting the grave risk of a deeper catastrophe for the real economy of producers and consumers. Second, Washington's selective generosity for influential financial losers is deforming democracy and opening the path to an awesomely powerful corporate state. Third, the rescue has not succeeded, not yet. Banking faces huge losses ahead, and informed insiders assume a far larger federal bailout will be needed--after the election. No one wants to upset voters by talking about it now. The next President, once in office, can break the bad news. It's not only about the money--with debate silenced, a dangerous line has been crossed. Hundreds of billions in open-ended relief has been delivered to the largest and most powerful mega-banks and investment firms, while government offers only weak gestures of sympathy for struggling producers, workers and consumers.

The bailouts are rewarding the very people and institutions whose reckless behavior caused this financial mess. Yet government demands nothing from them in return--like new rules for prudent behavior and explicit obligations to serve the national interest. Washington ought to compel the financial players to rein in their appetite for profit in order to help save the country from a far worse fate: a depressed economy that cannot regain its normal energies. Instead, the Federal Reserve, the Treasury, the Democratic Congress and of course the Republicans meekly defer to the wise men of high finance, who no longer seem so all-knowing.

Read the full article.

Why this crisis is far from finished

Robert Johnson — Fri, 25 Apr 2008 09:16:58 -0700

The article below from the Financial Times discusses the propagation of the credit crisis from Wall Street to Main Street. Even though the breathtaking disaster headlines have evaporated, the unfolding of this crisis is eroding living standards below the surface.

The financial markets are rallying and many leading investment bankers are declaring that the crisis is over. They do protest too much, methinks. Trying to buy time, politicians, financiers and policy makers are trying to fight "fear itself" and put the financial markets onto a more positive trajectory. In a sense we all benefit from that as they raise capital for the financial institutions. Either assets are sold or capital is raised to reduce leverage ratios. The latter is preferable for us all.

At the same time, there will be a creeping awareness that Wall Street is not self-contained. That their crisis is now in slow motion rather than hyper-speed does not mean that Main Street will not now feel the crunch that results from Wall Streets excesses.

Wall Street sets the rules for this game with its lucrative financial contributions to politicians. It is hard to fix the rules in the middle of the crisis in any event. Yet I remained concerned that the real efforts to fix these structural flaws in our market systems will take place after the election, when the importance of people/voters is diminished relative to the role of money and so-called "expertise". That demoralizing process is likely to unfold when the propagation from Wall Street to Main Street is evident to us all and the pain of still further declines in living standards of the American population cannot be denied.

It will take a great deal of will to address this challenge. Efforts will be made to declare financial regulation too complex for the lowly population to have a voice. Let us hope that progressives will increasingly see the role of the economic structure in their plight and not submit to this "tyranny of expertise" as Naomi Klein calls it, when the rules that govern our society are revised.

Why this crisis is still far from finished

By Mohamed El-Erian
Published: April 24 2008 19:24

During the past few weeks we have seen a growing number of market participants predict an end to the dislocations that erupted last summer and claimed victims throughout the financial system and beyond. While their predictions are understandable, they are premature. The dynamics driving the disruptions are morphing and may again move ahead of both the market and policy responses.

The optimistic view is based on two distinct elements. First, that the de-leveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system.

Both views have merit. Financial institutions, particularly in the US, have recognised the scale of the problem and are taking remedial steps. Just witness the recent round of capital raising by Citigroup, Merrill Lynch, JPMorgan and Wachovia. At the same time central banks in Europe and the US have opened up their financing windows, expanding the size of the financing, the range of institutions that can access it and the list of eligible collateral.

Yet, consistent with what we have seen since last summer, the dislocations are entering a new phase. As such, bold reactions on the part of policymakers may, once again, prove to be too little and too late.

Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.

Economic data in the US have taken a notable turn for the worse. Most importantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.

Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks.

It is thus too early to declare the end of the turmoil that started last summer. Instead, during the next few months we may witness a new phase of dislocations, led this time by the real economy. The blame game will intensify; political pressure will continue to mount; momentum will build for greater and broader regulation of financial activities within the banking system and beyond.

The focus will also be on the reaction of policymakers. Here the outlook is mixed. The good news is that the crisis is now moving to an area where traditional policy tools are more effective. This is in sharp contrast to the situation of the past few months, where central banks were forced to use instruments that were too blunt for the purpose at hand.

But there is also bad news. The sharp slowdown in the US real economy will occur in the context of continued global inflationary pressures. As such, the Federal Reserve’s dual objectives – maintaining price stability and solid economic growth – will become increasingly inconsistent and difficult to reconcile. Indeed, if the Fed is again forced to carry the bulk of the burden of the US policy response, it will find itself in the unpleasant and undesirable situation of potentially undermining its inflation-fighting credibility in order to prevent an already bad situation from becoming even worse.

It is still too early for investors and policymakers to unfasten their seatbelts. Instead, they should prepare for renewed volatility.

Why Financial Regulation is Essential

Robert Johnson — Thu, 17 Apr 2008 09:34:20 -0700

The Financial Times article by Martin Wolf illustrates that a man who has alway been pro market can see the problems with no regulation and self policing of markets. While Wolf is right to point out that regulation and enforcement are also human activities that can generate their own follies, the work of the society is to set rules to protect people from the excesses of a given segment of society while maintaining the maximum freedom of those within the sector to be creative.

All agree now that:

Risk management is appalling.
Executive Compensation Incentives matter.
Enhancing transparency is vital.
Leverage is extreme.

What is not envisioned yet is how these changes will be made by a political system that is so dependent upon the campaign contributions from Wall Street. Self regulation is not viable. Having the market participants make the rules for themselves through legislative proxies who they fund is not much better. What is essential to this process is citizen scrutiny and participation. Citizens must blast through the tyranny of expertise that is used to intimidate them from participating in that which impacts their lives profoundly. They should also recognize that after the election the influence of voters will diminish for a couple of years.

Wolf quotes Willem Buiter, the sharp witted economist from the London School of Economics on self regulation.

“Self-regulation stands in relation to regulation the way self-importance stands in relation to importance.”

The remaining question is about citizen action in the USA. Are we self respecting enough to exert the will and effort to take on the self important and implement a system of sound regulation. Right now the betting is still on the money rather than the population. What are we going to do about it?

Why financial regulation is both difficult and essential
By Martin Wolf, Financial Times
Published: April 15 2008

Nice try; no cigar. That was my reaction to the attempt of the banking community to forestall additional regulation, by recommending “a suite of best practices to be embraced voluntarily”. It was also the reaction of the policymakers meeting in Washington over the weekend. More regulation is on its way. After frightening politicians and policymakers so badly, even the most optimistic banker must realise this. The question is whether the additional regulation will do any good.

In an interim report on “market best practices”, the Institute for International Finance, an association of bankers, offers devastating self-criticism.* Here then are some of the weaknesses it identifies: “deteriorating lending standards by certain originators of credit”; a “decline of underwriting standards”; an “excessive reliance on poorly understood, poorly performing and less than adequate ratings of structured products”; and “difficulties in identifying where exposures reside”. Would you buy a voluntary code from people who describe their own mistakes in this brutal manner? I thought not. There are two powerful additional reasons for not doing so

First, in such a fiercely competitive business, a voluntary code is almost certainly not worth the paper it is written on. When they can get away with behaving irresponsibly, some will do so. This puts strong pressure on others. That is what Chuck Prince, former chief executive officer of Citigroup, meant when he told the FT that “as long as the music is playing, you’ve got to get up and dance”. So, as Willem Buiter of the London School of Economics remarks: “Self-regulation stands in relation to regulation the way self-importance stands in relation to importance.”

Second, the industry has form. The IIF itself was founded in 1983 in response to the developing country debt crisis. At that time, big parts of the west’s banking system were in effect bankrupt. Now, many upsets later, we have reached the “subprime crisis”. The IIF was created not only to represent the industry, but to improve its performance. It is clear that this has not worked.

Do not just take my word for it. Last month, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard published an extraordinary paper on the long history of financial crises.** The chart shows that the incidence of banking crises (measured by the proportion of countries affected) has been as high since 1980 as in any period since 1800; that the incidence of crises is correlated with liberalisation of capital flows; and that there was, until 2007, a decline in the incidence of crises in the 2000s.

Yet why, I ask, should this industry have apparently failed to improve its standards of performance over the past century? After all, almost every other industry has done so. Consider how confident we are that the food we buy will not poison us. Yet adulterated food was once a threat.

Consider, by those standards, the failures of the banking industry, as admitted by the IIF itself. Its purely operational performance is now impressive. But competition does not work well in finance. The “product” of the financial industry is promises for an uncertain future, marketed as dreams that can readily become nightmares. Customers are readily swept away by exaggerated promises, irrational beliefs, misplaced trust and sheer skulduggery. So, too, are practitioners: basing risk management on limited data and inadequate models is a good example. Emotions count wherever uncertainties loom.

Crisis on Wall Street - Shock Doctrine Opportunity - Notes from Take Back America Panel

Robert Johnson — Thu, 27 Mar 2008 10:17:50 -0700

Originally posted at Firedoglake.

The crisis on Wall Street appears to be very severe. The Federal Reserve's emergency actions, background discussions with foreign central banks about outright purchase of mortgages, and the premiums on interbank interest rates over Treasury Bills (The so called Ted Spread) suggest that fear of credit collapse is significant. As a result "the rules of the game" are in play.

Naomi Klein, in her recent book, The Shock Doctrine, addresses the strategy of response to crisis. She cites Milton Friedman who once wrote:

only a crisis-actual or perceived-produces real change. When the crisis occurs, the actions that are taken depend on the ideas lying around. That is our basic function: to develop alternatives to existing policies, to keep them alive, and available until the politically impossible becomes the politically inevitable. (from Capitalism and Freedom)

I would argue that the Wall Street meltdown and its shocking consequences will create the crisis conditions that are ripe for change. Albeit, Dr. Friedman had the opportunity to enact change because he often promoted ideas particularly suited to the wealthy and the powerful. Yet it is those ideas, largely underpinning the policies of the last 40 years, that are now called into question. Therein lies the opportunity.

The response to the Wall Street shock will have to, as Thomas Palley wisely suggests, be carried out on two fronts. One is policy. But policies must be justified with sound underpinnings. The extent of this crisis is likely to lead to reexamination in a cold critical light of ideological premises where the neoliberal ideas of free market fundamentalism will be shown to be in sharp contrast to the corporatist practice of the United States. As the Wall Street crisis deepens and spreads, the bailout will contradict the notion of a separation between state and market. Seen from the light of the financial crisis, other violations of market fundamentalism will be scrutinized. State support for military, oil, telecommunications, finance, and more belie the notion that there are clean boundaries between markets and politics. We will increasing realize that we have never been in that dream cloud where markets went unsubsidized.

In another instance, the market fundamentalists have gotten great traction from the "Horatio Alger" mythology of the self made man. Individual responsibility is the key to success, they say. That is an attractive notion. It seems to suggest that one has power to control one's own destiny. While I would never want argue that effort and self discipline are not helpful or necessary components of success, I would argue that context also matters. In the present crisis it is very likely that a multitude of hard working, disciplined and well educated people are going to be blown off their moorings as a result of the fallout from Wall Street. Things beyond their control are going to hurt them. Things that other people were allowed to do.

As a result, the experience dreadful outcomes in our society are likely to illustrate that the attraction of Horatio Alger mythology is illusory. Anxiety is reduced if you feel you have power over your environment. The protection of those beliefs is shattered when activity in society, over which you have no influence, overwhelms your life and livelihood.

Naomi's book illuminates many episodes where the wealthy and the powerful take advantage of crisis. The raising of consciousness about the process of change is a gift she gives us all. Yet I would augment that perspective with the awareness that the New Deal was also a response to shock. A response that was progressive in orientation. A response born of extreme pain, yet one that did usher in a more prosperous and stable era in the U.S. economy. Growth was higher, the economy more egalitarian, and volatility was lower than in the period since 1980. (See Peter Lindert's book entitled Growing Public for factual data)

It appears that the forces of change will do battle in the coming months. On the one hand a quick look at the Federal Election Commission data for our three Presidential candidates suggests that there may be one too many markets in America. The market for the rules of the game is one where Wall Street plays a leading role. (See http://www.opensecrets.org/pres08/index.asp) On the other hand votes do matter this November. On that one day they are the ultimate currency.

At the present time many sophisticated social leaders from days past, including Paul Volcker and Robert Rubin are, in my opinion rightfully, saying that we will have to resort to the Federal balance sheet and a public bailout. Wall Street took action, including spending many millions of dollars over the years to unshackle themselves from New Deal constraints on financial intermediaries, and we must pick up the losses. From this vantage point we are in a lose-lose game and in the short term our task is to mitigate unnecessary losses. It appears to me to be inevitable given the scale of the problem. The question will be what are the changes in the rules that will accompany the bailout? Who will make these rule changes so that we do not come back this way again. So that trust in our financial system is renewed.

We have a highly combustible societal cocktail brewing The combination of 1) what Sarita Gupta and David Sirota perceive, of rising awareness and mobilization, which we might call the Pissed OffPeoples Party (POPP); 2) The need for a bailout; 3) Wall Street money all over the candidates and Congressional Committees; 4) The refutation of the safety of Horatio Alger; and, 5) the temptation for financiers to suggest that financial issues are "too complex" foranyone but the experts (who made this mess) to rectify the system; combine to make for a very anxious process.

As the process unfolds, awareness of these tensions suggests we are likely to see efforts to:

Move the bailout underground along the lines suggested in the Financial Times on Friday where a Committee of Central Banks around the world would buy mortgage backed securities.
See repeated warnings (likely to be heeded by the political candidates) that anything they say will deepen the crisis in the markets.
Disenfranchise some stakeholders in our social design on the grounds of expertise. Expertise that is needed to comprehend these arcane instruments and their role in the seizing up of our financial system because of fears of counter party default.
Berate those who unmask market fundamentalism as socialists or utopians and avoid the contradictions that are apparent to all.

I do not at present see effective countervailing power that will focus the energy of the POPP into action. Organizations to represent this energy are likely to include some strange bedfellows. Independent bankers who are not "too big to fail" may want to participate. The labor movement can play a role. But right now the forces for progressive change are somewhat scattered.

It may be that the progressive effort to organize is too diminished and weak to make a difference to the outcome resulting from this crisis. The energy is felt, but cannot be productively channeled to overcome resistance and introduce constructive change in this iteration. In that event we are likely then to have shattered neoliberal ideology and still have neoliberal remedies adopted. In that event the unfolding events will deepen the anger within the POPP and inspire organization for future challenges.

At very least, I imagine the public will come to wish we had public financing of elections as they experience the questionable rules that will emerge from the current political incentive structures in response to the crisis on Wall Street. Second, because they will look at the bill and realize that they could have avoided this catastrophe and had strong infrastructure, schools, and health carefor what they spent bailing out our financial system in response to the current challenge.

Robert was formerly chief economist to the Senate Banking Committee and also former Managing Director of Solos Fund Management.