Ben Bernanke

Talking With Krugman: He's Anti-Austerity, Pro-Peter Gabriel, and "Not That Cosmic"

Richard Eskow — Tue, 15 May 2012 11:30:22 -0400

Everybody knows that Paul Krugman is a Nobel Prize-winning economist, a sometimes combative columnist and a liberal lion. But in a conversation which aired this weekend we learned more about his personal response to an ongoing crisis he describes as "really nasty," "very, very severe," and "gratuitious," and which he says "will not go away quickly or necessary at all" unless we do something.

We learned how Krugman trolls for music online, that he still believes that Ben Bernanke has been "assimilated by the Borg," and that despite his fondness for science fiction he describes himself as "not that cosmic."

He may be wrong about that last part.

We interviewed Prof. Krugman for our "Conversations" series on The Breakdown. (Previous guests include Katrina Vanden Heuvel, Thom Hartmann, economics/law professor William K. Black, Jr., and other very interesting folks.) Krugman's on a publicity run to push his new book - and not, we suspect, because he needs the money. The book promotes some policies that he (and we, along with many others) feel are urgently needed. (He's speaking at the American Dream conference next month, too.)

Krugman's book is called End This Depression Now! (exclamation point included). If that sounds like a self-help book - the sequel to Listening to Prozac, maybe, or something by Dr, Wayne Dyer - that's not altogether inappropriate in this age of collective near-despair.

(He could have called it Economy, Interrupted.)

We began by asking Krugman if what we had heard was true: That he became an economist because he loved the Foundation series of science-fiction novels by Isaac Asimov. (I was such an Asimov fan as a kid that I sent him a short story I'd written when I was twelve years old. In return I got a postcard that encouraged me to 'keep writing,' a diplomatic choice of words whose delicacy I failed to appreciate at the time.)

In the Foundation series, the fate of the Galactic Empire is studied and guided by a brilliant team of scientists known as 'psychohistorians,' whose field was invented by a 22nd-century genius named Hari Seldon. Like Krugman, I was fascinated by the idea that you could predict the human future if you just had enough information. Selden designed a handheld computer called the Prime Radiant, which projected its data and equations in the air around him. It all seemed pretty cool to me back then, too. We have a word for kids like that nowadays:

Nerds.

In Asimov's novels the Galactic Empire periodically faced a "Seldon Crisis." These existential dangers were usually navigated with the advice and guidance of the psychohistorians. I asked Krugman if the American empire was facing a "Krugman crisis."

"I'm not that cosmic," Krugman said.

In fact, Krugman was determined to keep the focus on the prosaic, straightforward nature of the problem, the human cost of our inaction, and the fact that its solutions are straightforward and practical. "We know to take textbook economics and apply it to this situation," he saaid, "(but) very few people in positions of influence are willing to listen. That's a horrifying thing, because we're suffering gratuitous economic disaster."

"It's completely unnecessary."

As Krugman put it in our conversation, the hard part is the politics. "(The economic solution) is not mysterious. This is not 'Gosh, what are you people proposing? This was all hashed out in papers a decade ago, many of which were written by Ben Bernanke."

"To the extent that people say the economics is confusing or uncertain," Krugman said, "that's overwhelmingly because people want it to be."

"Benanke knows all about this," Krugman said. That led to a question about the groupthink mentality that's keeping Washington focused on the wrong problem - deficits - in a time of widespread suffering. He spoke of the "turf theory" which says that people "end up defending institutional prerogatives ... we're supposed to fight that. We've had a rather severe shortage of people in positions of power who are willing to fight that."

Krugman's differences with the Administration lay less in what he sees as the President's personal values and more in the White House's perceptions of the political and pragmatic: "I believe that the President hasn't bought into the stigmatization of the people in distress, but what he has done is accepted the notion ... that you should stay within the confines of a conventional wisdom as defined by what amounts to a successful, deceptive propaganda campaign."

"And I'm arguing that's a losing strategy, even politically."

As I write this, the Peter G. Peterson "Fiscal Summit" is taking place in Washington DC. (Sen. Bernie Sanders and a number of other people are gathering outside to protest it, too) There, under the sponsorship of the anti-government billionaire Peterson, political heavyweights will gather to promote two insane ideas: that our most urgent problem is government deficits, not the economic misery of millions, and that the smartest thing we can do right now is pursue the austerity policies that are shattering Europe economically and politically.

This well-financed Washington obsession is the inspiration for Tom Tomorrow's latest cartoon, which gives a sci-fi twist to the economic debate that Krugman should especially appreciate (despite the fact that his own fate in it turns out to be dire.)

Tom Tomorrow's aliens say what all aliens used to say: "Foolish human." And if anything comes through more strongly than ever in the new book (and our conversation), it's Krugman's own humanity.

I asked about the challenge of hearing useful advice go unheeded, or avoiding a breakdown into aggravated despair in clashes like his recent one with Ron Paul, whose views on war and civil liberties add a great deal to our discourse - but whose economic remarks to Krugman were just off the wall. (Paul was saying something at great length about the Greek and Roman empires and the gold standard, as I recall).

"I try to keep the perspective that I'm frustrated because I can't get people to listen to what seems to me to be obviously the right ideas," said Krugman. "The real people who are frustrated are the 59 year olds out there who don't have jobs and may never get another one, or the nineteen year olds coming out of college with no job prospects."

"A sense of humor helps, too."

Krugman's book shows great empathy for the victims of our politically-induced economic malaise, too. He uses the moving Peter Gabriel song "Don't Give Up" to frame a discussion of our current economy's human costs. That led us into a discussion about the Willie Nelson/Sinead O'Connor version of that song, which I encouraged him to check out. (There's a sample of it in the interview), his YouTube habits, and ... well, you just gotta listen.

Krugman's a brilliant guy and excellent writer who I agree with most of the time. He stood up against the near-hegemony of the RIght in the public sphere during the run-up to the invasion of Iraq. That took a lot of courage. He's been taking a lot of bows and arrows ever since. (Rush Limbaugh even interrupted his tirade against me to take a shot at Krugman. I considered the association a compliment.)

Krugman won his Nobel for macroeconomics, which is as close to "cosmic" as it gets in that field. Psychohistory may even have influenced his Nobel-winning work (I wish I'd asked him) in economic geography and economies of scale. (Hari Seldon preferred a sample size of one quintillion people. That's not currently available - not on this planet, anyway.)

Cosmic or not, it was a down-to-earth and compassionate guy who showed up for the interview. He's written an important book that should be read by millions of people around the country - and by a couple hundred or so in Washington, where its message is most urgently needed.

__________________

You can hear the interview here. This weekend's show also included a special report entitled "The Case Against Chase: The Fall of the House of Dimon," and commentary on the - well, the psychohistory - of Mitt Romney's bullying episode. The full episode's podcast is below:

Some of our other conversations can be found on the Breakdown Conversations page. (Sorry about the formatting; we're working on it.)

Stress Testing Tim Geithner

Mary Bottari — Thu, 26 Jan 2012 12:54:38 -0500

Thanks to Occupy Wall Street, in the State of the Union this week President Obama struck some of his most populist themes yet. He wants to tax millionaires, bring back manufacturing and prosecute the big banks. He touted his Wall Street reforms saying the big banks are “no longer allowed to make risky bets with customers deposits” and “the rest of us aren’t bailing you out ever again.”

But are we safe from the next big bank bailout?

Many experts are dubious and Wednesday the consumer advocacy group Public Citizen decided to test the theory in the most direct way possible. They used the administrative law process to formally petition the nation’s top bank regulators to move swiftly to break up Bank of America (BofA) asserting in their petition: “The bank poses a grave threat to U.S. financial stability by any reasonable definition of that phrase.”

A Ticking Time Bomb

BofA is not just big, its behemoth. With assets of $2.1 trillion, equal to more than 14 percent of U.S. GDP, it is bigger than many small countries. Yet, its stock is trading at $7.

What does Wall Street know that we don’t?

The petition provides a compelling list of disturbing data points. In 2008-2009, BofA publicly took $45 billion in TARP bailout funds and secretly took another $1 trillion in emergency Federal Reserve loans. Yet, several analysts predict that BofA is woefully short of capital reserves and facing potentially billions in legal liability for its role in the crisis.

Although the bank declared net profits in recent quarters, these profit comes from accounting tricks, one-time asset sales and stock swaps. BofA’s share price to tangible book value is extremely low. The market suspects the bank is worth roughly half of what management claims and the price of credit default swaps (a type of insurance) on BofA recently rose to record highs.

“The bank is a ticking time bomb,” says David Arkush of Public Citizen. “If Bank of America in its current form were to fail, it would devastate the financial system. We’re asking the regulators to make sure that never happens. The only way to be sure is to reform the institution into something safer before any crisis materializes.”

Public Citizen asked the new Financial Stability Oversight Council (FSOC), which is chaired by Treasury Secretary Tim Geithner and made up of the nation's top bank regulators, to use the tools provided in the Dodd-Frank Wall Street reform law to act before a crisis occurs and to break BofA into smaller separate institutions. The law allows the FSOC to limit big bank mergers and acquisitions, restrict products and services or order it to divest assets or off-balance-sheet items after a vote to designate the institution a “grave threat” to financial stability.

“Too Big to Fail” Alive and Well

Although President Obama said the goal of Dodd-Frank was to end the era of “too big to fail,” neither Geithner nor Fed Chair Ben Bernanke got the memo.

Geithner told the Special Inspector General for the Troubled Asset Relief Program in 2011 future bailouts are possible: “In the future we may have to do exceptional things again if we face a shock that large. You just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock.”

Bernanke may already be engaged in a back-door bailout of BofA. Recent news reports indicate that BofA is trying to move $22 trillion in derivatives out of its Merrill Lynch subsidiary into its FDIC-insured bank. The Fed favors the move. The Federal Depository Insurance Corporation (FDIC), which provides insurance to depositors if a bank fails, does not.

“By taking this action the Fed is allowing these derivatives to pose a direct risk to the FDIC insurance fund, keeping taxpayers on the hook for another bailout,” according to Arthur Wilmarth of George Washington Law School.

Groups like Public Citizen fought hard during the Dodd-Frank debates to insert into the bill tools to allow regulators to break up big banks and prevent the next crisis. With BofA on the brink, its time for a “test of the machinery,” said scholar Lawrence Baxter of Duke Law School.

Expand the Stress Tests

Geithner is right when he says regulators can’t predict future shocks; will it be the EU debt crisis, a multi-million dollar damage award against the bank or exposure to something out of the blue? While we may not know its origin, we know the shock is coming.

Remember in the Dodd-Frank debates, an amendment to break up the banks was rejected, efforts to restore Glass-Steagall were rejected, a proposal to force banks to spin off and separately capitalize their dangerous derivatives desks was quashed. In leading the fight against the stronger measures, Geithner instead pushed the FSOC to scan the horizon for risk and keep an eye on the behemoth banks. He also pushed “stress tests,” which all too many banks seem to pass with flying colors.

Now its time to stress test Geithner. If the FSOC fails to deliberate and vote on the very serious condition of BofA, the whole exercise will be proven a sham.

Click here to tell the President to Break Up Bank of America.

The Greatest Hoax in the History of Money: The Fed, the Banks, the Lies

Richard Eskow — Thu, 01 Dec 2011 22:14:34 -0500

It took the journalists at Bloomberg News two years - and presumably lots of legal fees - to pry information out of the Federal Reserve that should have been made public long ago. We now know that the Fed's secret $7.7 trillion lending program wasn't just the most massive bank bailout ever seen, and it wasn't just free money for mega-bankers - though it was certainly both of those things. It was also the greatest hoax in stock market history.

No, scratch that. It was the greatest hoax in the history of money. And it was built on lies. How many? Let us count the ways.

Here's the first one: The banks paid back all the money back that they were given. No, they didn't. They paid back the principal on these loans. But by obtaining loans at rates far below market value, we now know they received the equivalent of $13 billion in cash giveaways.

Here's another lie: Fed economists support a free-market economy.

Ben Bernanke is a conservative economist who claims to support a free-market system. But we now know that the Federal Reserve lent astonishing sums to US banks in secret, and Bernanke fought with all the resources at his disposal to ensure that this information didn't become public. He didn't just want it to be held back to avoid a panic during the crisis. He wanted it kept secret forever.

I don't know what you call somebody like that, but I know what you don't call him: A capitalist. Free markets need transparency, so that investors and customers can make informed decisions and 'the wisdom of the market' can prevail. Nobody wanted the market to do its job. When it came to banks, they wanted it to be blind, deaf, and dumb, unable to make sound judgments about their financial soundness.

They still want it that way. They don't want investors to know how badly Wall Street executives failed at their jobs. They don't want the free market to do what it does best - thin the herd so it's free of incompetent managers like the executives who still run our largest banks.

You can believe in the free market, ur you can believe in today's Wall Street. But you can't do both.

Here's another lie, one that's spread by Dimon and others: Giant banks are more efficient. Size brings efficiency in other kinds of business, but these banks needed massive help. America's six largest banks accounted on any given day for an average of 63 percent of the debt on these loans. The only thing they're more efficient at is wringing free money out of government-created institutions.

And, wow. Jamie Dimon sure is a hypocrite. As Bloomberg noted:

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed's Term Auction Facility "at the request of the Federal Reserve to help motivate others to use the system." He didn't say that the New York-based bank's total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program's creation.

He also didn't mention that these favorable loans gave his bank nearly half a billion dollars in cash it otherwise wouldn't have had. Know what's convenient about that? It helps make up for the three-quarters of a billion Dimon's bank gave up to settle charges of bribery and corruption in Jefferson County, Alabama.

Chase borrowed massive sums of money, either because it was in bigger trouble than it has admitted or because it was bleeding an emergency public program out of greed. Either way, they weren't doing anybody a favor except themselves. How big a favor? Chase netted $457.9 million.

Citigroup's an even more extreme example. Once our largest bank (until continued mismanagement led to ongoing shrinkage). It only exists because Robert Rubin and other officials in the Clinton Administration,cleared the way for the largest merger in history with the enthusiastic support of the Republicans. That merger combined a bank with an insurance company, a harbinger of bad things to come in the risk area.

Citigroup's got the equivalent of a $1.8 billion gift, courtesy of Uncle Sam.

Bank of America CEO Brian Moynihan sneers at his critics, especially those who think you shouldn't foreclose on families without obtaining proof that you own their mortgage. "Oh, sure," he said in response to government demands, "we'll do our homework."

Bank of America's gift came to $1.5 billion.

Goldman Sachs shouldn't have been eligible for any Fed giveaways because it wasn't a commercial bank. But a special "waiver" allowed Goldman allowed to become commercial bank so it could be rescued from actions it took before it was a commercial bank. Before that it was an investment bank. Yet, strangely, it seems to have kept operating as an investment bank even after the transition, too, even though commercial banks aren't allowed to do that.

Understand that? Don't take it personally if you don't. You're not supposed.

Goldman Sachs's take? Just under $1 billion.

Washington's always telling us that bankers may have done naughty things, but they weren't illegal things. That gets us to our next lie: There's no evidence that bank executives have committed crimes. Thanks to Massachusetts Attorney General Martha Coakley, we may be about to discover whether that's true regarding foreclosures and mortgage filings. But when it comes to stock fraud, the evidence is already piling up.

The Federal Reserve and the US government may have stopped believing in the free market, but the law hasn't. It's a crime to deceive investors about the financial condition of your business, either by lying or by failing to provide the right information. Eliot Spitzer, who knows a thing or two about prosecuting financial crimes, hit the nail on the head when heasked: "where are the inquiries into the false statements made by the bank CEOs? And where are the inquiries about the Fed and Treasury officials who stood by silently as bank representatives made claims that were false, misleading, or worse?"

(Spitzer also proposes a five-point action plan that should be implemented immediately. His piece is well worth a read.)

How about this fib? The media's done a good job reporting on the banks. There's some great reporting going on out there -- Bloomberg, ProPublica, the Huffington Post, the Nation, the New York Times - but they're the exceptions.

Television's still a wasteland most of the time. Are you as sick of the "we got all the money back" line as I am? CNN personality Erin Burnett infamously used it to make an Occupy Wall Street demonstrator look stupid. But the reason he didn't know that because it isn't true. Banks paid back the principal but got a freebie from the interest. That's real money - billions of dollars of it.

You know that. I know that. But Erin Burnett, CNN financial reporter, doesn't seem to know that.

We're not condemning all television. Scott Pelley did a great report about homelessness on 60 Minutes just last week. But most channels haven't found the time to fully or accurately report on the enormity of this secret loan program. They've pretty much taken a pass on what, barring some ancient event I'm forgetting, is the greatest financial hoax in history.

And while we're on the topic of Occupy, let's thanking them for the fact we'll probably never hear this next lie again: "Wall Street and Main Street rise and fall together." Banks got massive giveaways. And despite their recent credit downgrade they're doing fine, thank you very much. The rest of the country? Not so much. In fact, let's do a quick inventory:

Robert Rubin made an estimated $155 million during his tenure at Citigroup.

One in four mortgages in this country is still underwater.

Brian Moynihan at Bank of America got promoted, then made that 'homework' wisecrack.

Twenty-four million Americans are un- or under-employed, including record numbers of young people and African-Americans.

The CEO of Goldman Sachs , Lloyd Blankfein, still has his job.

Poverty has soared to record levels since the financial crisis.

Erin Burnett, who made fun of a young demonstrator for not being aware of the misinformation she had repeated, still has an evening news program on CNN. She is engaged to be married to a Citigroup executive.

College graduates' unemployment rate rose last month, while the total amount of student loan debt in the United States is now greater than the total amount of credit card debt.

Jamie Dimon made a second career out of complaining that bankers are being unfairly criticized, even as Chase became the largest bank in the United States - and the world.

Jefferson County, Alabama, where Chase was forced to settle charges of bribing local officials, recently declared bankruptcy.

Fedspeak as a Second Language: What the Federal Reserve Really Said Today

Richard Eskow — Tue, 09 Aug 2011 16:30:53 -0400

Aspiring journalists are often advised to become multilingual so they can cover more stories. That's why I'm prepared to offer the first summer program in Federal Reserve as a Second Language ... once anybody turns up who can really understand it. Any attempt to translate the Fed's latest announcement could wind up sounding like the Hungarian/English phrasebook in that old Monty Python sketch, the one where the customer tells the shopkeeper, "My hovercraft is full of eels."

The gist of the Fed's statement today was this: "We're surprised that things are this bad and we realize we were wrong, but we have no immediate plans to change anything. (Although we might - someday)." The Fed then added: "We're failing at the jobs part of our dual mission ... and we expect to keep failing for a long time to come."

Markets rebounded at the news.

The Fed's done a lot of unusual things in the last couple of years. It has used public communication to manipulate markets in unprecedented ways. It has bought up extraordinary assets, dropped its rates to zero, flooded banks with rescue money, and even allowed companies that weren't banks to become banks so they could be rescued. (Goldman Sachs to The American Taxpayer: Hey, thanks, folks! I owe ya one!)

That's why it's surprising and disappointing that none of the Fed's innovations have been directed at the ongoing crises of unemployment, wage stagnation, and consumer spending. They're the root causes of the problems that seem to keep the Fed perpetually perplexed and disappointed.

Simultaneous Translation

We've got our phrasebook in hand. Let's get to work.

When the Fed says growth is "considerably weaker" than expected, rather than "somewhat weaker." it means: Things have really gone to hell. When it says there's "deteroriation" in the labor market where once it was merely "weaker than expected," they mean: Holy crap! And when it says the housing sector "remains depressed" the Committee means: You don't need a realtor, Mr. and Ms. Homeowner, you need an arsonist.

What about jobs?

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."

Translation: A lot of times we forget to even mention this part of our job. See? We mentioned it!

"The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."

Translation: We got it wrong, and things are worse than we thought. But we're not going to do anything about it, so we'll be failing at this part of our job for a long, long time.

And the monetary outlook?

"... the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent ... The Committee currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Translation: These zero and zero-ish rates were supposed to be an emergency measure to rescue the banking system in 2008. But we've decided to keep it on life support for a long time to come. That hasn't created any jobs, and we're sorry about that, but it should inflate the market a bit."

"The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability."

Translation: We talked about a lot of things we could do ... and aren't doing right now.

"It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate."

Translation: The greatest jobs crisis in a generation doesn't call for pulling out every tool in the tool box.

But if this isn't the time to do everything you can, when will it be the right time? If that's your thinking, then what does "as appropriate" really mean? That's easy to translate. For the millions of people who can't find work or are struggling to pay their bills, it means Your hovercraft is full of eels.

What could the Fed do?

We're constantly being told that the Federal Reserve is limited in its ability to respond to the ongoing crisis. But we didn't hear that kind of talk in 2008, and there's nothing in the Fed's charter that precludes it from taking more aggressive and innovative action. What could the Fed do?

Joseph Gagnon at the Peterson Institute of International Economics has some smart suggestions.for action the Administration - and the Fed - can take the need to ask permission from the obstructionists in Congress. Gagnon proposes an aggressive third round of quantitative easing, accompanied by "a clear statement that more is forthcoming if the economy continues to underperform." A a small additional step, the Fed could stop paying interest on the reserves it holds. While this wouldn't have a dramatic effect, it would remove an incentive for not lending money.

Gagnon also proposes that the Administration use its control over Fannie and Freddie to aggressively provide debt relief to homeowners. (The Administration's own program, which is limited to distressed mortgages, continues to be a disaster.)

There's more that the Fed could do if it really wanted to fulfill its dual mandate. It could link those zero-interest rates to consumer debt relief, especially for underwater loans. It could build the framework for an infrastructure development lending program.

Once the translating's done, the Fed sounds like nothing so much as a world-weary cop trying to keep the frightened citizenry away from the scene of a disaster. The Committee's members are trying to reassure everybody that things will be fine. They'e saying everything's under control., when they really don't know that for sure. They're saying Move along, folks. There's nothing to see here.

But like any crowd that's witnessed a disaster, everybody watching knows that's not true.

Bernankemania! Empty Golden Words From the Temple's High Priest

Richard Eskow — Wed, 27 Apr 2011 23:51:48 -0400

Ben Bernanke's voice has been known to put humans into a trance even under the best of circumstances, and I was under the influence of a fever and some cold medications. Still, other observers reported a similar reaction to my own. The Fed Chair's press conference felt like a sensory deprivation tank, but with extra-credit math questions.

Was Mr. Bernanke calm? Put it this way: I watched the video feed for several minutes before I realized it wasn't a photograph. A lizard can stay motionless for so long, you start wondering if it's real. It was like that. Then Bernanke turned his head, and I got the same feeling you get when the lizard finally blinks.

That's the Robitussin talking, not me.

Bernanke needed to do two things today: First, he needed to avoid making a careless remark that would roil the world's markets and set off a panic. Mission accomplished. And to avoid excessive scrutiny, he needed to be as placid and boring as possible. He might have overshot the mark on that one.

How did he do it? Perhaps he mastered the serene "void" mind of Japanese swordsmanship from The Book of Five Rings. Or maybe he dropped a lot of downers. Either way, it was especially hilarious to read this afterwards: Sarah Palin says the White House released Obama's long-form birth certificate this morning to "distract you" from Bernanke's appearance. Right. Because otherwise everybody would be glued to their sets, hypnotized by his performance, transfixed and motionless ...

... like lizards.

If only Bernanke had offered a glimpse of hope for the millions of Americans battered economically since he assumed leadership of the Fed. If only he had made the case for jobs. If only. But he didn't, and that's tragic.

That's not the Robitussin talking. That's me.

Master of the Temple

The Federal Reserve's been called the Temple ever since William Greider popularized the term in his 1989 book, Secrets of the Temple, which is still a must-read. (It's available at fine booksellers everywhere - which is to say, you can buy it online). Although this secretive institution was created by a democratically elected Congress, it has presided over our economic fate without public accountability ever since.

Yes, the Fed chair made a public appearance today. As the High Priest of his temple, it's his job to ensure that the public doesn't lose faith in its power. They could. They keep offering sacrifices, and there's still no sign of rain. And that's attracting attention to the Fed's secrecy and lack of accountability. So, like any good temple priest from ancient times, Mr. Bernanke reasserted his air of authority by mumbling in an archaic language understood only by his fellow initiates.

Yes, this was the first press conference ever given by a Fed chair. That means Bernanke managed to give the appearance of being less secretive by holding an event which, as many observers noted, managed to be both historic and boring at the same time.

The Many Moods of Ben Bernanke

But it wasn't really boring, if you were listening carefully. Uninformative? Pretty much. Disappointing? Yeah. But it was fascinating to watch a smart guy not communicate so effectively. And he didn't do it by saying too little. He did it by saying too much.

And by adopting a lot of different personas (personae). Instead of one Ben Bernanke, we got a whole roomful: Bernanke the Job Creator, Bernanke the Budget Cutter, Bernanke the Activist, Bernanke the Fatalist ... He used some sort of "identity easing" to increase the Bernanke supply, then hid in a flock of decoy selves.

So how can you tell which one's the real Bernanke? By paying attention to at what gets done, not what gets said.

Golden Words

Bernanke did offer some golden words, however - literally. The price of gold soared after his press conference. Let's hope Mr. Bernanke's Things To Do list for today didn't include "Build confidence in the dollar."

But Bernanke never said the words that might have improved the economy and helped a lot of people. He came close. He almost said we need a strong job-creation policy. But then, he almost said lots of things.

And while it was good of him to be so "transparent" and all, it would have been even better if he hadn't first waged a two-year battle to keep the Fed's discount lending a secret - and if it hadn't taken a court order to get them released.

Where are the jobs?

Bernanke indicated that the Fed's "quantitative easing" policy - buying up tons of government bonds to increase the money supply and cool inflation - was coming to an end. A reporter asked, should you really do that with unemployment near 9%? Another asked, why is the public so dissatisfied?

A cloud of phantom Bernankes arose in response. Jobs are important, said one. Jobs are part of our dual mandate, another agreed. But policies to address long-term unemployment are outside of our mission, frowned another. Yes, another agreed, nodding sadly. Unfortunately, we're a macroeconomic institution.

One of the Bernankes appeared to be struggling to say something - something important. Yes, yes, we whispered. Say it! Say, "Quantitative easing and discount windows can only help the entire economy when they're accompanied by government policies which require the banks to use the advantages they bring in an economically constructive way."

But that Ben Bernanke fell silent. Then he shivered, grew translucent, and faded from sight. Another Bernanke spoke in his place. Strategies for addressing long-term unemployment were, he said, "out of the scope of the Fed."

Enter the Hawk

But that "outside our scope" language evaporated quickly when budget deficits came up. All of a sudden, policy-shy Ben was replaced by policy arm-twister Ben. Those politicians better shape up, this shadow growled, or there'll be hell to pay.

A question about Standard & Poor's recent threat to downgrade the US government's credit (they were never that aggressive about mortgage-backed securities, were they?) brought out Bernanke's inner Deficit Hawk. He was "hopeful" the report will "provide one more incentive to address this problem," he said. "It's the most important economic problem this nation faces."

("Most important problem"? Better make that "dual mandate" one-and-a-half mandates instead. Sayonara, jobs!)

Bernanke added that it's "encouraging that we're seeing efforts on both sides of this aisle ... We're still a long way from a solution, but I think it's of highest importance that our political leaders address this problem ..."

(Sorry, jobs, but that clinches it: Fed Chairs may date mandates like you, but they always marry the other kind.)

In other non-news, Bernanke said that many of our current economic woes were driven by fuel prices, which the Fed doesn't control. Which is true ... sorta. The Fed does influence the value of the dollar, which in turn affects prices for commodities like oil. On the other hand, a lower dollar should help jobs and economic growth at home ... especially if it's accompanied by aggressive job creation policies.

So why not push for better jobs policies? Because Shy Ben comes out when jobs are mentioned. Tough Ben only appears when the topic is deficits.

Lip service

Bernanke didn't say today, nor has he ever said, that the real bubble that shattered the economy was really a credit bubble (to use Barry Ritholz's term), not a housing bubble. He didn't acknowledge that the models and assumptions that have guided US monetary policy for a generation were disproved by the events of the last three years. And he won't. He can't - not without questioning this entire career. And that would take real courage and wisdom. I thought he might have that in him. Guess not.

Bernanke could have said that the deficit must be addressed, but that the best way to do that is by starting with an aggressive program that puts people back to work, expands the economy, and then provides a strong foundation for addressing government deficits. He didn't say that.

Sure, he gave a lot of lip service to the Fed's jobs charter - finally. For two years he barely mentioned it, but today he actually used the phrase "dual mandate" - twice! That's good news ... if you think that golden words can create jobs. Otherwise its reasonable to assume that Bernanke wanted to look concerned about jobs, without actually doing anything more about them.

A Ben for all seasons

The bubble exploded and shattered on Bernanke's watch. Then the banks feasted off the goodies the Fed gave them, fattening themselves as the rest of the country starved. Bernanke's "quantitative easing" was never accompanied by what might be called "qualitative easing" - targeted policies designed to ensure that some of the financial advantages given to banks by the Fed were used to help the overall economy. Nope. And Bernanke still won't tell to the country or its leaders why those policies are needed.

S-sh-sh-sh. That kind of talk makes Tough Ben go away and Shy Ben come out.

It's not about Ben Bernanke in the end, anyway. It's about a broken political system and the economic powers it serves. Under this system, Bernanke's free to lower the interest rate and give American mega-banks billions in near-zero interest loans. And he has. Those banks can then keep his cheap money, refuse to use it constructively, and get rich by bleeding the economy dry instead. And they have.

As long as that behavior is acceptable to leaders in both parties, we'll keep on struggling. The next Ben Bernanke will differ in appearance only. He or she will serve the same banks, make the same mistakes, then offer the same ritual murmurings afterwards. They say that talk is cheap. But this talk distracts us from our most urgent economic problems, and that makes it very expensive talk. So expensive, in fact, that we can't afford it any more.

You could let golden words rain down night and day for a thousand years. You could bury this country in words from coast to coast, words that glittered like gold coins, and it wouldn't matter. Because words aren't coins. Words are words, and coins are coins. And while a few people keep raking in the the coins, the rest of us are still struggling to make change.

Breaking the Silence: FCIC Report Brings The Focus Back To Wall Street

Richard Eskow — Wed, 26 Jan 2011 20:50:10 -0500

The Financial Crisis Inquiry Commission's report couldn't come at a better time. At a moment when it seems that Washington would rather forget what happened two years ago, it documents the opportunism, bad judgment, and criminality that crashed the world's economy once - and could again at any time. An interconnected web of Wall Street criminality, discredited ideology, and politicians chasing big money - along with a surprising amount of executive incompetence - has caused continued suffering for millions. At a time when the nation's capital is convinced that CEOs need appeasing rather than policing, the FCIC report is a badly needed return to reality.

Wall Street executives weren't mentioned in the State of the Union or the Republican response. But their actions caused this crisis, and they can't be ignored politely like tipsy uncles at a family wedding. The only way to prevent the next crisis is by understanding the last one - and then taking the right actions.

There was a lot of talk on Tuesday night about the need for jobs, but very little about why we need them. The President lamented the fact that "there are at least five different entities that deal with housing policy." But he didn't point out that the housing market was undone by too little regulation, not too much - leaving one mortgage in five underwater, 3.4 million homes in foreclosure, and a generation's wealth wiped out in a few short months. And the Republicans sang the money-saving virtue of "less government" - even though we've learned that a government which spends less on regulation is the most expensive government of all.

As the New York Times reported, the FCIC report will conclude that "the 2008 financial crisis was an 'avoidable' disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street." It will document banker misdeeds that range from irresponsibility and mismanagement to corruption and criminality. It's been reported that the Commission will also refer a number of cases to the authorities for possible prosecution.

This report has had a long and sometimes challenging history. But to paraphrase an old gospel song, it "may not be here when you want it, but it's right on time."

Useful utopians

Over three decades, our government was captured by a libertarian-inspired economic philosophy that had previously been considered radical and impractical - correctly so, as it turns out. That philosophy's most prominent spokesman, former Ayn Rand acolyte Alan Greenspan, was celebrated as a "maestro," until the house of cards he came to symbolized finally collapsed.

The prevailing economic myth, of an impossibly wise and genuinely free market, was as useful as it was Utopian. It provided ideological cover for the deregulation that both parties embraced. Government leaders were compromised by the lure of huge campaign contributions, and by a revolving door that ensured future wealth for cooperative politicians and regulators from both parties. The result enriched Wall Street and the Washington elite and left the rest of the country wounded.

The deregulation of the nineties allowed banks take to risks they couldn't possibly survive. But they had been rescued in previous crises, and the cozy relationship between government and bankers assured them they'd be bailed out again. Freed from the consequences of their own actions, they gambled ... and we lost.

Money for nothing

The most surprising thing about the FCIC hearings for me personally was the lack of competence shown by so many top bankers. The Wall Street executives I worked for were smart, demanding, and driven, but bankers like Citi's Robert Rubin and Chuck Prince ... not so much. Their FCIC testimony displayed a shaky grasp of their business and a lack of concern about the risks facing their own organizations. Many of them seemed to lack even the most basic level of intellectual curiosity. A big bank is a fascinating, complex entity, but one executive after another seemed to shrug off the details their own banks' operations with bored indifference.

Sure, their testimony may have been expecially vague because of their understandable desire to avoid self-incrimination. But even allowing for that, the low level of managerial skill they displayed was disconcerting. Today's generation of financial executives may be enjoying the greatest disparity between income and executive performance since indolent princes inherited vast kingdoms through the divine right of kings.

Yet despite this embarrassing record, these executives want to be pampered and flattered by Washington again - and they're getting their wish. The President and his party took some steps toward genuine financial reform with last year's bill, but a great deal of work is still needed and their recent appointments aren't encouraging. Meanwhile, the Washington consensus is pressuring the Administration to assuage the "hurt feelings" of CEOs with some success, despite record profits that should provide more than adequate compensation for any injuries to their pride.

Unfinished business

The President only mentioned financial reform in passing, in his comments about regulations:

"When we find rules that put an unnecessary burden on businesses, we will fix them. But I will not hesitate to create or enforce commonsense safeguards to protect the American people. That's ... why last year we put in place consumer protections against hidden fees and penalties by credit card companies, and new rules to prevent another financial crisis ..."

Last year's bill was a start, but more reform is urgently needed - to break up "too big to fail" banks, end runaway speculation, protect consumers, and end the incestuous relationship between banks and government. Prosecutions are needed, too. They're the only way to ensure that bankers can't violate laws with impunity, knowing that even if they're caught their shareholders will pay the fines.

Defunding reality

But if the President and his party need to focus their efforts, the Republicans already know what they want to accomplish: They're committed to restoring the klepto-plutocracy that continues to plunder the economy. Their "rollback to 2008 spending levels" would conveniently eliminate funding for the urgently-needed provisions in last year's financial reform law. It would effectively shut down the Consumer Financial Protection Bureau and hamper investigation and enforcement at several different agencies.

In the Republican response to the State of the Union, Rep. Paul Ryan said that "limited government also means effective government." That statement has been roundly and repeatedly disproved - by Katrina, the BP spill, and, as the FCIC report will show, by the regulatory negligence that led to the Great Recession. Unfazed by reality, Rep. Ryan insisted that "limited government will unshackle our economy and create millions of new jobs."

For her part, Rep. Michelle Bachmann spoke of "132 regulations put in place in the last two years, many of which will cost our economy $100 million or more." But even if that were true - she offered no supporting evidence - that figure is dwarfed by the economic cost of a recession created by regulatory neglect and prolonged by an unwillingness to provide further stimulus.

"Limited Government" is the most expensive government of all

Here's an estimate of the recession's economic impact:

(via Paul Krugman)

The "limited government" approach to regulation cost us nearly three trillion dollars in lost prosperity.

Think of this graph as a glimpse of some happier alternate universe, where government did its job and the economy thrived as a result. Menzie Chenn, the economist who produced it, describes the recession as a "mindless deregulation and irresponsible fiscal policy induced-crisis" and warns that "certain forces seek to gut financial regulation by way of 'defunding.'"

The "defunders" are back.

Remembering the past to improve the future

The Republican members of the FCIC staged a walkout last month by ginning up an artificial (and sometimes unintentionally surrealistic) controversy, and now we know why. The Commission's report will be a comprehensive look at the failures of deregulation, the ongoing danger banks pose to the economy, and the misdeeds of past and present bank executives.

There are those who would argue that the Great Recession was unavoidable, but that's not true. It could have been avoided with stronger regulations, the deterrent effect of criminal prosecutions, and wiser heads than Alan Greenspan and Ben Bernanke at the helm of the nation's economy.

Memories are short in Washington, and this report will help us remember. It will take more than Tuesday's polite silence to rein in Wall Street and protect America's economic future. Hopefully this report will serve as a call to action.

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This post was produced as part of the Curbing Wall Street project.

Quietly Ticking Time Bomb in Fed Data

Mary Bottari — Fri, 10 Dec 2010 13:00:00 -0500

Last week, the Federal Reserve was finally forced by law to release some (not all) of the details of its back-door bailout of the global financial system. The Fed data focuses on the emergency lending programs initiated in 2007/2008, but it also includes data for the Fed’s more recent purchases of mortgage-backed securities (MBS). These later purchases represent the real risk for taxpayers in the Fed’s continuing bailout activities, but have received the least coverage in the mainstream press.

Federal Reserve Efforts Dwarf TARP

The Fed data supports our long-held contention that the Congressionally-approved and much despised $700 billion Troubled Asset Relief Program (TARP) was only a small fraction of the total bailout. By our count, and as we illustrate below below, TARP funds were a mere seven percent of total funds disbursed by federal government to aid the financial sector since 2007. Why does this matter? Because the more we focus on the much-despised TARP, the less we see the invisible hand of the Fed doing the heavy lifting.

Mortgage-Backed Insecurities?

As our next graph shows, the second phase of the bailout is all about housing. The Fed and the U.S. Treasury Department have struggled mightily to keep the housing and mortgage markets from melting down by pumping $300 billion in direct loans into Fannie and Freddie and collectively buying up $1.6 trillion in mortgage-backed securities (MBS) guaranteed by Fannie and Freddie. While Fed emergency loan programs have largely been wound down, these MBS purchases are still on the books.

These MBS purchases represent the most significant intervention in the housing sector in history, yet have not been subject to the scrutiny or oversight to which the TARP has been subject. Why is this a problem? Recent developments suggest these funds could be at risk.

If you read the headlines, you know that banks stand accused of robo-signing mortgages, shredding original mortgages, failing to notarize properly and otherwise breaking or bending the law to feed the Wall Street securitization machine. These problems are only coming to light now because the same banks are rushing to throw Americans out of their homes. As some homeowners fight back in court, more illegal practices are uncovered.

In addition to outright fraud, numerous state Supreme Courts have questioned the legality] of the Mortgage Electronic Registration or "MERS" system. MERS is the mortgage holder of record for 60 percent of U.S. mortgages, yet its legal standing to foreclose on American homeowners is in doubt and its shoddy processing of the promissory notes for millions of mortgages has ramifications for the securitization process as well.

In short, by screwing up the mortgage registration and transfer system, the big banks may have also screwed up the securitization process under New York trust law, casting doubt on the legality of an untold number of foreclosures and potentially trillions of dollars worth of MBS -- some of them held by U.S. taxpayers via the Fed, Treasury, Fannie Mae and Freddie Mac.

Hot Potato Actions Proliferate

This may explain why many private investors, and the Fed itself, are trying to force the big banks to buy back the troubled securities. Recently, the New York Fed requested that Bank of America take back $47 billion of mortgage securities, alleging that the bank didn’t properly “service” the mortgages. Fannie and Freddie are starting to push the banks to take back $13 billion of MBS and these are early days. “Put-back” lawsuits are in the works from investors across the nation and this entire house of cards may come tumbling down.

Not surprisingly the big banks are balking at taking back flawed securities. Acting like they are above the law, Bank of America and J.P. Morgan Chase, are refusing to buy back flawed securities from Fannie and Freddie. At the same time, they are refusing to modify mortgages for the very taxpayers who bailed them out during the crisis to the tune of $931 billion for Bank of America and $161 billion for J.P. Morgan Fed documents reveal.

Only very recently have some regulators cautiously conceded that the mortgage mess poses "systemic risk" to the economy. But the only government report on the risks these securities pose was issued by the feisty Congressional Oversight Panel for the TARP. The report warns “it is possible that ‘robo-signing’ may have concealed deeper problems in the mortgage market that could potentially threaten financial stability.”

Time to "Stress Test" the Fed?

The big banks themselves may have trillions of dollars worth of questionable securities on their books. Now we learn that the federal government does as well. While Fed Chair Ben Bernanke will be "stress testing" the banks for their exposure to faulty MBS, he has indicated that he won't make this information public. What does Bernanke have to hide? The sky did not fall when this information was released in the past, nor did it when the Fed data was released last week.

It's time to stress test the Fed. Should the MBS issue blow up in the courts, U.S. taxpayers could be on the hook for billions, dwarfing the cost of the bailout thus-far.

In the build-up to the 2008 meltdown, the Fed looked the other way as the big banks sold predatory and abusive mortgages to millions of American families. The result? A historic financial crisis and untold misery. Now the Fed is AWOL as the same banks abusively foreclose on millions using faulty documentation and illegal practices. Once again, the devil is in the details, and these details may hold the key to the next crisis. Congress needs to step up and put Bernanke on the stand to tell us exactly what he plans to do if trillions of dollars worth of mortgage-backed securities detonate.

Jamie Dimon of [[J.P. Morgan Chase]] assures us that we will undergo financial crises every five to seven years. With Dimon and Bernanke's help, we may be ahead of schedule.

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LEARN MORE ABOUT FORECLOSURE FRAUD AND FAULTY MBS: Credit Slips blog and Naked Capitalism blog.

Ben Bernanke Wants Your Social Security Money

Richard Eskow — Wed, 06 Oct 2010 22:53:30 -0400

Federal Reserve chair Ben Bernanke took another swing at Social Security and Medicare today, saying yet again that they'll need to be cut to protect our nation's financial health. Based on his record, any roadmap Bernanke lays out for the future is worth following ... as long as you hold it up to a mirror first so that it's reversed.

For those of you who prefer equations to words, let me put it this way: BB on SS = BS.

Bernanke's comments about Social Security yesterday weren't just wrong. They were spectacularly wrong. They were as wrong as his comments on housing in 2005, when he denied there was a housing bubble and said that a rapid decline in housing prices was "a pretty unlikely possibility."

They were as wrong as his comments in 2007, when he said "there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year" and added that "there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy."

They were as wrong as his comments in April of this year, when he said that "my best guess is that economic growth, supported by the Federal Reserve's stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year" (a year that's now half over). He added: "If economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery."

Let's hear a big shout from all those small business owners who are having an easier time getting bank loans. And if there any consumers in the house feeling more optimistic, wave your hands in the air like you just don't care.

Didn't think so ...

You'd think a record like that would inject even the most self-confident prognosticator with a little humility. Yet an unfazed Bernanke insists on issuing pronouncements about matters that are well outside his purview as Fed chair.

Bernanke's been on an anti-Social Security tear for some time. He took a run at it, and Medicare, in Congressional testimony last December. The seemingly mild-mannered economist even went so far as to remind Congress that it had the freedom to abolish Medicare and Social Security if it so wished: ""(Social Security is) only mandatory until Congress says it's not mandatory," he helpfully observed.

Why go after Social Security? Bernanke quoted bank robber Willie Sutton last December for his answer: ""That's where the money is."

Now Bernanke's no Willie Sutton. He's a decent enough guy, by all reports. They even say he drives a Ford Focus, for crying out loud. That's hardly a bankrobber's getaway car. So why is he gunning for Social Security? Ideology, for one thing, along with a massive dose of Washington tribalthink. Yesterday in Providence he once again sounded his klaxon, an alarm that remained deafeningly silent in the runup to the economic collapse, on the issue of entitlements. His stated concern was for future economic problems caused by government debt -- although he could neither describe how a crisis might be triggered or draw "a clear bright line" beyond which real troubles might begin.

Never mind. We need to cut entitlements anyway, says Bernanke, and the public will have to "accept some sacrifices." (Man, am I getting tired of comfortably well-off people asking others for "sacrifice." To paraphrase the old religious saying: I met a man who thought he was austere because he drove a Ford Focus, until I met a man with no feet ...)

Said Bernanke: "Expectations of large and increasing deficits in the future could inhibit current household and business spending -- for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending -- and thus restrain the recovery.'

You know what's inhibiting spending and restraining the recovery (besides the fact that folks don't have jobs, and the Fed's ignoring its mandate to maintain employment levels)? People keep hearing that their Social Security and Medicare benefits are going to be cut! It's hard to go out and stimulate the economy with part of your paycheck (if you're lucky enough to have one) when times are hard and all you hear is that they'll be taking another piece of your retirement security away.

Having sunk the economic ship, Bernanke and his fellow-thinkers now want to set it afloat again ... by puncturing the liferafts.

One part of Bernanke's assessment isn't completely off-base, at least at first. He cites two long-term trends, an aging population and health care costs, as major contributors to the deficit. There's no question that health care costs are eating the economy alive, and the added government cost of Medicare as more people age will place more and more of that cost burden in the government's hands. So did Bernanke propose a single-payer health care system with the power to reduce the overall cost burden? Or did he explore other ways to restructure the health economy so that it more closely resembles lower-cost European systems?

No. Aside from mass euthanasia for Baby Boomers -- an inhumane approach, no matter how sick you are of hearing "Hotel California" -- that leaves either massive tax increases or gutting Medicare as the only other options. Guess which way Bernanke's leaning? While he's been uncharacteristically Sphinxlike on the specifics, he thought extending tax cuts would be a good way to maintain a "stimulus." He didn't exclude tax cuts for the wealthy from that statement, a telling omission that flies in the face of most analyses.

So tax increases, while they receive lip service, aren't really called for in the Bernanke approach.

While he had no solutions for health care costs, at least his assessment of the problem was fair. But Bernanke's assessment of Social Security was completely off the mark. When it comes to retirement benefits, he doesn't have a clue "where the money is." Yesterday, for example, he raised the alarm about the ratio of younger adults to retirees: "This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase."

That's wrong. Really, really wrong. There's a lot that could be said about the life expectancy issue and worker/retiree ratios, but for now let's consider this: This wave of coming retirees was equally large when it was contributing to Social Security. That's one of the reasons why the expected shortfall doesn't occur until 2037, and why the program would still be able to contribute 75% of benefits after that (and 100% with a minor fix like lifting the payroll cap).

We'll say it again: Social Security isn't broken. Say it often enough and you might even stimulate a little more consumer spending.

Bernanke's honest, whatever his other flaws. He added: "Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers."

True. Then why fixate on Social Security? First, because the Washington elite finds it easy to stomach the kind of "sacrifice" that benefit cuts would require ... of others, especially those who aren't big campaign donors. Second, because there's no political will to raise taxes. Third, because nobody wants to address the real issue: health care costs.

Lastly, and most importantly, because there's a politician/economist orthodoxy on this topic that's truly strange to observe up close. There's a shared a set of folkways and beliefs around the subject of Social Security that DC outsiders can't understand or penetrate. And there's a ritualized aspect to this austerity talk, one that's worthy of ethnological study. It's as if the sacrifice of the elders was an initiation rite for Washington policymakers.

The Beltway Bubble: You can check out any time you like, but you can never leave ...

Some headlines today emphasized the fact that Bernanke wants to make these cuts slowly, rather than immediately. Bernanke said the following: "The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes. Indeed, in the past, long lead times have helped make necessary adjustments less painful and thus politically feasible."

We are not without sympathy, Mr. Bond. We will give you time to put your affairs in order ...

Bernanke's comments crystallize a strain of thinking that unfortunately dominates Beltway thinking right now: We can't make drastic cuts immediately but we can schedule future cuts now to demonstrate our "seriousness." This line of thinking says that cuts must be focused on the only area that can be addressed politically: partially repealing the New Deal by reducing Social Security benefits. Presumably it's hoped that this will create the political will, not for tax increases, but for subsequently cutting Medicare and other New Deal programs.

That sort of thinking begins by assuming that current political realities, established by the Right and compliant Democrats, are fixed and unchanging. But the political equation may be shifting: So far, more than 112 members of the House of Representatives have signed a pledge to block any cuts to Social Security.

Does the deficit need to be addressed? Yes -- at the right time, after the economy has returned to health. Is the groupthink Bernanke represents the right way to do it? Absolutely not. Health care costs need to be cut. And if you really want to know "where the money is," it's in the pockets of hedge fund managers and other ultra-rich Americans who, according to Beltway lore, will forever remain immune from significant tax hikes. And it's in the pockets of bankers who are enriching themselves by playing games with low-interest money from the Fed -- Ben Bernanke's Fed -- rather than lending it to get the economy moving again.

Sure, Social Security is where some money is. But that's money that working Americans paid into a trust fund through their payroll taxes, in the expectation that it would be there when they retire. Raiding it would be the act of a bank robber, not a policymaker.

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This post was produced as part of the Strengthen Social Security campaign.

Millions of Jobless, Billions for Bankers: The Fed Must Act Now

Richard Eskow — Tue, 13 Jul 2010 13:04:30 -0400

In a nation wracked with unemployment and recession, Wall Street firms are still paying billions of dollars in bonuses - and they're hiring, too. The Federal Reserve recently affirmed its right to regulate executive pay, but has yet to take action on it. It should. These two facts - that bankers are earning billions while millions are unemployed - don't just represent an injustice. They are seamlessly connected, representing two aspects of the same underlying problem. When people are given incentives to "make a killing" rather than invest in the future, that's exactly what they'll do.

If the Federal Reserve fails to act decisively, Congress needs to step in. Banks, especially big banks, benefit from implicit public guarantees. And any institution that profits from publicly-provided discounted lending needs to be held to a responsible standard. The President's voice on this issue would be particularly welcome, too. His "bully pulpit" should be used to discourage bullying from bank executives who are draining the economy for their personal enrichment with government support.

The Fed, which has assigned responsibility for compensation issues to Governor Daniel K. Tarullo, understands that there is a problem. Wall Street is infused with a culture -- and a payment system -- that rewards high risk-taking and only considers a firm's short-term profits. A banker who cuts a risky deal can walk away with tens of millions of dollars, even if it collapses a couple of years down the road (and even, as we've seen, if it takes the global economy with it). This bonus structure encourages exactly the kind of dangerous and unproductive behavior that caused the last crisis, while discouraging the kind of investment we need to get the economy going again.

How distorted has the system become? Several bailed-out firms paid out more in 2008 bonuses than they made in profits. Goldman Sachs paid out more than double its profits as bonus money that year, just two short years after CEO Lloyd Blankfein received a record bonus for practices that were destined to break the economy. Paying out more in bonuses that you make as profit is not "free enterprise," it's greed.

Ben Bernanke's rebuke to banks for not lending to small businesses was certainly welcome, but the Fed has watched idly as this problem developed. There have been no problems to encourage lending to the small enterprises that are the most likely to hire. Here's where compensation comes in: What banker in his right mind would forego millions of dollars in bonus money for a short-term risky loan in order to help small employers build up their businesses over the course of years?

A career site for hedge fund employees illustrated how much compensation comes in the form of bonus, rather than base pay, at least in one corner of the financial world:

When most of your income comes from the roll of the dice, you'll go where the short-term rewards are greatest.

In order for bankers to lend the right way, they need to be compensated the right way. That means some combination of "clawbacks" - return of pay when deals collapse - and longer-term compensation based on a firm's performance. But the Fed will have to take firmer action than that implied by Governor Tarullo's recent statement: ""The Federal Reserve expects firms to make material progress this year on the matters identified as we work toward the ultimate goal of ensuring that incentive compensation programs are risk appropriate and are supported by strong corporate governance."

The European Parliament has already passed guidelines that limit the cash part of banker bonuses to 20% of the total (30% for particularly large ones), with the rest tied to the bank's longer-term performance. They've also tightened capital requirements, so that bankers aren't rewarding themselves with funds that may be needed to cover losses.

That's important, because when taxpayers bail out the big banks they're filling a void that's been left in part by these big payouts to executives. That's something that Americans should remember if they recoil in horror at the idea that this is "socialism": We covered their losses once before, and implicitly may have to do so again. And banks benefit from the discounted loans we provide them through the Federal Reserve. The top three firms paid out an estimated $30 billion in bonuses in 2009, in the midst of an economy devastated by their behavior. Those bonuses aren't "performance-based," by any rational definition of the term. They're a massive transfer of wealth from the general population to the highest 1% of earners, subsidized and enabled by government policy and conducted in a way that continues to weaken and threaten the overall economy.

Banks and financial institutions will not act to get the economy moving until the Fed acts to make compensation more rational. And with Europe moving toward a more rational system, the world's most rapacious bankers could decide to move to our more hospitable climate. The Federal Reserve, and ultimately our elected officials, have a choice: Realign bonuses so that bankers become bankers again, or let the United States become the world's haven for greed gone wild.

Resident Evil: Are Struggling Homeowners As Immoral As the Big Banks?

Richard Eskow — Thu, 01 Apr 2010 02:25:53 -0400

Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners rewards those who were "reckless, speculative, and foolish" while punishing those who are not.

It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?

After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use - in, say, 2004?

They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.

Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?

Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?

The truth is, most people buy homes because they need a place to live -- and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)

And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:

Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a few hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:

It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.

Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions--an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."

In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem -- it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.

Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" - "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")

But the idea of principal reduction - whether it comes from HAMP or individual lenders like Bank of America - is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."

"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in -- families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.

The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.