According to this article in the New York Times.

Robert D. Hormats, vice chairman of Goldman
Sachs International, said the president "must
demonstrate to the world that he understands
that it's not just about saving ourselves."

And Mr. Obama must try to do all of that in the
middle of a global recession for which most of
the world blames the United States. "The U.S.
brand name has clearly suffered from this
crisis, and the rest of the world is no longer
willing to sit quietly and be lectured by the
United States on how they should conduct
economic policy," Mr. Rogoff said.

A crisis the the US precipitated by our past economic polices.
As is oft said to new comers to 12 step meeting, "Take the cotton
out of your ears and put it in your mouth and maybe you'll learn
something." Good advise for a new president.

C

After reading Josh's post and the Atlantic Monthly article, which I
highly recommend,  it is evident to me that one of the reasons for
the rise in the financial sector is the loss of the manufacturing
sector. Bot actually occurred at nearly the same time.  And it
was during this period that those businesses that produced
the consumer products were beginning to be run not by people
who knew anything about the products, but were only schooled
in and interested in one thing. How to make money and increase
profits - and to do it as rapidly as possible with as little outgo
as possible. Large short term profits became the byword.

Those who had started these corporations began to retire or die
or were forced out by stock holders with one and only one thing
in mind. Higher stock prices and bigger dividends. But the tactics
used to accomplish this would eventually destroy the company or nearly
so. To keep a company competitive requires putting money and
energy back into the company. It means being willing make the changes
necessary to remain viable.  But these new CEOs and corporate
heads would not and in many cases could not because their boards
would not allow it. And the minute it looked like the company involved
would not make the sort of profit that these boards deemed necessary,
the company was sold off and the stock holders just bagged the money.

It was a culture shift as in explained here.

 As more and more of the rich made their money in
finance, the cult of finance seeped into the
culture at large. Works like Barbarians at the
Gate, Wall Street, and Bonfire of the Vanities-all
intended as cautionary tales-served only to
increase Wall Street's mystique. Michael Lewis
noted in Portfolio last year that when he wrote
Liar's Poker, an insider's account of the
financial industry, in 1989, he had hoped the book
might provoke outrage at Wall Street's hubris and
excess. Instead, he found himself "knee-deep in
letters from students at Ohio State who wanted to
know if I had any other secrets to share.
...They'd read my book as a how-to manual." Even
Wall Street's criminals, like Michael Milken and
Ivan Boesky, became larger than life. In a society
that celebrates the idea of making money, it was
easy to infer that the interests of the financial
sector were the same as the interests of the
country-and that the winners in the financial
sector knew better what was good for America than
did the career civil servants in Washington. Faith
in free financial markets grew into conventional
wisdom-trumpeted on the editorial pages of The
Wall Street Journal and on the floor of Congress.

So the problem is not a financial one or even a political
one. The problem is a cultural one. A belief that the
only thing that matters is the money and how you get it
is of little consequence. And unfortunately it is a belief system
that is as old as this country itself. A cowboy - gold rush -
get it quick and then get out of town attitude that this country
needs to grow out of and grow up from. Or we will be no better
than some inconsequential Banana Republic with it's citizens
no better off.

C

Well the republicans have come out with their usual rehashed, 
regurgitated Reaganomics. All wrapped up in a shiny packet
containing......nothing new. Convinced as always that only the
private sector can do anything right.

Which is amazing since the private sector hasn't done anything
right for the last 8 years or more. In fact it has done damn near
everything wrong.

The GOP's approach to problems more resembles that of the
Three Stooges.

C

Joe Conason says, and I agree, that we need to pursue those
off shore accounts that corporate America is using to hide
it's wealth. He explains here.

But what reason other than evasion could there be
for Goldman Sachs Group to set up three
subsidiaries in Bermuda, five in Mauritius, and 15
in the Cayman Islands? Why did Countrywide
Financial need two subsidiaries in Guernsey? Why
did Wachovia need 18 subsidiaries in Bermuda, three
in the British Virgin Islands, and 16 in the
Caymans? Why did Lehman Brothers need 31
subsidiaries in the Caymans? What do Bank of
America's 59 subsidiaries in the Caymans actually
do? Why does Citigroup need 427 separate
subsidiaries in tax havens, including 12 in the
Channel Islands, 21 in Jersey, 91 in Luxembourg, 19
in Bermuda and 90 in the Caymans? What exactly is
going on at Morgan Stanley's 19 subs in Jersey, 29
subs in Luxembourg, 14 subs in the Marshall
Islands, and its amazing 158 subs in the Caymans?
And speaking of AIG, why does it have 18 subs in
tax-haven countries? (Don't expect to find out from
Fox News Channel or the New York Post, because News
Corp. has its own constellation of strange
subsidiaries, including 33 in the Caymans alone.)

When the cost of these shenanigans was last
estimated two years ago, the U.S. government's
annual loss in revenue due to tax avoidance by
major corporations and super-rich individuals was
pegged at about $100 billion -- considerably more
than a rounding error, even today. But of course
that is only a rough assessment, as is the estimate
of $12 trillion in untaxed assets hidden around the
world. Nobody will know for certain until the books
are opened and transparency is established.

Whatever the accurate accounting proves to be, it
is certain to exceed hundreds of billions annually
worldwide. That is money every country will need
badly for years, to repay debt, finance
reconstruction, and fund services, as the world
economy struggles to revive itself. Even in the
developing countries, where incomes are much lower
and billionaires tend to be scarce, the annual
revenue loss could be as much as $50 billion --
enough to meet the U.N.'s Millennium Development
Goals (if only the money were not stolen by local
elites and wired away to numbered accounts in tax
havens).

None of these tax havens could exist without the
connivance or at least the cooperation of the
world's most powerful governments, which remain
dominated by financial industry lobbyists even now.
The Organization for Economic Cooperation and
Development has sought greater transparency from
the tax havens for years, hearing promises from
most and defiance from a few.

A billion here...a billion there...pretty soon you're talking real
money. But seriously, this is what needs to be addressed.
Closing off these and other loop holes could pay for a substantial
part of the proposed budget.

C

David Kurtz has observed this.

The Treasury Secretary will announce more details on
the bank bailout plan in the next few minutes. Treasury
 has released a new fact sheet on the plan, and in a WSJ
op-ed today, Geithner looks to rebrand "toxic assets" as
"legacy securities" (bad mortgages are dubbed "legacy loans").

I have a friend who owns an IBM Legacy mainframe computer.
He paid about fifty bucks for it.

C

James K. Galbraith explains why.

The stimulus does not need to fill the whole
gap, because the CBO expects a "multiplier
effect," as first-round spending on bridges and
roads, for example, is followed by second-round
spending by steelworkers and road crews. The
CBO estimates that because of the multiplier
effect, two dollars of new public spending
produces about three dollars of new output.
(For tax cuts the numbers are lower, since some
of the cuts will be saved in the first round.)
And with this help, the recession becomes
fairly mild. After two years, growth would be
solidly established and Congress's work would
be done. In this way, the duration as well as
the scale of action was driven, behind the
scenes, by the CBO's baseline forecast.

Why did the CBO reach this conclusion? On
depth, CBO's model is based on the postwar
experience, and such models cannot predict
outcomes more serious than anything already
seen. If we are facing a downturn worse than
1982, our computers won't tell us; we will be
surprised. And if the slump is destined to drag
on, the computers won't tell us that either.
Baked into the CBO model we find a "natural
rate of unemployment" of 4.8 percent; the model
moves the economy back toward that value no
matter what. In the real world, however, there
is no reason to believe this will happen. Some
alternative forecasts, freed of the mystical
return to "normal," now project a GDP gap twice
as large as the CBO model predicts, and with no
near-term recovery at all.

And he then points out why Obama's team and Congress
are missing the boat.

The chance of a return to normal depends, in
turn, on the banking strategy. To Obama's
economists a "normal" economy is led and guided
by private banks. When domestic credit booms
are under way, they tend to generate high
employment and low inflation; this makes the
public budget look good, and spares the
president and Congress many hard decisions. For
this reason the new team instinctively seeks to
return the bankers to their normal position at
the top of the economic hill. Secretary
Geithner told CNBC, "We have a financial system
that is run by private shareholders, managed by
private institutions, and we'd like to do
our best to preserve that system."

But, is this a realistic hope? Is it even a
possibility? The normal mechanics of a credit
cycle do involve interludes when asset values
crash and credit relations collapse. In 1981,
Paul Volcker's campaign against inflation
caused such a crash. But, though they came
close, the big banks did not fail then. (I
learned recently from William Isaac, Ronald
Reagan's chair of the FDIC, that the
government had contingency plans to nationalize
the large banks in 1982, had Mexico, Argentina,
or Brazil defaulted outright on their debts.)
When monetary policy relaxed and the delayed
tax cuts of 1981 kicked in, there was both
pent-up demand for credit and the capacity to
supply it. The final result was that the
economy recovered quickly. Again in 1994, after
a long period of credit crunch, banks and
households were strong enough, even without a
stimulus, to support a vast renewal of lending
which propelled the economy forward for six
years.

The Bush-era disasters guarantee that these
happy patterns will not be repeated. For the
first time since the 1930s, millions of
American households are financially ruined.
Families that two years ago enjoyed wealth in
stocks and in their homes now have neither.
Their 401(k)s have fallen by half, their
mortgages are a burden, and their homes are an
albatross. For many the best strategy is to
mail the keys to the bank. This practically
assures that excess supply and collapsed prices
in housing will continue for years. Apart from
cash-protected by deposit insurance and
now desperately being conserved-the
American middle class finds today that its
major source of wealth is the implicit value of
Social Security and Medicare-illiquid and
intangible but real and inalienable in a way
that home and equity values are not. And so it
will remain, as long as future benefits are not
cut.

In addition, some of the biggest banks are
bust, almost for certain. Having abandoned
prudent risk management in a climate of
regulatory negligence and complicity under
Bush, these banks participated gleefully in a
poisonous game of abusive mortgage originations
followed by rounds of
pass-the-bad-penny-to-the-greater-fool. But
they could not pass them all. And when in
August 2007 the music stopped, banks discovered
that the markets for their
toxic-mortgage-backed securities had collapsed,
and found themselves insolvent. Only a dogged
political refusal to admit this has since kept
the banks from being taken into receivership by
the Federal Deposit Insurance
Corporation-something the FDIC has the
power to do, and has done as recently as last
year with IndyMac in California.

Aye and dar be the rub.

Geithner's banking plan would prolong the
state of denial. It involves government
guarantees of the bad assets, keeping current
management in place and attempting to attract
new private capital. (Conversion of preferred
shares to equity, which may happen with
Citigroup, conveys no powers that the
government, as regulator, does not already
have.) The idea is that one can fix the banks
from the top down, by reestablishing markets
for their bad securities. If the idea seems
familiar, it is: Henry Paulson also pressed for
this, to the point of winning congressional
approval. But then he abandoned the idea. Why?
He learned it could not work.

Paulson faced two insuperable problems. One was
quantity: there were too many bad assets. The
project of buying them back could be likened to
"filling the Pacific Ocean with basketballs,"
as one observer said to me at the time. (When I
tried to find out where the original request
for $700 billion in the Troubled Asset Relief
Program came from, a senior Senate aide
replied, "Well, it's a number between five
hundred billion and one trillion.")

The other problem was price. The only price at
which the assets could be disposed of,
protecting the taxpayer, was of course the
market price. In the collapse of the market for
mortgage-backed securities and their associated
credit default swaps, this price was too low to
save the banks. But any higher price would have
amounted to a gift of public funds, justifiable
only if there was a good chance that the assets
might recover value when "normal" conditions
return.

That chance can be assessed, of course, only by
doing what any reasonable private investor
would do: due diligence, meaning a close
inspection of the loan tapes. On the face of
it, such inspections will reveal a very high
proportion of missing documentation, inflated
appraisals, and other evidence of fraud. (In
late 2007 the ratings agency Fitch conducted
this exercise on a small sample of loan files,
and found indications of misrepresentation or
fraud present in practically every one.) The
reasonable inference would be that many more of
the loans will default. Geithner's plan to
guarantee these so-called assets, therefore, is
almost sure to overstate their value; it is
only a way of delaying the ultimate public
recognition of loss, while keeping the
perpetrators afloat.

Delay is not innocuous. When a bank's
insolvency is ignored, the incentives for
normal prudent banking collapse. Management has
nothing to lose. It may take big new risks, in
volatile markets like commodities, in the hope
of salvation before the regulators close in. Or
it may loot the institution-nomenklatura
privatization, as the Russians would
say-through unjustified bonuses,
dividends, and options. It will never fully
disclose the extent of insolvency on its own.

The most likely scenario, should the Geithner
plan go through, is a combination of looting,
fraud, and a renewed speculation in volatile
commodity markets such as oil. Ultimately the
losses fall on the public anyway, since
deposits are largely insured. There is no
chance that the banks will simply resume normal
long-term lending. To whom would they lend? For
what? Against what collateral? And if banks are
recapitalized without changing their
management, why should we expect them to change
the behavior that caused the insolvency in the
first place?

And this is the big fallacy of Geithner's plan. It based on a totally
false assumption - that the banks and their customers will
pretend this was nothing but a bad dream and continue on like
nothing has happened. And start playing nice, nice - by the rules.
Not bloody likely !

C

He raises some more questions in this article in Slate.

The government decision to bail out AIG was
made after the private parties supposedly at
risk had declined to structure a private series
of investments that might have avoided the need
for use of public money. Perhaps they knew the
impact of an AIG default would be small, or
perhaps they knew that the federal officials in
the room would blink and ante up. In a
post-Lehman moment when panic not reason was
dominating the discussion, perhaps they figured
they could walk away with extra billions-and indeed
they did.

This issue cries out for immediate government
inquiry. Maybe one or two of the more than two
dozen government entities now beating their
chests about bonuses can redirect their
energies to this much larger issue confronting
us: Who signed off on this $80 billion bailout-now
approaching $200 billion-and why?

Why indeed ?

The second question, of course, is why was
Goldman wise to AIG's declining position two
years ago, but nobody else appears to have
known? There is always the operating premise
that Goldman is better than the rest in the
field, but where were the federal agencies that
should have been taking a look at AIG's
leverage situation and general financial health?

And were AIG's public statements accurate in
revealing a decline? Or did Goldman, with its
multiple trading relationships with AIG, get an
early warning? This series of questions also
demands immediate inquiry and resolution.

What continues to be fundamentally
disappointing is that the "too big to fail"
institutions continue to absorb enormous sums
of taxpayer support without either demonstrating
the genuine need for such support, or altering
their behavior after receiving it.

Disappointing is putting it mildly. I should say outrageous
and rather fishy in themselves.

C