There are more than 15 million people unemployed and almost 2 million people set to lose their homes to foreclosure this year. But there is good news: the Wall Street banks are as profitable as ever and set to give out record bonuses this year. The taxpayer bailouts worked.
Congress is now debating a financial reform bill that is supposed to prevent this sort of disaster from ever happening again. Leaders in Congress are promising us tough measures that will put an end to "too big to fail" institutions and the other implicit and explicit subsidies that allow the Wall Street crew to get incredibly wealthy at our expense.
It's still an open question as to whether this reform effort will just be a pointless source of greenhouse gas emissions.
For example, the wording of a section of the house financial services committee bill that was intended to regulate derivatives trading included an "end user" exemption. This exemption would have given Enron a green light to carry on its shady dealings in over-the-counter transactions out of sight of any regulators.
After a bill to audit the Federal Reserve Board garnered 311 co-sponsors in the house, the financial industry's lobbyists got a member to put up an alternative amendment for an audit. The only problem was that this alternative "audit" bill would essentially have prevented an audit.
In another coup, there was an amendment put forward by Representative Paul Kanjorski that would allow the Fed to break up banks that pose a danger to the financial system. This garnered support from many who understood the bill to require the breakup of JP Morgan, Citigroup, and other "too big to fail" institutions.
But, this interpretation wrongly assumed that the amendment actually had some meaning. The authors of this amendment contend that no breakup of these giants is required because they do not pose a threat to the financial system at this moment. This assertion is of course absurd, because at a point where the collapse of one of these institutions does pose a threat to the financial system it will not be of any benefit to break them up.
It wouldn't have helped anything to break Lehman or AIG up into five different companies at the point where they were collapsing in September of 2008. The authors of these bills understand this fact - they are just treating the public like their subprime borrowers; suckers to be taken for a ride.
There are thousands of details that are a necessary part of any financial reform bill, but there is a simple way to know whether it was worth the effort. If the Wall Street banks are still in place, earning the same profits and paying the same bonuses, then there was no reform. There was just a pointless charade.
Much is still up in the air. To everyone's shock, the bogus Fed audit amendment was defeated in committee. A determined effort by Alan Grayson, one of the real audit bill's lead sponsors, along with impressive work from grassroots/netroots activists, hardened the opposition.
There is growing support to impose a modest tax on financial transactions. This tax would be a body blow to the Wall Street speculators while leaving middle-class investors largely unaffected. It could also raise more than a $1 trillion over the next decade to help the country recover from the damage inflicted by the Wall Street crew.
It is possible to design financial reform that will actually implement the changes needed to have a more efficient and fairer financial industry. There is also enormous public support for these changes. The question is whether public will can be harnessed to overcome the financial industry termites that infest every corner of the capital.
]]>Allowing our elected representatives to know what our central bank (the Fed) is doing with our money might seem reasonable, but not to Mr. Watt. He has proposed an alternative which would keep this information secret. According to Mr. Watt, the prospect of a full GAO audit poses a huge risk to the Fed's independent conduct of monetary policy.
The Fed also funneled tens of billions in handouts of taxpayer dollars through AIG to Goldman Sachs and other major banks. This may also not have been possible had it not been for the Fed's independent monetary policy. In fact, Wall Street's current high profits and high bonuses may not have been possible without the Fed's independent monetary policy.
The Fed deserves responsibility for the other side of the equation as well. We would not be sitting here in the wreckage of an $8 trillion housing bubble, with 10.2 percent unemployment and 2 million foreclosures a year, without the Fed's independent monetary policy. We would not have seen the projections of debt soar by $6 trillion at the end of the next decade without the Fed's independent monetary policy.
Representative Watt is exactly right, we should think very carefully before we let Congress do anything that interferes with the Fed's independent monetary policy. Who knows where that could lead us?
It's always good to see charity, but if Goldman really wants to help small businesses how about financing research on the implementation of financial transactions taxes. This could free up tens of billions of dollars that are drained off by the financial sector each year and possibly reduce the volatility of prices in many markets. That would be a great boost to small businesses.
]]>NAFTA is not very popular, so coming out against it sells well with the electorate, especially among people who vote in Democratic primaries. However, the people who vote in Democratic primaries are not deciding trade policy, so it does not look like NAFTA is going to be renegotiated. There is a similar feel to the discussion of new banking rules where everyone is committed to dismantling "too big to fail" institutions.
This means that lenders don't have to worry about whether these banks are good credit risks, because they know that the federal government will guarantee their credit. This is a huge subsidy to these banks since it allows them to borrow at a lower cost than their competitors. I calculated that the value of this subsidy may be as much as $34 billion a year.
While everyone agrees that taxpayers should not be subsidizing these financial behemoths, it is not clear that any of the reform proposals will actually address the problem. Needless to say, Goldman Sachs, J.P. Morgan and the rest are incredibly well connected politically. For this reason, it is hard not to feel like we are hearing promises to renegotiate NAFTA. When this round of financial reform is over and done with, in all probability Goldman Sachs, J.P. Morgan and the rest will likely still be standing there, looking pretty much the same as they do now. And the rest of us will still be waiting for NAFTA to be renegotiated.
While we may need additional revenue at some point, it makes far more sense to impose a financial transactions tax, which would primarily hit the Wall Street banks that gave us this disaster, than to tax the consumption of ordinary working families. We can raise large amounts of money by taxing the speculation of the Wall Street high-flyers while barely affecting the sort of financial dealings that most of us do in our daily lives.
]]> The logic of a financial transactions tax is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps and other financial instruments. For example, the UK puts a 0.25% tax on the sale or purchase of shares of stock. This has very little impact on people who buy stock with the intent of holding it for a long period of time.For example, if someone buys $10,000 of stock, they will pay $25 in tax at the time of purchase. If they sell the stock 10 years later for $20,000, they will have to pay $50 in tax. The total tax would be equivalent to an increase of 0.8 percentage points in the capital gains tax.
By contrast, if someone is interested in buying stock at 1.00pm to sell at 2.00pm, this tax is likely to take a bit hit out of their expected profits. The same applies people who are speculating in futures, credit default swaps and other financial instruments.
We can raise more than $140bn a year taxing financial transactions, an amount equal to 1% of GDP. Before we look to impose a national sales tax, or value-added tax, as the deficit hawk crew would like, we should insist that we first put in place a set of financial transactions taxes.
A national sales tax will primarily hit the consumption of ordinary workers. People will pay for it in all of their everyday purchases. Food, clothing, medicine - everything will cost a bit more as a result of a sales tax. Poor and middle-class people will end up paying a larger share of their income in this tax. This is both because they spend a larger share of their income than the wealthy and also because they spend a larger share in the United States. While the wealthy may have the opportunity to travel extensively in Europe or in countries not affected by the national sales tax, few low- or middle-income people will have this option.
Since the financial sector is the source of the country's current economic and budget problems it also makes sense to have this sector bear the brunt of any new taxes that may be needed. The economic collapse caused by Wall Street's irrational exuberance has led to a huge increase in the country debt burden. It seems only fair that Wall Street bear the brunt of the clean-up costs. A financial transactions tax is the way to make sure that this happens.
In short, we have to tell the deficit hawk crew, many of whom earned their fortune on Wall Street, to slow down. The country does face serious budget problems, even if they may not be as bad as this crew claims. However, if we need taxes to address a budget shortfall, then Wall Street is the place to start. After we have put in place a tax on Wall Street speculation, if we still need additional money, we can talk about a tax that will primarily affect the middle class.
The tax credit is noteworthy not only because it is an incredibly bad use of tax dollars. It is a great example of how so-called free market, anti-government conservatives are perfectly happy to use tax dollars to help people they like, specifically realtors, builders, bankers and the relatively affluent people who will be the primary beneficiaries of this tax credit.
This is not free market fundamentalism; it is crony capitalism. It is redistribution. It is "spreading the wealth around." However, the direction is upward. This should be obvious, but yet many progressives insist on denouncing free market fundamentalists. They should get paid by conservatives for these denunciations.
The truth is that the conservatives also have an ambitious agenda for the pointed headed bureaucrats. The big difference is that conservatives want the pointed-headed bureaucrats to be giving taxpayer dollars to the people who already have lots of money. They have no interest in leaving matters to the market, at least not if the outcome is to reduce the income of those at the top.
Progressives should expunge the term "free market fundamentalism" from their vocabulary. The bad guys are not believers in the free market; they are believers in using the government as a tool of the rich. We should never let them get away with pretending otherwise.
Fortunately, there is an easy and quick way to begin to get these unemployed workers back to work. It involves paying workers to work shorter hours. The mechanism can take the form of a tax credit to employers. The government can give them a tax credit of up to $3,000 in order to shorten their workers' hours while leaving their pay unchanged. The reduction in hours can take the form of paid sick days, paid family leave, shorter workweeks or longer vacations. The employer can choose the method that is best for her workers and the workplace.
If take-home pay is left unchanged as a result of the credit, then demand should be left unchanged. If workers are on average putting in fewer hours and demand is unchanged, then employers will need to hire more workers.
]]> This logic is about as simple as it gets. The process is also quick and cheap. In principle, the government can go this route to save jobs at a cost of a bit more than $20,000 per job, far less than the estimates of the cost per job under the administration's stimulus package.We don't even have to speculate about whether this sort of short-hours arrangement can work. Germany put a short-hours program in place at the start of its recession. Its unemployment rate today is 7.6 percent, about the same as the unemployment rate it had going into the recession. Imagine that workers in the United States, like workers in Germany, were dealing with the recession by putting in four-day weeks (while getting paid for five) or getting an extra two weeks a year of paid vacation. This sure beats being unemployed or being threatened with unemployment.
Seventeen states already have a "work-share" program in place that allows employers to use unemployment insurance money to cover a reduction in work hours, without a corresponding reduction in pay. More than 100,000 layoffs have been prevented as result of this program.
Sen. Jack Reed of Rhode Island has a bill that would increase funding for work-share programs and remove some of the bureaucracy that makes it difficult for employers to take full advantage of the programs that currently exist. The bill would also provide start-up money for the states that do not have work-share programs.
The Reed bill would be a big step towards following the Germany model, taking advantage of a program that is already in place. It could very quickly make a big dent in the unemployment rate, by preserving many of the jobs that are now being lost.
In this respect, it is important to clear up a common confusion about the economy. Every month, we get a figure from the Labor Department for the new jobs created or lost. However, this is a net figure. Approximately four million people leave their jobs every month, about half of these workers, or two million, lose their jobs involuntarily. If the economy creates more than four million new jobs, then we will have a positive jobs figure for the month. If the economy creates less than four million new jobs, then the Labor Department will report that the economy lost jobs in the month.
Suppose that this work-share program reduced the number of people who lose their jobs involuntarily by 20 percent, or 400,000 workers per month. This would have the same effect to our job count as adding 400,000 additional new jobs. If this rate could actually be maintained over a full year, then it would imply that the economy would generate nearly five million new jobs.
All the projections show that the unemployment rate is likely to continue to rising for the immediate future and remain high for years to come. The Congressional Budget Office projects that the unemployment rate will average 10.2 percent next year and even in 2011 it will average 9.1 percent. If this projection proves accurate, it would be a disastrous scenario for tens of millions of people.
There are quick and effective ways to increase employment, with shorter hours at the top of the list. Making tens of millions of people suffer for economic mismanagement and the greed of the bankers is not acceptable. We must do something.
]]>For example, the proposed council of regulators to assess systemic risk would have been a pointless source of greenhouse gas emissions. Alan Greenspan would have insisted that the housing market is just fine and that there is no risk of a nationwide fall in house prices. Given Washington ways, everyone would have deferred to the Maestro, and seen nothing wrong with AIG's trillions of dollars of credit default swaps. After all, if AIG gave life insurance to 50 million people, no one would get on their case because they would not be able to pay off if everyone died at the same time.
The plan to have large banks cover the cost of bailouts of their brethren would not have been made by anyone who remembered the financial collapse last fall. When AIG went down and the world was in full-fledged financial crisis does anyone think that the Fed/FDIC would have insisted that Citigroup, Bank of America and the rest cough up additional funds to cover AIG's bad debts? Are these people serious?
If the bill passes with a serious public plan, it could make an enormous difference for the future of health care in the United States. However, the fact that the public option is even on the table at this point, after all the political experts had counted it out, shows the enormous potential for popular pressure to influence policy debates in this country.
The basic story is that President Obama and the Democratic leadership in Congress had always been lukewarm in their support of a public plan. President Obama had included it in his original proposal, but has made it clear on numerous occasions that he did not view it as an essential part of his health care plan.
]]> Of course, that is not the way that presidents get measures passed that they really want. President Clinton never said that he didn't view NAFTA as being a big part of his trade policy. President Bush didn't say that Congressional authorization of the Iraq war was a relatively small matter in his larger foreign policy agenda. President Obama's statements, that a public option was not essential, were an invitation to Congress to give him a bill that did not include a public plan.This could have been the end of the story for a public plan, except for the determined efforts of progressive activists to insist that Congress include a public plan. While the plan's opponents argued that the leadership did not have the 60 votes needed in the Senate to end a filibuster, public plan supporters pointed out that public plan opponents did not have the 218 votes needed in the House to get a health care plan approved without a public option. The logic was simple, if progressive members in the House refused to back a health care bill without a public plan, then any health care bill that passes Congress would have to include a public option. A large coalition of progressive groups kept up the pressure, insisting that Democrats in the House insist that any bill include a public option. They bombarded members with phone calls, faxes, emails and staged protests and organized petitions. This coalition was helped by polls that consistently show a large majority of the public support giving people the option to join a Medicare-type public plan. In fact, a recent New York Times poll showed people supporting a public option by a margin of 65 to 26 percent. The same poll showed that overall health care reform package losing by a small margin.
Supporters of a public plan have also been helped by the facts. The Congressional Budget Office's analysis shows that a robust public plan, with rates tied to Medicare rates, can save $100 billion over the next decade. This is a substantial portion of the money needed to cover the cost of the health care bill. Given the popular support for a public plan and the evidence that it could save substantial amounts of money, it is clear that opponents of a public option are not responding to constituents or concerns over costs.
The sustained pressure from progressives seems to have firmed support for a public plan in the House, but there is still the issue of getting 60 votes in the Senate. Here, it is important to make a distinction that the media and political pundits have tried to hide. It is not necessary to get 60 senators who will support a public plan. It is necessary to get 60 senators who will allow the Senate to vote on a public plan. This is very different.
Until recently, filibusters were unusual. It was standard practice for a senator to support cloture - allowing a piece of legislation to come up for a vote - but then to vote against the bill itself. Filibusters were reserved for extraordinary issues that members of the Senate felt were especially important.
Currently, Democrats have 60 seats in the Senate. This means that the party just needs its members to allow the central piece of its president's legislative agenda to come to a vote. That should not require too much party discipline; after all, the senators could still vote against the bill itself.
It's too early to know if this "no filibuster" path will succeed, but the fact that a public plan is still in the mix is a testament to the ability of grassroots activists to move the national political agenda. The political insiders will do their best to deny it, but political pressure from the masses can and does make a difference. It has made a difference in the debate over health care and it can make a difference in other areas. Let's see what a little grassroots activism can do for the Wall Street banks.
]]>This is a good first step, but it is only a first step. The pay caps involve only a relatively small number of people in an industry where hugely bloated salaries are the norm. Even in these cases it is too early to know that the pay caps will actually prove to be binding. After all, Wall Street's main craft is evading regulations and taxes. It is entirely possible that those clever Wall Street boys will find a way to get around whatever pay restrictions Mr. Feinberg puts in place.
Whatever happens to the pay of this small group of executives the real problem goes much deeper. The Wall Street folks view the wreckage from last year as a minor distraction and are eager to get back to business as usual. This attitude was best expressed by "a person close to A.I.G.'s board," who said of plans to restrict pay at the AIG division that wrecked the company to $200,000: "that's insulting ... why wouldn't anybody quit?"
Furthermore, if anyone among these other groups of workers mess up so badly that they bring down their employer, they lose their job. They don't get to go somewhere else because a $200,000 paycheck is "insulting."
Wall Street badly needs fixing. Fortunately we have the tool to do the job. It's called a financial transactions tax (FTT) - a modest tax on trades of stock, futures, options and other financial instruments. Such a tax could easily raise $100 billion a year, while cutting the financial sector down to a manageable size.
An FTT is not an alien concept. We actually had a tax on stock trades until 1964. The United Kingdom still has a 0.25 percent tax on stock trades that, relative to the size of its economy, raises the equivalent of $40 billion a year in the United States.
If we follow the lead of the UK, we will a great revenue source that will barely touch most of the population. Investors who buy and hold stock for 10 years will barely be affected, as is the case of a farmer hedging her wheat crop. However, someone who buys stock at 2:00 with the intention of selling at 3:00 would pay a substantial price.
There are many other good arguments for an FTT, including that it is the fairest way to fix the damage to the budget caused by the recession and the bailout, but an FTT will not get an airing in a Congress where the banks continue to wield enormous power. Congress will only consider an FTT, as opposed to more regressive proposals like a national sales tax, if the public demands it.
The public will have an opportunity to express their outrage at the banks and the need to rein them in at the Showdown in Chicago beginning on October 25. If this protest proves successful, and there are hundreds more like it around the country, then Congress may start thinking more clearly about measures to change Wall Street culture and to get back our money.
The basic logic is simple. China's central bank has been buying up huge amounts of dollar-based assets for the last decade. Their purchases include short and long-term government debt, mortgage backed securities and to a lesser extent private assets.
The Chinese central bank's purchases have two effects. First, they help to keep interest rates low. This supports economic growth by keeping down the interest rate on mortgages, car loans and other borrowing that boosts demand.
Suppose China stopped buying up U.S. government debt. Interest rates in the U.S. would rise, which would have some negative impact on growth. Of course, the Fed could try to offset this rise in rates by simply buying more debt itself. It has already been buying debt and it could simply buy enough to replace the lost demand from China. This would leave interest rates largely unchanged.
Suppose that the Fed doesn't intervene and lets interest rates rise. This will have some negative impact on growth, but there will also be a very positive side from China's decision to stop buying dollars. The dollar would fall in value against China's currency. This would make Chinese goods more expensive in the United States, leading U.S. consumers to purchases fewer imports from China and more domestically produced goods.
A lower-valued dollar would also make our exports cheaper in China. That would allow us to export more to China.
The net effect would be an improvement in our trade balance, bringing back some of the 5.5 million jobs that we've lost in manufacturing over the last decade. In fact, since nearly all economists agree that the current trade deficit can't persist for long, China would be helping the country bring about a necessary adjustment if it stopped buying up dollars.
Even the rise in interest rates would have a positive effect since it would allow for the completion of the deflation of the housing bubble, with house prices finally settling back to their trend levels. This drop in house prices will be a painful adjustment, but there is no way to avoid it. Bubbles cannot be sustained indefinitely and we are better off allowing the housing market to return to normal so we can get back to a path of sustainable growth.
While decision of the Chinese to stop buying dollars might be good for the economy, it is likely to be disastrous for Citigroup and the rest of the basket case banks. If interest rates rose, then the value of the government bonds they hold would plummet. If the interest rate on 10-year Treasury bonds goes from the current 3.5 percent to a still low 4.5 percent, then the banks will have lost 8 percent on their holdings. At a 5.5 percent interest rate, a rate that would still be far below the average for the 90s, the loss would be 15 percent. Citi and the other basket cases could not endure these losses in their current financial state.
This could be why we see shrill pronouncements from the likes of the Washington Post editors, and other "experts" who couldn't see an $8 trillion housing bubble, that we need the Chinese government to keep buying up our debt. We absolutely do not need the Chinese government to keep buying U.S. debt and would almost certainly be better off if it stopped tomorrow. Citigroup and the other big banks do need the Chinese government to keep the money flowing if they are to have a chance of getting back on their feet. And, we know where the sympathies of the Washington Post's editors and other "experts" lie.
In the most extreme version of this boondoggle, the government will give a $15,000 handout to anyone who buys a home. That one really runs right to the top of the silliness meter. It's not cleat why we want people to buy homes. If the intent is to boost the housing market, this one falls short, since the vast majority of homebuyers will also be sellers, so their purchase does not on net boost demand.
The tax credit does create wonderful opportunities for gaming. I can "sell" my house to my brother and vice-versa, and we both get to pocket $15,000 (enough to buy health insurance for 5 kids for a year) at the taxpayers' expense.
But Congress may not be persuaded to get this silly even on Halloween, so they may settle for extending the first-time buyers tax credit. The current credit expires at the end of November.
The National Association of Realtors estimates that only 340,000 of the 2 million beneficiaries of the credit purchased homes they would not have bought otherwise. This means that taxpayers spent almost $50,000 for every additional home bought as a result of this benefit. With the median home costing $170,000, if we assume realtor fees, moving costs, and other expenses are equal to 20 percent of the purchase price, this would come to $34,000 of economic activity generated for every $50,000 we gave away through the credit.
But even this overstates the benefit of the credit. Most of the 340,000 people who bought a home because of the credit didn't just decide to buy a home because the government was giving them $8,000. The vast majority of the people walking away with $8,000 checks would have bought a home in 2010 or 2011; they just moved forward their purchase because of the credit.
This could still be good policy if we thought the economy was going to be back near full employment in 2010 or 2011. But there is no way the economy will have recovered in the next 2 years. The Congressional Budget Office projects that unemployment will average 10.2 percent in 2010 and 9.1 percent in 2011. We've effectively shelled out $15 billion dollars (the estimated cost of this year's credit) to make unemployment somewhat worse in these years, so that it will be slightly better in 2009. That doesn't sound too smart.
While there is not much of a story that the credit has directly boosted the economy, its backers claim that a side benefit is that the credit has boosted house prices. There is some logic here: the credit is a bit less than 5 percent of the median house price, so it is reasonable to believe that it has helped to raise house prices.
The only problem in that story is that it is not clear why we would want to boost house prices. Suppose we could snap our fingers and make everyone's house price double or even triple. That would be great news for the people who owned a home. Many could sell their homes and start renting and just live off their equity. Of course the one-third of the population that does not own homes would be less than thrilled about the fact that homes prices had doubled or tripled.
Imagine a policy that handed $200,000 in cash to everyone over the age of 40. That is more or less equivalent to a world in which home prices double.
The reality of course is that home prices are falling back to their trend levels after being inflated by a huge bubble for most of the decade. It is not clear why we would want the government to slow this process. That means that new homebuyers can expect to lose money when they sell their home at a lower price in the years after the credit has expired. That's a smart thing to do to our young people.
There would be logic to directing a tax credit to markets where the bubble has deflated so far that prices are overshooting on the downside. This would be places like Las Vegas and Phoenix where prices are already below their pre-bubble level. But logic and the homebuyers' tax credit never get in the same room.
That is why the homebuyers tax credit wins the award for silliest form of stimulus in 2009. There was a proposal for giving an $8,000 tax credit to the next 2 million people who purchase a pizza, but that one did not even come close for silliness. So let's give a big hand to the folks who developed the homebuyers' tax credit.
Then we should ask what happened to all those conservatives who are supposed to oppose handouts like this and the liberals who are supposed to care about fairness? Not in this Congress.
]]>Those disgusted by the bank bailouts, and the bankers who brought us this recession, will have a chance to make their views known when the American Bankers Association has its annual meeting in Chicago, October 25-27. A large coalition of labor, community, and consumer organizations are organizing a protest at this "Showdown in Chicago"
]]> A big turnout at this event can make a real difference. Just to review the scorecard, most of the country is still suffering the fallout from the bankers' irrational exuberance of the housing bubble era. The Congressional Budget Office (CBO) and other forecasters expect the suffering to endure for years to come.The unemployment rate is about to cross 10 percent, with an additional 9 million workers only able to find part-time work. CBO projects that unemployment will not return to normal levels until 2014. Almost 200,000 people are losing their homes every month through foreclosure. Tens of millions of people who had expected a comfortable retirement just saw most of their wealth disappear with the collapse of the housing bubble. State and local governments are being forced to lay off school teachers and fire fighters under the pressure of enormous budget deficits.
But not everyone is suffering. Thanks to the bailout programs put in place last fall, most of the country's major banks are back on their feet. In fact, in the most recent quarter, bank profits hit a new record high as a share of all corporate profits.
And the banks are sharing their wealth. Many of their top executives and high performers will be getting bonuses this year worth millions of dollars, in some cases the bonuses will be in the tens of millions.
In the meantime, in elite Washington circles people are busy making plans for a national sales tax so that the government can limit the fiscal damage caused by the bankers' recession. A sales tax is of course very regressive since low and moderate-income people typically spend the vast majority of their income, while our banker friends will more likely to be able to save some of their income or spend it in other countries where they will not be paying this new sales tax.
To summarize: the bankers wrecked the economy with their greed, ran off with taxpayer dollars in a massive bailout, and now plan to raise taxes for the rest of us. If that picture doesn't sound quite right, then go to Chicago.
This is a case where the divisions are not left-right, but of the elite against everyone else. When Congress was debating the TARP bank bailout last fall, members of Congress were hearing calls from people across the political spectrum who were outraged that their tax dollars were going to the banks that had wrecked the economy. A higher percentage of Republicans than Democrats ended up voting against this bankers' piñata.
The policies that will rein in the banks: reform of the Federal Reserve Board to make it democratically accountable, a tax on financial speculation to pay for the bankers' mess, and restrictions on the bank abuses of consumers that caused the carnage have support from people on both the left and right.
A bill that would require the Fed to disclose what it did with more than $2 trillion in loans to banks and other financial institutions was originally co-sponsored by Ron Paul and Alan Grayson, one of the most conservative and one of the most progressive members of Congress. Due to public pressure, it now has more than 270 co-sponsors.
This is exactly the sort of alliance that gets the elite worried. Reining in the power of the financial industry will be a long hard fought war, but it is one that must be fought. President and Nobel peace prize winner Barack Obama may not have been able to bring the Olympics to Chicago, but everyone who wants to retake our country from the banks can bring their backside there on October 25th.
For the vast majority of people in the country, who derive the vast majority of their income from working, the economy looks really awful. But the economy is not looking bad for everyone.
]]> As we are constantly reminded, the financial crisis is behind us and the banks are back in their feet. In fact, they are more than just back on their feet. In many ways they are doing better than ever. The most recent data from the commerce department shows that the financial industry profits now account for more than 31.5% of all corporate profits. This is a higher share than at any point during the housing bubble years.Of course, it is not that hard to make profits when you get to borrow money from the Fed at almost no interest and then lend it back to the government at 3.5% interest. Suppose the state of California was given the privilege of not only borrowing $1 trillion from the Fed at near zero interest but also using the money to buy Treasury bonds paying 3.5% interest. The $35bn in annual interest rate subsidies would take care of California's huge budget deficit pretty quickly.
But hey, California is just a big state. It's not a Wall Street bank. Congress is not going to tolerate special treatment for state governments.
The "save the banks" crew continues to peddle a seriously misleading story, mostly without challenge. They tell us that we had no choice. If we didn't give the banks trillions of dollars in their hour of desperate need, then the situation would be even worse.
There is no doubt that a complete collapse of the financial system would have complicated the recovery. However, handing the banks trillions, no questions asked, was not the only alternative.
Last year we faced a situation in which nearly every major bank faced bankruptcy: they could not pay their debts without the help of the government. Rather than just make below market loans, with few or no conditions, we could have made loans conditional on changing the way the banks did business. This would mean prohibiting them from dealing in complex derivative instruments, limiting leverage and seriously cutting executive compensation. (How does a $2m absolute cap - counting bonuses, stock options and other perks - sound?)
We could have done this because the US government held all the cards. If they didn't get money from us they would have been out of business. We could have told them to run around Wall Street naked, to walk on hot coals, to wear stupid looking hats, the choice was shutting down their banks and looking for new jobs.
Instead, we just handed them the cash, no questions asked. Now the banks are bigger and badder than ever and paying out big bonuses, just like before. As things stand, they will be an even bigger drain on the economy in the years ahead than they were in the years leading up to crash.
And, if anyone thinks that the banks have learned something about safe business practices, they have not been paying attention. What the banks have learned is that if you wreck your bank, and incidentally bring down the economy in the process, you can just send your lobbyists to Congress and the White House with empty bags and ask to have them filled up with money. The lesson is that Congress will say yes.
The politicians and the media can be counted on running to protect the banks in their hour of need. While tens of millions of people losing their jobs or their homes is just an unfortunate aspect of the modern economy, the collapse of Citigroup, Goldman Sachs, or Bank of America is a tragedy that our elites just can't fathom.
So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.
The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn.
]]> Unfortunately, the sociology of the economics profession and economic policymaking is structured so that the voices of those who raised concerns about the housing bubble were largely excluded from public debate. Federal Reserve Board Chairman Alan Greenspan and other leading lights of the economics profession insisted that everything was fine. As a result, nearly all the properly credentialed "experts" marched in lockstep behind their leaders, also insisting that everything was fine.Remarkably, even after this collapse, nothing has changed in the structure of debates over economic policy. Nearly every day of the week an organization in Washington sponsors a policy session on the budget deficit or other some other important economic topic and every last "expert" is among that distinguished group that somehow could not see an $8 trillion housing bubble.
This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn't be foolish enough to host a panel like this. Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn't call into question your competence as an economic analyst.
This should scare people. There is no reason to believe that people who were incapable if independent analysis before the bubble collapsed are now capable of thinking for themselves. In other words, the vast majority of the so-called experts who pontificate on economic policy are still people who are more accustomed to deferring to authority than doing their own analysis. This means that a great deal of silliness is likely to be perpetuated, just as was the case before the housing bubble collapsed.
The basic story on the budget deficit is very simple: We need badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth.
In the longer term, we will need to reduce our trade deficit to replace this demand, but this can only be brought about by a reduction in the value of the dollar against the currencies of our trading partners. If our budget experts had been capable of independent thinking before the crash, they would have pointed out the over-valued dollar as a main cause of imbalances in the US economy. Unfortunately, most of them are still incapable of recognizing the obvious.
The other big oversight that the budget experts commit is the failure to recognize the positive role that moderate rates of inflation can play in our economic recovery. Sustained inflation in the range of 3 to 4 percent will be the quickest way to rebuild the balance sheets of households who saw most or all of their wealth disappear with the bursting of the bubble.
Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash. For those old enough to remember, inflation was also a major factor in reducing the burden of the huge debt that the country incurred as a result of World War II.
Of course in the long term, if we don't fix health care then the deficits will be unbearable, but this calls for discussions of health care, not budget deficits. If we don't fix health care, the economy will be wrecked regardless of what we do with the budget.
But, we won't get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy. As it stands, the debate is dominated by a follow-the-leader crew who could not see an $8 trillion housing bubble.
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