More "Derivatives for Dummies": Proportionality

First, if you're not sure what an "insurable interest" is and how it relates to derivatives, please see my earlier post, "Credit Derivatives for Dummies: 'Insurable Interests'."

In order to fix the system, we – YOU AND ME – must understand the main factors in the current economic meltdown. Because from what our leaders have done so far, I'm very worried that either they don't understand it, or they're actually hoping we never will.

It's not as hard as it may seem. I think a lot of the people who helped create the crisis understood perfectly well that they were creating a glorified Ponzi scheme and have been deliberately obfuscating, first in order to pursue their own profits, and later to avoid being called to account for what they've wrought. Explaining it takes some words, but the concepts are simple.

The following is simplified, but I hope it'll make it easier to see the forest for the trees.

Assuming you've already got what an insurable interest is . . . here's another aspect of why the kind of speculation possible though credit derivatives is inherently problematic.

When someone gets a mortgage or an insurance policy on a property that they have a vested interest in, say, a house they're buying, there tends to be some kind of proportionality between the amount of the mortgage debt, the insurance, and the value of the property. Typically, there's a mortgage (historically for LESS than the total appraised value of the house, but never for more), and there's an insurance policy on the house for no more than the replacement cost of the house. The mortgage and the insurance are both outstanding obligations, but they are related to one another and to the actual value of the house, in that if the house is destroyed, the insurance will either go to rebuild the house or to pay off the mortgage.

So, suppose the house was purchased for $400,000. The worst-case scenario is that the house is completely destroyed.  In that case, the insurer has to pay out $400,000, but the borrower and mortgage lender are protected from loss. If the borrower and lender were deluded about the value of the property to begin with and the purchase price and loan were much bigger than they should have been – say the property was really worth only $100,000 – the borrower or lender's loss may be $300,000, which is very bad; but in any scenario, the total amount of losses that can actually be suffered by all of the parties put together is limited to $400,000.

The more deluded the parties were about the true value of the house, the bigger the potential losses; but while you may be able to pretend the house is worth four times its true value, you can't fool anyone into thinking it's worth hundreds of times its true value. So, so long as the insurance can only be sold to parties owning at least an indirect interest in that specific house, the total potential losses are intrinsically limited to something that bears some kind of proportionality to an at least tenuously plausible notion of the value of the house.

The bad mortgage loans on banks' books now are a problem, even if there were nothing else to worry about, probably much bigger than what we faced after Pres. Reagan's deregulation of S&L's led to that other debacle back in the 1980's. In the '80's, the S&L's that made the riskiest loans were declared insolvent and were liquidated. Resolving those loans was painful, but it was much less expensive than resolving the current crisis will be, because then, the borrower could re-negotiate the loan with her/his original lender, so many avoidable foreclosures were avoided (which tends to minimize the losses). Now, most borrowers won't easily be able to do that, because we allowed the banks that made the risky loans to "minimize" the risks by rolling them into pools of mortgage-backed securities that were sold to untold numbers of lenders. In fact, rather than minimizing the risks, securitization increased them by reducing banks' incentives to lend only to borrowers who could actually pay, effectively creating a race to the bottom in loan quality. So now, we may have even more bad loans, and, unless the gummint steps in, each borrower, in order to re-negotiate her/his loan, would have to negotiate with untold numbers of lenders, which would cost everyone involved much more than the amount of the loan. So, yeah, the bad mortgage loans are a problem.

But all those bad mortgage loans are still nowhere near the biggest factor in our current meltdown, because at least those losses can't exceed what people could persuade themselves or pretend the underlying properties were worth. The magnitude of the total of all the losses incurred by all of the borrowers, lenders, and insurers due to bad mortgage loans may be staggering, but they are not unlimited; they will bear at least some tenuous proportionality to the value of the underlying properties.

The really scary, mind-boggling factor is the credit derivatives. Because, since derivatives were sold to parties who had NO "insurable interest" in the assets on which they were betting (see my similarly-titled previous post), there was NO limit to the quantities of obligations that could be incurred with respect to the same assets. It's as if, instead of there being just one insurance policy with respect to any given house, thousands of insurance policies were sold with respect to the same house, to speculators with no property or other interest in that house but who just had a hunch it might burn down. So there was no proportionality, no inherent limit to the total amount of potential losses that could be incurred with respect to any single, actual asset. (Not to mention the vastly increased probability that one of the many who bought such insurance might succumb to the temptation to torch the place.)

And now you and I are being indirectly bankrupted to pay off on all those "policies."

AIG is one of the companies that sold the most "policies" in the form of credit derivatives.

Theoretically, if AIG had been charging appropriately large "premiums" for the derivatives they sold, and if they had segregated and invested enough of those premiums to cover their potential losses, they could have covered all the obligations they incurred.  But insuring companies have little incentive to underwrite their risks responsibly, unless they're regulated; and credit derivatives have not been regulated.  And the individuals who run insuring companies have little incentive to make sure their companies act responsibly, so long as those individuals can't be held personally liable for their "mistakes."  One of the things government regulators do with respect to ordinary insurance is to regulate insuring companies, including requiring them to disclose their reserves and potential liabilities and to maintain sufficient reserves to pay potential claims.

AIG didn't collect enough premiums, and/or they paid too much of what they did collect to senior management and shareholders, instead of retaining adequate reserves. They claim they didn't understand the risks. Well, I'm no economist, but I understand the risks better than AIG apparently did, and (a) it was their job to understand it, and (b) I find it hard to believe that all the people who spent their workdays creating and being the bosses of this mess, day in and day out over several years, were utterly clueless.

And the money did not just all go "poof"; some people made a lot on the bubble before it popped. They finance a lot of political campaigns.

Again, I was and remain strongly in favor of fast action by the gummint to restore confidence in the financially stronger banks and to stimulate the economy, but I do question the details with respect to how the money's being applied and why we know so little about that. E.g., some parties who bought derivatives may have been pension funds trying to hedge risks with respect to an "insurable interest" they actually owned, while others may simply have been extremely wealthy speculators who owned no such interest but simply wanted to place a bet that, say, Company Z was gonna tank.

It wouldn't give me any heartburn at all if the gummint simply said, you know what, we can't afford to pay speculators big winnings we never guaranteed in the first place.

The current chaos and continuing lack of transparency is a continuing looting opportunity. Credit derivatives are still unregulated and still continue to be sold (UPDATE: Timothy Geithner essentially confirmed this 3 mos. later here, while also failing to deny that derivatives sold today might be bailed out tomorrow), relating to mortgage-backed securities and lots of other things – only issuers like AIG could tell us what, but as far as I know, the gummint still hasn't required them to tell.

Where the people lead, the leaders will follow – I have a vintage button that says that, from back when Boomers helped force an end to the Viet Nam War.

For more details about the bailout and derivatives, see Dean Baker's piece at CommonDreams.

FURTHER UPDATE: Vanity Fair has a great excerpt from The Big Short by Michael Lewis, on the guy who was probably the first to figure out how to make a fortune betting against bad mortgage loans, Michael Burry.

FURTHER FURTHER UPDATE: Another good discussion of this subject at Charles Hugh Smith's oftwominds, with a description of the current state of looming, derivatives-driven disaster as of Feb., 2012: "[a]ccording to the Bank of International Settlements, as of June, 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, (32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are [still] not transparent or regulated."

Credit Derivatives for Dummies: "Insurable Interests"

Heard a discussion of credit derivatives on PBS last night by their business "expert," Paul Solman, and was disappointed that he totally ignored what I consider to be the WORST thing about derivatives.

As Solman explained, credit derivatives are like insurance. If you hold debt of a company, e.g., the company issued bonds or other securities that you bought, and you're nervous about the company's ability to make the agreed payments, you can buy a credit derivative to insure that if the company does go bankrupt, you'll still collect the amount they owe you.

But back up for a moment.  With respect to other, regular kinds of insurance, you can buy insurance for your own house or other property to cover your losses in case of fire, flood, etc. But you canNOT buy insurance on a house in which you have no ownership interest, because you're deemed not to have a sufficient interest in its NOT burning down. In fact, your owning insurance on a house in which you have no ownership interest gives you a positive incentive to commit arson. That's a big conflict of interests.

Owning the house, or whatever you're buying insurance for, is called "having an insurable interest." You actually have a vested interest in the property, or the life, or whatever it is that's insured -- you have a vested interest in its NOT being destroyed, so you're unlikely to abuse the insurance system to, say, merely gamble speculatively on its destruction, let alone actually commit arson or whatever.

Now, because credit derivatives are unregulated, not only do we have no clear idea of what's out there (although the commonly agreed estimate as of this writing is $62 TRILLION, which is several times the US's gross national product). But the worst part, which I've yet to hear anyone on the traditional media outlets including PBS or NPR explain, is that we have no idea whether most of the parties who bought and are still buying credit derivatives are doing so in order to protect the value of assets they actually own, or if they're just making speculative bets.

In other words, while some credit derivatives may have been bought by owners of bonds, mortgage-backed securities, or other securities to hedge the risks of actually owning those assets, large amounts of derivatives may well have been bought by people who were NOT purchasing insurance to protect any insurable interest, but who merely felt like betting that certain securities would crater – people who suspected that a few small bets might pay off big.

In fact, they could have been purchased by people who not only felt like betting that certain securities would fail, but who had enough inside info, if not power, to know that such failure was likely to happen, or even to help cause it to happen.

SO. The BIGGEST outrage about the bailout is that the gigantic wads of taxpayer money given to Wall St. may well be being used to pay off bets made by speculators with no insurable interest -- i.e., no real need for the money -- and who may even have helped bring about the failure of the companies they bet against.

(By comparison, the losses on the underlying "insured" assets – the home mortgages, etc. – are small potatoes; and even the bonuses bankers have been allowed to pay themselves, are trivial.)

Before we give any money to derivatives issuers like AIG, we should find out what their obligations are, including which of them are to counterparties with "insurable interests" and which are to mere speculators. Then we'd be in a position to make informed choices about how best to allocate taxpayer money.

And there's no good reason we can't find that out. We don't even need AIG's cooperation. All the government has to do is announce to the world, if you bought a derivative from AIG and you think AIG owes or could in the future owe you money on it, tell us who you are, the amount of the payment to be made, and some other info like what if any "insurable interest" it's intended to cover. And if you don't file your claim, your claim will be wiped out.

This is what happens if you or I become insolvent. It's called bankruptcy. Another thing about regular bankruptcy is, if the total of all the claims filed against you are bigger than all you've got to pay them with, then generally, the court just divides whatever you've got left among your creditors, and the remainder of your obligations is wiped out. The creditors take cents on the dollar, and eat the remainder as a loss. And they don't get reimbursed by taxpayers. This is fair because your creditors and investors had the opportunity to investigate what kind of credit risk you were before deciding to extend any credit to you; the taxpayers didn't.

Because the banks and AIG are so big, we're told, we can't afford to make their counterparty/creditors/investors eat the loss. That may be true in some cases. In others, not so much.

Yes, regulating this activity would be complicated; so is your phone, but we don't throw up our hands and say it's too hard.

You and me are sacrificing our retirements, kids' educations, etc., to make good on bets we never agreed to, placed by parties who not only stood to lose little if the catastrophes they bought insurance against weren't covered, but who in some cases actually had the power to CAUSE the catastrophes they were buying insurance against.

Nouriel Roubini, the NYU professor who predicted the current crisis, mentioned in a recent talk that throughout recorded history, there's been a more or less regular cycle of economic bubble-and-bust every ten years, with only one exception during which we managed to prevent such crises from arising for a solid fifty years: the fifty years while Glass-Steagall and other post-depression securities regulation remained in effect. Then we allowed Republicans and "New" Dems, financed by Free Marketeers, to dismantle it; and now we've got the biggest economic meltdown in history.

We need effective government to regulate markets and protect those of us who don't have the time or expertise to figure it all out. We've had effective regulation in the past, and we can have it again. It's not, really, a matter of brain-power; it's a matter of balls.

UPDATE: If you found this post worthwhile, you may want to check out my next post on this subject, More "Derivatives for Dummies": Proportionality.

FURTHER UPDATE: Vanity Fair has a great excerpt from The Big Short by Michael Lewis, on the guy who was probably the first to figure out how to make a fortune betting against bad mortgage loans, Michael Burry.

FURTHER FURTHER UPDATE: Another helpful, more recent article at Peak Watch, noting, among other things, "So far the auto industry – GM and Chrysler – have received $17.4 billion in U.S. funds after much gnashing of Congressional teeth. Meanwhile, [AIG] snapped its fingers and over the weekend Treasury officials gave it another $30 billion – bringing its total to $180 billion." The funds to AIG amount to a "nontransparent, opaque and shady bailout of [its] counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions." (quoting other sources).

Update Re- "Derivatives for Dummies" (What Every Legislator Should Know About How to Fix Our Economy, but Doesn't)

Remember my posts in May, 2009 (here and here) on "Derivatives for Dummies"?

Well, they're still relevant, because we still haven't done anything about regulating the derivatives that were the source of the biggest loss to our economy (no, it wasn't bad mortgages!) – so the problem has only gotten worse since 2008.

Charles Hugh Smith's oftwominds has an updated discussion, with a description of the current state of the looming, derivatives-driven disaster: "[a]ccording to the Bank of International Settlements, as of June, 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, (32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are [still] not transparent or regulated." [Emphasis supplied.]

If you don't know what I'm talking about, read my original posts (links at the top of this post). I don't think I've seen a simpler explanation, and it's not nearly as hard to understand as they try to make it seem.

As the hippies used to say, "where the people lead, the leaders will follow."

A Few Key Concerns Re- the Bailout Bill

This is a very rough draft, but I thought impt. to get it out.

We may well be at a make-or-break moment like few our country has faced before. So pls try to digest this sufficiently to pick out a few points you can relate to and call your congresscritters NOW.

Under the Bailout Bill, Paulson's Authority to Buy Bad Debt on Behalf of Taxpayers Is NOT Limited to U.S. Firms, or Even to Debt Secured by U.S. Properties

As stated by Rep. Brad Sherman (CA) on CNBC (video here):

"The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

"The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen."

See also this.

"It's the Derivatives, Stupid"

Much discussion I've heard talks about this bill as if it enables Paulson merely to buy mortgages, or interests in mortgage pools, and suggests that even if the loans are bad, they're only partially under-secured, so there's no way we'll lose more than a portion of our money and we might even come out ahead if we buy these assets at bargain prices.

This is a red herring.

Paulson is NOT limited to buying mortgages and interests in mortgage pools. Bad mortgages are only a small part of what he can buy, and they are only a small part of the problem -- only 5%, according to the gov't's own, recent report; derivatives are 95%.

These derivatives are basically shallowly secured bets. So, the much larger problem is the layers of leveraging on top of mortgage pools. See here:

“I think the $700 billion will be like a drop in the bucket because the total credit market in the U.S. is something close to $60 trillion. Then you have the CDS market – credit default swaps – of around $62 trillion. Then you have the whole derivatives worldwide worth about a notional $1,300 trillion. So the $700 billion is really nothing and the Treasury is just giving out this figure when actually the end figure may be $5 trillion. . . the problem is not that home prices have gone down; the problem is excessive leverage.”

I guess this is why the serious analysts I've read worry that this bill will do no more than delay our day of reckoning.

Why No Serious Discussion of Alternatives?

Such as:

1. The "Trickle Up" plan.

2. The progressive Dem plan described here.

3. Bill Clinton mentioned during his most recent appearance on The Daily Show that when faced with a similar situation, instead of buying bad assets outright, which sticks taxpayers with 100% of the risk, in a similar sitch under the Clinton Admin. we made LOANS which bore INTEREST. Note that under general legal principals, the first people to get paid off are lenders. Next, investors. Last, owners. So this approach would incentivize the people we're giving the money to get their houses in order and give significantly better assurance to taxpayers that both their original investment and possibly even some kind of profit will be recovered.

4. George Soros thinks we should buy equity, not bad assets. As suggested above, this approach would afford taxpayers more upside for less risk.

5. See also here.

6. And here ("In a Sept. 24 letter to congressional leaders, 166 academic economists [including three Nobel Prize winners] said they oppose Treasury Secretary Henry Paulson's plan because it's a "subsidy'' for business, it's ambiguous and it may have adverse market consequences in the long term. They also expressed alarm at the haste of lawmakers and the Bush administration to pass legislation.")

The Secret Pink Elephant

The Fed has been massively inflating the dollar as our only way out of this mess. Citizen wealth won't be eviscerated JUST by busted home values, or by hits to our savings though portfolio losses, or even by the bailout. We'll suffer as much or more through losses to our buying power.

(I saw this coming when we invaded Iraq while cutting taxes. There simply was no other realistic way to pay for it all.)

Elimination of the Mark-to-Market Rule

See here. Elimination of this rule means that the values claimed by companies for their assets need no longer have any basis in reality. Even assuming the new rule requires companies to estimate values reasonably and in good faith, proving that management understated values unreasonably or in bad faith will be all but impossible, since everyone agrees it's impossible to determine the values for assets for which there's no market (assuming you dismiss the notion that no market means the value is zero), and no one knows just how bad these debts are.

There will no longer be any meaningful basis for investors to evaluate companies' assets. Investors who understand the change won't want to invest in U.S. firms, and investors who don't understand it will basically be defrauded.

Elimination of the Up-Tick Rule

See this and sources cited therein.

Obviously, we need MORE, not less oversight, regulation, and meaningful DISincentives for bad behavior

. . . but this bill does NOTHING to bring those about; in fact if anything, it continues the trend initiated during the Reagan administration toward dismantling such protections. The Glass-Steagall Act should be restored, as well as the up-tick rule and other protections.

The Secret Hot Pink Elephant

All financial institutions would prefer a free-for-all; but perhaps now we have the chance not only to re-regulate our own markets but to persuade other countries to regulate theirs, too. This would not only ensure a level playing field for our own markets and institutions, but promote fairness to investors, large and small, world-wide.

Who Will Administer the Assets We Buy?

We'll be buying the worst of what "professionals" have stuck themselves with, but we won't have the stronger assets to help us carry any losses and we don't now have the professional expertise to deal with what we'll be buying.

People talk about this as a "liquidity crisis"; but there would be no liquidity crisis if those who created it weren't seriously worried that what underlies it is a bunch of big losses. These "assets" will require active management.

And does anyone really imagine the government as run by the current administration is going to deal with these assets more efficiently than incentivized professionals? Not really. As The New York Times reported ten days ago,

"Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

"Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

"At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees."

But aren't those the same people who drove the system off a cliff and couldn't fix it on their own dime?

Did You Know . . .

That Treasury Secretary Henry Paulson was Chairman of Goldman Sachs during the period for which it was investigated for fraudulent activity by Elliott Spitzer? (See Wikipedia on Paulson and Spitzer.)

UPDATE: Hm, looks like as of 10-15-08, the Wikipedia info on Paulson has been edited . . . no longer any mention of investigation of Spitzer's investigation of wrongdoing under Paulson's management of Goldman Sachs; instead, it says, "Paulson led government efforts to avoid a severe economic slowdown."

How to Fix the Economy (Including Social Security)?

The American Dream is being looted before our eyes.

I've worked for 40 years, stayed out of debt, saved, invested carefully – everything I was supposed to do. I and my employers have been paying into SS and Medicare for decades. During the last six months, I've lost a quarter of my retirement fund; and I fully expect that what I've got left will be eviscerated by inflation beginning in the not-too-distant future.

Now they want to cut Social Security and Medicare; see here, here, here, here and here.

I've got three multiple-choice questions.

1. WHO Should Pay for the Current Disaster?

(a) Old people who worked hard and saved, who've just lost a lot of their savings in the crash and have no hope of recovery before they die, let alone before they retire, and many of whom have no prayer of finding a job in this economy? (Note, not all the lost money simply "vanished," as some suggest. Some people came out ahead, and are still trying to.)

(b) Young people who mostly haven't yet lost much in the crash and may still have time to recover? (I'm NOT saying this is what should happen.)

(c) The wealthy top 2% who've benefitted the most by far from the regime of tax cuts and deregulation inaugurated under Reagan (remember the S&L debacle enabled by deregulation, and the subsequent bailout at taxpayer expense, which, monstrous though it seemed at the time, was apparently just a test-run for the much larger-scale looting now underway?), including but not necessarily limited to the Wall Street and military-industrial types who've most substantially helped create this mess??

(d) The people who've made/are still trying to make a bundle on credit derivatives and naked shorts??? (If you're not familiar with "naked shorts," see here and here. It's NOT fun for all.)

Personally, I'm voting for a new benchmark in public accountability: not one taxpayer should lose one dime before every one of the people who've made/are still trying to make a bundle on credit derivatives and naked shorts have LOST every dime.

2. HOW Should We Pay?

(a) We can cut Social Security and other "entitlements" to the people who proportionately contributed the most and who need it most, the elderly and the poor. (NOTE: even though it's true that SS funds have been borrowed by the rest of the gummint, there's still an obligation on the gummint to repay. If the U.S. is insolvent, there's a HUGE difference between being first in line for whatever's left vs. being last in line behind Wall Street and Halliburton, or worse, not being in line at all.)

(b) We can inflate the dollar, so everyone suffers equally in proportion to the dollars they hold (further vitiating peoples' retirement funds or other savings.)

(c) We can tax the heck out of everyone with assets or income greater than $2 million. 'Cause if you have more than that, you don't really need it, esp. not compared to the rest of us.

(d) We could confiscate the assets of the people who've made/are still trying to make a bundle on credit derivatives and naked shorts. After all, they just confiscated a quarter of my life's savings.

3. What Caused the Crisis -- WHAT Needs to Be "Fixed"?

(a) Deregulation. Over the last few decades, as our memories of the '29 Crash and ensuing Great Depression faded and our attention wandered or was spread too thin, conservatives repealed the restrictions that protected our savings from excessive speculation and fraud (yes, I know, some so-called "Dems" participated or failed to object; in my book, they're conservatives). They also gutted enforcement agencies by slashing budgets and staff. One result was the wave of S&L failures in the 80's. Few of those actually guilty were actually punished, so we continued down the primrose deregulatory path; voilà credit derivatives (the main part of the current disaster, esp. so long as we're not willing to allow those who made the bets suffer the losses), naked shorts, Madoff's 3-decade-long Ponzi scheme, etc.

We simply cannot leave the foxes in charge of the henhouse; we MUST not only restore but expand Glass-Steagall to cover new kinds of institutions, re-regulate in various other areas, and of course restore enforcement capabilities.

(b) The systematic impoverishment of the working/consuming classes in the U.S. and some other developed countries. During the last few decades, U.S. leaders (themselves in hock to multinational corporations) chose to promote a model in which economic growth was fueled by ever-increasing consumption, while allowing most consumers' real wages to fall far short of real inflation and enacting tax cuts that have disproportionately benefitted the top 2%. Jobs, but not labor or environmental protections, have been exported. U.S. workers' numbers, hours, and productivity have steadily grown; but we've been pushed into debt and steadily drained of the income and assets necessary to continue to consume.

Multinational corps. don't care; if U.S. workers can't afford the product; sooner or later, workers elsewhere will take up the slack.

(c) All of the above. Until we fix both (a) and (b) above, nothing else we do will restore us to genuine economic health.

It seems we're no longer governed by laws or governments; we are governed by multinational corporate interests -- and it's not even the interests of the stockholders in those corporations, as those of us who've watched our savings vaporize during the last few months have learned; it's the interests of senior management.

Helpful Explanations Re- the Current Economic Crisis

(For an inspirational soundtrack for this post, click on the video in the post two below this one, titled "Human Anthem.")

In a recent Vanity Fair article, Nobel-laureate economist Joseph Stiglitz argues that we can't fix our problems unless we understand the causes. He identifies five crucial wrong turns taken during the last few decades:

1. Removing Walls Between Foxes and Henhouses. In 1999 Congress repealed the Glass-Steagall Act, which had been passed in the wake of the 1929 crash in order to help prevent the same thing from happening again. It worked. The Act separated commercial banks, which were supposed to accept deposits and make loans based on prudent underwriting principles, from investment banks, which engage in organizing sales of riskier investments such as stocks and bonds. Repealing the Act and allowing banks to engage in both kinds of activities at once inevitably meant they would be under greater temptation and pressure to subject ordinary deposits to the much greater risks of equity investments directly or indirectly underwritten by the bank.

2. Installing a Fed Chair Who Favored Deregulation and Liquidity Injections. In 1987 the Reagan administration replaced Paul Volcker with Alan Greenspan. Volcker understood the need for regulation of financial markets and had successfully brought inflation down from more than 11% to under 4%. Greenspan believed markets are self-regulating, turned the money spigot on, and helped set the stage for a series of increasingly catastrophic asset bubbles.

Two other important deregulatory mistakes were the rejection of a call in 1998 by Brooksley Born, head of the Commodity Futures Trading Commission, for government regulation of credit derivatives, and the decision in 2004 to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, thereby further inflating the housing bubble.

Regarding our current bubble, bear in mind that the big problem isn't the bad mortgages; it's the credit derivatives. Even if derivatives were regulated like stocks or bonds, they are the kind of equity investment that depositary institutions probably should not be investing in. Warren Buffet has described derivatives as “financial weapons of mass destruction.” Greenspan consistently sided with those who argued that any kind of oversight might interfere with “innovation” in the financial system.

3. Injecting Money into the Wrong Bodies. Tax-cuts, touted as an economic cure-all, were repeatedly enacted that mainly benefitted the upper-upper class. When "trickle-down" failed, instead of admonishing Congress, Greenspan pumped the economy up by lowering interest rates and increasing the money supply.

4. Faking the Numbers. After the collapse of Worldcom and Enron revealed serious problems with corporate accounting, Congress enacted the Sarbanes-Oxley Act; but while corporations have complained that the Act is too burdensome, in fact it didn't go far enough. A main deficiency identified by Stiglitz is that it failed to rein in "incentive" options granted to executives, which rather than incentivizing better management performance, as claimed, proved to incentivize further distortions in accounting.

The incentives for the rating agencies such as such as Moody’s and Standard & Poor’s are similarly distorted, since the rating agencies are paid by the companies they're supposed to rate, with the predictable result that their ratings suffer "grade inflation" so long as things are going well, to be downgraded only after the problems become obvious anyway.

I'd add, the government itself has also taken steps to obscure if not "fake" economic realities, by jiggering the ways in which inflation and unemployment statistics are measured, by completely ceasing to publish M3 money supply statistics, and by widely-suspected, increasingly-frequent stock market manipulation by the President's "Plunge Protection Team."

5. The Bush Admin's Response to the Current Crisis. Stiglitz writes, "Valuable time was wasted as Paulson pushed his own plan, 'cash for trash,' buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks. . . . If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems—the flawed incentive structures and the inadequate regulatory system."

Quoting Greenspan during Congressional hearings this fall, Stiglitz concludes by observing: "The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, 'I have found a flaw.' Congressman Henry Waxman pushed him, responding, 'In other words, you found that your view of the world, your ideology, was not right; it was not working.' -- 'Absolutely, precisely,' Greenspan said."

In a recent piece on counterpunch, freelance writer Mike Whitney agrees, and further explores how past policies -- including both deregulation and the creation of excessive monetary and debt liquidity -- have enriched the highest-income citizens at the expense of middle- and lower-income citizens. The entire piece is well-worth the read; but to include just one quote: "The bottom line, is that financialization, which rests on the twin pillars of easy credit and ballooning debt, creates an inherently unstable system which is prone to wild swings and frequent busts. Bernanke is trying to restore this system ignoring the fact that workers -- whose personal balance sheets are already bleeding red -- can no longer support it. . . . There is a historic mismatch between supply and demand that cannot be reconciled by Bernanke's market meddling. Workers need a raise; that's how demand is created."

Helpful Image (Restore Glass-Steagall)

(Click on the image for a more legible version.)

UPDATE: From the MetroWest Daily News, quoting but without linking to The Nation:

Why do the losses of Jamie Dimon at JPMorgan Chase matter? The Federal Reserve allowed investment banks to convert to bank holding companies, now owning commercial banks, which are FDIC insured.

William Greider writes in the Nation magazine, “JPMorgan Chase parks all of its vast derivatives holdings in its commercial bank subsidiary, which means the taxpayer is on the hook for these losses since commercial banks are FDIC insured.” Greider further states, “In the event of a collapse, the banks can use its deposit base to pay off the derivatives, while leaving the Federal Deposit Insurance Corporation to reimburse depositors if their money runs out. JPMorgan has contracts totaling $72 trillion and 99 percent of them are booked at its FDIC- insured bank.”

Continuing — “We are “insuring” other big boys of banking in the same way. Citigroup has nearly all of its $53 trillion in derivatives in its FDIC-insured bank; Goldman Sachs has $44 trillion parked at and FDIC-backed institution. After Bank of America purchased Merrill Lynch, BoA began transferring the securities firm’s derivatives to the FDIC-insured bank, which now holds $47 trillion in contracts.” And the Ryan Republicans want to invest Social Security with these same bankers?

New Meme: "Too Big to Save"

"Fact #1. Too big to save. Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they've received to date.

"Fact #2. Bigger losses ahead. Even before any further declines in the economy, an unusually large portion of their assets are already in grave jeopardy — commercial real estate loans going sour, credit cards loans tanking, auto loans sinking, and residential mortgages turning to dust. Now, as the economy continues to tumble, avoiding much larger losses will be almost impossible.

"Fact #3. Big derivatives players. Bank of America and Citigroup are the nation's second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That's over ten times the derivatives that Lehman Brothers had on its books when it failed last year.

"Fact #4. They've bet far too much on each other's failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all — credit default swaps. These are the big bets that financial institutions make on the failure of other major companies."

More here.

More Insight into the Economic Crisis

and our gummint's putative efforts to fix it -- just a taste of what I'm trying hard not to feel sick with rage about this morning. (Emphasis {bolding} supplied in all instances.)

From Buzzflash 3/30/09, citing economist Jeffrey Sachs, WaPo, and The New York Post (much more at the foregoing link):

The banks have zeroed in on Geithner's cash giveaway bonanza, the "Public Private Investment Partnership" (PPIP) . . . . As expected, Bank of America and Citigroup have angled their way to the front of the herd, thrusting their pig-heads into the public trough and extracting whatever morsels they can find amid a din of gurgling and sucking sounds. . . .

"As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post...

"But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

"One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay."

. . . . Thus begins the next taxpayer-subsidized feeding frenzy featuring all the usual suspects. The race is on to vacuum up as much toxic mortgage paper as possible so it can be dumped on Uncle Sam at a hefty profit. Nice. These are the same miscreants the Obama Administration is so dead-set on rescuing. It's crazy to help people who use the cover of a financial crisis to fatten their own bottom line. Let them sink and be done with it.

From Geopolitics-Geoeconomics, 3/30/09 (more at the link):

What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default. [The five are, in order of decreasing magnitude, JPMorgan Chase, Bank of America, Citibank, Goldman Sachs, and the merged Wells Fargo-Wachovia Bank.] . . .

The Government bailout of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. . . .

This is what Wall Street and Geithner are frantically trying to prevent.

From Rolling Stone, 3/19/09 (much more at the link):

The global economic crisis isn't about money - it's about power. . . .

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

From NYT, 3/29/09 (more at the link):

Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox.

Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.

So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title — and a world of trouble — in her name.

“I thought, ‘What kind of game is this?’ ” Ms. James, 41, said while picking at trash at the house, now so worthless the city plans to demolish it — another bill for which she will be liable.

From Information Clearing House, 3/30/09, citing The Wall Street Journal and WaPo (much more at the link): "If Obama is serious about restoring confidence in the markets, he should replace current SEC chief Mary Schapiro with Eliot Spitzer." If Obama were serious, that is.

The lesson to me is, we ALL need to start working a lot harder to understand what's being done to us.

Another Good Article on Causes of the Economic Crisis

– which must be understood in order to fix it – by Michael Collins, who's boiled the history down to its essentials while identifying the key players. A few excerpts:

Our financial system looks ruined beyond repair. The credit default swaps crisis is 40 or so times bigger than the real estate meltdown over subprime derivatives. The top 25 banks in the United States are loaded down with $13 trillion in credit default swaps and the deal is coming unraveled. If we accept the highly dubious assumption that the debt from the financial meltdown needs to be repaid by us [i.e., us working stiffs, rather than just letting the players who made these risky bets absorb the losses], we're looking at $43,000 [per] citizen right now. And we're just starting.

It didn't get that way by accident. There was special legislation that enabled the current crisis.

This was classic Money Party strategy and tactics.

* * * * *

The baseline requirement for the era of greed was satisfied in 1999 when Congress repealed key provisions of the Glass-Steagall act. That law was established during the first Great Depression. It tightly restricted the opportunities for reckless speculation by banks.

* * * * *

Credit default swaps and other derivatives had been illegal for decades. In 1981, specific rules were set up to tighten restrictions against these schemes. But all that changed on Dec. 21, 2000 when the lame duck Congress passed the "Commodity Futures Modernization Act of 2000'" making these products legal. The legislation also barred the gathering of information that would serve as early warning on the legalized gambling on credit worthiness.

More here.

Nouriel Roubini, an NYU professor who predicted the current crisis, mentioned in a recent talk that throughout history, there's been a more or less regular cycle of economic bubble-and-bust every ten years, with only one exception during which we managed to prevent such crises from arising for a solid fifty years: the fifty years while Glass-Steagall was in effect.

Meanwhile, banks are still buying and selling credit derivatives and swaps.

Jail, Not Bail. If You Agree . . .

please contact your reps and favored media outlets.

Everyone knows bad mortgages are not the main problem -- they represent only a small percent of the total wealth that's being sucked out of our economy (see this gummint report; and several sources concur that the actual losses likely to result from bad mortgages alone won't be more than 5 - 10% of the total, if that).

The big losses are in the credit derivatives (if you're not sure what these are, see Financial Sense or MoneyMatters).

I don't mind bailing out poor people who got mortgages they shouldn't have gotten; I do mind bailing out their lenders, who should have known better (that would be McCain's plan, which might ultimately benefit some borrowers but would more directly benefit the lenders by taking the bad loans off their hands).

And I don't even mind bailing out any lenders who did not help create the mess and who bought derivatives in a reasonable effort to insure themselves against losses in mortgage-backed securities they actually owned.

But I DO mind very MUCH bailing out people who bought or sold derivatives NOT to hedge against losses for securities they actually owned but simply as a "bet." These people were engaging in naked speculation, and it is not only morally wrong to require the rest of us to bail them out, it is a huge mistake to shield them from their losses, as a matter of practical policy.

These are the people who lobbied for the deregulation that enabled them to create a mess so monstrous that their best defense now is to claim they don't understand their own creation.

(And note that there's been not just de-reg, but de-funding and de-staffing of oversight; see. e.g., here: "Mr. Lynn Turner, Chief Accountant of the [SEC] testified that the SEC Office of Risk Management, which had oversight responsibility for the Credit Default Swap market . . . was cut in [Bush] Administration ‘budget cuts’ from a staff of [over] one hundred down to one person.")

I've worked hard since I was 16, stayed out of debt, saved, invested conservatively, and I've just watched 25% of my life's savings be vaporized at a point in life when it's doubtful I'll ever be able to recover the loss -- and I'm supposed to bail out the guys that caused this?

I suspect a lot of these people deserve jail, not bail.

But what might make me just as happy would be if each of them were sentenced to work at a minimum-wage job and to have to actually live on it for a year or few. Or maybe even just at the mean average annual wages of U.S. workers.

So much for the rant.

The practical lesson I hope you're taking away from this experience is that we MUST re-regulate. It is not realistic to expect the foxes to guard the henhouse; nor is it realistic to expect consumers or even "sophisticated" investors to guard against sophisticated financial schemes. There is nothing patronizing about this; it's simply a fact: I and I suspect most other citizens simply do not have the expertise or even the time to investigate my depositary bank's claimed assets, let alone my other investments, the way a financial professional might -- any more than I have the expertise or time to evaluate scientific research on new drugs, or to capture and try criminals. This is the kind of stuff government is for.

The problem is not too much gummint; it's who owns it.

The problem is not that us Uhmericans are over-taxed; it's that we and our gummint's coffers are being looted (e.g., and this is just a trivial e.g., per ABC News, less than one week after the gummint committed $85 billion to bailing out AIG, the company spent $440,000 on a retreat for its execs, including $150,000 for meals and $23,000 in spa charges -- but hey, looting's stressful).

Moreover, forking over all the bail-out money we can print will do nothing to restore confidence in U.S. markets, either at home or abroad, so long as the same players are free to engage in the same schemes.

Only re-regulation can restore such confidence. We MUST restore Glass-Steagall, transparency, and accountability.

Forgive me for adding, please see my closely-related post from April Fool's day earlier this year, if you haven't already, here. As I mentioned,

Others reviewing the details of the plan are even more concerned. Mike Whitney writes that, though the proposals are being billed "as a 'massive shakeup of US financial market regulation,' . . . [we should not] be deceived. [They] are neither 'timely' nor 'thoughtful' . . . . In fact, it's all just more of the same free market 'we can police ourselves' mumbo-jumbo that got us into this mess in the first place. The real objective of Paulson's so-called reforms is to decapitate the SEC and increase the powers of the Federal Reserve. . . . "

"If Paulson's plan is approved in its present form, Congress will have even less control over the financial system than it does now, and the same group of self-serving banking mandarins who created the biggest equity bubble in history will be able to administer the markets however they choose without the annoyance of government supervision. That's exactly what Treasury Secretary and his pals at the Fed want; unlimited power with no accountability." More here; see also The New York Times.

I'm hearing darn little from our congresscritters on re-regulation. It's time to start letting them know we'll settle for nothing less.

Here's a little video:

Inquiring Minds Want to Know . . .

• Is AIG still selling credit derivatives? (see, e.g., Timmeh, here.)

• Has Goldman Sachs bought any derivatives (from AIG or anyone else) since the AIG bailout (see, e.g., this)?

• If so, what are the terms (i.e., what is G-S betting for or against, and are those derivatives attached to any "insurable interest" of G-S – i.e., if they're hedging risks re- a commodity or whatever that they actually own, that's one thing; if they're simply speculating that, e.g., commercial real estate in general will tank, that's another)?

Punk Economics

Here's a good explanation of the European debt crisis that's also applicable in the US:



A few points that might warrant further explanation:

First, there are good reasons why it's both more fair and more constructive to require lenders and derivatives speculators to eat losses arising from bad loans, rather than passing them on to innocent taxpayers. A basic concept in the law as it's evolved through the centuries is that, when a transaction or other course of conduct results in harm, if the person who was the primary cause (in this case, the borrower) lacks the financial means to make things right, the next person who should be held liable is the person who was in a position to figure out that there could be a problem but who, rather than investigating the situation and preventing the bad transaction, facilitated it and profited from it. In the present situation, this next person would be the banks that made and securitized the bad loans and especially those that created and sold pools of those loans and who also placed bets that those loans would go bad.

If the bankers are required to eat the losses on the loans and the bets they made on them, they'll be motivated not to make the same mistakes or commit the same frauds again. If, on the other hand, innocent taxpayers are required to pay for bankers' mistakes and frauds, the bankers are given every incentive to do it again. So it's both more fair and more constructive to let the bankers eat the losses they should have known would result, rather than imposing them on innocent taxpayers.

I personally also have no problem requiring borrowers who took out loans that went bad to eat their losses, although I do believe we should have a decent social safety net, so they don't end up on the streets.

Instead, we're doing the exact opposite of what would be most fair and constructive – we're bailing out the bankers and some of the borrowers, at the expense of the people who took no part in any of the foolishness or fraud.

Second, the reason excessive austerity won't help is that it's demand that drives economic recoveries. Even proponents of austerity occasionally slip up and admit this; and it's consistent with actual, historical experience in the US – the fact that the economy has tended to grow and deficits have tended to shrink during Democratic administrations, which tend to favor social safety nets and protections for workers, while the economy has tended to shrink and deficits have tended to grow during Republican administrations, whose policies have favored the 1%.

Giving money to people who already have more than they can spend does not stimulate the economy because they don't spend it. More particularly, rich people know it makes no sense to use the money to create inventory when so few others can afford to buy it, so they know it makes no sense to hire workers to create more inventory. When you give money to rich people during a recession, you encourage not job-creation but money-hoarding, which helps no one other than the rich. Thus, despite – or rather, because of – the fact that so much of the U.S. stimulus has gone to banks and big corps., employment has risen very little, while cash reserves held by those businesses have swollen dramatically. Time and again, "trickle-down" has been proven not to work, and that's why conservatives have abandoned the phrase; but they're still pushing the policy.

(It's ironic, too, that in order to believe that trickle-down could work, you have to embrace something its proponents emphatically reject: namely, you'd have to assume it makes sense for the rich to create products regardless of whether the market demands them, even at the risk that they're products no one would ever want, rather than letting the market – i.e., in this case, the rest of us – decide. I.e., you have to embrace centralized planning, only it's planning by the oligarchs rather than by an elected government.)

As a result of the way we've handled things under the undue influence of the rich, vast sums have been sucked out of the productive economy and pocketed by the oligarchs.

Basically, economics can be boiled down to one metaphor: you generally can't eat a carrot unless someone cultivates one. To the extent we allow the 1% to loot our carrots without doing anything to help grow them, we starve. The same is true vis à vis deadbeats among the 99%; but the 1% have perfected the means to loot our carrots faster and on a vaster scale. And we're not just practicing socialism for the rich; we're literally making crime pay, while impoverishing the people who have been the most economically productive . . . because the latter are the only people with any money left but who still lack (or who have as yet failed to effectively exercise) the political clout of the rich.

Finally, I agree with ar47yrr4p, who commented on the video, " . . . I think it might have been beneficial to mention Iceland and what happened there a couple years ago . . . you see they jailed their bankers and some of their MP's, threw out their government, [and] told the banks to shove it . . . and now Iceland is prospering." The same thing happened in the wake of the S&L debacle that resulted from Reagan's deregulation of those institutions: we liquidated the bad S&L's, prosecuted the fraudsters, and moved on.

Recent Interview of Noam Chomsky Re- the Economy, Etc.

by Amy Goodman:

NOAM CHOMSKY: Like Larry Summers, for example, who is now [Obama's] chief economic adviser. I mean, he was Secretary of Treasury under Bill Clinton. His great achievement was to prevent Congress from regulating derivatives, exotic financial instruments. Well, that’s one of the main factors that led to the crisis.

His kind of senior adviser, one of the first, was Robert Rubin, who was Secretary of Treasury right before Summers. His main achievement—many achievements, like what he did to Indonesia and the third world, but here, his main achievement was to lead the way to revoke the Glass-Steagall legislation from the New Deal, which protected commercial banks from risky investments. It broke down those barriers. Immediately after having done this, he left the government, joined Citigroup as a director, and they began to make huge profits, including him, from picking up insurance companies and so on and making very risky loans, relying on the “too big to fail” doctrine, meaning if we get in trouble, the taxpayer will bail us out, which is just what’s happening, taxpayers now pouring tens of billions of dollars into rescuing Citigroup.

Well, these are the advisers who were supposed to fix up the system. Tim Geithner was right in the middle of this. He was head of the New York Federal Reserve, so, yes, he was supervising these actions. Now, you know, you can argue about whether they’re doing the right thing or the wrong thing, but are these the people who should be fixing up the system?

Actually, the business press just had some interesting things to say about this. Bloomberg News, you know, main business press, had an article in which they reviewed the records of the people who Obama invited to his economic summit. I think it must have been last November or December. They just reviewed the record. I think there were a couple dozen of them. People on the—you know, people like, say, Stiglitz, Krugman, they were never even allowed close to it, let alone anyone from the left or labor and so on, given token representation. So they went through the records, and they concluded that these people should not be invited to fix up the economy. Most of them should be getting subpoenas because of their record of accounting fraud, malpractice and so on, and helping bring about the current crisis.

* * * * *

AMY GOODMAN: Why do you think Obama chose to surround himself [with people like Summers]?

NOAM CHOMSKY: Because those are his beliefs. I mean, his support comes from the—his constituency is basically the financial institutions. Just take a look at the funding for his campaign. I mean, the final figures haven’t come out, but we have preliminary figures, and it seems to be mostly financial institutions. I mean, the financial institutions preferred him to McCain. They are the main funders for both—you know, I mean, core funders for both parties, but considerably more to Obama than McCain.

You can learn a lot from campaign contributions. In fact, one of the best predictors of policy around is Thomas Ferguson’s investment theory of politics, as he calls it—very outstanding political economist—which essentially—I mean, to say it in a sentence, he describes elections as occasions in which groups of investors coalesce and invest to control the state. And he takes a look at the formation of campaign contributors, and it gives you a surprisingly good prediction of what policies are going to be. It goes back a century, New Deal and so on. So, yeah, it can predict pretty well what Obama is going to do. There’s nothing surprising about this. It’s the norm in what’s called political democracy.

Ok, arguably massively violating copyright here; but check out this segment:

NOAM CHOMSKY: Well, healthcare is a dramatic case. I mean, for decades, the healthcare issue has been right at the top of domestic concerns, for very good reasons. The US has the most dysfunctional healthcare system in the industrial world, has about twice the per capita costs and some of the worst outcomes. It’s also the only privatized system. And if you look closely, those two things are related. And the privatized system is highly inefficient: a huge amount of administration, bureaucracy, supervision, you know, all kinds of things. It’s been studied pretty carefully.

Now, the public has had an opinion about this for decades. A considerable majority want a national healthcare system, like other industrial countries have. They usually say a Canadian-style system, not because Canada is the best, but at least you know that Canada exists. Nobody says an Australian-style system, which is much better, because who knows anything about that? But something like what’s sometimes called Medicare Plus, like extend Medicare to the population.

Well, up until—it’s interesting. Up until the year 2004, that idea was described, for example, by the New York Times as politically impossible and lacking political support. So, maybe the public wants it, but that’s not what counts as political support. The financial institutions are opposed, the pharmaceutical institutions are opposed, so it’s not—no political support. Well, in 2008, for the first time, the Democratic candidates—first Edwards, then the others—began to move in the direction of what the public has wanted, not there, but in that direction.

So what happened between 2004 and 2008? Well, public opinion didn’t change. It’s been this way for decades. What changed is that manufacturing industry, a big sector of the economy, has recognized that it’s being severely harmed by the highly inefficient privatized health system. So, General Motors said that it costs them over a thousand dollars more to produce a car in Detroit than across the border in Windsor, Canada. And, you know, when manufacturing industry becomes concerned, then things become politically possible, and they begin to have political support. So, yes, in 2008, there’s some discussion of it.

Now, you know, this is very revealing insight into how American democracy functions and what is meant by the term “political support” and “politically possible.” Again, this should be headlines. Will a proposal come that approaches what the public wants? Well, we’re already getting the backlash, strong backlash. And what private healthcare systems are claiming is that this is unfair. The government is so much more efficient that they’ll be driven—there’s no level playing field if the government gets into it, which is true.

So much more here; please read the whole dam' thing.

Derivatives STILL Being Sold TODAY May Be Bailed Out Tomorrow

Per Timmeh's non-denial:

Obama's Disappointing Appointments per Naomi Klein et Al.

Very rough transcript of video of Klein here, which is unfortunately interrupted by an odd interlude of pop-tuneship (emphasis supplied):

" . . . we're seeing these very disappointing appointments partly because we have not been honest about the Clinton years . . . it was a nice message to present the 90's as these "wonder years" in contrast to the Bush years; and that created a situation in which you could have a Larry Summers presented as a wise man instead of going down with Alan Greenspan -- Rubin and Summers should have gone down alongside him. It was an election strategy that relied on intellectual dishonesty. Now, Obama has already won, so there's no reason to be pandering in this way. Now, there's going to be a stimulus package, but how is it going to be paid for. Obama promised to increase taxes on the wealthy; Emmanuel has hinted they might not do that. And there's a huge fight over the kinds of taxes paid by hedge funds; and Larry Summers is coming straight from managing a hedge fund, one of the most secretive hedge funds around. The real question is not will they spend taxpayer money on infrastructure; they will. But will they rack up huge deficits, or will they actually pay for this with taxes on the wealthy, which is what they promised to do; because if they don't pay for this in an equitable, progressive way, there will be a huge economic crisis down the road, it will be blamed on Obama, and then there will be a wave of privatizations of these new investments in public spending, and there will be a whole new bubble."

Klein is i.m.h.o. a very smart person.

I've been keeping notes on Obama's appointments, and they're not totally reassuring. In particular, on the economic front, despite what corporate media types say, there were plenty of people who did see our current crisis coming. Not one of them has been given any responsibility for pulling us out of it; instead, we're entrusted entirely to those who helped engineer it.

I don't have time to edit the following info properly but I don't want to hold it back any longer, so here it is; sorry it's a bit raw:

Some Got It Right:

http://online.wsj.com/article/SB123086035502948067.html : For years, they were the party poopers: financial prognosticators who, amid the ebullient stock prices and effervescent home values that defined the early 21st century, warned of trouble. In hindsight, they're the ones who got it right -- or, at least, some of it.

Often mocked for predictions that seemed outlandish at the time -- big banks will fail, Fannie Mae will go bankrupt -- a few of these outliers, including money manager Jeremy Grantham, mutual-fund manager Bob Rodriguez and brokerage-house owner Peter Schiff, were among the first to describe key parts of the U.S. financial meltdown.
____________

http://www.ritholtz.com/blog/2009/01/no-one-saw-it-coming-really/ : Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party [http://online.wsj.com/article/SB123086154114948151.html ]:

“It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. — and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.

Mr. [Raghuram G.] Rajan, a professor at the University of Chicago’s Booth Graduate School of Business, chose that moment to deliver a paper called “Has Financial Development Made the World Riskier?” [http://www.kc.frb.org/publicat/sympos/2005/PDF/Rajan2005.pdf ]

His answer: Yes.

Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation. Today, however, few are dismissing his ideas. The financial crisis has savaged the reputation of Mr. Greenspan and others now seen as having turned a blind eye toward excessive risk-taking.”
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From http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true# : Michael Lewis, Meredith Whitney, Steve Eisman, Vincent Daniel, Danny Moses, Ivy Zelman, Jim Grant, Dan Gertner
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http://clusterstock.alleyinsider.com/2009/1/economists-who-blew-it-agree-prosperity-is-just-around-corner
Henry Blodget

Now that we're mired in the worst economic crisis since the Depression, forecasters who didn't see it coming are consoling themselves by saying, "no one saw it coming." This is hogwash. Many people saw it coming: Gary Shilling, Nouriel Roubini, Jeremy Grantham, Dean Baker, Peter Schiff, Robert Shiller, et al. They just don't happen to work for major investment banks.

It is true that the folks who work for major investment banks didn't see it coming. Historians will eventually determine whether this is because the major investment banks uniformly employ boneheads, or, more likely, because, when you work for an investment bank, it is easier to conclude that now is always a good time to buy stocks.

(None of these people have been given any responsibility in Obama's admin.)

And Some Didn't:

See Naomi Klein at http://www.youtube.com/watch?v=GDvRfkfMpp8&eurl=http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=385x265682
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http://www.nytimes.com/2009/01/10/business/10rubin.html?_r=1&hp :

Robert E. Rubin, the former Treasury secretary who is an influential director and senior adviser at Citigroup, will step down after coming under fire for his role in the bank’s current troubles, the bank confirmed Friday.

Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent . . . .
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WSJ Says That Crash Promulgator Plays Central Role in Planning Obama Economic Policy

http://www.prospect.org/csnc/blogs/beat_the_press

The Wall Street Journal told readers that former Treasury secretary and Citigroup honcho Robert Rubin is playing a central role in designing President Obama's economic policy. It would have been appropriate to note that with the possible exception of Alan Greenspan, Mr. Rubin is the person most responsible for the policies that lead to the current crisis.

Mr. Rubin was a staunch advocate the policy of one-sided financial deregulation under which the government ignored prudential regulation while continuing to allow major banks to benefit from the government's "too big to fail" insurance policy. Mr Rubin also actively promoted an over-valued dollar which led to the enormous trade deficit of recent years. In addition, he had a "bubbles are fine" approach that allowed huge asset bubbles to grow unchecked.

The WSJ does note that Mr. Rubin personally profited from these policies in his role as a top Citigroup executive, but it does not point out the extent to which he was directly responsible for the policies that have produced the worst economic downturn since the Great Depression. If Mr. Rubin is in fact playing a large role in determining the economic policies of the Obama administration, this should be serious cause for public concern.
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http://theautomaticearth.blogspot.com/2009/01/january-10-2009-hornswoggled.html :

Ilargi: . . . . Lawrence Summers and Robert Rubin are the finance powerhouses in the upcoming Obama administration. They were in the exact same place 10 years ago. This time, they bring along a protégé in Tim Geithner, who will be the fall guy if all goes wrong. And they know it will go wrong; they've seen it before. They're not dumb. They're just sick, not stupid. They know it will go wrong, because everything they've done so far has failed. Only, that's not what they see. They can't see it, because they are gambling addicts. And as you can find out in Gambling Anonymous meetings, the addicts are masters in distorting their own perception of reality. Rubin and Summers differ from most addicts in that they are in positions to control what is legal, which is quite close to what is real, and what is not.

The November 12, 1999 repeal of the Glass-Steagall Act (officially named the Banking Act of 1933), enforced through the signing into law of the Gramm-Leach-Bliley Act by Slick Billy Clinton, gave them access to depositors’ money, and thus made it legal to use people's savings for "investments". 9 years later, those savings were all gone. Today they have an even larger pool of dough: the money of all Americans, and all of their children. This is what you're looking at when you see Henry Paulson, Barney Frank, Ben Bernanke or Barack Obama talk about bail-outs and rescue plans. It's all about providing the world's most megalomaniac gamblers with cash for their addictions. There's nothing else, that’s all there is.

The banking industry had tried to get rid of Glass-Steagall for a decade, but, aside from minor changes in 1980 and 1982, it wouldn't be until Rubin and Summers were at the helm, as Treasury Secretary and Deputy Secretary, that they succeeded in pushing through the repeal. After setting up the procedure, Rubin left the government on July 1, 1999, and joined the newly formed Citigroup, leaving Summers as Treasury Secretary to execute the plan and have President Clinton sign the Gramm-Leach-Bliley Act into law.

Citigroup was put together in 1998 by combining Citibank and insurance slash finance company Travelers. The only way this combination made sense was for the Glass-Steagall Act to be gone, since the Act barred banks merging with insurers. Citi would have had to shed many valuable assets within the next 2-5 years to remain within the law. But then-CEO Sandy Weill stated at the time: "that over that time the legislation will change...we have had enough discussions to believe this will not be a problem“. In other words, the fix was in. The fact that Rubin joined the company months before Clinton signed Gramm-Leach-Bliley only serves to confirm that.

* * * * *
Of course the Fed chairman during all this time was Alan Greenspan. In 2000, the trio of Rubin, Summers and Greenspan successfully argued for the deregulation of the derivatives trade. This enabled Citi and Goldman Sachs, as well as other major Wall Street players, to increase their bets and gambles manyfold. And let me repeat: it took just 9 years for them to burn through all customer deposits. And then some.

[More at link above.]
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The nomination of Admiral Dennis Blair for Director of National Intelligence cannot be permitted to pass under any circumstances.

As reported by Democracy Now, when genocidal monsters in the Indonesian military were committing massacres in East Timor, Admiral Blair DEFIED his orders to get them to stop, and instead gave them encouragement to continue. He then lied to Congress about it all. No such loose cannon with such blood on his hands can be allowed in the new administration. The links to both these video stories can be found on the Reject Blair Action Page below:

Reject Blair Action Page: http://www.usalone.com/reject_blair.php
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http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x417019
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Re- Dennis Ross, to be retained under the Obama admin.:

"In 2006, Ross joined a cast of neoconservatives and foreign policy hawks in supporting the I. Lewis Libby Defense Fund, an initiative aimed at raising money for the disgraced former assistant to Vice President Dick Cheney who was convicted in connection to the investigation into the leaking of CIA agent Valerie Plame’s name. Ross served on the group’s steering committee along with Fred Thompson, Jack Kemp, Steve Forbes, Bernard Lewis, and Francis Fukuyama.24 The group’s chairman was Mel Sembler, a real estate magnate who serves as a trustee at AEI and has funded the group Freedom’s Watch."

"After the 9/11 terrorist attacks, Ross supported the advocacy work of PNAC, a neoconservative-led letterhead group that advocated overthrowing Saddam Hussein in response to the attacks, even if he was not tied to the them.26 Ross signed two PNAC open letters on the situation in post-war Iraq, both published in March 2003. The first of these, “Statement on Post-War Iraq,” was issued on March 19, 2003, the day before the United States began its invasion. The letter argued that Iraq should be seen as the first step in a larger reshaping of the region’s political landscape, contending that the invasion and rebuilding of Iraq could “contribute decisively to the democratization of the wider Middle East.” Other signatories included Max Boot, Eliot Cohen, Thomas Donnelly, Joshua Muravchik, and several other core neoconservatives."

(The above quotes are from Right Web's Profile of Dennis Ross.
http://www.rightweb.irc-online.org/profile/4786.html )
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The Trouble with Sanjay Gupta
By Paul Krugman / The New York Times

So apparently Obama plans to appoint CNN’s Sanjay Gupta as Surgeon General. I don’t have a problem with Gupta’s qualifications. But I do remember his mugging of Michael Moore over Sicko. You don’t have to like Moore or his film; but Gupta specifically claimed that Moore “fudged his facts”, when the truth was that on every one of the allegedly fudged facts, Moore was actually right and CNN was wrong.

What bothered me about the incident was that it was what Digby would call Village behavior: Moore is an outsider, he’s uncouth, so he gets smeared as unreliable even though he actually got it right. It’s sort of a minor-league version of the way people who pointed out in real time that Bush was misleading us into war are to this day considered less “serious” than people who waited until it was fashionable to reach that conclusion. And appointing Gupta now, although it’s a small thing, is just another example of the lack of accountability that always seems to be the rule when you get things wrong in a socially acceptable way.

Link: http://www.michaelmoore.com/words/mikeinthenews/index.php?id=12995
NY Times link: http://krugman.blogs.nytimes.com/2009/01/06/the-trouble-with-sanjay-gupta/
MORE at http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4779242

Just sayin' . . . .

UPDATE: Per USAToday,

This morning's reports about Health and Human Services secretary-designate Tom Daschle, his tax troubles and the money he earned in recent years from interests in the health care industry that he would oversee, include:

• A New York Times report that Daschle, "was aware as early as last June that he might have to pay back taxes for the use of a car and driver provided by a private equity firm, but did not inform the Obama transition team until weeks after Mr. Obama named him to the health secretary's post."

• Word in The Washington Post that financial disclosure forms show that "Daschle's expertise and insights, gleaned over 26 years in Congress, earned him more than $5 million over the past two years, including $220,000 from the health-care industry, and perks such as a chauffeured Cadillac, according to the documents." The Times comes up with a larger figure. Daschle earned "more than $300,000 in income from health-related companies that he might regulate as secretary," it says.

The NYT notes,

As a politician, Mr. Daschle often struck a populist note, but his financial disclosure report shows that in the last two years, he received $2.1 million from a law firm, Alston & Bird; $2 million in consulting fees from a private equity firm run by a major Democratic fundraiser, Leo Hindery Jr. (which provided him with the car and driver); and at least $220,000 for speeches to health care, pharmaceutical and insurance companies. He also received nearly $100,000 from health-related companies affected by federal regulation.

Also, according to Common Dreams (citing WaPo), Daschle was among the Dems who voted for the bankruptcy reform bill, which made it much for difficult for consumers to actually discharge their debt, after receiving $45,000 in political contributions from CitiGroup during the previous six years. "I've never seen a bill that was so one-sided. The cries, claims and concerns of vulnerable Americans who have suffered a financial emergency have been drowned out by the political might of the credit card industry," said former Dem. Senator Howard M. Metzenbaum now head of Consumer Federation of America. A similar bill had been vetoed by President Clinton.

Further UPDATE: Per Juan Cole,

Meanwhile, it is rumored that among the main shapers of Obama's Iran policy will be Dennis Ross, the head of the Washington Institute for Near East Policy, the think tank of the American Israel Public Affairs Committee. During Ross's tenure there, the WINEP website carried a call to bomb Iran; a paper arguing that nothing bad would happen if the US did bomb Iran; and it listed as a WINEP associate Daniel Pipes, who spent most of his waking hours during the past year decrying Barack Obama as a stealth Muslim and an apostate (which was it?) and who has repeatedly said racist things about Muslims. Turning Iran policy over to the Israel lobbies, the major agitators for a US war on Iran, is a very bad idea . . . .

Further UPDATE: Via boingboing,

Snip from a post by Alan Wexelblat on the alarming number of copyright maximalist lawyers being appointed by the Obama administration to the Department of Justice. Bad news for people who believe in copyright reform, and greater freedom to share, remix, and reuse content online. Snip:

First off, there's the #3 man at Justice, Thomas Perrelli, accurately described by CNET as "beloved by the RIAA". Not only has this guy been on the wrong side in the courtroom, he's fingered as instrumental in convincing the Copyright Board to strangle Web radio in its crib by imposing impossible fee structures.

* * * * *

Then there's the #2 man, currently slated to be David Ogden. If that name only rings a faint bell it's because you have to cast your mind back to Eldred v Ashcroft, the argument on whether retroactive copyright term extensions were legal. Sitting over there on Ashcroft's side? That's Mr. Odgen. For extra-bonus ick points, Ogden also was involved in defending the heinous COPA legislation, fortunately now dead and buried (but not forgotten).

The capper on this line-up of suspicious characters is Donald Verrilli, now up for Associate Deputy Attorney General. This specimen of legal acumen is front and center in the Cartel's jihad, having appeared for Viacom when it sued YouTube, for the RIAA against Jammie Thomas, single mother. And if we peer back a little farther, we find Verrilli's dirty fingerprints on MGM v Grokster.