Drinking Austerity Kool-Aid in 2011

Jan 4, 2011Marshall Auerback

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Marshall Auerback explains how misguided attempts to reduce the deficit kill jobs, squeeze the working and middle classes, and inflate crude oil prices. And a corrupt political system doesn't help.

The beginning of the year always seems a good time to lay out some broader themes which could develop throughout the year, good and bad, so here goes:

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Marshall Auerback explains how misguided attempts to reduce the deficit kill jobs, squeeze the working and middle classes, and inflate crude oil prices. And a corrupt political system doesn't help.

The beginning of the year always seems a good time to lay out some broader themes which could develop throughout the year, good and bad, so here goes:

The good news is that the US budget deficit still looks to be large enough to support modest top line growth and sustain and stabilize incomes, even if it's not large enough to bring the jobs we need. As I've argued many times in the past, higher government deficits facilitate private sector deleveraging and continuously add to incomes and savings. It is no coincidence that the financial burdens of households and corporations have continued to fall (and savings rates risen) as government deficits have increased.

Unfortunately, the new Congress appears bent on misguided deficit reduction. By next week, the House of Representatives will have a deficit hysteric majority, with many pledged to a balanced budget amendment. And the world seems to be leaning towards fiscal tightening pretty much everywhere. The unemployment benefits program has been extended, but benefits still expire after 99 weeks, and less in many states. Net state spending continues to decline as state and local governments continue to reduce their deficits.

It is true that state tax collections are up quite nicely these days. But even with the recent improvement many states' total monthly collections are just getting back to 2007/2008 levels, so they are not in the position to ramp up spending. The commentators who are crowing about the current increase in revenues do not understand the historical significance of the extreme weakness we have seen for two full years. As Philippa Dunne (co-author of the excellent Liscio Report) has pointed out to me, sales taxes began to show signs of trouble in early 2007. Catch-up in the funding of unfunded pension liabilities will also continue to be a drag on demand.

Clearly, much of the emotion surrounding government deficit spending could be rectified if we simply viewed the deficits for what they really are. The budget balance is the difference between total revenue and total outlays. At the federal government level, if total revenue is greater than outlays, the budget is in surplus and vice versa. It is a simple matter of accounting with no theory involved. That's it. In other words, without any discretionary policy changes, the budget balance will vary over the course of the business cycle. When the economy is weak, tax revenue falls and welfare payments rise, so the budget balance moves towards deficit (or an increasing deficit). When the economy is stronger, tax revenue rises and welfare payments fall and the budget balance becomes increasingly positive. Automatic stabilizers attenuate the amplitude in the business cycle by expanding the budget in a recession and contracting it in a boom (see this for further explanation).

To judge from statements on both the left AND the right, it is clear that very few politicians get this basic accounting point, which increases the odds that these social programs will continue to come under attack in 2011. This has already occurred in the UK over the past few months. There, a Tory-led coalition government has completely drunk the deficit reduction "Kool-Aid". Instead of the public sector providing employment leadership at a time when the private sector is not yet ready to expand jobs growth, David Cameron's administration has been cutting jobs and forcing unemployment up (see the UK's Labour Market Statistics). As the austerity drive deepens, the deflationary impact of these job cuts will undermine private sector employment growth. Not that this will stop the cuts from happening here in the US. This sort of economic vandalism has now metamorphosed into "responsible fiscal action", if one is to believe the vast majority of the "experts" in the mainstream commentariat.

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The attacks on public sector unions reflect another flank in this ruthless pincer movement on middle and working class Americans, as this NYTimes article illustrates. It is fascinating to see how the public narrative in the media has gradually shifted over the past year from Wall Street's sociopathic practices (which were directly responsible for the creation of the crisis) to the alleged greed of public employee unions and their pension benefits, many of which were the product of agreed wage negotiation packages in which unions were receiving these pension benefits in lieu of increased wage benefits. During 2008, we were told that the government's hands were tied and that sanctity of contracts had to be honored. This was when the Federal Reserve authorized 100% payouts to the likes of Goldman Sachs on AIG's credit default swaps (in effect allowing the Fed to act as an extra budgetary vehicle of the Treasury, which is a violation of the Constitution and shows how patently false the Fed's claims of independence are). But I don't seem to recall many Wall Street types going on about the sanctity of contracts when agreements with the UAW were reworked to save GM or now when public employee union pension benefits are under attack. The argument seems to be that the states are suffering from a genuine solvency crisis in which everybody has to make sacrifices, including the "greedy" unions. So why should big financial firms, which would otherwise have been toast but for the munificence of the suffering American taxpayer, be any different? If the attacks outlined in the NYTimes piece reflect a broader trend this year, then it has ominous implications for the country as a whole.

Another worry related to the potential diminution of spending power is the troublesome rise in crude prices. Net demand is not up appreciably, and Saudi production remains relatively low. Peak oil dynamics could well be at work here. In a broader sense, what Paul Krugman describes -- "we're living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices" -- could well prove accurate. Which, in the absence of countervailing support to incomes via fiscal policy or increased private sector activity that increases jobs, means cuts in other areas of discretionary spending. Hardly a healthy trend in a world still constrained by inadequate demand. Crude prices are already up enough to be a substantial tax on US consumers that has probably more than offset whatever aggregate demand might have been added by the latest tax package.

A federal pay freeze has been proposed. The Fed's zero rate policy and its continuation of "quantitative easing" both serve to reduce net interest income earned by the economy.

Bank regulators continue to impose policies that work against small bank lending, whose wholesale funding costs are substantially higher than their "too big to fail" counterparts. The Dodd-Frank "financial reform" entrenches the dominance of the systemically dangerous institutions at the expense of the 6,000 or so other banks that engage in classic loan intermediation activity -- the sort of thing we want our banks to be doing.

Overseas, the euro zone looks set to muddle through with very weak domestic demand. The periodic disruptions to the credit markets have hitherto been mitigated by repeated European Central Bank bond buying of the national debts in the secondary markets, but at the cost of further fiscal austerity being imposed on the periphery countries.

What about the emerging world, which has hitherto been held out as the major repository of global growth? Does China slow as a result of fighting inflation? Or Brazil? Maybe India as well?

Finally, there is the odious problem of political corruption, which manifests itself in many forms, but most recently through the cynical revolving door policy between Wall Street and government. Peter Orszag's move to Citi after spending months launching broadsides against Social Security from his perch at OMB and then the NYTimes goes beyond cynicism. Nobody expects a former government official to live like a monk after spending time in public service. But the idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution and then, less than two years after his administration took office, would take a job that (a) exemplifies the growing disparities the administration says it's trying to correct and (b) unavoidably call on knowledge and contacts he developed while serving at OMB is sickening in the extreme. That his successor also comes from Citi simply perpetuates the incredulity. All this, under an ostensibly "progressive" Democratic administration.

The revolving door between Wall Street and Washington calls attention to the rotten heart at the core of the American polity today -- what James Galbraith has felicitously termed "the predator state". The state has become too weak and therefore remains another instrument of corporate predation. The revolving door policy (eagerly embraced by this president, much like his predecessors) perpetuates the problem because it enhances the dominance of the so-called "FIRE" (finance, insurance, real estate) sector of the economy. The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. Its revenue takes the form of what classical economists called "economic rent," a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as "capital" gains. Its ethos consists largely of denuding the state of any provision of public goods, privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of credit cards or the credit needed to get by. It's a zero-sum economic activity. One party's gain (that of Wall Street usually) is another's loss. It looks like we'll have much more of the same as we enter into 2011.

"Happy" New Year everybody.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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2011 Will Bring More De facto Decriminalization of Elite Financial Fraud

Dec 28, 2010Bill Black

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Our very own Bill Black takes a hard look at the criminal justice system -- and how financial fraudsters are beating it.

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Our very own Bill Black takes a hard look at the criminal justice system -- and how financial fraudsters are beating it.

The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade -- de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI's and the Department of Justice's (DOJ) focus.

The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications.

The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous "accounting control frauds" that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender's alleged efforts to defraud the federal government's TARP bailout program.

What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ's senior leadership cannot conceive of elite bankers as criminals. On Huffington Post, David Heath writes:

Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. 'It doesn't make any sense to me that they would be deliberately defrauding themselves,' Wagner said."

Mr. Wagner is confused by his own pronouns: "It doesn't make any sense to me that they would be deliberately defrauding themselves." This direct quotation needs to be read in conjunction with the author's description of his position: "banks lose money" when loans "turn out to be fraudulent." Wagner was responding to a question about control fraud -- frauds led by the person controlling the seemingly legitimate entity who uses it as a "weapon." The relevant "they" is the person looting the bank -- the CEO. The word "themselves" refers not to the CEO, but rather to the bank. The CEO is not looting the CEO; he is looting the bank's creditors and shareholders. Two titles capture this well known fraud dynamic. The Nobel laureate in economics, George Akerlof, and Paul Romer co-authored Looting: the Economic Underworld of Bankruptcy for Profit in 1993 and I wrote The Best Way to Rob a Bank is to Own One (2005). The CEO becomes wealthy by looting the bank. He uses accounting as his ammunition because, to quote Akerlof & Romer, it is "a sure thing." The firm fails (or in the modern era, is bailed out), but the CEO walks away wealthy.

Here is the four-part recipe for maximizing fraudulent accounting income in the short-term:

1. Grow extremely rapidly
2. By making bad loans at high yields
3. While employing extreme leverage, and
4. Providing only minimal loss reserves

A bank that follows this recipe is mathematically guaranteed to report record income in the near term. The first two ingredients in the recipe are linked. A bank in a reasonably competitive, mature market such as home mortgage lending cannot decide to grow extremely rapidly by making good loans. A bank can, however, guarantee its ability to grow rapidly -- and charge a premium yield -- if it lends to the tens of millions of people who cannot afford to own a home. Equally importantly, if many lenders follow the same recipe they will cause a financial bubble to hyper-inflate. Financial bubbles extend the lives of accounting control frauds by making it simple to refinance loans to those who cannot afford to purchase the asset. The longer that delinquencies and defaults can be delayed the more the CEO can loot the bank.

Note that the same recipe that maximizes short-term fictional income in the near term maximizes real losses in the longer term. Mr. Wagner is unable to understand that accounting control fraud represents the ultimate "agency" problem -- the unfaithful agent (the CEO) enriches himself at the expense of the principals he is supposed to serve and the firm's creditors. Agency problems are well known to white-collar criminologists, economists, lawyers that practice corporate, securities, or criminal law, and financial regulators. Yes, accounting control fraud causes the bank to suffer huge losses. The loans don't "turn out to be fraudulent" -- they are fraudulent when made. The recognition of the losses is delayed when an epidemic of accounting control fraud hyper-inflates a bubble, but the bubble will increase the ultimate losses. Sacramento, California is one of the epicenters of the mortgage fraud that drove the financial crisis, so Mr. Wagner's lack of understanding of fraud mechanisms is particularly harmful.

Financial regulators are essential to prevent this kind of error by senior prosecutors. The regulators have to serve as the Sherpas for the criminal justice system to succeed against epidemics of control fraud. The FBI cannot have hundreds of agents expert in many hundreds of industries. The regulators have to do the heavy investigative lifting. They have the expertise and greater staff resources. The regulators also have to serve as the guides. Their criminal referrals have to provide the roadmaps that allow the FBI to conduct successful investigations. The regulators played this role successfully at key times during the S&L debacle, filing thousands of criminal referrals that led to over 1000 priority felony convictions. During the current crisis the OCC and the OTS - combined - made zero criminal referrals. None of the federal regulatory agencies appear to have enforced the regulatory mandate that federally insured depositories file criminal referrals - and noncompliance with that requirement was and is the norm. There is no indication that the FBI has demanded that the regulators enforce their rules.

Absent guidance and support from the regulators, the FBI turned to the worst conceivable source of guidance and support - the trade association of the "perps" -- the Mortgage Bankers Association (MBA). The MBA, predictably, defined its members as the victims of mortgage fraud. The MBA invented a nonsensical definition of mortgage fraud which made accounting control fraud impossible. All fraud supposedly fell into one of two categories: "fraud for housing" or "fraud for profit." The MBA members are, in fact, victims of accounting control fraud. The mortgage banks, however, do not set MBA policy. The CEOs of the mortgage banks determine MBA policy and they are not about to tell the FBI that they are the primary source of the epidemic of mortgage fraud. Similarly, they are not about to make criminal referrals, which might cause the FBI to investigate why some lenders made loans that were overwhelmingly fraudulent. MBA members virtually never made criminal referrals even though they made millions of fraudulent loans. Why don't the victims make criminal referrals and help the FBI protect them from the frauds?

Why did an industry, home mortgage lending, which had traditionally been able to keep losses from all sources to roughly one percent suddenly begin to suffer 80-100 percent fraud incidence on "liar's" loans? Why would an honest mortgage lender make "liar's" loans knowing that doing so would produce intense "adverse selection" and a "negative expected value"? They would not do so. They were not mandated to do so by federal regulation or law. They were not encouraged to do so by federal regulation or law. They did so because their CEOs decided they would do so in order to maximize fictional income and real bonuses. The CEOs increased the number of liar's loans they made after they were warned by the FBI that there was an "epidemic" of mortgage fraud and the FBI predicted it would cause an "economic crisis" were it not contained. The CEOs increased their liar's loans after the MBA's own anti-fraud experts stated that they deserved the name "liar's" loans because they were pervasively fraudulent and after those experts said that "liar's" loans were "an open invitation to fraudsters." The industry's formal euphemisms for liar's loans were "alt-a" and "stated income" loans. None of this makes sense for honest CEOs.

The federal regulators have not made any public study of liar's loans. The FDIC and OTS' joint data system on mortgages is an anti-study -- it uses a categorization system that ignores whether the loans were underwritten. This makes the data base useless for studying loans made without full underwriting -- the loans that were overwhelmingly fraudulent and drove the crisis. Credit Suisse reported that mortgage loans without full underwriting constituted 49% of all new originations in 2006. If that percentage is even in the ballpark it indicates that that there were millions of fraudulent loans originated in 2005-2007. It is appalling that the regulators are not studying the facts necessary to understand the crisis and hold the perpetrator accountable.

Fortunately, the state attorneys general have studied these mechanisms and they have found that it was the lenders and their agents that overwhelmingly (1) prompted the false loan application data and (2) coerced appraisers to inflate market values. An honest lender would never engage in either practice or permit its agents to do so. The federal regulators, however, have spent their passion trying to preempt state efforts to protect borrowers. The federal regulators took no effective action in response to the State AGs' findings.

The combined effect of these private sector, regulatory, and criminal justice failures has created a set of intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud. Attorney General Mukasey famously dismissed the epidemic of mortgage fraud as "white-collar street crime." He did so in the context of refusing to establish a national task force against mortgage fraud. A national task force is essential in this crisis because of the national lending scope of many of the worst accounting control frauds. Attorney General Holder has maintained Mukasey's passive approach to the elite frauds that drove the crisis.

The U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature -- as well as the data on fraud and analytics are all readily available. The FBI must end its "partnership" with the MBA.

Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. The regulators need to make assisting prosecutions, and bringing civil and enforcement actions, against the senior officers that led the control frauds their top priority. The regulators need to make detailed criminal referrals, enforce vigorously the regulatory mandate that insured depositories file criminal referrals, and prioritize banks that made large numbers of nonprime loans but few criminal referrals. The regulators need to work with DOJ to prioritize the cases. In the S&L debacle we used a formal process to create our "Top 100" priority cases. The regulators need to investigate rigorously every large nonprime lending specialist by creating a comprehensive national data base. We have unique opportunities given the massive holding of nonprime paper by the Fed and Fannie and Freddie to create a reliable data base and use it to conduct reliable studies and investigations.

Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs. The SEC needs to clean up accounting and the Big Four audit firms. The bank control frauds' "weapon of choice" is accounting. The Big Four audit firms consistently gave clean opinions to even the most egregious frauds. Provisions for losses (ALLL) fell to farcical levels. Losses were not recognized. Clear evidence of endemic fraud was ignored.

What are the prospects for these three vital changes occurring in 2011? They are poor. There is no evidence that any of the three changes is in process. The new House committee chairs have championed even weaker regulation and have not championed the prosecution of Wall Street elites.

The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street's elites, has decried the lack of prosecutions.

Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions. In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating. After we brought several hundred successful prosecutions he began wearing a huge button: "Jail the S&L Crooks!" Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds. All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger. Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.

Bill Black is a NewDeal2.0 braintruster, an associate professor of economics and law at the University of Missouri-Kansas City, a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One.

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Wallace Turbeville Explains it All on Clearinghouse Governance

Dec 16, 2010Mike Konczal

mike-konczal-2-100Get the 411 on reforming those who control derivatives trading.

There's been a lot of blogosphere attention to this Louise Story article in the New York Times, A Secretive Banking Elite Rules Trading in Derivatives (see Felix Salmon, Kevin Drum).

For those who are interested in the regulation of derivative clearinghouses after the Dodd-Frank Act, I'd highly recommend this paper by Wallace Turbeville, Derivatives Clearinghouses In the Era of Financial Reform (pdf). It was presented at the Roosevelt institute's The Future of Financial Reform conference:

mike-konczal-2-100Get the 411 on reforming those who control derivatives trading.

There's been a lot of blogosphere attention to this Louise Story article in the New York Times, A Secretive Banking Elite Rules Trading in Derivatives (see Felix Salmon, Kevin Drum).

For those who are interested in the regulation of derivative clearinghouses after the Dodd-Frank Act, I'd highly recommend this paper by Wallace Turbeville, Derivatives Clearinghouses In the Era of Financial Reform (pdf). It was presented at the Roosevelt institute's The Future of Financial Reform conference:

Will It Work? How Will We Know?: Wallace Turbeville from Roosevelt Institute on Vimeo.

Turbeville is a derivatives specialist at Better Markets and a visiting scholar at the Roosevelt Institute; he formerly led VMAC LLC as its CEO, which he left in late 2009 to devote his efforts to financial reform, energy, and environmental policy issues. He's an expert in clearinghouse issues. This paper is fantastic, both as an overview and as a detailed response to many arguments.

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For instance, in relation to the New York Times article:

Decision Making and Governance. In the Reform Act, the public has entrusted the clearinghouses with an enormously important role in the economy. Much has been written about potential influence of the clearing members, in particular the banks, on clearinghouses. Our legal colleagues have been concerned with formal governance issues and ownership shares and the CFTC has promulgated proposed regulations limiting ownership by clearing members and requiring independent directors. These issues are important. But far more important is the influence of dealer banks as sources for clearinghouse volume and, as a consequence, revenues. Banks control and direct volume. The Reform Act even provides rules allowing a non-bank counterparty to choose the clearinghouse to be used for a trade. But if that counterparty depends on a bank to be available when it needs a price hedge or credit, it is naïve to think it will resist the desires of that bank.

The real business of a clearinghouse is credit management. This is typically controlled by a tremendously powerful risk committee. Dealer bank involvement on risk committees is common and freely acknowledge. Clearinghouses assert that bank knowledge of risks is helpful; and that their influence is appropriate since the clearing members represented by the banks are at risk if something goes awry.

But 2008 tells us that the public is also at risk if the clearinghouse does not properly balance prudent risk
management with the mandate of the Reform Act. At a minimum, the public’s interest should be represented by membership on the risk committees of major clearinghouses. Regulatory representation, or representation by other public interest organization, would legitimize the process as long as resources and expertise were provided to challenge decisions such as which derivatives are cleared and which are not.

At a recent roundtable held by the SEC and CFTC on clearing, a representative of JP Morgan said that the financial sector would support a governmentally owned clearinghouse that was guaranteed by the government. It is an intriguing idea, especially if the italicized language were dropped. A government guarantee might even make sense, so long as it kicked in after the clearing members bore all of the losses they could; a!er all, that is where we are anyway.

To the general argument over why clearing hasn't happened if it is such a good idea and why end-users would resist a mandate or not create one themselves, which are central to the debate:

Why the preference of bi-lateral transactions over clearing? Here are some possibilities:

• Financial institutions can offer credit to customers in the form of foregone collateral to cover risk. The credit is tied to an advantageously priced derivatives trade. The price of the credit, embedded in the derivatives price, is obscured. In practice, derivatives embedded lending is considered by banks as much more lucrative than straightforward corporate lending.

• Customers may value the hedge and the embedded credit extension more than a derivatives price which is tight to the market. O!en, their primary task is to hedge and the price is secondary. Think of a regulated utility whose fuel and purchased power costs are passed through to consumers, but who need to hedge to please the ratings agencies and equity analysts.

• The credit extension is not reported by the customer the same as direct lending, so their balance sheets appear healthier. These motivations are predominant among end users.

I recommend reading the whole thing.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Rob Johnson Hunts for the Budget "Moby Dick"

Dec 14, 2010

So you're concerned about the debt-to-GDP ratio? Then listen to Rob Johnson, who separates the real white whales to harpoon from the harmless minnows. A new paper he co-authored with Tom Ferguson points out that austerity and stagnation most threaten our fiscal future. The American people are angry, and "there is a lot of valid rage in our society," Rob says. But "fears of magic thresholds like a 90% debt-to-GDP ratio or mythologies that have to do with the painlessness of cutting deficits are playing on those fears, but they're not sending things in a proper direction."

More at The Real News

So you're concerned about the debt-to-GDP ratio? Then listen to Rob Johnson, who separates the real white whales to harpoon from the harmless minnows. A new paper he co-authored with Tom Ferguson points out that austerity and stagnation most threaten our fiscal future. The American people are angry, and "there is a lot of valid rage in our society," Rob says. But "fears of magic thresholds like a 90% debt-to-GDP ratio or mythologies that have to do with the painlessness of cutting deficits are playing on those fears, but they're not sending things in a proper direction."

More at The Real News

Is Social Security going to bring down the ship? Rob is "nominating Social Security as a minnow." It seems a bit fishy that those who avow it will go bankrupt by 2050 couldn't see a financial crisis just two years ahead of them, he points out. So perhaps that shouldn't keep us up in bed at night.

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So what is the largest fish threatening fiscal instability? "If you're doing a whale watch," Rob says, "the Moby Dick of the American budget problem has to do with... money and politics, the concentration of interests." And there are three things we spend our money on that hurt the budget most: wars, financial crises and health care. He points out that as a country we spend more on our military budget than all other developed countries put together, and "the American people carry that on their back." The budget could also be rocked by another large bailout of a financial institution -- a threat that looms larger as banks continue to be Too Big To Fail. "Anybody who calls themselves a deficit hawk should have been and should continue to be a financial reform hawk," Rob says. And lastly, we should all be most afraid of skyrocketing health care costs. As he puts it, "We are letting oligopolies be oligopolies in the health care industry, and that is the center of the problem."

So no, high deficits don't necessarily forecast stormy seas ahead. But there are things that might. He ends his presentation by saying, "If I were a bond speculator, I'd be worried if we don't invest in America. If I were a citizen, I'd be worried if we don't invest in America."

Be sure to check out the full Working Paper: "A World Upside Down? Deficit Fantasies in the Great Recession."

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Adam Smith Would Have Shredded the Bowles-Simpson Tax Madness

Dec 8, 2010Michael Hudson

adam-smithReal free marketers should be calling for an economy that favors workers, not rent seekers and creditors.

What would Adam Smith have said about the Bowles-Simpson economic report?

adam-smithReal free marketers should be calling for an economy that favors workers, not rent seekers and creditors.

What would Adam Smith have said about the Bowles-Simpson economic report?

What a pity the great free marketer was not around to serve on the deficit reduction commission. He not only would have rolled over in his grave, he would have risen up wielding an ax to the fiscal proposals that are diametrically opposite to the fiscal principles that he and his original free market contemporaries urged.

Writing in the wake of the French Physiocrats with their Impôt Unique to collect the revenues that France's landed aristocracy drained from the countryside and towns, Smith endorsed the idea that the least burdensome tax was one that fell on land rent:

A more equal land-tax, a more equal tax upon the rent of houses, and such alterations in the present system of customs and excise as those which have been mentioned in the foregoing chapter might, perhaps, without increasing the burden of the greater part of the people, but only distributing the weight of it more equally upon the whole, produce a considerable augmentation of revenue. (Wealth of Nations, Book V.3.68)

If Britain were to become a dominant economic power, Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Ground rent charged by its landed aristocracy should be taxed away on the logic that it was the prototypical "free lunch" revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were "some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market." In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers -- what economists call a zero-sum game at another's expense.

The 19th century elaborated on the concept of economic rent as that element of price which found no counterpart in actual cost of production and hence was "unearned." It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo's Principles of Political Economy and Taxation elaborated on the concept of economic rent. Under conditions of diminishing soil fertility in the face of growing demand, value was set at the high-cost margin of production. Low-cost producers benefited from the rising price level. Ricardo helped clarify the concept of differential rent by applying it to mining and subsoil wealth as well as to land. Heinrich von Thünen soon added the more helpful concept of rent-of-location (site value).

The important classical point was that economic rent was produced either by nature or by special privilege ("monopoly"), not labor effort. Hence, it was that element of price that could not be explained by the labor theory of value, except by marginal costs on what Ricardo hypothesized to be "rentless land" as recourse was made to poorer soils. Ricardo's follower John Stuart Mill explained that being income without labor or other costs, such rent formed the natural basis for taxation.

The Progressive Era developed the view that public utilities and other natural monopolies rightly belonged in the public sector, where governments would provide their basic services at a subsidized price, or even freely, as in the case of roads. The idea was to keep user fees no higher than the actual cost of production, so as to avoid "rent seeking". This pejorative term means extracting income by placing tollbooths on the economy's key infrastructure. To leave roads and railroads, electric and power utilities in private hands ran the risk of private owners "rack-renting" the population, adding to the cost of living and doing business.

U.S. policy is just the opposite. Commercial real estate has been regressively "freed" from debt -- leaving the rental value to be pledged to banks as interest. This un-taxing of land rent has been a major factor in inflating the real estate bubble on credit, much as deregulating monopolies has helped inflate their stocks and bonds on credit.

This is the policy that the Bowles-Simpson deficit reduction commission endorses. Its regressive tax proposals would shrink the economy, pushing it further into debt. This transfer of revenue from labor and business to property owners -- and from them to their bankers and bondholders -- threatens to force up the government's fiscal deficit (as states and municipalities are seeing today) and turn the United States into a Third World-type neofeudal economy.

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Smith: Wars should be financed on a pay-as-you-go basis, not by borrowing

If the shade of Adam Smith were to reappear today, he would be equally disturbed by the failure of the Bowles-Simpson commission to address the issue of war debts. Smith's argument against waging foreign wars was basically an argument that they were not worth the debt burden and the associated taxes to pay interest on it. These payments transferred income from taxpayers to creditors -- largely foreign creditors, the Dutch in Smith's day, Asians today.

Neither Bowles-Simpson nor President Obama acknowledge the extent to which the federal debt -- and indeed, most of America's rise in foreign debt for decades on end -- has stemmed from overseas military spending. During the Vietnam War years of the 1960s and ‘70s, the military deficit accounted for the entire rise in U.S. foreign debt, as private sector trade and investment was exactly in balance.

Smith wrote that even a land tax could not finance governments or "compensate the further accumulation of the public debt in the next war." His argument was that to free the economy from taxes, nations should avoid wars. And the best way to do this was to wage them on a pay-as-you-go basis. Borrowing rather than taxing meant the population did not feel the real cost of war -- and thus deterred it from making an economically informed choice.

So the Bush-Obama administration has taken a fiscal stance diametrically opposed to that of the patron saint of free enterprise. While escalating war in Afghanistan and maintaining over 850 military bases around the world, the administration has run up the national debt that Smith decried. By shifting the tax burden off property and off rent-seeking monopolies -- above all, off the financial sector -- this policy has raised America's cost of living and doing business, thereby undercutting its competitive power and running up larger and larger foreign debt.

The Wealth of Nations traced the growth of Britain's national debt, listing how all new war borrowing was secured by a new excise tax. Writing in the wake of the Seven Years War with France, fought largely over their respective possessions in the New World, Smith urged Britain to free its American colonies. In a similar vein, after France's Revolution, its Minister of the Navy, Bertrand de Molleville, wrote that Louis XVI in 1792 had blamed the overthrow of his monarchy on the burdensome taxes levied to finance the war with Britain in America.

This did not prevent a new wave of Franco-British war under Napoleon, and by the time this new wave of warfare ended in 1815, interest charges absorbed some three-quarters of British government revenues and devastated French finances. Led by Henri de Saint-Simon, French free marketers focused as much on freeing economies from interest-bearing debt as the Physiocrats had sought to tax the landed nobility.

The balance of the 19th century saw a move throughout Europe to endorse progressive taxation. The aim was not class warfare that takes from the rich to give to the poor. Led by the industrial middle class and its leaders, the aim was to make national economies more competitive by freeing them from economic rent and private bank credit. Landlords and bankers were the two rentier classes bequeathed by Europe's feudal epoch: a hereditary aristocracy receiving land rent simply by virtue of birth and ownership, and banking based increasingly on securing the monopoly of credit creation as a means of extracting interest. Pressure grew to socialize the land's rental value and financial systems so that the economic surplus created by monopoly privilege and the rise in national prosperity would form the natural tax base, not excise taxes on consumer goods and incomes that increased the cost of living (and hence the break-even costs of labor) and of capital.

None of this classical free market theory is to be found in the Bowles-Simpson commission. It advocates a continued shift of the tax burden off property and the wealthiest layer of the population onto labor, as well as a fiscal giveaway to the vested interests. This is not what the classical economists meant by a free market. Their idea was to free markets from rent and interest, not to dismantle the government's power to tax and regulate prices to keep them in line with socially necessary costs of production.

So where are the "real" conservatives and free marketers today? They have been dropped from the academic curriculum. This virtual censorship is what enables the media to avoid calling the Bowles-Simpson commission what it is: a travesty of free market theory.

The way that Adam Smith would have addressed the deficit would have been to say, "Mr. Obama, pull out of Afghanistan -- and perhaps 850 of our foreign bases." And the century of free market economists who followed Smith would have said, "Tax away unearned rentier income. And do not pay creditors by selling off the private domain to rent-seeking privatizers erecting tollbooths on the economy." That was precisely the legacy of feudalism that free market theory was designed to reject, after all.

In view of the conspicuous absence of true free market conservatives, it is clear that President Obama selected members of the Bowles-Simpson commission to provide a rationale -- or at least a rhetorical cover story -- for turning the U.S. economy into a neofeudal one. It will be increasingly indebted to creditors, enjoying their revenue and "capital" gains (mainly land-price gains that John Stuart Mill's generation called the "unearned increment") at the top of the economic pyramid.

It won't work. It will drive the economy further into debt, shrink the fiscal base and further polarize the economy between rentiers (for whom John Maynard Keynes proposed euthanasia) and wage earners.

Prof. Michael Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL). His website is michael-hudson.com. **A shorter version of this post appeared on Counterpunch.

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A Foreclosure Lawyer Goes to Washington

Dec 8, 2010Thomas A. Cox

white-house-150Foreclosure lawyers may be better off working in the states than getting DC involved.

white-house-150Foreclosure lawyers may be better off working in the states than getting DC involved.

A couple of weeks ago, I was invited down to Washington to testify before the House Judiciary Committee hearing, "Foreclosed Justice: Causes and Effects of the Foreclosure Crisis." The panel that I was to be on included two other lawyers who represent homeowners, Professor Christopher Peterson (the University Of Utah law professor who has really got MERS's number), and representatives of three of the large loan servicers. Since one of those loan servicers representatives was to be from GMAC Mortgage, LLC, an outfit that has commanded quite a bit of my time and attention over the past six months, I hoped for the opportunity to make sparks fly with him in the hearing room.

I worked hard on my written testimony, giving GMAC Mortgage a lot of special attention. I headed down to DC on the day before the hearing just to be sure I made it on time. At 7pm, a call came in from the committee staffer telling me that the servicers were not going to be at the next day's hearing after all. Perhaps I am getting a swelled head, what with all of the recent media attention, but I wondered if the last-minute bailout meant that GMAC's representative did not want to sit before the committee with me as I much as I wanted to be with him.

Despite the absence of the servicers on our panel, I was still feeling energized the next morning. After all, after two recent hearings conducted by the Senate Banking Committee and one by the Subcommittee on Housing and Community Opportunity of the House Finance Committee, the House Judiciary Committee hearing was to be the first one where real, everyday foreclosure defense lawyers were appearing to explain the foreclosure crisis from a personal perspective. (No disrespect here to Diane Thompson of NCLC, who testified before the Senate Banking Committee -- she surely is a real lawyer, but she sits at the right foot of God as the country's preeminent expert on HAMP.)

The next day there were to be two panels before the 40-member committee, which meets in a big, impressive room. The first would include representatives from the OCC, Treasury and the Federal Housing Finance agency and a State Supreme Court (trial court) judge from New York. I was geared for action, but when the hearing started, there were only nine committee members in their seats. Later, the number shrank to three -- one of them distracted by an animated cell phone conversation.

Between a recess for a House vote and the glacial progress of the hearing, my fellow panel members and I were informed by a staffer mid-afternoon that, while they were thankful for our attendance, our panel would not getting an opportunity to testify that day.

Despite this unpleasant surprise, I came away with four observations:

1) I believe that an activist federal intervention into state property laws  to help solve the foreclosure scandal should be avoided. There are some areas where our federal government can handle issues better than the states, but this is not one of them. Example: The recent win that I scored in the Maine Supreme Court in August, where, construing more than 150 years of Maine foreclosure law development, our Court ruled that MERS cannot have standing to conduct foreclosures in Maine. This much-desired result came from local judges on a readily accessible state level court interpreting legal issues presented by local lawyers. We did not need, nor do we want, remote legislators in Washington telling us what the law will be for uniquely local matters.

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2) During the hearing, one of the Republican committee members argued that if the rule of law was enforced across the board, then perhaps the mortgage servicers would not be behaving as they do. He asked why there is not much more activity at the state level to sanction the lawyers who enable and present the servicers' dishonest claims. He wondered why the state courts are not being much more active in sanctioning misconduct, and why there is no criminal prosecution of misconduct, simple as submitting affidavits filled with perjury. I felt that these were legitimate questions. The dishonest affidavits issue is a simple one and I do not think that there is a good excuse for state boards of bar overseers failing to take action against the offending lawyers. And it puzzles me that no one state Supreme Court has taken any creative action, or undertaken a judicial inquiry to determine what, if any, remedy should exist for homeowners who lost their homes based upon dishonest affidavits. On the other hand, state judiciaries are tremendously overloaded and underfunded and have little to no spare capacity to take these issues on.

3) I wanted to ask this Republican if Congress should demand that Attorney General Eric Holder bring federal criminal charges against those who broke the law by submitting thousands of dishonest affidavits. I met with our newly appointed U.S. Attorney here in Maine about a month ago to urge him to consider using federal mail fraud and wire fraud statutes to pursue criminal charges against the servicers and perhaps their lawyers. The cryptic response seemed to be that the direction to do so would need to come from Washington. Apparently there is no such direction. Months ago, Holder said he was investigating. What is there to investigate? The crime is simple. We have served the evidence up on a silver platter of thousands of dishonest affidavits filed all over the country. Attorney General Holder should instruct U.S. attorneys in all fifty states to immediately start indicting those responsible for filing the dishonest affidavits, including the affiants and the notaries right on up to senior officers in the servicers who had to know what was going on. A wave of such indictments would surely change the culture in the servicing industry.

4) Another thing that stuck with me from the hearing is an apparent fundamental misunderstanding on the issue of principal reductions. Those who advocate against a foreclosure moratorium until there can be certainty that servicers will behave are also generally against forcing servicers to provide principal reductions as a part of the loan modification process. What the advocates of the "foreclosures are good" school seem to ignore is the fact that every foreclosure is, in fact, a principal reduction. Each foreclosure of an underwater mortgage reduces the principal recoverable on that loan. The rub is that foreclosures result in larger principal reductions than do loan modifications, which reduce the loan balance to market value, where homeowners can afford to pay. This is so because once a foreclosed property goes into REO inventory, it usually sells at a 20% discount to market value (and it also depresses the value of surrounding properties). Wouldn't it be better to avoid this deep discount and keep a homeowner in his home with a principal reduction to market value, rather than putting that homeowner on the street where his ability to become a consumer again will be delayed so much longer?

The House Judiciary Committee reconvened this hearing for December 8, 2010. I was about to leave Maine when I was advised at the last minute that the Republicans were now demanding another delay of one week. While I have agreed to return to Washington for this now twice delayed hearing, I wonder how much value I can really bring to that Committee's process. Relatively few committee members are even willing to show up, and the lame duck House of Representatives leaves me doubtful about really being heard and having a meaningful impact.

I came away feeling that I may be more useful in focusing on solutions up here in Maine in the hope that they may continue to ripple outwards. Because not much is happening in Washington.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Whose Side is the White House On?

Dec 6, 2010James K. Galbraith

2-face-obama-150In a speech given on November 20, 2010 at the ADA Education Fund's Post-election Conference at the Harvard Kennedy

2-face-obama-150In a speech given on November 20, 2010 at the ADA Education Fund's Post-election Conference at the Harvard Kennedy School, Galbraith asks who Obama is really working for, and demands that progressives seek leaders who will fight the good fight.

I want to raise a hard question -- a question on which Americans are divided. It seems to me, though, we will get nowhere unless we realize where we are, what has actually happened, and what the future most likely holds.

Recovery begins with realism and there is nothing to be gained by kidding ourselves. On the topics that I know most about, the administration is beyond being a disappointment. It's beyond inept, unprepared, weak, and ineffective. Four and again two years ago, the people demanded change. As a candidate, the President promised change. In foreign policy and the core economic policies, he delivered continuity instead. That was true on Afghanistan and it was and is true in economic policy, especially in respect to the banks. What we got was George W. Bush's policies without Bush's toughness, without his in-your-face refusal to compromise prematurely. Without what he himself calls his understanding that you do not negotiate with yourself.

It's a measure of where we are, I think, that at a meeting of Americans for Democratic Action, you find me comparing President Obama unfavorably to President George W. Bush.

In economic policy it was said earlier we have a lack of narrative. This afternoon, Gregory King asked why the people didn't know that the Republican Party is uniformly and massively opposed to job programs, to state and local assistance, and to every legislative measure that might aid and promote economic recovery from the worst crisis and recession in modern times. Why is that that they didn't know? Could it have anything to do with the fact that the White House didn't tell them?

And why was that?

The president deprived himself of any chance to develop a narrative from the beginning by surrounding himself with holdover appointments from the Bush and even the Clinton administrations: Secretary Geithner, Chairman Bernanke, and, since we're here at Harvard, I'll call him by his highest title, President Summers. These men have no commitment to the base, no commitment to the Democratic Party as a whole, no particular commitment to Barack Obama, and none to the broad objective of national economic recovery that can be detected from their actions.

With this team the President also chose to cover up economic crime. Not only has the greatest wave of financial fraud in our history gone largely uninvestigated and unpunished, the government and this administration with its stress tests (which were fakes), its relaxation of accounting standards which permitted banks to hold toxic assets on their books at far higher prices than any investor would pay, with its failure to make criminal referrals where these were clearly warranted, with its continuation in office -- sometimes in acting capacities -- of some of the leading non-regulators of the earlier era, has continued an ongoing active complicity in financial fraud. And the perpetrators, of course, prospered as never before: reporting profits that they would not have been able to report under honest accounting standards and converting tax payer support into bonuses; while at the same time cutting back savagely on loans to businesses and individuals, and ramping up foreclosures, much of that accomplished with forged documents and perjured affidavits.

Could the President and his administration have done something? Yes, they could have. Where was the Federal Deposit Insurance Corporation? Why did they choose not to implement the law -- the Prompt Corrective Action law -- which requires the federal government to take into receivership financial institutions when there is a significant risk of large taxpayer losses to the insurance fund? Where were the FBI and the Department of Justice? Did the President do anything? No. Is he doing anything now? No. Why not? The most likely answer is that he did not want to. My understanding, in fact, is that there was one meeting where this issue was raised, and the President stated that his economic team had assured him they had the situation under control.

On the larger economic policy front, the White House gave away the game from the beginning. How? First by guessing at the scale of the disaster. When leading economic advisers (I believe, in fact, it was President Summers) announced that the unemployment rate would peak at 8%, they not only guessed wrong, but gave away the right to assign responsibility to the previous administration when things got worse. This was either elementary bad politics or deliberate self-sabotage. But it gets worse. The optimistic forecast helped to justify a weak program. Useful things were done, but not nearly enough to convey the impression of a forceful policy to the broader public. Then once the banks were taken care of and the stock market took off again, it seems clear that the team at the White House didn't care anymore.

Again, could they have done differently? Of course. The President could have told the truth, which is that we faced a historic meltdown, a collapse of the core financial institutions of our economy, and that we had really no way of knowing how bad economic conditions might get or how long this would endure and that therefore the situation would require a full mobilization: all resources, all hands on deck, major departures of policy, no holding back, and the responsibility for trouble and failure falling plainly on those who would obstruct the course. None of the people he chose to advise him on economic policy was remotely capable of thinking in those terms.

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We've learned from Vic Fingerhut and Mike Lux that the administration went down in public esteem when people realized it was working for the banks and not for them. Why did they think this? Why did they go from "blaming Bush and Wall Street to blaming Obama and Wall Street"? Because plainly they could see what was in front of their faces. Except in manner, President Bush never really pretended to be a President for ordinary folks; President Obama did. Bush was who he was; Obama held out, fostered, and promoted vast hopes, mobilizing the American population behind his leadership on that basis. And he disappointed those hopes -- to use a very harsh word, one could say he has betrayed those hopes. How can one therefore blame the voters for acting as they have acted?

What happens next? Let's again not kid ourselves, we have lost a great many seats in the House of Representatives and the House of Representatives isn't coming back into a Democratic majority in the near future. Simply because of the balance of exposures -- the larger numbers of Democratic Senators exposed to reelection in the next cycle, the greatest likelihood is that the Senate will also go Republican in two years time. President Obama has set his course. He has surrounded himself with the advisers of his choice and as he moves to replace President Summers we hear from the press that the priority is to "repair the rift with his investors on Wall Street." What does that tell you? It tells me that he does not have President Clinton's fighting and survival instincts. I've not heard one good reason all day to believe that we are going to see from this White House the fight that we want, that he could win in two years, or any reason we should be backing him now.

The Democratic Party has become too associated with Wall Street. This is a fact. It is a structural problem. It seems to me that we as progressives need -- this is my personal position -- we need to draw a line and decide that we would be better off with an under-funded, fighting progressive minority party than a party marked by obvious duplicity and constant losses on every policy front as a result of the reversals in our own leadership.

What is at stake in the long run? Two things, mainly, in my view. First, it seems to me that we as progressives need to make an honorable defense of the great legacies of the New Deal and Great Society -- programs and institutions that brought America out of the Great Depression and bought us through the Second World War, brought us to our period of greatest prosperity, and the greatest advances in social justice. Social Security, Medicare, housing finance -- the front-line right now is the foreclosure crisis, the crisis, I should say, of foreclosure fraud -- the progressive tax code, anti-poverty policy, public investment, public safety, and human and civil rights. We are going to lose these battles-- get used to it. But we need to make an honorable fight, to state clearly what our principles are and to lay down a record which is trustworthy for the future.

Beyond this, bold proposals are what we should be advancing now; even when they lose, they have their value. We can talk about job programs; we can talk about an infrastructure bank; we can talk about Juliet Schor's idea of a four-day work week; we can talk about my idea of expanding Social Security and creating an early retirement option so that people who are older and unemployed or anxious to get out of the labor force can leave on comfortable terms, and so create job openings for younger people who, as we've heard today, are facing very long periods of extremely aggravating and frustrating unemployment; we can talk about establishing a systematic program of general revenue sharing to support state and local governments, we can talk about the financial restructuring we so desperately need and that we'll have to have if we are going to have a country which has a viable private credit system and in which large financial power is not constantly dictating the terms of every political maneuver.

We are not going to get these things, but we should have a clearly defined program so that people know what they are. And then, frankly, as was said earlier today, said most elegantly by Jeff Madrick, in the long run we need to recognize that the fate of the entire country is at stake. Its governance can't be entrusted indefinitely to incompetents, hacks, and lobbyists. Large countries can and do fail, they have done so in our own time. And the consequences are very grave: drastic declines in services, in living standards, in life expectancies, huge increases in social tension, in repression, and in violence. These are the consequences of following through with crackpot ideas such as those embodied in the Bowles-Simpson deficit commission, as Jeff Madrick again outlined, such notions as putting arbitrary limits on the scale of government, or arbitrary limits on the top tax rate affecting the wealthiest Americans.

This isn't a parlor game. The outcome isn't destined to be alright. It will not necessarily end in progress whatever happens. What we do, how we proceed, and how we effectively resist what is plainly about to happen, matters very greatly for the future of our country, of our children, and of another generation to come. We need to lose our fear, our hesitation, and our unwillingness to face the facts. If we thereby lose some of our hopes, let's remember the dictum of William of Orange that "it is not necessary to hope in order to persevere."

The President should know that, as Lincoln said to the Congress in the dark winter of 1862, he "cannot escape history." And we are heading now into a very dark time, so let's face it with eyes open. And if we must, let's seek leadership that shares our values, fights for our principles, and deserves our trust.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

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The Beginnings of a Credit Card-Free Revolution? Maybe Not.

Dec 1, 2010Bryce Covert

More consumers shred their plastic, but the picture may not be so rosy.

More consumers shred their plastic, but the picture may not be so rosy.

Welcome to the club, eight million new people without a credit card! CNNMoney reported yesterday that credit card use is in decline, with the number of cardless people jumping up to 78 million this year from 70 million last year. In a recession where every penny counts, many consumers shredded their cards in a move to reduce their debt (and probably avoid fee hikes). The article reports, "TransUnion said the average U.S. credit card debt fell more than 11% over the past year to $4,964 in the third quarter." Gerri Detweiler of Credit.com called the phenomenon "unprecedented." Consumers never abandon their plastic, she says; the numbers have "always gone up." Perhaps a silver lining of our economic misery could be consumers moving from debt and risk to saving and building real wealth.

But the drop in users isn't all due to penny pinching and/or outrage. Part of this trend is from "charge-offs in the higher risk segments," says TransUnion. Because the new credit card act puts a kink in card companies' ability to jack up interest rates and impose fees, they dumped consumers who they "saw as dead weight," the article reports. With a recession causing more defaults on debt, the companies are getting out of riskier accounts. So both consumers and companies are parting ways with risk.

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And with easy access to credit cards dried up, some see the opportunity to cash in by creating new products. Enter the Kardashians -- because we should always take financial advice from celebrities famous only for being famous. The reality TV celebs planned to market a pre-paid debit card to young teenage girls with their faces painted across the front. While they decided to shut down the venture (after Connecticut Attorney General Richard Blumenthal questioned the legality of the card's "pernicious and predatory fees"), they aren't alone in trying to get in on a growing trend. Annie Lowrey reports that "the total market will double in size in the next three years, with customers loading a whopping $672 billion onto prepaid cards by 2013." The cards are sometimes used to get money to underserved communities such as immigrants and the poor. But they are also seen as a way for banks to cash in on a new distaste for credit cards among young people and to avoid rules that could limit profits on credit and debit cards. Lowrey points out that the Kardashian Kard (yes, with a 'K') would have had "more fees than the Kardashians have reality shows." On top of that, these cards don't have "the protections or the financial-education benefits of plain-vanilla banking products," she adds.

So good news: more people converting to the non-credit card cause. Bad news: not all of those people chose to leave credit card ownership of their own accord, and financial wizardry is already on the case, filling our need for predatory products. Innovation at its best!

Bryce Covert is Assistant Editor at New Deal 2.0.

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What if Obama Prioritizes Bondholders Over Workers?

Dec 1, 2010Mike Konczal

mike-konczal-2-100Obama's federal pay freeze may not be a blunder but a deliberate move to align himself with the banks.

mike-konczal-2-100Obama's federal pay freeze may not be a blunder but a deliberate move to align himself with the banks.

In case you haven't seen it, Brian Buetler has a roundup of reactions to President Obama's two-year federal pay freeze. Ezra Klein has three ways of looking at the freeze, which are not mutually exclusive: 1) This is more unwise, unilateral bipartisanship, 2) This is a smart way to protect the federal workforce, 3) This is bad economics and bad policy.

I think we should discuss a fourth option: President Obama thinks this is a really good idea and wants to spend political capital and energy to carry it out.  Rather than a piece of strategy to force concessions from the other side, this is instead something he wants his administration associated with and wants to take the lead in making a reality.  He's asking for the middle class to suffer first, before bankers and before the richest, without asking for anything in return.

When people refer to this as self-defeating or a political miscalculation, they are assuming that Obama isn't weak on core liberal values, or that his version of liberalism isn't far different than what was expected, or that he doesn't think this is worth fighting for. This is precisely what needs to be interrogated and challenged. The reality might simply be that his administration has different goals much more aligned with traditional centrist Democratic positions, prioritizes fighting for different objectives, and views the world through a different lens. They put bondholders over unions and public workers.

I see this with Treasury issues. The people I've met at Treasury are quite brilliant. I think they are wrong about a lot of what just happened, about what they prioritize and what they isolate or obscure, but I do not think it is because of ignorance. Obama is a smart person, smarter than me and probably smarter than you.  If your reading of this situation requires the assumption, "Obama is consistently making the wrong choice and is misled," you should rethink your position without assuming that and see where it leads you.

It would be one thing if this was an ambiguous part of Maritime law or something, but this gets at a core debate. Liberals think that the work government does is both worthwhile and crucial to the functioning of our country. Conservatives think it is not. Conservatives want to sow discord between factions of middle-class people to distract from lowering taxes and providing goodies for the rich, and this is precisely one avenue for doing that.

I talked about state and local government not being overpaid here. They are definitely not overpaid in their salaries. What closes the gap partially -- but not entirely -- is that health care costs have spiraled out of control for many middle-class people and retirement risk has been shifted more aggressively to working-class people. There is a failure to provide adequate benefits for private workers, and Republicans and now Obama want to convince you that this is normal. It isn't.

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Larry Mishel brings up the important point that Federal workers are clustered in major cities where their pay lags city workers. When I first worked in the private sector in San Francisco, I received a pay bump that was clearly targeted for the higher cost of living there. I wouldn't have if I had decided to work for a regulator. Here's how shocking it is (table 4):

Again, benefits close that gap, but that is a failure of providing benefits by the private market. This failure is anxiety producing for middle-class voters.  It isn't surprising that it works as an effective lever against government.

Meanwhile, here's the President of Third Way, Jonathan Cowan, sounding just like Obama:

As the former chief of staff of HUD, I’ve seen how crucial and committed the federal work force can be. But a pay freeze is the right thing to do. It shouldn’t be seen as a critique of their hard work, and federal employees should get behind it. We have a long-term structural deficit crisis and either everyone is going to contribute to spending cuts, or the United States will cease to be the number one global economic power. Federal employees can lead by example, showing the American people that they place the financial health of the country above a pay increase these next few years. If we’re going to trim Social Security and Medicare -- which are essential steps to balancing the budget -- we’re also going to have to show that we can bring the costs of running the federal government in line as well.

What's the difference here?

So much for Ed Kane's vision of stronger financial market regulators who are more talented and more public-minded.   You simply won't get that without being willing to invest in the people you hire.

Mike Konczal is a Fellow at the Roosevelt Institute.

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End This Fed

Dec 1, 2010Matt Stoller

the-fed-150Our Federal Reserve doesn't work. Progressives have to get out in the fight to change it before Sarah Palin claims victory.

the-fed-150Our Federal Reserve doesn't work. Progressives have to get out in the fight to change it before Sarah Palin claims victory.

“We probably know more about tribes in the Amazon jungle than we do about the real nature of power in the United States. Neither political science, nor history, nor economics do very well on this.” - Tom Ferguson

Something new is happening around the contours of monetary policy. It’s becoming part of our popular political landscape. We saw this a few weeks ago, when Sarah Palin injected into the 2012 presidential race the idea of fundamentally reorganizing the Federal Reserve’s mandate. Republican Mike Pence, Senator Richard Shelby, and a host of other Republicans have jumped on this concept, and there will soon be legislation introduced to make this happen.

Beyond Republican politicians, the public is beginning to rethink our monetary order. A YouTube video on quantitative easing has over 3 million views. The video slams the Fed for missing the dotcom bubble, the subprime crisis, for being fundamentally undemocratic and unaccountable, and for being engaged in collusive dealings with Goldman Sachs. Financial blogs and CNBC discuss the Fed, and its associated characters, with deep insight and passion. And Bernanke drew 30 no votes in his confirmation hearing in 2009, the most ever for such a position, just four years after drawing almost none. The market nearly crashed on the possibility that Bernanke’s nomination would fail before the White House stepped up aggressive lobbying efforts. On the left, the last few years saw a remarkable grassroots coalition of economists and activists to bring transparency to the central bank, joining a long-sought libertarian crusade. I was a staffer for Rep. Alan Grayson, who was working with that coalition to require an independent audit of the Federal Reserve. Tomorrow, because of provisions put into Dodd-Frank by Senator Bernie Sanders and Congressmen Grayson and Ron Paul, the Federal Reserve will release details of its 2007-2010 emergency loans to the web.

This network of politicians, advocates, and bloggers will go to town on whatever revelations come out of that. (Although the Fed obnoxiously put its Maiden Lane disclosures in a non-copy or printable PDF format, so we’ll see how easy they make it to get this info.) The defenders of technocracy are out in force as well. Paul Krugman is defending the institution, if not every decision. The Democratic partisan class is going after right-wing Fed critics, while more liberal independents are pointing to the Fed in the 1940s and the Reconstruction Finance Corporation as a very different monetary model. Not since the populist movement of the 1890s has there been this much discussion of monetary structures among the public, and so much dissent about how money is created and circulated throughout the economy. It’s happening for a reason. The public is now paying attention to finance. We ran a focus group in Orlando last year, and one of the surprising conclusions was that nearly every independent voter knew who Ben Bernanke was. People don’t like the structure of our financial oligarchy, and they are talking about it. Even the deficit hysteria and the Fannie/Freddie GSE fights are a function of this monetary debate.

It is good that this debate is happening. It means that we will be able to examine the real power structure of the American order, rather than the minor food fights allowable in our current political system. This will bring deep disagreements, profound ones, but also remarkable possibility. Modern American industrial policy is to push capital into housing, move manufacturing abroad, build a massive defense establishment, and maintain an oligarchic financial sector. This system isn’t a structural inevitability. People built it, and people are unbuilding it. People with names, motivations, and reputations. People like us, and like Sarah Palin.

In 1989, Bill Greider published a remarkable book called "The Secrets of the Temple: How the Federal Reserve Runs the Country" in which he described how Fed officials were the real decision makers in the American political order. Shielded by the argument of ‘political independence’, most politicians wouldn’t and still won’t dare interfere with the workings of our economic structure, even though the Constitution clearly mandates that the monetary system is the province of Congress. The dramatic and overt coordination of this ‘independent’ central bank with the executive branch and the banking sector, and its flouting of Congressional and public scrutiny, have removed its institutional legitimacy.

Like most American institutions, the Fed has shrouded itself in myth, with self-serving officials discussing the immaculate design of the central bank as untouchable, secretive, an autocratic and technocratic adult in the world of democratic children. But the Fed, and specifically the people who run it, are responsible for declining wages, for de-industrialization, for bubbles, and for the systemic corruption of American capital markets. Take this passage from Greider’s masterpiece, on the inflation battles of the early 1980s.

“When White House officials congratulated themselves on how swiftly inflation was declining, Volcker pulled out his card on union wages and warned them not to be too optimistic. Until labor got the message and surrendered on its wage demands, the underlying rate of inflation would continue to push prices upward -- and collide with the stringent reality imposed by the Fed’s money policy.”

Here was the Federal Reserve Chair, a Democrat, carrying around union wage stats in his pocket so he would know whether he was driving worker pay down fast enough. If you want to understand the poverty of the financial reform debate, that Volcker was ‘the hero’ of the reform side should illustrate it.

On a basic level, the Federal Reserve has two jobs. One is to maintain price stability, and the other is to maintain maximum employment. This ‘dual mandate’ comes from debates in the 1970s about full employment, and was part of the Humphrey Hawkins legislation that President Carter watered down from its original liberal origins. While the Fed ostensibly has to care about full employment, Carter made sure this would be more of a guideline, and it is quite obvious to anyone who pays attention to FOMC minutes that most Fed officials don’t take it seriously. Nevertheless, the Fed has a bunch of tools to accomplish these goals. It regulates the money supply through its balance sheet and a variety of market interventions, it maintains the payments and clearing system, and it regulates banks. It also has a number of consumer protection responsibilities, and has emergency lending authority that was radically expanded by Wall Street super-lawyer Rodgin Cohen in 1991 through a very subtle secretive maneuver.

Structurally, the Fed is a two-part system, with a Board of Governors in DC and Reserve Banks that sit in 12 separate regions of the country that represented roughly equivalent sectors of the economy in 1913. The Board of Governors has 7 members, each of whom can have one 14-year term, and a Chairman who has a four year term. These members are appointed by the President and confirmed by the Senate. Monetary policy is set through the Federal Open Market Committee, which has members from both the board and the Reserve banks. If you ever want to see how the country is actually run, read the transcripts of FOMC meetings, which are released on a five year lag (they used to be shredded as a matter of course). It is stunning to read how Reserve bank presidents basically talk to WalMart and high-end headhunter firms to find out how their regional economy is doing, and then set monetary policy. It’s also crazy that we still do not know what the FOMC was saying from 2005 onward, during the height of the mortgage boom and bust. All of this is secret, and very much open to subpoena for some enterprising politician. (It is one of my great disappointments that neither the Democratic House or Senate tried to get these transcripts, given that we know that Alan Greenspan was muffling dissent on the housing bubble in 2004, the last released transcript.)

The Reserve Banks are quasi-public and quasi-private entities owned by member banks. The New York Fed, for instance, pays dividends to JP Morgan, and has a .org web address. The Reserve banks are governed by Boards of Directors that are drawn mostly from the banking sectors of their regions, as well as large companies and the occasional union leader or university president. The Fed also has a large research staff and funds most macro-economic monetary policy research. It is uncommon to find ‘credible’ economists in monetary policy who have no financial ties to the Federal Reserve banks. The Fed is actually one point of contention between the right-wing billionaire Koch family and the Ron Paul libertarians; the Kochs are supportive of Federal Reserve-tied scholars, and Paul’s people are not (the Palin Tea Party had no involvement in the Audit the Fed fight, the Ron Paul Tea Party was the driving force on the right for that legislation).

This structure is the result of a political compromise in its inception, a holdover from the Wall Street-populist fights of the 1890s, the financial panic of 1907, as well as legislative shifts over 90 years. It is a deeply corrupt and indefensible system rife with conflicts of interest. The Reserve banks conduct a good amount of the regulatory work in our banking system. Their boards are staffed with bank leaders, and the presidents of the Reserve banks are actually hired by these bankers. Reserve banks even pay dividends to their bank members (attention Congresscritters who want to find a pay-for!). This ‘I’m a dessert topping and a floor cleaner’ identity allows Reserve banks -- particularly the NY Fed -- to intimidate courts and aide its allies on Wall Street. Additionally, the Reserve banks aren’t subject to the same government policies regarding Federal wages, so they can pay higher wages and give lucrative and prestigious consulting contracts to economists. In one hearing in the 1960s, a Reserve Bank was busted for buying thousands of ping pong balls. That lack of accountability, while silly, was and is still the norm.

The ambiguous identity is the reason the Fed was able to bureaucratically box out the FDIC as a center of intellectual gravitas. It also leads to overt corruption. Jamie Dimon, for instance, was on the board of the New York Fed when JPMorgan was negotiating with the New York Fed to buy Bear Stearns. Pete Peterson is a former New York Fed President, and hired Tim Geithner to be the New York Fed, who he is now presumably pushing to cut entitlements. Steven Friedman was on the NY Fed board, buying Goldman stock at the same time.

The list of failures goes on and on. But fundamentally, it is not corruption that is at the heart of the problem for this Fed system, it is a lack of democratic accountability. The Fed failed to stop the S&L crisis, the dotcom boom and bust, and the mortgage boom and bust, and shoveled money to AIG with an overtly disdainful approach to the public. Despite the best efforts of Fed allies, the center cannot hold. During Dodd-Frank, Chris Dodd and Barney Frank tried their best to protect the Federal Reserve, lavishing praise on Bernanke, and ultimately blocking the move to make the New York Fed president an appointed position. They did nothing about the egregious 14-year term, the banks appointing their own regulators, the dividends that go directly from the Reserve banks to private banks, the lack of ethics restrictions and pay scale restrictions, or the corruption of the macro-economics profession at the heart of the Federal Reserve’s research imperatives. Frank did not legislate out of malice. Indeed, he often expressed respect for democratic input into the legislative process, insisting, for instance, that the conference committee be televised. But ideologically, Frank took a Reagan-era liberal view that the goal of the banking system was to provide housing for the poor while protecting consumers’ rights. The rest of the capital markets structure was, as he put it in one caucus meeting, “rich people fighting other rich people."

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The new intellectual order dismisses this attitude as small bore. Institutionally, the environment has changed for the Fed and its traditional allies. Whereas at the beginning of the financial panic in 2007-2008, the Fed was a sole provider of expertise and credibility on finance to the political class, by 2010, the new financial blogosphere destroyed the Fed’s mythic stature. It is common for staffers to get more and better information from blogs, and for hearings to be driven by the conversation online, than from the Congressional liaison group at the Fed. Read this remarkable Q&A between Ben Bernanke and Senator Bunning during Bernanke’s confirmation hearing, which was a series of questions inserted into the record, questions largely drawn from bloggers. The public has changed its appetite as well. This YouTube clip of Elizabeth Coleman, the Inspector General of the Fed, was my boss’s most successful hearing appearance, and possibly the most consequential hearing put on YouTube, ever:

Over 3 million people have now seen this official say that she wasn’t tracking where trillions of dollars have gone. I prepped Rep. Grayson for that hearing, and I used materials from the blogs to do it. Many members watched this hearing on YouTube and signed on to the bill to audit the Fed as a result. And so tomorrow, we are going to get a peek at the Fed’s emergency lending activities from 2007-2010 because of this legislative activity. Even before that, though, the Fed has become far more open and responsive to requests for information. We’ve already seen, via Maiden Lane disclosures, that the Fed has been lending money to random companies, like the Red Roof Inn, and buying up lots of toxic crap. We’re going to see a whole lot more. The conversation is no longer in the hands of the bankers.

This is a tremendous step forward. Of the many castle walls the Fed used to keep the rabble out, secrecy and complexity were critical. The Fed couldn’t keep its dealings secret, and financial bloggers are constantly explaining, explaining, and explaining. Those walls have fallen. A lack of public debate was another. That too has fallen. A monopoly of public information dissemination, via personal contacts between bankers and outlets like the Washington Post (whose owner in the 1930s was Hoover’s Federal Reserve Chairman), has broken down as well through internet communities. Gradually, a new generation of politicians is gaining the confidence that the people themselves through their elected representatives should be making critical decisions about economic efficiency and banking. The Fed is adapting to these changes, building up its communication staff and doing town hall-style meetings. Bernanke is on TV all the time, a far cry from the days when the Federal Reserve head simply refused to even brief Congress. In some ways, the hardest part of the fight is generating public debate, but that has been accomplished. The structure of our monetary system is now up for grabs.

As we move forward in this debate, it is important to understand that Sarah Palin is coming from a tradition genuinely rooted in American economic debates, from the era of the late 19th century, when Wall Street came together to finance railroad mega-corporations. Her argument is one against the mutability of money; she rejects the idea that money is a political object, because that implies that it is collective decision making that determines property values and ultimately the social hierarchy. She believes in a natural and fixed social hierarchy, which is a very conservative idea deeply held by the business class. Palin is using the lack of legitimacy of the modern Fed, the failed technocratic screw-ups and the elitist tendencies, to push for the equivalent of a societal debtor’s prison. She is speaking for creditors, and many of the conservative forces within the Federal Reserve agree with her. It is important to understand that reflexively defending the Federal Reserve, which is what the Democratic establishment is doing, is a foolish and anti-populist attempt to pretend that the Fed is a legitimate decision making body. It isn’t. It is powerful, but not legitimate.

Liberals must move beyond our consumer-driven approach and think about reform of the credit system and of the monetary order, as Elizabeth Warren has done through her remarkable tenure on the Congressional Oversight Panel. The basic problem is the one that poet and economist Jane D’Arista puts forward in her 1991 paper No More Bank Bailouts. (And yes, she wrote that in 1991, so it is worth listening to her.) The link between the Federal Reserve and the ‘real economy’ is broken. When banks were the main conduit between the financial world and economic activity, translating savings into investment, the Fed could manipulate the economy by manipulating the banking sector. But now that shadow banks dominate our credit markets, and the Fed has allowed hot money to take over monetary policy, the Fed’s tools just don’t work. That’s why quantitative easing is foolish. We must dispatch with the ridiculous notion that pushing hundreds of billions of dollars into a broken banking system will have useful consequences.

Instead, let’s recognize that the Fed doesn’t fulfill either part of its mandate, and work toward a better and more plausible system of monetary stability. That’s not a long-term process, it’s a constant process. D’Arista argues that the Fed must connect itself to the shadow banking system and force credit to flow. This necessarily implies important changes in how the Fed interacts with financial services firms and entities. To give some idea of what this might look like, at least conceptually, Timothy Canova paints the portrait of a more democratic Federal Reserve financing the government debt during World War II. Cooperating with a phalanx of institutions, such as the Reconstruction Finance Corporation, and government boards that directed wartime rationing, the Fed was able to bring unemployment down to 1% and dramatically equalize economic opportunity and wealth building for the middle class. Another possible conceptual framework, though one that wouldn’t work today for obvious reasons, is the subtreasury plan put forward in the 1890s by the Populists, which would tie the monetary supply to real economic activity -- in that era, agricultural output. I’m not sure how to tie intrinsically worthwhile economic output to the growth of the money supply, but it should be quite obvious that growing money to help credit default swap traders is a deeply corrupt way to think about how we as a society should define money.

Reform also requires what Ed Kane, a scholar at Boston College, has tackled, which is regulatory capture and growing a new cadre of publicly-minded policy makers and regulators. One of the biggest problems at the Fed is that its people simply do not work in the public’s interest, and see their goal as preserving the existing secretive banking structure. I found this to be true in my limited dealings with the Fed. At one point, I was trying to understand why the Fed granted Goldman Sachs an exemption from regulatory scrutiny as a bank holding company. The examiners and Goldman’s lobbyist were both happy to help me understand that I needn’t worry. When I mentioned that my boss was going to send a letter on the matter (it’s here, as well as the response from the Fed), both Goldman and the Fed examiner's responses were the same. They turned hostile, and whined, ‘Can’t we handle this privately?’ The Fed examiner told me that he would not be able to give me good information if he was forced to work on a public response on the matter.

Leaving aside whether the Fed made a good decision on that particular regulatory decision, this is no way to run a legitimate institution in a democratic society. With a loss of legitimacy comes a lack of public trust and a vulnerability to any form of critic. The Fed is now less respected than the IRS. And so Sarah Palin has her opening, as do the conservative hard money creditor interests. Liberals should stop their love affair with conservative technocratic myths of monetary independence, and cease seeing this Federal Reserve as a legitimate actor. At the very least, we need to begin noticing that these people do in fact run the country, and should not. We must also begin to internalize the new forces of openness and rethink how a monetary system can function in an internet-enabled society. This will require thinking about Fed 2.0 from the perspective of the social web, as well as building upon the increase in transparency being forced on governing elites by such groups as Wikileaks. The top-down backroom system just won’t work if it relies on retaining secrets between Bank of America and the Fed that a third party or a court can release. The Fed can’t print its way out of a public that has lost faith in the banking system and the dollar. If we rethink money creation properly, however, we will be able to remove money creation from the hands of the oligarchs, and strike deeply at the uncompetitive nature of the American political economy. I do not know how to do this, but it is possible.

Tomorrow, we’re going to see some of what the Fed did from 2007-2010. And there will be ample justifications for why the Fed needed to do what it did, just as the Treasury keeps talking about how TARP made money. But the Fed gave $13 billion to Goldman Sachs through AIG, a direct transfer of $80 from every working American to the employees of Goldman Sachs. We’re soon going to find out who else got our money. And this disclosure, and the accompanying political debate over the monetary order, is the beginning of changing the way we think about money itself.

And with that, here’s the new law and the disclosures it forces:

From p. 754 of Dodd-Frank:

(c) PUBLICATION OF BOARD ACTIONS.—Notwithstanding any other provision of law, the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities pro- gram, foreign currency liquidity swap lines, and any other program created as a result of section 13(3) of the Federal Reserve Act

(as so designated by this title)— (1) the identity of each business, individual, entity, or for-

eign central bank to which the Board of Governors or a Federal reserve bank has provided such assistance;

(2) the type of financial assistance provided to that busi- ness, individual, entity, or foreign central bank;

(3) the value or amount of that financial assistance; (4) the date on which the financial assistance was provided; (5) the specific terms of any repayment expected, including

the repayment time period, interest charges, collateral, limita- tions on executive compensation or dividends, and other mate- rial terms; and

(6) the specific rationale for each such facility or program

Matt Stoller is the former Senior Policy Advisor to Congressman Alan Grayson. Stoller specialized in legislation on auditing the Federal Reserve and on the problem of foreclosure fraud.

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