Tuesday, December 29, 2009

WHAT WENT WRONG ...

I wasn't going to post for a few more days but this article (by way of nakedcapitalism.com) caught my attention. It was written by Steven Keen, at Business Spectator, who was asked to contribute to a German journal. The discussion topic: The failure of the vast majority of mathematic-economic models to anticipate the Global Financial Crisis.

In a few words Keen argues that economists have created so many myopic models that they and our increasingly sycophantic media don't understand how our economic world really works. Keen looks specifically at two "modelling" areas that have led economists off track: (1) a continued belief in Milton Friedman's monetary theories, which don't adequately account for credit and debt creation, and (2) a disturbing belief that economies tend toward disequilibrium.

How did these two beliefs impact our (mis)understanding of the world before last year's meltdown? Keen responds:

Because neoclassical economists treated any economic variable generated by a market economy as being in equilibrium, they fantasised that stock and house prices were in equilibrium when clearly they were in a bubble, and they ignored rising levels of private debt in the belief that whatever level of debt applied was an equilibrium one – and therefore justified by market fundamentals.

In a few words what we have is market arrogance coupled with ideological blinders working to create - as I have described elsewhere - a fairytopian world of perfect competition and fluid decisions that somehow work themselves out ... as if some mythical and magical invisible hand make things work in harmony all the time.

What a bunch of crap.

I wrote about this in my book when I described how markets really work, whether through favorable legislation or money policies that benefit specific groups. Specifically, I pointed to economists like Hyman Minsky (who saw debt as both good and bad, and tried to make sure that we understood the difference too) and John Maynard Keynes (who saw disequilibrium). Both understood and saw the flaws Keens writes about. Still, modern economists try to explain away favorable legislation, or downplay disequilibrium, as aberrations because they don't fit the model.

This is why I especially like what commentator Raymond D'Hollander has to say about economists depending too much on mathematical models:


Mathematics is simply a tool to be used in engineering systems. Nothing more, nothing less. Every engineer knows that the world is not perfectly normal (in the statistical sense) so no engineer worth his salt would base his entire design on some untested mathematical formulas. Boeing or Airbus would never design an airplane in a computer, manufacture it from the computer-generated instructions, and then immediately load it up with 300 passengers on its maiden flight. On the other hand economists and the global financial sector appear to believe that this is a perfectly viable way of approaching the world's economy.

In my view, economists and market players believe in the models they create for two, self-serving, reasons.

First, models - especially in CDS, CDO, and other ABS markets - allow(ed) economists to believe that they are "scientific" and are in control of what they see. Second - and simply put - the models that have been created allow market players to get rich. They buy enough time to squeeze money and profits that don't really exist. The bailout funded counterparty payouts (thank you Ben Bernanke and Tim Geithner) show this to be true. The money wasn't really there, unless you were always banking on a bailout.

Steven Keen does a good job of explaining what went wrong with the models and assumptions of economists (though some might find it somewhat technical). I encourage you to read it if you get the time. The comment section is especially good too.

- Mark

Thursday, December 24, 2009

CHRISTMAS EVE POST

OK, I won't be posting for a couple of days. So here are a couple of Christmas favorites.

A reminder of what Christmas is about ...



This is the Peanuts' Christmas Dance (I dance like the guy in Orange) ...



Merry Christmas.

- Mark

Wednesday, December 23, 2009

WHY I SUPPORT THE HEALTH CARE BILL

Those of you who follow this site, or who have heard me speak on air or at  public functions, know that I support the Public Option (actually, I support a single-payer system, but that's for another day). You also know that I think if our gourmet health care deal included the Public Option what we've ended up with is the health care version of Hamburger Helper. But I support what Senator Reid and Speaker Pelosi have pushed through thus far.




Still, I want to make it clear that while I will support what I think will eventually make it out of committee I'm not naive about what's in the health care bills presented by the House of Representatives and the U.S. Senate. Much of it is not pretty, and down right stinks.  Here's why.

WHAT WE HAVE ...
There is absolutely no doubt that what we're looking at is health care legislation that perpetuates a broken system. It will continue a system that costs 50% more than any other nation in the world, while delivering far less in terms of health outcomes. This is what good lobbying (see Aetna), political extremism (see Sen. Jim Demint), and unethical elected officials (see Sen. Joe Lieberman) will get you in America.

So, let me get this out of the way: The health care bill is a windfall for the insurance and pharmaceutical industry. It insures price-fixing and price gauging long into the future. The Senate health care bill maintains the status quo in the following ways.

* REGULATORY SUBSIDY: The anti-trust exemption for the health care insurance industry, which allows the industry to create oligarchic market structures throughout the country, was maintained in the Senate health care bill. This undermines competition and guarantees price-fixing.

You can thank Senators Joe Lieberman (I-Connecticut) and Ben Nelson (D-Nebraska) and the Republican Party for this.

* NO HONEST BROKER: There is no government, or public, option available to keep this oligarchic industry from price-fixing and organizing the market to suit their needs (I'm still not convinced about the health exchanges). With no honest broker to provide a legitimate alternative to the health care insurance industry (like public universities provide an alternative to private universities) prices will continue to climb.

Again, you can thank Senators Joe Lieberman and Ben Nelson and the Republican Party for this.

* NO PRICE COMPETITION: Incredibly, Congress turned down an amendment that would have allowed imported drugs (from Canada, no less) to compete with price-rigged drugs sold here in the United States. The amendment was defeated.

There was bi-partisan stupidity on this one.

Still, in spite of all this I support what's coming down the health care pike (assuming the Conference Committee doesn't go nuts, or something). Here's why.

WHY SUPPORT THE HEALTH CARE BILL ...
1. As I tell my students, good legislation is a process, not a moment. We need to see this legislation as the first step on a long path. Social Security, Civil Rights, the Women's Movement, and Medicare - all involving long hard fought pieces of legislation - took decades, and even more than a century (in the case of Civil Rights and the Women's Movement) to get right. Think about Medicare. At first it covered only hospital visits. Then regular doctor visits. Then medicines were included. In many respects we're still working on Medicare.

Rome wasn't built in a day. A good health care system won't be either.


2. This is what seals the deal for me. We need to support the health care plan currently making its way through Congress (even without a public option) for one simple reason: The Republican Party is using health care to defeat President Obama.

Republicans could care less about helping ordinary Americans who have no health insurance. They're after political power. If they can kill the health care bill they believe they can wound President Obama politically. This, they believe, will help them win more seats in 2010 and, in their minds, the presidency in 2012. They know they can't run on their record, their past, or their failed ideology. So dragging President Obama down is their goal.

This is not governing. It's petty, vindicative, and childish.


3. There are some very good elements that need to be supported. No drops/denials for pre-existing conditions ... a $10 billion increase in funding for the health centers (thank you Sen. Bernie Sanders) ... expanded access to high quality primary health care for millions ... mental health counseling ... dental care ... more/stiffer regulations ... etc. There are too many to list.

The point is, significant progress is being made.


4. We need to keep in mind that if we do absolutely nothing health care costs are going to continue rising anyways. This country will go broke if we do nothing. Check this out.



Simply put, if we have to suffer through increased costs (and they will continue to rise because we've legislated market competition out of the market), we might as well as get something in return.

Now, some of you might have noticed that above I make it clear that costs and prices will continue to rise with the current piece of legislation too. This is true. Some of you may have also noticed that the health insurance industry has promised to raise rates so they can blame it on the health care legislation. This is probably true too.

What's clear though is that "out of pocket" expenses will not rise as quickly because of provisions in the bill. Sure, I don't like the fact that some union health plans will be taxed. But I do like that the industry must now dedicate 85% of their premiums to health care, instead of the current 68-70%.

Again, this is a process, not a moment. We need to support the President on this.

- Mark

Tuesday, December 22, 2009

HEY, WHERE'S OUR FINANCIAL TOILET?

Imagine you have a family member who has a gambling problem. But they don't call it a gambling problem. Instead they talk about "a system" that they have. It's guaranteed to break Las Vegas. In their minds they are not gambling. In their mind they are "investing" time and money (in their minds, they're not sociopaths either. But that's another story).



Their investments gambles, as we all know, require money. But the family doesn't have any money to spare. So the investor gambler has to find cash. If this is done legally they will go to a bank. Or they will draw money from a retirement account, or some similar pot of cash. Eventually their debt loads become unbearable and financial institutions either stop lending or require more collateral. Pretty simple, right?

Now imagine if your gambling family member is able to convince banks to lend money, no questions asked. A permanent line of credit. They can go to Las Vegas and stay until their bets pay off. Sweet.

So, which route would you follow if you were our gambling family member? (A) Put up more collateral, and go to Las Vegas, (B) Secure a permanent line of credit (no questions asked), and go to Las Vegas, or (C) Stop borrowing and actually work for your money?

I know. Tough call.

Our bailed out financial institutions chose Option "B." This is how they did it.

To gamble with a continuous stream of other people's money - with virtually no questions asked - our nation's financial institutions created a nice accounting gimick called Structured Investment Vehicles (SIVs). These SIVs were, in essence, legal shelters where financial institutions could dump all the toxic investments bets they made with borrowed money. In a few words, SIVs are no better than legal financial toilets.


These financial toilets were made possible because our nation's financial institutions convinced the experts at the Financial Accounting Standards Board (which the Securities and Exchange Commission oversees) that moving financial crap off of their books was a good thing.

Over time the financial sector was even able to convince naive market players and gullible media sycophants to refer to their debt-laden SIVs as "capital arbitrage." Creating and moving so much bad debt and toxic crap never sounded so sexy (though, it still looks like - fair warning, don't click if you're stomach's not up to it - this).

I bring all of this up because alot of the crap our nation's financial institutions created in their financial toilets (SIVs) is still not worth much. Much of it, if you will, still stinks. Think about it this way. If you bought a house for $300,000 in 2007 it might only be worth $150,000 today. You and I have to eat this kind of financial loss. The banks don't want to eat what they have in their SIV toilets. Part of the reason for this is that it amounts to hundreds of billions of dollars in losses, which means their balance sheets won't look as good as they're telling the world.

This is where it gets really fun.

Banks now want regulators to allow them to revalue the bad bets they made - which they shoved into their SIV industry toilets (or "trust preferred securities") - at the price they originally paid. This way, the fees and bonuses that are tied to these bets get paid off at full value. Banks win big (again). Incredibly enough, the regulators are actually considering the proposal.

Hey, I have an idea. Since the regulators are caving in on things like this, let's do the following.

I say let the banks revalue their SIV financial crap. But on one condition. You and I get to revalue our homes at the market value we saw between 2004 and 2007. And just like the financial clowns who are getting bonuses and fees from revaluing the toxic crap they created, you and I get to sell our homes back to the banks at 2004-07 prices.

What's good for the goose is good for the gander, right?

I know, I know. It will never happen. I just wanted to share with you how our market system has very little to do with accountability and competition, and more to do with favorable legislation, manipulated regulations, and bailed out financial toilets.

- Mark

P.S. As a point of reference, the revaluation of depressed assets that I've described above is referred to as "mark-to-market" accounting. Responsible industry insiders refer to the method as "market-to-make-believe." I discuss market-to-market in previous posts, and in my book. Click on the labels and themes below for more information.

Monday, December 21, 2009

SUPPORT THE SENATE HEALTH CARE BILL?

Super Numbers Geek, and all around smart guy, Nate Silver has a nice chart that helps to "uncomplicate" the current health care debate. That is, if you like charts. In a few words, Silver believes that if the Holy Grail for Liberals and Progressives was to get a single-payer system (everyone is covered by one payer) while the alternative is the status quo (a dysfunctional health care system that eventually bankrupts the nation) America could do a lot worse than what the Senate just passed.

Silver places the current Senate Bill just below a watered down public option, but significantly above the status quo. You can check out his reasoning here.




To arrive at this point Silver looks at some of the key components in the Senate Bill and finds some real positive nuggets: (1) a ban on denying coverage for people with pre-existing conditions, (2) additional and much stronger regulations on insurers, (3) the creation of health insurance exchanges, and (4) mandating that insurance companies spend between 80-90% of all the premium money they take in on health care (currently they only spend about 70%). These are significant advancements.

Still, progressives like Jane Hamsher at Firedoglake.com are opposed to the current bill for the following (good) reasons:

1. It forces you to pay up to 8% of your income to private insurance corporations -- whether you want to or not.

2. If you refuse to buy the insurance, you'll have to pay penalties of up to 2% of your annual income to the IRS.

3. After being forced to pay thousands in premiums for junk insurance, you can still be on the hook for up to $11,900 a year in out-of-pocket medical expenses.

4. Massive restriction on a woman's right to choose, designed to trigger a challenge to Roe v. Wade in the Supreme Court.

5. It's partially paid for by taxes on the middle class insurance plans you have right now through your employer, causing them to cut back benefits and increase co-pays.
 
6. Many of the taxes to pay for the bill start now, but most Americans won't see any benefits -- like an end to discrimination against those with preexisting conditions -- until 2014 when the program begins.

7. Allows insurance companies to charge people who are older 300% more than others.

8. Grants monopolies to drug companies that will keep generic versions of expensive biotech drugs from ever coming to market.

9. No reimportation of prescription drugs, which would save consumers $100 billion over 10 years.

10. The cost of medical care will continue to rise, and insurance premiums for a family of four will rise an average of $1000 a year -- meaning in 10 years, you family's insurance premium will be $10,000 more annually than it is right now.

Both Silver and Hamsher make very good points. But this chart from Nate Silver (from his post "Why Progressives Are Batshit Crazy to Oppose the Senate Bill") helps to explain why what's in the Senate Bill is still better than sticking with the status quo. In a few words, up-front out of pocket expenses are much lower under the current Senate Bill (about $9,000) than under the projections for the current system ($19,576).





I'll have more to say about this tomorrow. I'll also explain why I think we may have to support the bill that will emerge from the Senate & House Conference Committee.

- Mark

UPDATE: Here's a link that uses Jane Hamsher's 10 reasons to oppose the Health Care Bill as the rationale for supporting the bill. I like it.

Sunday, December 20, 2009

HEALTH CARE UPDATE

It looks like the health care bill in the Senate will come up for a vote in a couple of hours. If you want a Starter-Kit for understanding why our health care debate has gone off track check this out. As Paul Krugman put it, the U.S. Senate appears to be seriously "dysfunctional." What this means is that influence peddling in America is alive and well.

Incredible as this sounds, as lousy as the bill is, it may still be better than the status quo.

Still, keep in mind that this morning's vote (scheduled for 1 A.M.) won't be the final vote. The Conference Committee will have their say too.

- Mark

Thursday, December 17, 2009

SEN. FRANKEN SHUTS SEN. LIEBERMAN DOWN

I like this. Senator Al Franken (D-Minnesota) pretty much tells Joe Liebermann (I-Aetna) to STFU. Good for him.

Still, Sen. John McCain (R-Arizona) is shocked at what Franken's actions will do to the "comity" in the Senate. He should be more concerned about what the Party of No is doing to democracy in America, or what his bringing Sarah Palin to our nation's political stage has done to the level of our political dialogue (she lowers it).



Look, Lieberman's been all over the place on health care for years. His position changes every time he wants more media attention. Except for carrying the health insurance industry's water, Lieberman brings nothing to the table when it comes to our discussion on health care.

- Mark

Wednesday, December 16, 2009

MR. PRESIDENT, MEET THE MANSON CLAN

President Obama had a meeting with bankers on Monday. Several bankers didn’t make it. Classy. Their absence and the tone of the meeting made it clear who’s in charge. It isn’t President Obama.


At the meeting President Obama pressed bankers to lend more money and reminded them that, given what occurred last year, they need to understand that we’re all in this together.

That should teach them. Maybe next time he’ll really get tough and force a group hug on them.

Predictably, in what can only be termed a lame PR moment, the bankers (who were present) smiled on cue and agreed that we should all work together. It was quite the Kumbaya Moment.


I know I feel better.

BACK IN THE REAL WORLD …
Meanwhile, in the real world, the banker’s lobbyists have been marching on Washington. While President Obama is asking the industry for favors, and looking to hand out good citizenship medals, the industry's lobbyists are busy fighting tooth and nail so the industry can avoid paying their fair share. They're also working to dilute proposed regulations which would help prevent what happened last year from occurring again.



Effectively what happened on Monday is that the bankers smiled, and publicly agreed to be good neighbors. At the same time their operatives were working so that the industry could tell President Obama and the American taxpayers to f@#k off.

It's really that simple.

And why not? They kept their jobs. They got their money. They got their $38 billion tax breaks. They got their trillion dollar Federal Reserve guarantees. So it’s business as usual. Consider the following.


* The derivatives market that got us into this mess is now bigger than it was before last year’s meltdown (around $140 trillion).

* Bonuses and salaries for Wall Street’s biggest players, most of it a product of business and accounting fraud, are still going through the roof.

* Many of these guys are now arrogantly telling the world that they’re largely independent of last year’s economic meltdown, or that the government is to blame for the collapse and the now laggard recovery.

* Some of them feel it’s OK not to plan ahead for a meeting with the President of the United States.

If chutzpah is killing your parents and asking the court for leniency because you’re now an orphan, bankers are now on an entirely different family tree. In fact, in many ways they're looking more and more like the lost siblings of the Manson Family.



What a bunch of pricks.

- Mark

Tuesday, December 15, 2009

MARKET CHEERLEADERS LIVING IN FAIRYTOPIA

Back in March I got into a rather interesting e-mail discussion with one of the economists at Merrill Lynch (in New York). It came after I read one of their monthly newsletters, where the authors presented the world with what they thought was sound market analysis. It was garbage, and I let them know.

Well, hang on to your hats. We're now getting more and more of the same garbage, as you can see in this "It's Not the Government's Recovery" piece by Brian S. Westbury and Robert Stein. The authors do their level best to show the world that people in the bailed out financial sector (like them) know what they're doing when, in fact, they don't get it. In my view, they have no idea about cause and effect relationships when it comes to our current market environment.

Check this out.


The authors first claim that accounting gimmicks like "mark-to-market" - which allows the financial sector to reprice garbage - have made things better. And it did ... for market players on Wall Street.

What the authors don't mention is that the freedom to reprice their garbage came in the bailout language signed by President Bush after Newt Gingrich and the financial industry lobbied Congress extensively (here's what I think about mark-to-market), while others worked on FASB rules. This means that the federal government altered the rules for the industry to help revitalize collapsed market prices. There were no invisible hands here as the authors suggest.

Then the authors argue that "easy money and the the normal tendency for free markets to heal from panic" created the conditions for recovery. This is truly pathetic.

Look, I voted for President Obama and genuinely want him to succeed. But the recovery isn't real (no matter what Larry Summers says). Those of you who read this blog regularly know why. To the extent that things may have stabilized, the "easy money" policies (via low interest rates) that made this possible were mandated/facilitated by the Federal Reserve. This occurred with the cooperation of the White House and the Treasury Secretary. This is government policy.

Finally, the authors also hide behind industry junk terminology ("V-Shaped recovery", "monetary velocity," etc.) that, I'm sure, impresses gullible family members and drunk neighbors. But it does little more than camouflage reality. It completely misses the multi-trillion dollar guarantees that the Federal Reserve, the FDIC, and the Treasury Department created for Wall Street's market garbage. This along with mark-to-make believe are what is creating the illusion that things are picking up on Wall Street (by facilitating counterparty payoffs). 

At the end of the day, what Westbury and Stein present is stunningly superficial and myopic. It really belongs in the Irving Fisher School of Permanent Plateaus. More to the point, to suggest that markets are "healing" because of some kind of Magical Market Pixie Dust is simply delusional.



There's more from the authors (including the incredibly ignorant suggestion that the "economy would be doing even better ... if government had stayed out of the way") but it's clear that Westbury and Stein really have no clue what's happening in the economy. These guys are living in a free market fairytopia.

That they're writing this stuff, and people take them seriously, should be a Red Flag. They're cheeleaders, not analysts.

- Mark

Monday, December 14, 2009

THEIR "OWN TWO FEET"? (Not these rugged individualists)

While at Chico State I had a colleague who made sure everyone knew how unbridled competition and "the market" had made this country great. Rugged individualism combined with hard-nosed decisions had turned America into a prosperous nation. Of course, since this was the mid-1980s, he was also a fan of President Ronald Reagan.

Anyways, one of the things that struck me was how he would speak (brag?) about the job waiting for him in the financial sector when he graduated. He always made it clear that he was ending up at the top of the job food chain because of his studious ways and his great potential. He was winning the Darwinian struggle, and was kind enough to let everyone know it. Evolution was on his side. He probably saw himself like this guy (or perhaps the Marlboro Man?).


As it turned out "Mr. Rugged Individualist" wasn't the person he thought himself to be.

First, I learned that his parents worked in the financial industry in San Francisco. This was critical because his parents had pretty much secured the job for Mr. Rugged Individualist. To be sure, I have no doubt that Mr. Rugged Individualist was smart and had to do well in the interview. He would also have to perform once on the job. But suggesting that he had made his own way in life was a stretch.

This is especially the case because I later learned that Mr. Rugged Individualist didn't have to work or borrow money while going to Chico State. His parents paid his tuition. They also paid the rent. Took care of the food too. As for me ... I had to work and borrow money throughout my years at Chico State (and beyond). So I thought to myself, "How can you be Mr. Rugged Individualist if your link in the human chain has been as a subsidized desk jockey rather than the mythical Hunter & Gatherer?"




Still, none of this disuaded Mr. Rugged Individualist from his line of thinking. According to Mr. Rugged Individualist, he had emerged at the top of our capitalist food chain on "his own." He was standing tall, on his own two feet, as it were.

I bring all of this up because of this article from Bloomberg. In it, Goldman Sachs executives suggested that they weren't really part of the mess that brought down the economy and that they stand "on our own two feet."

I smell another Mr. Rugged Individualist in the making. Here's why.

Apart from the fact that Goldman Sachs was the recipient of about $10 billion in bailout funds, it was the stupidity of former CEO, Hank Paulson, who helped wreck our economy.

As I've pointed out many times, as CEO of Goldman Sachs Mr. Paulson went to the Securities and Exchange Commission (SEC) and was given permission to raise debt levels of his industry from about 8-1 to 40-1. Why is this important? Think about it this way. If you make $10,000 a year would a bank (any bank) lend you $400,000? Let's take this one step further. Would they lend you $400,000 to gamble away in the market? Paulson pushed for - and got - permission to borrow more and more money to invest gamble in the toxic crap we now know as CDOs and CDSs. We all know how those instruments played out.

But it isn't Paulson's SEC-sanctioned stupidity alone that makes Goldman Sachs - and their industry desk jockeys - just like my Rugged Individualist colleague at Chico State. It's the fact that Goldman Sachs spokesman, Lucas van Praag, claimed that Goldman Sachs shouldn't be held to the same post-bailout standards as other financial institutions. Why? According to Mr. Praag Goldman Sachs not only paid back their TARP money but the majority of their money doesn't come from trading financial instruments like CDOs and CDSs (it accounts for about 12% of their income). Instead, Goldman Sachs makes their money from advising clients ... who they also happened to advise to make investments gamble in the CDO and CDS markets.

Got that?

Clients from Goldman Sachs, who might have gone broke were it not for the government bailout, are the primary source of Goldman's income. Not recognizing the irony (or is that hypocrisy?) of this, David Viniar, Goldman Sachs’s chief financial officer, is the one who said in an October conference call that his firm doesn’t benefit from any implicit government guarantee and that:

“We operate as an independent financial institution that stands on our own two feet.”

What are these people smoking? Seriously, this kind of thinking and behavior is sheer nonsense, bordering on the psychotic.

Think about it this way.  Goldman Sachs, who went to the SEC to secure permission to invest gamble recklessly with borrowed money, is now claiming to be an independent player because the majority of their business is with wealthy people.

This might fly except for one fact: The same wealthy people they advise didn't lose their shirts, and avoided financial collapse, only because the government bailed out their investments and saved the financial sector. If their market bets - which Goldman advised them to take - had not paid out they would have lost, big time. Goldman Sachs would've been facing a ton of lawsuits, and probably would've sunk faster than the Titanic.



Let me make this clear. The Troubled Asset Relief Program (TARP) money - which our financial institutions are trying desparately to pay back, so they can pay out record bonuses - are only one component of the $1.5 trillion Bush/Obama bailout program. Another component involves trillions of dollars more in market guarantees from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department. These guarantees are a virtual windfall for Wall Street.



Largely ignored, in part because Joe-Six Pack and the media don't understand it, is how companies like Goldman Sachs are benefitting from the additional trillions of bailout dollars made available by the Federal Reserve and the Treasury Department. These funds weren't voted on in Congress. They were just made available to purchase, absorb, and purify the toxic garbage companies, like those Goldman Sachs invested in and then advised their clients to purchase.

With Neil Barofsky, the special inspector general for TARP, saying that the total cost of the bailout could hit $23.7 trillion, these funds dwarf the TARP funds made available through Congress (again, $1.5 trillion). Without them Golman Sachs would have had gone the way of the Dodo Bird.



At the end of the day, companies like Goldman Sachs can't crow about standing on their own two feet. Not as long as their clients and their industry continue to suckle off of Treasury, FDIC, and Federal Reserve programs. As I pointed out earlier, if these companies want to claim that they stand on their own two feet they (1) need to pay back the TARP money and (2) then ask the federal government to rescind the trillions of dollars that the Federal Reserve, the FDIC, and the Treasury Department have made available to the industry.

Without this, Goldman Sachs and the entire financial sector are no more independent than my "rugged individualist" college friend.

- Mark

Sunday, December 13, 2009

GLENN BECK'S GOLD FEVER

Jon Stewart takes FOX News' Glenn Beck to task for being a paid spokesperson for companies selling gold, and then using his program to hype fears about the collapsing economy. The collapsing economy meme is necessary to get people to buy gold as a stable investment.


The Daily Show With Jon StewartMon - Thurs 11p / 10c
Beck - Not So Mellow Gold
www.thedailyshow.com
Daily Show
Full Episodes
Political HumorHealth Care Crisis

- Mark

Saturday, December 12, 2009

"OBAMA DOCTRINE" PRAISED BY CONSERVATIVES (and what they missed)

Apparently President Obama's Oslo speech not only swayed conservatives but, as I suggested two days ago, has set the tone for what appears to be an emerging Obama Doctrine: Peace through cooperation, Order through strength.

This, as will become clearer below, demonstrates that President Obama, like the post-war architects of 1945, has a much more sophisticated understanding of power than his predecessor, and many of his contemporaries.



While conservatives have focused on President Obama's muscular comments that "the United States of America has helped underwrite global security for more than six decades with the blood of our citizens and the strength of our arms" they completely ignored what President Obama said about how "global security" has been maintained. Specifically, President Obama made it clear that Pax Americana - the American Peace - was made possible because the United States openly embraced multilateral institutions.

These institutions (NATO, the United Nations, the Bretton Woods institutions, etc.) helped shape diplomacy and maintain order after World War II. As President Obama noted:

In the wake of such destruction, and with the advent of the nuclear age, it became clear to victor and vanquished alike that the world needed institutions to prevent another world war. And so, a quarter century after the United States Senate rejected the League of Nations -- an idea for which Woodrow Wilson received this prize -- America led the world in constructing an architecture to keep the peace: a Marshall Plan and a United Nations, mechanisms to govern the waging of war, treaties to protect human rights, prevent genocide, restrict the most dangerous weapons.

In many ways, these efforts succeeded. Yes, terrible wars have been fought, and atrocities committed. But there has been no Third World War. The Cold War ended with jubilant crowds dismantling a wall. Commerce has stitched much of the world together. Billions have been lifted from poverty. The ideals of liberty and self-determination, equality and the rule of law have haltingly advanced. We are the heirs of the fortitude and foresight of generations past, and it is a legacy for which my own country is rightfully proud.
What President Obama was telling the world, which conservatives rarely acknowledge (or simply don't understand) is that institutions and treaties matter. Put more bluntly, he was pointing out that modern diplomacy and global stability has moved beyond the simple embrace of balance of power, shifting alliances, coercion, and brute force.




This is critical because history tells us that order built on shifting alliances and simple coercion alone tend to break down, and have swallowed the world into increasingly destructive wars. Indeed, over the past 400-plus years we have seen the destruction of "global" (European) order via increasingly vicious wars. The bloody wars of religion brought on the Protestant Reformation, which reached a climax with the Thirty Years War (ending in 1648). These wars were followed by the War of Spanish Succession (1701-1714).




The instability and carnage that the Napoleonic Wars (1799-1815) brought to the European continent was followed by the ugliness and destruction of World War I. With it the world came to realize that, as President Obama put it, "The capacity of human beings to think up new ways to kill one another proved inexhaustible ..." 



World War I, as we know, was followed by the destruction of World War II, which inspired scholars to think of both WWI and WWII as modernity's version of the Thirty Years War.



This is important to understand because President Obama is acknowledging that, over time, we have learned that patterns and expectations created by treaties have had an impact. Treaties crafted at Westphalia (1648), Utrecht (1713), Vienna (1815), Versailles (1919), and at Bretton Woods (1944) and Potsdam (1945) have helped to establish international rules, protocols, and global patterns that, in many ways, create the functional equivalent of a global constitution (for an excellent book on this, see G. John Ikenberry's After Victory).

Established patterns have created expectations that have built - as I constantly tell my international relations students - islands of order in the sea of anarchy. This doesn't mean that war can (or will) be eradicated. It only means that the proclivity toward war can be reduced. This can only happen if other nations see the institutions, and the nations that create those institutions, as legitimate.

Legitimacy today, as President Obama emphasized, comes only when responsible leaders are prepared to use force with cause. But it also comes when everyone, including the biggest actors, play by the rules established by the treaties and institutions created. As President Obama put it:

So part of our challenge is reconciling these two seemingly inreconcilable truths -- that war is sometimes necessary, and war at some level is an expression of human folly. Concretely, we must direct our effort to the task that President Kennedy called for long ago. "Let us focus," he said, "on a more practical, more attainable peace, based not on a sudden revolution in human nature but on a gradual evolution in human institutions." A gradual evolution of human institutions.

What might this evolution look like? What might these practical steps be?

To begin with, I believe that all nations -- strong and weak alike -- must adhere to standards that govern the use of force. I -- like any head of state -- reserve the right to act unilaterally if necessary to defend my nation. Nevertheless, I am convinced that adhering to standards, international standards, strengthens those who do, and isolates and weakens those who don't.

There's more. Much more. So do yourself a favor and read the speech (it's that good).

But make no mistake. By advocating Peace through cooperation, Order through strength, President Obama presented the world with a more responsible way of thinking about global security that, as former Speaker of the House Newt Gingrich put it, bordered on the "historic."

- Mark

UPDATE (11-21-12): If you want to read an excellent book on the Obama Doctrine take a look at David E. Sanger's Confront and Conceal: Obama's Secret Wars and Surprising Use of American Power (Random House, 2012). It provides a detailed look at the Obama Doctrine by outlining the president's use of coalitions when broader U.S. global interests are evident (like the intervention in Libya) and aggressive unilateralism when specific U.S. security interests are involved (the drone attacks and the killing of Osama Bin Laden). For a quick but still nuanced review of the Obama Doctrine check out Joseph S. Nye's article, "The Obama Doctrine's First Term."

Here's the link for the speech.

Thursday, December 10, 2009

THE NOBEL SPEECH: THE OBAMA DOCTRINE?

In my International Relations class I always introduce students to the key theories that help us understand developments over time and around the world. The goal isn't to reaffirm or convince the students of one approach over another. At present - while we must pay attention to certain truths, like the security dilemma - no one approach is superior for understanding international relations.


The idea is to get my students to see that it isn't sufficient in the modern world to say, "We are more civilized and my club is bigger than yours so we will win." The British learned this lesson by the middle of the 20th century. The French learned this lesson too. The Soviet Union learned this lesson in Afghanistan at the end of the 20th century.

At the same time, in the modern world it is not sufficient to embrace the thinking of those with bumper stickers that read, "Won't it be a Great Day When the Navy has to Hold a Bake Sale and Schools Have All the Money they Need?". There are - as President Obama noted during his speech - moments where wars are just and necessary.


The grand chessboard of global politics isn't simply a function of "kicking ass" or turning an island into a parking lot. It's not about seeing who has the most rifles, bombs, and troops. But it's also not about moralizing to the point of embracing the undertones of the Beatles' song "All You Need is Love." Understanding global politics involves knowing how to create and sustain systemic stability with both a sword and a pen. Under the American Peace, or Pax Americana, we've increasingly embraced the pen. This is something to brag about. It's not only what you do during war, but what you do after victory that counts.

Knowing when to employ aggressive strength or strategic restraint is what creates the historic tales of grand masters on the global stage. 




This is why I thoroughly enjoyed President Obama's humble but realistic Nobel Peace Prize speech. While I'm still not convinced about the fuzziness of his Afghanistan policy, it's clear that he gets it when it comes to international relations. The art of global politics involves understanding power and the responsibility that comes with that power. Crafting a policy that threads those two needles is what turns an ordinary politician into a statesman. President Obama looked like a statesman at Oslo.


Addressing the challenges that come with trying to create global security, President Obama reminded the world that more than six decades of stability had been established under an enlightened America that used it's military strength. President Obama seems to understand that if he must operate in a world that doesn't provide black and white answers he must be both a warrior and a statesman.

Embracing these contrasting and seemingly contradictory positions - as Howard Fineman told us - is what's so reassuring about President Obama. In the immortal words of F. Scott Fitzgerald:  


The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.

If President Obama laid the groundwork for the beginning of an Obama Doctrine, it is his embrace of a rules-based multilateralism, seasoned with this maxim from Machiavelli:



The rule of man is law. The rule of the beast is force. In order to insure the former, you must have access to the latter.


Again, while I'm not thrilled about his rationale for Afghanistan at this point, President Obama's Oslo speech suggests he knows what he's doing.

- Mark

UPDATE: For those of you who agree with my sentiments here, and enjoy reading Reinhold Niebuhr, this post from Dailykos puts my Obama Doctrine suggestion on another, more philosophical, level. For those of you unfamiliar with Niebuhr, you might know him through the serenity prayer ("God grant me the serenity to accept the things I cannot change, Courage to change the things I can change, And wisdom to know the difference.").

THE IRREFUTABLE STUPIDITY OF SARAH PALIN

While there's so many real news developments going on, I just couldn't resist this. Check out this Huffington Post article from Cenk Uygur - host of The Young Turks - where he describes "The Irrefutable Stupidity of Sarah Palin."

Currently the Washington Post is taking some heat for running Sarah Palin's op-ed piece on the science behind global warming. Keep in mind that Sarah Palin's faith - and knowledge of science - did not prevent her from having Rev. Thomas Muthee pray for/with Sarah to have every form of witchcraft rebuked from her (yet, nothing was done to try and cure the stupid?).




Here's one video post (same event) that takes a little creative licence to illustrate the evil that was "rebuked" from Sarah Palin that day in the Wasilla Assembly of God. I'm not sure, but it appears that Sarah also had a pseudo exorcism performed on her too. You be the judge.

And to think, she's been invited to speak here at the Bakersfield Business Conference. It will no doubt be a sell out event. I love this town.

- Mark

UPDATE: In a Morning Joe segment Christopher Hitchens calls Sarah Palin "a disgraceful opportunist and a real moral coward."

Wednesday, December 9, 2009

OUR "HAMBURGER HELPER" HEALTH CARE MOMENT?

As a college student living in Chico I remember when I casually invited a female friend to dinner at my apartment. Nothing special. She was my roommate's friend too so it was just a regular dinner. As per our usual effort we made whatever we had. That night it was Hamburger Helper. Yum.




When our guest arrived I could tell immediately she was thinking something entirely different. Much different. Perhaps a ribeye steak? Ooops.

Whatever it was, it was obvious her expectations were a bit more upscale. She diplomatically told us that she had "eaten earlier" and was "not that hungry." Ouch.

This is kind of like how I feel what's been delivered by our Congress on health care over the past six months. Many of us expected much more and have had our expectations down-graded from single-payer to a public option, to a trigger, and so on ... the health care equivalent of being served Hamburger Helper.

Incredibly, if early reports on last night's health care "agreement" are any indication, we might not even get that. Like Clark Griswold at Uncle Eddie's barbecue in National Lampoon's Vacation, it's possible we might be getting Uncle Eddie's Hamburger Helper, passed off as health care reform ...



I haven't read the bill yet. So I hope I'm wrong. But the way the Democratic Party has been caving in to both the health care industry and Republican Party demands, I wouldn't be surprised to see "Uncle Eddie's Hamburger Helper" served up on our health care menu. Yum ...

Stay tuned.

- Mark

PAUL VOLCKER'S THE MAN (and Reagan Blew It)

In 1987 the Federal Reserve Board voted 3-2 to allow commercial banks to underwrite (invest in or accept some of the risk for) a limited amount of financial instruments like municipal bonds and mortgage backed securities. Underwriting bonds and securities had been a problem before the Great Depression because banks took depositor money and jumped into bigger and riskier investment schemes. As is the case today, bankers got greedy and stupid. Funny how some things never change.

Anyways, when bond markets and security investments tanked in 1929 banks who had taken bigger and bigger risks collapsed and took their depositor's money with them. There was no Federal Deposit Insurance Corporation (FDIC) back then so ordinary depositors lost their money to the stupid deals bankers made. You know the rest of the story.




Fast forward back to the Federal Reserve's 3-2 decision in 1987 ... By allowing our FDIC-insured banks to take on the risk of underwriting securities the Federal Reserve opened the door that would eventually enable our FDIC-insured commercial banks to get involved in the financial crap (CDOs, MBS, CDS, etc.) that brought down our economy last year. This is important to know because one of two board members who voted "no" on the 3-2 Fed decision was then Chair of the Federal Reserve, Paul Volcker.



I provide this background because Paul Volcker once again is doing us all a favor, which will probably go unnoticed (again). Via nakedcapitalism.com we learn that while in Sussex, England Mr. Volcker gave a speech and told some of the world’s most senior financiers that their industry’s “single most important” contribution in the last 25 years has been automatic telling machines, which he said had at least proved “useful”. Imagine, telling a group of financial executives with big wallets - and even bigger egos - that their greatest gift to humanity over the past generation was ATMs. Beautiful. But he didn't end there.

Mr. Volcker then went on to tell the group - after being asked about the importance of securities - that the commercial banks could innovate all they want "but do it within a structure that doesn’t put the whole economy at risk." The real surprise here is that many in the crowd were "stunned" by his common sense approach to banking.

Mr. Volcker finished by saying the industry needed to "wake up" and that investment banks and hedge funds should be the only financial groups taking on high risk investments. He added that our governments should also be telling them "If you fail, fail. I’m not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."  That this even needed to be said - and that anyone would be offended or "stunned" by the suggestion - says much about where we're at today.

And, for those of you keeping score at home, Ronald Reagan effectively fired Paul Volcker and replaced him with Alan Greenspan. You do the math.

- Mark

Tuesday, December 8, 2009

WHAT YOU REALLY NEED TO KNOW ABOUT THE HEALTH CARE DEBATE

As promised from last night ...




Today we’ve learned that the U.S. Senate has formed a deal on health care reform. I haven’t seen what’s in the deal so I won’t comment on whether I like it or not. However, as I promised last night, I am going to present a rather quick overview that explains why we need REAL health care reform. First, the cost comparisons (links have been provided in previous posts; click on topic labels below).

ECONOMIC COST TO OUR NATION
I think one of the greatest concerns I have is what non-competition and virtual monopolies have done for private health care costs in America. Think about this: In 1970 America spent 7.2 cents of every dollar we generated on health care costs. Today we spend 17.6 cents of every dollar we earn on health care. Here are projected costs in America, starting the year 2018, if we do absolutely nothing regarding health care.

* 2018 = 20 cents of every dollar earned goes to health care.

* 2025 = 25 cents of every dollar earned goes to health care.

* 2052 = 49 cents of every dollar earned goes to health care.

Put another way, our monopolistic private system will eventually swallow our national income if we do nothing to reign in costs.




Does this have to happen? Not if we look at costs around the world, and how they achieve those costs.

COMPARATIVE COSTS
If we look elsewhere we see costs that aren’t remotely near what we spend as a nation.

* Canada   = 10 cents of every dollar earned goes to health care.

* France    = 11 cents of every franc/Euro earned …

* Germany = 10.6 cents of every mark/Euro earned …

* Japan      = 8.1 sen of every yen earned …

* UK         = 8.4 pence of every pound earned …

* Switz.    = 11 centimes out of every franc/Euro earned …

What’s worse is what we spend on administrative costs in America. The most widely accepted figures tell us that the private sector spends about 30 cents of every dollar they get in premiums on administrative costs (media, profits, bonuses, etc.). The federal government, on the other hand, spends 2 cents of their budget on administrative costs.

More recent, industry friendly, estimates point to the federal government spending 5 cents of every health care dollar on administrative costs while the private sector spends approximately 17 cents. Still, either way you slice it, health care administrative costs are at least 3 times as high in the private sector than they are in the public sector.

But, wait, it gets worse.

COMPETITIVENESS, EFFICIENCY & PERSONAL COSTS
What does health care cost our national economy in terms of competitiveness and efficiency? Think of it this way. Corporate America has to purchase health care at a price that is 30% higher than what other countries pay (see above). Want to buy a U.S. made automobile? Tack on 30% extra to cover the health care costs of each worker in America versus what Japan and Germany pay to build their automobiles.

Rising co-pays, skyrocketing premiums, denial specialists, and suddenly being dropped from coverage also work against individual security and overall economic efficiency. Simply put, when workers are forced to transfer more of what they earn to the health care industry because of the non-competitive nature of the industry workers are worse off. This not only robs consumption from other areas of the economy but it creates financial land mines for individual families beset with sudden surprises, like claim denials or being dropped from insurance rolls.

These financial land mines, in turn, have contributed to a surge in personal bankruptcies in America. More than 1.2 million bankruptcy cases are expected to be filed by the end of this year. Well over half of these are filed because of the inability to deal with the costs of catastrophic illness. Incredibly, half of catastrophic illness bankruptcies happen to families with health insurance.

Finally, while we might be able to put an accounting figure on the cost, there is no way to measure the personal and emotional costs when 44,000 Americans die from lack of health insurance in America.

Still, many on the far right will argue that quality and customer satisfaction are what separate America from the rest of the world? Let’s take a look at the claim.

NATIONAL SATISFACTION
This OECD report makes it clear that more people in the U.K., Germany, and France (among others) are happier with their overall health care system than we are here in the U.S.

Still, there’s no doubt that a good number of Americans are happy with their health care. Here’s why. What the vast majority of Americans like about their health care is really mandated and/or covered by the government. Think about the following:

* The federal government covers the elderly, our military personnel, and our military veterans through Medicare, military hospitals, and the VA.

* Private firms and employers are subsidized ($246.1 billion in 2008) by the American taxpayer so that they can provide private health insurance. Put another way, your private employer gets reimbursed by the federal government for providing “private” health insurance.

* Government regulations - and not private insurance policy - forbid private (government subsidized) employer insurance plans from discriminating against employees with pre-existing conditions.

* When we combine Medicare, our military personnel, and what the American taxpayer subsidizes for “private” sector plans we find that 60% of total health care costs are absorbed by the federal government.

* With the federal government involved in covering 60% of all national health costs one thing becomes clear: We’re already paying for a National Health program. We’re just not getting the benefits.

At the end of the day Europeans are more satisfied with their health care system than we are. And to the extent that we are happy with our health care system it’s because the federal government is managing or mandating some of the more key elements that make our nation’s health care system work. Again, we already have a national health care program. We just don’t get the benefits.

OTHER CONSIDERATIONS
In other areas that should make us reconsider why the Party of No opposes reform, we should ask the following questions …


* Why is it that 62.9% of physicians support a public option?

* Why is it that life expectancy is higher in Japan, the UK, Germany and Switzerland?



* Why is it that Portugal, Greece, and even Cuba have better infant mortality rates than we do?




Related to life expectancy and infant mortality rates, I have just one question: Where the hell are the “right to life” crazies in this debate? Just wondering ...

Look, when all is said and done, profit maximization is the primary motive for the private insurance industry. It’s that simple. This explains why the private insurance industry's primary techniques for holding down costs are: (1) practicing risk selection, (2) limiting services covered, (3) constraining payments to providers, (4) hiring & training claim denial specialists, and (5) shifting costs to patients. Improved health care is not in the mix. If this status quo continues we are all in big trouble.

We need national health care reform that brings real reform and real competition. A vibrant public option is supposed to do this ... just as public universities provide a "public option" to those who can’t or don’t want to attend private universities. I get this. Most of you get this. We’ll see over the next few days whether Congress gets it too.
 
- Mark

Monday, December 7, 2009

PETER PAN, DARWIN & OUR HEALTH CARE DEBATE

From time to time I've gotten into e-mail discussions about what I write in the Bakersfield Californian, what I say on radio or TV, or for what I presented in my book. Or I'll get stuff from local conservative politicos, which reminds me why living here in Bakersfield is so much fun for a Liberal like me. There's a lot of good conservative material to comment on. Usually it involves some naive assertion about how wonderful markets, Christ, or freedom are (or some variant thereof).

Then there are the self-appointed geniuses. They like to use Latin terms (poorly) and then take me down intellectual cul de sacs that make sense only if you like debating word definitions and/or their Rush Limbaugh-Glenn Beck-FOX News-fed interpretation of events. This winds up with them telling me how much smarter they are than people in academia (which includes me too). I know they're smart because conservatives tell me they are (what more proof do I need?). This usually trails into the self-styled genius confiding to me how nice it is that "a couple of intellectuals like us" can discuss the issues (being demoted and elevated to genius level in a span of 15 minutes is always fun).

Whatever the topic, it always includes statements about how great everything would be if we just let markets, Christ, freedom, etc. work their "magic."

No real knowledge of history, spirituality, nor a sense of the human condition are necessary. Research? Nah. Studying an issue? Too egg-headish. Catholics? Going to hell (something about icons). You just need to believe in their fairytopia world, where people do good because it's the right thing to do ... as long as you believe. Tax cuts for the rich? Don't worry, they won't produce deficits (this time). Seriously. At some point I expect Peter Pan to emerge. 


At the end of our exchanges I'm usually entertained with direct or indirect judgments about "moral degenerates" sucking off the system. This usually stops the discussion because a line has been drawn, and the sense of rugged individualism these geniuses attribute to themselves is beyond debate. They have won Darwin's evolutionary race to top. Just ask them. Debate over.



This, ironically, is counter intuitive when you consider that many of these Darwinian winners also claim to be Christians. When I acknowledge their evolutionary greatness and point out, just for kicks, that what they're suggesting about themselves fits in with what Darwin said about evolution they go ape (figuratively speaking, of course). The discussion is usually finished once we reach the functional equivalent of an Ayn Rand puppet show.

I discuss all of this because I got the following on the health care debate from a prominent local politico the other day.

I HAVE BEEN OPPOSED TO MEDICARE FROM THE BEGINNING. PEOPLE NEED TO LEARN TO TAKE CARE OF THEMSELVES.

I REFUSED TO ALLOW MY MOTHER TO USE MEDICARE OR MEDI-CAL WHEN SHE HAD KIDNEY FAILURE. IT IS HERS AND MY RESPONSIBILITY AND NOT THE REST OF AMERICA. SHE HAD INSURANCE AND SHE HAD SAVED FOR A RAINY DAY.
I thought to myself, "How is it that rather than saying, 'Thank God that my family is blessed, and that we have had the good fortune to do well for ourselves' this person would rather put himself on a pedestal and wag fingers at the rest of the world?".

I know part of it has to do with him pounding his chest (like an ape?) about his personal accomplishments. So I responded with this:

Dear____________.

According to the Bible there are four causes for poverty and the conditions that make Medicare a necessity. Laziness, or what you might want to call a lack of personal responsibility, is just one of them. Look, you can't speak about "personal responsibility" if people are getting ripped off, are wrongly judged, or are thrown into a condition through no fault of their own. A man getting run over by a truck because he didn't look both ways is no different from a man run over by a drunk driver. I would like to think that I would still care. If I couldn't do anything to help I have no problem pitching in to support those who can. Or does your sense of personal responsibility say, "Let them die in a ditch"?

As well, you want to keep in mind that the party you work for has been systematically transferring wealth from one class (the middle-class) to another (America's already rich) with government support. The wealth that has been created over the previous generation is not a product of hard work and personal sacrifice alone. It's also a product of favorable legislation, especially in the financial sector. That you would confuse hard work and personal responsibility with write-offs, subsidies and favorable legislation explains much. It especially explains why republicans continue to think that more of the same is exactly what we need in order to clean up the mess Reagan started and Bush finished off.

I didn't get a response. It doesn't matter. It probably would have been incoherent and ancedotal.

Still, I think it's important that we understand what we're trying to do when it comes to this health care debate. As a result, I'm going to synopsize the numerous health care posts I have presented here into a brief overview (no more than 750 words) explaining why health care reform is absolutely necessary. No FOX News sound bites. No Glenn Beck emotional breakdowns. No Rush Limbaugh ignorance. Just simple policy points, and how health care reform will make America stronger. I'll make it interesting too.

I'll post it by this time tomorrow.

- Mark

GEITHNER: USEFUL STOOGE?

This Slate article on Treasury Secretary Tim Geither is brutal. Former NY governor Eliot Spitzer all but calls Geithner the banking industry's useful stooge. I don't know why he held back.

Here's what he has to say about the NY Federal Reserve under Tim Geithner's leadership during the 2008 crisis.

The New York Fed [under Geithner] didn't have the backbone to stand up to Wall Street, didn't understand its capacity to protect taxpayers, and didn't appreciate that its responsibility was to taxpayers.
Spitzer finished the article with this: "He doesn't know how to negotiate, doesn't understand what cards he holds, and doesn't understand the need for fundamental reform." Ouch. This, my friends, helps to explain how the American taxpayer got stuck with the trillion dollar bailout bill.



Read the article. It doesn't explain why Wall Street screwed America. We already know why. Wall Street is full of greedy unethical chumps. Instead it explains how it happened ... with a wink and a nod from the very people who are supposed to protect the American taxpayer. Simply put, Tim Geithner became Wall Street's useful stooge.

- Mark

Saturday, December 5, 2009

HAPPY HOLIDAYS (you'll enjoy this one)

Have you ever wanted to relax and "enjoy the silent majesty of winter's morn, and the cool clean chill of a Holiday air"? Me too.

Then you read about how bailed out Goldman Sachs not only set Wall Street pay record records but that their chief executive officer, Lloyd Blankfein, actually believes that his company "would not have failed" if they had just been left alone.

Great. The people who created our economic mess and then dumped all their crap on the American taxpayer now think they did nothing wrong. In a few words, during this Holiday Season they get to keep their bonuses and walk away while we deal with the sh*t they created. It works something like this.




Lloyd Blankfein, as well as the other CEOs of financial America, are Randy Quaid. Happy Holidays.

- Mark

Thursday, December 3, 2009

BofA RETURNING BAILOUT CASH ... IT'S SMOKE & MIRRORS

In an effort to get out from under the watchdog eyes of the federal government Bank of America is re-paying $45 billion in TARP bailout money. Sounds like great news, huh? The "road to recovery" others will argue. Well, hang on to your wallets. It's all smoke mirrors ...


QUICK OVERVIEW
BofA is saying that they will use $26.2 billion of its own money, and $18.8 billion in raised capital (for a total of $45 billion), to pay down what they borrowed from the Troubled Asset Relief Program (TARP). Where have they gotten the $26.2 billion? This is especially a good question since they were moving toward financial Armageddon after purchasing the very toxic Merrill Lynch just 9 months ago. BofA is getting the money from at least three developments:

* TAPPING RAINY DAY FUNDS

* BAILOUT FUNDS TURNED STRAW INTO GOLD

* CONTINUED GAMBLING

I'll take each one in turn.

TAPPING RAINY DAY FUNDS
BofA, like all other FDIC-backed financial institutions, has reduced the amount of money they are putting aside for a rainy day (blue line on the chart; called Coverage Ratio). As The Pragmatic Capitalist points out (in "The Bank Profit Mirage"), this means that if things go bad in some client accounts banks will have less money to deal with the problem than they did before the market collapsed last year. How do we know this? Because the FDIC keeps track of this stuff. Again, look at the Blue Line on the chart.




But then it gets really bad. Every time somebody decides that they can't make payments on a home loan or a small business loan it becomes a non-performing loan. Look at the red line on the chart (Non-Current Loans & Leases). As you can see, things aren't going well for American debtors these days. When BofA (or any bank) decide they can't squeeze any more money out of a debtor they simply write the account off as a loss (or a "charge-off"). Things aren't going well here either. Look at the green line in the chart (Loan Loss Reserves).

You don't have to be a rocket scientist to see things aren't going well for FDIC-insured banks.

Most institutions are supposed to have money to cover accounts they anticipate will go bad. After last year - and given current economic conditions for Middle America - you would think that banks would be putting billions more into the Blue Line (Coverage Ratio, to cover anticipated losses). They're not. Instead of using billions as operational (rainy day) funds they're shifting them over to their bottom line and calling it a "profit."

And just like that, it looks like banks are doing better. See how easy that is?


In a few words, BofA is taking billions out of it's rainy day fund at precisely the time that they should be putting more into it. My guess is that they're confident that their current market bets will continue to pay-off because of government guarantees in other (non-TARP) areas. Here's why.

BAILOUT FUNDS TURN STRAW INTO GOLD
I'll try and make this as simple as possible. The once toxic derivatives, and other market garbage, that Merrill Lynch, Goldman Sachs, and AIG (among others) had were suddenly cleansed. Because of the federal government's bailout money, the Federal Reserves gurantees and credits, and the Treasury Department's intervention, well over $5 trillion in watered stock, bad assets, and toxic securities were pretty much cleaned up by the U.S. government. I previously wrote about this in my "Iron Maiden" posts.

These financial cleansing activities by the Federal Reserve and the Treasury Department covered at least $1.9 trillion for new lending and $4.8 trillion for troubled asset purchases. They also explain why Goldman Sachs, Merrill Lynch, AIG, etc. were suddenly made "profitable" to the point that they could pay out 100 cents on the dollar. Everything they thought was toxic was suddenly turned into gold.



In a few words, banks are profitable because the American taxpayer has made them profitable through Federal Reserve and Treasury Department trillion dollar guarantees. If our financial institutions, like BofA, were really doing fine they would pay back the TARP money and then ask the Federal Reserve and the Treasury Department to rescind their trillion dollar guarantees. But they can't. They need the guarantees to make money off the toxic assets they're still flushing out of the system. This is not a sign of recovery.

CONTINUED GAMBLING
As I pointed out two posts ago one of the reasons financial institutions are starting to see profits is because they've gone back to the same derivative markets that helped get us into this mess. Rather than making loans to small businesses and entrepreneurs (who take longer to pay off) financial firms like BofA are betting on making a quicker buck on derivative contracts. This "recovery" strategy - as any half-wit should see - is only working because of the trillion dollar Federal Reserve guarantees and Treasury Department interventions.



Gambling with a continuous stream of the House's money does not make you a success ... no matter how much you make. In fact, it should make you the butt of the gambling den's jokes. But that's not the case for America's financial institutions. They actually believe they're the ones making things work.

FINAL THOUGHTS
The additional $18.8 billion that BofA says it will use to pay it's TARP loan back will come from selling more of it's stock. This means BofA will dilute the value of current shareholder stock in order to raise capital. This is not good news for their shareholders. But the goal isn't to appease shareholders today. It's to get the U.S. government off of its back so that BofA

At the end of the day, that anyone buys into the idea that the major financial institutions are healthy is dumbfounding. Toxic assets were spun into gold by the U.S. government. Money (or "profits") used by BofA to pay back the federal government is really operational capital that should be used for the rainy day around the corner. Instead, BofA, like other financial institutions, is banking on the Fed's trillion dollar guarantees to make anticipated losses whole. But this is understandable. Federal Reserve trillion dollar guarantees don't have TARP-like conditions attached to them (thank you Tim Geithner and Ben Bernanke).

Finally, that BofA and other financial institutions continue to bet on interest rate and foreign currency derivative markets - which have been made whole by government money - should be a red flag. The fact that the media wants to talk about the "recovery" of BofA, instead of asking why they're so healthy, tells me one thing: We've learned nothing from the previous years of smoke & mirrors.

Stay tuned.

- Mark