Monday, August 31, 2009


Great. Just great.

It looks like the Federal Deposit Insurance Corporation (FDIC) - which is supposed to guard the bank deposits of people like you and me - is now guaranteeing new bank owners against losing money. How is this possible, you ask? In a few words, to entice buyers to purchase failing banks the FDIC is offering to cover around 80 percent of the losses associated with buying a troubled bank. Put another way, you and I are on the hook for up to 80% of a failing - but recently purchased - banks' losses in the future.

The Wall Street Journal is reporting that in a "loss-share" arrangement, the new owners of failed banks don't have to worry about future losses. Specifically:

To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.
To date the FDIC has paid out $300 million under the loss-share agreements. This should be of concern because at the end of June the FDIC had just $10.4 billion in its deposit-insurance fund, down from more than $50 billion last year. With hundreds of banks on its "problem" bank list (click here or on the graph below for an interactive chart on bank failures) you can be sure that the FDIC will be looking toward the U.S. taxpayer to help out.

Can someone tell me, again, how the "free market" is supposed to work?

- Mark

Thursday, August 27, 2009


From Think Progress ...

A couple of weeks ago, the Congressional Budget Office (CBO) released a preliminary score of the health care legislation under consideration in the Senate Health, Education, Labor, and Pensions (HELP) Committee. The bill was estimated to cost $1 trillion over 10 years, while reducing the number of uninsured by "only" one-third. As many informed bloggers noted at the time, the cost estimate was incomplete because the legislation that the CBO reviewed did not contain language about a public health insurance plan or an employer mandate.

Nevertheless, Republicans seized on the opportunity to engage in merciless political attacks, citing the incomplete CBO score as proof that health care reform is not worth doing:

John McCain: "[The CBO estimate] should be a wake up call for all of us to scrap the current bill and start over in a true bipartisan fashion."

John Boehner: "[T]he public option would cost over $1 trillion, and would cause 23 million Americans to lose their private health care coverage."

Lindsey Graham: "The CBO estimates were a death blow to a government run health care plan."
The HELP Committee has since added language for a public plan option to its legislation, as well as an employer mandate provision. The AP reports the new results:

The plan carries a 10-year price tag of slightly over $600 billion, and would lead toward an estimated 97 percent of all Americans having coverage, according to the Congressional Budget Office, Sens. Edward M. Kennedy and Chris Dodd said in a letter to other members of the Senate Health, Education, Labor and Pensions Committee. [...]

The [employer mandate] provision is also estimated to greatly reduce the number of workers whose employers would drop coverage, thus addressing a major concern noted by CBO when it reviewed the earlier proposals.
In other words, the addition of the public plan dramatically reduced the overall cost of the bill and ensured coverage of almost all Americans. So what excuses will McCain, Boehner, Graham, and other Republicans offer now? Their attacks were not only found to be baseless, but their concerns about the costs and coverage have also been addressed.

UPDATE: The incoming president of the American Medical Association, Dr. J. James Rohack, said his organization now supports a public plan, after initially indicating its opposition. The AMA supports an "American model" that includes both "a private system and a public system, working together," he said.

UPDATE: Jonathan Cohn has more.

UPDATE: This report says the public option not only makes the market work more efficiently, but that we could save about $2 trillion a year with it.

- Mark


I attendend Congressman Kevin McCarthy's (R-Bakersfield) health care "town hall" meeting last night. In a few words, it was little more than a political rally filled with people looking for affirmation, rather than information.

From the FOX News-like "Constituent Resource Packet" distributed by Congressman McCarthy's staff, to the Q&A period, it was obvious that the rally was geared to feeding the "bash the government" crowd. Indeed, Congressman McCarthy did a very good job of feeding his supporters the political red meat they need as they try to feel their way through this era of Obama politics.

Congressman McCarthy quickly dispensed with one disabled person who made a plea for government health care (by saying he needs more choices and tax credits) and made quick work of another who made it clear that congress has the authority to take up health care with the "General Welfare" clause in the constitution (he told him he could ask only one question). For good measure we were entertained with the vile passions - evident in the loud ovations - that got whipped up every time someone mentioned those damn "illegals" ripping off the system (who, I'm sure, Jesus would want to deny health care).

What struck me as particularly good grandstanding was Congressman McCarthy's constant reference to budget deficits. Recall, republicans said little to nothing when President Bush gave away anticipated trillion dollar surpluses in the form of tax cuts. This massive transfer of wealth to the rich - partially funded with middle class paid social security surplus dollars - helped put our nation's debt picture further into the red. Congressman McCarthy said nothing about this.

For good measure, Congressman McCarthy also failed to mention the two primary reasons that we're going to see a $1.5 trillion dollar deficit this fiscal year: (1) President Obama's budget hand was forced by Bush's bungled economic programs and failed economy and (2) President Obama doesn't want to hide budget numbers like President Bush did when he was in office.

Think about it, President Obama (and George W. Bush) wouldn't have had to spend $750 billion in stimulus (and debt-funded) money if President Bush's "free market" deregulation-bubble economy programs hadn't blown up in our nation's face. If you're keeping score at home, that's $750 billion in this (and next) year's budget that President Obama had forced upon him by President Bush and his failed policies.

As well, President Obama made it clear that he wouldn't hide budget numbers as President Bush did. Keep in mind that every year President Bush put up his budget numbers he conveniently ignored including the costs of the War on Terror, and the wars in Iraq and Afghanistan. This is like doing your household budget but conveniently ignoring the costs of vacation, holiday, tuition, birthday, and other non-daily (or supplemental) expenses.

Instead, President Bush waited to push through emergency or "supplemental" budget bills after each budget was passed, which helped many (mostly republican) Americans think that we weren't spending hundreds of billions. Nice. These numbers didn't show up in President Bush's budget because President Bush didn't want America to see how much his Bungled Wars Project was going to cost the American taxpayer each year. If you're still keeping score at home, you can add at least another $250-300 billion to the budget deficit that President Obama inherited.

This was not a town hall designed to inform the people. It was a political rally. In Kevin's district it's good politics. In America it's a shame.

I'll have more to say about Congressman McCarthy's analysis of the health care bill (H.R. 3200) in the coming days.

- Mark

Wednesday, August 26, 2009


The Lion of the Senate, Ted Kennedy (1932-2009), passed away last night.

While there are many who will remember his struggles rather than his triumphs - a great life has both - ultimately his life will be remembered for the justness of his cause and the legacy of his accomplishments. There are few areas of our lives that are not touched in positive ways by legislation crafted or sponsored by Ted Kennedy. If you were 18 years old and voted you can thank Ted Kennedy. If you're a woman and played sports without having to break the bank you can thank Ted Kennedy (Title IX). If you're ....

Unlike others, Ted Kennedy's influence only grew with time. The role his endorsement played in securing the Democratic nomination for Barack Obama can not be denied by those who participated in the Democratic primaries. I especially enjoyed his convention speech in Denver.

Still, I think the eulogy he gave for his brother, Robert F. Kennedy, is one of the most thoughtful and inspiring speeches of our time.

Interestingly, while not much was expected of Ted Kennedy when he first ran for office in 1962 (both JFK and RFK were hardly encouraging, at first) he accomplished more legislatively than both of his brothers did put together. Smaller minds will no doubt look to the mistakes he made in his life. But there's no doubt that our country is a better place because of Ted Kennedy.

If "To those that much is given, much is expected" is a truism of life, as a man born into great wealth, Ted Kennedy eventually grew into a role that allowed him to meet those expectations. My prayers are with him today.

- Mark

P.S.: A reminder ... In this short clip, this is what Ted Kennedy has been fighting for over the past 40 years. He explains why.

Tuesday, August 25, 2009


In a previous post I noted my frustration with the lies and gullibility that surrounds the current health care debate (shouting match?). While I would like to suggest that this is how good policy is made, that would be too far from the truth. Simply stated, the opponents of President Obama's health care overhaul (whatever it's final form) are worried sick that genuine reform will undermine the electoral prospects of the republican party, and the profits of the health care industry.

At the forefront of this irresponsible and fact challenged parade is Republican National Committee Chairman Michael Steele. Here's Michael Steele writing about health care in the Washington Post:

First, we need to protect Medicare and not cut it in the name of "health-insurance reform." As the president frequently, and correctly, points out, Medicare will go deep into the red in less than a decade. But he and congressional Democrats are planning to raid, not aid, Medicare by cutting $500 billion from the program to fund his health-care experiment.
Apart from the fact that no final bill has been introduced, President Obama has repeatedly stated that there would be no cuts to Medicare beneficiaries. Indeed, according to a Kaiser Family Foundation analysis of HR 3200, proposed legislation allows for a 5% Medicare payment INCREASE for primary care services to some physicians.

Unswayed by the facts, Michael Steele continues:

Second, we need to prohibit government from getting between seniors and their doctors. The government-run health-care experiment that Obama and the Democrats propose will give seniors less power to control their own medical decisions and create government boards that would decide what treatments would or would not be funded.
This statement is an obvious reference to "health boards" and "death panels" that republicans like to claim are at the heart of President Obama's health care reform.

What republicans like Steele fail to mention is that the "health boards" system they are trying to scare Americans about is little more than a nation-wide information sharing infrastructure that allows health care professionals "access" to medical information so that proper medical decisions can be made. There are no "mandatory" rulings or steps that have to be made.

In fact, one piece in the proposed legislation that pushes for sharing “appropriate information to help guide medical decisions at the time and place of care” is almost identical to President Bush’s 2004 Health Information Technology executive order, which pushes for a nationwide infrastructure to "to guide medical decisions." Put another way, if the goal of sharing medical information amounts to "health boards" then President Bush has already created them.

Because the goal is to share information rather than to make collective decisions this means that government sponsored boards and panels - unlike the processes followed by private "claim denial" specialists - are NOT going to use money as a criteria to decide whose life is worth cutting loose. Period.

There's more - much more - to the lies and innuendo surrounding Michael Steele's fact challenged op-ed. You can go here to see the details.

If you also want to see how the conservative Heritage Foundation is using abortion, rationing, "illegal immigrants" and health care industry funded research to try and scare Americans about proposed health care reform, click here.

- Mark

UPDATE: Here's a woman - whose family has insurance - explaining that her husband has been denied (by a private "board" or "panel," I'm sure) the care necessary to keep him fed and hydrated. In this WWJD moment, Senator Coburn (R-OK) makes a lame appeal to neighbors helping neighbors (but nobody volunteers to help) and then asks her to make an appointment with his staff after saying government is not the solution (unless, of course, you're a corporation looking for bailouts, subsidies, and write-offs). Classic.

Monday, August 24, 2009


In today's op-ed column Paul Krugman makes an observation that should be at the heart of our public debates today. Specifically, Krugman looks at the silliness behind the "private sector good-government bad" mentality, and muses over why this mindset continues to persist.

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.
I agree with this. If you want to understand why Reaganomics was not as successful as the zombie pundits and politicians clearly think it is, here's one of my previous posts on the topic.

- Mark

Friday, August 21, 2009


Of all the developments that surround the health care debate today perhaps the most frustrating is the nonsense and abject ignorance tied to the growing belief in Death Panels (people need to learn to read the proposed legislation), health care on demand for illegal immigrants (again, learn to read), and the spooky “government takeover” of health care, which is little more than gruel for the conspiratorial Black Hawk Helicopter / Waco Conspiracy / Birther crowd.

Seriously. At what point do we start laughing at these people?

Then again, the Death Panel-Government Takeover discussions are exactly the type of red herring conversations the insurance industry and the republican party has always wanted. The insurance industry wants it to maintain profits. The republican party wants it because they understand that if President Obama delivers real reform in the health care arena they may find it hard to emerge from the political woodshed for an entire generation.

While the republican-insurance industry goal of maintaining the status quo appears to enjoy the tactical points handed to them by FOX News, Rush Limbaugh, and their internet brethren, there are several points that can, and must, be addressed.

We need to understand - as economist Paul Krugman pointed out - that to the extent that a majority of Americans are happy with their health insurance it’s due primarily to three factors:

1) The federal government already covers the elderly, our military personnel, and our military veterans through Medicare, military hospitals, and the Veterans Administration.

2) Private firms and employers are subsidized ($246.1 billion in 2008) by the American taxpayer so that they can provide “private” health insurance.

3) Government regulations forbid private employer insurance plans (again, they are subsidized) from discriminating against employees with previous health conditions.
Still, the state of our current health care system is not good. Here's why.

Rising co-pays, skyrocketing premiums, denial specialists, and being suddenly being dropped from coverage because of “pre-existing” conditions, that can range from pregnancy to acne treatment, have combined to make our health care system a field of financial land mines. You never know when your coverage will blow up in your face.

Worse, the managed care system we have for the non-military and 65 and under crowd – which has been crafted by the medical and insurance industries, mind you – is three times as expensive as other industrial nations (it accounts for 16% of our GDP).

If this weren’t enough, health care coverage isn’t available to well over 44 million Americans, while health care in America is NOT close to being the “best in the world” (more on this below). The primary reason for this is that the goal of our insurance industry driven system is profit maximization, not health care.

Apart from giving Americans less health bang for their medical buck, our current health care system also acts as a competitive drag for Corporate America. The total cost of paying into our current system is at least 30% higher than what America’s commercial competitors have to pay around the world. This undermines corporate America’s competitiveness abroad, and costs Americans jobs, as discussions surrounding Detroit’s automakers made clear earlier this year.

At the same time American workers are afraid to leave jobs that provide health care. This not only undermines labor mobility in America, but it works against what Adam Smith (capitalism’s patron saint) said was crucial for capitalism to prosper in any economy. All of this helps to explain why American companies have started to push for what George Lakaoff says should be an American Plan (Americare?) that provides universal health care.

Indeed, our current system is so dysfunctional that Physicians for a National Health Program have called for universal health care and put out a series of studies that show:

* Canadians are healthier and have greater degree of access to health care (American Journal of Public Health).

* Administrative costs consume 31% of all private health care costs in the U.S., which is far higher than the 2-3% absorbed by Medicare’s “bloated” bureaucracy (New England Journal of Medicine).

* Half of all bankruptcies in America are from medical bills, in spite of the fact that over half of all families filing for bankruptcy for medical reasons have insurance (Market Watch).

* 60% of all health costs in America are already publicly funded (Harvard University).
With reference to the latter, consider this: Tax credits for corporate and other private health care programs, combined with what we pay to underwrite health insurance for federal employees (the Federal Employee Health Benefits Program), means that we’re already paying for a National Health program. We just don’t get the benefits.

How bad is it? As I pointed out in a previous post, in a recent study of five industrialized nations America is “dead last” when it comes to providing quality health care to it’s citizens. Specifically, in spite of spending more (by far) on health care than any other country on earth, we lag behind other industrial countries when it comes to life expectancy, MRI units per every thousand people, and infant mortality rates, among others.

It’s gotten so bad that in the case of infant mortality, America is currently ranked #45 in the world, and lags behind the likes of Cuba, Greece, and Portugal. My question is, When will the "We’re # 1 / Sanctity of Life" crowd begin to show up in this health care debate?

And, yes, I support the public option.

- Mark

Thursday, August 20, 2009


If you like reading charts and graphs that shed light on the mess we're facing then I have the site for you. Michael White at New Observations has a series of charts and graphs that explain why the housing market, and the economy, are still in deep trouble. In the graph below, put together by Deutsch Bank, there are five estimates of how many homeowners in America owe more than their house is worth (to enlarge, click on the graph).

The caption that accompanies this graph asks the right question: "How many homeowners would make money by walking away from their mortgage? Whether the number is 11 million or 25 million ... the risk factor is wildly high."

Think about the question. It may no longer be feasible to think of people walking away from their homes in ethical terms; e.g. "You signed a contract, so you're obligated to make payments." This is especially the case in a society that just bailed out reckless financial institutions, subsidized subsequent mergers, and then told auto workers, labor, and state employees in California that "your contracts are negotiable" (think furlough days and mandated 10% wage reductions in the case of the latter). Rather, the real question to ask - in this "make a buck at any cost" society - is "How much money can I make by walking away?"

Capitalism at it's very best, wouldn't you say?

Go to the article and see the graphs for yourself. You might also want to see how the banks are doing at this site, The Bank Implode-O-Meter, which keeps track of our failed banks since 2007 (143 have failed since, with 150 more on the brink).
What a mess.

- Mark

UPDATE: According to the quarterly survey by the Mortgage Bankers Association 13.6% of all single-family mortgages are now deliquent, which is a new record.

Wednesday, August 19, 2009

ARE BANKERS LOOKING FOR HANDOUTS? (Blast from the Past Edition)

I first posted this in December of 2007, about nine months before the market collapsed in 2008. I still like it. I'm posting it again because I was just learning how to blog back then and put it in the wrong section (which some of the more savvy readers told me about months ago). Also, I'm in the process of rearranging my blog and I want this article to be more accessible (and with links), so you're seeing it again. Finally, this post makes it clear that - as I point out in my book - the market collapse should not have come as a surprise to anyone in Washington.

Continued from the "So Much for the Invisible Hand" post ...

Let’s start with this. If I make poor financial decisions, either in a small business or by lending to free-loading in-laws, I have to suffer the consequences, right? However, if I live in the world of big finance and fat broker fees I can be stupid and greedy, and can expect a free ride. Here’s how it works (or how it's working out now).

Right now banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions. Bankers, of course, might disagree with my assessment because they see a genius every time they look in the mirror (money does that to people). Still, one institution after another reports they have to write-off billions of dollars in losses because of the sub-prime lending packages they sit on. Today they find themselves short on cash as they draw from reserves, or seek out other institutions to lend them operating funds. But investors and banks are reluctant to lend to anyone. The Wall Street Journal reports why:

Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.

The reluctance to lend money has the world’s central bankers worried that a recession, or worse, may be around the corner. This explains why the Federal Reserve has cut interest rates by one point since August (to prime the economic pump), and why the Bush administration is working with lenders (on a lousy plan) to get them to cut sub-prime borrowers some slack on their terms. And now we get this.

The Federal Reserve is offering an additional $40 billion dollars in new loans to lending institutions, and making the money available to banks that offer collateral terms that aren’t much different from the past.

Seriously. Is this how you “discipline” the market? By offering additional money with no real penalties for poor decision-making? For those of you keeping score at home this is what we have.

1. Lenders, focusing on fat fees and big bonuses (from anticipated high interest rate income) decide to lend to people who really can’t afford to borrow. 
2. The income from high interest rate loans don’t pan out because sub-prime markets were always tied to unrealistic contracts based on wishful thinking. 
3. After the defaults begin lending institutions amazingly act surprised, wondering “What happened?” 
4. Big institutions start looking for cash. They need the money to either: (1) shore up their financial situation and/or (2) lend, which will enable them to make money charging fees and interest. 
5. No one wants to lend because they’re scared and, well, the banks/borrowers made stupid decisions in the past. 
6. The central banks of the world decide to create a pool of money to help build confidence in financial markets; i.e. we're seeing yet another market bail out for big institutions.

Isn’t this grand? You screw up and you get the opportunity to secure more loans. Imagine that. I wish my bank would find new ways to make money available to me every time I made poor financial decisions.

At the end of the day this is not only a market subsidy but a reward for bad behavior. Is this the way capitalist markets are supposed to work? I think not.

Oh, and did I mention that the dollar continues to sink around the world? And don’t anyone take a peek at consumer (and national) debt in America because it’s not pretty. And consumer confidence? It's at a two year low. No wonder the bankers are jittery. They see a financial mess around the corner and no one seems to know what's going on, or how to fix it.

- Mark
[December, 2007]


A while back I wrote that the economy wouldn't recover very quickly because the American consumer is simply "tapped out." The point I made is that Americans simply are carrying too much debt, while wages for the average family have virtually stagnated over the past 10 years.

With unemployment hovering around 9.5% and an economy on tax-payer funded (i.e. borrowed) life support, the recovery that we're seeing may be little more than debt-funded Potemkin Village. Making matters worse is that the trillions of borrowed dollars rolling their way through the economy is being gobbled up and hoarded by the financial institutions that got us into this mess. In a few words, we're living on borrowed time, hoping and praying that the financial elites who got us into this mess will be able fix things on their own - if we simply give them more money.

Where have I heard this before .... Oh, yeah, it was 1980.

If you recall, back then Ronald Reagan told us that if we just put enough money into the hands of those with wealth that eventually they would do the right thing - because market players are rational - and the economy would soar. His plan? Give more tax cuts to the rich, and get government out of their way.

Our federal deficit almost tripled under Ronald Reagan, while his deregulation policies are primarily to blame for the deregulatory-induced mess we are now confronting. So much for market players acting rationally. If only someone would write a book about the myth of free markets ... Oh, yeah, I already did ;-)

Anyways ...

In this article that discusses the potential for economic recovery ("The Rise and Fall of Artificial Wealth"), authors Michael D. Intriligator and R. Kyle Martin make it clear that not only are consumers tapped out, but that it will be a long time before a real recovery is on the horizon. Using an array of graphs and sound analysis, Intriligator and Martin tell us that President Obama - following in the Bush-Paulson footsteps - is simply putting money in the wrong hands. Here's what they have to say:

The problem with President Obama's approach to date is that he has been trying to fix the economic problems with a top-down approach. Obama has essentially continued the Bush - Paulson TARP approach, bailing out huge banks, insurance companies, brokerage houses and some major corporations. This approach is similar to President Reagan's "trickle down" economics that didn't work then and that is not working today.
If you want to understand why Reaganomics, or "trickle down," didn't work you can read my previous posts (like this one). If you want to see what trillions in taxpayer-funded bailouts is bringing us, check out these bank failure numbers. The point is - as Intriligator and Martin point out - we need to get more money into the hands of those who will spend it.

You may not agree with how Intriligator and Martin want to go about doing this (the focus is on homeowners and investors) but you have to consider their primary point: We're in the eye of the storm, and the only ones who have been given sound vessels to weather the storm are those who pushed the rest of us into the water.

- Mark

Tuesday, August 18, 2009


I just read this piece addressed to free market "Muckety Mucks" from Bill in Portland Maine, a Featured Writer from Dailykos. I've always liked Bill's work, and the humor he brings to what he writes. I've posted his piece below for those of you who don't like clicking on links.

In the FYI Department, Bill wrote a very nice endorsement for my book, The Myth of the Free Market, part of which made its way to the back jacket cover.

- Mark


Dear Conservative Free-Market Capitalism Muckety Mucks,

Why haven’t you fixed the economy yet? Seriously---what gives?

I'm asking because conservatives in fancy suits keep telling me---okay, screaming at me---about how fundamentally sound their ideas are, and how the private sector, not the government, is our best and greatest hope for making the economy leap back to life like Mark Sanford's libido when he lands at Ezeiza International Airport.

So what's the holdup? We've been in a recession since December of 2007. Why aren’t things all better yet for ordinary Americans? You were so awesome at making the mess, but cleaning up the pile of poopies you left on the nation's living room rug seems to be proving a bit more, um, problematic. Why?

You've got an army of giant, throbbing brains in your right-wing think tanks working day and night. The Heritage Foundation has never been wrong...just ask 'em! And the U.S. Chamber of Commerce never misses an opportunity to proclaim their infallibility in multimillion-dollar ad campaigns. So...why are we still in Sucksville? And why does the evil Big Government seem to be running circles around you?

And don’t try and hide behind the fact that there's a Democrat in the White House. He's been shoveling money into your coffers faster than Sarah Palin shoveling bullshit through Twitter. And he's hardly put a regulatory straightjacket on you...more like a snug cardigan sweater.

I admit I'm not an economist. I don’t know a Laffer curve from a box of David Vitter sex diapers. No, I'm just a simple, average citizen who has listened to you jawbone for decades---amplified non-stop by Fox News, CNBC, the Wall Street Journal and right-wing radio---about how perfect your system of "unfettered everything" is. How greed is good and regulation is the devil's work. And yet, you seem to be strangely ineffective at fixing it when it breaks. Could it be you've been bullshitting us all along? Are you nothing more than the financial equivilent of a bunch of two-year-olds randomly pushing buttons in the command center at NORAD? Or did you just lose your instruction manual? (Check under the couch!)

Fix the damn economy on Main Street already, you Ayn Rand-worshipping free-market capitalist wizards. Show us how it's done. Be the heroes we've been holding out for. I'll check back on your progress in 30 days. I expect Americans to be squatting over solid gold commodes by then. That's how much I believe in you.



P.S. Make sure you do it honestly, ethically and legally. That won't be a problem, will it?

Monday, August 17, 2009


Back in the good 'ol days the New York Stock Exchange (NYSE) operated on the simple principle that said if you have something to sell on the floor of the NYSE someone would buy it. If it wasn't worth the price you could either lower the price or simply withdraw the product. Simple enough, right? Under this principle NYSE specialists accounted for 80% of all trading on the NYSE.

Today the NYSE specialists have been overwhelmed by firms like Goldman Sachs (and other bailed out institutions) that are gaming the system by using supercomputers on the floor of the NYSE that fool other computers. Here's how it works.

According to Money Morning's Martin Hitchinson, the supercomputers fool other "institutional" computers by making orders and then quickly withdrawing the order. The goal is to see how many orders will be met, which allows the supercomputer to obtain information on a large buyer’s limits. They use this information to buy shares elsewhere and sell them (on-sell) to institutional investors before they know what's happened. The end result?

1. NYSE specialists now account for roughly 25% of trading (instead of 80%).

2. Firms like Goldman Sachs are now having profitable "$100 million trading days."

3. The goal of this type of High Frequency Trading (HFT) is not "investing."

4. The goal of HFT on the NYSE is simply "rent-seeking" (which is a fancy term in economics for market manipulation).
As Money Morning's Contributing Editor Martin Hutchinson put it, "The bottom line for us ordinary market participants is that insiders are using computers to game the system."

Several of you who know something about the market might be asking yourself, "Isn't it illegal to trade on insider knowledge like this?" The short answer is yes. In fact, the Securities and Exchange Commission (SEC) has promised to ban flash orders like HFT ... on September 1. In the mean time, many of the great days you're seeing on Wall Street may have little to do with market confidence than with big financial institutions (most of which got us into this economic mess) playing more games with the market.

At the end of day these guys are not providing value to the market. They're simply extracting wealth. Think about that the next time some talking head tells you that the market is recovering.

- Mark

Sunday, August 16, 2009

I HATE MOM (and the Government)

OK, I'm back ...

This was sent to me by one of my colleagues from the Economics Department. It's both funny and informative (especially if you're still having trouble understanding why we're in the economic mess we're in now). It's so clever that I've posted the entire article below. Still, here's the link


I hate mom (and the government)
By Uwe Reinhardt

To provide a proper backdrop for my lecture on the government's role in the economy in ECO 100: Introduction to Microeconomics, I always preface it with the question: "Who in this class has a mother?" In a good year, as much as 25 percent of students raise their hands. The rest won't admit it, probably because, with their gazillion regulations, mothers have been the biggest buzz kills to human ingenuity and innovation through the ages. Presumably the only reason these progress-stifling creatures have survived evolution is that when teenagers get into trouble, it is usually mothers to whom they run for instant succor. (For an illustration, see the video on of the teenager accidentally shattering a fish tank with a barbell and immediately screaming, "Mom!")

Now, what mothers are to teenagers, government is to the seasoned free enterprisers who run the private sector of our economy. When they are not being ingenious and innovative, they sit in their offices, clubs or golf carts, wringing their hands over the mindless, enterprise-stifling regulations issued by politicians and government bureaucrats who "cannot walk and chew gum at the same time." Yet, like mom-seeking teenagers, when trouble strikes, these same free enterprisers routinely run to the government for succor.

Watch, for example, as our swashbuckling, freewheeling investment bankers on Wall Street - Tom Wolfe's "Masters of the Universe" - now run to our government for socialist succor after the huge mess they have made of their companies, of our economy and indeed of global finance. One can cloak what they did in technical jargon such as "under-pricing risk." One can even write sycophantic apologias on their behalf, as New York Times columnist David Brooks did when he opined that the current calamity on Wall Street is just a byproduct of "financial innovation." The fact is that what happened on Wall Street was much less innovative than reckless and ill advised (in the vernacular, "stupid").

The bankers' new, new thing was persuading investors around the world that if dodgy mortgages - technically known as sub-prime mortgages - were packaged and repacked several times over, the risk inherent in them would somehow miraculously evaporate. By skillfully marketing that belief, they sucked sheiks in Dubai, town governments in Narvik, Norway and, ultimately, themselves into financing millions of dodgy home mortgages in the United States extended to borrowers unlikely to make the mortgage payments over the longer run.

The foundation of this game was a set of financial incentives that would have been judged misaligned by any student in ECO 100. The dodgy loans were originated by brokers who did not care about the borrowers' credit because they were paid commissions based simply on how many deals they brought to local banks, which then made the loans. The local banks did not care about the borrowers' credit either because they immediately sold the right to the monthly mortgage payments at a profit to the big banks on Wall Street. The latter bought these receivables sight unseen, usually without checking the credit standing of the original mortgagees because they made their profits by bundling tens of thousands of these dodgy mortgages to resell them the world over as "collateralized debt obligations" (CDOs), which are rights to the giant but inherently uncertain cash flows from the dodgy mortgages.

In the end, the banks even booked huge profits on repackaging their original CDOs into yet other bundles of CDOs, which were then peddled around the world as well. Evidently believing themselves that thus manure could be made to smell like roses, so to speak, the big banks invested hundreds of billions of their own shareholders' dollars in these miracle bundles, typically with borrowed funds.

Eventually news penetrated even Wall Street that millions of the dodgy mom-and-pop mortgages would be likely to default unless government came to the rescue. Once that became obvious, the CDOs directly or indirectly based on these mortgages plummeted in value, driving many heavily indebted investors to the brink of bankruptcy, among them some of the big banks. And thus we now hear from Wall Street the primeval scream "Mom! Mom!" - with "Mom" being dutifully played by former Princeton colleague Ben Bernanke of the Federal Reserve and, ultimately, the U.S. taxpayer.

We can only hope that our government's sundry Band-Aids will heal the scrapes that the bankers brought on us all. But, sadly, it is a safe bet that a year or so after the diseases have been brought under control, most likely at taxpayers' expense, the swashbuckling free enterprisers who brought on the disease will once again sit in their offices or golf carts, cursing the government and its "mindless regulations."

And therein lies the essential difference between teenagers and the seasoned adults who run the private sector. Eventually teenagers grow up to appreciate their moms.

Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Wilson School. He can be reached at

Sunday, August 9, 2009


I'll be in and out this week and won't have time to post, but will be back full-time by next Sunday. Until then you can check out what former Labor Secretary Robert Reich is saying about health care, or check in with NY Times' columnist Paul Krugman. And if you're really brave check out or one of my favorites, Economist's View. All of these can be found by clicking on the "Blogs I Read" linked on the left side of this blog.

- Mark

Friday, August 7, 2009


In this clip Fox News Corp. and it's host, Trace Gallagher, create a "breaking news" interruption to announce Shark Week on Discovery Channel. The reason? Michigan Senator Debbie Stabenow was scoring points explaining the Obama "Cash for Clunkers" program.

Can you imagine? Inventing a "breaking news" story just so you can switch to a glorified commercial about Shark Week on the Discovery Channel. Where's the urgency in announcing Shark Week? What's next, breaking news on the utility of tampons?

I've said it before (click on the labels below), and I'll say it again: FOX News is a joke.

- Mark


Paul Krugman provides a nice overview of the "astroturf" (fake grass-roots) protests that corporate America is helping to organize on behalf of the health care industry. Here's a snippet:

Robert Gibbs, the White House press secretary, has compared the scenes at health care town halls to the “Brooks Brothers riot” in 2000 — the demonstration that disrupted the vote count in Miami and arguably helped send George W. Bush to the White House. Portrayed at the time as local protesters, many of the rioters were actually G.O.P. staffers flown in from Washington.

But Mr. Gibbs is probably only half right. Yes, well-heeled interest groups are helping to organize the town hall mobs. Key organizers include two Astroturf (fake grass-roots) organizations: FreedomWorks, run by the former House majority leader Dick Armey, and a new organization called Conservatives for Patients’ Rights.

The latter group, by the way, is run by Rick Scott, the former head of Columbia/HCA, a for-profit hospital chain. Mr. Scott was forced out of that job amid a fraud investigation; the company eventually pleaded guilty to charges of overbilling state and federal health plans, paying $1.7 billion — yes, that’s “billion” — in fines. You can’t make this stuff up.
Rachel Maddow has a nice introduction to the 2000 Brooks Brothers fake "grass roots" protesters from the Republican party here:

If you want to see who's pulling the strings to kill health care reform today check out this (at times humorous) clip from Rachel Maddow:

I think Rachel Maddow gets it right: These are "made for YouTube ambushes." Just like the protests in Florida in 2000, the Swiftboating of John Kerry in 2004, and the current Astroturf Health Care Protests, what we're seeing is a well-funded effort on the part of organized lobbying groups who are bent on seeing President Obama fail on health care reform.

The goal isn't simply stopping health care reform. It's political. They want to get rid of President Obama, and see health care as his Waterloo.

This is not governing. It's corporate America pursuing political power for their political patron, the Republican Party. The unfortunate stooges you see at the townhalls - while passionate - are simply pawns in this game

- Mark


If you can't (or don't want to) make it to any of the townhalls on health care reform, check out the series of clips from a Q&A session with Rep. Donna Edwards (D-MD). Rep. Edwards does a great job responding to a set of questions that I'm sure most of us have thought about. Click here to see the clips.

- Mark

Wednesday, August 5, 2009


Here are two posts from Dailykos that help to explain why the right wing of the Republican party should not be surprised that they are either laughed at or ostracized by mainstream America.

In this post, we see that a group of professional scientists from around the world took time out of their conference to visit America's Ignorance Museum, which is located in Kentucky (while it's officially called the Creation Museum, it's really a tribute to ignorance). The people who run this museum should be embarrassed. But they're not. Here's why.

They have a bastard political step-brother that seems to be getting stronger. It is now rearing it's ugly head in the form of racially tinged intolerance from the "birthers" and others who think and find humor in items like this.

Rather than deal with the issues, more and more people from the far right are finding comfort in petty ridicule and the willful ignorance of the facts (like the broken country that President Obama inherited).

That this mind-set is a product of stereotypes dragged from one of America's ugliest periods of racial intolerance seems to be unimportant to many in the Republican party at this time. As long as they believe they are scoring political points party leaders are willing to let the far right push this mind-set as part of a larger political strategy to discredit the Obama administration.

Like the Village Idiots of yesteryear, we could mock or laugh at these people. But we can't. They have too much political cover at this point. And that's the saddest part of all.

- Mark


This is why we have separation of church and state in America:

A former Blackwater employee and an ex-US Marine who has worked as a security operative for the company have made a series of explosive allegations in sworn statements filed on August 3 in federal court in Virginia. The two men claim that the company's owner, Erik Prince, may have murdered or facilitated the murder of individuals who were cooperating with federal authorities investigating the company. The former employee also alleges that Prince "views himself as a Christian crusader tasked with eliminating Muslims and the Islamic faith from the globe," and that Prince's companies "encouraged and rewarded the destruction of Iraqi life."
When you come to believe that God has your back - in any religion - things like this are bound to happen (see Chp. 3 in my book). In the sworn statement one former Blackwater employees alleges that ...

Mr. Prince intentionally deployed to Iraq certain men who shared his vision of Christian supremacy, knowing and wanting these men to take every available opportunity to murder Iraqis. Many of these men used call signs based on the Knights of the Templar, the warriors who fought the Crusades.
Nice. Read the entire story here.

- Mark

Tuesday, August 4, 2009


If you want to know what will trigger the insurance industry to drop your health coverage take a look at this Youtube clip. These insurance company CEOs make it clear that anywhere from 1,200 to 2,000 conditions and ailments (like high blood pressure and pregnancy) can trigger their cancelation review policy from their "denial specialists" (who earn postive evaluations for canceling policies that save the company money).

Several things caught my eye:

1. EXPEDIENCY OVER INFORMATION: Securing health records of potential clients are not the primary concern of the insurance industry when it comes to signing them up (this comes in handy when the industry needs to deny coverage for "unknown" and "previous" conditions).

2. HONEST MISTAKES: Unintentional mistakes on an application for health insurance can trigger investigation, interruption, or cancelation (necessary for saving money, not lives).

3. RISE OF THE MACHINE: Programmed computers, rather than people, can have final authority over what triggers investigation, interruption or cancelation of an insurance policy (so much for that "personal" touch).

Towards the end of the clip (4:50), when the CEOs are asked if they will stop denying coverage to those they cover unless they commmitted "intentional fraud" in their application - as opposed to an honest mistake - all of the CEOs said they would not make that promise. Cancelations would continue, even if applicants made an honest mistake (kind of like, "The beatings will continue until morale improves").

Put another way, you can pay for a product but in the health insurance industry there is no longer a guarantee that the provider has to provide you with the service. Does this sound like a "free market" to you? More importantly, this clip makes it clear that your insurance coverage can be dropped simply because you got sick, as this LA Times article points out.

Final thought: If you ever wanted to see the character of the "mindless bureaucrat" - that many like to complain about when it comes to government servants - this clip makes it clear who's putting up all the roadblocks, and/or hiding behind regulations.

- Mark

Monday, August 3, 2009


I know this post is a bit long. But not understanding these issues is exactly why we get screwed out of our hard earned dollars. Conservatives like to complain about giving their money to the poor when it's stuff like this that drains our tax coffers, and has the potential for collapsing our system.

Below is an e-mail that was sent to me from one of our local politicos. It was sent to him from a local conservative politician, who I have had several ("collegial") conversations over other issues in the past.

In a few words what's posted below is an argument designed to get congress, and the American public, to legislate market prices out of the market. The writer is arguing that we need to suspend Mark-to-Market, which is little more than a scam to inflate portfolios and bonuses in the financial sector.

Because of bailout guarantees taken on by the Federal Reserve you and I will eventually pay for inflated portfolios and bonuses (in the form of higher taxes or inflation). Simply put, professional market players are banking on our congressional representatives, and the American public, being too stupid to figure this stuff out. My response to this argument follows. If you can't follow the logic of the argument (you're not alone) just jump to my response, which explains what these people are really trying to do.

Here's the argument as it was sent to me ...

Apparently, public policy hath no fury like a CPA scorned.

In late 2007, the Financial Accounting Standards Board (FASB) imposed mark-to-market accounting on the US financial industry. This required financial firms to value securities at market prices, and then account for any gain or loss as a change in regulatory capital. Within a year, the US was in the middle of the worst pure financial panic in a hundred years. Coincidence? We think not.

On its surface, market-to-market or "fair value" accounting makes some superficial sense. Markets usually provide transparent and verifiable prices, so companies can't just contrive numbers to make their earnings look good.

The problem with mark-to-market (MTM) is that it makes no accommodation for the fact that market prices for securities often deviate - sometimes substantially, but always ultimately temporarily - from the underlying fundamental value of the assets. Since markets are forward looking, MTM forces financial firms to take hits to capital over something that "might" happen in the future, but has not happened yet. It's like forcing homeowners to come up with more capital when a hurricane approaches because their house might be destroyed.

This, in turn, creates a vicious downward cycle as capital constraints hurt banks, undermine the economy and drive prices lower, and then destroy more capital. In 2008, when markets for mortgage-backed securities became extremely illiquid, the financial crisis intensified. This drove away private capital and enticed government to flood the system with liquidity. This government activity helped cause panic and a recession. But all of these government programs were just a way to work around the accounting rules.

As former FDIC chairman William Isaac has repeatedly said, if mark-to-market rules had been in place in the early 1980s, the Latin America debt crisis would have destroyed every money center bank in the US. Thank goodness that did not happen. Instead, the system was given time to heal. That's what should have happened in 2008. Instead, FASB stubbornly stuck to its guns over MTM accounting.

Finally, in mid-March 2009, with stocks at new lows, Congress started to twist arms on the issue. FASB was forced to loosen up its rules and allow cash flow to be used when markets were illiquid. Just this small change did the trick. Banks were finally able to raise new capital, $100 billion or so, and the stock market surged. In fact, things have improved so much that the Federal Reserve and Treasury are finding less and less interest in the programs they designed to "save" the financial system.

But now, like a horror flick monster that just won't stay dead, FASB's accountants are proposing to expand the application of mark-to-market accounting rules across the board, to include all financial assets, including regular loans. The outcome of this debate is extremely important.

MTM accounting, because it ties the balance sheet of an institution to its income statement, and then its capital accounts, creates unnecessary volatility. There is no real market for bank loans and the value of any loan is always in the eye of the beholder. As a result, "who" is doing the beholding determines the viability of an institution and maybe even the health of the economy.

If that power is given to accountants, who have no actual responsibility for running financial institutions, but can be tarred with some of the liability (think Arthur Andersen), the result will be a more tentative banking system that takes less risk. That may sound good these days, but imagine watching a football game played by accountants who stop running because they might get a broken leg when tackled. Fair value accounting needs to be fully suspended - now.

The following is my response to this nonsense. And, yes, it really is nonsense.

... Thanks for sending me this. Let me start with this: Suspending MTM does little more than legislate the market price out of the market. It's a bad idea ...

What I see in the piece you sent me ... is terribly slanted and bereft of any real understanding of how markets are supposed to work. Mark-to-market (MTM) is what helped blow the lid off of the incredibly stupid things that some of the financial institutions were doing. Suspending MTM until "market" prices recover in a heavily bailed out and subsidized economy is a bad idea. That's like asking a bookie to suspend the debts owed until the bettor can find enough money from his rich uncle to cover his old bets, so he can start anew.

Look, good market players know how to (or should know how to) account for "temporary" deviations in prices. The reason the U.S. financial system collapsed was not because MTM exposed temporary deviations. The financial system collapsed because derivative, CDO, and CDS markets had grown so large that they dwarfed the entire value of the stock and housing market. The nonsense had to stop some time. The CDS and CDO market were badly inflated, poorly capitalized (as to their ability to pay out), and dependent on bad debts in the housing markets. These contracts - good and bad - were then bundled together and sold as a "new" investment instrument. We knew this wasn't good stuff 10 years ago (see the intro of chp. 12 in my book) and eventually became exposed because of MTM, which is a good thing.

The piece also makes reference to how the market for mortgage backed securities (MBS) became "illiquid". Look, the MBS market became "illiquid" because the market was inflated and based on faulty-bad assumptions from the beginning (artificially low interest rates, No Doc loans, NINJA loans, poorly vetted CDO-CDS market instruments, etc.). Once market players saw the lid blown off they became spooked. Lending stopped because banks and other investors didn't trust one another, or what they had on the books (which they now want to reinflate). This was compounded by the fact that many of those who were putting money into the market were "bad" debtors that Hyman Minsky would have categorized as Ponzi-scheme investors. As we saw during the market collapse, these CDO-CDS-MBS market players were not hedged, or even good speculators (see p. 207-208 in my book).

Also, I find it interesting that the author would reference former FDIC chairman William Isaac and the Latin American debt crisis (which came to light in 1982). Several U.S. banks had lent Latin America (but in this case especially Mexico) so much money that it exceeded total bank assets. How smart was that? This was not a Latin American debt crisis. It was a Western lending debacle (we could get into the flow of Petrodollars, and corruption levels, but I'll leave that for another day). The system was given "time to heal" during the debt-loan crisis because people needed time to digest the incredible stupidity of lending so much money to corrupt regimes because of false assumptions. Keep in mind that his government-escorted bailout occurred under Ronald Reagan.

The result? "Too big to fail" entered our political and financial language permanently. We saw banks "recover" under a U.S.-escorted recovery program that led to an explosion in the secondary market (for debt securities) that, in many respects, helped create the conditions for the CDO-CDS market we have today.

Finally, I'm not sure what to do with this comment: "... in mid-March 2009, with stocks at new lows, Congress started to twist arms on the issue. FASB was forced to loosen up its rules and allow cash flow to be used when markets were illiquid. Just this small change did the trick. Banks were finally able to raise new capital, $100 billion or so, and the stock market surged." Cause and effect is assumed and, more to the point, aren't substantiated here. Look, more money became available because of political pressure and because the Federal Reserve created so many programs, and encumbered so many financial obligations, that the U.S. taxpayer is now on the hook for anywhere between $7-9 trillion dollars (more if you look at other areas). Freeing up $100 billion is a drop in the bucket when you've got access to trillions that's backed by Fed guarantees.

At the end of the day, suspending MTM is a bailout gimick designed to perpetuate "too big to fail" long into the future. It's a market subsidy that Lenin would have embraced when he introduced NEP. In this case, the American taxpayer ("the peasants") retain commercial autonomy while the "commanding heights" of the economy (war, banking, etc) remain dependent on the state for favorable legislation and "centralized allocations" of resources when necessary (again, see what the Fed has encumbered). And, was the case under Lenin's NEP, while financial institutions are instructed (allowed) to operate commercially, they are not expected to deliver output according to state mandated quotas.

There's more, but the piece you sent me is really little more than a Wall Street apologists attempt to perpetuate what got us into this mess. The increasing use of the state for favorable legislation and to achieve market goals says much about the chasm that exists between the theory and reality of today's free market proponents. These guys are on no firmer intellectual ground than Lenin or Stalin.

There's more to the argument which I didn't address, but I'm sure this is enough for now. My sense is that congress will cave and give the financial institutions what they want. I hope not. Because of the collapsed CDO-CDS markets the costs could potentially reach into the trillions.

And you thought public welfare was expensive before the meltdown.

- Mark

Sunday, August 2, 2009


OK, I'm getting old. Here's the son of one of my high school friends playing the Star Spangled Banner at HIS high school four years ago. It's awesome.

FYI, I went to visit with friends in Santa Cruz this week, which explains why I haven't been posting. I'm sure you understand. It was a good week. I'll start posting again Monday.

- Mark

P.S. OK Second Mom, if you're reading this you're going to love my posts on Obama this week. And, NO, I'm not going to quiz you on my book ;-)