GOP DOESN'T HAVE A CLUE ABOUT THE HUMAN SPIRIT

We hear it all the time. Let's cut taxes and deregulate so that entrepreneurs can work their magic. Only then can we spur entrepreneurialism and rejuvenate America's markets, the argument goes.

Well, guess what? Creativity and prosperous markets were with us long before Ronald Reagan and the current wave of deregulation, tax breaks for the rich, and other legislative gifts to America's financial mandarins happened. In fact, I'm pretty sure that Bill Gates and Steven Jobs weren't sitting around their garages waiting for tax cuts and deregulation to come up with their Microsoft and Apple ideas (go ahead, ask them).

Inventions and creativity have been happening since the dawn of time. History tells us this. Initiative and innovation are human constants, and depend on many factors that go beyond tax cuts and deregulation.

Benjamin Franklin's lightening rod, penicillin, and Jonas Salk's polio vaccine are examples of this. The influenza outbreak during WWI stirred curiosity and spurred some of the greatest publicly funded medical research that the world has ever seen. History is full of many other examples where phenomenal breakthroughs were made for reasons beside monetary gain.

The thing we want to keep in mind is that people invent and do things for reasons that go beyond the profit motive or tax cuts. Think about the things that were invented in the 1940s and 1950s when the tax rate on America's wealthiest wage earners was 90 percent.

Whether it's pride, personal goals, accident, art, nationalism, or simple curiosity, the human experience shows us that tax breaks aren't the only instigator behind human creativity.

Below is a very partial list of creativity and products that were built without the promise of tax breaks, the profit motive, or deregulation.

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THE NASA INVENTIONS ...

Do you like ear thermometers, memory foam, scratch resistant lenses, invisible braces, shoe insoles, satellites and long distance communication, ionized adjustable smoke detectors, road safety grooving (which cuts hydroplaning), cordless tools (for Apollo missions), water filters (ionized charcoal), kidney dialysis, cat scans, cancer fighting drugs and shiny hair, and deformable mirrors (which provide 100 times the imaging), among others? Thank NASA for directly building or having a hand in these and more than 6,300 other patented inventions.

But, contrary to common folk wisdom, TANG was not one of NASA's inventions. That's a myth.

THE MILITARY DISCOVERIES ...

The military connection ... Anesthesia (Civil War), nuclear energy, the computer (from code breaking), the internet (cold war invention for use during nuclear war), satellite communications, synthetic rubber, penicillin, jet engines (thank you German military scientists), submarine technology (American Revolution), and Pepto Bismol.

Perhaps the best example of a military-related invention is the story of the most popular gun in the world, the AK-47. Mikhail Kalashnikov, a Russian tank driver came up with the idea for the AK-47 while recovering in a military hospital during World War II. Around the world between 75-100 million AK-47s are in use today, which makes it the most popular gun in the world.

And if we want to stretch it, even the Rosetta Stone was discovered as a result of a military campaign (Napoleon's romp through Egypt). Anthropology and the study of languages haven't been the same since.

ACCIDENTS & SERENDIPITY ...

Do you like the microwave, Viagra, artificial sweeteners, Popsicles, brandy, Teflon, and penicillin? They were accidents of curiosity. So were Velcro, X-rays, the pacemaker, super glue, and play-doh.

Then we want to keep in mind that while Thomas Edison wanted to make money, reproducing music wasn’t what he had in mind when he invented the phonograph. And the list goes on ...

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As you can imagine, there are many more discoveries and inventions that have made the United States and our world a more comfortable, interesting, and dynamic place. And these discoveries weren't tied to tax breaks or deregulation. Curiosity, environment, and simple need matter.

Whether it's national security (nuclear weapons), concern over health (medicines), the thirst for knowledge, personal pride, the arts, or simple accidental discoveries it's clear that tax breaks and deregulation are weak excuses for hijacking both the economy and the legislative process in America.

What Wall Street and our nation's bankers want today are specific guarantees on return to go along with their bailouts. This is especially the case when we consider that 30 years of tax cuts and deregulation have produced little beyond $14 trillion in debt, a collapsed economy in 2008, and wealth gaps that rival the Gilded Age. Indeed, after 30 year years of the GOP's tax cut jihad America ...

... has reduced it's revenue source to such a degree that we now owe $14 trillion, instead of the $979 billion when Ronald Reagan entered office.

... has refocused the economy so that extractive financial instruments, which rest upon up-front fees and larger than life bonuses, dominate the mind-set of America's shadow banking system and Wall Street.

... has made America lose sight of the fact that innovation, curiosity, and inventions aren't entirely dependent on tax cuts for the rich. They never have been, and we shouldn't believe that they are today.

I'll go one step further. Tax breaks and deregulation are now political poison pills that have recklessly reoriented America's economy and burdened its financial future.

Think about it. Our 30 year tax cut race to the bottom has become the GOP's way of using the levers of the state to push an innovative and inventive spirit that has always been with us. But instead of spurring wealth creating innovations Wall Street and America's shadow banking system have focused their energies on creating wealth draining financial instruments that have done little but create a largely "symbolic" economy dependent on taxpayer bailouts.

Today, only a handful of individuals on Wall Street have benefited from 30 years of tax cuts and favorable legislation. Yet, the GOP is calling for more of the same. Worse, the collateral damage has been so great that many believe human curiosity and innovation in America today are dependent on the very same state sanctioned tax breaks and legislative gifts that brought us the financial blow back we saw in 2008.

Somehow using the state to create an economy that benefits a few at the expense of the rest doesn't strike me as the best way for getting the government out of the marketplace. In fact, in many ways, it makes today's financial titans almost entirely dependent on the state for their financial fortunes. Let's call it their Orthodox Paradox.

Look, after 30 years of tax breaks for the rich and deregulation America should be swimming in jobs and be pretty much debt free (as Reagan promised tax cuts would do, but Clinton's tax hikes were scheduled to produce). Instead we are trillions in debt and have an economy swamped by growing wealth gaps and unemployment, both of which are a product of tax cuts and favorable legislation for Wall Street's financial mandarins.

At the end of the day, people demonstrate initiative and inventiveness for many reasons that go beyond tax brackets and legislative fits. Telling Wall Street and our bailed out bankers that they can hide behind the economic uncertainties caused by their policies - which collapsed the economy and primarily benefited them - is the height of insanity.

But we have learned one thing from the GOP's 30 year race to the bottom. They really don't have a clue about American history, or what motivates the human spirit.

- Mark  

WHY THE MARKET CRASHED IN 2008 (in 10 easy to understand steps)

Arrgh ... If I hear one more GOP presidential hopeful blame our current market mess on President Obama again I think I'm going to have a brain aneurysm. To be sure, I understand the political part of what the candidates are doing. What gets me is how so many Americans buy into the ignorance and stupidity, and it's starting to burn through the electorate like wildfire ...

I bring this up because people speak as if President Obama could have somehow waved a magic wand and fixed the economy in just three years. Apart from having to deal with a "just say no" GOP, what they forget is that it took the better part of 6 years for the Bush administration and a GOP-led Congress to blow through budget surpluses and set the stage for burning down our economic house.

Destroying the peace and prosperity that was left to President Bush took some real effort and incompetence, and can't easily be undone.

So, in an effort to dispel any notion that President Obama is to blame for our current mess (though, I agree, he screwed up on bailing out the banks), I'm going to present what I hope is an easy ten point overview of why the market collapsed in 2008. What you'll see is that our current economic mess didn't happen over night, and won't be turned back over night either. I'm drawing the information straight out of my book. So if you want more information go out and buy my book (I know, shameless plug).

As you'll see, there's enough bi-partisan stupidity to go around, though one party definitely deserves more blame than the other for our current mess. You can quibble with the 10 points (I might even emphasize one point over another in the future), but the general outline of our market collapse, and what ails our markets today, are here.

Anyways, here goes. Our market collapse, in ten easy steps ...

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THE BEGINNING

1. A Naive Belief in "Free Market" Ideology (blinds policymakers)
... Ronald Reagan enters the White House after Maggie Thatcher becomes Britain's Prime Minister. Trickle Down economics is born. Deregulation, tax cuts for the rich, and globalization are embraced.
... After dumping trillions in borrowed money into the economy Reagan almost triples the national debt, raises taxes on the middle class (FICA), and lifts the debt-limit ceiling 17 times. Yet he's hailed as a fiscal conservative.
... In an effort to concentrate on  "free markets" in the 1980s, U.S. leaders effectively ignore economic costs associated with (1) paying for the defense of the west, (2) America's rude introduction to unbridled globalization (caused, in part, by the success of Bretton Woods), (3) the structural changes in the economy caused by the rise of financial services sector (i.e. the "symbolic" economy), (4) Nixon's price controls, and (4) OPEC's inflation inducing price hikes.
... Instead of dealing with costs of U.S. militarism, competition from abroad, the financialization of the economy, Nixon's price controls and OPEC price hikes, America's leadership blames sluggish U.S. economy on "the state" (regulations, domestic programs, and taxes), while calling for "a good 'ol shot of capitalism" in 1980.

BUILD UP: 1970s-1980s

2. Deregulation / Financialization  of Economy (regulator vacation)
... 1971 the dollar is de-linked from gold and becomes a commodity. Futures markets develop for money, interest rates, and other novel investment tools of the trade.
... OPEC price hikes wreak havoc on markets and prices. Pundits and foreign policy experts alike (see especially Henry Kissinger) are caught flat footed.
... new policies and deregulation pushed by financial services sector make the Savings & Loan debacle possible (1970s/1980s), and help to set the stage for the deregulation stupidity that eventually leads to the dismantling of the Glass-Steagall Act and the passage of the Financial Services Modernization Act (1999)
... financial services sectors consolidates as symbolic economy grows in importance. SEC begins its disappearing act.

3. Interest Rate Manipulation (what free market?)
... Interest rates are used first to stabilize markets, and then as a tool to stimulate them. Bailouts and money dumps begin in earnest under Alan Greenspan's leadership at the Federal Reserve. The Greenspan Put (dumping cheap money into the system when Wall Street gets in trouble) begins in 1987.
... Federal Reserve becomes Wall Street's support system, and then it's puppet.
... Market recklessness surges as financial services (and gambling) grows.

4. Yield Hunts / Secondary Markets (casino economy begins)
... Inflation + low interest rates in 1980s lead bond traders to start looking for higher yield investments.
... Non-traditional investment products become more attractive, but market players are (initially)reluctant because of low bond ratings.
... Globalization (largely unregulated) allows financial firms to seek higher investments abroad through loans, secondary markets, arbitrage, etc.

5. Bailout City (what, accountability?)
... Beginning with Mexico in 1982 (actually it begins earlier, but this is where I'm starting), Wall Street's stupidity is bailed out time and time again. The Greenspan Put begins in earnest in 1987 with LTCM.
... Accountability and free market ideology are undermined with bailouts, but no one cares. Wall Street/investment bankers continue to believe in the wonders of the market.

MANIA: 1990s / Aughts ...

6. Securitization / Derivative Markets Explode (hello Rumpelstiltskin)
... Market players become Rumpelstiltskin, and turn crap into gold. CDOs, SIVs, CDSs, and other novel investment products become popular, especially after ratings agencies get into bed with Wall Street's biggest investment banks. Interconnected market players game the system.
... Wealth extraction becomes more important than wealth creation. What would have been criminal or fraudulent before becomes modus operandi with favorable legislation.
... Security markets begin demanding more products (i.e. debt) to securitize, as rating companies begin to hand out AAA ratings on virtually anything that can be chopped up and modeled.
... Symbolic economy grows 30-40 times the real economy.

7. Toxic Market "Innovations" Applauded (herd mentality for rugged individualists)
... Wall Street (Goldman Sachs then-CEO, Hank Paulson) goes to SEC for permission in 2004 to carry 40:1 debt to equity ratios (Imagine going to a bank and asking to borrow $2 million on a $50,000 a year income). It's granted.
... With demand for securities growing, hedge funds, shadow banks, and Wall Street press Washington regulators to allow "non-conventional" lender packages into the housing market.
... Non-bank, or shadow banks, become critical cogs in financial machine. Subprime mortgage underwriters ignore all lending standards.
... With brokers dumping newly created loans 30-60 days after they're written, NINJA loans, No Doc loans, Liar loans, and other type of teaser programs become the norm.
... Caution thrown to the wind as competent regulators like Brooksley Born are buried politically (after she called attention to disastrous derivative markets), and Sarbanes-Oxley legislation allows Washington/Wall Street to say "See, we fixed it" after Enron. Free market praised as fraud & lack of oversight become the norm.
... Consumers borrow and use homes as ATMs, which give the illusion of prosperity.
... Personal debt climbs; Bush doubles the national debt. Bubbles and record profits grow.

8. The Federal Reserve / Congress Become Cheerleaders (casino economy goes Vegas) 
... Cheerleaders (who should be regulators) applaud innovative instruments and massive (unregulated) lending as evidence of the power of unrestrained markets.
... Home equity loans explode, consumption increases. Debt is the name of the game as it provides source for new securities and credit default swaps (insurance).
... Alan Greenspan cheers "new paradigm of active credit management" as interconnected institutions and the shadow banking system sign off on new securities, mortgage back contracts, and other debt instruments/loans.
... Wall Street and financial services sector pay and bonuses shoot through the roof.
... Notional value of contracts surge past $285 trillion (when annual GDP is only $14 trillion).

PAYING THE PIPER: The Mother of All Bailouts

9. Boom / Bust / Credit Freeze (back to reality)
... What do you know? Strawberry pickers making minimum wage really can't afford $700,000 home loans.

10. Blame Game Begins (continues today)
... Government Secured Enterprises (Fannie Mae), FHA loans, and Community Reinvestment Act (the poor) originally blamed for market collapse. Former Treasury Secretary Hank Paulson joins the game.
... George W. Bush (wrongly) claims he inherited a recession, and left with a recession. Nothing to see here. What a loser.
... Much anticipated bi-partisan FCIC report is blind-sided by GOP primer that deliberately excludes any mention of Wall Street, the shadow banks, interconnected cronyism, and deregulation (all the stuff I highlighted in red above).

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The incredible thing is that we have now come full circle. Today, Republican presidential candidates are full fledged free market ideologues, pushing for more of the same policies that got us into our current mess. Don't believe me? Start at #1 above. Begin reading, again.

Only this time the banks and Wall Street are the only ones who have access to, and are profiting from, unlimited cheap money and our propped up casino economy. Think about it. Today the house of cards (yes, it's still a house of cards) is propped up by cheap money for Wall Street, deregulation for Wall Street, favorable legislation for Wall Street, and adherence to a failed ideology in Washington that keeps the trillion dollar bailout and QE money flowing, for Wall Street.

At the end of the day it took almost a full generation to reach our current level of market stupidity. It's not going to end under President Obama in one term. Especially with the GOP acting like a political boat anchor.

- Mark

WALL STREET... "SCREW THE CAR FAX"

One of the reasons the market collapsed in 2008 is because market players either ignored or didn't have enough information about derivative market exposure. Then they ignored the casino economy this ill-informed derivative market helped create. This is important because when market players learn new things about co-signers, collateral, job status, price, or market valuations they might be more (or less) willing to consummate the deal.

Think about an esteemed uncle who promises to co-sign a house note for you, and then learning that he is going to declare bankruptcy. But his books still look good, so he's willing to hold off until you get the house. Is withholding this information a good idea, for anyone? Now imagine this market wide.

Not securing and sharing critical information proved devastating in 2008. Even though Wall Street and other market players were backed up by rosy market models (that few understood), the money people on Wall Street started to panic when they learned that big financial houses (like Lehman Bros.) didn't actually have the money to back up their over sized market bets.

Well, hold on to your hats. Because of Wall Street's muscle in Washington, it looks like much hasn't changed after all. Wall Street's lobbyists have fixed things so that we're poised to party like it's 2008. Cue to Prince ...

Seriously, International Finance Review is reporting that the trading centers ("trade repositories") that are supposed to document and house information crucial for derivative markets may not be collecting the information that they should. According to a recent report on Over The Counter (OTC) derivative data, the regulatory scope of derivative trade centers appears to exclude,

"... information contained in derivatives master agreements and credit support annexes, as well as data relating to collateral or payment transfers, or valuation data coming from external sources."

Translated this means that critical due diligence - like collateral and market valuation, among others - that could help assess risk, isn't always documented or presented. You know, kind of like before the market collapsed in 2008.

So, in spite of Dodd-Frank (as I pointed out here), Wall Street can enter into a derivative agreement and they don't necessarily have to reveal previous prices (how much the last customer paid) or demonstrate proper collateral. It's kind of like going car shopping and asking for the Car Fax and being told, "Our market doesn't really require this."

Why is this important? Because as of January 2010 the notional value of the OTC derivative market has apparently grown to about $300 trillion dollars in the U.S., and over $600 trillion between the G-10 countries. This is about 20-40 times the size of the American economy.

So, yeah, we're doing it all over again.

- Mark

DON'T TAX "JOB CREATORS" ... AND OTHER GOP MYTHS

Don't tax the "job creators."

Sounds like another stupid but effective Frank Luntz sound byte for his GOP and Fox News drones, don't you think? Still, these are words the republican party and other conservative groups would have you believe we need to follow if we want to save the American economy. It doesn't matter that over the past 30 years that:

* Middle class wages have stagnated or dropped, while hours worked have climbed for the vast majority of Americans.

* With tax breaks corporate America sent or created 2.4 million manufacturing jobs abroad while eliminating 2.9 jobs here over the past 10 years.

* An assortment of tax breaks, subsidies, and bailouts helped the 400 richest Americans increase their wealth by $30 billion during the 2008 market collapse.

The last figure is especially important for two reasons. First, in the process of increasing their wealth by $30 billion during the 2008 market collapse the total combined wealth of the 400 richest Americans reached $1.57 trillion, which was more than the combined net worth of 50% of the U.S. population. Second, $30 billion is enough to provide 500,000 school teacher, firefighter, or police jobs at $60k per year.

You would think that this would be enough to get most Americans to reconsider how and why America's wealthiest class got richer during an economic downturn, while the middle class stagnated or saw their economic position deteriorate. Indeed, you would think someone would ask whether we need to suspend or rescind the Bush tax cuts, which cost our nation about $300 billion in revenue. Think again.

Instead, most Americans are buying into the notion that they need to work harder. Oh, and they're told not to press congress to tax the job creators of America.

Much of this argument is a product of the regular rantings of Rush Limbaugh and Fox News. Probably taking their cues from Frank Luntz, they're claiming that wealth in America is a product of hard work alone, so we can't tax the wealthiest Americas because they have the most money, which means they're working the hardest. Legacies, trusts, inheritances, bailouts, favorable legislation, legal waivers, court settlements, lobbying, etc. have nothing to do with building or maintaining wealth in America.

According to Fox News and Rush's ditto heads if the rich are getting richer it's because they're smarter and work harder than you and me. Conversely, if you lose your job or your wages stagnate you are a loser. Or you're simply not working hard enough. End of story. So work harder, moron.

Nothing is said about:

* Legislation that pays corporations to take jobs overseas.

* Government bailouts that payout and then reinforce crooked contract deals on Wall Street (since the early 1980s).

* Tax cuts that are neither requested nor necessary, which we have to borrow from the Chinese to pay.

The fact that 90% of America did not share in the income gains during the aughts is viewed as inconsequential. Wealth was created somewhere, so you just need to "work harder."

This is an interesting position when you consider that the GOP and other conservative groups have spent the better part of the past 30 years going after private and now public unions in an effort to gut the funding source of the democratic party. In the process they have vilified ordinary blue collar Americans - like teachers, firefighters, and police forces - while extolling the virtues of a pampered elite that have gotten congress to underwrite bailouts, then sponsor one favorable piece of legislation after another for their financial causes.

With conservative mouthpieces manning the communication lines, we now live in an America where many Americas believe that wealth has nothing to do with favorable legislation, tax cuts, bailouts, trade legislation, and organized attacks on labor but, instead, flow to those who work hard. But as Business Insider demonstrates, the evidence tells us otherwise - and it's unambiguous.

Here's a look at what's happened to tax rates on the top 1% of income earners, and the corporate tax burden in America, since the 1960s.

To reinforce the point, here's another look at the direction of taxes on the richest Americans (they went down), and tax revenues from individuals in general (increased), corporations (nose dived), and payroll (sharp increase on FICA/Medicare) over the past 40 years.

Now, after being promised more jobs, more income, and more wealth for everyone in America if we just reduced regulations on corporations and cut taxes on the rich that America would be riding a wave of full employment and prosperity, right?

Today, while Americans don't work as many unpaid hours as workers in China or Mexico, the vast majority of American workers are working longer hours for less pay (again, unless you're in the top 10% of earners). And it shows, when you look at growing wealth disparities in America ...

Still, we're told that if you haven't gotten richer as a result of Reaganomics-inspired policies and market friendly legislation it's because you need to work harder. It's your fault.

Indeed, in spite of all the legislative gifts and tax breaks that corporate America and the rich have received we have little to show for it other than a casino economy, a national debt that's 14 times what it was in 1980, record income and wealth gaps, and more than 9% unemployment. But instead of walking things back, or trying to understand what happened, we've taken an inglorious path of blaming or killing the messenger. America's Vichy Republicans are winning the day.

Out of a job? Loser. Less take home pay? Whiner. No jobs? Go after unions. Increased wealth gaps and budget deficits in America? Cushy pensions. Record bonuses and pay for Wall Street? They earned it. And on it goes ...

The end result is that today we're told that we can't afford government, while the wealthiest Americans can't be taxed because they're "job creators." This is laughable when you consider that projected budget surpluses by the CBO in 2001 ($5.8 trillion) could have paid off our national debt (perhaps this year), while Bush's tax cuts did little more than encourage speculation and widen wealth gaps in America. Throw in the fact that corporate America eliminated 2.9 million jobs during the Bush years while creating 2.4 million jobs abroad and you have one serious WTF moment.

Fortunately, there are a group of wealthy Americans who are both patriotic and understand what America's financial terrorists are doing to our country.

They understand that if America's top quintile (one-fifth) of income earners pay a majority of federal taxes (67%, 2009 figures) it's because they received a majority of our nation's income (53%) and have captured a majority of our wealth and productivity gains over the past 30 years.

They understand that if the top 10% of America's wealthiest have captured and now control more than 70% of our wealth that America is better if they also pay the lion's share of our nation's income taxes. And, no, they don't buy into the myth of income tax free loading, or similar talking point absurdities. Billionaire Warren Buffet is one of these individuals, and recently called for taxing America's richest at a higher rate, while "Millionaires for Fiscal Strength" have been calling the GOP out for their fiscal stupidity for some time now.

President Obama should call BS on the GOP's job creator lie, and start a real jobs program. And he can start by taking a page out of Peter the Great's book, and focus on our crumbling infrastructure.

- Mark

TODAY'S MARKET MESS IS NOT ABOUT LAST WEEK

There are a few posts that I'll post later today, but I wanted to comment first on what's been happening in the markets today. Simply put, all of this is very predictable.

Back in April of 2010 market players (and Washington) were going "goo-goo, ga-ga" over the stock market because it hit 11,000. At this time (a little before 10:30 am PST) "the market" appears to be in a state of panic because the Dow is heading downward towards 11,000 in part because Standard & Poor's down graded America's credit rating from AAA to AA+ after last week's GOP-led debt ceiling clown show.

As I pointed out back in April, if you don't fix what caused the market to collapse in the first place (deregulation, a culture of debt, and unabated speculation and gambling on Wall Street), and even encourage more of the same, "the sh*t will hit the fan." Guess what? Today, it's hitting the fan.

But there's more. And it should give everyone who cares about America cause for concern.

Over the past three years Washington has tried desperately to fix our market mess by putting a band-aid over the problem. Specifically, we've engaged in a money drop on Wall Street. As I pointed out when I discussed how the banks don't trust one another, and then explained why "I'm a Market Guru," what's actually been propping up our markets has been legislative gifts and the federal government's trillion dollar money dump (which market players like to call Quantitative Easing because Bailout-Plus sounds too welfarish).

In essence, we've been papering over the cracks with tax payer backed bailouts and favorable legislation, and it's starting to show. If we had dealt with the real causes behind the market collapse in 2008, what we saw in Washington last week would have been just another side show. Instead, the GOP-led stupidity we've been watching the past few months is accelerating the beginning of the end of America's exorbitant privilege.

What this tells me - and should tell every American - is that America's fortunes are being held hostage by political ideologues and financial terrorists who don't understand the difference between policy (i.e. Keynesian) tinkering and corporate welfare. And it's killing our economic paradigm.

But wait. It gets worse. We've seen this before. All of it. History is whispering in our ear, and it's not pretty ... as I wrote in this post last year.

I'll have more to say about this later, but President Obama is going to speak about the mess any time now.

 - Mark  

HERE WE GO AGAIN ... BANKING ON DEATH, III

In my book I wrote about dead peasant insurance. It worked something like this. Companies would take out insurance policies on their employees. Those on the lowest rung of the totem pole would be offered a $10-25,000 insurance policy when they were hired. When they died their family would collect the money.

This is where it gets interesting.

What the companies didn't tell their employees is that when they took out policies the policies actually paid out anywhere from $100-300,000, and some times more. But the family members still only received $10-25,000. The companies could do this because of favorable legislation that gave them tax credits (as a business expense) to purchase the insurance policies.

This means that the American taxpayer you and me actually paid for the insurance policies. But the company collected when the "dead peasant" insurance policy paid off.

Nice, huh?

Anyways, we're now seeing the evolution of another death based financial contract. It turns out that Goldman Sachs and the usual suspects on Wall Street want to peddle insurance contracts to pension "investors."

Sound good so far? Not really. Here's why.

Because people are living longer, each additional year of life expectancy adds as much as 4% to future pension requirements. This cuts into profits. Longevity cuts into the bottom line. However, by providing insurance to pensions and other retirement institutions Goldman Sachs hopes to convince the pension groups that they are dumping the expense of each additional life year onto insurance providers.

But here's the catch.

The "insurance" providers are not categorized as insurance companies. As a result the pension insurance system isn't regulated like regular (car, home, etc.) insurance companies. These insurance providers don't have to have the reserves on hand to pay out if something really goes wrong (you know, like in 2008).

Instead, these market players are considered as part of our unregulated derivative and/or "swap" market. Call it the "death derivative" market. But, at the end of the day, they don't legally need to have the money to pay out claims. To be sure, they can collect premiums, and can suck the financial life out of their customers. But, like the economic zombies they're sure to become when the going gets rough, they're not legally obligated to give anything back.
 

 
So, instead of selling insurance Goldman Sachs and other banks are really selling "death derivatives" - which are contracts that derive their value from an underlying asset, and can be bought and sold to others with few if any oversight (similar to an earlier class of "death securities" I wrote about over a year ago).  

In plain language what this means is that if the insurance providers collecting premiums today go belly up tomorrow because more people suddenly die, many pensions who think they have insurance will find themselves facing a shortfall, big time.

Goldman Sachs, and their band of snake oil salesmen, are saying "Don't worry ... private market players know what they're doing ... and besides, insurance companies don't go bust." Huh?

Incredibly, these guys have already forgotten and moved past Lehman Bros. and A.I.G. And why not? They got their money.

We should know better. The motive here isn't insurance. It's revenue. These guys need to be regulated. But they won't be.

It's de javu all over again.

- Mark

THIS IS WHY WEALTH GAPS CONTINUE TO GROW

In my previous post I warned about embracing the findings of debt commissions that are created with the idea of paying down our national debt, but do little to look at how we accumulated so much debt. As I pointed out, what we've ended up with are policy prescriptions that raise taxes on the middle-class, erase inflation from official statistics, and give America's super rich what amounts to a tax free ride.

And we've been doing this in spite of the fact that unemployment, budget deficits, and wealth gaps have climbed ... after we were told that tax policies that favored the rich would solve all our problems.

Well, get ready for another round of favorable legislation that will only benefit what is perhaps America's most pampered and undeserving class: the super rich who inherit even more money.

In this piece from Bloomberg.com it appears that many members of Congress - but especially the Republicans - want to extend the tax exemption that allows Paris Hilton, George W. Bush, and other super rich Americans to inherit family fortunes without paying any taxes on their financial gifts.

Try claiming that your gambling or lotto winnings should not be taxed and see how much sympathy that gets you.

While it's called the estate tax America's super wealthy have gotten their political Oompa Loompas - the Republican Party - to derisively refer to it as the death tax. It's usually a good political show because the press buys into the headline grabbing death tax story line. Then the Republicans whine, with effect, that people who have hundreds of millions of dollars dumped on their no lap (for no other reason than they came out of the right womb) should not have to pay anything on that wealth.

Incredibly many middle-class Americans buy into this nonsense, as if they have plenty of money to pick up the tax tab for the super rich.

We have record budget deficits, two ill-managed wars, unemployment hovering around 10%, plus unfunded trillions committed to Wall Street's bailout (which primarily benefit the super wealthy) and the Republicans think the George Bushes and Paris Hiltons of America - who did nothing to build their family fortunes - deserve yet another tax break?

Is it any wonder that the wealth gap in America continues to climb?

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For an excellent book on this topic read this from Bill Gates, Sr. (yeah, it's Bill's father) and Chuck Collins ...



If you don't have the time or money to get the book you can read this op-ed review of the book that I wrote for the Bakersfield Californian a few years back.

- Mark

REVERSING AMERICA'S DECLINE ... LET'S BEGIN WITH WALL STREET

The decline of the American Empire is occurring as we speak. It is also increasingly anchored to a nation that embraces the financial smoke and mirrors peddled by Wall Street.

But Wall Street isn't really interested in helping the economy - or our nation - manufacture exportable goods like wind, solar, and other Green technologies of the future. Instead, they're focused on "investing" in the production of increasingly useless (and damaging) derivative markets, accounting discounts (see the S&L mess), structured investment vehicles (capital arbitrage), and other "innovative" market instruments that produce quick payouts and bonuses for Wall Street executives.

As a result, the real economy is being held hostage to the quick financial gains that Wall Street can make in what Peter Drucker called the symbolic economy. The problem here is that the practices embraced in the symbolic economy are little more than accounting gimmicks. They not only create a casino mentality, which contributes to market bubbles, but allows Wall Street executives to use creative accounting to extract wealth, as opposed to building it.

Think about it this way, between 2002 and 2008 about $1.4 trillion in subprime mortgages were issued. However, Wall Street then took these simple mortgage contracts, bundled them up into securities, sold them, and then made huge bets on them. In the process they created about $14 trillion in "securitized" bets (e.g. CDOs/CDSs) which dwarfed the actual value of mortgage contracts. In oversimplified terms, it would be the same as if you were able to bet $1.4 million based on the value of your $140,000 house ... even though you hadn't paid off the mortgage!

The absurdity of these bundled market bets was made clear when housing prices began to collapse, like a house of cards ...

If we channel the financial ghost of Joseph Schumpeter it's easier to say that we're no longer living in a world where Wall Street is interested in helping to build monopolies. They just want to play it.

As always, the proof is in the pudding.

Right before the market collapsed in 2008 the financial sector (investment banks, commercial banks, etc.) accounted for 40 percent of corporate profits. After the market collapse (2009) it accounted for about 36%. Much of this figure is due to the fact that the services sector (which includes insurance, finance, etc.) has grown, and now represents more than 50% of our nation's economy, which is up from 30.2% in 1960.

All of this means that the primary characteristics of the market have changed. We no longer produce real durable goods & services that other countries seek. Instead we are the kings of producing empty symbolic goods & "services" that can't compete with the technologies of the future currently being developed in places like China, Brazil, and Asia. This has occurred because our nation's market players have increasingly found it easier to make derivative bets, play with the tax code, game regulatory agencies, cut examiner budgets, and secure favorable legislation from congress so that their market instruments - rather than real investments in durable goods - can prosper.

The rest of America, if we are to read into Wall Street's actions, can eat crack.

Among the many problems that have emerged from our borrow and spend, tax cut, and deregulation orgy over the past thirty years include:

(1) Massive debt loads for our country ($13 trillion and counting).

(2) The GOP's continued embrace of jihad-like tax cuts for the rich policies (necessary for placing financial bets, and to win elections) and deregulation (necessary for looting our nation's wealth).

(3) The financialization of our economy (finding out how to produce CDO-squared derivatives isn't an espionage task other nations will send their spies out to pursue).

(4) A casino like mentality that focuses on extracting wealth for a few rather than creating wealth for the nation.

How do we fix this mess? Among the many solutions I like, which I've commented on before, include:

(1) Reregulating our financial sector (Europe is actually leading the way here).

(2) Creating a consumer protection agency with teeth (let's start by naming Elizabeth Warren to head the agency).

(3) Tax claw backs (to get back some of the ill-gotten gains).

(4) General tax increases on the top 2% of the nation (who actually did little for their increased wealth over the previous 30 years, beyond securing favorable legislation), and

(5) Enacting the Tobin Tax (a small tax on fast-paced, high-frequency trading, which feed a Casino mentality).  

There's more, but I'll leave it at that for now.

Zach Carter has an interesting article that discusses some of the background information necessary for understanding what needs to be done, and how we can scale back our bloated financial sector. It's real simple stuff. Check it out.

- Mark

FINANCIAL TERRORISTS & FALSE PATRIOTS ARE THE REAL ENEMY?

If you want to understand how we're getting cheated out of hundreds of billions of dollars in tax revenue by our very own financial terrorists, the following is a primer. While I understand this may be conceptually difficult for the Country First, false patriot Tea Baggers, they need to pay attention to this one ...

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It looks like Wall Street and other financial titans who have been playing in our financial mud pit are going to pay 2011 bonuses in late 2010. Their rationale? They want to help their executives avoid paying out more taxes anticipated because of changes to tax laws. In the case of Credit Suisse Group in London, they want to compensate their executives for the tax hit they took in 2009.

Got that? Companies that drove our economy into the ground, and who should have been forced into bankruptcy, believe that their incompetence deserves to be rewarded. Instead, after happily accepting the benefits of a U.S. government orchestrated bailout, which allowed them to guarantee profits and complete big payouts, the biggest financial institutions are thanking governments by turning their backs on them precisely when budget shortfalls demand a little help from all corners.

This is one of the reasons why I called for nationalizing our failing institutions (here, here, and here). I didn't want the same people who ran our economy into the ground recovering only to socialize the losses and then, later, privatize the profits.

Too late. It's now a done deal. Our financial terrorists have socialized the losses, and seem content to ride the American taxpayer into the ground for their own financial benefit.

The end result is that you and I are paying for the bailout - in the form of increased budget deficits, lost jobs, fewer legal rights, chopped salaries, greater uncertainty, etc. - while Wall Street and their Washington friends continue to find new ways to stick it to Main Street. Check out these evolving stories ...

* OFFSHORE THEFT: Goldman Sachs, which received government debt guarantees and $10 billion in taxpayer funded bailout money, saw it's effective tax rate drop to 1%. Why? Because it moved some of its money off shore to avoid paying taxes.

* LEGAL COVER: In order to get taxpayer funded bailout money, which propped up their company and the profits of other institutions, AIG gave up it's right to sue companies who misled them. This helped keep regulators and law enforcement officials away from the mess created by Wall Street.

* HUSH MONEY: After securing trillions in guarantees and loans during the bailout Wall Street's financial institutions began paying out million dollar fines for misleading investors, selling "made-to-fail" instruments, and "misstating" anticipated losses. In laymen terms, they paid fines for fraudulent behavior.

* SIMPLE COLLUSION: Goldman Sachs and Bank of America colluded with firms that sent school district (infrastructure) money their way. Once the money was secured these firms then paid out bribes, all of which cheated cities and towns of much needed funds. Making matters worse, those involved in directing money to Goldman and BofA then deliberately withheld information about higher paying financial programs from municipalities and other governments.

* OUTSOURCING WHITE COLLAR JOBS (but here in America): Banks who received the biggest rescue packages requested visas for more than 21,800 foreign workers, to do white collar jobs! The average annual salary for those jobs was $90,721. During the last three months of 2008 - when the market meltdown was at it's height - the largest banks that received taxpayer loans announced more than 100,000 layoffs (where's organized labor here?).

Can anyone say with a straight face that the real terrorists we need to worry about are right here in our country?

Think about it ... Wall Street's stupidity and greed collapses the economy ... Wall Street uses a taxpayer funded bailout to subsidize undeserved bonuses ... Wall Street shifts money offshore to avoid taxes ... Wall Street bribed convinced Washington to restrict the legal right to sue corporate incompetence ... Wall Street paid what amounts to hush money to avoid court cases ... Wall Street firms colluded to steal funds from local schools and cities ... Wall Street outsourced jobs by bringing foreign workers to America (at the same time they had their hand out to the American taxpayer) ...

Is putting America further in debt what Country First is all about? Where's the Tea Bag outrage over Wall Street's theft of American tax funds here? Why wasn't Mr. Tea Bag, Glenn Beck, discussing how all of this makes a travesty of patriotism at his white self-pity rally on Saturday?

At the end of the day, our financial terrorists are causing more problems for America than the terror babies the Glenn Becks of our world like to whine about. When the false patriot, Tea Bag Bunch, begins to figure this out (and adds a little color to their mob) maybe it will be time to take them seriously.

Until then, they're just perpetuating a debt-drenched, corporate welfare, system that increasingly makes us dependent on China. And, if I'm using my Glenn Beck-logic tin foil hat, that makes them all traitors.

- Mark

Note: Photo added after original post.

UNFORTUNATELY, WALL STREET STILL KNOWS BEST

Apart from being the type of financial reform that only the comics at Monty Python could appreciate, the new financial reform bill does almost nothing with regards to change the structural conditions that led to the 2008 market collapse. John R. Talbott, author of The Coming Crash in the Housing Market (2003) has a detailed master list of what makes the financial reform bill largely toothless.

But the real sin that I see in the financial reform legislation is not what it leaves out, but in it's premise. Fundamentally it's guided by a corrupted and failed ideology where the God's of Wall Street can say one thing ("When we're in trouble you need to bail us out") and then say another to Main Street ("When you're in trouble you can eat crack").

While our market ideology is supposed to be guided by the principle that if you work hard you will get ahead - which is the moral justification of capitalism - it's been turned on its head by Wall Street's new guiding lights of favorable legislation and unnecessary tax cuts. While the first corrupts the ideology, the latter deprives the state of the funds it needs to function.

Worse, after experiencing a catastrophic market collapse caused by 30 years of following Wall Street's "No tax, No Government" approach to public policy our political mandarins continue to believe that we need to appease the God's of Wall Street, as if they just did our nation a favor. What they don't understand is that the Wall Street's market players today are little more than rats on a sinking ship.

The failure to extend unemployment benefits, and the rather weak financial reform bill in front of Congress now, makes it clear that Congress is prepared to appease the Wall Street Gods. What they conveniently ignore is that unemployment benefits are needed because of what Wall Street did, and should not be determined by the sense that Wall Street will be offended by another $33 billion in debt (especially since we could pay for the benefits by retroactively taxing Wall Street's undeserved bonuses).

What our national leadership doesn't seem to understand is that as long as Wall Street is able to live by one set of rules, while Main Street is supposed to live by another, their concern over a few billion dollars in additional debt, and focusing on a set of weak "structural reforms" is akin to rearranging deck chairs on the Titanic. Want some evidence? Check out these two charts.

When compared to other economic downturns in the post-war era job losses have never been as steep as they are now.

Worse, the period of unemployment has almost doubled during this recession compared to other periods. It's one thing to be unemployed, but to be unemployed with no prospects on the horizon can be downright depressing.

The problem is that while Wall Street and their patrons have secured favorable legislation that's allowed them to change the rules of the game in their favor ("Bailouts & taxcuts for us, austerity & no job security for you ..."). This has created a situation where, as Les Lepold points out, there's "too much wealth in the hands of the few and too much power and wealth controlled by Wall Street".

While the new financial reform bill does little to limit this power and wealth, our too-big-to-fail banks, as Lepold points out, "are still with us--and cockier than ever." He adds:

Very few commentators or policy officials have the nerve to call for restoring taxes on the super-rich to the levels they paid from the 1930s through the 1970s. (Back then, their tax rate was up to 91%. Now they pay as little as 15% because they can claim their booty as "capital gains.") The 10 leading hedge fund managers each "earn" an average of $900,000 an hour (not a typo). Public officials and pundits should be calling such wildly excessive incomes a disgrace to democracy--especially given that without taxpayer bailouts the financial elites would have earned nothing at all. Instead we are told to admire the robbery as if it were a sign of entrepreneurial genius.

And, sure enough, we continue to admire the robbery. Think about it. How else could a group of people who caused our economic meltdown turn the tables and then be rewarded financially (bonuses & bailouts), legally (waivers), and with a politically opportunistic movement (Tea Party anyone?) that does their bidding? That Wall Street continues to have so much political influence after making a mess of things should be a national embarrassment.

At the end of the day, Wall Street and their political muscle in Congress continue to perpetuate the lie that we live in a free market economy. We don't (read The Myth of the Market). The reality is that Wall Street has become a voracious gambling den governed by favorable legislation and an irresponsible and clueless plutocracy.

Still, in the eyes of Congress, Wall Street continues to know best. Let's be blunt. As long as we continue to believe all we need to do is tinker on the margins of Wall Street's world, reform or no reform, we're in deep trouble.

- Mark

UNDERSTANDING OUR EPIC FOOLISHNESS

This article on "our epic foolishness" from the NY Times' Bob Herbert really captures how "our failure to master the challenges confronting us" has been going on for some time now. It might make the Republicans feel good that President Obama may be facing his Katrina in the Gulf Coast (ignore, for the moment, how they're finally admitting Bush's actions were epic failures), but the reality is that our national "hubris and ignorance" are finally "threatening to destroy us."

What Herbert is referring to is how our short-sighted actions and false bravado no longer match our long-term abilities. From epic failure in the Middle East, to our technological inability to cap a well, to our explosive and failed financial institutions, America has arrived at the point where our policies are held hostage by a bumper sticker mentality that feeds on crazy people shouting empty slogans.

Budget surpluses in 2000? Tax cuts! Economy slows down after 9/11? Deregulation, and tax cuts! Economy recovering? More deregulation, and tax cuts! Economy collapses after 2008? Deepen deregulation ... and more tax cuts! Need an energy plan? Drill, baby, drill! How do we fix Wall Street after 2008? More deregulation! Trouble in the economy? Damn illegals! And the list goes on ...

Whatever ails our society, and economy, Congress has arrived at the point where good policy has been abandoned in the name of empty sloganeering. If it can't fit on a bumper sticker, it's not good policy. Is this any way to run a country? Is this any way to run the United States of America? It is if you're a member of Congress.

But this didn't happen over night.

Roots of our Epic Foolishness, Favorable Legislation
One of the key developments over the past thirty years is how favorable legislation for America's financial institutions has made them so damn lazy. Stuffed with one legislative gift after another, our nation's financial institutions have gone from watching their money and making prudent business decisions in the 1950s and 1960s to having Uncle Sam rewrite the laws that allowed them to become reckless, and helped them develop a sense of business entitlement.

For example, back in the 1970s and early 1980s we were confronted with corporate bankruptcies (Boeing and Chrysler) and the Savings & Loan debacle. A combination of high interest rates and, then, some really stupid loans, combined to drive the Savings & Loan industry into the ground. Congress responded by bailing out corporate America and rewriting the laws so that banks could sell their money losing loans (often to one another), with the losses of the S&Ls being picked up by the American taxpayer.

The bankers, as you might expect, fared very well. Worse, the stage was set for "secondary" markets to grow, which have helped banks find a place to take their failed loans and dump them off on other market players. The financialization of the American economy, built on a pile of debt, was right around the corner.

Later, in the 1980s and 1990s, when banks were threatened with bankruptcy because of the loans they made to developing nations, Uncle Sam (and the IMF) stepped in to save the banks from their reckless stupidity (over and over). It was also at this time that Congress began rewriting the laws so that America's financial institutions could bundle up their crappy loans, label them collateralized debt obligations (CDOs), and dump them on other unsuspecting market players.

The lesson that America's financial titans took away from these experiences was classic. They decided that they would lend even more money! And why not? It was clear that Uncle Sam would fix whatever their reckless decisions brought down on the economy. 

Epic Foolishness ... Blowback
Now, here we are, a decade into the 21st century and we're seeing the results of our nation's decades long decision to fawn over corporate American and Wall Street's bankers. Only this time, after bailing out Wall Street, and simply rolling with the punches - as we've done in the past - it appears that many regular Americans have had enough.

Those caught in the middle of corporate America's favorable legislation orgy with Congress appear to be fighting back against the schemes that brought us no doc loans, adjustable rate contracts, foreclosures, forced bankruptcy, higher interest rates and record pay and bonuses.



It turns out that many ordinary Americans aren't paying the bills any longer. And they're doing it in droves. In this article from the NY Times it turns out that more and more Americans have stopped paying their mortgages. With foreclosure proceedings initiated against 1.7 million of our nation’s households, over 650,000 mortgage holders haven't paid in 18 months. According to those who have stopped paying, it's not their fault that the market and the economy tanked.

Moreover, they argue that it's also not their fault that the banks made no doc and adjustable rate loans (and credit cards) available to people with debt-to-equity ratios that didn't make historical sense. In the eyes of those who are losing their homes, and find themselves with excessive debt, expecting favorable legislation, new laws, and waiting for the American taxpayer to pick up the pieces for their stupid business decisions shouldn't be corporate America's business model.

But it is.

Today, as this NY Times article points out, we find that Wall Street's biggest banks were essentially providing "no doc" loans to students because they understood that laws on the books would not allow student loans to be discharged in normal bankruptcy proceedings. Put another way, loans weren't made based on the consumers ability to pay, they were based on laws that said borrowers couldn't discharge the loan. This encouraged banks to rmake more loans, which they repackaged or bundled up into CDOs, which they sold in secondary markets (and then recklessly insured with CDSs).

Again, why take the time to conduct basic due diligence when you have Uncle Sam around to rewrite the laws, and make your loan department profitable, whether you make prudent business decisions or not?

Undermining the Moral Justification of Capitalism
Of all the failures that have occurred over the past thirty years perhaps the greatest one has been how corporate America has begun to slowly rob America of the moral justification of capitalism that once made this country great. By pursuing favorable legislation that saves them the trouble of making sound business decisions, America's financial mandarins not only think they're living on Easy Street, but they are slowly robbing our nation of the spirit that told us "If you work hard you will get ahead."

Favorable legislation, get-rich-quick schemes, unwarranted subsidies, bailouts, etc. all work against the spirit that made this nation great, and the moral justification of capitalism. Too big to fail banks, too big to cap oil spills, and too big to catch jihadists all point to a nation that embraces the false bravado of nationalism, while ignoring the spirit behind the moral justification of capitalism.

These developments, as Bob Herbert suggest, are the essence behind our epic foolishness.

- Mark