BUSH'S REAL LEGACY TOUR . . .

Keith Olbermann and the people at MSNBC have outdone themselves . . .



- Mark

IS IT TUESDAY YET?

I don't know about anyone else, but I've about had it with George Bush's Lying "But-Don't-Blame-Me" Tour as he prepares to leave the White House. Never have I seen a more self-indulgent and pathetically "reflective" exhibition over a failed record and stunning incompetence.

While Bush acknowledges mistakes like the "Mission Accomplished" banner, and using taunting words ("Bring 'em on"), America's Nero steadfastly refuses to accept that he politicized the intelligence, decided to invade Iraq long before 9/11, signed off on torture as a matter of policy, was incompetent in New Orleans, fiddled while the economy exploded on his watch, and led a host of other failures that would gnaw and embarrass almost any other normal human being.

Today I saw a clip of Bush lying (once again), claiming that he entered the White House with a recession and is leaving with a recession - acting as if the economy he is leaving us is akin to what he inherited from Bill Clinton (and, no, we weren't in a recession in 2001). What a moron.

But the most galling of all of President Bush's Lying Tour bag of lies is his claim that one of his greatest accomplishments is that we were not attacked after 9/11. As MSNBC's Martin Wolfe put it, while there is a relationship between the rooster crowing and the sun coming up, the rooster doesn't get credit for the sun's appearance.


I don't know about anyone else, but when it comes to poultry and President Bush, all I can think about is this guy . . .


For those of you who don't recall, this guy is from Foghorn Leghorn. He was the original Chicken Hawk.

- Mark

FORGET THE DEFICITS . . . SPEND

Let's assume that you're in battle and you get wounded. Do you do the hard scrub and clean out the mess before it gets infected, or do you take some penicillin and hope it clears up on its own?

After pulling us through a recent Martin Wolf (the UK's Financial Times) article, this is the question posed by Yves Smith over at Naked Capitalism. Looking at the economic challenges we face, Wolf makes it clear that we're screwed. From private expenditures to balance of trade deficits, to falling industrial output and corporate debt loads, things are looking really bad . . . long into the future. Things are so bad that Wolf thinks (and I agree) that Barack Obama needs a stimulus package at least 2.5 times bigger that what he is asking for.

The rationale is quite simple.

With corporations and almost everyone else in America overextended we can do one of two things. We can force a "slow bleed" of $350 billion stimulus packages every 6 months on America (which will piss everyone off). Or do we do the bold thing and spend the $3-4 trillion we need to buy out homeowners and consumers who are sitting on a pile of bad debt that has the financial industry fretting over their future bottom lines? (which will only piss off the few remaining "free marketeers" and their fellow Flat Earth Society members).

There's more to this story, but I say we forget deficits for now (we've done it before) and spend. Let's do the hard scrub and clean out the mess before Bush's Economic Debaclypse spreads and turns our economy gangrene.

I'll discuss how we should spend on this Saturday's program.

- Mark

GLOBAL FINANCIAL CRISIS 1 STOP SHOP

The UK's Financial Times has one of the best overviews of the global financial credit squeeze and market meltdown that I've seen. From Bernie Madoff and the U.S. economy, to Euroean bank exposure and the "fallen giants" around the world, the Financial Times' interactive review of the global financial crisis is first rate.

You can check it out here.

- Mark

SAY "NO" TO SECOND HALF OF $350 BILLION

Columnist David Sirota explains why the Bush-Obama request for the remaining $350 billion should be turned down. While I don't always support Sirota, I agree with his rationale.

REASON 1: Treasury Says It Doesn't Need the Money

REASON 2: "New" Conditions Are Filled With Loopholes & Omissions

REASON 3: Congress Still Abdicating Its Oversight Responsibilities

REASON 4: Nobody Has Explained Why This Is the Best Way to Spend $350 Billion

Check out Sirota's entire article here. I'll have more to say about this on this Saturday's radio program.

- Mark

BEST ARTICLE OF THE YEAR

OK, I know it's just January 10, but this Frank Rich article ("Eight Years of Madoff") is a masterpiece. After going through a short list of the criminal activities and political blunders of the Bush administration, Rich makes a cogent but cautionary point about pursuing the criminality and incompetence of the Bush years:

If we get bogged down in adjudicating every Bush White House wrong, how will we have the energy, time or focus to deal with the all-hands-on-deck crises that this administration’s malfeasance and ineptitude have bequeathed us?

Rich then points out that because nothing less than our nation's honor is at stake that "every legal effort must be made to stop what seems like a wholesale effort by the outgoing White House to withhold, hide and possibly destroy huge chunks of its electronic and paper trail." With more than $10 Trillion in new debt and obligations piled up by Bush, Rich makes what probably is the best case for pursuing investigations, or creating high-level commissions . . .

The more we learn about where all the bodies and billions were buried on our path to ruin, the easier it may be for our new president to make the case for a bold, whatever-it-takes New Deal.

Put another way, it's not just our national honor and the rule of law that are at stake. Bush's incompetence needs to be revealed or else we could lose sight of the financial and political debacles confronting us.

- Mark

THE DEFENSE: "I'M JUST CRIMINALLY STUPID"

I was out this weekend but a colleague sent me a couple of articles that fit into what I've been posting or commenting on over the past year . . .

First up is this article ("The Failure of Our 401(k)s") from the LA Times, which outlines how the 401k program that we were sold back in the late 1970s became the financial smoke & mirrors that corporate America needed to start defunding corporate retirement plans. Their argument ran something like this: "Hey, you already have a 401(k), why do we need to fund you again?". The real stroke of genius lay in how the 401(k) plan allowed industry executives to shelter income (which reduced their tax load) while funneling money into the financial sector that otherwise would not have gone that way.

Moral of the Story: Wall Street got a free injection, which made them feel like masters of the universe; today we get less purchasing power, and a perilous private retirement system.

The next LA Times article ("Financial Scoundrels Have Little to Fear from the Law") makes it clear that, whatever the final outcome of the current economic mess, few of the perpatrators will actually be fingered and/or sent to jail. The reason is quite clear. Unless you were really reckless (like Enron's Ken Lay or Bernie Madoff) there really is no law against being greedy or criminally stupid.

Moral of the Story: White Collar crime pays, especially if it's tied to being criminally stupid.

- Mark

SHOP TIL YOU DROP?

According to the LA Times, a woman in Britain litterally shopped herself to death. She was found buried under her numerous new suitcases and unopened stuff:

"An expert search team and environmental health officers were also called in to help and on Wednesday evening her body was finally found buried under the suitcases.


The house was stacked with brand-new umbrellas, candles, ornaments, trinkets, clothes and electrical items, many of them unopened, as well as piles of videotapes."

Keep this in mind the next time someone says "shopping never hurt anyone."

- Mark

THESE IDIOTS SAW IT COMING . . .

In my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy, I make it clear that government regulators had an idea what was happening, but stood by as market players promoted and took advantage of a weak regulatory environment. Knowledge of the dynamics that led to our current market meltdown goes all the way back to 1998! In a few words, the market meltdown should not be seen as a surprise, or a once in a lifetime event (as Alan Greenspan claims). The biggest players knew what was happening, and kept on pushing for more deregulation. It's hard to come to any other conclusion than these idiots saw it coming . . . What follows below is from Chapter 12 of my book.

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... [In 1998] the Federal Deposit Insurance Corporation issued a set of guidelines for member banks managing transactions that involved bundled loans that were sold as collateralized securities. Concerned that deposit-taking institutions had not exercised sufficient risk management when handling these loan contracts the F.D.I.C distributed a “Statements of Policy” at the beginning of 1998 making it clear collateralized security transactions were on their radar screen.

While it set out to reacquaint institutions with basic due diligence procedures, it also listed ways private firms could defraud F.D.I.C-backed institutions. More bluntly, the Statements of Policy (SOP) guidelines said private financial institutions weren’t always playing fair with F.D.I.C. backed institutions, especially when it came to complex financial instruments.

Among the embarrassingly basic rules of caution covered included “know your counterparty,” credit analysis, and credit limit reviews. The guidelines were so simple it was difficult to tell whether they were issued for the new finance guy at the local car dealership, or were really geared for seasoned, F.D.I.C. affiliated banking institutions.

Still, one thing stood out – in the wake of the 2008 market collapse – the 1998 SOP offered a Crow’s Nest view of what went wrong. Pointing to the tactics of subsidiaries belonging to “financially stronger and better-known firms” the SOP warns that larger corporations “may not be legally obligated to stand behind the transactions of related companies,” so the subsidiary may not be credit worthy. The F.D.I.C.’s advice? Don’t trust the other guys “character” or “integrity” until you get “the stronger firms” signature.

That this needed to be said should have raised red flags back in 1998. Incredibly, the guidelines get even more basic.

We all know when we purchase a new car we have to deal with the sales staff. We’re then shuffled off into cubicles where we have to deal with the finance and credit team, who also want to sell us stuff. There’s a reason why the dealerships keep these two positions apart. Sales staff, anxious to sell a car, will either lower credit standards or overlook red flags on a customer’s credit report. Not so in the F.D.I.C. institutions.

Apparently burned by too many conflict of interest transactions involving sales and finance pulling double duty, the F.D.I.C. found it necessary to remind banking institutions that credit evaluations for CDO transactions, for example, should be done by “individuals who routinely make credit decisions” and not those involved in sales. The F.D.I.C institutions were then provided with the incredibly sage advice that they should be on the look out for buyers who were already “overextended.”

Perhaps the greatest words of caution are saved for institutions inclined to believe CDO instruments could be used as market collateral. F.D.I.C. guidelines make it clear that simply because an institution has a CDO-affiliated instrument doesn’t mean it’s sitting on an asset whose book value is equal to its market value.

The 1998 guidelines suggests, for example, that if a $100 million CDO transaction has occurred that “experience has shown” the underlying product or contract “will not serve as protection” if the subsidiary fails, or if the firm does not have control over the security. Put more simply, the tone of the 1998 SOP guidelines tell us market players and the federal government knew that U.S. financial institutions were sitting on a financial powder keg long before the 2008 market melt down began . . .

- Mark

THE PROBLEM OF FAVORABLE LEGISLATION

In one of my previous posts I suggested that the problems we confront are not simply tied to what's happening in the housing market, and the unscrupulous financial practices that led to the real estate market boom and bust. For this reason I argue that simply throwing a trillion dollars at the banks will not be enough to get our economy moving again. In addition to undoing bad legislation, one of the biggest challenges Barack Obama confronts is how to get American consumers spending, thus creating demand and job growth. The problem is that American consumers are swamped by debt and burdened by stagnant wages. I describe what's happening in Chapter 2 of my book, The Myth of the Free Market: The Role of the State in a Capitalist Economy (Kumarian Press, March 2009), which I reproduce here.

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BANKRUPTCY REFORM OR INDENTURED SERVITUDE IN AMERICA?
When personal bankruptcies in the United States hit 1.5 million in 2002 and then went to 1.6 million in 2003, one of the goals of the US Congress was to find a way to reduce the number of bankruptcy filings. This led to bankruptcy reform legislation in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

After climbing to 2 million bankruptcies in 2005, filings dropped to 600,000 in 2006. The problem was solved, right? Think again. Bankruptcy filings rose to 822,590 in 2007 and were on pace to reach 1 million at the end of 2008. What explains the surge in bankruptcy filings? Several developments are at work here.

First, Congress catered to the interests of the financial industry but failed to address the principle causes of bankruptcy. Second, the industry raised fees and reduced grace periods after the BAPCPA was passed. Finally, the credit card companies lent people even more money after 2005 because it became more profitable to do so.

According to noted bankruptcy attorney Leon D. Bayer, in addition to making it more difficult to file for personal bankruptcy, the 2005 legislation didn’t wipe out the reasons people file for bankruptcy. More than 90 percent of all personal bankruptcies are filed for three reasons: job loss, divorce, or catastrophic illness. There’s little that Congress can do about these life events.

Because no provisions were made in the BAPCPA to work with people who are hit by these real-life incidents, debtors soon found that the notion of “broke and in debt” was no longer good enough. The newly divorced, the medically recovering, and the unemployed would have to wait until they hit distressed debtor status to qualify for bankruptcy. Debtors, after all, had to be taught a lesson. This helps explain why military personnel in the National Guard were not given special consideration either. A deadbeat is a deadbeat according to the industry—there are no exceptions. And Congress agreed.

So, rather than addressing the underlying causes that lead to bankruptcy in America, the 2005 legislation simply deferred and, more realistically, compounded the situation for those confronting uninvited financial problems.

Now, you’re probably scratching your head and asking why legislators didn’t anticipate this. It’s a good question. To start, we must acknowledge that the biggest supporters of the 2005 legislation were the credit card companies. They aren’t run by dummies. Some may get greedy, which compels them to make dumb decisions as a group over time, but the companies are not run by inherently dumb people. The executives in the credit card industry saw that bankruptcy filings were going through the roof in 2005. They also understood that there was an economic bubble waiting to burst. So they moved to protect themselves and their “fee and penalty” gold mine (fee income accounted for 31 percent of industry profits in 2001, whereas total income from late fees jumped from $1.7 billion in 1996 to $7.3 billion in 2003 ).

To be sure, the industry knew that the vast majority of Americans filing for bankruptcy were placed in their situation by uninvited life circumstances—job loss, divorce, or illness. But the details of their lives were viewed by disengaged industry lobbyists as being as “unfortunate” as they were unimportant. Like the Vegas strip, the goal of “The House” (the credit industry) is to get people in the door, at the table, and to keep them there. If they’re not at the table, you can’t get debtors, no matter what their circumstances, in the fee and penalty cycle. So the industry went to “their muscle” (i.e., Congress) to make it more difficult for debtors both to qualify for bankruptcy and to discharge their credit card debt. And they got their wish.

Then, in spite of promising that consumers would benefit from the legislation (because fewer losses would accrue to the creditors), the industry immediately reduced grace periods, increased interest rates, and hiked late and over-limit fees (among others). Because the industry already had “universal default” authority, which allows the industry to hike rates on a clients account if the client is late making a payment on a competitor’s account, the industry prepared itself for even greater profits. Profits for the industry jumped from about $30 billion per year in 2005 to almost $40 billion in 2007. But the reasons for record profits after 2005 can’t be traced simply to increased fees, higher rates, and shorter grace periods.

By helping the credit card industry reduce bankruptcy filings after 2005, Congress ensured that the companies would have fewer losses and more earnings (although I’m not sure whether favorable legislation that generates more income for an industry counts as genuine “earnings”). With more money at hand, the industry, incredibly enough, lent more. You would think that they would have learned a lesson from being just one year removed from record bankruptcies—and the fact that Americans had a savings rate that was effectively zero. Think again. In 2007, according to Laurent Belsie at the National Bureau of Economic Research, the credit card companies did the following:

[They] started lending more, even to consumers with bad credit. Credit card debt increased more quickly during the past two years [2006–2007] than at any time during the previous five years.

Comfortable in the knowledge that it was more difficult for borrowers to enter into bankruptcy proceedings, the credit industry determined that it was in their financial interest to lend more. Teaser rates, cashable checks, and other industry gimmicks filled our mailboxes. And why not? By raising the bar necessary to file for bankruptcy, the industry knew that fees, penalties, and other charges would add significantly to their client’s debt load. According to Robert D. Manning, author of The Credit Card Nation, all of this is a good thing for the industry because

In the old days, the best customer was someone who could pay off their loan. Today the best client of the banking industry is someone who will never pay off their loan.

Keeping distressed debtors in the game longer can make for fatter profits. But there is something else at work here. The industry is increasingly bundling credit card debt into debt contracts. And why not? The credit card companies have hundreds of billions of dollars that are owed to them by consumers. Rather than maintain a debt of, say, $6,000—which most middle-class Americans can’t pay off in the immediate term—it’s much easier to bundle and sell the debts that are owed to investors who are looking for income streams, with interest.

Because the debt is secured by the payments of the credit card holder, the debtor becomes the “collateral” paying the debt—hence, a collateralized debt obligation (CDO). And, with the 2005 BAPCPA to maintain debtor compliance, credit card debtors become government-enforced collateral.

The practice of selling credit card CDOs has become so profitable that, by the end of 2007, “one-third of Capital One’s $151 billion in managed loans had been sold as securities.” This figure is sure to grow. After home equity loans came to a crashing halt in 2007 and 2008, consumers have been forced to rely on their credit cards more and more, often just to pay their mortgages. This helps explain why the credit card industry opposed the 2008 Credit Card Holder’s Bill of Rights (HR 5244), which, among other things, imposed industry restrictions on questionable fees, sudden rate hikes, and payment time frames.

These developments explain why the 2005 BAPCPA has become such a moneymaker for the credit card industry. The harder it is for someone to pay off his or her credit card debt, the longer it will be before the debt is paid. And debt that can’t be repaid, or repudiated, becomes a continuous source of industry income.

Julie L. Williams, chief counsel of the Comptroller of the Currency, explains what’s happened: “Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset.” Put another way, the bankruptcy bill of 2005 turned personal misfortune and consumer debt into yet another income stream for financiers and Wall Street.

Without addressing conditions in the economy, the three primary causes behind bankruptcy, or what the industry has done to entice clients, the BAPCPA does much to violate the integrity of market capitalism while undermining the spirit of Adam Smith’s order of nature and reason.

- Mark