LESS BANG FOR THE BUCK ...

Less bang for your buck. This is what republicans want to get out of the stimulus package. They claim that they want to eliminate government transfer and spending programs because, according to them, they don't generate enough bang for the buck. The republican proposal? More tax cuts.

Let's consider the general contours of 3 options, and what their impact would be on the economy:

1. GOVERNMENT SPENDING ON INFRASTRUCTURE: The federal government spends $1.00 on infrastructure and other goods & services, and generates between $1.00 and $2.50 in economic stimulus.


2. GOVERNMENT TRANSFERS MONEY TO YOU & ME: The federal government transfers $1.00 to you and me and generates between eighty cents to $2.20 worth of economic stimulus.


3. TAX CUTS FOR THE RICH: The federal government continues to do what it's been doing under George W. Bush. We grant more tax cuts for the rich. But for every dollar we spend we only generate between ten cents and fifty cents in economic stimulus.

How do we know this is what we get for every dollar the U.S. government spends? Because the Congressional Budget Office has been crunching the numbers and this is what they've told us we get in return for every dollar spent.


It's really pretty simple. What President Obama and the democrats want to do - transfer and spend money - will generate more bang for the buck. The republicans, however, have been holding out for more tax cuts, claiming government spending and transfers are a waste.

I have confidence that President Obama knows what he's doing, but at some point he needs to understand that the republican plan at this point is to stonewall and dilute the impact of his policies. They understand that if President Obama succeeds they will be banished to the political swamplands for a generation.

It's almost as if they want want Obama to fail. Oh, yeah. They do.

- Mark

WE OVERPAID BANKS BY $78 BILLION

OK, now I'm convinced more than ever that we need to get some of our money back by going after salaries and bonuses that were paid to executives of failed institutions. It appears that we overpaid the banks with TARP money by $78 billion.

How did this happen? The congressional oversight panel for TARP is telling us that the Treasury Department under Secretary Henry Paulson misled the public as to how it would price assets that the government would purchase. Specifically, Elizabeth Warren told Congress:

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another,"...

Warren also told the banking committee that after three months on the job, her panel is still not getting enough answers from Treasury. This is not good.

Is there enough wrongdoing to drum up some indictments? It seems so. Read the post from Naked Capitalism to find out why.

- Mark

THIS IS WHAT I'M TALKING ABOUT ...

A week ago I posted the following: Let's RETROACTIVELY tax bonuses of executives who ran their companies into the ground and then asked for and received TARP aid. I was thinking we could tax the more than $18 billion in bonuses at a 90% rate, or something like that. Even my liberal colleagues here at the university thought I was nuts.

Then we got Sen. Claire McCaskill's call to limit CEO compensation. I became a happy camper. Now that I've (finally) read the specifics of Senate Bill 360 I'm an even happier camper.

Specifically, these are the parts I like:

(a) ... no person who is an officer, director, executive ... may receive annual compensation in excess of the amount of compensation paid to the President of the United States.

(b) Duration- The limitation [of CEO pay & bonuses] in subsection (a) shall be a condition of the receipt of assistance under the TARP, and of any modification to such assistance that was received on or before the date of enactment of this Act ...

In plain English, this says that the executives who received big bucks after TARP was enacted can keep $400,000 (what we pay the president) but will have to pay the rest of it back.

And I thought my 90% clawback tax proposal was far fetched. Go get 'em Claire McCaskill.

Maybe we'll finally bring some semblance of market reward back to the system, and save America in the process. And no, I'm not being overly dramatic with my last comment. Our system of compensation and reward is so out of whack that the moral justification of capitalism is in peril.

Like I said, SB 360 makes me a happy camper.


- Mark

DEMERIT BASED PAY

Among the many investment newsletters I get every day (most of them offering garbage "investment" advise), the one that seems to provide consistently thoughtful and useful analysis is Agora Financial's "Rude Awakening." To be sure, many of their newsletters hyped the market before it crashed along with everyone else, but they were also very generous in providing an outlet for stuff like this:

Yesterday morning, a wonderful thing happened – an individual in a position of power made an attempt to separate incompetent corporate executives from lavish pay packages. President Obama announced plans to limit pay to $500,000 a year for the executives of any company that receives extraordinary government assistance ...

... The fact that ANYONE would defend generous pay packages for overtly incompetent corporate executives suggests to this stock market observer that America’s financial crisis is far from over. Even after all the wealth that Wall Street has destroyed during the last 18 months, some folks still believe that the raw, unalloyed incompetence that produced the current financial crisis deserves multi-million-dollar paydays, rather than ankle bracelets.

We don’t agree…and returning to one of our favorite themes, we would urge all investors to actively avoid investing alongside scumbags [my emphasis]. If a scumbag happens to produce a positive result for the minority shareholder, it will always be an accident. Seek out the CEOs and executives who align their interests directly with the minority shareholders and who behave like owners, rather than trust fund babies.

These guys get it. Obama gets it. If you're wondering when the incompetents on Wall Street will get it, my only advise is to hang on.

- Mark

"WHY AREN'T YOU DOING YOUR JOBS?"

From nakedcapitalism.com ...

Wow. In this YouTube clip Rep. Ackerman (D-NY) really goes off on SEC regulators who can't seem to explain why Bernie Madoff was able to pull off his $50 billion Ponzi scheme - after the SEC was handed all the information they needed to bring Madoff down by Harry Markopolos. The people at Southwest could probably use this clip for one of their "Wanna get away?" commercials.



At the end of the day, Rep. Ackerman is asking one simple question: "Why aren't you guys doing your jobs?"

- Mark

MARKOPOLOS TESTIFIES

Harry Markopolos, the private investigator who tried to blow the whistle on Bernie Madoff, testified before Congress today and told the story of a Securities and Exchange Commission (SEC) that dropped the ball on its oversight functions.

Saying that the SEC had become "nonfunctional" because of agency officials who were "financially illiterate" Markolopos made it clear that the SEC's inability to do its job made the agency "harmful to our capital markets and harmful to our nation’s reputation as a financial leader."

Those are pretty tough words for an agency that was created by FDR to make sure that market players played by the rules and actually did what they said they were doing. The SEC is not supposed to fawn over and cover for industry.

But I especially liked the testimony of Markopolos because it supports what I say in in my book about the regulatory environment that has governed our nation's economy since the early 1980s ...

. . . In 1987 the Federal Reserve Board voted 3-2 to allow banks to handle a limited amount of underwriting for financial instruments like municipal bonds and mortgage backed securities. By allowing banking institutions to take on the risk of distributing these types of securities the Federal Reserve was effectively undermining one of the principal firewalls of the 1933 Glass-Steagall Act.

Specifically, one of the Acts goals was to keep commercial banks away from selling (underwriting) securities, or getting involved in investment banking. The thinking was that banks might get reckless and, because of their F.D.I.C. guarantee, force the federal government into a bailout situation. Before the collapse of 1929 commercial banks had done this by pushing faulty investment products, but with little concern for their client’s interests. Investors and bank depositors lost millions because, ultimately, the banks “overriding interest was promoting stocks of interest and benefit to the banks.”

The voting members of the Federal Reserve in 1987, however, had been convinced that this could not happen in the modern era. Then Citicorp vice-chairman, Thomas Theobald, argued that corporate misbehavior couldn’t occur like it did before 1933 because the economy had seen the emergence of: (1) a “very effective” Securities and Exchange Commission, (2) knowledgeable investors, and (3) “very sophisticated” rating agencies. Three members were convinced. Two were not.

One of the “nay” votes from the Fed Board came from Fed Chair, Paul Volcker. He believed if commercial banks were allowed to get back into underwriting securities (like mortgage backed securities) they would lower lending standards in an effort to gain lucrative fees from underwriting bonds, which would strengthen their securities market position and generate more profits. Still, without veto power Volcker’s nay vote didn’t matter. His argument lost the day.

Paul Volcker notwithstanding, the Fed board members who voted to allow commercial banks to underwrite securities failed to recognize the weakness in Theobald’s argument. The SEC could always be converted into a toothless tiger if its chair and staff were governed by ideology rather than the public interest. Greed can get the best of investors in an increasingly deregulated environment. Ratings agencies could be co-opted, and even consumed by market euphoria. A running with the market herd mentality could quickly swamp market players who, as John Kenneth Galbraith pointed out in A Short History of Financial Euphoria, are filled with fast-profits and a sense of their own genius because of what they see as their “novel” wealth generating skills.

With the walls between S&Ls, commercial banks, and investment banks crumbling in the 1980s, U.S. banks dove into lucrative mortgage and security instruments. Rather than learn from the intoxicating effects of previous periods of deregulation, speculation, and debt-driven growth, caution was thrown to the wind. The commercial banking sector slowly came to depend on mortgage backed assets as their primary earning’s tool, jumping from about 28 percent of bank earnings in 1985 to more than 60 percent in 2005 . . .

Worse, as I point out in my book, this lax oversight environment crept into all aspects of commerce in America, and led market players to assume that they could get away with playing fast and loose with the books. This helps explain Bernie Madoff. It will also help us understand the "mini-Madoff's" that seem to be crawling out of our financial floor boards.

I'll have more to say about this on Saturday's program.

- Mark

ENDING SOCIALISM FOR THE RICH INCLUDES THIS ...

David Cay Johnston has an excellent article at Mother Jones. I especially like his call to end "socialism for the rich" by "in effect, reverse engineering the debacle." I like the suggestion to retrace our legislative steps because, well, it mirrors what I wrote for the Bakersfield Californian at the beginning of the year (I know, I know ... I'm tooting my own horn here. But it is my blog).

As a professor who regularly watches students struggle and take on debt that they can't afford, I especially like what Johnston had to say about rewinding the legal subsidies congress has legislated for the credit industry here ...

Over the past 40 years, the cost of public colleges has doubled, and financing tuition is an $85 billion a year business for credit companies. Sallie Mae, the biggest of the private student loan companies, earns an average 48 percent annual return, three times the return of commercial banks. Students who sign up for loans with what appear to be low fixed rates may discover upon graduating that they face an 18 percent rate; if they make a single late payment, late fees will be tacked on every month until the debt is paid off. And the law makes no allowance for students who can't find a job in a bad economy, or can't work because of illness, or choose to serve their communities by, say, joining Teach for America. Albert Lord, Sallie Mae's chief executive, has become so rich from student lending that he built his own private golf course just outside the nation's capital.

Profiteering off students is not just an obscenity; it ultimately weakens the economy. The abuses at Sallie Mae and other student lenders deserve exposure via congressional hearings. Then perhaps lawmakers will find the spine to make the rules fairer. Indenturing the brightest young minds in an information society is the equivalent of eating your seed corn in an agrarian one. In the long run, you're doomed.

I couldn't have said this better. Reading this brought back bittersweet memories of when I finally got a full time job 13 years ago. I then began making payments on my student loans which were bigger than my car payment, and as big as my mortgage.

For those of you wondering, my first year as a full time university professor netted me a whopping $36,000 per year. Things were so bad I almost left the university for several lucrative offers in the private sector. I would have made mint. I also would have sold my soul. Selling your soul for an education should not be a choice imposed on anyone. Some time down the road we need to fix the legislated subsidies that we've worked out for the student loan & credit industry.

- Mark

MILTON FRIEDMAN GOT THINGS WRONG TOO

Last week I had a post explaining "How We Got Here" and made reference to how economists and other academics dropped the ball when it came to holding policymakers to account. I ended by promising to post something that would show how Nobel prize economist Milton Friedman got things wrong too. Then I failed to post it. Ooops.

A day late, and a dollar short, here's the post I promised. What follows is an excerpt from my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy (click on the book's icon located on the left side of this blog).

In Free to Choose: A Personal Statement, Milton Friedman took care to review the causes of the Great Depression. With characteristic bravado he declared that “the independent Federal Reserve System was to blame for the mistaken monetary policy that converted a recession into a catastrophic depression.” He also claimed “[w]e now know that the depression was not produced by a failure of private enterprise, but rather by a failure of government.”

Speaking of failures, Friedman failed to say anything about the well documented market schemes, market myopia, speculative euphoria, and structural weaknesses in the overall economy at the time. Friedman’s greatest failure, however, was to falsely suggest – with his “We now know …” claim – that there’s scholarly consensus on the causes of the Great Depression. Nothing could be further from the truth.

Nobel Laureate Paul Samuelson, for example, argues there could be “dozens” of explanations for “cycle theories” that explain business slumps and economic depression. Looking at the claim that the Federal Reserve encouraged speculation early on John Kenneth Galbraith dismisses the argument as ‘formidable nonsense.’

Another Nobel Laureate, Kenneth Arrow, questioned Friedman’s focus on monetary policy, warning “the sole emphasis on incompetent monetary policy as the cause of the Great Depression is disputed by serious scholars.” He adds that “really bad turns in monetary policy did not come until the end of 1930” when the recession was already “severe.”

Friedman also ignores that before the creation of the Federal Reserve System capitalist history is rife with market failures on a grand scale, suggesting “instability” is “endemic in the free enterprise system.” Indeed, standard history texts of the American economy point to easy lending by industry (margin purchases, easy credit, shady loans, etc.), structural weaknesses in the banking industry, and slowdowns in the agriculture and housing markets, among other issues.

In sum, it’s clear the causes behind the Great Depression are far from decided, and the manias that lead to destructive herd mentalities in markets may be more common than we want to believe. More importantly, it tells us that Milton Friedman was prone to making broad statements that aren’t supported by the facts . . .

- Mark

I AGREE WITH THIS . . .

Barney Frank explains his position on the stimulus package. He also takes a swipe at those who claim to stand on principle against excessive spending, while saying nothing about the wasteful spending going on in Iraq.



- Mark

FOREIGN WORKERS = MORE BONUS MONEY

It used to be that companies in the U.S. sought H-1B visas (which allows temporary employment of foreign workers) when they had specialized needs that only a foreigner could address. Whether the need was tied to a specific skill or a language didn't matter. The goal behind securing an H-1B visa was to fill a gap that U.S. workers could not. This is no longer the case. The Associated Press is reporting:

The dozen banks now receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721 ...

I find it difficult to believe that banks can't find corporate lawyers, junior investment analysts, or human resource specialists in this country. But here's the money quote from the AP report ...

During the last three months of 2008, the largest banks that received taxpayer loans announced more than 100,000 layoffs ... Foreigners are attractive hires because companies have found ways to pay them less than American workers.

I'm not even going to speculate here. Let's be blunt. By lowering costs the guys at the top can also pay themselves more bonus money. They also get a more pliant and servile workforce too. Just the threat of having your job handed to an "H-1B" is good enough to induce conformity. It's that simple.

They may not realize it just yet, but it appears that white collar executives could benefit from the assistance of organized labor. Or do we just let "the market" work it's magic?

- Mark