Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

January 28, 2009


John Schoonover - The reason there is so much fictitious capital floating around stems from the consequences of the end of the post-war boom in the OECD countries during the late 60s.

While production and returns on productive investments expanded during the post-war reconstruction period, and while consumers made up for time lost during the depression, these two drivers petered out as reconstruction was accomplished and folks had bought all the houses, cars and refrigerators that they needed.

At that point, productive capacity went into under-utilization and further investment in production became far less attractive than it had been. So, the question for owners of capital became, "Now, what do we invest in?" As we have found out, the answer to that question is "speculation". And that, assisted by the removal over time of all the barriers installed during the New Deal to keep 1929 from happening again, pretty much explains why all that fluff is killing the financial system.

Now, how to rebuild the economy? As far as I can tell, the only way to rebuild the economy is to invest in production, rather than speculation. However, for the past 35 years, nobody has found a way to make productive investments sufficiently attractive to get the attention of much of the capital that is out there looking for ROI. Furthermore, the amount of capital available for investment seems to far surpass the amount that could be productively invested.

In short, within the limits imposed by capitalist accounting procedures, it doesn't look like there is much you can do to rebuild the economy. Capitalism seems to have reached its limits to growth, and will probably limp off the stage of history, much the way that feudalism did before it, and will be replaced by a system, at least we can hope, that is more attuned to production motivated by human, rather than capital's, needs.

Alan S. Blinder, NY Times - Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable - yes, avoidable - human errors. Recognizing and understanding these errors will help us fix the system so that it doesn't malfunction so badly again. And we can do so without ending capitalism as we know it. . .

WILD DERIVATIVES - In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE -The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. . . .

A SUBPRIME SURGE - The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common. . .

FIDDLING ON FORECLOSURES The government's continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago - and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms. Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. . .

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. . . .
People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear's rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not? After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP'S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. . . Decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP's first $350 billion were an inconsistent mess. Instead of pursuing the TARP's intended purposes, he used most of the funds to inject capital into banks - which he did poorly.

NY Times - The stimulus bill working its way through Congress is not just a package of spending increases and tax cuts intended to jolt the nation out of recession. For Democrats, it is also a tool for rewriting the social contract with the poor, the uninsured and the unemployed, in ways they have long yearned to do. With little notice and no public hearings, House Democrats would create a temporary new entitlement allowing workers getting unemployment checks to qualify for Medicaid, the health program for low-income people. Spouses and children could also receive benefits, no matter how much money the family had.

In addition, the stimulus package would offer a hefty subsidy to help laid-off workers retain the same health plans they had from their former employers.

Altogether, the economic recovery bill would speed $127 billion over the next two and a half years to individuals and states for health care alone, a fact that has Republicans fuming that the stimulus package is a back door to universal health coverage. . .

The bill would also create a new option for people 55 or older and for those who have worked for the same employer for 10 years or more. They could retain health benefits under Cobra, at their own expense, until they became eligible for Medicare at 65 or obtained coverage through another job. Under this option, employers said, younger workers could conceivably hold onto their coverage for decades.

NY Times - Fifty-one transit systems have recently proposed service cuts or fare increases, including those in Atlanta, Denver, New York, Phoenix, St. Louis, San Diego and Washington. If these cuts go through, they will make it harder for people to get to work (or look for work), and they will undermine one of the long-term goals of the stimulus package: laying the groundwork for a greener economy.

NY Times - The formulas by which the stimulus money for public schools would be allocated to states and local districts are complex, but take into consideration numbers of school-age children in poor families. The level received per student would vary considerably by state, according to an analysis by the New America Foundation, a research group that monitors education spending. New York would be among the biggest beneficiaries, at $760 per student, while New Jersey and Connecticut would fall near the bottom, with $427 and $409 per student, respectively. The District of Columbia would get the most per student, $1,289, according to the foundation's analysis.

Alec MacGillis, Washington Post - In testimony before the House Budget Committee, Alice M. Rivlin, who was President Bill Clinton's budget director, suggested splitting the plan, implementing its immediate stimulus components now and taking more time to plan the longer-term transformative spending to make sure it is done right.

"Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away," said Rivlin, a fellow at the Brookings Institution. The risk, she said, is that "money will be wasted because the investment elements were not carefully crafted.". . .

"Every penny of the $825 billion is borrowed against the future of our kids and grandkids, and so the question is: What benefit are we providing them? What are we doing for the country? It's the difference between real investment that will serve the nation for 30, 50 years and tax cuts, and that's a very poor tradeoff," said Rep. Peter A. DeFazio (D-Ore.). "I go to my district and people say, 'Yeah, I can use 10 extra bucks a week, but I would rather see more substantial investment.' We've gone through a couple bubbles that were borrowing and consumer-driven. We want a recovery that's solid and based in investment and productivity, and that points us at building things that will serve us decades to come."

Even some Republicans echo the call for more infrastructure spending, saying they would be more willing to support the bill if it showed more tangible and focused benefits, instead of being scattered across an array of existing programs. Rep. John L. Mica (Fla.), the ranking Republican on the transportation committee, called the proposed infrastructure spending "almost minuscule" and expressed regret that the administration had not crafted its plan around an ambitious goal such as building high-speed rail in 11 corridors around the country, which Mica said would cost $165 billion.

"They keep comparing this to Eisenhower, but he proposed a $500 billion highway system, and they're going to put $30 billion" in roads and bridges, he said. "How farcical can you be? Give me a break."

David Weidner, Market Watch - Some bankers got it right. So, why are they being ignored? If you believe our leaders, we can't find anyone to reform the financial system other than tax evaders and undistinguished and overpaid career regulators. When Robert Rubin explains away the financial crisis by saying "nobody was prepared for this" we have to just shrug and accept it. How else could we end up getting such yawn-inducing candidates as Tim Geithner, Mary Schapiro for the Securities and Exchange Commission, Dick Parsons as chairman of Citigroup Inc

Neither the old or new administration has inspired much confidence with its picks for top jobs. They are flawed candidates, each with a history that requires the public to grit its teeth, hold its nose and hope for the best. . .

We are left to wonder why President Obama has overlooked bankers with far better pedigrees for top jobs. . . What follows is an admittedly incomplete list. . . But if I can come up with these people off the top of my head, why can't anyone in Washington find these guys?

John Allison The chairman of BB&T Corp. not only led his bank through the dicey mortgage waters, but has been drafted as a populist hero for his stand against the government's banking bailout. It was Allison who wrote a stinging letter to Congress on Sept. 23, arguing that the contemplated bailout would reward poorly managed banks at the expense of properly managed banks like Winston-Salem, N.C.-based BB&T. Allison, 58, urged some controversial reforms like the elimination of "fair value" accounting, but as someone who built BB&T into one of the top 15-biggest banks by assets in the U.S. market during the last 30 years, and largely avoided the toxic mortgage mess, his record is hard to debate. Plus, he doesn't mince words. "The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley." Allison wrote. . .

Ralph Babb, the 60-year-old chairman and chief executive of Dallas-based Comerica Inc. Babb isn't even as well known as the other banking executives, and to be honest, he's a mystery to us who follow Wall Street in the Northeast. But if there's anything that recommends him, it is this: Comerica is the biggest bank in Michigan. Knowing what's happening to the auto industry, how it lost tens of thousands of jobs, is there anyone who isn't impressed that Comerica made nearly $200 million during the last 12 months? Here's another reason to bring him to Washington: the bank only had $133 million in charge offs in the fourth quarter on a balance sheet of more than $65 billion, and that was double the rate of a year ago. Analysts, such as Peter Winter at Bank of Montreal, note with a hint of astonishment that credit has held better at Comerica than many of its competitors. Consider that unemployment in Michigan is now about 10% and the state lost 30,000 jobs in October and November alone, according to the Bureau of Labor Statistics. Sure, Comerica has had trouble. Babb had to cut jobs. Profits fell to just $3 million in the fourth quarter. He's been criticized for abandoning Detroit, where the bank had been based for more than 150 years. And given economic conditions, Babb and Comerica are definitely going to have a tough 2009. Popular or not, Babb has done enough that he would merit an interview in my book. . .

Jeff Poor, Business & Media Institute - [GOP Senator Jim] DeMint, speaking Jan. 27 at The Heritage Foundation in Washington, D.C., explained the Obama administration will "create crisis and widespread panic" just like its predecessor in order to get Congress to act expeditiously.

"I've been around long enough to know whenever someone tells me I have to make a decision right now, my response is no," DeMint said. "That clears it up right away and I think more and more the Bush administration and now this administration knows that they're not going to get a quick reaction out of Congress unless they create crisis and widespread panic. And that's going to be their M.O. to get Congress to act."

Another senator, James Inhofe, R-Okla., explained the Bush administration used a similar tactic, under the direction of former Treasury Secretary Henry Paulson, to get the $700-billion TARP bailout bill passed by Congress back on Oct. 4.

DeMint said some Republicans now regret they voted for the TARP package, even though there is no way to gauge what might have happened had it not been passed.

"I think there's a lot of buyer's remorse among Republicans who voted for the bailouts of all kinds last year," DeMint said. "And, it's hard to prove that, some of them are saying, 'It didn't work out so well, but it'd been a lot worse if we hadn't.' It's hard, it's hard to argue that unless you know anything about how business works."

"And then it's obvious that what we did was inject a whole lot of uncertainty into the marketplace," DeMint said. "So no, I don't think there's discord because of that, uh, and I really don't blame my colleagues. If you got the President and the Secretary of the Treasury coming in saying, 'The world economy is going to collapse next week if we don't do something.'"

NY Times
- The Swedes have a simple message to the Americans: Bite the bullet and nationalize. . . With Sweden's banks effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.

Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.

Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.

In the process, Sweden wiped out existing shareholders.

By contrast, the United States government, so far, has bailed out banks without receiving large equity stakes in return, said Bo Lundgren, Sweden's minister of fiscal and financial affairs during the Swedish bank takeover.

"For me, that is a problem," said Mr. Lundgren, who called himself more of a free marketer than some Republicans. "If you go in with capital, you should have full voting rights."


Anonymous wellbasically said...

John Schnoover with the worst commentary yet... 5/6 of the world is in dire poverty and there's nobody left to sell to? And that Marxist loser line at the end.

January 29, 2009 11:17 PM  

Post a Comment

<< Home