Category Archives: Politics

Obama Happy to Cut Broad Range of Services to Preserve Pentagon Pork

In another manifestation of Obama’s continuing move to the right, his latest stunt has been to out-Republican the Republicans as a defender of the Pentagon. The GOP, which is out to cut $100 billion more from Obama’s version, has targeted the Department of Defense for $15 billion from an initial request of over $500 billion. From a statement released by the Administration:

The bill proposes cuts that would sharply undermine core government functions and investments key to economic growth and job creation and would reduce funding for the Department of Defense to a level that would leave the department without the resources and flexibility needed to meet vital military requirements….If the president is presented with a bill that undermines critical priorities or national security through funding levels or restrictions, contains earmarks or curtails the drivers of long-term economic growth and job creation while continuing to burden future generations with deficits, the president will veto the bill.

Contrast this stand-fast position on the military budget with Obama’s willingness to throw pretty much anyone else under the bus. John Walker provided a pithy illustration of the guns v. everything else tradeoff in a mock letter to low income Americans. Key section:

The 7 Things Really Wrong with the Treasury’s GSE Reform Plan

As readers no doubt know, the Treasury Department released its overdue plan for reform of the Fannie and Freddie, otherwise known as GSEs (for “government sponsored enterprise”) last Friday. We were surprised that some normally astute commentators, such as Mike Konczal and Felix Salmon, were taken in by this thin and misleading document. As banking expert Chris Whalen said by e-mail, “The proposal is completely disingenuous. Read 180 degrees opposite what it says.”

What is particularly striking is it is not very difficult to difficult to see through the stage management. Throughout the document, the Treasury calls its proposal a “plan” when it is anything but. Putting some stakes in the ground and then offering three mutually exclusive alternatives and no timetable for resolution is not a plan.

The reason for this failure to put forward a real proposal is that Treasury is trying to present itself as a fair broker of a politically fraught process. But that’s bunk. The outcome, unless the public wakes up to this new effort at looting, is already clear.

The fix is just about in.

Our Response to the Center for American Progress Objection to Our Post on Its GSE Reform Proposal

Readers have hopefully had the opportunity to read “The Center for American Progress Objects to Our Critique of Its GSE Reform Plan”, which contained an e-mail by David Min of the Center for American Progress presenting its bones of contention.

While we appreciate that the CAP has gone to the trouble to communicate with us directly, we are not persuaded by its arguments.

We’ll recap the e-mail and then address the issues individually:

1. You need to have some form of government guarantee to have a mortgage product that is fair to middle class consumers (his writing is a bit confused, at one point he uses “no” when he means “yes”, but this is the drift of his gist).

2. We’ve mistated who would eat “catastrophic risk” under the CAP scheme, since the Catastrophic Risk Fund and the new mortgage insurer investors would take losses first

3. Not all “banks” are behind or support the CAP proposal

4. This plan is the best option for the public and less lucrative to the financial services industry than a “privatization” model

Let’s dispatch these arguments in order.

The Center for American Progress Objects to Our Critique of Its GSE Reform Plan

We received this e-mail from David Min on February 11 about our post titled, “Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs.” That piece took a dim view of a GSE “reform” proposal from the Center for American Progress, which we pointed out is “THE mainstream Democratic think tank for Congress and the administration”.

We must note that this message mischaracterizes some aspects of our post (for instance, we discussed at length in the our post why we thought the catastrophic risk fund would come up short, and this e-mail does not address our argument). Nevertheless, we thought readers would be interested in his message. From Min:

Shoddy Anti Derivatives Reform “Study” From Firm That Falsely Claimed Top Academics as Advisor

t’s high time that reporters start lifting the veil to look at exactly who is behind the “research” put out by think tanks. Even drug company research, which many members of the public now know to view with some doubt, at least has an actual investigation of some sort underpinning it (the doubts about them usually involve study design and/or interpretation of results). Think tank end product should be taken with even more salt, since it too often is the intellectual equivalent of a CDO: taking junk ideas and dressing it up in a structure and a brand name so that most people will regard it as AAA-rated thinking.

A piece by Andrew Ross Sorkin at the New York Times is an all-too-rare and badly need hard look at the less than savory process of creating impressive-looking arguments in favor of special-interest serving policies.

Irish Bond Haircuts: Too Little, Too Late

The justification for Lenihan’s ruinous guarantee of both bank deposits and senior bondholders was partly a legal one. Irish law, like UK law, makes it hard to favour depositors ahead of bondholders; so FDIC-style resolutions aren’t an option. One might object that laws can be changed by sovereign governments, but the other justification was political: […]

Matt Stoller: The Egyptian Labor Uprising Against Rubinites

By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller

Via Wikileaks, we learned that the son of the former President of Egypt, Gamal Mubarak, had an interesting conversation in 2009 with Senator Joe Lieberman on the banking crisis. Gamal is a key figure in the forces buffeting Egypt, global forces of labor arbitrage, torture, and financial corruption. Gamal believed that the bailouts of the banks weren’t big enough – “you need to inject even more money into the system than you have”. Gamal, a former investment banker trained at Bank of America, helped craft Egypt’s industrial policy earlier in the decade.

Our purpose is to improve Egyptians’ living standards. We have a three-pronged plan to achieve this: favoring Egypt’s insertion into the global economy, reducing the state’s role in the economy, and giving the private sector greater freedom.

Deregulation, globalization, and privatization. This should be a familiar American recipe, commonly associated with former Treasury Secretary and Goldman Sachs chief Bob Rubin. That Rubinite rhetoric has been adopted by the children of strongmen shows the influence of Davos, the global annual conference of power brokers. Gamal, far more polished than his father, understood that the profit and power for his family lay in cooperating with foreign investors to squeeze labor as hard as possible.

Mubarak’s inner circle aligned themselves with international investors and set themselves against domestic business and military interests.

Why are Half of the FCIC Interviews Being Withheld?

The FCIC has made a great show of being transparent, but if you are going to make that your signature, you can’t engage in halfway measures. Lambert Strether, in an e-mail titled “A data conversion effort that shows FCIC’s “Resource Library” is farcically bad and obfuscatory” noted:

Obviously, any independent evaluation of the material is not at all a priority with these guys. Yes, they’ve made it easy enough to DISTRIBUTE, and no doubt there will be an iPhone app any day now. Yay. But as far as making it easy to EVALUATE, which takes data you can interchange and manipulate and search, everything they have done makes that harder. Every single thing.

More tooth gnashing from Lambert here and here.

Another mystery is why so many interviews are being withheld.

“Project Merlin” Flags a New Phase of the Bankers vs Regulators Showdown

I was reining myself too much when I wrote this. Or rather, I just wasn’t going far enough. On reflection, two or three more bullet points from the malodorous Treasury press release are worthy of comment, and there’s some extra context to add.

First, the purported object of Project Merlin was to achieve a new understanding between banks and government after the 2008 crash, the 2008-9 bailouts, and the 2009-2010 bonus rows. A Magna Carta-like settlement of rights and responsibilities, perhaps. So you’d think there’d be some public undertaking by the banks, promising never to screw up so mightily again: not to drift stupidly into massive dependence on market-based funding, perhaps, or simply, to manage credit risk better; or not to incentivize risk taking via heads-I win-tails-you-lose bonuses; or not to award performance-unrelated bonuses immediately after massive infusions of taxpayer support.

Oddly, none of that is in the Treasury press release

Guest Post: The Faulty Economic Development Model Behind America’s Support for Dictators (Instead of Democracies)

American leaders have wrongly assumed that dictatorships are better for emerging economies …

Mubarak’s Billions Beyond the Reach of Law

My mother is not so dumb. I’m visiting her today, and showed an economic analysis of the looting in Egypt by Gamal Mubarak and his cronies to her. The reaction:

That’s terrible. Those bloodsuckers. No wonder he didn’t want to leave. He wanted to make sure his money was safe first.

Turns out she was spot on. As I know by virtue of having read Nicholas Shaxson’s Treasure Islands (out in the UK, due to be published here in April) on tax havens, the world of “offshore” banking is vastly larger and more untouchable than most people realize. He describes in considerable detail about how buffers are built in so that funds become untraceable, and have further protections (as in if the authorities walk in to shut down a banking operation, the money can be moved through rapidly through several banking centers so it cannot be found, much the less seized).

And the de facto offshore banking protectorates of the US and the UK appear to be the state of the art. As George Monbiot observed:

Paulson Denies Culpability in Crisis, Yet Even Bear Turned Down His Deals

The release of the first batch of FCIC interview reveals interesting finger-pointing among some of the major players. We’ve argued (and in ECONNED, provided a considerable amount of supporting analysis) that the subprime shorts drove the demand for bad mortgages. There is no other explanation for the explosion of demand for “spready,” meaning bad, mortgages that started in the third quarter of 2005. As Tom Adams and I describe in a recent post:

Signs of recklessness were more visible in 2004 and 2005, to the point were Sabeth Siddique of the Federal Reserve Board, who conducted a survey of mortgage loan quality in late 2005, found the results to be “very alarming”.

So why, with the trouble obvious in the 2005 time frame, did the market create even worse loans in late 2005 through the beginning of the meltdown, in mid 2007, even as demand for better mortgage loans was waning? It’s critical to recognize that this is an unheard of pattern. Normally, when interest rates rise (and the Fed had begun tightening), appetite for the weakest loans falls first; the highest quality credits continue to be sought by lenders, albeit on somewhat less favorable terms to the borrowers than before.

In other words: who wanted bad loans?…

James Galbraith: Deficit Hawks Down – The Misconstrued “Facts” Behind Their Hype

By James K. Galbraith, a Vice President of Americans for Democratic Action who teaches at the University of Texas at Austin. Cross posted from New Deal 2.0.

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

So Why is the FCIC Protecting Bernanke & Co?

Yes, the question in the headline is rhetorical. We know that great efforts have been made and are continuing to be made not to reveal certain aspects of the financial crisis, and the only rationale that makes an iota of sense is the information would embarrass certain people in power.

The latest object lesson is the failure of the FCIC to post the full recording of its 2009 interview with Bernanke. The rationale is that the interviews contain “legal or proprietary information”, so it is being withheld for five years. Are these people unable to use a calendar? The critical phase of the crisis was pretty much over as of end of 2008. Any sensitive customer or transaction position information from that period is now stale.