Comments on the Economy from Baseline Scenario

One of my go-to sources for information on the American economy is Baseline Scenario, by Simon Johnson and James Kwak. Here are three recent posts (Neil Young and "all Along the Watchtower" is a special treat at the end):

A Colossal Mistake of Historic Proportions: The “JOBS” bill
Posted on March 19, 2012 by Simon Johnson

By Simon Johnson, co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You

From the 1970s until recently, Congress allowed and encouraged a great deal of financial market deregulation – allowing big banks to become larger, to expand their scope, and to take on more risks.  This legislative agenda was largely bipartisan, up to and including the effective repeal of the Glass-Steagall Act at the end of the 1990s.  After due legislative consideration, the way was cleared for megabanks to combine commercial and investment banking on a complex global scale.  The scene was set for the 2008 financial crisis – and the awful recession from which we are only now beginning to emerge.

With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital.  We find ourselves again on a bipartisan route to disaster. . . . .

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Who’s a Freeloader?
Posted: 14 Mar 2012 04:30 AM PDT
By James Kwak

. . . .The moral of the story is that if you follow the money, almost everyone is a freeloader; by this criterion, there’s no meaningful distinction between Social Security and Medicare, on the one hand, and welfare programs, on the other hand.
. . . .

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The Koch Brothers, The Cato Institute, And Why Nations Fail
Posted on March 8, 2012 by Simon Johnson
By Simon Johnson

A dispute has broken out between the Cato Institute, a leading libertarian think tank, and two of its longtime backers – David and Charles Koch. The institute is not the usual form of nonprofit but actually a company with shares; the Koch brothers own two of the four shares and are arguing that they have the right to acquire additional shares and thus presumably exert more control. The institute and some of its senior staff are pushing back.

According to Edward H. Crane, the president and co-founder of Cato, “This is an effort by the Kochs to turn the Cato Institute into some sort of auxiliary for the G.O.P.” Bob Levy, chairman of the Cato board, told The Washington Post: “We would take closer marching orders. That’s totally contrary to what we perceive the function of Cato be.” . . . .

Oh really, I thought Cato was already an "auxiliary for the G.O.P.”
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Neil Young & Bruce Springsteen - All Along The Watchtower

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The Calmer, Original Version:
Bob Dylan - All Along The Watchtower (Audio Only)

Was Wall Street Sugar Daddy, Standard & Poor's, Attempting to Use the "Markets" to Influence U.S. Budget Debate? (Of Course!)

On Monday of this week, beginning of Passover, lest you forget, Standard & Poor's issued a credit rating on your government. They wrote something like (or at least that is what the press flooded the information highway with):

"Standard & Poor's cut America's credit outlook to negative on fears U.S. lawmakers may not agree on a long-term plan to reduce the deficit. The move signals a 1-in-3 chance that America could lose its AAA rating within 2 years. A downgrade could mean higher borrowing costs for the U.S. gov't, businesses and consumers, exacerbating America's credit woes."

This was repeated over and over, ad nauseam, in the mainstream press, which includes NPR. Now, we are supposed to understand, I suppose, that Republican, and even Democrat calls, for cutting your heart out are perfectly reasonable.

My bullshit meter needle jumped immediately over to the right side of the bullshit dial, so I kept my eyes open for intelligent commentary.

Here is some of what I found this week on S&P's self-serving attempt at subverting our "democracy:"

Long-time progressive activist, Norman Soloman's BS meter apparently went off the scale immediately, and one day later he wrote in a RootsAction alert::

At a time when extreme budget cuts to Medicare and other vital programs are on the table in Congress, S&P is trying to escalate a deficit-reduction panic along Pennsylvania Avenue. In short, S&P is trying to manipulate Washington for Wall Street's gain.

S&P is the same outfit that rated hundreds of billions of dollars in subprime-backed securities as investment grade.

And S&P "gave Lehman, Bear Stearns and Enron top ratings right up until their collapse," the Center for Economic and Policy Research explains. S&P "has a horrible track record for judging credit worthiness."

In a related article concerning the trashing of the American Middle Class and poor, Robert Scheer wrote:

Published on Wednesday, April 20, 2011 by TruthDig.com
The New Corporate World Order
by Robert Scheer

The debate over Republicans’ insistence on continued tax breaks for the superrich and the corporations they run should come to a screeching halt with the report in Tuesday’s Wall Street Journal headlined “Big U.S. Firms Shift Hiring Abroad.” Those tax breaks over the past decade, leaving some corporations such as General Electric to pay no taxes at all, were supposed to lead to job creation, but just the opposite has occurred. As the WSJ put it, the multinational companies “cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show.”

See URL above for rest of article.

And then, yesterday, 4/20/11, William Greider weighed in on S&P:

Published on The Nation
The Credit Rating Hoax
William Greider | April 20, 2011

Standard & Poor’s, the self-righteous credit-rating agency, has a damn lot of nerve. It provoked scary headlines by solemnly threatening to “short” America. That is, downgrade the credit-worthiness of US Treasury bonds unless Congress and the president oblige creditors by punishing the citizenry with severe budget cuts. What a load of crap.

The headline I would like to see is this: “S&P Execs Face Major Fraud Investigation, Takes the Fifth Before Federal Grand Jury.”

News coverage on S&P’s credit warning typically failed to mention that Standard & Poor’s itself is in utter disrepute. It was an unindicted co-conspirator in the Wall Street deceitfulness that brought the nation to financial ruin. During the bubble of inflated housing prices, S&P and other rating agencies blessed the fraud-based mortgage securities issued by Wall Street banks with AAA ratings—deceiving gullible investors around the world and assuring bloated profits (and executive bonuses) for the greedy bankers. S&P provided cover for the massive scam that led to the crisis that sank the national economy.

That story line is the essential reason federal deficits soared in the age of Obama. National wealth was massively destroyed, government tax revenues collapsed, the feds spent trillions bailing out the imperiled financial system. In short, the bankers did it, abetted by see-no-evil accomplices like Standard & Poor’s. . . . .

See URL above for rest of aticle, etc.

Another relevant article by Greider, especially for hopelessly deluded Democrats:

Krugman Gets His History Wrong
Posted on June 1, 2009

Paul Krugman, like many other Democratic partisans, wants to blame Republicans and right-wingers for causing the financial disaster by deregulating the system.  This may be comforting to Dems but, alas, it requires them to falsify the history, as Krugman does in this morning's column. Krugman flogs the notorious Garn-St. Germain Depository Institutions Act of 1982 and quotes Ronald Reagan's extravagant praise for the measure. [http://www.nytimes.com/2009/06/01/opinion/01krugman.html?_r=1&hpw]

What Krugman leaves out is that financial deregulation actually started two years earlier -- before the Gipper got to Washington. A Democratic Congress and Democratic president (Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since).  It was the 1980 legislation that took the lid off banking and doomed the savings and loan industry, the mainstay that used to provide housing loans and home mortgages.  The thrifts were able to raise capital because they were allowed to pay a half percent more in interest to depositors. Bankers wanted them out of the way.  The Democratic party obliged.

See URL above for links and rest of article.

Lastly, hopefully, is the following article by Simon Johnson of "Baseline Scenario:"

While I may be accused of a radical left-wing mindset for my views on the environment and Capitalism, and occasionally of being a right winger, racist and xenophobe, for my views on population growth, mass immigration, and etc. (don't listen to me, I am beyond redemption, but do the labels really mean anything these days?), Simon Johnson is in fact an intermediary between "left" and "right," and was once an "International Monetary Fund's Economic Counsellor (chief economist)."

Is S&P’s Deficit Warning On Target?

Posted: 21 Apr 2011 05:26 AM PDT
By Simon Johnson

See link for important supporting info.

On Monday Standard & Poor’s announced that its credit rating for the United States was “affirmed” at AAA (the highest level possible), but that it was revising the outlook for this rating to “negative” – in this context specifically meaning “that we could lower our long-term rating on the U.S. within two years” (p.5 of the report).  This news temporarily roiled equity markets around the world, although the bond markets largely shrugged it off.

While S&P’s statement generated considerable media attention, the economics behind their thinking is highly questionable – although, given the random nature of American politics, even this intervention may still end up having a constructive impact on the thinking of both the right and the left.

It is commendable that S&P now wants to talk about the U.S. fiscal deficit – one wonders where they were, for example, during the debate about extending the Bush-era tax cuts at the end of last year.

The main problem is that S&P did not lay out even the most basic numbers or even point readers towards the nonpartisan and definitive Congressional Budget Office analysis of medium- and longer-term budget issues.[1]  This matters, because the CBO numbers definitely do not show debt exploding upwards immediately from today – if you’ll take the time to look at Table 1.1 in the latest CBO report, the line “debt held by the public at the end of the year” (meaning private sector holdings of federal government debt; excluding government agency holding of government debt) makes it clear – debt as a percent of GDP rises to 75.5 percent at the end of 2013 and then increases very little through 2019.

There are two serious budget issues made clear by the CBO’s analysis.  First, the big increase in debt in recent years has been primarily due to the financial crisis.  To see this, compare the January 2011 CBO forecast (cited above) with its view from January 2008 (see page XII, Summary Table 1), before the seriousness of the banking disaster – and ensuing recession – became clear.  At that point, the CBO expected federal government debt relative to GDP to reach only 22.6 percent (compare with 75.3% for the same year, 2018, from the 2011 projections.) 

In other words, the financial crisis will end up causing government debt to increase by more than 50 percent of GDP over a decade.  This is the major fiscal crisis of today and our likely tomorrow (for more on this, see this column).

Again, see link for important supporting info.
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Damn, here is another article:

Senate report on Wall Street crash: The criminalization of the American ruling class
18 April 2011

The US Senate Permanent Subcommittee on Investigations released a voluminous report last Wednesday on the Wall Street crash of 2008 that documents the fraud and criminality that pervade the entire financial system and its relations with the government.

The 650-page report is the outcome of a two-year investigation that involved over 150 interviews and depositions as well as the examination of subpoenaed emails and internal documents of major banks, government regulatory agencies and credit rating firms. The report, entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” establishes that the financial crash and ensuing recession were the result of systemic fraud and deception on the part of the mortgage lenders and banks, carried out with the collusion of the credit rating corporations and the complicity of the government and its bank regulatory agencies. . . .

See link above for rest of this informative article
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For another kind of "balance," don't forget to tune in on occasion to Scott Horton, at Antiwar Radio. I recommend Gareth Porter and Philip Giraldi.

Some Views on the Economy

In This Edition:

- A quiet crisis whispers of impending poverty

- The Private Sector Fallacy (Baseline Scenario)

- Krugman: The Third Depression

I am but one fallible soul in a universe of human emotion and thought (more like like a turbulent sea), so tonight I would like to bring to you once again, the thoughts of other souls, who might, and quite likely do, have a better understanding of our situation, in this case, the economic situation. They may, or may not be extreme, cheery, beyond the pale, and etc., but they are worth reading. In any event, they raise good questions and food for thought.

This first was referred from a fellow I used to read back in the 1990’s, who also happens to be on Jay Hansen’s “America 2.0” mailing list, to which I subscribe. He simply suggested that readers check out “The Automatic Earth” web page and so I did.

Here is what I found:

The Automatic Earth
A quiet crisis whispers of impending poverty

Ilargi: President Obama said during the G-20 meeting in Toronto, where he was told to take a hike by European leaders, that both he and British prime minister David Cameron

"... are aiming at the same direction, which is long-term sustainable growth that puts people to work..."

Somewhat curious, since his Vice President, Joe Biden, said a few days ago that

"...there's no possibility to restore 8 million jobs lost in the Great Recession."

Looks a lot as if the nonsense now starts to contradict itself. Perhaps we shouldn't expect anything else.

Biden then added that there is

"...no way to regenerate $3 trillion that was lost. Not misplaced, lost."

Don’t know what the Pennsylvania Avenue spin team thinks of Biden's remarks, but they do sound just about right to me, and a lot less hollow than Obama's empty fluff. Biden made me think of Springsteen's My Hometown (see video below), which has this verse:

Now main street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back
To your hometown, your hometown, your hometown

My Hometown--Bruce Springsteen


That sounds to me like a remarkably accurate portrait of much of America in a few years time. And Britain. And the rest of Europe.

The talk in the press has shifted towards debt, debt and more debt. And austerity. Whether Obama and the rest of the Keynes religion like it or not.

Ambrose Evans-Pritchard writes about an RBS note to its clients that warns of money printing by Bernanke. He says:

"America is one twist shy of a debt-deflation trap."

Ambrose is right there. But he's dead wrong in his subsequent remarks:

"There is no doubt that the Fed has the tools to stop this".

Oh, believe me, Ambrose, there's plenty doubt.

"Sufficient injections of money will ultimately always reverse a deflation," said Bernanke.

Bernanke may say what he wants, but that doesn't make him right. We are in the beginning phase of a debt deflation. And if you want to talk about ultimately, then I’ll give you this one: ultimately debt cannot be repaid with more debt. Haven't the past two years of failing policies taught these people anything? The Fed balance sheet stands at record highs, and bloating it even more will solve the problems? What is it with these folks? It's not as if Ambrose doesn't have the data:

"The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era."

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7% in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40% in a month."

No, the debt deflation must and will run its course, and Bernanke is devastatingly powerless to do anything about it. Not that he will ever admit it, even if he knew. But it's like having your local weatherman believe he controls the climate.

$2,5 trillion hasn't done the trick, and neither will $5 trillion. Money velocity is way down and so is M3 broad money supply. How would Bernanke turn that around? The money simply isn't going anywhere. Except into a deep dark void. It's disappearing faster than Bernanke can print.

Once the deflation has run its ugly course, and it will be horrendous, printing presses may cause inflation, and given the level of ass-clowniness among economists it's highly likely that they’ll pick such a course. They've never seen a crisis they couldn't make worse. But I’ll bet you ten to one that by then Bernanke won't be in office anymore.

I’m going to post an article I happenstanced upon today sort of like an extra intro. I don't often do that, but this piece by Texan journalist Richard Parker struck a special chord. And since it brought Joe Bageant to mind, and Joe just posted a new piece, I’ll close today’s TAE with that.

But first, for those of you who haven't seen it yet, once more the wonderful video from CaptainSheeple, "A Tribute to the Automatic Earth".

[The video depends on images from the great Depression—I would Have preferred images from present day life, the homeless and etc.]


Richard Parker: Recession as big as Texas pummels rural parts of America
Wimberley, Texas: The grass in the pasture stands tall. Throughout the spring, bluebonnets, Indian paint brushes and black-eyed Susans waved from the roadside. The Blanco River runs clear and full now, and the tourists return to the town square. A wet winter and cold spring have broken the grip of a two-year drought in Texas. But this plenty camouflages a drought of another sort: the economic one. Texas was slow to be swept up by the Great Recession. But now its pain has come home to big cities and small towns, as the lagging effects of the recession batter the ranchers, storekeepers and families who all withstood — until now.

While Washington's fury is directed toward the Gulf oil pill, it has largely lost sight of the recession. Yet Congress continues to weigh financial reform, and it would do well to remember the human cost of the Great Recession, triggered by the titans of Wall Street but borne heavily by everyday people. Since the crisis began and through the first quarter of this year, more than $2 trillion in mutual funds have been wiped out, 4.5 million homes have gone into foreclosure and 6.8 million jobs have been lost. With its art, eclectic character and natural beauty ours is one of the best little towns in the nation to visit; it says so right in the pages of The New York Times and Travel Holiday Magazine.

But for those of us who live here, a quiet crisis whispers of impending poverty. A merchant confides he can't take another year like the last two. A Mexican stonemason tells me that a single project tided his family through winter. A Realtor relays that all over town, people who never took a mortgage they couldn't afford are looking to give up, sell out and move on. The alternative is tallied and cataloged at the stately 102-year old, brick-and-limestone county courthouse over in San Marcos. Jack Hays, for whom this county was named, was a living legend for his exploits as a Texas Ranger, namely for fighting the Comanche.

Today, people are losing their homes not to raiding parties but to banks. There were 157 up for auction in April alone. For 15 withering months there have been 100 or more, according to the San Marcos Daily Record. It cites George Roddy, whose company dutifully counts all of them: "This foreclosure storm is far from over." The list carries the names of familiar ranches, springs and creeks. Yet the tale of Hays County is, sadly, more emblematic than unique in the vast landscape that stretches westward beyond the Hudson and the Potomac. Up in Austin, $6.5 billion in real estate value has been wiped out as if by a tornado. The resultant cuts in money for teachers, cops and services in the city are likely just around the corner.

In Austin and elsewhere, the conservative cultural boosterism of Texas initially downplayed the recession. Heir to George W. Bush's original political office and many of his finest traditions, Republican Gov. Rick Perry quipped of the recession in 2009, "We're in one?" It was his so-far-overlooked Katrina moment as time proved that bravado as prematurely false as that of his predecessor. "Texas has been hit much harder by the 2008-09 recession than previous ones," according to the Federal Reserve Bank of Dallas. Starting with a 6.1 percent unemployment rate at the beginning of the crisis, the job market fell throughout last year to end 2009 at an 8.2 percent unemployment rate. This year, manufacturing orders picked up, but the job creation rate stood stubbornly at zero in the first quarter.

Today in Texas, one in five people struggle to feed themselves and one in five children live in poverty, according to the Center for Public Policy Priorities in Austin, founded by Benedictine nuns. Perhaps Perry's economic prowess will trail him out of the state like a coyote when he seeks the presidency. However, this is not a Texas story but an American one, told in fiscal crises that stretch from California to Illinois, from Alabama to New York. It is in Washington where the Great Recession will be justly dealt with — or not. Realistically, after all, Congress and the regulators have assiduously polished their reputations as hand-maidens of the banks at least since the repeal of Glass-Steagall in 1999.

It doesn't take an expert to understand that much of the legislation in Congress is mere cover for the politicians and the big banks. It isn't designed to redress the latest crisis or stop the next one. It puts matters in the hands of regulators who consistently failed, to, well, regulate. Regardless of party, the politicians will let the big banks go on gambling with other people's money. The only real solution is to reinstate Glass-Steagall and break up the big banks. Only one senator, Democrat Ted Kaufman of Delaware, railed for that and against something dressed up in the Orwellian costume of "reform."

Back here in Texas, when European settlers first came to the Hill Country they pushed ever deeper, establishing ranches, farms and homesteads because those early wet years made the land lush, green and inviting. When the Comanche came they scared some settlers. But when the droughts came, revealing a harsh, arid landscape clinging to hard-scrabble rock, it forced the hands of far more. I have taken what I have left and squirreled it away in a small Hill Country bank. But I, too, have to face the inevitable: I ask my 16-year old, Olivia, what she thinks about selling our little place high in the oaks and cedars over the Blanco. She looks at her sister, Isabel, and reflects, then replies: "We've made a lot of good memories here." I nod. So we have. So I will wait until, or unless, this drought forces my hand, too.

More at The Automatic Earth
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And then there’s this bit from The Baseline Scenario, Simon Johnson’s and James Kwak’s informative web blog. The main point is this:

“Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.”


The Private Sector Fallacy
Posted: 30 Jun 2010
By James Kwak

Felix Salmon highlights an important point to bear in mind when it comes to banks and short sales. Actually, it’s an important to bear in mind when you’re thinking about any big private sector company, be in Citigroup or British Petroleum. Yes, companies do things in their own self-interest that hurt other people and may not be net benefits to society. But they also do things that are not in their own self-interest all the time, because companies just aren’t all that efficient.

Felix’s post is largely about two factors. One is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.

A third factor is simply that companies are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of big companies, of which I have seen many, from various perspectives.

Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.
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For another view, as far as any hint of reining in spending goes, there is this, from Paul Krugman, liberal economist, who writes for the New York Times (anyway you look at it, the common people, are in deep do-do):

June 27, 2010

The Third Depression
By PAUL KRUGMAN

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
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My view is that the Federal government needs some leeway and flexibility in spending during tough economic times, if they can prevent run-away inflation. They should, however, spend the money on the human needs of the general population, not on Wall Street. Local governments can't print money, and therefore need to cut budgets, to the extent that the Federal Government won't bail them out.

Looting Main Street (and you too!)

Some Articles on Wall Street, the Federal Government, & You:
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The Sickening Abuse Of Power At The Heart of Wall Street

Posted: 24 Apr 2010 12:02 PM PDT
By Simon Johnson, co-author of 13 Bankers

Here’s where we stand with regard to democratic discourse on the future our financial system: leading bankers will not come out to debate the issues in the open (despite being approached by reputable intermediaries after our polite challenge was issued) – sending instead their “astro turf” proxies to spread KGB-type disinformation.

Even Larry Summers [after watching the video at the link to the left, are you thinking this is someone you would like to trust?], who has shifted publicly onto the side the angels (surprising and rather late, but welcome anyway), cannot – for whatever reason – bring himself to recognize the dangers inherent in our unstable and too-big-to-manage banks.  Or perhaps he is just generating excuses that will justify not bringing the Brown-Kaufman amendment to the floor of Senate?

So let’s take it up a notch.

I strongly recommend that the responsible congressional committees request and require all assistant secretaries at the US Treasury (and other relevant political appointees over whom they have jurisdiction) to appear before them early next week.

The question will be simple: Please share your calendar of meetings this weekend, and provide us with a complete accounting of people with whom you met and conversed formally and informally. 

The finance ministers and central bank governors of the world are in Washington this weekend for the spring meetings of the International Monetary Fund.  As is usual, the world’s megabanks are also in town in force, organizing big meetings and small dinners.

Through these meetings dutifully troop US treasury officials, providing in-depth and off-the-record briefings to investors.

Banks such as JP Morgan Chase and the other top tier financial players thus peddle influence, leverage their access, and generally show off.  They accumulate information from a host of official contacts and discern which way policymakers – their “good friends” – are leaning.

And what is the megabank whisper mill working on?  Ignore the “economic research” papers these banks put out; that is pure pantomime for clients-to-be-duped-later.  I’m talking about what they are telling the market – communicated in specific, personal conversations this weekend.

They are telling people that, based on their inside knowledge, Greece and potentially other eurozone countries will default on their debt.  Perhaps they are telling the truth and perhaps they are lying.  Most likely they are – as always – talking their book.

But the question is not the substance of their whisper campaign this weekend, it is the flow of information.  Have they received material non-public information from US government officials?  Show me the calendar of the top 10 treasury people involved, and then we can talk about whom to summon from the private sector to testify – under oath – about what they were told or not told.

There is no question that the megabanks derive great power and enormous profit from their web of official contacts.  We should reflect carefully on whether such private flows of information between governments and “too big to fail” banks are entirely suitable in today’s unstable financial world.

Large global banks make money, in part, through nontransparent manipulation of information – this is the heart of the SEC charges against Goldman Sachs.  But the problem is much broader: the Wall Street-Washington corridor is alive and well on its way to another crisis that will empower, enrich, and embolden insiders (public and private) while impoverishing the rest of us.

The big players on Wall Street are powerful like never before – and they use this power to press for information and favors from sympathetic (or scared) government officials.  The big banks also appear hell-bent on abusing that power.  One consequence will be further destabilizing global financial markets – watch carefully what happens to Greece, Portugal, Ireland, and Spain at the beginning of next week. 

It is time for Congress to step in with a full investigation of the exact flow of information and advice between our major megabanks and key treasury officials.  Start by asking tough questions about exactly who exchanged what kind of specific, material, market-moving information with whom this weekend in Washington.

[Please go to Baseline Scenario for the many informative links.

Also see other good posts on regulation of Wall Street at Baseline Scenario:

Greek Bailout, Lehman Deceit, And Tim Geithner

Break Up The Banks

John Paulson Needs A Good Lawyer

The Best Thing I Have Read on SEC-Goldman (So Far)

And search their posts for other info.
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Other links:

Looting Main Street

Merkley amendment to ban conflict of interest trading by banks (PROP Trading Act)

U.S. charges Goldman with subprime fraud

American Kleptocracy

What’s Wrong with the Financial Reform Bill

Dylan Ratigan Mocks Wall Street

The Banks: "Too Big To Fail" Must Become "Small Enough To Fail."

In the following article, Simon Johnson explains why "Too Big To Fail" must become "Small Enough To Fail."

The Baseline Scenario
What happened to the global economy and what we can do about it
What Would Really End “Too Big To Fail”?
with 47 comments

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

As we move closer to a Senate – and presumably national – debate on financial reform, the central technical and political question is: What would prevent any bank or similar institution from being regarded – ultimately by the government – as so big that it would not be allowed to fail. If you are “too big to fail” (TBTF), credit markets see you as lower risk and as more attractive investment – enabling you to obtain more funding on cheaper terms, and thus become even larger.

Everyone agrees, in principle, this is a bad arrangement. It’s an unfair distortion of markets – giving huge banks the opportunity to grow bigger, because they have implicit government guarantees. It is also manifestly unsafe, because it encourages reckless risk-taking: If things go well, the TBTF bank gets the upside; if there is mismanagement of risk, or just bad luck, the downside falls to the taxpayer and to society more broadly. These costs can be huge: 8 million jobs lost since December 2007.

But there remains sharp disagreement on what exactly would end too big to fail. The main views fall primarily into three camps.
. . . .

Make our largest banks small enough to fail. There is simply no other way to really end the problem of Too Big To Fail.

See What Would Really End “Too Big To Fail”? for full article, including Johnson's lucid arguments and associated links.

Hey, That Horse is Still Alive!: More on Citizens United

In This Issue:

- Ralph Nader on Citizens United & What Can Be Done About It

- Polls on Citizens United and Limiting Corporate Speech

- Paul Krugman and Simon Johnson on Obama Sucking Up to Wall Street
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The Case Against Corporate Speech

By Ralph Nader and Robert Weissman

February 10, 2010 " Wall Street Journal" -- Last month, by a vote of 5 to 4, the U.S. Supreme Court gave carte blanche to the world's largest corporations to spend unlimited sums of money to support or oppose candidates for elected office. Big Business domination of Washington and state capitals will now intensify.

The case of Citizens United portends dire consequences for the nation's constitutional premise of "we the people," not we the corporations. Our constitution, at its origins and through all of its amendments, makes no mention of corporate entities, only human beings and their government.

For 120 years, it was not Congress but the Supreme Court that expanded the definition of "persons" to include for-profit corporations for the purposes of applying constitutional protections. For 30 years, the court has granted First Amendment speech protections to corporations as "artificial persons."

But not until last month has the court declared that the First Amendment gives corporations the right to spend unlimited money to influence elections. The court majority, self-styled believers in precedent and judicial restraint, overturned two major Supreme Court decisions and reversed decades of campaign-finance laws aimed at preventing corporations from having undue influence over local, state and national elections.

Granted, existing campaign-finance rules have been inadequate. Regular news reports document how corporate spending debases elections and elected officials. But that doesn't mean things can't get worse. The court has challenged whatever social mores are left that view no-holds-barred corporate cash register politics as unseemly.

The disparities between individual contributions and available corporate dollars mock any pretense of equal justice under the law. A total of $5.2 billion from all sources was spent in the 2008 federal election cycle (which includes 2007 and 2008), according to the Center for Responsive Politics. For the same two-year period, ExxonMobil's profits were $85 billion. The top-selling drug, Pfizer's Lipitor, grossed $27 billion in sales during that time.

Such disparities invite corporations to spend whatever they believe necessary to further entrench the corporate state. The money they now spend will be used to reward friends and punish opponents.

Corporations know that money makes a big difference when it comes to blocking protections for workers, consumers and the environment. Wall Street, health insurance and drug companies, fossil fuel and nuclear power companies, and defense corporations have been hard at work defeating common-sense reforms that would make them more accountable.

Do we want more elected officials to believe that to challenge corporate agendas is to risk their career?

There is every reason to expect that there will be much more direct corporate electoral funding in the wake of Citizens United. Funneled without limit through trade associations and shadowy front groups able to run vicious attack ads without identifying their corporate patrons, such lucre will deter good candidates from running for office because they won't want to have anything to do with such dirty politics.

What can be done about this accelerating drift into the muck?

In the absence of a future court overturning Citizens United, the fundamental response should be a constitutional amendment. We must exclude all commercial corporations and other artificial commercial entities from participating in political activities. Such constitutional rights should be reserved for real people, including, of course, company employees, to enhance a government of, by and for the people.

Corporations are not humans. They do not vote. They should not be accorded a constitutional right to influence elections or public policies, especially given their enormous embedded privileges and immunities compared to real people.

While the arduous amendment process is underway, the progressive response to Citizens United rests with several legislative and administrative initiatives.

First, the Fair Elections Now Act in the House and Senate would provide candidates a base of funding to run viable campaigns without being indentured to corporate money. But these bills would not prevent corporations from overwhelming the public funding.

Second, a strong shareholder-protection policy should limit corporate political spending. This would require executives to get support from an absolute majority of their shareholders before spending any money on politics.

Third, as the nation's largest customer, the government could refuse, by statute or executive order, to contract with or provide subsidies, handouts and bailouts to any company that spends money directly in the electoral arena. This would help avoid corruption. No longer would Citigroup or General Motors, which were saved by taxpayers and are wards of Washington, be able to lobby as if they were stalwarts of sink-or-swim free enterprise.

As Justice John Paul Stevens, writing for the minority in Citizens United, demonstrated, the Framers did not intend for the First Amendment to confer protections on businesses beyond freedom of the press. The robust guarantees of the First Amendment are vital for real, live human beings, to ensure their expressive and democratic participative rights are protected. There can be no level playing field between the giant multinational corporations and individual citizens without such differential rights.

It is worth recalling that representative democracy is rule by the people. Corporations, first chartered into existence over 200 years ago by the states, were meant to be our servants, not our masters. Especially in the aftermath of Citizens United, it is time to right this relationship.

Copyright ©2010 Dow Jones & Company, Inc.
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Polls on Citizens United and Limiting Corporate Speech

About a week and a half ago I heard a news report stating that the majority of Americans agree with the Supreme Court ruling in Citizens United. When I looked at the actual Gallup Poll numbers, a different picture emerged.

A careful reading though, reveals that while 57% agreed that "campaign money given to political candidates" is a form of protected free speech, a whopping 76% think the government "should be able to limit the amount corporations and unions can give."

The Roper Center also reports that a FOX News poll found "that voters disapproving of the decision 53-27."
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The Baseline Scenario
What happened to the global economy and what we can do about it

President Obama On CEO Compensation At Too Big To Fail Banks
with 80 comments

Bloomberg today reports President Obama as commenting on the $17 million bonus for Jamie Dimon of JP Morgan Chase and the $9 million bonus for Lloyd Blankfein of Goldman Sachs,

“I know both those guys; they are very savvy businessmen,”

and

““I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.” [Emphasis Added]

Taken separately, these statements are undeniably true. But put them together in the context of the Bloomberg story – we have to wait until Friday for the full text of the interview – and the White House has a major public relations disaster on its hands.

Does the president truly not understand that Dimon and Blankfein run banks that are regarded by policymakers and hence by credit markets as “too big to fail”?

This is the antithesis of a free-market system.[Emphasis Added] Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout (details here) means that the playing field is now massively tilted in favor of these banks. (I put this to Gerry Corrigan of Goldman and Barry Zubrow of JP Morgan when we appeared before the Senate Banking Committee last week; there was no effective rejoinder.)

Not only that, but the incentives for the people running these megabanks is now to take on reckless amounts of risk. They get the upside (for example, in these compensation packages) and – when the downside materializes – this belongs to taxpayers and everyone who loses a job. (See my testimony to the Senate Budget Committee yesterday; there was no disagreement among the witnesses or even across the aisle between Senators on this point.)

Being nice to the biggest banks will not save the midterm elections for the Democrats. The banks’ campaign contributions will flow increasingly to the Republicans and against any Democrats (and there are precious few) who have fought for real reform.

The president’s only political chance is to take on the too big to fail banks directly and clearly. He needs to explain where they came from (answer: the Reagan Revolution, gone wrong), how the problem became much worse during the last administration, and how – in credible detail – he will end their reign.

What we have now is not a free market. It is rather one of the most complete (and awful) instances ever of savvy businessmen capturing a state and the minds of the people who run it. Is this really what the president seeks to endorse?

By Simon Johnson
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FEBRUARY 10, 2010, 10:59 AM
Obama Clueless

Paul Krugman

I’m with Simon Johnson here: how is it possible, at this late date, for Obama to be this clueless?

The lead story on Bloomberg right now contains excerpts from an interview with Business Week which tells us:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Obama sought to combat perceptions that his administration is anti-business and trumpeted the influence corporate leaders have had on his economic policies. He plans to reiterate that message when he speaks to the Business Roundtable, which represents the heads of many of the biggest U.S. companies, on Feb. 24 in Washington.

Oh. My. God.

First of all, to my knowledge, irresponsible behavior by baseball players hasn’t brought the world economy to the brink of collapse and cost millions of innocent Americans their jobs and/or houses.

And more specifically, not only has the financial industry has been bailed out with taxpayer commitments; it continues to rely on a taxpayer backstop for its stability. Don’t take it from me, take it from the rating agencies:

Copyright 2010 The New York Times Company

Simon Johnson on Financial Sector of US Economy

A little "policy wonky" for some, i.e., intelligent, but if you can't believe Simon Johnson, who can you believe?
For Bio see: http://en.wikipedia.org/wiki/Simon_Johnson_(economist)
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The Quiet Coup
The Atlantic, May 2009
Simon Johnson

http://www.theatlantic.com/doc/200905/imf-advice

"From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy
. . . .
The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.."

For entire article please see: http://www.theatlantic.com/doc/200905/imf-advice
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Measuring The Fiscal Costs Of Not Fixing The Financial System
Posted: 05 Dec 2009 06:30 AM PST
Simon Johnson

http://baselinescenario.com/2009/12/05/measuring-the-fiscal-costs-of-not-fixing-the-financial-system/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29

[For links, please see full article link above.]

This post is a slightly edited version of remarks prepared for delivery at Unwinding Public Interventions in the Financial Sector: Preconditions and Practical Considerations, IMF High-Level Conference, Thursday, December 3, 2009, Washington D.C. I participated in Session 2: Managing Fiscal Risks—Public Finance Aspects of Unwinding.

The Problem

1) The underlying fiscal problems of the U.S. have significantly worsened as a direct result of how the financial crisis of 2008-09 was handled.

2) The U.S. economic system has evolved relatively efficient ways of handling the insolvency of nonfinancial firms and small or medium-sized financial institutions. A large number of these institutions have failed so far this year, without causing major disruption to the economy.

3) The U.S. does not yet have a similarly effective way to deal with the insolvency of large financial institutions. The dire implications of this gap in our system have become much clearer since fall 2008 and there is no immediate prospect that the underlying problems will be addressed by the regulatory reform proposals currently on the table. In fact, our underlying banking system problems are likely to become much worse.

4) The executives who run large banks are aware that the insolvency of any single big bank, in isolation, could potentially be handled by the government through the same type of FDIC-led receivership process used for regular banks. However, these executives also know that if more than one such bank were to fail (i.e., default on its obligations), this could cause massive economic and social disruption across the U.S. and global economy. The prospect of such disruption, they reason, would induce the government to provide various forms of bailout. They also invest considerable time and energy into impressing this point onto government officials, in a wide range of interactions.

5) Even more problematic is the underlying incentive to take excessive risk in the financial sector. With downside limited by generous government guarantees of various kinds, the head of financial stability at the Bank of England bluntly characterizes our repeated boom-bailout-bust cycle as a “doom loop.” The implication is repeated bailout and fiscal stimulus-led recovery programs.

6) The implementation of the Troubled Asset Relief Program (TARP) exacerbated the perception (and the reality) that some financial institutions are “Too Big to Fail.” This lowers their funding costs, enabling them to borrow more and to take more risk. The consequences include a contingent fiscal liability – both for specific bank rescue measures and, on a larger scale, the fiscal stimulus needed to offset a potential future credit crisis.

7) U.S. national debt will increase substantially as a result of direct bank bailouts and, more importantly, the discretionary fiscal stimulus needed to keep the economy from declining – as well as the standard deficit due to cyclical slowdown (a feature of the “automatic fiscal stabilizers”.) Privately held net government debt will increase from around 40 percent of GDP to the 70-80 percent of GDP.

8) If any country provides unlimited government support for its financial system, while not implementing orderly bankruptcy-type procedures for insolvent large institutions, and refusing to take on serious governance reform and downsizing for major troubled banks, it would be castigated by the United States and come under pressure from the IMF. Yet this is the approach that the U.S. has implemented.

9) At the heart of every crisis is a political problem – powerful people, and the firms they control, have gotten out of hand. Unless this is dealt with as part of the stabilization program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Again, this is the problem in the U.S. looking forward.

10) The Obama administration argues that its regulatory reforms will rein in the financial sector in this regard. Very few outside observers – other than at the largest banks – find this convincing.

Towards a Solution

1) As legislation on restructuring the banking industry moves forward, attention on Capitol Hill is increasingly drawn to the issue of bank size. Should our biggest banks be made smaller?

2) There is a strong precedent for capping the size of an individual bank: The United States already has a long-standing rule that no bank can have more than 10 percent of total national retail deposits. This limitation is not for antitrust reasons, as 10 percent is too low to have pricing power. Rather, its origins lie in early worries about what is now called “macroprudential regulation” or, more bluntly, “don’t put too many eggs in one basket.”

3) This cap was set at an arbitrary level — as part of the deal that relaxed most of the rules on interstate banking — and it worked well (until Bank of America received a waiver).

4) Probably the best way forward is to set a hard cap on bank liabilities as a percent of gross domestic product; this is the appropriate scale for thinking about potential bank failures and the cost they can impose on the economy. Of course, there are technical details to work out — including how the new risk-adjustment rules will be enacted and the precise way that derivatives positions will be regarded in terms of affecting size. But such a hard cap would the benchmark around which all the specifics can be worked out.

5) What is the right number: 1 percent, 2 percent, or 5 percent of G.D.P.? No one can say for sure, but it needs to be a number so small that we all agree any politician who cares about our future would have no qualm letting it fail, and when doing so have confidence that our entire financial system is not at risk as it fails.

6) A hard cap at 4 percent of G.D.P. seems about right for a bank with the most conservative possible portfolio. This would mean no bank in our country would have no more than about $500 billion of liabilities, even with a relatively low risk portfolio. On a risk-adjusted basis, most investment banks would face a cap around 2 percent of GDP.

7) A large American corporation would still be able to do all its transactions using several banks. They would even be better off — competition would ensure that margins are low and the banks give the corporates a good deal. This would help end the situation where banks take an ever-increasing share of profits from our successful nonfinancial corporations (as seen in the rising share of bank value added in G.D.P. in recent decades).

8) Indeed, the whole world would soon realize that our banks are more competitive and offer better pricing than others.

9) If, as might occur, the Europeans subsidized their big banks with cheap finance and implicit subsidies, the U.S. should let our nonfinancial corporates benefit and understand that our banks may become ever smaller. We can let Europeans subsidize banking because we all get better deals through their taxpayer subsidies, and then our corporates will have more profits to bring back to America.

10) Today our politicians and regulators lack credibility. They have bailed out too many banks and need to show they have truly regained the upper hand — by showing that they are installing such a hard size cap rule without exception.

11) The litmus test is simple. Does Goldman Sachs continue to grow, and continue to be regarded as almost as good a risk as the United States government (Goldman’s Credit Default Swap spread is currently around only 70 basis points above that of the United States), because it has demonstrated it is too big to fail? Or, will the government impose a cap on the size of such institutions and require Goldman Sachs to find sensible ways to break itself into pieces – becoming small enough so that it will not be bailed out again next time?

In the Absence of Real Reform

1) Real progress towards reducing the risks inherent in the U.S. financial system is unlikely. As long as there are financial institutions that are Too Big To Fail, we face a potential fiscal cost. We should recognize this in our government budget and balance sheet accounting.

2) The overriding principle behind IMF fiscal assessments is the need to capture true total fiscal costs. Best practice for the U.S. needs to reflect this approach.

3) All subsidies and taxation – including the entire cost of supporting the continued existence of large banks – should be reflected transparently in the budget and subjected to the prioritization of the budgetary process.

4) Our current accounting for guarantees and governments’ assumption of other contingent liabilities create the impression that government actions to support the banking system are costless. This is a dangerous illusion – as seen in the recent increase in US federal government deficit and debt.

5) If we don’t recognize these costs explicitly, we run the risk of taking on ever more contingent liability. If the financial system reaches the point where its failure cannot be offset by fiscal (and monetary) stimulus, then a Second Great Depression threatens.

6) Next time, we cannot be certain that the available size of fiscal stimulus – either in the US or worldwide – will match the negative shock to demand caused by the credit crisis. Either we will already have too much debt or we will be constrained by the consequences of taking on even more debt. Or – just as in 1930 – the financial decelerator will simply be too large to be offset by any feasible fiscal measures.

By Simon Johnson

Thinking About Health Care and Financial Reform, + P. A. Sells Out--Again & Obama Hypocrisy

In This Edition:

- Who Pays for Health-Care Reform, and Is It Fair?
- What About Financial Sector Reform?
- Abbas helps Israel bury its crimes in Gaza
- "Mr. Hope & Reform" Comfortable with Rank Hypocrisy of Double Standard on Israel's Nukes
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Who Pays for Health-Care Reform, and Is It Fair?
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/22/AR2009092200044.html?nav=rss_opinion/columns
By Simon Johnson and James Kwak
Tuesday, September 22, 2009; 12:36 AM

No one is against expanding health coverage on principle. As we come down to crunch time, the health-reform debate is all about money.

Once you accept that health insurance plans must meet some minimal criteria and that everyone has to have one (or pay a penalty), you are left with the issue of funding. If 30 million to 45 million additional people will have health insurance, then someone has to pay for it. But the first thing to bear in mind is that, seen from the perspective of American society as a whole, this isn't money that we lose; it's money that we spend on health care for members of society and that goes to health-care providers who are, by and large, also members of society. In this view, in other words, it's a question of redistribution.

This should not be surprising. Insurance itself is a mechanism for redistribution. Take homeowners insurance: Money flows from people who don't lose their houses to people who do. In homeowners insurance, the general principle is that the premiums you pay should be proportional to your expected losses (the damage you could suffer times the probability of that damage). We generally consider this to be fair; if your insurance premiums are too high, you could sell your house and move to a smaller one.

The analog to this would be to force everyone to pay the expected cost of his health care. This would be "fair" in the sense that each person's costs would be proportional to his expected burden on the system. But it would break down because you cannot trade in your body for a healthier one that is cheaper to insure. As a result, the health-care bills on the table require that insurers charge the same amount to all people of the same age.

But even after taking differences in people's health status out of the equation, the numbers still don't add up on their own. The median household income in 2008 was $50,000. The average family health insurance policy provided through employer coverage cost more than $13,000. About 8 million people in households making $50,000 to $75,000 (and 29 million in households making less than $50,000) are uninsured. Asking them to suddenly start paying $13,000 per year for health insurance -- and potentially thousands more in out-of-pocket expenses -- is not going to work.

As a result, health-care reform has to involve redistribution. But this should not come as a big surprise. Social Security, for example, is a vast redistribution scheme. The amount you contribute depends on how much you make (up to the income cap, which makes little sense); the amount you receive depends partially on how much you contribute, but also on many other factors, most notably how long you live.

The real question is: Who pays? The House bill has the most generous subsidies, reaching up to 400 percent of the poverty level, and pays for them in part through an increase in income taxes for the very rich. Sen. Max Baucus's bill has less generous subsidies, and instead of taxing the rich directly, it imposes new fees on insurers, drugmakers and medical device manufacturers, and also has an "excise tax" on expensive health insurance plans. (It also includes a shockingly stupid provision to tax employers for hiring low-income people if they don't provide health insurance, but let's assume someone in the Senate Finance Committee comes to his senses and they kill that.)

Once you've made health care mandatory, lower subsidies are a tax on the middle class, plain and simple. The individual mandate -- the requirement that everyone have health insurance -- is itself a tax. The difference from Social Security and Medicare -- other redistribution schemes with mandatory taxes -- is that the individual mandate taxes the very people who are supposed to benefit from the program. Subsidies lower that tax but don't eliminate it. So the main people paying for health care reform are middle-class Americans who don't have insurance now and will probably get insurance after reform. Is that fair? It depends on whether you think taxes should be an even trade between taxpayer and government -- you get what you pay for -- or you think taxes are a way of spreading the benefits that government provides to all of society.

Taxing the rich is, by contrast, a tax on people who are most able to pay, but also the people who will benefit the least from health-care reform. Because the marginal utility -- the amount of extra enjoyment gained -- of one dollar is much lower for a rich person than for a middle-class person, it is also the most painless way to generate tax revenue. Is that fair? Again, it depends on how you see the relationship between taxpayers and the government.

The excise tax is more complicated. All other things being equal, it should affect the rich more than the poor. But other things are not equal. Some people need more expensive plans because of their health conditions. Health care is more expensive in some states than in others. So who pays will depend on a lot of factors that most people have little control over. (The one thing we can be sure of is that insurers won't pay; though this is billed as a tax on insurers, they will just pass the costs to consumers.) The excise tax would also have knock-on effects: As employers start hitting the threshold at which their plans become taxed, they and their employees will shift into cheaper plans with higher deductibles and higher copays -- which means that more of the net costs will shift to employees. Is that fair?

The challenge today is that politicians are wary of voting for anything that is called a tax, even though we know we need to pay for health-care reform somehow. In the end, if you think that individuals are responsible for dealing with their problems on their own, you probably see health-care reform as a special interest program for the uninsured and think the uninsured should pay for it (through lower subsidies). On the other hand, if you think that all Americans should have the right to a minimal level of health insurance, you probably think health-care reform is good for America, pure and simple, and favor increasing taxes on the people who can actually pay them.
_________________________________

What About Financial Sector Reform?
Where Are We Again? (Pre-G20 Pittsburgh summit)
Simon Johnson--Baseline Scenario
http://baselinescenario.com/2009/09/14/where-are-we-again-pre-g20-pittsburgh-summit/#more-4969

This revision to our Baseline Scenario is required reading for my Global Entrepreneurship Lab (GLAB) class at MIT this week.
[see link above for entire article and all links to other articles]

Financial markets have stabilized – people believe that the US and West European governments will not allow big financial institutions to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. . . . .

We are on a dangerous and slippery slope.

Yet there is no real reform underway or on the table on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare (and even there, the final achievement looks likely to be limited).

The latest New York Times assessment of financial sector reforms is bleak. The Washington Post is running an excellent series on exactly how and why the banks have become stronger (part one; part two). Big banks have risen greatly in power over the past 20 years and were already strong enough this winter to ensure there was no serious attempt to rein them in.

Financial innovation is under intense pressure in both popular and technocratic discussions, but does not face any effective regulatory controls (our view; Adair Turner). This is a dangerous combination. Unless and until there is real re-regulation of finance, repeated major crises seem hard to avoid. Wall Street responds, “we have changed how we behave,” but this must at best be cyclical – after any emerging market crisis, the survivors are careful for a while. But then they go on another spree and you re-run the same boom-bubble-bust-bailout sequence, in a slightly different form and with potentially more devastating consequences. The potential for serious crisis will not decline unless and until you change incentives – and this frequently requires a change in power structure (think Korean chaebol, Thai banks, or Indonesia under Suharto).

The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before mid-2010. The financial markets are not so convinced – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices. The conventional oil market view is that there is plenty of spare capacity so we cannot experience the price spike of early 2008; we’ll see if this proves complacent.

Emerging markets, in particular in Asia, are increasingly viewed as having “decoupled” from the US/European malaise. Increasingly, we hear that Asia’s fundamentals allow strong growth irrespective of what is happening in the rest of the world. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new round of financial speculation – based in part on a “carry trade” that now runs out of the US. Most Asian currencies are a one-way bet against the US dollar over the medium-term, as they are already considerably undervalued and their central banks actively intervene to prevent significant appreciation. The appetite for this kind of risk among investors is up sharply.

What should we expect from the Pittsburgh summit on September 24-25? “Nothing much” seems the most likely outcome. The leadership of industrial countries does not want to take on the big banks, and the technocrats have contented themselves with very minor adjustments to key regulations (“dinky” is the term being used in some well-informed circles.) The G7/G8/G20 is back to being irrelevant or, worse, mere cheerleaders for the financial sector.

Overall, the global economy begins to recover, but the crisis created huge lasting costs for many poorer people in the US and around the world. Recovery without financial sector reform and reregulation sows the seeds for the next crisis. The precise timing of crises is always uncertain but the broad contours are clear – just like many emerging markets over past decades, the US, Europe, and the world economy look set to repeat the boom-bailout cycle. This will go on until at least until one or more major countries goes completely bankrupt, or until a real financial reform movement takes hold either among technocrats or more broadly politically – and the consensus then shifts back towards the kind of much tighter financial regulation that was established after the last major global fiasco in the 1930s.

-- Simon Johnson

Abbas helps Israel bury its crimes in Gaza
Ali Abunimah, The Electronic Intifada, 2 October 2009
http://electronicintifada.net/v2/article10807.shtml

Representing the moribund Palestine Liberation Organization, the executive committee of which seen here, Mahmoud Abbas has abandoned a resolution to hold Israel accountable for its alleged war crimes in Gaza. (MaanImages/POOL/Omar Rashidi)

Just when it seemed that the Ramallah Palestinian Authority (PA) and its leader Mahmoud Abbas could not sink any lower in their complicity with Israel's occupation of the West Bank and the murderous blockade of Gaza, Ramallah has dealt a further stunning blow to the Palestinian people.

The Abbas delegation to the United Nations in Geneva (officially representing the moribund Palestine Liberation Organization) abandoned a resolution requesting the Human Rights Council to forward Judge Richard Goldstone's report on war crimes in Gaza to the UN Security Council for further action. Although the PA acted under US pressure, there are strong indications that the commercial interests of Palestinian and Gulf businessmen closely linked to Abbas also played a part.

The 575-page Goldstone report documents evidence of shocking Israeli war crimes and crimes against humanity during last winter's assault on the Gaza Strip which killed 1,400 Palestinians, the vast majority noncombatants and hundreds of them children. The report also accuses the Palestinian resistance movement Hamas of war crimes for firing rockets into Israel that killed three civilians.

Goldstone's report was hailed by Palestinians and supporters of the rule of law worldwide as a watershed; it called for suspects to be held accountable before international courts if Israel failed to prosecute them. Israel has no history, ever, of holding its political and military leaders judicially accountable for war crimes against the Palestinians.

Israel was rightly terrified of the report, mobilizing all its diplomatic and political resources to discredit it. In recent days, Prime Minister Benjamin Netanyahu claimed that if the report were acted on, it would "strike a severe blow to the war against terrorism," and "strike a fatal blow to the peace process, because Israel will no longer be able to take additional steps and take risks for peace if its right to self-defense is denied."

Unsurprisingly, an early ally in the Israeli campaign for impunity was the Obama Administration, whose UN ambassador, Susan Rice, expressed "very serious concerns" about the report and trashed Goldstone's mandate as "unbalanced, one-sided and basically unacceptable." (Rice was acting true to her word; in April she told the newspaper Politico that one of the main reasons the Obama Administration decided to join the UN Human Rights Council was to fight what she called "the anti-Israel crap.")

Goldstone, whose daughter has publicly described her father as a Zionist who loves Israel, is a former judge of the South African Supreme Court, and a highly respected international jurist. He was the chief prosecutor at UN war crimes tribunals for Rwanda and the former Yugoslavia.

That the Goldstone report was a severe blow to Israel's ability to commit future war crimes with impunity is not in doubt; this week bolstered by the report, lawyers in the UK asked a court to issue an arrest warrant for visiting Israeli Defense Minister Ehud Barak. That action did not succeed, but Israel's government has taken extraordinary measures in recent months to try to shield its officials from prosecution, fearing that successful arrests are just a matter of time. Along with the growing international campaign of boycott, divestment and sanctions, the fear of ending up in The Hague seems to be the only thing that causes the Israeli government and society to reconsider their destructive path.

One would think, then, that the self-described representatives of the Palestinian people would not casually throw away this weapon. And yet, according to Abbas ambassador Ibrahim Khraishi, the Ramallah PA shelved its effort at the request of the Americans because "We don't want to create an obstacle for them."

Khraishi's excuse that the resolution is merely being deferred until the spring does not pass muster. Unless action is taken now, the Goldstone report will be buried by then and evidence of Israel's crimes -- necessary for prosecutions -- may be harder to collect.

This latest surrender comes less than two weeks after Abbas appeared at a summit in New York with US President Barack Obama and Netanyahu despite Obama abandoning his demand that Israel halt construction of Jewish-only settlements on occupied Palestinian land. Also under US pressure, the PA abandoned its pledge not to resume negotiations unless settlement-building stopped, and agreed to take part in US-mediated "peace talks" with Israel in Washington this week. Israel, meanwhile, announced plans for the largest ever West Bank settlement since 1967.

What makes this even more galling, is the real possibility that the PA is helping Israel wash its hands of the blood it spilled in Gaza for something as base as the financial gain of businessmen closely linked to Abbas.

The Independent (UK) reported on 1 October:

"Shalom Kital, an aide to defense minister Ehud Barak, said today that Israel will not release a share of the radio spectrum that has long been sought by the Palestinian Authority to enable the launch of a second mobile telecommunications company unless the PA drops its efforts to put Israeli soldiers and officers in the dock over the Israeli operation." ("Palestinians cry 'blackmail' over Israel phone service threat," The Independent, 1 October).

Kital added that it was a "condition" that the PA specifically drop its efforts to advance the Goldstone report. The phone company, Wataniya, was described last April by Reuters as an "Abbas-backed company" which is a joint venture between Qatari and Kuwaiti investors and the Palestinian Investment Fund with which one of Abbas' sons is closely involved. Moreover, Reuters revealed that the start-up company apparently had no shortage of capital due to the Gulf investors receiving millions of dollars of "US aid in the form of loan guarantees meant for Palestinian farmers and other small to mid-sized businesses" (See "US aid goes to Abbas-backed Palestinian phone venture," Reuters, 24 April 2009).

Just a day before the Abbas delegation pulled its resolution in Geneva, Nabil Shaath, the PA "foreign minister" denounced the Israeli threat over Wataniya as "blackmail" and vowed that the Palestinians would never back down.

The PA's betrayal of the Palestinian people over the Goldstone report, as well as its continued "security coordination" with Israel to suppress resistance and political activity in the West Bank, should banish all doubt that it is an active arm of the Israeli occupation doing tangible and escalating harm to the Palestinian people and their just cause.

Co-founder of The Electronic Intifada, Ali Abunimah is author of One Country: A Bold Proposal to End the Israeli-Palestinian Impasse.
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Obama Agrees to Keep Israel's Nukes "Secret"

By Eli Lake

October 02, 2009 "Washington Times" -- President Obama has reaffirmed a 4-decade-old secret understanding that has allowed Israel to keep a nuclear arsenal without opening it to international inspections, three officials familiar with the understanding said.

The officials, who spoke on the condition that they not be named because they were discussing private conversations, said Mr. Obama pledged to maintain the agreement when he first hosted Israeli Prime Minister Benjamin Netanyahu at the White House in May.

Under the understanding, the U.S. has not pressured Israel to disclose its nuclear weapons or to sign the nuclear Non-Proliferation Treaty (NPT), which could require Israel to give up its estimated several hundred nuclear bombs.

Israel had been nervous that Mr. Obama would not continue the 1969 understanding because of his strong support for nonproliferation and priority on preventing Iran from developing nuclear weapons. The U.S. and five other world powers made progress during talks with Iran in Geneva on Thursday as Iran agreed in principle to transfer some potential bomb fuel out of the country and to open a recently disclosed facility to international inspection.

Mr. Netanyahu let the news of the continued U.S.-Israeli accord slip last week in a remark that attracted little notice. He was asked by Israel's Channel 2 whether he was worried that Mr. Obama's speech at the U.N. General Assembly, calling for a world without nuclear weapons, would apply to Israel.

"It was utterly clear from the context of the speech that he was speaking about North Korea and Iran," the Israeli leader said. "But I want to remind you that in my first meeting with President Obama in Washington I received from him, and I asked to receive from him, an itemized list of the strategic understandings that have existed for many years between Israel and the United States on that issue. It was not for naught that I requested, and it was not for naught that I received [that document]."

The chief nuclear understanding was reached at a summit between President Nixon and Israeli Prime Minister Golda Meir that began on Sept. 25, 1969. Avner Cohen, author of "Israel and the Bomb" and the leading authority outside the Israeli government on the history of Israel's nuclear program, said the accord amounts to "the United States passively accepting Israel's nuclear weapons status as long as Israel does not unveil publicly its capability or test a weapon."
For Rest Of Article See:
http://www.washingtontimes.com/news/2009/oct/02/president-obama-has-reaffirmed-a-4-decade-old-secr//print/