Points To Charles Johnson

At least someone on the conservative side is willing to reveal the soft underbelly of this corporate lobbyist-organized "tea party" movement and show to whom it appeals:

Woman: [Shouts] “Burn the books!” [applause]

Man: “I don’t think you were serious about that, were you?”

Woman: “I am too.”

Man: “Burn all the books?!”

Woman: “The ones in college, those, those brainwashing books.”

Man: “[laughs] Brainwashing books?”

Woman: “Yes.”

Man: “Which ones are those?”

Woman: “Like, the evolution crap, and, yeah...”

I'll be at the New Way Forward demonstration today (actually right about now, as I've post-timed this), and so obviously I have no problem with getting out in the streets and expressing my opinion. In fact, I support the teabaggers to go out and let everyone in the country see the radical nature of their agenda and their general insanity. It will be a teachable moment, and all on tape.

No, The Economic Crisis Is Not Over

I guess all it took was one decent earnings forecast, and the collapse of the global financial system has been called off. Nothing to see here, everyone go home.

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup (C) and Bank of America (BAC). The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

The writer of this piece's tongue is halfway in cheek, and at the end he acknowledges the major changes bringing us to this so-called "resolution." But the cheery tone can be seen in other big panorama articles today, suggesting that the traditional media has as much of an attention-deficit disorder as a daytrader, and all the depth of an evening with the cast of Hee Haw. The wild swings in mood mirror the volatility in the markets, which actually doesn't portend well. Some context can be provided by Dean Baker:

In the case of bank profits, much of the profit was driven by a surge in mortgage refinancing which produces large fees for banks. This surge will continue for the near term, but before long most of the people who are able to refinance their mortgages will have done so. Banks have also opted not to declare large write-downs of bad loans in the current quarter. They have apparently decided, possibly for political reasons, to defer write-downs of bad debts for future quarters.

It is important to put reports on chain store retail sales in some context. First, the same store sales are higher relative to overall chain sales because the chains have opened fewer new stores over the last year and in some cases actually have fewer stores in March of 2009 than in March of 2008. More importantly, there will be some upward bias in the chain store sales overall since there are fewer alternatives stores in 2009 than in March 2008.

Many stores that might have provided competition for the chains in March of 2008 no longer exist in March of 2009. Therefore, we should expect to see an increase in chain store sales even if there had been no change whatsoever in overall retail sales.

The President was more circumspect today, announcing that he sees "glimmers of hope" but that "the economy is still under severe stress" and talk of the crisis lifting is easily mocked given the spectre of double-digit unemployment before the year is out. I'm sure that people who don't fear job loss can have no problem announcing an end to the crisis, but others are not so lucky.

I think Simon Johnson made an excellent point discussing this at the New York Times' website:

Some stock market rallies are reassuring. Others provide at least temporary respite. And a third kind, more commonly seen in emerging markets, actually expose deeper underlying problems and contribute to a further downturn.

We seem to be experiencing this third kind of rally in the U.S. right now. Equity prices are up sharply, but the debt market continues to indicate a high probability of default. In particular, the level and recent trajectory of credit default swap spreads suggest that, as the financial system as a whole stabilizes, market participants expect increasing odds of failure (and failed bailout attempts) for the very largest banks.

The fact that the Federal Reserve won't let the banks release the stress test results just doesn't augur well. And even if we escape without more bank failures and a period of stagnation until the economy kicks back in, the biggest potential problem would be to see the establishment wipe their brow, thank their lucky stars for the bailouts and go back to the same exact practices that got us into this mess. I don't think the White House will lack assertiveness and take their eye off of the problem, but I do think they will decline to fundamentally restructure the economy in such a way that the finance sector shrinks to a level that cannot harm the greater economy in a systemic way. Paul Krugman gets to the heart of this need for restructuring today, the idea that banking must become boring.

Much of the seeming success of the financial industry has now been revealed as an illusion. (Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself.) Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.

But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.

Krugman charts how we followed the exact same course in the period from 1920-1970; the bankers got rich, speculated madly, caused the Depression, and the tight regulations on the industry that followed reduced both the excitement of banking and the lucrative nature of it. "Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans," he concludes.

We're in that Second Gilded Age right now, and the return of banking to the staid reallocation of capital that is its core function must follow the hash that's been made of the economy. The banks had too much money to play with and ended up nearly gambling away the whole system. They bought the political process and it came relatively cheap compared to the largesse it allowed them to reap. The incentives created were perverse. The risks taken were unconscionable. And they cannot be repeated.

But by calling an early end to the crisis and not wrestling with the fundamental shift that is needed, we only set ourselves up for future failure. And the Bush-era retreads manning the TARP desk are not likely to recognize this or work toward such a solution. In fact, nobody in the political class is, unless we make them.

Tomorrow, A New Way Forward demonstrations will be held in over 70 cities across the country. I'm not sure a set of protests is necessarily the right thing to do to mass political pressure, but I do know that this is a genuine grassroots effort - unlike the Fox News-promoted, lobbyist-driven tea parties - and the message of structural change, not an exhale and relief that the crisis has lifted, is the exact message that our representatives need to hear right now.

Our plan: Real structural change of Wall Street

Any bank that's "too big to fail" means that it's too big for a free market to function. The financial corporations that caused this mess must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place -- new banks, managed by new people. An independent regulatory body must protect consumers from predatory practices.

As Wall St. corporations grew bigger and bigger until they were “too big to fail,” they also became so politically powerful that they led to distorted and unfair policies that served companies, not citizens.

Its not enough to try to patch up the current system. We demand serious reform that fixes the root problems in our political and economic system: excessive influence of banks, dangerous compensation systems, and massive consolidation. And we demand that the reform happen in an open and transparent manner.

I've been banging this drum quite a bit, but I urge you to join these protests or at least get connected with what this group is trying to do. I really hope for it to be a beginning point and not an end point. Because until the financial sector has been fully decentralized, re-regulated and restructured, we're just going to go through this again and again.

Low Stress

Like Kevin Drum, I'm really trying to figure out what the hell this NYT article means.

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

....Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

....Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

If a bank needs "exceptional assistance," they either haven't passed the stress test, or the test isn't stringent enough to account for that possibility. If the banks need to be bailed out again, then they too have not passed the stress test, designed to see, as far as I can tell, that banks can survive on their own. In other words, the stress test isn't a stress test at all but a check of how much more money will need to be plowed into the system.

Here's Kevin:

So what have we learned here? First: all 19 banks will pass. Second: not all the banks can be winners. Third: the ones that pass — but aren't winners! — will be propped up by taxpayers. Fourth: no, they won't be propped up by taxpayers, they'll be forced to sell assets and raise private capital.

Huh? Which is it? If by "pass," regulators merely mean that a bank won't be instantly seized and its management defenestrated, then I guess this makes sense. Awards for all! On the other hand, the prospect of a bank getting a "needs improvement" grade and then successfully selling a big stock issue to raise private capital is just fanciful. Even banks that pass with flying colors will have trouble doing that.

So what's going on here? Why are Treasury officials privately telling reporters that everyone is going to pass but that some banks will receive a pass-minus and may be required to do things that are almost certainly impossible? Are they just trying to lay the groundwork for failure and temporary nationalization later on? Or what?

Any leak at this stage would of course give the impression that everything is fine. Wouldn't want to roust the "animal spirits" and get everyone panicking again. But just that very fact points to the outsized influence of the financial industry in driving US policy. The financial sector is simply too big relative to the rest of the economy, and the consequences are immense.

But what caused the fall and rise of inequality? A lot of very high incomes, both in the pre-1930 world and now, have been in the finance sector. A recent paper by Phillipon and Reshef (cited today by Gillian Tett in the FT) traces the path of relative compensation in finance, and ties it to regulation and deregulation. Here’s the key figure:



OK, correlation does not imply causation yada yada. The move to regulate in the 1930s was part of a broader crackdown on rampant capitalism, and the deregulation since 1980s was similarly part of a broader phenomenon. But it’s a good bet that finance is a key part of the story of how we got to where we are.

Over the past couple weeks, as this argument has become more prominent, the pushback from the banks is that the "level-headed" people must rein in the impulses of the "pitchfork" crowd, because economic recovery depends on a healthy banking sector. In other words, the same economic terrorism argument ("Keep us fat and happy or we'll blow this economy to bits!"). Simon Johnson deconstructs this nonsense.

You might think the “anti-pitchfork” strategy might work, particularly as it has in the past (e.g., in the early Clinton years). The problem for this strategy now is not just the fragile state of banks - by itself this can be ignored for a long while through forbearance, behind a smokescreen of complicated schemes with confusing acronyms - but the ways in which the markets they created now operate [...]

The technocratic options are simple, (1) assume a better regulator, of a kind that has never existed on this face of this earth, (2) make banks smaller, less powerful, and much more boring.

In other words, a dash of new regulation and a solemn promise from the banksters never to break the economy again won't cut it anymore, as the system has grown too big and too destructive. What we need is a different conception of the system of providing capital, one balanced against the size of the industries they can support, which actually produce goods and create jobs.

I know that the teabaggers have their own TV network and have sucked up all the political oxygen with their series of demonstrations, but the New Way Forward events happening this weekend are important. Not because street actions are necessarily valuable in the 21st century, but because the organizers behind this effort have a clear message that pushes against the simple left-right lens and really seeks a reinvention of our economic realities. Here's how honorary co-chair Mike Lux describes the effort:

I agreed this week to become an honorary co-chair of A New Way Forward, a spontaneous grassroots movement that is reminding me of the early days of Moveon.org. This impressive group of passionate organizers got involved because they were listening to progressive economists and business leaders talk about alternatives to the Geithner plan on re-building the banking system, and they decided to get involved. Some of these organizers are old hands like Joe Trippi (who truly is an old hand -- I met Trippi when he was helping Walter Mondale in Iowa in 1983, and he already seemed like an old hand then) and Zephyr Teachout of Dean campaign fame, and some are relative youngsters like Tiffiniy Cheng.

I agreed to become a co-chair in part (of course) because I strongly support the principles for banking policy that they have laid out -- the same ones supported by all of the economists and economic policy thinkers I respect the most, people like Paul Krugman, Dean Baker, Joe Stiglitz, William Greider, Simon Johnson, Jamie Galbraith, Leo Hindery, and Rob Johnson. But I also agreed to help because the spontaneous passion and obvious organizing skill, completely unsupported with money or institutional DC help, reminded me of the early days of Moveon.org. Before there was ever the online organizational giant of Moveon.org, it was a simple internet petition written and put online in the living room of Wes Boyd and Joan Blades and forwarded to a few of their friends. Wes and Joan didn't know anything about how Washington D.C. works, or how a PAC operated, or how a poll was conducted. They didn't have any money or institutional support when they started, although a few of us in DC recognized their potential and lent a helping hand. All they had was their passion about an issue (in that case, the impeachment fight), and great instincts about online organizing.

Somehow I got listed among their supporters, and it's a pleasure to be put in the company with the others on the list. Ultimately what will be important is not this series of rallies but what they spark. However, it would be nice to see a good counterpoint to next week's nonsense, so please join the demonstration in your area.

Ignoring The Obvious

Over the weekend, the New York Times had an article with the thesis statement that the legislative machinery is rusty and unused to the kind of ambitious policy agenda that Barack Obama has proposed.

Lawmakers, senior staff members and other experts agree that a combination of divided government, thin majorities, the running battle for Congressional control and an emphasis on national security caused a decline in the old-school legislative give-and-take that will be required to deliver major health, energy and education measures to President Obama.

“We have been miniaturized,” said Senator Olympia J. Snowe, a moderate Republican from Maine and a veteran of health care negotiations. “You have three talking points on a card. We are going to have to be taught and relearn the process, crack the notebooks.”

Congress has not even managed to produce its basic spending bills on time in recent years and has exhausted considerable energy dealing with recurring tax and Medicare snags. Big bills have been few and far between — the 2003 Medicare drug plan and a 2007 energy law are examples — as lawmakers nibbled around the edges of problems [...]

As members of Congress and analysts look at the daunting demands for legislation emanating from the White House, some wonder if Congress is up to the task.

“Do we have a Lyndon Johnson in the Senate at the moment, someone who can push through legislation?” asked Stanley E. Collender, a former top aide on Capitol Hill and a longtime observer of Congressional budget fights. “We haven’t seen it in a while.”

There's no doubt that some of this is true. The "Masters of the Senate" have come and gone, and the reasons cited do tell part of the story. Furthermore, the internal dynamics of the Republican opposition tend them in the direction of unthinking opposition, behaving like perpetual candidates in a contested primary (Similarly, the glory-seeking Evan Bayhs of the world see value in obstructionism and shining attention on themselves). But this article never gets around to mentioning the special interests who frustrate progress on a daily basis. And we see them lining up, one by one, particularly with respect to the domestic agenda, to throw sand in the gears of the legislative machinery. As campaigns grow more expensive, and as inequality increases with the biggest firms getting bigger, these impediments have simply metastasized.

For example, lobbyists for practically every corporation want to halt the move to tax overseas profits from offshore tax havens, something the entire world came to an agreement on at the G-20. Corporate farming interests succeeded in removing cuts to farm subsidies from the budget resolution. And despite the rhetoric that action on the climate and on the economy are inextricably linked, oil companies have flat out given up on renewable sources of energy, and appear to have convinced the Administration to cave on the 100% auction element of their cap and trade proposal.

The Obama administration might agree to postpone auctioning off 100 percent of emissions allowances under a cap-and-trade system to limit greenhouse gas pollution, White House science adviser John P. Holdren said today, a move that would please electricity providers and manufacturers but could anger environmentalists [...]

During the presidential campaign, Obama called for auctioning off all greenhouse gas emissions permits at the outset, rather than just a portion of them. Many industry leaders say a phase-in will be essential to easing the transition to a low-carbon economy.

"The idea, obviously, is to end up with a bill that reflects both the thinking of Congress and the administration, a bill that the president can sign," Holdren said, adding that when it comes to a 100 percent auction, "Whether you get to start with that or get there over a period of time is something that's being discussed."

We have a model for "getting there over a period of time," in Europe, where they wasted a decade making almost no progress on reducing carbon until they just went ahead and moved to a full auction. The whole point of cap and trade is to price carbon, not give it away for free, because the pricing element encourages the innovation needed to make the needed reductions.

Some, like Chris Bowers, are optimistic that public investment will continue to grow. The question remains whether that will manifest in government spending that improves lives, or the kind of corporate welfare and Treasury raids we have seen over the last decade. Call me skeptical. And I think the reason is simple - a political class too intertwined with a corporate elite, too attentive to their concerns over the concerns of their constituents. Perhaps full public financing of all campaigns is the answer, and what we should be fighting for. Or maybe we just need A New Way Forward to sever that symbiotic relationship and restructure the economy.

Lost in the talk of tea parties by anti-tax zealots are the A New Way Forward demonstrations this weekend. It is crucial that we send a message that real structural change is not optional but necessary. I urge you to find the demonstration in your area and attend.

A New Way Forward

My assumption about the favorable market reaction to Tim Geithner's plan to buy up Big Shitpile is that the Big Money Boyz got the answer they wanted to this question:

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

CNBC's latest Howard Beale for the overclass, Mark Haines, echoed these fears, as a paid echo is wont to do, despairing over how "scary" things are getting, what with Americans paying attention to the massive ripoff being undertaken at their expense and all.

HAINES: There were some scary stories in the paper over the weekend.

BURNETT: Mmm-hmm.

HAINES: About this kind of thing, regulating or somehow impacting executive pay, even among financial companies that didn’t take government money. It’s getting scary.

For the record, the bad asset (I'm sorry, "legacy asset". Bad framer!) plan could very plausibly fix the near-term problem while doing absolutely nothing for the long-term one. If the credit markets loosen and economic activity restarts as a result of this proposal (and I'm dubious), that would be wonderful. But if it restarts in the exact same fashion as the recent past, by allowing a small band of financial sector elites to make absurd profits, literally stolen from the taxpayer, and to keep their share of the overall economy unsustainably and unaccountably large, the long-term forecast on a host of fronts will be grim. Not only would it simply reinflate a bubble that could just as easily pop, but it would cement the viewpoint that corporate behemoths own government and took it over in a bloodless coup.

And contra Mr. Haines, what I heard this weekend were more stories of looting by the big banksters, as well as a growing impression that Goldman Sachs holds an unelected place inside the government.

Simon Johnson gets at the real problem.

The government feels that it cannot take over large banks, there is no bankruptcy-type procedure that would work, and only deference to the CEOs of major financial institutions can get us out of this mess. This is a conscious strategy decision from the very highest levels.

I’d like to say: OK, but this is absolutely the last time we will try for a solution to our banking problems involving a private sector-led approach. Of course this would not be credible and bank CEOs know this. Instead, I propose the following.

If Secretary Geithner’s scheme works, we draw the lesson that our banks became too big and we aim to make them smaller relative to the economy moving forward. The regulatory agenda currently in progress - including for discussion at the G20 next week - would do essentially nothing to reduce the political power of big banks. We need simple caps on bank size, leverage relative to the economy and - this is harder - measures of interconnected tail risk (i.e., is everyone making the same kind of crazy loans?). Design a system with this in mind: regulators get captured and super-regulators get super-captured.

If the scheme doesn’t work, we draw the exact same lesson. And, of course, we should expect Chairman Bernanke to move forward with his Plan B (or is it Plan Z?): inflation.

In any case, our top political leadership needs to really sell some version of the following message. We let the banks get out of control and the cost will be enormous; our debt/GDP ratio will in all likelihood rise from around 40% to over 80%. We cannot afford to have the same problem again. We must break the power of banks before they break us all. And if you don’t think banks can do that much damage to economies, just look around outside the United States - the world is full of countries where growth is slowed or distorted by a financial system that becomes too powerful. This is not about tweaking the existing U.S. regulatory system; it is about complete change and - in many senses - turning back the clock to a financial system that was simpler, smaller, and much less dangerous.

This is the point missing from all the back and forth about the raw details of the Geithner plan. Under not even the rosiest of scenarios would it scale back the power and size of the financial sector relative to the economy, which in the end must be the ultimate solution for now and the future. The public fumes at scenarios that maintain a status quo that failed them and caused them undue pain, especially when they can conceive of a new way forward, where banks perform their core function under a regulatory microscope, and they never grow so large that they can possibly take down the entire economy.

Digby has been asking about the need for the left to assert itself. A group of very sharp organizers are putting together a mass series of demonstrations on April 11, calling itself A New Way Forward. Rallies are already being planned for 20 cities, and beyond just showing up in the streets, there is a careful effort to tie this into a greater movement, with a mission statement and a vision for a post-bailout, post-bubble economy.

NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts. (see Krugman on nationalization)

REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused. (see Simon Johnson on reorganizing)

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function. (see Mike Lux on decentralization)

Big bankers ruined our economy and now they are gaming the political system so they can profit even more off the crisis they caused. They must be stopped [...]

At the personal level, we know that the smart thing to do with our money right now is generally the less flashy thing. Paying off our debts and saving for the future protects us from the risks we can't afford to take in the current market. The same rules apply to the banks. This is a time for a level-headed government to step in and steer unhealthy banks away from more risky bets, and to help them stabilize in the name of economic security for America.

Nothing tells the bankers to keep on doing what they're doing more than an endless stream of free taxpayer money. The banks know that the government considers them too big to fail; if nationalization is off the table, what incentive do they have to act in the public interest?

In a basic sense, this is a fight against corruption. Not in the sense of a quid-pro-quo (though that may be there too), but in the sense of a corrupt ideology. For the most part, the world of economists, politicians and financiers is one elite web of influence. At some point, private profit took over as the only value to consider in building an economy, and it has never subsided. This is true of the thinking from both major parties.

Forget short-term thinking. We need a long-term rejection of the Masters of the Universe mentality and a full reorganization of the economy. I think A New Way Forward is on to something.