Fed Up

Alan Greenspan had an interesting change of heart today. He endorsed the Consumer Financial Protection Agency as an overseer of banks and lenders.

For Alan Greenspan, lapdog to Ayn Rand, perhaps the only person in America not to recognize the possibility of human greed in the financial markets, to come out for a federal body overseeing the Masters of the Universe, the same kind of consumer protections he opposed while chairing the Fed, is quite a turnaround indeed. But then Greenspan told us that he was rethinking his theories after the biggest financial collapse since the Depression.

Greenspan: I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms…

Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Greenspan: Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In particular, Greenspan said that the Fed's current responsibilities are quite enough for the body to manage without the added layer of consumer protection. He might have gone a bit further and mentioned that, when faced with a choice between monetary policy and consumer protection, the Fed will always choose the former. They don't exist for the mere consumer. You can see this in the performance of Alan Greenspan's Federal Reserve during the housing bubble.

The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending [...]

The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.

But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

Binyamin Appelbaum's story is well worth reading. If the Federal Reserve were a rank-and-file employee, they would have been fired long ago.

I don't know if Greenspan is trying to atone for past sins or actually learn from past experience. But when you have Greenspan and the World Bank in agreement with the likes of Elizabeth Warren, that Fed powers have grown too strong and a separate entity needs to be charged with protecting people who enter into financial arrangements, there clearly is a growing consensus here.

Postscript: Barney Frank's interview with Ezra Klein has some excellent insights. Frank feels we must limit securitization - the idea that if you spread enough risk around you could sell literally anything. He wants higher capital requirements and less leverage for the big banks as well.

Bill Clinton And Derivatives

Bill Clinton, whose Administration set the ball rolling on a lot of the structures that ultimately led to ruin in the financial markets, gives a pretty honest take of where he feels he went right and wrong:

Mr. CLINTON: Now, there basically have been three charges, if you will, laid at our doorstep, because everybody recognizes that I vetoed the securities reform bill and that we had a very different economic philosophy. But they — the three charges are one, because I enforced the Community Reinvestment Act for the first time and over 90 percent of all lending done under that law was done when I was president, $300 billion, that part of that was a lot of little banks made loans to people they had no business making loans to to buy houses so they could check the box for the Community Reinvestment Act. That’s the right-wing argument.

Then there’s the argument from the left that I shouldn’t have signed the bill that got rid of the Glass-Steagall law because that enabled banks and investment banks in effect to merge their functions.

And then there’s the argument that I make, which is that I should have raised more hell about derivatives being unregulated. I believe the last one is by far the most valid, although I don’t think that the Congress would have permitted anything to be done because Alan Greenspan was against it [...]

But I do believe on the derivatives they made the argument, the people who were against regulating it, that people like you weren’t buying derivatives. It wasn’t like you were investing your 401(k) in derivatives. You were investing your 401(k) in mutual funds, which were subject at least under normal times to the jurisdiction of the S.E.C., which was supposed to be minding the store. And so because we had a hostile Republican Congress which threatened not to fund — I don’t know if you remember this but we had a huge knock-down fight when they threatened not to fund the S.E.C. because of what Arthur Levitt was doing to try to protect the American economy from meltdowns. They said, “Oh, he’s interfering with a free market” and all that. This is what he’s supposed to do.

They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need. And it turned out to be just wrong; it just wasn’t true. And once you got that massive amount of money invested in derivatives that people thought — it’s like these credit default swaps, where people thought, the Lehman people talk about it, they thought, or the A.I.G. people, they thought it was 100 percent safe investment, they thought there would never be defaults on these mortgage securities. So of course you wanted insurance there because you got the insurance premium, you make the profit and you couldn’t possibly lose money, right? Well, it turned out to be all wrong. That rested on a lot of assumptions, including the fact that the ratings agencies would do a good job, which didn’t happen, in evaluating risk. So I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed and that we had done that. That I think is a legitimate criticism of what we didn’t do.

Clinton doesn't buy the arguments about Glass-Steagall or the Community Reinvestment Act. And much of his argument rests on the fact that the Bush Administration just gutted the regulatory apparatus, particularly the SEC, and so he was operating under a different environment. And David Leonhardt makes another very good point - the Clinton Administration allowed the run-up of the dot-com stock bubble, so thinking they would have charged in and stopped the housing bubble doesn't really hold water. They were lucky to get out of office when they did.

But this is pretty honest, and points to Clinton's instincts on this, which were always more finely attuned than his advisors. The derivatives market took off after Clinton left office, when the stock bubble popped and the relationship between housing and mortgage-backed securities started to realize itself. At the same time, Long-Term Capital Management, which invested heavily in derivatives, failed during Clinton's tenure (he couldn't come up with the name in the interview), and apparently this led Clinton to approach Alan Greenspan on the subject, who predictably said that derivatives were a niche market. In other words, Clinton deferred to Greenspan. So how would he have stopped the bubble from inflating, then? I can't see Clinton having bungled the issue as much as Bush, but while his instincts were solid, the follow-through, not so much.

Meanwhile, we have the benefit of hindsight now, and certainly a desire to regulate derivatives. Which makes the banksters unhappy:

For credit-default swaps, information about intraday trades and prices has long been controlled by a handful of large banks that handle most trades and earn bigger profits from every transaction they facilitate if prices aren't easily accessible.

For example, credit-default swaps tied to bonds of companies such as General Electric Capital and Goldman Sachs typically have a pricing gap of 0.1 percentage point between the bid and offer price. That translates into a $40,000 margin for every $10 million in debt insured for five years. Greater price transparency could narrow that gap, lowering costs for buyers and sellers but reducing fees for banks.

Just so you know who's looking out for you. Now, if the banksters still run the place, as Dick Durbin said, then everyone can be right about the dangers of the financial markets and it wouldn't amoung to a hill of beans.

Brooksley Born And The Financial-Political Complex

I almost missed this one yesterday, but the WaPo had a profile of Brooksley Born, the lawyer who, while the Clinton Administration's Chairman of the Commodity Futures Trading Commission, foresaw the coming crisis in unregulated derivatives, including credit default swaps, and staged an ultimately futile campaign to rein them in. Within this article are some of the most fascinating and unbelievable quotes from the men who led our financial efforts then - and some who continue to do so now.

You expect a house organ like the Wall Street Journal to respond to Born's concern over derivatives by saying, "the nation's top financial regulators wish Brooksley Born would just shut up." But this line just absolutely floored me:

Born's baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan -- routinely hailed as a "genius," the "maestro," the "Oracle" -- wanted her to come over for lunch.

Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

This is the Randian mindset of the perfection of the market that has caused so much pain for so many millions of people. Greenspan either was literally so in thrall to the Masters of the Universe and his perfect little system that he found greed written out of the program, or so clever that he used transparently idiotic theories to simply allow legalized theft. Either way, everyone should know that this is the philosophy under which the United States, and really the world, financial system operated for three decades, directly from the mouth of its most powerful practitioner. Andrea Mitchell should resign in shame.

Sadly, however, it doesn't stop there.

That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a "concept paper" -- essentially a set of questions -- that explored whether there should be regulation of over-the-counter derivatives. (Derivatives are so-named because they derive their value from something else, such as currency or bond rates.)

They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn't have legal authority to regulate the derivatives anyway [...]

In early 1998, Born's plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled.

"Larry Summers expressed himself several times, very strongly, that this was something we should back down from," Waldman recalled.

In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. Summers declined to comment for this article.

The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said.

"Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it."

The rest of it reads like a Hollywood potboiler, with Born trying to outmaneuver her more powerful counterparts, ultimately falling short even after being partially vindicated by the failure of Long Term Capital Management, and finally resigning. We're living with the consequences.

But surely you recognize some of the Democratic named involved in shutting Born down. Now let that color your impressions of this report (subs. req.):

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages [...]

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.

Surely, Larry Summers would follow the refrain of the Maestro, that there couldn't possibly be any fraud because the customer would figure it out and stop doing the business. Of course, in this case, the "customer" and the vendor are... the same people.

James Kwak has more on this plan, which I pretty much expected (what's to stop the banks from using shell companies to buy up their own assets at the right price, with government guarantees, even if the Feds break precedent and reject this?). Kwak has a good short version of this: "It allows a bank to sell half of its toxic loans to Treasury – at a price set by the bank."

And he wants Tim Geithner and Sheila Bair to reject this. But the experience of Brooksley Born suggests that the problem with the incestuous political-financial complex is one of mindset. They view the goals of the banksters as superior to the goals of the country, or at best relatively aligned. And thus, regulating those complex financial instruments, or blocking clear giveaways of public money, somehow equals hurting the greater economy. Whether through dime-store philosophy or simply looking out for the interests of the wealthy - and themselves - we've become completely subservient to oligarchs who clearly value their success over that of the country. Which is fine for them - but there's nobody advocating for the greater public, warning of the dangers of runaway capitalism, arguing for a return to the core mission of finance, to smoothly flow capital to those who need it, rather than the Wild West show we still see today. In other words, there are no more Brooksley Borns. And even if there were, the system is so rotted that not even someone of her talent and determination can get the message through. Despite the worst financial crisis since the Depression.

But never mind, because we have "green shoots."

Here's the coda to the Born article, by the way:

Born keeps informed, but she has other concerns, bird-watching jaunts and trips to Antarctica to plan, mystery novels to read, four grandchildren to dote on. "I'm very happily retired," she says. "I've really enjoyed getting older. You don't have ambition. You know who you are."

Greenspan Joins The Politburo

Mr. Andrea Mitchell sheds his inner John Galt and comes out for nationalization.

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Of course, Greenspan wants to protect the senior bondholders, raising the usual spectre of total chaos. But this is a step in the right direction. And it gives the Obama Administration political cover to rip the band-aid off and do what's necessary. They'll still be tarred as socialists, but the cognitive dissonance would be too great to ignore.

I am worried that the bondholders have a gun to the head of the global economy. I don't know how you properly structure nationalization with them remaining intact - you'd just be paying them off with taxpayer money. Maybe this is why the "stress tests" to determine solvency or insolvency aren't adequate:

Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks [...]

Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.

One possibility is that even a very quick and dirty look at many of the big banks' books will reveal them to be in very bad shape. In fact, the inadequate staffing could be part of the private conversation: "You know we didn't send in enough bodies to do this right, and even using your numbers, which we can assume in some cases will be flattering, you look like a goner."

But all of Geithner's actions to date are inconsistent with him taking a tough stand. Having a lot of people party to a process that finds that some of the big banks are in trouble would be hard to keep secret (to my knowledge, none of these people have high level security clearances. Government employees and contractors in those cohorts do keep their mouths shut). So I think it is more likely that the banks will get scorecards that show them to be in various stages of peril, but none will be found to be terminal. (They can't be given a clean bill of health, that would call the whole rationale of the TARP and its various injections into question, and also would put Geithner at considerable risk if any bank declared OK fell over in less than 12 months).

But even the designation of "sick but not ready to be hospitalized" carries with it risk to the Administration. If the banks get sicker than anticipated, how can they explain it? They can't say, "oh, things got worse than we contemplated". The whole point of a stress test is to anticipate worst case scenarios. And it is pretty certain a fair number of the big banks will be on such large-scale life support by year end that it will be hard to make a case not to put them in receivership.

Whatever statement Geithner puts out about the results of the stress test is likely to come back to haunt him, as did Colin Powell's "there are WMD in Iraq" speech before the UN did. And Powell had a better reputation going into Iraq than Geithner has in prosecuting his war.

If you're not willing to legitimately analyze the banks, and the ratings agencies, for that matter, you're not going to reach the right conclusions.

The Vicious Cycle

If the no drama team is scared, then I'm scared.

It's quite unsettling to talk to members of Barack Obama's transition teams these days, especially those who are helping with the economics portfolio. Without going into details, the sense I get from them is that they are very worried that the economy will get a lot worse before it gets better. Not just worse... a lot worse. As in -- double digit unemployment without the wiggle factors. Huge declines in aggregate demand. Significant, persistent deficits. That's one reason why the Obama administration seems to be open to listening to every economist with an idea and is stocking the staff with the leading lights of the field. In one sense, the general level of concern among Obama advisers and transition staffers is reassuring; they get the magnitude of the problems, and they're not going to assume that, just because the bottom has never dropped out before -- certainly not in the lifetimes of most people doing policy these days, the bottom will never drop out.

Ambinder winds this around to the worry that an unstable nation, like Pakistan, will suffer a total economic collapse and the US won't have the wherewithal to bail them out. But I see a bigger problem - that the worldwide slowdown and drop in demand crashes China's stratospheric growth, which has been an engine for the global economy for the last decade.

BEIJING — Chinese exports registered their largest drop in nearly a decade last month, suggesting that the global recession could be far worse than many economists had previously predicted.

According to statistics released by the Chinese government Wednesday, exports fell 2.2 percent from November 2007 to November 2008 — the largest year-over-year monthly decline since April 1999.

Even at a time of increasingly dour economic news, the Chinese trade numbers stunned many economists. They struck an ominous note for China, where labor unrest has increased markedly as the economy has slowed in the last month.

Many analysts had anticipated that the monthly trade figures would show China's export machine slowing along with the global economy, but few had expected it to slip into reverse. In October, exports surged 19.2 percent year-over-year.

"We were expecting a slowdown, but the magnitude is a bit shocking," said Wang Tao, an analyst at UBS Securities.

China makes stuff that American consumers buy. When American demand drops, China has a lot of surplus labor. And their factories close. Really terrible situation.

We're also seeing extremely stable entities like the NFL and National Public Radio cut jobs and close down parts of their business (the Arena League? Gone).

In these troubled times, it's important to hold people responsible, so that as we drag ourselves out of this ditch, we never put ourselves in the same situation again. Joseph Stiglitz, who isn't on Obama's economic team right now for reasons that are inscrutable, makes the argument in this month's Vanity Fair that the problem was explicitly ideological.

There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight [...]

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known.

What we ought to see here is the death of both neoliberalism and free market fundamentalism - the ideas that risk can always be managed, that asset bubbles are good when they're running so they should be encouraged, that investment banks should be unregulated and free to make big bets with other people's money, that credit rating agencies owned by the banks would be independent enough to make judgments on those banks, that tax cuts are an economic panacea, all of it. Stiglitz' final paragraph should be seared into our brains.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

What has me worried is that this failure of ideology will result in a very long and deep economic collapse, out of which there isn't much hope for a few years, and that Obama, not his predecessors, will be tarred with the responsibility for the problem because he could not work the country out of it, and in opposition we get the exact same failed solutions (really, Mike Pence is calling for things like a balanced budget amendment), and an American public starving for relief will buy what Republicans are selling again. That's the vicious cycle we have to avoid, and so drastic steps must be taken without worrying about the short-term political consequences.

The Sadness Of Alan Greenspan

Today our ex-Master of the Universe had his "nobody could have anticipated" moment.

Former Federal Reserve chairman Alan Greenspan called today for imposing some of the same sorts of regulations on mortgage securities he resisted when he was in office, acknowledging that the current financial crisis had exposed "a flaw" in his view of how the world and markets function.

The absence of significant controls on how mortgages are repackaged into larger and more complex securities has been cited as a central cause of the current financial crisis.

In testimony before the House Government Oversight Committee, Greenspan said that as a result of the current situation the United States is heading for a "significant rise in layoffs and unemployment" and a continued downturn in home values as the world works through a crisis that is "broader than anything I could have imagined."

Greenspan, who called the current financial crisis a "once-in-a-century credit tsunami," said that he remained "in a state of shocked disbelief" that banks and investment firms did not do a better job of analyzing the risks involved with investing in home mortgages extended to less creditworthy borrowers.

Under questioning from Rep. Henry Waxman (D-Calif.), the committee chairman, Greenspan acknowledged that the failure of that expected self-regulation represented "a flaw in the model" he used to analyze economics. "I was going for 40 years or more on the perception that it was working well."

Here's that key moment.



Is he really this stupid? He predicated his entire economic philosophy on the premise that greedy people wouldn't act greedily? This free market fundamentalism might work in computer simulation, but in the business world you pretty much have people who want to get ridiculously rich as a matter of projecting power. Also, to suggest that Greenspan had just nothing to do with hyping adjustable rate mortgages and deregulation is absurd. This is his problem and he ought to be slow roasted for it.

If men were angels, no laws would be necessary, to borrow a phrase. But regulation exists for creeps like this:

CONVERSATION OF THE DAY....Between Rahul Dilip Shah and Shannon Mooney, a pair of analysts at the credit rating agency Standard & Poor's, chatting via IM back in 2007:

RDS: btw: that deal is ridiculous

SM: I know right ... model def does not capture half of the risk

RDS: we should not be rating it

SM: we rate every deal

SM: it could be structured by cows and we would rate it

I actually don't think Greenspan is this dumb, he just wanted to let the party keep going until he retired or died so he wouldn't have to be pinned with the blame. Tough break, Alan.

Digby is great on this.

Being able to pass on all your risk to someone else while personally coming out on top is a pretty glaring and obvious flaw in the system unless you think that wealthy people are too wise and moral to ever do such a thing. The only people who believe that are Randians and Joe the Plumber. Everybody on Wall Street certainly seemed to know the score and acted accordingly [...]

Uncle Alan is in his 80s and he's just learned that his heroes aren't what he thought they were after all. No wonder he's in a state of "shocked disbelief." It's a wonder he didn't keel over.

I know people are focused on Hank Paulson and what a poor job he's doing, but focus some attention back on this Randian fool Alan Greenspan. He deserves to have his entire reputation destroyed.

Trusted Sources

Shankar Vedantam had a significant article in the Washington Post that essentially explains the campaign that John McCain has been running as an indirect way to fire up their own base:

As the presidential campaign heats up, intense efforts are underway to debunk rumors and misinformation. Nearly all these efforts rest on the assumption that good information is the antidote to misinformation.

But a series of new experiments show that misinformation can exercise a ghostly influence on people's minds after it has been debunked -- even among people who recognize it as misinformation. In some cases, correcting misinformation serves to increase the power of bad information [...]

Political scientists Brendan Nyhan and Jason Reifler provided two groups of volunteers with the Bush administration's prewar claims that Iraq had weapons of mass destruction. One group was given a refutation -- the comprehensive 2004 Duelfer report that concluded that Iraq did not have weapons of mass destruction before the United States invaded in 2003. Thirty-four percent of conservatives told only about the Bush administration's claims thought Iraq had hidden or destroyed its weapons before the U.S. invasion, but 64 percent of conservatives who heard both claim and refutation thought that Iraq really did have the weapons. The refutation, in other words, made the misinformation worse.

A similar "backfire effect" also influenced conservatives told about Bush administration assertions that tax cuts increase federal revenue. One group was offered a refutation by prominent economists that included current and former Bush administration officials. About 35 percent of conservatives told about the Bush claim believed it; 67 percent of those provided with both assertion and refutation believed that tax cuts increase revenue.

In a paper approaching publication, Nyhan, a PhD student at Duke University, and Reifler, at Georgia State University, suggest that Republicans might be especially prone to the backfire effect because conservatives may have more rigid views than liberals: Upon hearing a refutation, conservatives might "argue back" against the refutation in their minds, thereby strengthening their belief in the misinformation. Nyhan and Reifler did not see the same "backfire effect" when liberals were given misinformation and a refutation about the Bush administration's stance on stem cell research.

The logic here can be explained by the decades-long project by conservatives to delegitimize collective trusted sources - in particular, the "liberal media" - and cultivate their own. When conservatives hear about the Duelfer report, they can easily access a refutation from across the spectrum of wingnuttia, written by Stephen Hayes or Hugh Hewitt or some other wingnut welfare recipient. When they hear that tax cuts don't increase revenue, they have dozens of bits and pieces of information they can store in their minds to refute the refutation. When they hear an obvious lie in one of John McCain's ads called out by a fact-checking organization, they can hear Karl Rove tell them that the fact-checkers are biased.

Collective trusted sources aren't going to be much of a help here among your hard-core wingnuts (among moderates and independents, the type who say "all politicians are full of it and I think for myself," it probably won't either). It is not enough to show a chart with verifiable facts about how earnings for everyone but those with professional degrees are dropping in the Bush economy - wingnut supply-siders argue the economy's doing great, and that chart was probably from some liberal think tank (it was from the Census bureau). It is not enough for someone like Joe Klein to plainly state the facts of John McCain's health care policy, which amounts to a huge tax increase on the middle class (not enough has been made of this. McCain wants to tax employer-provided benefits as income, and the goal is to get employers to drop their benefits packages, leaving the individual on their own to manage a largely unregulated individual insurance market armed with a tax credit too meager to pay for decent coverage. McCain's core philosophy about health care is that Americans have TOO MUCH of it, and if they were forced to buy it themselves, they would buy less.) - he's part of the liberal media. US News and World Report can can chronicle John McCain's journey from maverick to liar, and so can the National Journal. But they are just more liberal media house organs.

In fact, it's not enough for someone like Alan Greenspan to admit, several years too late, that McCain's plan to "finance tax cuts with borrowed money" is distasteful, or even for McCain's own economic adviser to admit that tax increases are inevitable for the next President AND that McCain is lying about this because tax cuts for Republicans are "a brand, and you don't dilute the brand" - there's a whole industry of economic denialists who will spin and shape and distort to tell you that federal revenues are bigger under Bush, and tax cuts equal increased revenue, and all the other discredited arguments.

Which is why Meghan Kelly's demolition of Tucker Bounds today on Fox News is arguably more important than the independent analyses or comprehensive takes from sources that ought to be trusted more.



You see that Bounds falls back on "you can't trust what Obama will say because he voted to raise taxes 94 times," etc. He's trying to delegitimize anything that comes out of Obama's mouth. And for some wingers, that will be enough. But seeing this argument play out on conservative media is far more likely to be impactful to those who have seen traditional sources trashed and conservative sources elevated and made trusted over the years. "Why is John McCain saying Obama will raise taxes on the middle class when he’s not?" is a pretty compelling argument coming from an embedded conservative trusted source, I would imagine.

We all have the power to be trusted sources in our spheres of influence. Instead of passing around links to the New York Times saying something or Time saying another, the only way to persuade in an environment of diminishing trusted sources is to create your own arguments. Cracks in the facade like Meghan Kelly showed today are not going to be plentiful, important as they may be.

This is the brave new world conservatives have entered us all into by creating parallel realities. The problem for them is that when the emperor is eventually caught naked, everybody sees it pretty clearly.

Kneecapping

I think Steve Benen has this right. Hillary Clinton's "Tuzla-gate," exaggerating her daring dive into Bosnia under sniper fire, is really hurting her campaign, her electability argument to the superdelegates, and her national security credentials. This is especially true because the exaggeration is not isolated; she's said the same lie on multiple occasions. So she had to change the conversation. And so here's how she changed it.

Sen. Hillary Rodham Clinton, in a wide-ranging interview today with Pittsburgh Tribune-Review reporters and editors, said she would have left her church if her pastor made the sort of inflammatory remarks Sen. Barack Obama's former pastor made.
"He would not have been my pastor," Clinton said. "You don't choose your family, but you choose what church you want to attend."

Obama's lead in national polls has slipped since clips of the retired Rev. Jeremiah Wright began being played on national news programs. The uproar prompted Obama to give a wide-ranging speech on race in America a week ago. The Clinton campaign has refrained from getting involved in the controversy, but Clinton herself, responding to a question, denounced what she said was "hate speech."

"You know, I spoke out against Don Imus (who was fired from his radio and television shows after making racially insensitive remarks), saying that hate speech was unacceptable in any setting, and I believe that," Clinton said. "I just think you have to speak out against that. You certainly have to do that, if not explicitly, then implicitly by getting up and moving."

This is just low and dirty. As Benen says, for two weeks, Clinton stayed out of the Rev. Wright controversy. She watched Obama hit a home run with his speech on race relations, and she watched him maintain his prominence in the polls in North Carolina and catch up in Pennsylvania. The Bosnia incident has created a major honesty gap. So it was time to push the Wright story back into the news. That's really disgusting. And she continued this outside the editorial board in Pittsburgh:



Mike friggin' Huckabee had enough sense to put the Wright issue in context. Hillary's knee-jerk response is to fall back on reactionary ideas and attacks to sustain herself and her candidacy. This was most emblematic in her promotion of Alan GREENSPAN, of all people, to take part in a "foreclosure emergency group," because "he has a calming influence still to this day on Wall Street -- don't ask me why because I never understand what he's saying -- but nevertheless people respond to that Delphic oracle approach." The default is to fall back on these narrow elites, on reactionary ideas and on right-wing attacks, pursuing as one DNC official called it the Tonya Harding option.

I'm so over this and I think that the Democratic Party is over this.

What We Need To Do Is Give The Henhouse Back To The Foxes

Paul Krugman came out with a tour de force today, excoriating all of the Presidential candidates for failing to develop a serious policy for regulating the financial markets so that they never get so out of control again, threatening our economic stability. I don't know if Hillary Clinton's speech today was supposed to be a response, but if so she has quite a tin ear:

Democrat Hillary Rodham Clinton called on President Bush on Monday to appoint ''an emergency working group on foreclosures'' to recommend new ways to confront the nation's housing finance troubles.

The New York senator said the panel should be led by financial experts such as Robert Rubin, who was treasury secretary in her husband's administration, and former Federal Reserve chairmen Alan Greenspan and Paul Volcker.

Such a panel would recommend legislation and other steps to ''help re-establish confidence in our economy,'' Clinton said in prepared remarks for a speech on the economy in Philadelphia. She and Sen. Barack Obama are campaigning heavily in Pennsylvania, which holds its presidential primary April 22.

Now, Clinton is talking about foreclosures, whereas Krugman was talking about regulating investment banks and what they did with packaging mortgages into securities. Connected, but not quite the same. The problem here is who she recommended to deal with the problem - the same figures who CREATED it! Alan Greenspan shouldn't be anywhere near the levers of power ever again. And Robert Rubin was heading up Citi during this whole mess, and somehow didn't get the memo that the housing market was in the midst of an historic bubble.

This should be newsworthy. Mr. Rubin is not only a former Treasury Secretary, he is in the top management at Citigroup and he is one of the top Democratic policy advisers. The failure to recognize the housing bubble and the danger it posed was an act of extraordinary negligence that would get people fired in most lines of work. The fact that he still doesn't recognize the enormity of this oversight even after the fact (economists did recognize the housing bubble and the dangers its collapse would pose to the financial system) is remarkable.

We're going to put HIM in charge of fixing things?

I don't know that Obama would have come up with any better names. And McCain doesn't remember any. So we're, in short, screwed, by the endless recycling of elite know-nothings who continue to get things wrong and are never held to account. This is a DC establishment problem at the root.

UPDATE: Obama's campaign responds by claiming he called for just such a panel a year ago, and that "One key difference, however, is the diversity and representation that Obama called for – not just some of the same people who helped to create these problems or have a direct financial industry stake in the outcome." Points for awareness.

Not Saint Greenspan!

Well this is long overdue. And reported on Mrs. Greenspan Andrea Mitchell's network, too, although it's from their content agreement with the Washington Post:

Perhaps the Maestro composed some discordant notes after all.

The record of longtime Federal Reserve chairman Alan Greenspan -- worshipped by business leaders and dubbed "Maestro" in a 2000 biography by The Post's Bob Woodward -- is getting a critical look as his successor Ben S. Bernanke wrestles with problems that began on the Maestro's watch.

Many economists blame Greenspan for lax bank supervision and for keeping interest rates too low, too long from mid-2003 to mid-2004. That, the theory goes, fueled the housing bubble and spawned subprime and adjustable-rate mortgages for low-income people, vast numbers of whom can't make their payments now. Banks bought those mortgages in bundles that are worth far less than they originally were. That has led to big write-offs, shaking the entire financial system.

In an interview yesterday, Greenspan said the Fed wasn't to blame. He said that global forces beyond the control of the Federal Reserve had kept long-term interest rates low, fueling the housing bubble earlier this decade. "Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time," he said. "I don't know of a single example of when interest rate policy has been successful in suppressing gains in asset prices."

Oh hahahahaha. Yeah, I guess cheerleading for adjustable rate mortgages and telling everybody to go buy them up in 2004 didn't affect national attitudes. Must have been those "global forces" like US investment banks coming up with elaborate pyramid schemes to turn crap mortgages into billions in an era of lax oversight. Yeah, the Fed is TOTALLY blameless.

And now we're seeing this "global" economic meltdown hit locally.

In Seattle, sales at a long-established hardware store, Pacific Supply, are suddenly dipping. In Oklahoma City, couples planning their weddings are demonstrating uncustomary thrift, forgoing Dungeness crab and special linens. And in many cities, the registers at department stores like Nordstrom on the higher end and J. C. Penney in the middle are ringing less often.

With Wall Street caught in a credit crisis that has captured headlines, the forces assailing the economy are now spreading beyond areas hit hardest by the boom-turned-bust in real estate like California, Florida and Nevada. Now, the downturn is seeping into new parts of the country, to communities that seemed insulated only months ago.

Congratulations, "Maestro," this is your legacy. A possible depression. It'll be a little solace watching you squirm for the rest of this downturn.

Who's Bailing Who?

In case you were wondering, yes, we're still in the midst of a major housing crisis. Home sales are down in Southern California by 43%, for example. And foreclosure rates may be starting to stabilize, but that still means that many are losing their homes, plus the rate resets scheduled for next year could transform that trend real quick.

A lot of economists, the Treasury Department, and George Bush himself are making a lot of noise about saving people's homes. But that's not even close to what this is about. This is about bailing out banks who made a lot of horrible decisions and don't want to pay for them.

That's not the first thing you'd think when you hear this quote from St. Greenspan:

GREENSPAN: Well, I think it's important to recognize that there are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages and even when they've tried exceptionally hard.

But when you think of how you come to grips with this, it's important to help those people outside -- without affecting the mortgage rates and without affecting the structure of markets. Cash is available and we should use that in larger amounts, as is
necessary, to solve the problems of the stress of this...

STEPHANOPOULOS: Cash from the government?

GREENSPAN: Cash from the government, yes. In other words, if you're going to do that, it's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely.

This is not at all what it seems, however. Companies like Merrill Lynch and Morgan Stanley are taking billions of dollars in "write-downs," which basically means a total loss on a portion of their securities. Practically all of those bad securities are due to mortgages that have been defaulted on. The banking industry is in serious crisis and looking for a handout. And while they're getting it from the Federal Reserve, to the tune of $20 billion in short-term loans, and also in foreign investment (Morgan Stanley got a $5 billion dollar stake from China today), it's far more palatable to make it look like a bailout for John and Jane Doe than for Mr. $100 million dollar bonus CEO. When it would have meant something to take action, before the thousands upon thousands of foreclosures, the Fed and the Bush Administration stood mute.

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

Of course he wasn't interested. It didn't affect him or his fellow shareholders. But as soon as it did, suddenly the financial aid packages just HAD to kick in. For the good of the people, you see.

I suspect there will be a bailout of "Big Shitpile," laundered through the false "good intentions" of cash payments to homeowners. What that bailout won't go is give any incentive to the banks or the lenders to be careful ever again. Because they can always count on that yummy corporate welfare to bail them out.

Everything's Fine!

Economists have kind of an incentive to keep things humming along, so when they say "we aren't headed into recession", I tend to discount their analysis. But this is simply excessive.

Government reports released Thursday showed surprising resilience in the broader economy, even as the financial system and the housing market continue to weaken. Retail sales rose 1.2 percent in November, and even housing-related areas like furniture and building materials were up.

Wholesale prices surged, indicating strong demand and raising cautionary flags about inflation, and a weekly report found that new unemployment claims fell by 7,000, suggesting a healthy job market.

OK, but inflation's up, too.

Look, the structural problems in this economy aren't going to all hit in a month. Retail sales is a function of consumers still having the easy accessibility to credit that they have. When that ends, the economy, which is driven by consumer spending, will sputter. And the credit crunch will eventually hit consumers, no matter how much money global banks inject into the system.

Denying that there's a larger problem with the economy because of the housing crisis is the worst thing we can do right now. The House and Senate certainly aren't. Neither is Alan Greenspan, who's listing the chances of recession in 2008 at 50-50. Of course, he has an incentive to wipe his hands clean of the matter, too.

All that wisdom about an “accident waiting to happen” — an accident for which he, of course, bears no responsibility.

Remember, this is the guy who brushed off Edward Gramlich when he warned about subprime problems; who “frequently argued there could be no housing bubble.”

The chutzpah is breathtaking.

In fact, the chutzpah of Greenspan can be applied to all of our economic "leaders."

The Subprime Scam

It's indeed shocking that up to 55 percent of all subprime mortgage borrowers had credit scores high enough to get conventional loans. But not when you consider that lenders have financial incentive to do so in the form of yield spread premiums.

The yield spread premium (YSP) is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for.

Yes, that's legal. Brokers are paid money to screw their customers.

And this insatiable greed is now causing a fundamental financial crisis, mainly because the professionals in the industry don't even know what they're dealing with:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created [...]

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

The bottom line is that credit has dried up and businesses can't generate needed capital. The collapse of home prices ended up turning all these bonds backed by mortgages into jelly. All these newfangled ways to hide risk have been exposed.

But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis [...]

The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.

This should put a nail in the coffin of the legacy of Alan Greenspan, who recklessly encouraged these kinds of free market principles run amok and then got credit for reining them in after a lot of people got hurt (in effect being, as Patrick Artus said last week, "the arsonist and the fireman"). And it should put an end to this regulatory-free nirvana that the business community pushed for years. But instead, they're looking to get in their last bit of fun before their allies in Congress take a powder.

Business lobbyists, nervously anticipating Democratic gains in next year’s elections, are racing to secure final approval for a wide range of health, safety, labor and economic rules, in the belief that they can get better deals from the Bush administration than from its successor.

Hoping to lock in policies backed by a pro-business administration, poultry farmers are seeking an exemption for the smelly fumes produced by tons of chicken manure. Businesses are lobbying the Bush administration to roll back rules that let employees take time off for family needs and medical problems. And electric power companies are pushing the government to relax pollution-control requirements.

“There’s a growing sense, a growing probability, that the next administration could be Democratic,” said Craig L. Fuller, executive vice president of Apco Worldwide, a lobbying and public relations firm, who was a White House official in the Reagan administration. “Corporate executives, trade associations and lobbying firms have begun to recalibrate their strategies.”

And now we know that what is good for global business is frequently bad for America at the same time.

The Grass Is Always Greenspan

The bottom is starting to drop out of the housing market.

WASHINGTON (Reuters) - Sales of new single-family U.S. homes fell 8.3 percent in August to a 795,000 annual sales pace, its slowest rate in over seven years, while the inventory of homes dropped, a Commerce Department report showed on Thursday.

Analysts polled by Reuters were expecting August sales to fall to an annual rate of 830,000 from July's previously reported rate of 870,000, which was revised to 867,000. The August sales pace was the slowest since a 793,000 rate in June 2000.

Some analysts blamed new, tough mortgage standards for part of the sales decline.

"A lot of people who were close to making deals or actually in contract to buy found it more difficult to get financing," said Michael Bizenov, president of Sterling National Mortgage, Sterling Bancorp in New York.

Meanwhile, the supply of unsold homes is at an 18-year high. All of which is happening while Alan Greenspan is hawking books and sipping cocktails.

Alan Greenspan says there's nothing he could have done about the housing bubble. Monetary levers are too crude to do any good, and the least worst option is to let the bubble collapse on its own and then pick up the pieces afterward.

Maybe so. But that still doesn't explain why Greenspan cheered on the bubble back in 2004.

Greenspan, of course, not only loved the housing bubble, but loved the Bush tax cuts before deciding that they weren't working for the larger economy. Apparently Greenspan the author isn't acquainted with Greenspan the Republican hack.

By contrast, Naomi Klein's new book is really interesting:

Meanwhile, the book that should be in the spotlight is The Shock Doctrine.

It's a brilliant dissection of what Naomi Klein calls "disaster capitalism," an economic philosophy born half a century ago at the University of Chicago under Milton Friedman. It holds that the best time to institute radical free-market policies is in the aftermath of a massive social crisis, such as a terrorist attack, a war, or a natural disaster like Katrina.

Klein shows how the crony capitalists running the Bush administration saw post-invasion Iraq as the perfect proving ground for all their pet free-market policies. The fantasy was that a privitazied and corporatized Iraq would become a free-market utopia that would spread the gospel of the market throughout the Middle East. Democracy would reign, and Halliburton and Bechtel would stand supreme.

After the tsunami in Southeast Asia, there was a land grab. After Katrina in New Orleans, developers tried to eliminate prevailing wage. The plan is seeing disaster as opportunity. And Klein hammered Greenspan on Democracy Now about all of this, including his curious line that we had to get Saddam out because he could have held up the world's oil supply.

Are you aware that, according to the Hague Regulations and the Geneva Conventions, it is illegal for one country to invade another over its natural resources?

Amen.

What I've Been Doing Most Weekends

Lately I've been condo shopping. And I think I'm the only one left on the market now that the subprime market is crashing like a Ford hardtop in a 70s Burt Reynolds movie. Anecdotally speaking, everything on the market 6 weeks ago is still there. And these are nice places, small but completely remodeled, and close to the beach. The problem is that the death of subprime loans means that the entry level market is done, because the only way people were getting into it were by putting no money down and floating two mortgages with a junk loan. Well, that's biting everyone in the ass, and it's reaching a crisis point.

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.

The spring buying season, when more than half of all U.S. home sales are made, has been so disappointing that the National Association of Home Builders in Washington now expects purchases to fall for the sixth consecutive quarter after it predicted a gain just last month.

Ameriquest fired most of their staff today, after settling out of court for $325 million to pay back victims of their predatory lending practices. And they're just the first of many lenders to have their businesses completely torched. That's why stocks plummeted earlier this week; that and the growing realization that this housing market will get far worse before it gets better, and given that the housing boom contributed to most if not all economic growth the past few years, that means recession with a capital R.

This explanation of the crappy mortgage scams that brought us to this point is enough to make you sick.

Today's pop quiz involves some potentially exciting new products that mortgage bankers have come up with to make homeownership a reality for cash-strapped first-time buyers.

Here goes: Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets."

Two years ago I was told by a lender that "Nobody gets a 30-year fixed anymore." Just two weeks ago a major bank tried to sucker me into an interest-only balloon mortgage. The lending market is simply designed to rip off the homebuyer, and even despite this crash that mentality continues to exist. And it also happens to be a core Republican idea pushed by such leading figures as Alan Greenspan back in the day, which makes sense since it only benefits banks and not working people:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . .

Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

It's just another example of how these insane fiscal policies have chipped away at the American dream. We're going to have millions of families in fiscal crisis over the next few years because they were misled by banks and lying government officials spewing their sunny talk about how constructive and beneficial it was to leverage themselves to the hilt and put their entire financial future in jeopardy.

And this actually works in my favor (like I said, I'm the only one in the market and I can qualify for a traditional loan and put money down), but it makes me no less livid.