The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.
The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”
Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”
Keep in mind that the Fed already has refused to disclose its assets, its balance sheet or its dealings with other banks and investment firms. Now the Treasury Department - the federal agency most directly in charge of the banking sector - asks for a review of the structure of the Fed, just simply how it organizes itself. And the Fed, whose chairman is chosen by the White House, said no.
Simply put, this is a runaway organization. We cannot expect it to be a credible partner on setting bank pay limits, for example, when it is intimately tied to the largest US banks, the CEOs of whom make several orders of magnitude more money than their global counterparts. Obviously those compensation limits will come up short, because a shadowy temple of an organization holds this tremendous, unaccountable power over the financial system.
Paul Krugman may think the Fed is now getting it - perhaps out of fealty to Ben Bernanke - but from where I sit, this is an unelected nation state with the arrogance of a dictator. They need to be brought to heel.
President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said.
Mr. Emanuel said Mr. Obama will make the announcement from Martha's Vineyard Tuesday. He said the president credits Mr. Bernanke for "pulling the economy back from the brink of depression."
Mr. Bernanke's term as Fed chairman expires in January. His renomination requires Senate confirmation.
Dean Baker said at Netroots Nation that he supported Bernanke's re-confirmation because "otherwise, Larry Summers would become the chair, and that would be awful."
Not exactly praiseworthy. But probably where we're at.
I'd say that, as a condition of Bernanke's re-appointment, we need a full audit of the Fed so we can figure out where the trillions of dollars that they used to staunch the bleeding in the financial markets has gone. But Senators may disagree with me.
Well, if you hadn't heard, the crisis in the financial markets ended, and everything's fine now. The banks were able to raise more capital than needed to comply with the stress tests, as investors swallowed all their stock offerings. And why not? The federal government put a virtual guarantee that the top banks would not be allowed to fail, and the stocks are already low, low, low, so there's almost no risk to the purchase. CEOs aren't buying the stock, so maybe they know this to be a bear-market rally, but they also know they have what amounts to a federal backstop. Sure, the next wave of foreclosures will degrade the quality of loans and mortgage-backed securities even further, but then the government will just buy the bad ones out. In fact, the banksters don't like the price right now, so they've put a plug in the legacy loan program:
The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets. . . .
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Just last week at least some banks wanted to participate in the program – to buy assets from themselves. Once Sheila Bair rejected that idea, I guess they lost interest. Essentially the stress tests placed a big government stamp of approval on their balance sheets, so their current strategy is to wait out the recession and hope the prices of their legacy loans recover. There’s no downside risk, because if the economy gets worse and they ever need to unload those loans, they can count on the plan being resurrected.
The Federal Reserve asked the banks to raise additional capital to comply with repaying their TARP money, but if they found it this easy to sell stock already, they should have no problem reaching that hurdle. Basically the industry made it through the worst, and now they exist on this fantasy plane where they remain too big to fail, socializing the risk while privatizing the profit.
The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government builds huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.
In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled investment portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needs to think about putting its fiscal house back in order.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said [...]
“Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Mr. Bernanke said.
I thought the Fed dealt with monetary policy and the Treasury Department fiscal policy, but what do I know.
Let me pinpoint the years where the words "deficit" or "fiscal sustainability" never crossed the lips of someone of Bernanke's stature: Jan. 1981-Jan. 1993 and Jan. 2001-Jan. 2009. At that time deficits didn't matter. Now all of a sudden, in the midst of cleaning up the wreckage of the Bush regime, no discussion of economic policy can go by without the important mention of getting our fiscal house in order.
I believe deficits do matter, eventually. But it only makes sense to work on "fiscal responsibility" if you believe the crisis is over. And if that's what Bernanke thinks, we have serious problems. Because the housing market remains in free-fall. And unemployment is still going over the edge. What's happening here is that Bernanke is fronting for the fiscal scolds (so is Peterson Institute fellow Simon Johnson, who dresses up this talk in prettier language sometimes) who seek to eliminate the social safety net through "entitlement reform." Going back to the same old arguments as if the Great Recession has transformed into some boom time seems really premature.
More Regulatory Authority? How About Using What You've Got
At their joint hearing with the House Financial Services Committee, both Tim Geithner and Ben Bernanke advocated for regulatory authority over non-bank financial institutions. I'm trying to get a handle on this. First of all, the investment banks all went under this past fall, so Goldman Sachs, under current law, is a bank. JP Morgan is a bank. So is Merrill Lynch. AIG stands out as the exception to the rule, but regulating their PRODUCTS would seem to be the key, not granting emergency authority to seize them. What's more, states regulate insurance companies, and while I think there ought to be a federal overseeing authority, that could get messy. And as you'll read below, the financial products unit did have federal oversight. Then there are hedge funds and the like, but again, I see the regulatory needs in the product line and not necessarily the ability to seize. FWIW here's Bernanke's argument:
The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG's pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.
AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG's when its own agency was responsible for the doomsday machine part of AIG.
And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act [...] The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions [...] Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.
After the events of last week, Congress has little appetite for giving Treasury or the Fed more authority. Steny Hoyer shot it down today. Regulations are nice, but regulatory will appears to be what's lacking here, and giving the same people who want to bail out the whole sector with no strings attached more power doesn't seem advisable.
Douglas Holtz-Eakin, John McCain's chief economist during the Presidential campaign, makes the case for temporary bank nationalization. That it comes after a swipe at the federal government's ability to participate in the economy makis it even more jarring.
I remain convinced that the financial crisis is the greatest threat to the U.S. economy. It should be the top policy priority and, since I think it will be very expensive, the top budgetary priority as well. Unfortunately, at the moment it does not appear that either the public or the Congress displays any willingness to devote more taxpayer dollars to addressing the crisis. We need to shift the policy tactics and the public perception right now.
The right thing to do is to apply the principles of responsibility and competition, and the lessons of history to get this right. The most important lesson is that failed, insolvent banks cannot be permitted to continue to operate using taxpayers’ subsidies. Letting these “zombies” walk the financial system was at the heart of the savings and loan crisis and the slow Japanese recovery from its financial crisis. These institutions should be taken over, their management and shareholders suffer the consequences of their failure, and the assets re-sold to private sector entities as fast as is feasible. That’s good policy: discipline failure, promote real competition, and use assets effectively in the private sector.
Doing business that way eliminates “bailing out the banks” and “saving AIG” from the public discussion, and hopefully will make taxpayers more willing to open their wallets to solving the problem. Yes, it will be costly – but the cost is the price of not allowing the unwinding of individual institutions to cause a chain reaction of financial collapse.
If an economist who is predisposed to bash government, who ran a campaign for an anti-government crusader, can understand the necessary steps to get us out of this mess quickly and with the least damage possible, this really is no longer an ideological issue. You have Douglas Holtz-Eakin, Alan Greenspan and Harold Meyerson on the same side of an issue, ferchrissakes. And Meyerson hits on the main reason why this hasn't been done yet - a continued thrall to the banksters instead of a dispassionate analysis of the best option for the entire population instead of a handful of elites.
But Geithner's indulgence of bankers' indulgences is fast becoming the Obama administration's Achilles' heel. The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration's efforts to restart the economy. So long as it's Be Kind to Bankers Week at Treasury -- and we've had eight straight such weeks since the president was inaugurated -- American banking, and the economy it is supposed to serve, will remain paralyzed. The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks' toxic assets without really having to assume the risk. That's right -- the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us -- with our capital, not theirs -- from the mess that they created.
A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them.
There are simply too many questions with the public-private partnership idea. I understand the desire to keep the ultimate costs low. But considering that the quantitative easing program being run out of the Fed is virtually GUARANTEED to lose the country $200 billion at the low end, I don't think we should fool ourselves anymore with the bromide that a bailout can pay for itself. We either pay now or light a bunch of money on fire and pay more later. And so trying to make hedge fund managers partners in a scheme that is fated to fail, with only the private interests taking the upside, makes no sense. The ultimate question that supersedes everything right now, as even Ben Bernanke acknowledges, is whether or not we will have the political will to take the necessary steps.
In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons. There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power. The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.
...Today Bernanke is trying to build the political will out of the sand we currently have.
"We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities," he said in prepared remarks to a community bankers convention in Phoenix.
"Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating," he said.
I you just read President Obama's budget and the surrounding documents, you would say as a progressive that the Administration has the exact right priorities, that they have identified the problem, will seek to make the tax code more fair and work rewarded rather than wealth, and will invest in the fundamental elements like health care, energy and education that will make this nation prosperous for decades to come. But if you read the financial sections, you are looking on in absolute horror. We are turning on an endless spigot to the very banksters who got us in this mess.
Taking the wraps off its much anticipated bank-rescue plan, the Obama administration on Wednesday announced that it will provide a virtually unlimited solvency guarantee to the nation's 19 largest banks [...]
The plan works like this: Through the end of April, federal regulators will pore over the books of the 19 largest banks — such as Citigroup, Bank of America, Wells Fargo and others. They'll be looking at conventional measures such as the composition of a bank's cash on hand, and at unconventional ones, such as how financial firms are valuing complex and opaque investments that are often shorthanded as toxic assets.
The idea behind the so-called stress tests is to gauge if the banks have enough capital to cope with a more severe downturn than even today's — one in which the economy contracts by 3.3 percent and the unemployment rate tops 10 percent. That's far from the worst-case scenarios that some of the gloomier forecasters predict.
At the end of the exercise, if it's determined that banks lack enough capital to weather such a storm, they'll be given six months to raise more capital from private investors or to ask for a capital buffer from the government.
If a bank is unable to raise private capital and needs to get capital from the federal government, it would do it in exchange for "convertible mandatory preferred shares." They could be converted into common stock on an as-needed basis, which would inject new capital into the bank. The government would become a shareholder in the company through its ownership of common stock.
Banks don't have to complete the stress test to apply for this capital buffer. Citigroup is expected to get a fresh injection of capital through this program in coming days. In exchange, the government is expected to take a stake as high as 40 percent.
Calculated Risk has the full terms. This is just going to cost a fuck-ton of money. Obama's team is planning to prop up zombie banks forever. And it will be forever, or at least for as long as most of us will be comfortable with. There is no way Congress will be able to allocate the money for such a maneuver - the anger over the banks will be overwhelming - so Obama wrote it into his budget. He basically made room for up to $750 billion more in banking aid, while calling it a $250 billion dollar expenditure - 8% of total federal spending in the budget - because of a presumption that we will get some of that money back. So the cash is already earmarked.
If anyone really believed these banks' capital was adequate, would we have this never-ending parade of special facilities, rate cuts to near zero levels, and programs to rescue stressed borrowers? All the interventions say loud and clear that most if not all of the big banks are in parlous shape, but the Administration keeps repeating the canard that the banks have more capital than needed "to be considered well capitalized." Well, either the standards for capital adequacy are rubbish or all the weekend specials and Congressional high stakes poker have been a complete waste of taxpayer money. You can't have it both ways, and you reduce your credibility by peddling this sort of thing. And this isn't just my reaction; readers who have seen this sort of formulation (it has shown up before) find it either comic or pathetic.
Anyone with a passing familiarity with the banks suspected of being in most urgent need of new funding, Citigroup and Bank of America, knows that their stock prices have fallen to levels that suggest serious doubts about their survival. Meredith Whitney, the bank stock analyst whose forecasts have been most accurate, said her best idea was to short Ciitgroup, last week, even at super depressed levels [...]
What Ben Bernanke does not say but clearly suggests is that asset prices are being depressed artificially by ‘irrational despondence.’ Stepping in to offer a bid to these assets will lift them — at which point the despondence will go away and all will be fine with the world.
This view is misguided because many asset prices are still above their long-term trend. This is certainly the case with house prices, where renting is still significantly cheaper than purchasing in many locales.
What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn't simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.
Even the stress tests seem to be envisioning a world where the "bottom" of the recession is substantially higher than what most economists would predict in their most pessimistic scenario (which is the point of the stress test). This would paint a rosier scenario for the banks than should be assumed, and would allow the Administration to continue to claim that nationalization is not the answer.
Timothy Geithner's main concern seems to be bailing out his friends and sparing no expense in doing so. All those late-night phone calls must have convinced him. He may also think, and has convinced Obama, that this is the only way to restore functioning credit markets. But that neglects both economic and political reality:
If the banks are owned by the same people who own them now, and managed by the same people who manage them now, then it’s going to be extraordinarily difficult to persuade the congress and the public that we ought to make enormous transfers of funds from the taxpayers to those owners and managers. What’s more, the banks will continue to be managed by the same bad managers who got us into the current situation. As a result, we’re going to wind up giving the banks less money than they really need to take off. And they’ll continue to be managed poorly. So they’ll continue to be wards of the state. And no private investors are going to want to give smaller, healthier banks the capital they would need to expand and thrive. Consequently, our economy will continue to be dominated by large, semi-dead financial institutions that hamper growth.
What they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.
"Japan" refers to their decade of zero growth as a result of propping up zombie banks instead of taking the necessary steps of temporary takeover, wiping out the shareholders and starting over. It's basically throwing money down a black hole. And that's the path we're headed down.
In many ways, the stimulus package debate has been overshadowed somewhat by the request for the second half of the bailout money, orchestrated by both the current and the next President. I think the reason for this is that we're starting to hear a steady drumbeat from banks that need more cash infusions to survive in this economic climate. The first tranche of money hasn't fixed the balance sheets of these companies, and it indeed might have encouraged them to take larger write-downs because they could absorb them. Bank of America is asking for billions in US aid because they claim not to have known the extent of the rot inside Merrill Lynch when they bought it. Citi is about to fall over if they don't get more funds. And that's just the beginning.
On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place [...]
Since last September, no major banks have failed and the credit markets have thawed somewhat.
But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.
Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.
Bernanke expanded upon this at a speech this week, saying that the recovery package would be "doomed" if the financial and credit markets weren't fixed. And we're starting to see the same kind of wrangling for more bailout money from the financial sector and their establishment cheerleaders, warning that even more than the $700 billion allocated must be put into the banks.
I agree with Atrios - the time has come to talk about nationalization. There is no oversight over this huge amount of money lent by both the TARP program and the Fed, which is only now coming under scrutiny. It's been a slush fund of close to $2 trillion dollars, without a sense of who got that money or where all of it is going.
Indeed, Treasury is already promising more money to the banks before they are even authorized by the Congress to do so. Sadly, the way it has been structured, it will be very unlikely for Congress to stop the delivery of the other $350 million. They have to vote affirmatively to keep it away from the President, which the Senate will do today, but the President can veto, and then override would require a 2/3 vote. I don't think you'll see that kind of support for holding back the money in Congress.
What ought to be done is that Congress should establish some oversight, and the TARP funds should be committed in a radically different way. On the first point, Barney Frank has worked to draft a bill putting restrictions on the bailout money, which include limiting executive compensation and demanding information on where the money is going. But top Democrats feel that the bill doesn't need to become law and that it should be seen more as a guideline, and Obama ought to be trusted to do the right thing. This isn't about taking someone at his word, this is about Congress fulfilling its oversight duties. So that should clearly be passed as a statute with the force of law instead of wishful thinking.
1. Do not use any of the money to buy stock in -- that is, to "recapitalize" -- the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi's balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi's lousy assets will be worth more than taxpayers paid for them. But we're not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It's a giant Ponzi scheme. The money will disappear.
2. Do not use the money to buy the banks' "troubled" assets. This might have made sense a year ago when the proportion of such assets -- which include mortage-backed securities as well as loans to private-equity partnerships that pissed them away -- was relatively small. But these days a huge and growing proportion of bank assets are "troubled." (It's also a huge waste of taxpayer dollars for the Fed to exchange them for Treasury bills.)
3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.
4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.
5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.
6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable lenders, they should return the money.
Absolutely. Obama says that the second tranche will be used to limit foreclosures. That's simply a wiser use of the money rather than throwing it into the sinkhole provided by the banks. It would provide a bottom-up stimulus and generate actual economic activity. Reich has an excellent suggestion for how this could be done.
Meanwhile, Congress should attach to TARP II -- or to the upcoming stimulus bill -- a small change in the bankruptcy law allowing homeowners to renegotiate their mortgages on their primary residences (as owners of second homes and commercial real estate can already do). The practical effect will be to give homeowners more bargaining leverage with their mortgage banks, and save at least 800,000 homes from foreclosure. Yes, in theory, holders of mortgage-backed securities will take a hit but as a practical matter they've already taken a hit because the securities (and the securities in which they're wrapped) are already deemed to be junk. At the least, this change will put a bit of a damper on the rising number of foreclosures. A home that's occupied by a family paying something on their mortgage is far better than a home that's empty, on which no one is paying anything.
And the money from TARP could be used to sweeten the pot for lenders to get moving on these workouts, though ultimately they're going to have to take a haircut.
This ought to be a bright line for progressives. Bankruptcy and foreclosure reform ought to be a part of this bill - and we should be willing to fight for it. Thomas Geoghegan, the progressive candidate running to replace Rahm Emanuel in IL-05, has a petition calling for no more blank check bailouts.
We call on Congress to reject President Bush’s request for another $350 billion blank check bailout. The Congress must follow their constitutional role and provide guidelines and restrictions on any money given to banks and Wall Street. These include:
Give priority – directly if possible – to help people keep their homes. Get public interest representatives or directors on bank boards in all of the banks receiving money. Penalize any bank that has been hoarding money from the first bailout In a time of economic hardship, with people losing their jobs, health care, pensions, and homes, Americans need economic security. We need a raise in social security, less debt, and single payer universal health care reform.
I watched almost all of the hearings in front of the Senate Banking Committee, and I have to say that the mood I gauged from the public comments of the Senators is extremely damaging to President Paulson's hopes of a stick-up for $700 billion. Chris Dodd came out and called the Paulson plan unacceptable. Richard Shelby, the Republican ranking member, is skeptical that the plan would even work. I didn't hear really any positive comments, and Sherrod Brown's were pretty representative:
To Bernanke: "I haven't received one phone call from a constituent that's been positive. I don't think people making $50,000 a year are interested in bailouts out executives whose country club fees are many times that. Does Wall Street owe the American people an apology?"
The anger in the Dirksen Senate office building reflects the anger in the country at the prospect of giving a significant portion of the Federal treaasury away, no-strings-attached, to those rich people who created the problem in the first place. The CEO compensation issue may be somewhat irrelevant, but if ordinary Americans see the through-line between their wallets and billionaire executives' luxury racing craft then the deal is politically impossible and will face a great revolt. What's more, the big banks are threatening not to participate in the bailout if their bonuses are taken away, so it is a factor, and I think Senator Obama is exactly right:
First, the plan must include protections to ensure that taxpayer dollars are not used to further reward the bad behavior of irresponsible CEOs on Wall Street. There has been talk that some CEOs may refuse to cooperate with this plan if they have to forgo multi-million-dollar salaries. I cannot imagine a position more selfish and greedy at a time of national crisis. And I would like to speak directly to those CEOs right now: Do not make that mistake. You are stewards for workers and communities all across our country who have put their trust in you. With the enormous rewards you have reaped come responsibilities, and we expect and demand that you to live up to them. This plan cannot be a welfare program for Wall Street executives.
There are bigger issues, however, and that's whether or not taxpayers get equity stakes in these banks who are relieving their distressed assets. In arguing against that, Ben Bernanke gave the game away.
"I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …"
This should be read in the context of Brad Setser’s calculations: he finds that if Treasury pays a price that seems appropriate given the poor quality of the assets, “The hit to the banks balance sheet might be too big” — the losses would be much larger than the amounts banks have already acknowledged, so that their capital position would be severely weakened.
So the plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.
What possible justification can there be for doing this without acquiring an equity stake?
The Wall Street Journal sees the same issue. And Markos finds a key quote that connects the executive pay issue and the equity stake issue and proves that this is really about making rich people richer.
"With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them."
Careful how you deal with them? How about you LET THE FUCKING FREE MARKET HANDLE IT then? If they want taxpayer funds to bail out their incompetence, they give up equity, they accept limits on executive compensation. If they don't want those conditions imposed on them, they don't take our money.
Simple, right? And if they don't take our money, who cares? They are strong and successful! And the taxpayers don't have to give up a dime. Everyone wins!
I am now certain that this is all a giveaway to the GOP's friends on Wall Street and an effort to financially handcuff the next administration. It has little to do with saving the economy. Otherwise, Treasury and White House officials wouldn't be talking about bribing and arm twisting these banks into taking government handouts.
Not to mention the fact that Paulson flat-out lied about wanting oversight in the bill when he presented a plan that stated his actions would be "non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
I don't quite know where this is going to go - the Congress and the White House have ignored the entreaties of the American people before. But the movement is away from the stick-up and toward something with an upside for the taxpayer. Chuck Schumer talked about a short-term plan to test the system and waiting until the next Presidency to make a full solution. Chris Dodd is doing a great job so far, and I don't know where it's going, but this doesn't totally feel like a steamroll right now.
UPDATE: Hilarious. The Republican Study Group - basically hard-right conservatives - have released their counter-proposal for the bailout. It includes suspending the capital gains tax for two years, privatizing Fannie and Freddie, and repealing the Humphrey-Hawkins Full Employment Act. In case you thought that the GOP suddenly got religion on economics and wanted to move forward without throwing money at rich people at the expense of the poor.
To Bernanke: "I haven't received one phone call from a constituent that's been positive. I don't think people making $50,000 a year are interested in bailouts out executives whose country club fees are many times that. Does Wall Street owe the American people an apology?"
Now talking about equity stakes in the affected companies. He's got Paulson and Bernanke on the run. Brown is giving voice to this refrain:
Henry is playing the role of Colin Powell in selling a disastrous plan to the American people. We all know how that turned out.
I have come to the conclusion that the bailout bill cannot be fixed and thoughtful members of Congress should simply say no. This is closer to the Social Security privatization fight - where only saying no until privatization was off the table - than the minimum wage increase fight, where Republicans extracted billions in tax breaks for business as the price of paying poor people a little bit more. Liberal congressional leaders are treating the bailout like the minimum wage deal. It is not. This vote is the bookend signature act of the Bush Administration to be coupled with the first vote authorizing Bush to invade Iraq. The details are not particularly relevant. Reports out of Washington say that the Bush Administration is comfortable adding in the notion of taxpayers getting an equity stake in bailed out Wall Street firms, but only if it is option, and not a requirement. And just who do you think is going to take that option? Not Henry Paulson.
There's a serious question to be asked about whether this is an effort to rescue the financial markets or an effort to drain the federal treasury and block a progressive agenda.
...see also Bernie Sanders, another progressive hero, calling for a progressive tax so that the wealthiest Americans can pay for this bailout. Christ, even Jim Bunning is questioning that credit card debt and student loans have been crammed into this bill. This may be a situation where Congress rumbles and grumbles and then passes a shit bill, but I'm not sure...
It is kind of amazing that all of these massive government bailouts have occurred with virtually no input from any elected leader. The Fed and the Treasury Department are really driving the boat. Bush made a statement in the Rose Garden this morning which said, approximately, that's he's aware of the problem and somewhat concerned about it. Some would say he's pulling a Katrina; clearly he's not involved in this at all.
According to The Wall Street Journal, Bush was briefed on the rescue after it was in play. And even then, he was only "briefed." There's been no effort on the part of the White House to even advance the idea that Bush is an engaged participant who's actively signing off on these actions, possibly because suggesting his involvement in a crisis of this complexity would cause the stock market to run and hide in a corner.
Congress, too, has been cut totally out of the loop. The AIG bailout -- in fact, all of the bailouts -- have been conceived entirely without their involvement. Indeed, the Federal Reserve and the Treasury Department have been acting, over the course of this crisis, as if they are the sum total of the government. And that may be the correct approach: Neither the president nor the legislative branch possess the expertise or speed to be involved in the real-time crisis management that Bernanke and Paulson are trying to manage. They could, presumably, reverse decisions after the fact or change the contours of the law, but for now, the ship is being steered by the Chairman of the Federal Reserve, the Treasury Secretary, and an informal working group of Wall Street CEOs and banking powerhouses. And the government, as we normally think of it, has basically accepted their temporary authority. You've heard of martial law? We're currently in a state of market law.
I think Paulson and Bernanke clearly have enough information to know what they're doing, but of course they have a different loyalty than an elected official. Clearly their goal is to save the financial markets. Elected officials would presumably look at how this impacted constituents. There's a significant amount of overlap there, but it's not a monolith. If the Fed is running the show, you will get Fed-friendly policies.
Lawmakers are fairly teed off that they've been pushed out of the loop here, and Nancy Pelosi is seeking to put them back in charge. I think it's fair that a $85 billion dollar bailout of the world's largest insurer comes with some Congressional, and therefore popular, input. Interestingly, the Republicans in the House are the ones talking populist.
"My instincts and my gut tell me they made the wrong move. But I don't have all the information they do," said Rep. Paul D. Ryan (R-Wis.), the senior Republican on the House Budget Committee, who yesterday fielded furious calls from constituents. "People are angry because they see this as their tax dollars bailing out Wall Street speculators. And in some cases, it is." [...]
"Just how long can the poor beleaguered taxpayer be expected to bear all the losses and bear all the risk?" said Rep. Jeb Hensarling (R-Tex.), one of the protest's organizers. "Lehman Brothers must have the worst lobbyist in town, since they are the only ones that appear to have lost out on the bailout mania."
This seems like a cover, something easy to say after the fact without taking responsibility for the environment they helped create. Indeed, the standard-bearer of the party is trying to show his conversion to a corruption fighter and a regulator who will stop the greed on Wall Street, bail out the auto industry and unleash the innovation of the American economy. But it's a fantasy world.
“Yesterday, nearly 80 years after the Hoover Administration took America with blissful ignorance into depression, the Dow Jones Industrial Average dropped more than 500 points – the biggest one-day decline since trading opened after the attacks of 9/11. With one major investment bank headed for bankruptcy, another sold at a bargain-basement price, and one of the world’s largest insurance companies teetering, investors rushed to sell their shares.
“With our financial markets reeling, the American people are wondering whether they will lose their jobs, whether they will be able to pay their child’s next tuition bill, whether their pension and retirement savings will be safe.
“There is no reason to think we are headed into an economic depression. There is no reason to panic. Yet one Senator – John McCain – woke up yesterday morning, surveyed the state of the U.S. economy, summoned the ghost of his fellow Republican, Herbert Hoover, and declared, ‘The fundamentals of our economy are strong.’
Even his helpers, like Mike Huckabee, aren't helping, recounting his long history against government and regulation.
I don't want Paulson and Bernanke making these huge decisions outside public scrutiny, but I certainly don't want John McCain or his picks doing it, either. Just consider that, in a McCain Administration, the guy with this unbridled power would likely be Phil Gramm.
While Bush and the Republican Party talk up how technically not horrible the economy is, Ben Bernanke spoke just like a whiner on Capitol Hill yesterday.
Warning of the risks of a further slowdown and higher inflation, Ben S. Bernanke, chairman of the Federal Reserve, offered a gloomy assessment of the economy on Tuesday as President Bush, speaking a few blocks away, urged Americans to have faith in the country’s financial foundation.
In testimony before the Senate Banking Committee, Mr. Bernanke avoided the word “recession” in characterizing the current economy, noting instead that consumer spending and exports were keeping growth “at a sluggish pace” while the housing sector “continues to weaken.”
He added that spending for personal goods had “advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes.”
While the risks to the overall economy were still “skewed to the downside,” he said, inflation “seems likely to move temporarily higher in the near term.”
As if on cue, the consumer price index jumped up yesterday at the fastest rate in 17 years, mainly due to rising energy prices. And Bernanke didn't see any hope on that horizon, either:
In his testimony, he was especially pessimistic about any easing of energy prices, dismissing suggestions that they were being driven by speculation in futures markets. Instead, he said high energy costs reflected the markets’ recognition that demand was outstripping supplies.
“Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil,” Mr. Bernanke said. “On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.”
I think there's a slight amount of speculation in the markets, but we're reaching a fundamental truth about oil, that production either is peaking or has peaked, and that we need an actual plan for getting off the carbon economy instead of cries of "Drill More!" for a product whose supply is diminishing.
The economy is basically everyone's #1 or #2 issue headed into the election. This NPR/Kaiser Foundation poll looking at economic issues in Ohio and Florida shows that 89% of residents in those two states think that the economy is "not so good" or "poor." Can 89% of the people be wrong? Sure, if they're all a bunch of whiners like Phil Gramm keeps saying. Of course, well over 89% of the country didn't buy the porn films he helped produce, so maybe he's just bitter.
The big picture is that the failed conservative policies of socializing risk and privatizing profit has caught up with them. They failed to react to bubbles in the housing market and practically forgot about regulation, and homeowners were screwed. They let insurance companies discriminate against their customers and saw 47 million Americans join the ranks of the uninsured. They sought bailouts for financial institutions who made bad decisions but not the homeowners who bore the greatest impact from them. They didn't respond to rising energy demand and sought only to raise profits for their oil company pals. They ran up huge deficits, borrowed for the future from China, and stratified inequality so much that it looks like a new Gilded Age. And now, they want to elect a man as President who will gladly carry out the same policies and further privatize the economy and tear at the social safety net.
(I'm glad that the DNC is taking on McCain on Social Security, by the way. Here's the video:)
On the one hand, Ben Bernanke lauds the expansion of education access at all areas of development, including the community college system, as among the best methods to reduce income inequality in the long-term. Now, Bernanke doesn't set education policy for the Administration. But he does have some sway over the financial services industry, if only in terms of influence and not the levers of policy, so he might be in a position to do something about this.
Some of the nation’s biggest banks have closed their doors to students at community colleges, for-profit universities and other less competitive institutions, even as they continue to extend federally backed loans to students at the nation’s top universities.
Citibank has been among the most aggressive in paring the list of colleges it serves. JPMorgan Chase, PNC and SunTrust say they have not dropped whole categories, but are cutting colleges as well. Some less-selective four-year colleges, like Eastern Oregon University and William Jessup University in Rocklin, Calif., say they have been summarily dropped by some lenders.
The practice suggests that if the credit crisis and the ensuing turmoil in the student loan business persist, some of the nation’s neediest students will be hurt the most. The difficulty borrowing may deter them from attending school or prompt them to take a semester off. When they get student loans, they will wind up with less attractive terms and may run a greater risk of default if they have to switch lenders in the middle of their college years.
Walling off colleges like this, which are a tremendous opportunity for low-income students to achieve a degree and some upward mobility, by making loans unreachable is the equivalent of a new caste system. This would be an absolute disaster for the working class and their children.
If this is so crucial to America's economic future, surely Bernanke can devise some incentives for banks to make available student loans for community colleges. I mean, he wouldn't want to be accused of delivering empty, meaningless rhetoric.
Republican White House hopeful Fred Thompson made light of Federal Reserve Chairman Ben Bernanke's call for a quick economic stimulus Thursday and said it might be best to leave the economy alone for now.
Thompson was answering questions in a restaurant where Bernanke could be seen on a TV urging short-term relief to avert a recession. Thompson was asked what he would do.
"You could probably get a 'Law & Order' rerun on TNT there if you wanted to switch that around a little bit," quipped Thompson, who acted on the series. When the host reminded him Bernanke is a South Carolina native, Thompson joked: "That looks a little boring to me. I don't care."
At a campaign stop attended by a CBS reporter in Lady's Island, S.C., Thompson was asked if he, "as a Christian, as a conservative," supported President Bush's global AIDS initiative. "Christ didn't tell us to go to the government and pass a bill to get some of these social problems dealt with. He told us to do it," Thompson responded. "The government has its role, but we need to keep firmly in mind the role of the government, and the role of us as individuals and as Christians on the other."
Thompson went on: "I'm not going to go around the state and the country with regards to a serious problem and say that I'm going to prioritize that. With people dying of cancer, and heart disease, and children dying of leukemia still, I got to tell you -- we've got a lot of problems here. . . . "
I think the only war Thompson's going to be fighting is the war on narcolepsy.
So it looks like the Republicans have backed off the effort to use the economic downtown and the need for a stimulus package in a Shock Doctrine way to try and make the Bush tax cuts permanent.
"I think there is a way to come to an agreement," House Minority Leader John A. Boehner (R-Ohio) said in an interview. "Not having an agreement is a lose-lose." [...]
A member of the GOP rank-and-file, Rep. Lee Terry of Nebraska, expressed the feelings of both parties when he said: "People expect us to act." If Democrats and Republicans can get together, he said, it will "let people know we can do something here."
Perhaps the most striking illustration of how much these developments were changing the atmosphere on Capitol Hill was the readiness of Republicans to step back from their long insistence that Congress make the Bush tax cuts permanent. Such tax cuts have been central to GOP economic policy for more than two decades.
Now Republican leaders say they are ready to put off action.
"It's impossible for me to believe that [permanent tax cuts] would be part of the agreement, as much as I would like to see that happen," Boehner said.
I think the overriding sentiment of the rest of this Congress has to be a limit to future harm. Making the tax cuts permanent would be intolerably harmful for fiscal responsibility. And with the downturn already underway (these Q4 banking numbers are awful), there's no need to just raise the future structural deficit problems any further.
To elaborate a bit, Bernanke's basically saying-without-quite-saying that any stimulus package that Congress passes shouldn't include making permanent the Bush tax cuts. He's not taking a stand on the tax cuts per se, but instead saying that whether or not it's a good idea is a separate issue from any short term stimulus package. They're two different issues - short term stimulus and long run structural - and they should be seen as such.
This stimulus package is by no means a done deal. But it won't make a bad problem worse and put the next President in a deeper hole. That's progress.
I think 0% interest rates are how low Helicopter Ben Bernanke would have to cut them to get us out of this mess. The economy is just souring on too many fronts, and it's all interconnected. We know that housing is a mess. People are barely managing to keep their homes, and they certainly aren't able to borrow against it and live off the home. As a direct result, consumer spending is in the toilet:
An already weak holiday shopping season turned out to be even worse than expected for many of the nation's retailers, who reported Thursday they had disappointing sales results for December. The poor performance raised more concerns about consumer spending, and in turn, the health of the economy.
And if you have no way of borrowing against your home, but you need to borrow to survive, or just borrow to grab some more material goods or that last Christmas present, or to keep up with your own living standard, why then you'd borrow against your credit cards.
We've just learned that credit card debt increased at an 11.3% annual rate in November. In 2005, it increased at a 3.1 percent rate. Why the jump? As Dean Baker says, "People borrow against their credit cards when they can't borrow against their homes. It looks like a lot of people can't borrow against their homes."
Meanwhile, we know that certain prices continue to soar. Gas is expected to hit $3.50 a gallon this summer, and health care costs averaged seven THOUSAND dollars a person last year. Now, that's mostly incurred by the sickest among us, but premiums and deductibles are certainly going up. And that's delivering a health care system that is decreasing in effectiveness.
A pair of researchers has just published an update that compares various countries on their rates of "amenable mortality," defined as deaths that are "potentially preventable with timely and effective health care." In 1997, the United States ranked 15th out of 19 industrialized countries. So how are we doing now?
Answer: we're now 19th out of 19. The rest of the countries have improved their performance by an average of 16%, while the U.S., that well-known engine of healthcare innovation, has improved by only 4%. So now we're in last place.
As Kevin Drum says, "This is really bad news. The chickens are coming home to roost."
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