A Missed Opportunity

Here's a report from the Inspector General for the TARP program saying that Treasury lied to get money into the hands of the banks.

The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky [...]

Mr. Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses.

That was George Bush's Treasury Department. And this practice of private equity companies and Wall Street investment firms looting the Simmons Bedding Company through borrowing the company into debt and taking out profits, is a fairly common practice. Neither should be intimately associated with the Obama Administration. Neither should the TARP program, initiated by Henry Paulson and the Bush White House. And yet, these revelations are happening on a Democrat's watch. And Chris Bowers is absolutely right to note that the bailout has constrained Obama's moves on the economy and threatened the Democratic majority for years to come.

The $810 billion Wall Street Bailout is a loadstone hanging around the neck of the Democratic Party. It thwarting what should have been a realigning moment in American electoral politics. Upon regaining control over the federal government following the 2008 elections, Democrats should have been able to cement their image as, in the words of Al Gore, "the people versus the powerful." Instead, we have become complicit in perpetuating a federal government that is more responsive to the wishes of powerful moneyed interests at the expense of the vast majority of Americans. And so, our chances at realignment are slipping away [...]

Maybe it wasn't possible to pass a $1.2 trillion stimulus in early 2009. However, this was due as much to Congress passing a $700 billion Wall Street bailout in October 2008 as it was to anything else. From October 2008 through February 2009, Congress did actually pass more than $1.2 trillion in economic stimulus. The problem was that, in the form of the Wall Street bailout, most of that money went to the same people financial institutions who caused the economic meltdown.

Perhaps the distinction between the stimulus and the bailout is clear in the minds of most economists and policy wonks, but it is not clear to many Americans. As such, passing the Wall Street bailout imposed a huge opportunity cost on the amount of money the Obama administration could realistically ask for in the February stimulus / jobs package. If they had not asked for $700 billion to hand over to Wall Street, they might very well have been able to ask for, and pass, the $1.2 trillion needed in the stimulus package.

Again, the bailout began prior to Obama's election, but Democrats in Congress held the majority when it passed, Obama endorsed it, and he even started pressuring members of his own party about it. He clearly had no problem with it, and yet it has narrowed his options on a sagging economy that has not seen much of a comeback on the jobs front. As Paul Krugman notes today, Christina Romer knew that the stimulus package would need to be twice as large as it ultimately became, but Larry Summers didn't even offer that as an option for political reasons. They didn't think they could move a $1.2 trillion dollar stimulus. So Summers talked himself into calling the stimulus “an insurance package against catastrophic failure,” admitting its lack of sufficiency. And the bailout contributed to that. Bowers is right that people don't make the distinction between the bailout and the stimulus in their minds; to them it's all government spending. And the right has used this skillfully, taking advantage of the anxiety people feel with job loss and financial insecurity to advance a kind of right-wing populism that ultimately serves corporate interests as much as the bailout did. As a result the teabaggers are gaining the upper hand in this debate:

Having said all that, there is great, HUGE value in this movie as an emotional, populist polemic for the left, something I've been screaming about since the beginning of the financial crisis. It's extremely disheartening to see the administration and so many Democrats in congress completely ignore the political and policy ramifications of failing to engage in fundamental financial reform and fiery populist rhetoric at a time like this. This teabagger movement is happening in a vacuum created by a lack of interest in this topic by liberals who are so enamored of being members of the new "creative class" and the like that they aren't paying attention to the cynicism and anger that's reaching critical mass among average working stiffs out there. It's easy to dismiss it, but very, very foolish. The issues Moore raises in this film will be answered on the right with authoritarianism, militarism, immigrant bashing and violence. It's a recipe for disaster unless the left takes this on in direct, political terms.

It's all there in Ryan Lizza's beat sweetener on Larry Summers and the Obama economic team. Fairly or unfairly, they are being tarred as corporate sellouts and tagged as the ones who ushered in the bailout. What that really suggests is that the parties in this country are interchangeable in the face of corporate hegemony, where powerful interests can write the laws no matter which party nominally controls the government. Right now, that's being proven by an economy working only for the banks and not regular people. And the Democrats are in power at this moment.

This is a dangerous time, where a party at near-historic lows in the public consciousness could actually rise to power, because they can credibly claim the mantle of being the party of the people. If the Democrats don't show Americans they are on their side, that's exactly what will happen.

That's Only If You Think $23.7 Trillion Is A Lot Of Money

Neil Barofsky puts a number on the worst-case scenario:

The federal government has devoted $4.7 trillion to help the financial sector through its crisis, a level of assistance equal to about one-third of the overall U.S. economy, a watchdog report said Monday.

Under the worst of circumstances, the report said, the government's maximum exposure could total nearly $24 trillion, or $80,000 for every American.

That's an unlikely circumstance and represents the gross exposure, but what it does show is how the TARP funds are really a drop in the bucket. All of these special programs that banks can access make a mockery of them "paying back" their obligations. All of them are still open to the banksters. And what burns me more than the exposure is how the banks have used this money:

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

Roughly 80 percent of respondents, or 300 banks, also said at least some of the money had supported new lending.

They've taken our money and shaken it lovingly down their gullets. And as a result, the economy hasn't budged. Larry Summers is finally urging banks to lend, but he could have put this in writing months ago. It is simply not good enough to expect voluntary compliance. Hope is not a plan.

...I'm still trying to figure out how you can say that the stimulus plan is working except for the jobs. Wasn't that the point?

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."

Throwing More Money Down A Sewer

When the stress tests were first released late last week, the official line was that most banks remain well-capitalized, but should hold a reserve above the regulatory requirements just in case. Then we heard that at least one unidentified bank would need more capital, but everything else is OK. Today, we're getting some names:

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government's so-called stress tests of lenders, according to people familiar with the situation.

The capital shortfall amounts to billions of dollars at Bank of America, based in Charlotte, N.C., people familiar with the bank said.

Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.

The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital.

I don't think the rebuttals will exactly help. Of course BofA and Citi will insist that they're well-positioned. They've been saying that since well before receiving $45 billion dollars a piece in government money. Which helped mitigate the worst effects, but did not solve the problem, as we can plainly see.

And then there's that ominous last line, that it's "unlikely" that they're the only banks shown to be in trouble by the stress tests. Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. are mentioned as possibles. We've gone from zero banks in trouble to a healthy portion of the 19 studied in a matter of days. There's also a wonderful line in there where government officials say "banks directed to raise more capital shouldn't be viewed as insolvent." Um, isn't that the purpose of the stress test and the very definition of an insolvent firm? Apparently not, says Edward Harrison.

"Instead, the capital is intended to cushion the banks against potential future losses under dire economic conditions. Federal officials say they won't allow any of the top 19 banks to fail.

Still, it is unclear how flexible the government will be about adjusting the results, especially as banks plead their cases individually. Banks have until the middle of this week to lodge their formal responses to the tests. Bankers expect that will set the stage for several days of intense negotiations between the banks and their examiners."

Ah, I see, it is all a sham.

It sounds a lot like a test where the student banks who just failed go to the teacher regulator with mommy and daddy bank lobbyists in tow to see if they can get their grades changed higher. See, the stress are just a scheme to make us think the Federal government is actually doing something about the under-capitalized banking system in the U.S.. In reality, the Obama Administration is just buying more time in order to let us grow our way out of this problem.

While Larry Summers does appear to now believe that financial industry growth has been outsized, he adamantly asserts that the stress tests were designed to get the banks the capital they need, not to reveal their essential insolvency. No bank will be able to recapitalize entirely with private funds. This imagining of the stress tests is simply a recipe for more government largesse. While we may be on the right track to putting in the proper amount of sand in the gears to ensure this never happens again, I'm extremely troubled by the way out being seen as feeding the giant maw of the banks over and over and over again.

Finally Taking A Look At Usury In The Credit Card Industry

In Al Franken's "Why Not Me," which chronicles his fake run for the White House (as opposed to his fake run for Senate, and I say "fake" because it can't be real that it's April and he still hasn't been seated), his single issue that he rides to victory is ATM fees at banks. I've been wondering why more politicians haven't jumped on consumer banking issues, that interface with the public every single day. Looks like the President has thought this over as well.

President Barack Obama plans to crack down on deceptive credit-card industry practices that have saddled U.S. consumers with huge debts and soaring interest rates, U.S. officials said on Sunday.

Top White House economic adviser Lawrence Summers said Obama would be "very focused in the very near term on a whole set of issues having to do with credit card abuses."

"We need to do things to stop the marketing of credit in ways that addict people to it," Summers said in an interview on the NBC television talk show "Meet the Press."

Summers, director of the White House National Economic Council, said the administration is concerned about practices that result in consumers being "deceived into paying extraordinarily high rates that they wouldn't have paid if they knew they were getting themselves into."

The movie Maxed Out covers this topic fully, and guess who emerges as the lone voice in Congress wanting to tackle this issue? Chris Dodd. His bills regulating the credit card industry have been so watered down over the years they actually arrive on the President's desk in liquid form. It's high time we did something about these usurious rates.

That said, I am not all that encouraged by the fact that the industry gets a White House meeting to plead their case:

Executives of the nation's largest credit-card companies will meet with President Barack Obama at the White House on Thursday to discuss growing concerns about questionable practices in the industry.

White House Press Secretary Robert Gibbs said Monday that the meeting would be a chance to stress the need for greater clarity in the way that credit cards are marketed and administered. During his campaign last year, Obama strongly supported legislation to improve the rights of cardholders.

"What we want to do is ensure that people can have access to the credit that they need, but that we can also do this in a way that's transparent and fair and honest. And I think that's one of the things that the president will talk to them about," Gibbs said.

A recent survey of credit card practices by the Pew Charitable Trusts found that of more than 400 cards offered online by the 12 largest issuers, all allowed payments to be applied in ways that disadvantaged cardholders, such as paying off lower-interest balances before those that accrue higher interest.

Keep in mind that most of these credit card issuers are the same banks that received huge bailouts from the government. Yet they continue to gouge the consumer. Why exactly do they deserve a meeting at the White House? Are consumers getting a meeting?

The Lesson

I don't know that I have much to say about the dysfunction in the Obama economic team that wouldn't just be a rewrite of Glenn Greenwald's piece, but it may be worth it to just disseminate the information. Here's the story so far:

Banks lost a ton of money by making terrible bets based on fanciful notions that housing prices would go up 20% year over year approximately forever. All the while the executives sat on each other's boards and handed out giant bonuses and compensation packages to each other while the financial sector grew essentially out of control. In the process, they used their money and power to effectively buy Capitol Hill and make sure their portion of the economy could keep growing, whether through usurious interest rates, a total lack of oversight (including by some of the same people now charged with overseeing the banks) or just massive wealth transfers. When everything came crashing down, the very last thing these banking interests wanted to do was admit defeat or give back any of their money and power. At the same time, the entire country was furious at them. So they set to work bribing who they knew would be top officials in the next government, people like Larry Summers, who honestly didn't even need to be bribed. And every time Congress or the executive branch threatened to end their party and put limits on their power, they found in Summers and other officials a willing partner in subverting the rules that would make them give back their bonuses and excessive compensation, which by the way the taxpayer is funding. We, the taxpayers, are told that this is necessary to ensure financial sector participation in the program to rid the banks of all of their bad assets at a potentially massive taxpayer expense. However, left unsaid is the fact that the same banks are planning to game the system by passing the same bad assets back and forth among each other at high prices, and using tricky accounting tactics to pretend that the assets on their books have value.

I think we can go to Greenwald now:

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC from regulating these derivative markets. More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

At the same time, the exact same banks which the government has propped up to the tune of trillions of dollars will not lift a finger to help out industries that produce tangible goods, further crumbling them and increasing the financial sector share of the economy.

And the lesson we have to learn here is that the financial sector bought government and has thus far gotten what they paid for.

I think I'll watch some basketball. Go Villanova! Your government is in control. You are free... to do as we tell you...

Dodd Was Pushed - Who Pushed Him?

Chris Dodd's "admission" that he was asked by unidentified Administration officials to take out the limits on executive compensation and bonuses from the stimulus package is being treated like a bombshell, for reasons which escape me. Let's start with his statement (via email):

“I’m the one who has led the fight against excessive executive compensation, often over the objections of many. I did not want to make any changes to my original Senate-passed amendment but I did so at the request of Administration officials, who gave us no indication that this was in any way related to AIG. Let me be clear – I was completely unaware of these AIG bonuses until I learned of them last week.

Reports that I changed my position on this issue are simply untrue. I answered a question by CNN last night regarding whether or not a specific date was aimed at protecting AIG. When I saw that my comments had been misconstrued, I felt it was important to set the record straight – that this had nothing to do with AIG.

Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers. Again, I have led the fight to curb excessive executive compensation, and will continue to do so.”

Dodd is classier than whatever Administration official tried to rat him out on this. But the fact remains that Dodd devised the amendment capping bankster salaries, authored it, got it passed through the Senate, and then someone in the White House asked him to nix part of it, which he did, reluctantly, while keeping in the forward-looking language. And by the way, this was all public knowledge in the run-up to the conference committee on the stimulus. I fail to understand how there could be a grand conspiracy on such a well-covered subject.

The only question that remains is: Who?Who asked Dodd to take out the amendment?

The anti-bonus provision has been the subject of several posts in the liberal blogosphere today, after an anonymous administration official was quoted in the New York Times Sunday appearing to place the blame on Dodd for the weakening of the language.

Jane Hamsher cites two contemporaneous articles on the stimulus that identify top administration opposing to Dodd's original, tougher language. This one from the Wall Street Journal reports that Timothy Geithner and Lawrence Summers "had called Sen. Dodd and asked him to reconsider."

And this one, from The Hill, says President Obama himself wanted changes in the provision.

If those reports -- both anonymously sourced -- are accurate, contacts with Dodd occurred well above the "staff level." Something tells us we'll be hearing more about this.

The reporters from the WSJ and The Hill who anonymously sourced their stories could actually shed the most light on this by simply giving up their sources, but of course that's not going to happen. So we wait. Tim Geithner or Larry Summers have an opportunity to clear their names as well.

Finding A Scapegoat

Good to see that the Treasury Department is so concerned about the AIG bonus babies that they are throwing Chris Dodd to the wolves to deflect criticism.

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

That's just not true, as both Jane and Glenn Greenwald explain pretty definitively. Under a Dodd-written amendment, the Senate version of the stimulus bill included executive compensation limits for all recipients of TARP money, only to have the amendment stripped of retroactivity and applied strictly toward future payouts, after negotiations with none other than Tim Geithner and Larry Summers:

The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.

This wasn't a small behind-the-scenes fight, it was a major contention in the stimulus debate, subject of several articles. Obama's economic team didn't want limits on executive compensation, and Dodd did. The Administration won, and now in the midst of this furor they're trying to rewrite history by putting Dodd and themselves in opposite roles.

Dodd is a threatened incumbent who the right wing has been slandering for months, and now some anonymous official in the Obama Administration has taken the heat off themselves by allowing a firestorm based on a myth. Chris Bowers writes:

Now, some elements inside the administration have reached the point where they are placing blame for something Geithner and Summers did--block legislation that would have stripped the bonuses--on the person who wrote the legislation that would have stripped the bonuses. And that person just happens to be the most vulnerable Democratic Senators in 2010.

Glad to see that some senior administration officials value Geithner and Summers more than either Democratic Senate seats, or even more than honesty. There is a serious problem inside the Obama administration on this matter, and dismissals are needed to solve it.

In a related development, Republicans tied Democrats in the congressional generic ballot in one poll today, and took the lead in the other. I guess the new "Geithner uber alles" strategy isn't working out to well for Democrats.

I think it's premature to hype those poll numbers, especially when other ones taken at the same time show an opposite dynamic, but unquestionably, there is a rot at the heart of the economic team. This is the first incident that Obama has truly owned, regardless of the deflections. Republicans don't completely have their act together on this - they're too conflicted, having argued for free market fundamentalism for so long that the knee-jerk response is to argue for more. Even their ideas for clawing back the bonuses are crude copies of what the President has already decided. But anyone can plainly sniff out the villains here, and in addition to hyping the bogus Dodd assertion, the GOP is going after Geithner.

Reps. Steven LaTourette (R-OH) and Thaddeus McCotter (R-MI) introduced a resolution of inquiry today that would force Geithner to reveal the full extent of his department's communications with AIG.

The resolution would affect not just talks over bonuses but about the very structure of the Federal Reserve's investment in the company -- which appears to have included built-in limitations on the government's influence over management.

This is the real deal, folks: resolutions of inquiry (ROIs) are a crucial procedural tool for the minority party to seek information from the executive branch. Democrats did this during the Valerie Plame/Spygate scandal and the debate over the Bush administration's extraordinary rendition. The Congressional Research Service found in a November study that ROIs oftentimes succeed in prying out information even if they fail on the House floor.

No rational Democrat can disagree that we need to know about those communications. Geithner's connections with AIG go all the way back to the initial bailout decision, and are tied to the tens of billions in payments to counterparties, which is the far more damaging element of this - essentially a double-dip for banks who already received government money. While the bonus scandal raises the right-wing phony populist ire, the drumbeat for more investigations into Geithner's contacts with AIG and what he knows about the counterparties and maybe about why the Federal Reserve is injecting billions into foreign central banks and why more than half of the AIG bailout money is leaking over the border and a whole host of other issues which involve Geithner but also the previous Administration. And the very clear potential exists to drown the entire Administration agenda into a day-by-day recitation of whether the President still has faith in his economic advisers, etc.

The President brought this upon himself through his hirings. But if he wants to find a way out, he could stop the practice of his team blaming others and start living up to his own rhetoric.

Condition Critical

The AIG bonus scandal is a real crisis for this Administration. Now revealed to be as big as $450 million dollars, the money is weighted heavily toward the Financial Products division that wrote all the credit default swaps which contributed to nearly taking down the global financial system, and there are only 370 people at this division, so you're looking at about $1M per person for the unit that lost $40 billion and destroyed their own company. At this point, I'm not sure why AIG NEEDS a Financial Products division at all. Far from shoveling them $450 million dollars, they shouldn't have a job. Yet that's what CEO Edward Liddy is doing, and pretty brazenly - saying that he's very sorry, but his people are getting their cash. I agree with Hilzoy:

And extortion is what it is (morally; I am not a lawyer, and I'm not trying to make a legal claim.) If I ran someone down in a car on a deserted road, it would take a lot of gall for me to ask him to pay me an exorbitant price to take him to the hospital since there's no other car around. When you run someone down, taking him to the hospital is the least you can do, and payment shouldn't so much as enter the picture.

Likewise, when you run the world financial system and the American taxpayer down, it takes a lot of gall to ask for not just a performance bonus, but a retention bonus as well. Any remotely decent person would stay and try to unwind the damage s/he had caused, if s/he was the only person who could do so, and would be content with his or her salary. (After all, it's not as though people in financial services are generally underpaid.)

The expressions of outrage on the part of the axis of Geithner and Summers are nice, but the shrug of the shoulders and words like "There's nothing we can do" are disingenuous at best. First of all, we the people own AIG. We have an 80% stake, and shareholders of that magnitude ought to be able to dictate at least some terms. Second, this "contractual obligation" argument was not operative when auto workers - whose companies are not owned by the government at an 80% rate - were forced to tear up their own contractual requirements on wages and accept new terms as a condition for their industry bailout.

Jane has a long piece on this today.

The White House is worried about backlash over AIG's payout of $450 million in bonuses to the executives in its high flying Financial Services Group, the out-of-control derivatives trading arm that looted the company, destroyed its stock and contracted for huge bonuses even after they saw the risk of collapse.

Robert Reich says that the administration's failure to stop this is a sign that "our democracy is seriously broken," and it is. When the story was initially leaked by a "senior government official," this was the excuse for the administration's impotence in what can only be characterized as a grand theft [...]

American taxpayers now own 80% of AIG. They'll be paying back the government, and paying off the bonuses, with our money. There is no reason to be tiptoeing around these people.

Are Geithner and Summers are just too aligned with Wall Street interests to do what needs to be done?

The bottom line is -- nobody trusts them. Congress needs to use its subpoena power to get a hold of these AIG contracts and make their own analysis.

President Obama is in a tough spot. Today he said that he intends to stop the bonuses from going forward, putting him in direct contrast to his own economic advisers.

"It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession.

"How do they justify this outrage to the taxpayers who are keeping the company afloat," the president said.

Obama spoke out in the wake of reports that surfaced over the weekend saying that financially strapped American International Group Inc. was paying substantial bonuses to executives.

Noting that AIG has "received substantial sums" of federal aid from the federal government, Obama said he has asked Treasury Secretary Timothy Geithner "to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."

He's saying the right things. But if the functionaries continue to look at what's best for Wall Street over what's best for the people, Obama will be caught. The fact that AIG is vowing to cut bonuses in the future will be of little consequence. If the 2008 bonuses stand, there will be hell to pay, and eventually Republicans will figure out how to play this game.

This is arguably made worse by the fact that AIG has now released the list of beneficiaries to its rescue, the counterparties who were paid off in the process of the bailout. It's pretty much the same group of domestic and foreign banks expected, but now the bonus babies at AIG are being paid to funnel money to Goldman Sachs and the like. The optics are terrible. And if the Administration is not careful, and continues to please elites at the expense of the people, they will face a massive backlash.

...Marcy Wheeler thinks AIG is making a veiled threat to the government, that either they get their bonuses or they would trigger a default event and take the taxpayer for billions more. Honestly, how is this any different from what they are already doing? If we cancelled the contracts and let France appoint a designee, wouldn't we be done with this company? I'm sure it's more complex than that, but I'd be fine with a lawsuit and a final payoff to end it... I understand that this would set off an event that could pull the whole house down, so obviously it's quite a serious terrorist act AIG managed to pull.

Bonus For Me But Not For Thee

The government owns 80% of AIG. We've provided $180 billion dollars in taxpayer money. Somehow, these companies don't understand that you can't turn around and provide $165 million in employee bonuses, from the stanpoint of optics, after doing that. The Treasury Secretary urged a renegotiation of the bonuses and AIG's chief executive just went ahead and defied him and took care of his own. Larry Summers called it outrageous on ABC today.

The bonuses are apparently contractual. But we could put them in bankruptcy tomorrow, and then they'd all be out of luck.

I don't think contractual bonus obligations have much standing in bankruptcy proceedings. But this article from CFO.com, sent along by TPM Reader JM, suggests that that's only the start of it. The article is about the follow-on to the Lehman bankruptcy. But what it argues is that if creditors can show the the bankrupt institution was actually insolvent at the time the payments were made they can force the execs to cough up earlier bonuses as well. And remember AIG was in dire straights long before the US government stepped in and provided the lifeline last fall.

Late Update: As we know, AIG isn't legally in bankruptcy, though it's only been saved from that fate by a government bailout. But TPM Reader CW raises what is in many ways a more spot-on point: "Have Richard Shelby and Bob Corker held their press event demanding that AIG break their contracts with their overpaid Financial Products workers for their shoddy work?"

Good point.

Silly, only auto workers getting health care benefits bankrupt the country, not Masters of the Universe getting millions in bonuses!

With so many people hurting, it's really criminal for this to be taking place.

Post-Bubble Economics

I thought Larry Summers gave an interesting speech yesterday. Clearly the White House is interested in having him in public right now. He dominates the Sunday shows tomorrow, and with Geithner's credibility in question, he's the biggest voice on economic issues coming from that point of authority. Most progressives have a dim view of Summers because of his past association with the deregulation and corporate-friendly policies of the Clinton Administration. But let's look at a bit of what he said yesterday.

The beginning was a reassurance that this crisis will pass, that the policies being put in place will lead to economic growth. The White House is clearly trying to project confidence on this front, using their blog to pick out examples of "Recovery in Action" from across the country. But then Summers summarized the current problem, and offered what was, for me, a novel way of thinking about it.

It was a central insight of Keynes' General Theory that two or three times each century, the self-equilibrating properties of markets break down as stabilizing mechanisms are overwhelmed by vicious cycles. And the right economic metaphor becomes an avalanche rather than a thermostat. That is what we are experiencing right now.

• Declining asset prices lead to margin calls and de-leveraging, which leads to further declines in prices.
• Lower asset prices means banks hold less capital. Less capital means less lending. Less lending means lower asset prices.
• Falling home prices lead to foreclosures, which lead home prices to fall even further.
• A weakened financial system leads to less borrowing and spending which leads to a weakened economy, which leads to a weakened financial system.
• Lower incomes lead to less spending, which leads to less employment, which leads to lower incomes.

An abundance of greed and an absence of fear on Wall Street led some to make purchases – not based on the real value of assets, but on the faith that there would be another who would pay more for those assets. At the same time, the government turned a blind eye to these practices and their potential consequences for the economy as a whole. This is how a bubble is born. And in these moments, greed begets greed. The bubble grows.

Eventually, however, this process stops – and reverses. Prices fall. People sell. Instead of an expectation of new buyers, there is an expectation of new sellers. Greed gives way to fear. And this fear begets fear.

This is the paradox at the heart of the financial crisis. In the past few years, we've seen too much greed and too little fear; too much spending and not enough saving; too much borrowing and not enough worrying. Today, however, our problem is exactly the opposite.

It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself. It is this transition that has happened in the United States today.

This is kind of a recitation of the theory of animal spirits that the White House is consumed with, the psychological theory for the crisis in the markets. The financial barons had an "irrational exuberance" on the way up, and now they have an irrational pessimism on the way down, the theory goes. Only I don't think it's all that irrational - the phantom wealth created by the derivative markets and on-paper assessments of assets really has vanished and it's not coming back. Ultimately, restoring confidence isn't going to paper over the giant hole in the balance sheet.

Nevertheless, here was Summers' assessment of the solution, after laying out the problem:

While greed is no virtue, entrepreneurship and the search for opportunity is what we need today. We need a program that breaks these vicious cycles. We need to instill the trust that allows opportunity to overcome fear and enables families and businesses to again imagine a brighter future. And we need to create this confidence without allowing it to lead to unstable complacency.

While the economy is falling far short today, perhaps a trillion dollars or more short, we should never lose sight of its potential. We have the most productive workers in the world, the greatest universities and capacity for innovation, an incredible amount of resilience, entrepreneurship, and flexibility, and the most diverse and creative population of any major economy [...]

Taken together, these steps to support incomes, increase the flow of credit, and normalize housing market conditions address each of the vicious cycles that is leading to decline.

With the passage of time, it will permit the re-engagement of the normal processes of economic growth: rising incomes and employment, greater credit flows, increased spending, a stronger US economy and a stronger global economy. They will reinforce crucial dynamics that will also operate to promote recovery.

There's a substantial amount of question about whether those steps, particularly with respect to the banking sector, are going to work. And really, recovery hinges on getting those steps right. But what I really, really liked about Summers' approach was that he rejected the idea of reinflating bubbles as the road to recovery, and using this crisis as an opportunity to rebuild the economy on a sustainable path. This sequence is solid.

Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble's excesses and those who did not. And, it is not entirely healthy even while it lasts. Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.

Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor. That is why the President has priorities that go beyond the immediate goal of containing the downturn and promoting recovery.

I think that is the perfect way to rebut the stodginess of the naysayers who have decided Obama is doing too much too fast. In fact, laying the foundation for sustainable growth goes hand-in-hand with that progress on health care and energy and education. It will make business more competitive, and increase home-grown manufacturing industries. Most of all it will bring the economy into balance, so that the "industry" of wealth creation isn't too big to fail and instead performing its actual function of facilitating the flow of capital through the real economy. Obama addressed this as well in remarks to the Business Roundtable. We can't have bubble and burst cycles anymore that rip up the middle class who didn't create them.

You see, we cannot go back to endless cycles of bubble and bust. We can't continue to base our economy on reckless speculation and spending beyond our means; on bad credit and inflated home prices and over-leveraged banks. This crisis teaches us that such activity is not the creation of lasting wealth -- it's the illusion of prosperity, and it hurts us all in the end.

Instead, we must build this recovery on a foundation that lasts -- on a 21st century infrastructure and a green economy with lower health care costs that create millions of new jobs and new industries; on schools that prepare our children to compete and thrive; on businesses that are free to invest in the next big idea or breakthrough discovery.

In addition, Summers defended the need for increased labor protections.

If we want to propel this economy forward and we want to have a sound expansion, it has to be an expansion whose benefits are more broadly shared. And that goes to questions of tax policy... It goes to the questions of education over the longer term. And it goes to the question of having a healthy and well-functioning trade union movement. And I think it is hard to avoid the conclusion that the way in which our labor laws have functioned, and have been enforced and been acted on over many years, have not been constructive from the point of view of having a healthy trade union movement. And an attempt to redress that balance seems to me something that is appropriate at such a time.

I think this is a good philosophy going forward. It's the right message, and one that's harder to argue with. The Masters of the Universe broke the economy, and now we have to take the steps to ensure it never happens again. But in addition, we have to reward work and not wealth, so that these greedheads aren't even in the position to try it.

You Kids Just Don't Understand

Barack Obama, the President of the United States, with about 10,000 things to do, doesn't read blogs. That's not a big deal - he's a busy man and can have whatever reading list he wants. What may be a big deal is the almost fetishistic desire to reject certain solutions based solely on their perceived ideological moorings.

Q: Sir, we’re landing here, but what are you reading these days? What kind of newspapers do you read, do you read the clips, do you read actual papers, do you watch television?

A: Other than The New York Times?

Q: Other than The New York Times. Do you read Web sites? What Web sites do you look at?

A: I read most of the big national papers.

Q. Do you read them in clips or do you read them in the paper?

A. No, I read the paper. I like the feel of a newspaper. I read most of the weekly newsmagazines. I may not read them from cover to cover but I’ll thumb through them. You know, I spend most of my time these days reading a lot of briefings.

Q: And television? Do you watch? Web sites?

A: I don’t watch much television, I confess.

Q: And Web sites?

Q: No blogs?

A: I rarely read blogs [...]

Q: Has anybody said to you, No, sir, you can’t do that? Has there been a moment in these last six weeks where you tried to do something and somebody said, Sorry, sir, it doesn’t work that way?

A: Well, I mean, I think what we were talking about earlier in terms of Guantanamo. People didn’t have to tell me, No you can’t do that. It was simply, Well, sir, here are the challenges that we face in terms of making a decision about that. In the entire banking sector – we spend every day, myself, Rahm Emanuel, Tim Geithner, Larry Summers, Christina Romer, every single day, we will spend at least an hour of my time just talking through how we are approaching the financial markets.

And part of the reason we don’t spend a lot of time looking at blogs is because if you haven’t looked at it very carefully then you may be under the impression that somehow there’s a clean answer one way or another – well, you just nationalize all the banks, or you just leave them alone and they’ll be fine, or this or that or the other. The truth is this is a very complex set of problems and bad decisions can result in huge taxpayer expenditures and poor results.

Part of the reason I don't spend a lot of time looking at Obama's opinion on blogs is because if you haven't looked at them very carefully, you may be under the impression that somehow they all advocate a clean answer one way or another. The truth is they have offered a very complex set of opinions across the spectrum, and bad impressions can result in mass stereotyping and poor analysis.

What's at issue here is that he's not really talking about blogs, per se, so much as he is talking about critics, from the right to an extent but particularly from the left, the financial bloggers who are disappointed at the Administration's halting efforts thus far. What this suggests is that any point of view with goes ideological on the liberal side of the ledger is dismissed because of extenuating circumstances. That is a recipe for groupthink, a feedback loop where only the opinions of Geithner and Summers are respected. In particular, he namechecks blogs in relation to the banking situation, the one area where he is getting the most criticism. The reaction to criticism here is to reject the perspective of the critics because they lack information. That's just not good. Especially when the critics are experts in the field.

I've heard quite a lot of this in my time - veterans of the political scene telling me that I just don't understand the complexities and settle for simple-minded solutions. They're frequently wrong when the full accounting is done. This is a dangerous mindset, almost a bunker mentality, for the Administration to have.

Also, um, bloggers are individuals, lots of them on the left voted for the President, they have opinions, and there's simply no reason for them to be insulted by their chief executive.

Fears of A Real Crash

I'd like to laugh at the Republican growing pains from dealing with the minority and the near-universal opprobrium for their policies, and I'm sure I will in a future post. Maybe even the next post. But we're seeing the consequences of those policies resulting in a seemingly unending death spiral, a global death spiral, and I'm afraid schadenfreude can't even cheer me up.

A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.

"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."

Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.

It's the global component to this that has me extremely worried, aside from the Geithner/Summers effort to pay off the banksters. The EU is stiffing Eastern Europe as that region bears some of the toughest burdens of the financial crisis. Case-by-case support will simply staunch the bleeding without saving the patient. The Hungarian Prime Minister called it "a new Iron Curtain" to divide Europe. Before long, what is currently happening in Ukraine - where tent cities on the main square bear signs saying "Everyone Out" and many cities are WITHOUT HEAT AND WATER - could set a depressing standard. The European Central Banker seems like he's in a dreamworld, predicting that there's no threat of deflation against all evidence. There's a report that European banks have $24 TRILLION in toxic assets on their balance sheets. That is a bona fide crisis in global debt that is destroying entire nations. Put it this way, when the lender of last resort is increasingly the Mafia - yes, the actual Mafia - there's a serious problem. Basically, there is an increase in savings to manage the debt, and it's causing investment to plunge. And somewhere in the world, one of the richer countries has to pick up the slack for all this shortfall in demand, and nobody is doing it with the speed or decisiveness required.

It's quite scary, and our brainiacs Tim Geithner and Larry Summers aren't helping at all. In an article designed by the leakers to pin the blame of any failure on them, their policies on the financial crisis are displayed:

Treasury Secretary Timothy F. Geithner and National Economic Council Chair Lawrence H. Summers pushed for weeks for a strict cap on the nation's debt. And while other advisers argued that the administration needed a more flexible spending plan, they could not deter the president from ultimately agreeing with the views promoted by the partnership of Geithner and Summers [...]

Geithner and Summers are also taking the lead in shaping the Obama administration policies for creating millions of jobs through the economic stimulus plan, rescuing the banking system, revitalizing the housing market, restructuring the auto industry and overhauling financial regulation.

Obama's decision to make Summers and Geithner the key players in such a wide-ranging agenda has left some within the government concerned that they will be unable to handle so many complex issues at once. Geithner already was widely criticized on Wall Street for being too vague when he announced the financial rescue package last month.

The reviews are in on this dynamic duo, and they are not good. Not good at all. As Paul Krugman says:

The sickening feeling of drift — the sense that policymakers are refusing to face hard facts, and are dithering while the world economy burns — just keeps getting stronger.

I may throw up.

They Won't Get This One

GM and Chrysler are asking for another $14 billion.

General Motors and Chrysler asked the government for an additional $14 billion in aid, a dramatic acknowledgment that conditions in the U.S. auto industry have grown significantly worse in just two months. GM presented a survival plan that also calls for cutting a total of 47,000 jobs globally and closing five more U.S. factories. That represents the largest work force reduction announced by a U.S. company in the economic downturn. Chrysler said it will cut 3,000 more jobs and stop producing three vehicle models [...]

GM said it could need up to $30 billion from the Treasury Department, up from a previous estimate of $18 billion. That includes $13.4 billion previously allocated and $9.1. billion in new loans. The world's largest automaker said it could run out of money by March without new funds.

GM's request includes a credit line of $7.5 billion to be used if the downturn in the auto industry is more pronounced than expected. But the automaker claimed it could be profitable in two years and fully repay its loans by 2017.

Chrysler LLC requested $5 billion in new loans on top of the $4 billion it received in December. The company had said it might need an extra $3 billion.

Both requests were part of restructuring plans the two automakers owed the government in exchange for earlier loans.

I just don't think this is going to fly. The Congress couldn't muster enough votes for the first bailout, relying on George Bush to divert some TARP money. Unfortunately, carmakers don't have the juice of wealthy banksters, and they don't have an endless well of political capital to draw from. In fact, the well's empty.

The UAW, by the way, did everything asked of them, reaching agreement with the Big Three and sacrificing for the sake of the industry. Needless to say, it won't be enough for the GOP.

Geithner and Summers, who make up the new two-headed car czar, will have a politically dicey decision to make. Will they cut the bondholders loose and restructure the auto company debt? If not, we're seeing basically the end of the American auto industry. What a shame.

The Hiccup

The big story of the day is the Washington Post's rendering of Timothy Geithner's last-second switch on the bank plan, away from a "bad bank" aggregating worthless assets:

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

They should have delayed the rollout, then. It might have caused some churn in the markets, but so did a poorly-explained, light-on-details half-measure. Geithner lost the trust of the markets by failing to explain his plan fully. Considering that the biggest thing the Obama Administration has to offer right now is confidence, that's devastating.

The other issue is what K-Drum describes:

Say what? After nearly two years of crisis and weeks of work, they suddenly discovered that buying up toxic assets from banks was problematic because the assets were expensive, hard to value, and risky for taxpayers? That's not exactly rocket science. Hell, someone who had only casually browsed through the blogosphere over the past year would know that. And not even the financial blogosphere. Just ordinary lay blogs like this one.

I really don't know what to think of this. Maybe the Post has it wrong. (Though their account matches others I've read.) Maybe the problems were actually more subtle than the Post lets on. But it sure sounds as if the Treasury team spent months discovering little more than that the world is round. WTF?

I think that's the problem of a self-sustaining closed loop. They believed their own bullshit, in short, until they couldn't anymore and had to fact reality. In addition, the Treasury Department has a critical lack of staff at the moment, making it easier for Geithner and Larry Summers to have control of the policy without dissenting voices or really any other voices. Josh Marshall explains why this is.

From what we can tell, one of the big issues is that it's actually hard to find people with the requisite knowledge of banks and the capital markets who aren't also compromised -- either in policy or business terms -- by the housing bubble and the rest of the financial collapse. And that raises again as a question: why have none of the people who were financial orthodoxy dissidents and saw what was coming been brought in to the administration. I know I'm hardly the first one to bring this up. And we know that the big appointees -- Summers and Geithner -- were part of the mix. But there aren't even any of them further down into the appointment structure. They're all still on the outside.

There's a groupthink problem here that Obama needs to address. The economy is meltng down in record proportions and we can't afford to rest the recovery on the backs of basically two people. As Krugman says, Geithner and Summers are smart but they need to get out more. They also might do by having some more friends.

Summers Eve

I am definitely worried that Lawrence Summers is acting as a kind of mole inside the Obama White House, defining economic policy in the most neoliberal of ways. I think he is mostly responsible for the mix of tax cuts, particularly corporate tax cuts, in the initial pre-compromised stimulus bill. And he's certainly responsible for the terrible "bad bank" idea, which I haven't gotten around to writing about recently, but which would basically hand over maybe trillions in taxpayer money to the very bankers who got us into this mess. Obama is cautious and certainly listens to varying points of view, but my fear is that Summers was winning the arguments, at least until the past couple days, when the President could no longer abide the right-wing attacks and came out in a forcefully partisan manner.

The question is who will be the counterweight to Summers in the White House? Chris Hayes thinks it could be the Vice President.

Summers has already come to dominate the White House economic policy shop. One person close to Obama's economic team told me that on economic policy, "it's looking like it's Larry's show." This leaves a disconcerting vacuum in the White House for a labor-liberal voice equal in stature and clout. Enter, perhaps, Joe Biden.

In December he named Bernstein, formerly of the labor-friendly, stoutly progressive Economic Policy Institute, to be his chief economic adviser, a position with no recent precedent. Bernstein then co-wrote the first economic report released by the transition team, which attempted to quantify the benefits of the president's proposed stimulus. He is one of the people present for the daily economic briefings to the president.

In the weeks before inauguration, Biden reached out to labor leaders, including the AFL-CIO's John Sweeney, confirming that he would be a strong advocate for them in the White House. And he has publicly supported "Buy American" provisions in the stimulus package that would require participating firms to purchase their materials from domestic companies--a measure that Summers pointedly refused to endorse during a recent briefing with reporters.

Biden is "really pushing hard" on "a more progressive populist approach to economic policy," says Mike Lux, the transition's liaison to the progressive movement. "I'm just delighted that there's somebody with his clout that's doing this, otherwise our side would be in a lot worse shape."

Indeed, Biden's appearance yesterday at a Maryland train station was a signal of his growing progressive populism on domestic issues, as is his task force on the middle class. I didn't think Biden would end up being the champion of any of this, but I hope he can keep Summers from dominating.

The Easily Removed Cap

I always considered the $500,000 executive pay cap for firms who receive TARP money to be a symbolic gesture and woefully inadequate in the face of what the White House was considering doing to bail out these companies. Now it appears that even the cap itself is symbolic:

Pair that with this, from the regulations themselves:

These new standards will not apply retroactively to existing investments or to programs already announced such as the Capital Purchase Program and the Term Asset-Backed Securities Loan Facility.

And this from the existing terms of the CPP:

The maximum amount of capital eligible for purchase by the Treasury under the CPP is the lesser of (i) an amount equal to 3 percent of the Total Risk-Weighted Assets of the applicant or (ii) $25 billion.

And it sounds as if some big banks will still be eligible for tons of money without having to defer a penny’s worth of compensation for their top executives. Good times.

This actually exempts most major firms, not just some banks. And there are no claw-back provisions to get the bonuses or any retroactive pay. Guess the TARP-receiving banks got their money's worth with that $114 million in lobbying and campaign contributions. I'm assuming the "scrutiny" of corporate perks like private jets and such will be similarly riddled with loopholes. The same for the Senate's efforts, though at least in theory they'd be better.

But Sen. Claire McCaskill's (D-MO) executive-pay cap bill is retroactive, applying to companies that have received past as well as pending bailout infusions. And McCaskill just said she has no intention of giving up her push to attach her version of CEO pay caps to the economic stimulus bill. Here's her statement:

"Everyone is on the right track here. I'm proud the president made this announcement in terms of the rules changing. I'm gratified that my colleagues also agreed that something must be done to restore the confidence of the American people that we have some idea of what's going on. I stand willing and ready to work with everyone to change the arrogant, greedy culture that created this mess in the first place."

McCaskill's office added that she would still push her CEO pay proposal "as a fallback assurance" that the new Treasury Department rules would be heeded. Sen. Bernie Sanders (I-VT), another leader on the executive-pay issue, also weighed in to call Obama's move "a good step forward, but we have to go further."

Late Late Update: Sens. Olympia Snowe (R-ME) and Ron Wyden (D-OR) aren't giving up either; they just announced plans to offer an amendment forcing bailed-out companies to repay already distributed executive bonuses that exceed $100,000. The subtle message from Congress to the administration on these executive pay caps seems to be, "Good start -- but not enough for us."

That sausage-making process has just begun, so it remains to be seen if it'll be as seemingly worthless as the Obama-Geithner rule. And yes, I see the hand of Summers in this.

Limits Of The Imagination On The Banks

Timothy Geithner and the Obama team are promising a revolution, but you know, not too much of a revolution.

Another option is nationalizing individual banks or even the entire banking system. This idea has gained ground since Great Britain effectively nationalized the Royal Bank of Scotland last week, taking a 70 percent ownership stake in it and reportedly considering similar moves in other major banks.

Sweden offers the closest thing to a modern precedent among developed nations. In the early 1990s, amid a steep housing downturn, its government took over the banks. Those that were saddled with the worst assets were corralled into the financial equivalent of a holding pen. This period of financial quarantine eventually ended as the economy rebounded.

Could such nationalization of banks happen here, in the citadel of capitalism? The government seized mortgage finance giants Fannie Mae and Freddie Mac in September, as well as insurance behemoth American International Group.

"I think the appetite for nationalization is just not there," said Nariman Behravesh, the chief economist for forecaster IHS Global Insight in Lexington, Mass.

The Washington Post fleshes this out more, with Larry Summers cool to the idea because "governments make poor bank managers." As I think Atrios said today, so do bank managers!

To date, the government has focused its efforts on offering federal funds to banks in exchange for ownership stakes. But the prices of bank shares are so low now that the government risks owning these firms outright if it makes a major investment of taxpayer money.

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

When your worry is that bank share prices are so low that you might up owning them through investment by accident, I think you've nationalized the banks already. If the word "nationalization" is the sticking point because it's icky and outside the realm of "sensible" opinion, so be it. You can change the word. Just don't ideologically oppose the scenario most likely to work because of its nomenclature.

The point is, our "elites" -- those who, as Jay Rosen notes, determine the "sphere of legitimate controversy," place the views of people like me on the very edge (if we're considered within the sphere at all, and frequently we aren't). And everything to the "left" of that is considered in the "sphere of deviance," which means that an enormous swath of ideas and human history, and most certainly "socialism," has been purged from realm of legitimate contemplation [...]

So what does this mean? Well, events have compelled us to consider a course of action that is outside the realm of acceptable debate. Even those Pete Peterson jokers, whose obsessive desire to privatize social security make you want to roll your eyes and shout "get a room," acknowledge that “the case for full nationalization is far stronger now than it was a few months ago." It's not a new idea -- people like Dean Baker, Ian Welsh and a host of others have been saying it for a while.

But as Krugman notes, we will probably first have a host of expensive, unsuccessful "new voodoo" schemes because "Washington remains deathly afraid of the N-word."

Thanks to the collective wankery of those who dictate what is and isn't fit for discussion, we now have no way to reasonably contemplate a measure that could prevent our further economic slide. We'll probably throw a bunch of money at things that won't work before reality forces us to accept a course of action we can't talk about.

It's absurd. Even wankers like Clive Crook have unburdened themselves from the confines of "serious" debate and called for nationalization, because there's simply nothing left in the policy toolkit. The banks killed themselves. Taxpayers are going to have to pay for it, so they might as well get ownership in the process instead of paying far more than the assets of the banks are worth because nobody wanted to say the dreaded "N-word."

Matt Yglesias is on target with this: "When you’re talking about a problem of widespread bank insolvency that’s produced a global depression, then it doesn’t make a ton of sense to be worried about impairing the quality of bank management."

...See also Steve Clemons.

Roads, Rails And Subways, Please

Rep. Peter DeFazio thinks that Barack Obama's getting some bad advice:

There’s a pretty good consensus among members of the House that it should be more. But the dictate from on high in the negotiations with Obama’s advisers — I don’t think the President is there — I think he’s ill-advised by Larry Summers. Larry Summers hates infrastructure, and some of these other economists — who were very much part of creating the problem. Now they’re gonna solve the problem. And they don’t like infrastructure.

They want to have a consumer-driven recovery. We need an investment- and productivity-driven recovery for this country, a long-term recovery.

It's kind of curious that Obama's public statements and YouTube addresses always speak very highly of infrastructure improvements, but there are substantially less funding toward that in the stimulus that you'd expect if you simply read the public PR instead of the actual bill. Although, there has been a general de-emphasis recently, as energy, health care and education spending take prominence.

The reason you want lots of infrastructure spending in the stimulus is because it can both be spent quickly and leave something behind afterwards. That's true of the health care and energy spending as well, but that's not what infrastructure spending appears to be competing with. It's competing with business tax breaks that do not provide nearly the kind of "bang for your buck" that can multiply the effect of fiscal spending. These Chamber-of-Commerce-friendly provisions being put in the Senate package, for example, are appalling.

The Senate bill includes a pro-business tax provision called bonus depreciation, which would allow companies accelerated write-offs of existing equipment and inventory if they make new purchases.

The Senate version also incorporates a complicated but important provision that the U.S. Chamber of Commerce and other business groups are pushing. This measure, which isn't in the House bill, would allow some companies to reduce taxes if they buy down their debt between late 2008 and 2011. The idea is to encourage companies to lower their debts, a process called de-leveraging, and thus get in better shape for an eventual economic recovery.

"We're very encouraged," said Bruce Josten, the vice president of government affairs for the Chamber of Commerce. "The specific purpose . . . is to create an incentive on a very short-term basis to have an orderly process to de-leverage that debt and strengthen their balance sheets."

The other issue here is that Americans interface with their infrastructure to a far greater degree than any other proposed spending (unless you sit on the Internets all day like me, in which case the broadband spending would apply). Therefore they know intuitively that it's crumbling, and they are desperate to see it fixed, and are even WILLING TO PAY FOR IT. Keep in mind that this passage was written by Frank Luntz.

Consider this: A near unanimous 94% of Americans are concerned about our nation's infrastructure. And this concern cuts across all regions of the country and across urban, suburban and rural communities.

Fully 84% of the public wants more money spent by the federal government -- and 83% wants more spent by state governments -- to improve America's infrastructure. And here's the kicker: 81% of Americans are personally prepared to pay 1% more in taxes for the cause. It's not uncommon for people to say they'd pay more to get more, but when you ask them to respond to a specific amount, support evaporates. (That 74% of normally stingy Republicans are on board for the tax increase is, to me, the most significant finding in the survey.)

This isn't "soft" support for infrastructure either. It stretches from Maine to Montana, from California to Connecticut. Democrats (87%) and Republicans (74%) are prepared to, in Barack Obama's words, put skin in the game, which tells you just how wide and deep the support is.

And Americans understand that infrastructure is not just roads, bridges and rails. In fact, they rated fixing energy facilities as their highest priority. Roads and highways scored second, and clean-water treatment facilities third.

You can see a road or a bridge or a new rail line or a better water treatment plant. You will use it every single day. And so the closest thing to a "bailout for Main Street," to employ that overused phrase, is an investment in immediate and long-term infrastructure spending. That can't all be accomplished by the stimulus, nor should it be - we should work for a long-term funding source through something like a National Infrastructure Bank, and we should try to alter the percentage of mass transit and rail spending in the transportation bill (right now it's 80-20 for roads). But clearly, with all the less targeted and less useful corporate tax breaks in there, infrastructure could be prioritized more.

In my mind, the two things progressives should be fighting for in the recovery bill is increased infrastructure spending at the expense of those corporate tax giveaways, particularly the benefit for lowering debt (which has no short-term benefit to the economy at all), and getting the mortgage cram-down provision into the bill, so bankruptcy judges can lower the amount that people upside down in their homes owe. Let's see how much leverage progressives have.

Dance, Senators, Dance!

As I said yesterday, there's a good kind of Democratic disunity, the kind where Senators stand up for liberal values and push against more centrist measures. The New York Times covers the tension on those business tax cuts in the stimulus bill today. And Tom Harkin used the words "trickle down."

"There's only one thing we've got to do in this stimulus, and that's create jobs," Harkin told me. "I'm a little concerned by the way Mr. Summers and others are going on this ... it still looks a little more to me like trickle-down."

Likening Barack Obama's economic recovery plan to the failed supply-side excesses of the Reagan and Bush years is a bit of a Cassandra moment. But Harkin didn't back down. "What I'm hearing from Mr. Summers is that they've got a different approach -- tax breaks, and this and that," he said. Harkin warned that, much like the outcome of George Bush's $600 stimulus package last year, recipients of quick tax cuts "are going to be salting it away, not spending it."

When I asked if he felt his concerns were heard during the meeting, he looked to the floor and slowly shook his head. It was almost forlorn.

Chris Bowers looks at this and thinks we need to fight. But Digby thinks it's a dance, noting that the leaders of this effort have been John Kerry and Kent Conrad.

And this actually may be good news. It seems very unlikely to me that Kerry is acting out of school, but is rather playing the role of the liberal stimulus spending obsessive who will (hopefully) balance out the tax cut fetishists in the senate negotiations, giving Obama some space to compromise at least somewhere to the left of The Club For Growth. (Unfortunately, that still leaves us with the Blue Dog deficit hawks, but maybe Rahm has pictures or something.)

It's all just a guess, of course, but I simply don't believe that Kerry and Conrad are out there running at Obama from the left on their own. They just don't have it in them. They are staking out this position for negotiating purposes on his behalf. Obviously, we don't know how far any of them will go to fight for it, but at least the liberal economic argument looks like it will be made.

I see no reason why they aren't both right. Even if this is a game for the cameras to give Obama space to his left, it doesn't mean that progressives shouldn't rally to Kerry and Conrad and make the argument. In fact, it seems to me that is the whole purpose - to "make Obama do it," as it were, and create a bottom-up rally for a real, liberal stimulus with a focus on job creation.

Which progressives ought to do. But that doesn't mean that Larry Summers is necessarily in on the game. It's entirely likely that he just believes in neoliberalism and corporate power, and is making the argument from the other side. We can win this one, but that's not foreordained.

...significantly, the business tax breaks was practically the one proposal that Obama didn't mention in yesterday's speech. That's something I'd love to see quietly dropped.