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."

Your Free Market At Work

2008 was a mixed year for corporate America. On the one hand, everybody lost money and almost crashed the global economy. On the other hand, some CEOs got PAAAAAID!!

More U.S. chief executives got pay raises than had their pay cut in 2008, a year when billions in taxpayer dollars went to prop up struggling companies and millions of workers lost jobs, according to an AFL-CIO survey released on Tuesday [...]

The executive pay study of major companies by the AFL-CIO, the country's largest labor federation, calculated compensation that included stock options granted to CEOs but not yet vested.

Some governance experts favor this method, which is intended to take into account the intent of corporate boards.

Using that methodology, Citigroup Inc CEO Vikram Pandit made $38 million in 2008, compared with the roughly $11 million reported in the company's compensation section in U.S. Securities and Exchange Commission filings.

Citigroup collected $45 billion in government bailout funds in 2008.

"When it comes to CEO pay, many companies continue to hew to the fiction of pay for performance," said Daniel Pedrotty, director of the AFL-CIO's Office of Investment.

I like how the article characterizes the AFL-CIO's methodology as if it's novel. They calculated CEO compensation based on their total compensation. What's the mystery here?

As I said before, ultimately CEO compensation is hard to stop with caps or bonus limits because money, like water, can flow around a rock. Adding marginal tax brackets and significantly taxing the highest ends of total compensation would have a greater impact. But the big story here is the complete disconnect between pay and performance. Wall Street talks sweetly about capitalism as long as they don't have to play by its rules.

Conservatives Against Consumer Choice

Over at the Health Care For America Now blog, Jason Rosenbaum reports on a new study about the proposed public option in the Obama health care plan.

The Lewin study found that if such a plan were open to all employers and individuals, and if it paid doctors and hospitals the same as Medicare, the government plan would quickly grow to 131 million members, while enrollment in private insurance plans would plummet.

"The private insurance industry might just fizzle out altogether," said John Sheils, a Lewin vice president and leading author of the study.

By paying Medicare rates the government plan would be able to set premiums well below what private plans charge. Monthly premiums for family coverage would be $761 in the government plan, compared with an average of $970 in private plans, the study estimated. Employers and individuals would flock to the public plan to cut costs.

Mr. Sheils, you talk like that's a bad thing. Conservatives (like Sheils) always point to the glories of the free market, and how it will bring the best efficiencies to business and consumers. That's all anyone's talking about. A public option competing with the private market could only win on cost and quality, like any other competition in the marketplace. What conservatives argue for is a monopoly for the health insurance industry. They fear a public option on the belief that people might LIKE it.

The New York Times endorsed the idea yesterday.

…What many critics seem to fear most is that a new public plan would sweep away its private competitors and evolve over time into a full-fledged single-payer system (sometimes called Medicare for all). No matter how fair the competition between public and private plans might be at the start, they warn that the government would find it irresistible to rig the outcome through its regulatory and pricing powers and its ability, in a pinch, to subsidize the public plan with taxpayers’ money.

That fear seems overblown. Innovative, nimble private plans with well-integrated service systems might outperform any government plan, just as some now outperform Medicare through better coordination of services, stronger preventive care and broader benefits.

A new public plan is neither the cornerstone of health care reform nor the death knell of private insurance. It should be tried as one element of comprehensive reform. If, over time, a vast majority decides the government plan is superior, so be it.

My fear is that the public option enacted will bear little resemblance to the ones discussed here. If a "level playing field" public option is not allowed to use Medicare bargaining power, it will not be able to drive price and quality in the same fashion. While it would offer a counterweight to the insurance monopoly in the same way that union presence drives up wages in an industry, it would act more like a non-profit, not a faithless insurance company-eating machine changing the paradigm of health care. We need not only a public option, but a strong one.

...King of All Health Wonkery Ezra Klein essentially corroborates my fear.

The Lewin Group modeled a couple different versions of the private plan. One version, which I've previously called the Single Payer Lite version, attaches itself to Medicare's payment rates. That allows it to offer premiums that are 32 percent lower than those of private insurers. That's what you're seeing in the graph atop this post. In such a world, the private plan is expected to see enrollment of 131 million, 119 million of whom would be refugees from private insurance. When private insurance executives stay up at night worrying about a public plan, this is what they're worrying about.

Then there's the level-playing field option. Here, the public plan doesn't get to use Medicare's set payment rates and instead needs to negotiate with hospitals and drug companies just like any other insurance plan. Its rates end up proving similar to private insurance. Lewin assumes a certain set of administrative advantages here that still allow the private plan to offer premiums nine percent lower than private insurance, but the difference is modest. Under these assumptions, the public plan sees enrollment of 20 million, only 12 million of whom are coming for private insurance.

The difference between zero and 20 million is a lot smaller than the difference between 20 million and 131 million. What the Lewin report is actually showing, then, is that the key question is not whether there is a public plan, but whether the government can set its payment rates.

Something to keep in mind.

Will Regulations Save Us?

The supposed saving grace of the Geithner bank bailout is that at least regulations will be imposed that would eliminate the possibility for this to ever happen again. At least that's Europe's view, as well as Obama's long-term position:

But I think the most important thing that we can do is make sure that we put in a bunch of financial regulatory mechanisms to prevent companies like an AIG holding the rest of us hostage. Because that's -- that's the real problem.

The problem is not just what's happened over the last six months. The problem is what was happening for years, where people were able to take huge, excessive risks with other people's money, putting the entire financial system at risk -- and there were no checks, there were no balances, there was nobody overseeing the process.

Just enforcing the laws already on the books would represent an improvement over, say, the past thirty years. But any confidence that some kind of regulatory overhaul is imminent gets sapped by the first major "reform".

The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets [...]

Fair-value, also known as mark-to-market accounting, requires companies to set values on most securities every quarter based on market prices. Wells Fargo & Co. and other companies argue the rule doesn’t make sense when trading has dried up because it forces banks to write down assets to fire- sale prices.

What this boils down to is that the government will allow banks to pretend that their worthless assets are worth significantly more than what the market will pay for them. In other words, banks will rescue themselves from insolvency by using the magical power of bullshit.

You can't blame this one on the Bush Administration.

Meanwhile, the next regulatory move appears to be vesting more power in the Fed, which failed to regulate the banks the last time. I agree with a new authority to oversee massive financial industry risk and their exotic products, but not with an unaccountable and secretive board that won't even account for the trillions of dollars in hastily printed money they've spent on bank assets.

Regulators have plenty of authority right now. Their reticence to really challenge elites and risk a short-term loss in GDP to protect a larger meltdown reflects a lack of will.

Looking back with 20/20 hindsight the issue isn’t so much that we needed better “rules” as it is that we needed regulators we took seriously the idea that cracking down on private sector funny business is their job. Instead, we seem to have mostly had regulators who regarded the laws on the books as an unfortunate and anachronistic departure from a pure laissez faire ideal. So you got things like the SEC prosecuting celebrities on tenuous charges, but no real oversight of a mortgage sector run amok. When you look back at the trajectory leading up to the crisis, the problem of “deregulation” isn’t so much that there’s some particular rule that was removed during the Greenspan Era that could have saved us as it is that the mindset that drove the legislative agenda of deregulation ultimately proved paralyzing to policymakers.

Certainly, if anything would destroy the mindset of Randian laissez-faire capitalism, it would be the events of the past six months. But given the clear signs from this allegedly "socialist" Administration thus far, I'm not so sure.

The National(ize)

Looking at the continued sucking of our resources into the financial industry's toxic sinkhole, I see no way out of this mess without a total nationalization of the banks.

With two of the nation’s largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are “too big to fail” and yet unable to function as the sinking economy erodes their capital.

Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.

And the new ground rules laid down by Mr. Obama’s top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives.

“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”

Which is what we need at this point. The masters of the universe had it their way for a while and they very nearly destroyed the economy. Banks need to lend, not cover their trillions in losses. If they do not lend, they are not a bank, and the government ought to take them over and run them like a bank for the time being until they can untangle and deleverage everything. It would be a lot better than the current situation, where the government is the main shareholder in the bank but cannot tell the executives what to do.

The only reason this won't happen is if the limits of the establishment imagination are reached, and they cannot think of nationalization in anything but the most icky, ultra-librul ways. Well, the Irish government just took over Anglo Irish Bank, so the role model is out there, and in the "Celtic Tiger" which was a model for conservatives of a thriving capitalist economy, no less.

Once the banks can actually function on their own again, we can set them back out into the market, only with shiny new regulations that assure they cannot agglomerate too quickly or over-leverage themselves ever again.

Friedman, In The Study, With The Manifesto Of Laissez-Faire Capitalism

The New York Times had a great article about how the President and his philosophy of the "ownership society" inflated the housing bubble and caused the historic collapse in the market. And I guess this is true to an extent, and the article doesn't presume that encouraging homeownership is solely responsible. But the article only skirts around the edges of why this was dangerous.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

The focus on Fannie and Freddie is kind of ridiculous, as I've gone over on this blog time and again. They were a symptom and not a cause, entering the toxic market well after it had gotten out of control. What the article described, but not boldly enough, is that Bush's crusade for homeownership, a POLITICAL strategy designed to win the hearts of minorities and low-income Americans who could realize their dreams, was achieved through a crusade for deregulation, an IDEOLOGICAL strategy designed to allow financial executives the most leeway possible to conduct their sophisticated Ponzi schemes. Bush and his advisors would never interfere with the inflation of the bubble, because it won them a rhetorical victory, and they laughed off suggestions that the crash would be extremely dangerous. So they allowed lenders to come up with instruments that basically pushed the global economic system to the brink of collapse.

While much of this is the same old story of politics over policy - Bush could go around and say "Owning your own home is the greatest gift of all" and feign obliviousness to the chicanery used to get people into these homes - I don't want to divorce the ideology from the politics. The President was always a laissez-faire capitalist and a free market fundamentalist, using government to encourage homeownership, in this case, but essentially eliminating the rules that would create any barriers to making that a reality. And that was by design.

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

While it's important that the President tells the whole country that you can own a home no matter how much money you make, it's far more important that he create conditions where lenders can actually give those kinds of mortgages out. The lenders were of course responding to demand for mortgage-backed securities and derivatives and threw away lending standards so they could print up more and more of them. Barry Ritholtz gets this right - the problem was that Bush was an avowed deregulator.

That Bush had as a goal increased home ownership is, quite bluntly, irrelevant. It is a worthy goal, and certainly one that could be achieved without forcing the collapse of the financial system.

Indeed, as the chart at right shows (source: NYT), home ownership has increased every year since 1994. Funny, from that year and for each of the next 10 years, there was no collapse. You have to ask yourself why. No, the 1997 Tax Break, did not, as the NYT implied yesterday, Help Cause Housing Bubble. Home ownership was rising years before that went into effect.

What Bush did differently than prior Presidents was that he genuinely believed that regulations proscribing bad corporate behavior were unnecessary. It was that ruinous belief system, one he shared with other key players, that led to the crisis [...]

Increasing home ownership in America is a legitimate political goal. Waiving down-payments requirements, dropping lending standards, allowing predatory lenders to flourish — that is what is the underlying cause of boom bust and collapse.

You're seeing this similar dynamic now in the revelations that Chris Cox sought to dismantle the SEC while he was the chairman of it, allowing traders free reign and hewing to the anti-regulation mantra of the Bush Administration. This mania was not limited to the housing sector (check out the Consumer Products Safety Commission, for another example). If you want to go all the way back, the culprit is Milton Friedman.

For half a century, Chicago’s hands-off principles have permeated financial thinking and shaped global markets, earning the university 10 Nobel Memorial Prizes in Economic Sciences starting in 1969, more than double the four each won by Columbia University, Harvard University, Princeton University and the University of California, Berkeley.

Chicago’s laissez-faire imprint underpins everything from U.S. President Ronald Reagan’s 1981 tax cuts and the fall of communism that decade to quantitative investment strategies.

In 1972, Friedman helped persuade U.S. Treasury Secretary George Shultz, former dean of Chicago’s business school, to approve the first financial futures contracts in foreign currencies.

Such derivatives grew more complex after Chicago economists created the mathematical formulas to price them, helping spawn a $683 trillion market that’s proved to be a root of today’s financial system breakdown.

On Dec. 16, the U.S. Federal Reserve cut its target lending rate to as low as zero for the first time and said it will buy mortgage- backed securities [...]

Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.

“The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.

University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.

“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.

Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge.

Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.

The Chicago Boys brought us to this moment of crisis. Their radical theories have ruined the global economic system. I don't know whether having a former University of Chicago professor (whose economic advisors come from that school as well) as the President-elect is a good thing, in that he's been close enough to that heart of darkness to see its flaws, or a bad thing, in that he still holds the vestiges of their theories of deregulation. If Obama is a pragmatist, as he claims to be, he will recognize that Friedmanism must be totally repudiated, buried, locked up and forgotten.

Arnold's Freedom To Choose

This week, Naomi Klein bravely stepped into the lion's den this week and addressed the University of Chicago, protesting their bid to name an economic research center after Milton Friedman. It was a bravura speech where she made the argument that the current financial crisis is the final repudiation of Friedman's twisted theories of unregulated capitalism.

More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.

So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don’t think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.

Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don’t mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.

But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have—and I would even use the word “fundamentalists” have—which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.

Klein mentions the Free To Choose series, and later on she highlights something I forgot - the man who introduced one of those series on PBS:



"Being free to choose means being free to make your own decisions. Free to live your own life, pursue your own goals, chase your own rainbow without the government breathing down your neck or standing on your shoes. For me it meant coming to America, because I came from a socialistic country where the government controls the economy."

That was Arnold Schwarzenegger in 1990, spouting free market fundamentalism in a corporate-sponsored documentary which mainstreamed ideas that today have brought us to the brink of economic failure. It's important to know what altar at which Schwarzenegger worships. It's important to know how he was, for a long time, the glitzy front man for Friedmanism, the showy snake oil salesman that got Joe Six-Pack to think that corporate behemoths eliminating rules for themselves was in the best interests of the common man. Arnold believes that these ideas, about "free enterprise and free people," are immutable, hard science, and incapable of being wrong.

Except we are now at a moment when, as governor, Schwarzenegger is bearing the brunt of the worst effects of unbridled capitalism. His state is caught up in the credit market freeze, with no money to pay the bills. He is begging the state's citizens to buy bonds and bail the government out, an approach taken so clumsily that he got Wall Street shaken at the precise time when he has to go into the market to borrow money. The state's public infrastructure is crumbling on his watch and even that won't be enough to make up the revenue shortfall.

Now a lot of people would let Schwarzenegger off the hook for this. The national economy went bad, and the financial markets failed as a result of the housing bubble bursting, and surely the governor of California can't be held responsible for that. Except he is such a devotee of Friedmanism, and in fact one of its key pitchmen, that of course he can be seen as guilty. And as the current cesspool of deregulation, where market forces run wild and greed becomes virtue, gets a reckoning due to the carnage it has caused, so too must the man who introduced Free To Choose all those years ago. He was wrong then, and he's doubly wrong now. To quote Naomi Klein:

Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman’s other life—he wasn’t just an academic. He was a popular writer. He met with world leaders around the world—China, Chile, everywhere, the United States. His memoirs are a “who’s who.” So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.”

It's the ideological blinders that caused this crisis that must be taken off if we're ever going to get out. Schwarzenegger is somehow seen as the "good cop" Republican in the mix of California, wanting ever so to do the right thing. But the one area of jurisdiction, the one part of this crisis where the California governor could have had a hand in stopping the bleeding, when he could have imposed regulations to help stop predatory lending and rein in the runaway mortgage market in one of the biggest bubble states in the country, Arnold not only decided not to then, but has continued to do so.

I guess the banks and the lenders need to be free to choose.

Free Market Capitalism

So the government decides to heed their foreign paymasters and bail out Fannie Mae and Freddie Mac, which is really a proxy bailout of the entire financial industry, which would have been on the hook for all of their bad loans. This adds to the list of the government, in recent years, bailing out the airlines and various banks. And there are plans - bipartisan plans - to bail out the U.S. auto industry. As a result of the Fannie and Freddie bailout, the stock market goes wild.

This is known as "capitalism." Not corporate Marxism. How dare you. And everyone knows that what we need is less government.

...One thing that would be super-duper, by the way, is if the woman who may be the next Vice President of the United States knew how Fannie and Freddie actually function.

...We're also about to bail out the national highway fund, because higher gas prices have led to less collections from gas taxes. Remember that John McCain wanted to SUSPEND the gas tax, which would put taxpayers on the hook for far more than the current proposed $8 billion dollar bailout. Capitalism.

McCain's Terrible Health Care Plan

(Part three of a two-part series!)

In a weak moment not focused entirely on random black preachers from Chicago, MSNBC's "Race For The White House" took a minute to focus on John McCain's health care policy. Eugene Robinson had to concede, "It's not much of a plan - it does nothing for the 47 million people without health care. Increasing walk-in clinics? People can't walk right now! They'll have to add ramps to them."

Actually, increasing access would be a good thing, but of course McCain's plan is far more hurtful than that. His central tenet on health care is that people have too much insurance.

This is truly amazing: McCain and his handlers knew they had to say something about health care. So they turned to their friends (and financial supporters) in the health care industry and the conservative think tanks. And they have adopted the most extreme right-wing ideological approach, premised on the idea that the big problem in health care is that Americans have too much insurance – in their words, we don’t have enough “skin in the game” – and that only when we have to buy health care with money that comes directly out of our own pockets will consumers force doctors, hospitals and insurance companies to become more efficient [...]

So McCain wants to tax workers’ health care premiums that are paid for by employers. Ask any expert, conservative or liberal, and they will tell you the result will be companies will stop providing health care as an employee benefit. Fortune Magazine quotes one of their experts on the impact of McCain's plan: “I predict that most companies would stop paying for health care in three to four years,” says Robert Laszewski, a consultant who works with corporate benefits managers.

Now keep this in mind: McCain and his corporate advisers don’t dispute this. The massive upheaval that would result – millions of families losing their health coverage on the job and then having to try to find an insurance company that would sell them a new policy that would cover their families—that’s not an unintended consequence of his proposal. That chaotic loss of health security is exactly what McCain intends to happen. He wants us all to buy insurance not as part of a group—like an employee group or a co-op—that can negotiate for better coverage at lower premiums, but as individuals, at the mercy of the private insurance companies.

The only benefit to individuals who will be scrambling for new coverage is a tax credit that is completely insufficient to cover the current cost of healthcare by a factor of about 2:1.

And it's a tax credit, which means the actual benefit is substantially less than the numbers he states (maybe 30%), because it's simply factored into deductions. And if you are so poor that you don't pay anything in taxes, guess what? You don't get the tax credit, because it would be a deduction from zero. And so the people most at risk, the most likely to be uninsured, get nothing from McCain's plan.

I need to tweak this section a bit. The tax credit is effectively a cash payout, but at $2,500 for individuals and $5,000 for families it remains woefully insufficient to cover anything but the most bare-bones care, and in most cases not even that - the average health care bill is twice as much. Also, assuming that this tax credit will come in with your normal refund, families will essentially have to lay out the funds year-round for this and wait until April for reimbursement - which is not only an opportunity cost but actually an impossibility for a lot of folks.

Oh, and don't even get me started on Health Savings Accounts, which is what McCain wants you to do with any excess money if you find a cheap insurance plan. Simply put, they're abominable, and under McCain's plan they're designed to drain your cash out for trips to the doctor since you're stuck with high-deductible, low-coverage insurance.

In the end, the individual who does qualify for the credit will be paying more for health care
than corporations do now, CONTRIBUTING to rising costs, not the opposite.

I don't actually have a huge problem with severing the employer-based relationship to healthcare, but only if individuals could pool their risk to keep costs down and be able to bargain for coverage - you know, like a single-payer system would do. McCain's option simply leaves individuals out on an island with no bargaining power. We'd be in far worse shape than we are now.

But that's not the worst part.

And get this: McCain wants to abolish the regulations that currently exist in most states that require companies to insure people with pre-existing conditions, provide benefits that don’t exclude some medical conditions, and prevent them from charging huge premiums for crumby benefits. How would he do this? By “giving people the freedom” to buy insurance in other states with weaker regulations. You can bet that most of the big insurance companies are now shopping around for the state that wants to become the corporate headquarters state for the new deregulated health insurance industry – if President McCain wins. Delaware? Mississippi? Arizona?

UPDATE: McCain talks vaguely about "working with governors" to create non-profits that would backfill the cost to insurers to cover high-risk patients, creating yet another middleman! There are little if any specifics on this part, and it's highly dubious that it would work.

By eliminating state-created mandates to insure individuals for a variety of maladies, McCain would really end up hurting the sick and chronically ill, leaving them with no insurance. An unregulated market would simply refuse to insure people by the millions in an effort to maximize their costs by insuring only the healthy. You know, the way it is now - only worse, because the states would be unable to look out for their own citizens, and insurance companies would start a race to the bottom, bribing states with their business in exchange for lax regulation. The McCain campaign's response to this? Let the market sort it out!

Steve Bernard was talking about treatments for his 9-year-old son, Jake, who was born with a cleft lip and palate. Jake has already undergone numerous surgeries with more to come. Bernard described his battle to get insurance coverage for speech therapy. “Every time they say, `No, speech therapy isn’t covered,’ and we say, `yes it is covered.’ As a matter of fact in the state of Florida there are specific statutes that were created by other parents of kids with clefts that will protect those kids.”

He ended his comments with a plea to McCain, whose adopted daughter, Bridget, also had a cleft palate: “If there’s ever going to be somebody in leadership position who is going to know it, it’s going to be you, and we’re hoping you understand that,” Bernard said.

Left unsaid was that McCain’s health plan is designed to weaken state regulations like the one in Florida that, like 14 other states, mandates that insurance companies cover treatment for cleft palates. McCain says that mandates like this one drive up the cost of insurance, and he would allow people to buy coverage across state lines. Many experts predict that under this system, insurance companies would simply gravitate to the states with the fewest rules.

Asked about the contradiction between the family on the stage and the McCain policy, McCain senior policy adviser Douglas Holtz-Eakin said that the marketplace will fill the void. If there is a demand for this kind of coverage, he said, some insurance company will offer it. “There are boutique products in every other market,” he said.

McCain's laissez-faire stance makes George Bush look like Michael Moore. He offers nothing but double talk on the subject of health care, and fails on virtually every level - to lower costs, increase coverage, and reduce the power of the insurance industry. He's had government-run health care for his entire life, and his meager gruel offered to those who do not suggests that Elizabeth Edwards is right - on health care he's completely out of touch with reality.

World Food Crisis Update

It took the World Bank to raise the alarm for needing immediate food aid and panic across the globe for Bush to get the message. But he did get it, and so credit where due.

President George W. Bush on Monday ordered $200 million more in U.S. emergency food aid to be made available to help alleviate food shortages in Africa and elsewhere, the White House said.

Bush took action a day after top finance and development officials from around the world called for urgent action to stem rising food prices, warning that social unrest would spread unless the cost of basic staples was contained.

"This additional food aid will address the impact of rising commodity prices on U.S. emergency food aid programs, and be used to meet unanticipated food aid needs in Africa and elsewhere," the White House said in a statement. It said the assistance would be made available through the U.S. Agency for International Development.

Good news. But, of course, this is a temporary fix which doesn't even fill immediate needs between now and May 1. The problem is largely structural and a consequence of rising prices due to a variety of factors, particularly the cost of oil to transport food. However, don't dare suggest something disruptive like price controls which might save a few lives.

Treasury Secretary Henry Paulson warned on Sunday that governments should resist temptation to try to control soaring food costs through price controls, which he said would likely make the situation worse.

In remarks prepared for delivery to the World Bank's development committee, Paulson said such measures were "generally not effective and efficient" at protecting people likely to suffer the most.

"They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries," Paulson said.

They tend to create food that people can eat, and I'm willing to take a little inefficiency in the short term. Anyway, Paulson has little credibility telling anyone about unnecessary intervention in the markets after propping up Bear Stearns. It's not like he particularly believes in unfettered capitalism, at least when it comes to bailing out his rich buddies.

Corporate Welfare

E.J. Dionne finally says it:

Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.

The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe have any idea what kinds of devalued securities sit in one another's portfolios.

So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can't have that. It's just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail," because they could bring us all down with them.

Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don't expect these people to trade in their BMWs for Saturns, do you?

This is so overdue. We've essentially in the Bush era set up a kind of corporate Marxism, where risk is socialized, but where wealth is privatized. And the middle class, in this case homeowners, are the only ones who feel any pain.

Ben Bernanke believes that he can save the economy by managing and financing the ultimate downfall of these financial institutions. Which is fine, because the alternative is a massive meltdown of the entire system. But let's call it exactly what it is. And let's no longer allow the other side to say things like "let the market make its own decisions," because they only believe that when they're not affected. This is a bailout, and it's government intervention into the markets to save them. Because they currently are non-functional and unregulated.

The Grass Is Always Greenspan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Amen.