Scumbag Millionaires

You can be forgiven for wondering why Bernard Madoff would try to steal billions in the first place. He was already rich and well-respected, and none of his investors would have complained, presumably, about losses in the midst of the economic collapse of the past few years. But what's coming out in the past 48 hours, about how Madoff had signed checks totaling $173 million ready to pass off to employees at the time of his arrest (I'm assuming to hold it for him), and how he's been mailing jewelry and watches SINCE his arrest, suggests that he's just one of these "greed is good" thieves who always needed more, no matter his position or standing.

The detail was provided in a court filing Thursday as prosecutors argued that Madoff should have his bail revoked and be sent to jail. They said the checks were further evidence that he wants to keep his assets away from burned investors.

In the filing, Assistant U.S. Attorney Marc Litt said Madoff cannot be trusted because he had long engaged in a "scheme that required the defendant to lie routinely to thousands of people and a scheme which has caused extraordinary damage to individuals, families, and institutions all over the world."

The judge will now decide whether Madoff should be sent to jail or remain free on bail in his luxury Upper East Side penthouse.

I would say jail at the very least. And some investors or the US Treasury could use all those assets, too.

As for what to do about the larger problem of financial industry fraud, the SEC is broadening their investigation, and even Republican Congressmen are talking about a "statutory and regulatory structure for the 21st century." I would hope that this doesn't narrow into a solution about how to stop Ponzi schemes. The sickness lies in the lack of regulation throughout the financial services industry. Here's what the President-elect had to say about it, and I think it's largely on point.

Obama: Well, by the time that G-20 meeting takes place, we, I believe, will have presented our approach to financial regulation. I think some international coordination has to be done. But right now, we just have to take care ... (unintelligible) ... and Wall Street has not worked, our regulatory system has not worked the way it's supposed to. So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency. We're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively. We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible. And there's systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits. So we've got to update the whole system to meet the needs of the 21st century. This is an assignment that my team is already beginning to work on and I think that we will have, fairly shortly, a package that we've worked alongside Barney Frank and Chris Dodd, to present to the American people.

This is the perspective we need. The failure of the SEC to recognize the Madoff crime is shameful, especially considering the warning signs were there and investment officers were actually trying to warn them. But the real failure is that the financial industry as an institution was disinclined to blow the whistle.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

(More here.)

You can say much the same about credit default swaps, or mortgage-backed securities, or the credit-rating industry, or any of the instruments and institutions that failed the country. In short there was nothing stopping them from maximizing their own interests and insulating themselves, not the economy, from risk. The problem is bad incentives, and they directly stem from free-market fundamentalism without limits or controls. It's a system where cheerleading is encouraged and dissent is verboten. Where the interests of the shareholders are subservient to the interests of the bondholders and the CEOs. And that MUST change. To quote Gordon Brown, one of the few leaders on the global scene during this crisis:

The prime minister said 2008 would be remembered as the year in which "the old era of unbridled free market dogma was finally ushered out". In his traditional new year message, Brown struck a tone of tempered optimism, saying that Britain can this year build a better tomorrow through strategic investments while dealing with the dangerous challenges of today.

He said: "The failure of previous governments in previous global downturns was to succumb to political expediency and to cut back investment across the board, thereby stunting our ability to grow and strangling hope during the upturn. This will not happen on my watch."

Absolutely. 2008 was the year when free market dogma became so toxic it nearly swallowed up the entire financial system and the fortunes of untold millions. Madoff is not an oddity; he's an EXAMPLE. An example of what can never happen 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.

The Bigger Con Is SEC Officials Pretending To Work

Yesterday, Chris Cox, the chairman of the SEC threw his mercy on the court.

The Commission has learned that credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action.

Cox is authorizing an Inspector General probe. Someone honorable might resign in disgrace. Apparently, the investigations of Madoff it finally got around to relied on VOLUNTARY information from Madoff himself. Madoff's niece married an SEC official who was involved in oversight of Madoff's brokerage business. The amount of obvious, credible warning signs that the SEC missed in this case are growing. I would simply have looked at the fact that Madoff's own sons' foundations invested elsewhere is a pretty decent sign in its own right. The reason that nobody at the SEC went after Madoff is that he was a "master of the universe."

Fusfeld added that during the 90's he had used Madoff as a witness in a securities case to which Madoff was tangentially connected. "The man had charisma," said Fusfeld."He was one of those people that, when he walked into a room, everyone stopped what they were doing and watched him."

Had the SEC watched him a little closer, however, numerous investors might have been saved some crippling losses.

Unbelievable.

Today, President-elect Obama introduced Mary Schapiro, a longtime regulator, to replace Chris Cox at the SEC. It's impossible for her to do worse, and I hope she wields the Madoff scandal as an impetus to do rigorous and effective oversight over these clowns, and I hope she is provided new regulatory tools to conduct that oversight.

Other regulatory appointments are profiled here.

Not A Bug But A Feature

This Bernard Madoff Ponzi scheme is really kind of incredible, if only because we haven't seen such a con on a high level like this in so many years. In fact, probably not since Charles Ponzi, the original scam artist. Maybe in the future they will be called Madoff schemes. As Anonymous Liberal notes, this is a tragedy for the federal government as well, because there will be billions lost in expected capital gains tax revenue as a result of the crime. All these investor losses will be deductible, as well as rebates of past capital gains that they've paid, and the cost to the Feds could rival the amounts talked about in the auto industry rescue.

Now, I think there's a reason this will wind up to be such a massive loss for those involved, and that's because this is not separate from the current financial crisis, but part and parcel of it. Because in this era of trusting the market, in believing in magical men who make money appear in everyone's numbered back account, the SEC didn't come close to investigating the scheme.

Bloomberg reported yesterday that since Madoff registered the investment arm with the Securities and Exchange Commission in 2006, that agency hadn't got around to looking at the business's books. The SEC usually tries to go through the books of newly registered firms in their first year.

"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," one expert told the Associated Press.

But the problem doesn't appear to have started in 2006.

As early as 1999, an executive in the securities industry had urged the SEC to probe Madoff, on the basis of the remarkably steady returns that his investment business seemed to provide. The executive, Harry Markopolos, argued that Madoff must be generating those returns by "front-running" -- that is, using the brokerage arm of his company to illegally provide information to the investment arm.

The SEC said in a statement that it had conducted two investigations into the brokerage arm -- not the investment arm -- of Madoff's company, in 2005 and 2007. The first, begun in response to allegations of front-running, found three violations of rules requiring brokers to obtain the best possible price for customer orders. That investigation appears to have led to Madoff agreeing to register with the SEC the following year, giving the agency access to far more information than it previously had. But the 2007 probe, conducted after Madoff registered, found no evidence of anything improper.

Investment firms were as off-limits under Clinton as they were under Bush. In fact, as long as everyone made money, regulators weren't much exercised to investigate. This is the same root cause that led us to the crisis. Nobody checked the derivatives, nobody checked the CDOs and the credit default swaps, and nobody checked out Bernie Madoff. In good times, these bullets could be dodged. Not so now.

This is why you can't base an economy on pushing paper and inventing sums of money to trade, dependent almost entirely on greed.

Happy Birthday, Recession!

The National Bureau for Economic Research has dated the beginning of the current recession at December 2007, meaning we have been in the midst of recession for one year. They did something quite unusual for some economists and tied the start date to the beginning of when the bad economic picture started to actually affect people's lives.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then [...]

Other series considered by the committee—including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey—all reached peaks between November 2007 and June 2008.

The committee determined that the decline in economic activity in 2008 met the standard for a recession, as set forth in the second paragraph of this document. All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion. Many of these indicators, including monthly data on the largest component of GDP, consumption, have declined sharply in recent months.

Semanticists desperate to protect the status quo have clung to the "a recession is only present after two straight quarters of a decline in GDP" but we know better. That is only one statistic in the face of all this other evidence. And when you put it all together, contra Larry Kudlow, we're in a longer recessionary cycle than the last two, in 1990-91 and 2001.

In short, things are really, really bad and the prospects for a quick turnaround are remote. The lies and unsustainable risks of Wall Street have finally caught up with them (that's a sublime piece by Michael Lewis. It'll make you sick. Wall Street traders were making fantasy football bets with our future). They made enormous bets and pressured everybody to stay positive and keep the go-go dancers dancing. Eventually, many saw the obvious pitfalls but those voices were marginalized.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job [...]

In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

• Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
• Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
• Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.
• Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
• Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.

If the investment bankers and the Bush Administration were thinking ahead, they would have detained economists for being gloomy, like this actual case in Latvia.

Wall Street didn't care what it was selling. Their greatest strength lied in making sure nobody else understood it and blocking the regulators from doing anything about it. Eventually, reality caught up. And it has overwhelmed the greater economy.

Now the question turns to what we do about this. The consensus is forming on the left and even in the center and some elements of the right. Joseph Stiglitz is arguing for $600 billion to $1 trillion over two years and an even bigger investment in jobs than the Obama team has suggested. Robert Reich is firmly in the Keynesian camp, while emphasizing how these infrastructure projects must be tightly controlled and not bridges to nowhere. And Paul Krugman lays out the whole thing in the most lucid fashion.

Even if the rescue of the financial system starts to bring credit markets back to life, we'll still face a global slump that's gathering momentum. What should be done about that? The answer, almost surely, is good old Keynesian fiscal stimulus.

Now, the United States tried a fiscal stimulus in early 2008; both the Bush administration and congressional Democrats touted it as a plan to "jump-start" the economy. The actual results were, however, disappointing, for two reasons. First, the stimulus was too small, accounting for only about 1 percent of GDP. The next one should be much bigger, say, as much as 4 percent of GDP. Second, most of the money in the first package took the form of tax rebates, many of which were saved rather than spent. The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.

The usual objection to public spending as a form of economic stimulus is that it takes too long to get going—that by the time the boost to demand arrives, the slump is over. That doesn't seem to be a major worry now, however: it's very hard to see any quick economic recovery, unless some unexpected new bubble arises to replace the housing bubble. (A headline in the satirical newspaper The Onion captured the problem perfectly: "Recession-Plagued Nation Demands New Bubble to Invest In.") As long as public spending is pushed along with reasonable speed, it should arrive in plenty of time to help—and it has two great advantages over tax breaks. On one side, the money would actually be spent; on the other, something of value (e.g., bridges that don't fall down) would be created.

Krugman also stresses financial reform of the kind that the regulators wanted to implement back in 2005, and across all markets globally.

What we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression. I won't try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks. Since the 1930s commercial banks have been required to have adequate capital, hold reserves of liquid assets that can be quickly converted into cash, and limit the types of investments they make, all in return for federal guarantees when things go wrong. Now that we've seen a wide range of non-bank institutions create what amounts to a banking crisis, comparable regulation has to be extended to a much larger part of the system.

We're also going to have to think hard about how to deal with financial globalization. In the aftermath of the Asian crisis of the 1990s, there were some calls for long-term restrictions on international capital flows, not just temporary controls in times of crisis. For the most part these calls were rejected in favor of a strategy of building up large foreign exchange reserves that were supposed to stave off future crises. Now it seems that this strategy didn't work. For countries like Brazil and Korea, it must seem like a nightmare: after all that they've done, they're going through the 1990s crisis all over again. Exactly what form the next response should take isn't clear, but financial globalization has definitely turned out to be even more dangerous than we realized.

Krugman concludes by stating that we have to get beyond our doctrinal biases and work the problem instead of fretting about some future concern ("I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men"). He takes that up in his column today, arguing that those worried about the deficit are again thinking short-term, and in fact the future of our fiscal balance depends on getting the recovery right.

But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects [...]

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

I quote at length because these are concepts which must be ingrained into progressive thinking about the mess we're in, and must be argued over and over to push the Obama Administration in the right direction, and back us off this precipice where we've found ourselves after decades of deregulation and allowing Wall Street to have their way with the economy.

Nothing Conservative About It

A week or so ago, Ezra Klein argued that America is a small-c conservative nation from a structural and operational standpoint, in that the checks and balances between the different branches and the practice of the filibuster in the key lawmaking body frustrate major change or rolling back policies already enshrined into law.

Insofar as you take the traditional definition of conservatism -- which prizes stasis over change -- America's legislative process is designed to prevent large scale action. The reason we don't have a universal health care system, for instance, is not because Europeans wanted health care while Americans didn't. It's that in Europe, the desire for change aligned with the system's capacity for reform. In a parliamentary democracy, where there's no filibuster, you can do things like universal health care. It's a rather heavier lift in our political system, which is choked by the filibuster and the committee structure and a thousand other traps designed to protect the minority from having to submit to reforms desired by the majority (this is all well-described in Sven Steinmo and Jon Watts's essay, It's The Institutions, Stupid).

That doesn't make us ideologically conservative -- it doesn't mean that we, as a country, agree with Republicans. But it makes us operationally conservative in a way that's as frustrating to those who would try to roll back the welfare state or privatize Social Security as those who would try and act to prevent global warming or reform our health care system.

And this is entirely true, if you focus on the theory of government, and consider the laws of the land as a guide for how government operates. On the question of universal health care, which is used as an example here, the operational conservatism of the country certainly plays a role. But in terms of how government has changed over the years, even in the last three decades, the change is nothing short of radical. Daniel Zwerdling, NPR's best correspondent, kicked off a fine series today about the federal contracting process, which has gotten completely out of control since Ronald Reagan and his "government is the problem" rhetoric, to the extent that nobody inside the government knows precisely how many contractors have been hired or whether or not they are using taxpayer dollars effectively. And this goes well beyond contracting out jobs like mowing the grass in a national park, but to basic decisions being made inside federal agencies.

•Since President Bush took office, the government has doubled the amount of contracts with industry. The administration paid corporations more than $400 billion last year to work for everybody from the Forest Service to the CIA.

•The administration has given the majority of that contract money to companies that didn't have to compete to get it — or faced only limited competition.

•There are actually more contractors handling the war in Iraq than American troops.

All these figures come from government reports. And for the most part, these contractors aren't the ones making Humvees or computer systems or other kinds of products. The administration is paying most of the contract money to corporations to perform the kinds of services that federal employees normally do. And the administration has done all this with almost no public debate.

Tomorrow's Zwerdling segment will cover the fact that private contractors are paid to recover tax money, despite the fact that countless reports have shown them to be less successful than IRS agents, while costing the taxpayer far more than they take in.

One way to measure the program's performance, Kelley said, is by the amount of revenue collected by the private contractors; that sum continues to be only a fraction of the IRS's initial estimates. When start-up costs of $71 million are considered, the IRS program resulted in a net loss of $50 million in its first year of operation. This small return has forced the agency to revise the break-even point for the program to the year 2010—at the earliest.

"The bottom line is who does the work more cost effectively?" said Kelley. "According to IRS numbers, IRS employees bring in $13 for every dollar spent, whereas private debt collectors bring in $3 for every dollar spent. It doesn't take a TIGTA report to figure that out."

Where the operational conservatism has come in is when the Congress has tried to stop this program. The House voted to end the use of private debt collectors, and it has died every time in the Senate.

But these are truly radical steps, where government has become a conduit for profit-taking by giant corporations and policy is set with an eye toward those contracts.

And a "conservative" nation would never allow this:

The U.S. military expects to have 20,000 uniformed troops inside the United States by 2011 trained to help state and local officials respond to a nuclear terrorist attack or other domestic catastrophe, according to Pentagon officials.

The long-planned shift in the Defense Department's role in homeland security was recently backed with funding and troop commitments after years of prodding by Congress and outside experts, defense analysts said.

There are critics of the change, in the military and among civil liberties groups and libertarians who express concern that the new homeland emphasis threatens to strain the military and possibly undermine the Posse Comitatus Act, a 130-year-old federal law restricting the military's role in domestic law enforcement.

What do you mean, possibly?

This goes to the other side of how this nation is changing radically - with a series of programs conceived largely by executive fiat that weakens civil liberties protections and subverts the plain letter of the law. This includes illegal wiretapping of American citizens, indefinite detention of prisoners without charges, and the dehumanizing practice of torture, which is ineffective and deeply dangerous to the lives of our troops, as this senior interrogator in Iraq explains.

Torture and abuse are against my moral fabric. The cliche still bears repeating: Such outrages are inconsistent with American principles. And then there's the pragmatic side: Torture and abuse cost American lives.

I learned in Iraq that the No. 1 reason foreign fighters flocked there to fight were the abuses carried out at Abu Ghraib and Guantanamo. Our policy of torture was directly and swiftly recruiting fighters for al-Qaeda in Iraq. The large majority of suicide bombings in Iraq are still carried out by these foreigners. They are also involved in most of the attacks on U.S. and coalition forces in Iraq. It's no exaggeration to say that at least half of our losses and casualties in that country have come at the hands of foreigners who joined the fray because of our program of detainee abuse. The number of U.S. soldiers who have died because of our torture policy will never be definitively known, but it is fair to say that it is close to the number of lives lost on Sept. 11, 2001. How anyone can say that torture keeps Americans safe is beyond me -- unless you don't count American soldiers as Americans.

Yet this practice is what slaves to executive power like Bill Kristol think are worthy of the Medal of Freedom.

In fact, what anyone who has been paying attention must conclude is that this has become a deeply radical nation, from deregulation to privatization to the dismissal of the rule of law, and the key project for the next President is to rein in the radicalism and return us to the, yes, conservative principles that are supposed to govern. Russ Feingold ably explains the need from the standpoint of the rule of law and the Constitution in this interview. But it can be expanded to the de-fanging of federal agencies and the transfer of government wealth to corporate bank accounts.

Any restraint and respect for the structure of government from the radical right only kicks in when they're out of power, when they have to use the means at their disposal to block the reversal of their extreme policies. If the Obama Administration plays the game inside the lines, if "going through the federal government line by line" means cutting services that are purported to not work instead of getting the government back from corporate takeover; if "reviewing every executive order" means trying to maintain extreme executive power by promising to carry it out competently instead of abolishing anything that subverts the rule of law; then there will be no return to the traditional values that have made America a lasting democracy.

World Report

Here are a few things that caught my eye.

• Will you look at that, another foreign policy failure for the Bush Administration. They're basically saying that, with the Israeli government in a fair bit of turmoil, there isn't likely to be any movement on a Mideast peace deal. This is what happens when you wait 7 1/2 years to pay any attention to the Arab-Israeli conflict. I know the economic crisis is all-consuming, but Obama would do well to attack this early in his Administration, because it truly is the linchpin to peace throughout the region, and ignoring it for years will only cause more violence and resentment.

• Not that Israel is necessarily going to be inclined to cooperation with Obama. Tzipi Livni, who is the more "dovish" of aspirants for the Prime Minister's post, warned the President-elect that dialogue with Iran would be unwise because it may project "weakness." I don't think Obama will agree - but this gives you an insight into the prevailing mindset in Israel regarding Iran, driven more by paranoia than facts (the consensus of the US intelligence community is that Iran has no nukes, a fact that is conveniently forgotten).

• The E.U. is eager for financial reforms to regulate international banks, but waiting for President Bush to do the right thing is a Godot-like experience. Their plan, to hammer out reforms now and reassess them when Obama takes office with his input, is decent enough, I just think it's wishful thinking.

• Practically the only politician coming out of the financial fallout looking sound is Gordon Brown, who was one of the few to implement a solution that matched the problem. Voters in England appear to be responding by giving his party a boost, as Labour won a key byelection in Scotland. Brown was part of the Blair regime that was as asleep at the switch as every other world government leading up to the crisis, so I'm not sure he deserves all this praise, but I do think he's recovered enough to actually contend for his re-election instead of the sure defeat to the Tories predicted earlier.

• All hell is breaking loose in Zimbabwe, and right on schedule. After negotiating a power-sharing agreement, Robert Mugabe is now going to form his own government and deny cabinet posts to his rival Morgan Tsvangirai. The only surprise is that this didn't happen sooner. I hope Tsvangirai has a food-taster. Mugabe plays for keeps.

• Remember when the Russian "invasion" of Georgia was the greatest international crisis since the end of the Cold War? Turns out that it not only was not a consequential crisis on par with, say, the war in Iraq, but it was not a Russian invasion.

TBILISI, Georgia — Newly available accounts by independent military observers of the beginning of the war between Georgia and Russia this summer call into question the longstanding Georgian assertion that it was acting defensively against separatist and Russian aggression.

Instead, the accounts suggest that Georgia’s inexperienced military attacked the isolated separatist capital of Tskhinvali on Aug. 7 with indiscriminate artillery and rocket fire, exposing civilians, Russian peacekeepers and unarmed monitors to harm.

This is good journalism but you could have considered the source of the scaremongering - neocons with an agenda - back when the whole thing was in the news, and drawn the same conclusion. Neocons are wrong about everything. And the way to break their lock on power is to find everyone who hasn't been wrong about everything, regardless of ideology or political party, and put them in a room together, and unify them against these clowns. There's a lot at stake.

The Old "That Thing You Didn't Say Isn't True" Trick

Marc Danzinger writes at Winds of Change under the name "Armed Liberal." In my scattered meetings with him, I've found him to be neither armed nor liberal, but maybe I caught him on a bad day. A few weeks ago, we appeared on a radio show together, and we got into a discussion over whether or not Fannie Mae and Freddie Mac could be blamed for the financial meltdown, which is a tautological discussion at the outset, because the idea that there's one simplistic answer for something so complex isn't an argument worth having. But I made my points, and he made his, and then a week or so later he wrote this long piece on his website that I imagine he considered the definitive takedown of moi.

Now, I was fully prepared to let this go, but this "Fannie and Freddie did it!" meme has shown no sign of letting up, with House Republicans calling for a special counsel to investigate the GSE's role in the crisis, and in particular the conduct of former Clinton Administration officials (Man, that old Whitewater magic has some kind of pull). They desperately want to push this off onto any organization that has ties to Democrats to absolve themselves. So I'm compelled to respond.

In his post, Armed Liberal cites the conversation we had on the radio.

Dave and Marcy Wheeler were taking the "Fannie had nothing to do with this" position. I countered with "I've got this 92-page Powerpoint from the Milken Institute that says otherwise..."

Dave immediate dismissed it, saying "Did Fannie or Freddie make subprime loans?" And while I went to get the appropriate slide from the deck to show him, we moved the conversation along - because according to Brad, no one cares.

But I do, and I'll suggest that we all should. because they did, and further because of who they were and their position in the financial ecology, what they did was dramatically more important than what any other single institution chose to do.

Well, let's stop right there, because that's a misstatement of what I actually said. I never said "Did Fannie or Freddie make subprime loans?" I said "Did Fannie or Freddie guarantee or securitize subprime loans?" And I know that's what I said for two reasons. One, he has the damn mp3 on the site. And two, I was quoting a post I had written that very day which contained that very specific language:

• Fannie and Freddie did not guarantee and securitize subprime loans. Such loans didn’t meet their conforming loan standards. In fact, as the subprime market was building, Fannie and Freddie lost market share because they were under stricter standards. Thus, their participation in the secondary market did not assist in the creation of the subprime market.

• It’s true, however, that Fannie and Freddie were damaged by the subprime crisis because everyone in the housing sector was damaged by falling home prices and, more significantly, the two companies branched out into a broader investment portfolio. In that portfolio were included mortgage-backed securities that hurt all of those who purchased them. Fannie and Freddie weren’t the biggest players in this and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases (which speaks poorly for Fannie and Freddie’s decision making, but precludes them from responsibility for the crisis).

• Fannie and Freddie were supposed to be more closely supervised than other lenders—with their own regulator, which was supposed to keep a special eye on them because they are important institutions. Those regulators, who were part of the Bush administration, failed along with the rest of the Bush regulatory apparatus to stop the problem.

In the first paragraph, you see that Fannie and Freddie were losing market share, and were basically forced into a subprime market that was already created and well underway. In fact, it was their foot in the free market that forced them into that. This weird hybrid of a "government-sponsored entity," still responsible to shareholders, demanded that Fannie and Freddie chase the market.

Now, Armed Liberal uses the quote of mine he fabricated to "prove me wrong." But there is a major difference between what I said and what he thinks I said. Fannie and Freddie "made" subprime loans, after the market was in place and the bubble was set (Armed Liberal even quotes a WaPo piece saying that they didn't get into the market until 2006), but they didn't guarantee and securitize them. They bought mortgage-backed securities as part of a broader investment portfolio. That was stupid, as they were under-capitalized. But they wanted to show their shareholders that they were going where the mortgage market was going and finding a way, despite their loan conforming standards, to be a part of it.

The problem with the mortgage market was that these shaky loans were sliced and diced into securities that were sold off to others. Fannie and Freddie did not and could not perform that. They got involved when the market was already collapsing. There's a difference between dumb and responsible. If they didn't purchase MBS's, there was a giant pile of money (Big Shitpile) ready to do the same.

When Armed Liberal pulls out the main slide that proves all this (here's an excerpt of his text):

Now if you'll recall, this all started when I suggested, arguing with Marcy Wheeler, that Fannie and Freddie did have something to do with the meltdown. Dave Dayen countered with "do Fannie and Freddie make subprime loans?" And I was flipping through the deck, looking for this slide:

You'll note that 61% of the loans Freddie had in its retained portfolio in 2006 were subprime, and a further 25% were Alt-A.

It's the kind of thing you wish you'd had at your fingertips when you're arguing in public...

As to Fannie, in 2006 the ratios were 46% subprime and 35% Alt-A.

I'll send this link over to Marcy and Dave (as well as Brad) and see what they have to say.

What I'll say is that you're looking at their stock protfolio. This lists the percentages in the mortgage-backed securities they purchased, and that has been ably spun by the Milken Institute (where this guy's "proof" comes from) into Fannie and Freddie being solely responsible for them. That's just silly, for reasons described above.

You don't really have to believe me on this one. You can go ahead and look at the reporting:

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

Or the United States Treasury Department:

The PWG found that the principal underlying causes of the turmoil in financial markets
were:

• a breakdown in underwriting standards for subprime mortgages;
• a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, credit rating agencies, and global investors, related in part to failures to provide or obtain adequate risk disclosures;
• flaws in credit rating agencies’ assessments of subprime residential mortgage-backed securities (RMBS) and other complex structured credit products, especially collateralized debt obligations (CDOs) that held RMBS and other asset-backed securities (CDOs of ABS);
• risk management weaknesses at some large U.S. and European financial institutions; and
• regulatory policies, including capital and disclosure requirements, that failed to mitigate risk management weaknesses.

(You won't see Fannie and Freddie referenced in there, with the possible exception of the regulatory policies that failed to mitigate risk management, where I completely agree. But of course this is because they were forced by their quasi-private status to operate like everyone else in the market. My remedy for that comes later.)

... or former Treasury Secretary John Snow, SEC Chair Chris Cox, and former Fed chairman Alan Greenspan, and believe me, if there was a scapegoat to be had, they would have no problem using it.

Today in a House Oversight Committee hearing with former Fed chairman Alan Greenspan, SEC chairman Christopher Cox, and former Treasury secretary John Snow, Rep. John Mica (R-FL) revived that argument. He also tried to tie the crisis to Sen. Barack Obama (D-IL), holding up a chart called “Follow the Money Trail.” He pointed that Obama has been the largest recipient of donations from Freddie and Fannie. (Actually, he’s the second highest.)

Committee chairman Henry Waxman (D-CA) chastised Mica for trying to turn the financial crisis into a political issue. He noted that Freddie and Fannie “certainly played a role” in the current situation, but then asked the witnesses, “Do any of you believe that they were the cause of this financial crisis?” All three men said no. Watch it:

I don't know why Armed Liberal has such a hard-on to blame Fannie and Freddie, and I'm not going to go all Matt Taibbi on him and ridicule him for not knowing what the hell he's talking about. Instead I'll try to find some common ground. This was a private sector problem, a failure of regulation and a failure of overwatch on the runaway securitization of loans and the insurance and bets made behind the loans. To the extent that Fannie and Freddie were a part of that, late in the game, it was because they were part of the private sector. I see absolutely no reason to have government-sponsored entities that are partially public and partially private. I imagine this makes it easier to perform poor risk management because the risk is taken away from you. So I would take them permanently off the private market so they could stick to their core function instead of chasing wealth. If this were the case, no lobby shop would be available to press Republicans and Democrats alike to back off any meaningful regulation.

So we need to re-regulate the market and make Fannie and Freddie what they always should have been - backstops. As for Armed Liberal, the next time he wants to argue with me, it'd be nice if he quoted me accurately.

...just to elaborate on this a bit, I'm always skeptical of anyone who leads this off with "subprime loans." The problem of them was not their existence but the securitization. There are also regular loans in those MBS's, and there are loans to people who qualified above subprime but were given one of the more exotic loans. The securitization made everyone generally feel confident, that even if a bunch of loans failed they were a small subset of the total market and so lending standards could be acceptably thrown out. Fannie and Freddie were on the other side of that transaction. They shouldn't have bought them in 2006 and beyond, but they simply weren't responsible for creating the instruments, and their absence from the market wouldn't have collapsed it at all - the dot-com bubble flowed very naturally into the housing bubble, and all the global money went nicely with it.

Also, I associate myself with Ezra Klein's remarks about how we can actually find blame in all of this and use that evidence to create new solutions, essentially a new oversight structure that treats banks for what they do and not who they say they are, and treats insurance like insurance (I'm talking about CDS's here). Do read them.

Tweety Tricked Me!

If you get into an intellectual war of words with Chris Matthews, and you lose, that's a disqualifying event for public life. Michelle Bachmann is just such a loser.

Chris Matthews laid a trap, and I walked into it. […]

Chris Matthews was using the term over and over, and I should not have used it. […]

This was Chris Matthews. I made a big mistake by going on the show. I never should have. […]

I just didn’t recognize — I never watched the Chris Matthews show before. I should have before I went on. I didn’t recognize that he would lay a trap the way that he did.

He laid this trap by allowing you to say what you were saying instead of cutting you off. And by taping it.

The D-Trip has an ad on the air in the district now, hitting her CONTINUED love of deregulation and the Wall Street cash she's taken for her campaign. I'm a little befuddled why they're not hitting the McCarthyism, but maybe the free media is doing that job for them. The idea that "hyper-regulation" caused the crisis is nutty, too. I hear that the NRCC might not save her from this one.

Bye bye Bachmann.

UPDATE: And now, in friendlier media outlets, she's just rearranging the words.

BACHMANN: All I did on Chris Matthews is I questioned Chris Matthews and said, “look, if John McCain had friends like Jeremiah Wright and Bill Ayers and Father Pfleger, you’d be all over him Chris, but you’ve laid off of Barack Obama.” And so, he was using the word “Anti-American” and I told Chris, what I question are Barack Obama’s views. Because Barack Obama’s views are against America. They won’t be good for our country.

It's all so simple. All she did is say that Obama's views are against America. Now if that makes him anti-American, well, you must be one a' them liberal elitez.

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.

Making A Horrendous Plan Worse

John McCain's health care idea is to get employers to throw their workers off of their health plans by taxing the benefits, leaving employees to the wilds of the individual insurance market armed only with a tax credit that is too small to actually pay for health insurance. Barack Obama's campaign has been hammering this of late, so McCain's team adjusted the tax hit, applying it to income taxes and not payroll taxes. But I guess the budget numbers didn't match up, so to pay for that too-meager tax credit, it turns out that McCain wants to cut Medicare.

John McCain would pay for his health plan with major reductions to Medicare and Medicaid, a top aide said, in a move that independent analysts estimate could result in cuts of $1.3 trillion over 10 years to the government programs.

The Republican presidential nominee has said little about the proposed cuts, but they are needed to keep his health-care plan "budget neutral," as he has promised. The McCain campaign hasn't given a specific figure for the cuts, but didn't dispute the analysts' estimate.

To be clear, creating efficiencies in the marketplace and applying cost controls would reduce Medicare spending in the same way it would reduce overall health care spending, but McCain isn't advocating that. He just wants to cut Medicare. To fill in his budget gap for his insufficient health care tax credit. I guess when Sarah Palin used a Reagan quote about how "if we aren’t vigilant, we’ll end up telling our children and our children’s children about a time when America was free," wherein Reagan was talking about what would happen if Medicare were enacted, she was being descriptive and not allusive.

Paul Krugman further explains McCain's dangerous health care plan today, and he wrote it even before this attempt to gut health care entitlements:

The good news, such as it is, is that more people would buy individual insurance. Indeed, the total number of uninsured Americans might decline marginally under the McCain plan — although many more Americans would be without insurance than under the Obama plan.

But the people gaining insurance would be those who need it least: relatively healthy Americans with high incomes. Why? Because insurance companies want to cover only healthy people, and even among the healthy only those able to pay a lot in addition to their tax credit would be able to afford coverage (remember, it’s a $5,000 credit, but the average family policy actually costs more than $12,000).

Meanwhile, the people losing insurance would be those who need it most: lower-income workers who wouldn’t be able to afford individual insurance even with the tax credit, and Americans with health problems whom insurance companies won’t cover.

And in the process of comforting the comfortable while afflicting the afflicted, the McCain plan would also lead to a huge, expensive increase in bureaucracy: insurers selling individual health plans spend 29 percent of the premiums they receive on administration, largely because they employ so many people to screen applicants. This compares with costs of 12 percent for group plans and just 3 percent for Medicare.

By the end, Krugman announces himself "terrified" by the McCain campaign's ideas. You should be too.

...SEIU has an ad out about healthcare today as well.

McCain: Veto The Bill I Voted For, Mr. President

This is some kind of flip-flop record:

SCARBOROUGH: Why did these (pork-barrel) items have to be in this critical bill?

MCCAIN: Well that’s just the way the system is working in Washington and the reason why it’s got to be fixed, and it’s got to be changed. And no matter what the stakes are, you’ve got to stop this by starting to veto bills that come across the president’s desk. … It’s insanity and it’s obscenity, because it’s a waste of taxpayers’ dollars and it goes on, and until we stop it, until we get frankly a president who will say, I’m gonna veto these bills, I’m gonna make the people famous that put them on there, uh, famous.

I want to clear up a misconception that these "sweeteners" were somehow picked specifically to appeal to individual legislators in the House. That's not true. This was a tax package that the Senate passed weeks ago. They picked it up and added it, maybe to appeal to a couple tax-cutting Republicans, but really to jam the House and force them to vote for it, after they demurred earlier. For crying out loud, the bill increases taxes on Big Oil. Do you really think they would have constructed it that way to appeal to Republicans? It's the only part of this or ANY bill passed this year, really, that would help reindustrialize America (due to the renewable energy production tax credits), and as a standalone I would have voted for it happily.

But let's get back to the main point. McCain flew to Washington yesterday and voted for the bailout bill. He hasn't been on the Senate floor to vote in six months. So this was obviously very important. And now, he turns right around and says that the President has to show some courage and veto the bill which he just voted to pass.

The disconnect is staggering. It's the same feeling you get when you see McCain's reinvention as a master regulator despite his consistent opposition for 26 years. More than anything, this is why he's losing. People don't trust him.

Accord

The word on the street is that the House and Senate leadership has reached an agreement on the bailout, and the structure is still substantially similar to the Bush stick-up, albeit with inprovements.

The plan calls for the Treasury Department to buy deeply distressed mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price.

The aim is to prevent the credit markets from drying up and causing a meltdown of the U.S. economy.

The bill includes pay limits for executives whose firms seek help, congressional aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more-aggressive efforts to prevent home foreclosures. In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the years ahead.

The White House also agreed to strict oversight of the program by a congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.

At the insistence of House Republicans, some money would be devoted to a program that would encourage holders of distressed mortgage-backed securities to keep them and buy government insurance to cover defaults.

The legislation would place limits on severance packages for executives of companies that benefit from the rescue plan, but details were sketchy.

Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits.

To help struggling homeowners, the plan requires that the government try to renegotiate the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.

This sounds fine as long as you believe that something absolutely must be done immediately and the banks are worth saving. If you think this plan wouldn't solve the underlying problem and the great risk to the economy is a risk that is solvable, i.e. by nationalizing the banks on the Swedish model, then the plan suddenly doesn't sound so fine. My gut feel is that rich people are trying to prevent a recession that is a completely normal part of the traditional economic cycle. Foreclosure rates are high, but not unmanageable. The problem is that banks are leveraged to the hilt and the toxic securities are nearly impossible to untangle. Throwing a bunch of money at this problem will only satisfy those troubled banks temporarily unless they de-leverage and stop organizing securities in such a cockamamie manner.

I have relatives who can't get business loans, so the credit tightening is real, even if it's being goosed by financial firms seeking the bailout payday. But a cash injection just delays the problem.

So, if you don't stop financial institutions from making bets they don't really understand, based on favourable assumptions they can't back up, they'll keep doing so. Add in massive leverage and you're looking at a gusher. The ship keeps taking on water.

If you don't close the hole, if you don't make it impossible for financiers to keep flooding the boat with water, they will keep doing so. As with gamblers who are down, they will stay at the table trying to get their money back. Worse, because they know that the government is making what amounts to an open ended commitment to buy toxic crap at a price more than it's worth, why shouldn't they play? Heads they win, tails the taxpayers bail them out.

If you don't patch the hull, if you don't make significant regulatory changes at the same time as you are creating a bailout bill, you're just buying time. The ship may stay afloat as long as you don't stop ferrying buckets of money to the financial sector, but it's still got a massive hole in the hull and it's still taking on water.

Any bailout bill that does not have significant regulatory changes will not solve the problem. It will, at best, kick it sdown the road for as long as taxpayers are willing to fork over a hundred billion a month or so to keep it from exploding. It may even make the problem worse because of moral hazard—heads the financier who makes a bet wins, tails the government bails him out.

It's fairly clear that a bipartisan bill could not include these regulatory changes, although I'm not sure the Democratic leaders doing the negotiating even tried. Which is why there shouldn't have been a bill at all in the middle of a heated political environment. You could have pushed out a little cash to keep lending going through the election and then let the people weigh in on what party they'd like to see finish the deal. That's democracy, and that's the transparency we need to make a decision like this.

The real point is that the next President is going to be in a massive hole. The budget deficit and the national debt will be historic, the housing market will still be in the crapper, and by the first quarter of 2009 we'll be in recession, if not earlier. It's a terrible economic picture, and I think you can accurately characterize it as a Bush Administration knee-capping.

Good. God.

I don't know what to say.



Transcript with full context.

COURIC: You've said, quote, "John McCain will reform the way Wall Street does business." Other than supporting stricter regulations of Fannie Mae and Freddie Mac two years ago, can you give us any more example of his leading the charge for more oversight?

PALIN: I think that the example that you just cited, with his warnings two years ago about Fannie and Freddie--that, that's paramount. That's more than a heck of a lot of other senators and representatives did for us.

COURIC: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.

PALIN: He's also known as the maverick though. Taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about--the need to reform government.

COURIC: I'm just going to ask you one more time, not to belabor the point. Specific examples in his 26 years of pushing for more regulation?

PALIN: I'll try to find you some and I'll bring them to you.

I think the wrong candidate decided to suspend their campaign. No wonder they're trying to spike the VP debate.

Leadership

I don't think the Democratic candidates' speeches should be lost in favor of McCain's nutty "Time Out!" gambit. Joe Biden tore McCain a new one on national security today.

[T]ime and again, on the most critical national security issues of our time, John McCain's judgment was wrong. Right after the terrorists attacked us on 9-11, John responded by urging that we consider attacking countries other than Afghanistan, including Iraq, Iran and Syria. In the run up to the war in Iraq, John insisted that we would be greeted as liberators... that we didn't need a lot of troops... that victory was imminent.
Then, he said he wasn't worried about Afghanistan... that we would "muddle through"... and he declared Afghanistan to be "a remarkable success. In John's judgment, there is nothing to talk about with Tehran. And he has one idea for dealing with Russia: kick it out of the Group of Eight nations."

[...]

John McCain continues to insist, against all the evidence and all the facts, that Iraq is the central front in the war on terrorism... and not the mountains between Afghanistan and Pakistan where the people who actually attacked us on 9-11 reside and are regrouping."

"John is more than wrong -- he is dangerously wrong. On a question so basic, so fundamental, so critical to our nation's security, we can't afford a Commander-in Chief so divorced from reality and from America's most basic national interests."

This is elemental. Afghanistan is now fifteen times more violent than Iraq, and it's becoming increasingly unlikely that we're going to get significant buy-in from the Pakistanis on stopping cross-border attacks, at least not with the current Administration in charge. The stakes are incredibly high and John McCain is out to lunch, without anything approaching a strategy.

Barack Obama had a speech today in Dunedin, FL, about the economy, and he laid the blame at the feet of the conservative philosophy of laissez-faire economics and mass deregulation.

Now, in the last few days, my opponent has decided to start talking tough about CEO pay. He's suddenly a hard-charging populist. And that's all well and good. But I sure wish he was talking the same way over a year ago, when I introduced a bill that would've helped stop the multi-million-dollar bonus packages that CEOs grab on their way out the door. Because he opposed that idea. I sure wish he joined me when I blew the whistle on the fired CEOs of Fannie Mae and Freddie Mac who tried to walk away with golden parachutes. I sure wish he felt the same outrage about CEO pay when his top economic advisor – who he calls a 'role model' – walked away with a $42 million package after being fired from Hewlett Packard. I sure wish he would change his current plan to give the average Fortune 500 CEO a $700,000 tax cut at a time when millions of Americans are struggling to pay their bills. That's what I'd like to hear.

You see, the John McCain you've heard from over the last few days is a lot different than the John McCain who's been in Washington for the last twenty-six years. He talks about getting tough on Wall Street now, but he's been against the common-sense rules and regulations that could've stopped this mess for decades. He says he'll take on the corporate lobbyists, but he put seven of the biggest lobbyists in Washington in charge of his campaign. And if you think those lobbyists are working day and night to elect my opponent just to put themselves out of business, well I've got a bridge to sell you up in Alaska.

The truth is, when my opponent first reacted to this crisis by saying that the fundamentals of our economy are strong, he didn't just make a mistake. He revealed an out-of-touch philosophy he's followed for decades in Washington – the idea that if we give more and more to those with the most, prosperity will trickle down to everyone else; the idea that no harm will be done if we let lobbyists shred consumer protections and fight against every regulation as unwise or unnecessary.

Well what we have seen over the last few weeks is nothing less than the final verdict on this failed philosophy. And I am running for President of the United States because the dreams of the American people cannot be endangered anymore.

John McCain didn't suspend his campaign today because he's some great leader. He suspended his campaign because he can't win the argument.

And The Lies And Distortions Continue

So I guess McCain has been slamming Barack Obama's ties to individuals in his orbit with ties to Fannie Mae and Freddie Mac, while having his campaign manager receive millions from the mortgage giants to lobby for them against increased government regulation:

Senator John McCain’s campaign manager was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say [...]

...several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. Some who came forward were Democrats, but Republicans, speaking on the condition of anonymity, confirmed their descriptions.

“The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month.

After the Obama campaign decided to make an issue of this, McCain decided to shoot the messenger and claim that the New York Times is not a real news organization. Which I'm sure endeared them to their conservative base, but is pretty much a non-answer answer. It certainly doesn't address Davis' lobbying on behalf of deregulation, which matches up perfectly with the words out of McCain's mouth:

Q: In 1999, you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?

McCAIN: No. I think the deregulation was probably helpful to the growth of our economy.

While McCain is hiding behind Obama on the subject of the Wall Street bailout and hoping not to catch any shrapnel, he has been vocal, along with key Democrats, in rejecting massive golden parachutes for CEOs of the effective companies. Which is a solid argument, made less solid by having a CEO who received a golden parachute as a member of your economic inner circle:

On NBC this morning, host Meredith Vieira noted that (Carly) Fiorina “is an example of exactly the kind of person you say is at the root of the problem.” McCain replied, “I don’t think so”:

McCAIN: I don’t think so. … Because I think she did a good job as CEO in many respects. I don’t know the details of her compensation package. But she’s one of many advisers that I have.

Q: But she did get a $45 million dollar golden parachute after being fired while 20,000 of her employees were laid off.

McCAIN: I have many of the people, but I do not know the details of what happened.

“How can you not know the details of her past? I mean, that would be awfully important,” Vieira responded.

This is a familiar dodge for McCain, feigning ignorance when challenged with a question that he knows has a terrible answer.

It's getting to be embarrassing for this guy.

Making Nice With Krugman

Barack Obama has jumped all over John McCain's article in a trade publication about how he wants to deregulate the health insurance industry the same way he helped deregulate the financial sector, mentioning it in stump speeches and now releasing an ad.



"A risk we just can't afford to take" is a new tag line, and I think it's effective.

What's interesting is that this little nugget of information was dug up by Paul Krugman, who was wary of Obama throughout the primary campaign, including in a high-profile spat over Obama's health insurance plan. This is kind of a rapprochement of sorts. As long as Obama's team seems to be reading Krugman, I hope they'll take a look at his opinion on the financial stick-up being attempted by Bush and President Paulson:

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Read the whole thing. You too, Barack.

Social Security, Populism Front And Center - Choice Needs To Be Made

As the financial markets go to hell, connecting the mess to the McCain-Bush plan to privatize Social Security is a natural. And it's worked its way into Obama's standard stump speech.



He actually went further:

Speaking at Bethune-Cookman University at an event highlighting his campaign's efforts to appeal to women voters, Obama invoked the current financial crisis by taking aim at an article carrying McCain's name in the current issue of Contingencies magazine, published by the American Academy of Actuaries.

In it, McCain wrote, "Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."

"So let me get this straight -- he wants to run health care like they've been running Wall Street," Obama told the audience. "Well, Senator, I know some folks on Main Street who aren't going to think that's such a good idea." [...]

"You know, you hear them talking about Wall Street and Main Street -- well, this is Wall Street plus Main Street, and I'm worried about Main Street. I'm worried about people being able to send their kids to college or to be able to afford their homes," Bush said. "...I said, what's it going to take to make sure Main Street doesn't get affected by the policies of Wall Street? And this is what they came up with, and this is big ticket, because it's a big problem."

McCain has attacked Obama this past week for ties to former executives of Fannie Mae and Freddie Mac, including in two television ads. But he said it's McCain whose campaign is replete with current or former lobbyists for the mortgage giants. He cited comments by the former head of Fannie Mae's government relations office, who was quoted in Politico as saying, "When I see photographs of Sen. McCain's staff, it looks to me like the team of lobbyists who used to report to me."

"Folks," Obama said, "you can't make this stuff up."

On Social Security, Obama said, McCain's support for privatization would leave senior citizens at risk at a time when the stock market has plummeted. "I know Senator McCain is talking about a 'casino culture' on Wall Street -- but the fact is, he's the one who wants to gamble with your life savings and that is not going to happen when I'm president of the United States."

He said that if McCain had his way, "the millions of Floridians who rely on it would've had their Social Security tied up in the stock market this week," although McCain has not called for full privatization of the system.

That letter from the Fannie Mae guy is hilarious.

This is good populist stuff, and considering that, after all this, McCain still favors privatizing Social Security, this message is what's going to work.

Obama's statement of principles on the proposed bailout is similarly good, although we're going to need to see what happens the moment after Bush and Paulson say "no" to see what happens on that one.

I also love this ad using Lily Ledbetter:



We have the lines clearly drawn. But the result of that bailout legislation will prove whether those lines result in talk or action.