Today's Links

Today's Links

1--"You Would Have to Be Fool to Buy a House Now"

2--Belt-tightening program for Greece sparks street violence; three dead in gov. clash

3--Consumer spending above pre-recession level

4--Can the Euro be Saved?

Quote: "The social and economic consequences of the current arrangements should be unacceptable. Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago." Joseph Stiglitz

5--National Review debunks supply-side mythsQuote: " There is no evidence that the tax cuts on net produced more revenue than the Treasury would have realized without them."

6--Public Debt and Other Issues Henry Liu

Quote: "...the danger comes not from the size of the deficits or debt, but on how the proceeds from them are used....Far from ruining the US economy, war production financed by public debt catapulted the country into the front ranks of the world’s leading economic and financial powers, because the US homeland was not affected by war damage and civilian consumption was curbed in the name of patriotism. The national debt turned out to be a blessing, because a good supply of government securities provided for a vibrant credit market and public sector spending created the rise in demand that private companies could satisfy profitably with a guaranteed market.The truth is that the positive economic functionality of the national debt rests not so much on its level, high or low, but on how the debt is expended. When the national debt is used to expand economic production with full employment and rising wages, it will produce positive economic effects. But if the national debt is used to finance speculative profits achieved through pushing down wages via cross-border wage arbitrage, or to structure ballooning interest payments to service old debts by assuming more new debts, it will eventually drag the economy to a grinding halt by a debt implosion crisis."


7--Two Different Banking Crises - 1929 and 2007 Henry Liu---Wholesale Credit Market Failure

Yet with the benefit of deposit insurance instituted during the New Deal remaining operative, the current financial crisis that began in mid-2007 was caused not by bank runs from depositors, but by a melt down of the wholesale credit market when risk-averse sophisticated institutional investors of short-term debt instruments shied away en mass.

The wholesale credit market failure left banks in a precarious state of being unable to roll over their short-term debt to support their long-term loans. Even though the market meltdown had a liquidity dimension, the real cause of system-wide counterparty default was imminent insolvency resulting from banks holding collateral whose values fell below liability levels in a matter of days. For many large, public-listed banks, proprietary trading losses also reduced their capital to insolvency levels, causing sharp falls in their share prices.

8--Greek Default Already Decided WSJ

9--Fed Faces Deflation With Few Weapons, Rosenberg Says

Today's Links

1--U.S. Faces Inflation or Default, Nouriel Roubini

2--Shadow Banking, Nomi Prins

3--U.S. Role in Mortgage Market Grows Even Larger, Wall Street Journal


4--Bad by any Measure, macroblog FRB of Atlanta

5--The Role of Fraud in the Financial Crisis, James Galbraith

6--Crisis Panel to Probe Window-Dressing at Banks, Louise story NYT--- Today's "must read"

7--Still Unbalanced, Tim Duy

8--Greek End Game, Paul Krugman NYT

9--Follow the Money, James Hamilton, Econbrowser

Bernanke's Trillion Dollar Parlor Trick

The American Enterprise Institute is helping the Federal Reserve develop a strategy to dump $1.25 trillion in mortgage-backed garbage on the U.S. taxpayer. If the plan goes forward, the losses will be greater than all of the other bailouts combined. This is big, and it will require political activism to make sure the plan fails.

There's nothing fancy about the AEI's strategy; it's a straightforward "no frills" ripoff. Bernanke buys the toxic assets and non performing loans from the banks (which he's already done) and then transfers them to the GSE's (Fannie Mae and Freddie Mac). It's that simple. The Fed merely acts as a middle man to create a paper-trail long-enough to confuse the public about what's really going on. And, what's going on is another sleazy looting operation. Here's an excerpt from the AEI's web page by the eerily-named "Shadow Financial Regulatory Committee" which explains it all:

"Freddie and Fannie have been placed in conservatorship and the Treasury has confirmed that their debt is now guaranteed by the U.S. Government. This means that their debt is essentially identical to Treasury debt. The Treasury could simply issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction being an IOU to the U.S. Treasury. Freddie and Fannie could then swap the acquired Treasury debt for MBS held by the Federal Reserve. This transaction would have several desirable features. It would place housing debt on the books of Freddie and Fannie where it belongs and remove the Fed from financing U.S. housing policy, which is appropriately a fiscal policy and not a monetary policy function. This would also help to re-establish Federal Reserve independence from the Treasury and fiscal policy. Finally, it would free the Fed to device strategies to reduce its balance sheet by engaging in more traditional asset sales in the much deeper Treasury market where the pricing impacts would be smaller and would accommodate a more rapid reduction in excess reserves." ("Mortgage Backed Securities in the Federal Reserve’s Portfolio" Shadow Statement No. 294, American Enterprise Institute)

So, there it is in black and white; the committee believes that dumping the red ink on the public would have "several desirable features." Indeed. It would move the bank's private losses off the Fed's books and onto Freddie and Fannie's "where it belongs". That would remove the Fed from any further obligation.

Naturally, the Fed will need a way to cover its tracks, so the AEI recommends that they ratchet up the fear of inflation. That means we can expect the Fed to mobilize its allies in the media to launch a public relations campaign that focuses on the imminent (and imaginary) threat of hyperinflation. That will create the diversion Bernanke needs to carry out his trillion dollar sludge-dumping operation.

According to the Wall Street Journal, Fannie and Freddie's total debt outstanding, at the end of 2009, was already a whopping $8.1 trillion, which is slightly higher than "the $7.8 trillion in total marketable debt outstanding for the entire US government." The off-balance sheet debts of the GSE's have mushroomed since the beginning of the financial crisis, because the banks and other financial institutions have used the two mortgage giants as a toxic recycling center for their sour investments. Bernanke's ginormous transfer of red ink follows that same pattern.

It's a shame that congress can't figure this stuff out. As an agent of the big banks, Bernanke is merely acting as one would expect. He saved the banks from nationalization and kept their political and financial power intact. He also usurped congress's authority over the budget purse-strings by purchasing the notorious toxic assets and, thus, dabbling in fiscal policy. Now he's putting the finishing-touches on another behemoth swindle so he can clear the Fed's books and resume the arduous task of bubblemaking.

Isn't it about time that congress wake up and smell the coffee?




No Hope for Britain By Afshin Rattansi

Excerpt--"We have generations, now, of economists who have learned their profession not in the shadow of Keynes but of towers of glass and steel in the City of London. For journalists and economics pundits, this is not the time to increase the deficit through investment in infrastructure and making things. Instead, this is the time for cuts in public expenditure because bond traders demand it – all based on mistaken algorithms and formulae about risk. If the next government actually cuts expenditure to the orders of the bankers, it will surely lead to civil unrest on the streets of Britain. And it is astounding that the party leaders do not realize that civil unrest will not impress the bond markets." (Read more)


Why a Criminal Case against Goldman Matters Pam Martens

Excerpt:--"My advice to Goldman is to throw yourself on your sword. Come clean on everything and clean house. Put a modest gym in the basement of your new digs and donate the 54,000 square foot space to charities for the struggling folks you ripped off in their pensions and 401(k)s. And maybe it’s time to apologize for what you did in 1928 and 1929 as well." (Read more)


The Return of Hooverian Economics By Anthony DiMaggio

Excerpt:--"While the virtues of Keynesian economics have been understood for decades, right-wing government officials ... have undertaken a radical campaign to sell the public on cutting social services as a solution to “balancing the budget.” ... Jobs haven’t been created despite federal stimulus spending in the hundreds of billions of dollars, in large part because states are using stimulus money to make up for their budget shortfalls, rather than raising taxes to compensate for those shortfalls. In short, stimulus money is being used to replace declining budget revenues; by elementary logic, then, there can be no stimulus if federal funds are simply filling in the holes that were already present in state deficits.

According to the Center for Economic and Policy Research (CEPR), the $787 billion federal stimulus had the effect of subsidizing states that were in the process of cutting their budgets and social services. As CEPR estimates “state and local budget deficits to the tune of $100 billion a year will offset the stimulative effect of the president’s American Recovery and Reinvestment Act. Stimulus dollars used to cover deficits will have no stimulative effect.” ....

Without stimulus money, the economic decline in 2009 to 2010 would surely have been far worse. As the Center on Budget and Policy Priorities (CBPR) explains: “Because states also face legal requirements to balance their budgets, they must enact program cuts [or] tax increases to close their budget gaps.” Budget cuts, CBPR concludes, “reduce demand for goods and services, making a weak economy even weaker. Without federal funds, states would have to take even more dramatic measures that, by reducing demand, would cost jobs and make the recession even more severe.” This last sentence should be kept in mind when we discuss the future effects of further state budget cuts. States are likely to worsen the recession if they pass draconian budget reductions. While Democratic and Republican officials promise that cutting spending will help balance the budget, the effects will likely be the opposite, with budget revenues declining even further due to large numbers of state and local employees being fired from their jobs and contributions to state tax revenues declining further because of the mass firings. This has already happened, with massive cuts in the private sector leading to huge reductions in state budgets. Such job losses will put additional strains on the public sector, and justify additional pressures for another round of budget cuts and job losses. Such practices create a cyclical process whereby budget cuts and further economic deterioration become mutually reinforcing and contribute to a greater downward spiral in reducing tax pools and increasing budget deficits." (Read more)

Cliches won't fix the financial crisis, Dean Baker, UK Guardian

Excerpt Dean Baker: "Policy that rests on unexamined assertions (that emanate from the teachings of long-dead economists) will be every bit as destructive today as it was in the first Great Depression....Contractionary moves by these governments (in Europe) will worsen the downturn in these countries and in fact, make matters worse in the sound finance countries as well. ... downward pressure on these economies will likely require a debt restructuring at some point anyhow. The debt burden grows when economies shrink and that seems to be the plan coming from the economic centre of Europe.....

There was perhaps an excuse for bad policy in the 30s; after all Keynes didn't publish the General Theory until 1937. But, there is no excuse today – the ideas of Keynes have long been known and widely disseminated. It is a tragedy and an outrage that the people deciding economic policy are mindlessly repeating tired cliches rather than seriously trying to design policies that address the crisis in front of our faces." (Read more)

The Subprime Conspiracy: Was there a plan to blow up the economy?

Many people now believe that the financial crisis was not an accident. They think that the Bush administration and the Fed knew what Wall Street was up to and provided their support. This isn't as far fetched as it sounds. As we will show, it's clear that Bush, Greenspan and many other high-ranking officials understood the problem with subprime mortgages and knew that a huge asset bubble was emerging that threatened the economy. But while the housing bubble was more than just an innocent mistake, it doesn't rise to the level of "conspiracy" which Webster defines as "a secret agreement between two or more people to perform an unlawful act." It's actually worse than that, because bubblemaking is the dominant policy, and it's used to overcome structural problems in capitalism itself, mainly stagnation.

The whole idea of a conspiracy diverts attention from what really happened. It conjures up a comical vision of top-hat business tycoons gathered in a smoke-filled room stealthily mapping out the country's future. It ignores the fact, that the main stakeholders don't need to convene a meeting to know what they want. They already know what they want; they want a process that helps them to maintain profitability even while the "real" economy remains stuck in the mud. Historian Robert Brenner has written extensively on this topic and dispels the mistaken view that the economy is "fundamentally strong". (in the words of former Treasury secretary Henry Paulson) Here's Brenner :

"The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles.

“In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration's huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. " ("Overproduction not Financial Collapse is the Heart of the Crisis", Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal)

What Brenner describes is an economy \that--despite unfunded tax cuts, massive military spending and gigantic asset bubbles--can barely produce positive growth. The pervasive lethargy of mature capitalist economies poses huge challenges for industry bosses who are judged solely on their ability to boost quarterly profits. Goldman's Lloyd Blankfein and JPM's Jamie Dimon could care less about economic theory, what they're interested in is making money; how to deploy their capital in a way that maximizes return on investment. "Profits", that's it. And that's much more difficult in a world that's beset by overcapacity and flagging demand. The world doesn't need more widgets or widget-makers. The only way to ensure profitability is to invent an alternate system altogether, a new universe of financial exotica (CDOs, MBSs, CDSs) that operates independent of the sluggish real economy. Financialization provides that opportunity. It allows the main players to pump-up the leverage, minimize capital-outlay, inflate asset prices, and skim off record profits even while the real economy endures severe stagnation. (Read whole article)

The Interrogation of Lloyd Blankfein

Tuesday's hearings of the Permanent Subcommittee on Investigations laid the groundwork for future criminal prosecutions of Goldman Sachs Chief Executive Lloyd Blankfein and his chief lieutenants whose reckless and self-serving actions helped to precipitate the financial crisis. Committee chairman Senator Carl Levin (a former prosecutor) adroitly managed the proceedings in a way that narrowed their scope and focused on four main areas of concern. Through persistent questioning, which bordered on hectoring, Levin was able to prove his central thesis:

1. That Goldman puts its own interests before those of its clients.

2. That Goldman knowingly misled it clients and sold them "crap" that it was betting against.

3. That Goldman made billions trading securities that pumped up the housing bubble.

4. That Goldman made money trading securities that triggered a market crash and led to the deepest recession in 80 years.

The hearings lasted for 8 hours and included interviews with seven Goldman executives. Every senator had the opportunity to make a statement and question the Goldman employees. But the day belonged to Carl Levin. Levin was well-prepared, articulate and relentless. He had a game-plan and he stuck to it. He peppered Goldman's Blankfein with question after question like a prosecuting attorney cross-examining a witness. He never let up and never veered off topic. He knew what he wanted to achieve and he succeeded. Here's a clip from his opening statement:

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities.....It profited by taking advantage of its clients' reasonable expectation that it would not sell products that it didn't want to succeed....

Goldman's actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit....Goldman documents make clear that in 2007 it was betting heavily against the housing market while it was selling investments in that market to its clients. It sold those clients high-risk mortgage-backed securities and CDOs that it wanted to get off its books in transactions that created a conflict of interest between Goldman's bottom line and its clients' interests." (Senator Carl Levin's opening statement for the Permanent Subcommittee on Investigations)

Levin's entire statement is worth reading, but these two paragraphs distill his plan for exposing Goldman. He was determined to "go small" and repeat the same points over and over again. And it worked. From a purely strategic point of view, Levin's battleplan was flawless. The Goldman execs never knew what hit them. They swaggered into the chamber thinking they'd breeze through the hearings and have a few laughs over cocktails afterwards, and left with their heads in their hands. They were outmatched and outmaneuvered.

Senator Carl Levin:

"These findings are deeply troubling. They show a Wall Street culture that, while it may once have focused on serving clients and promoting commerce, is now all too often simply self-serving. The ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us. The toxic mortgages and related instruments that these firms injected into our financial system have done incalculable harm to people who had never heard of a mortgage-backed security or a CDO, and who have no defenses against the harm such exotic Wall Street creations can cause....

These facts end the pretense that Goldman's actions were part of its efforts to operate as a mere "market-maker," bringing buyers and sellers together. These short positions didn't represent customer service or necessary hedges against risks that Goldman incurred as it made a market for customers. They represented major bets that the mortgage securities market - a market Goldman helped create - was in for a major decline. Goldman continues to deny that it shorted the mortgage market for profit, despite the evidence...

The firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage related products to those clients while it was betting its own money against those same products or the mortgage market as a whole. The scope of this conflict is reflected in an internal company email sent on May 17, 2007, discussing the collapse of two mortgage-related instruments, tied to WaMu-issued mortgages, that Goldman helped assemble and sell. The "bad news," a Goldman employee says, is that the firm lost $2.5 million on the collapse. But the "good news," he reports, is that the company had bet that the securities would collapse, and made $5 million on that bet. They lost money on the mortgage related products they still held, and of course the clients they sold these products to lost big time. But Goldman Sachs also made out big time in its bet against its own products and its own clients." (Sen. Carl Levin)

Levin had all the facts at his fingertips and put them to good use. Goldman's execs were on their heels from the start and never really regained their footing. Even worse, the hearings showed that Goldman cannot be trusted. Their reputation is in ruins. Levin proved that if Goldman has junk in its portfolio, it won't hesitate to dump it on its clients and then pass around high-fives at the prop-desk. Here's a typical exchange between Levin and the former head of Goldman's mortgage department, Dan Sparks:

SEN. CARL LEVIN: June 22 is the date of this e-mail. "Boy, that Timberwolf was one shitty deal." How much of that "shitty deal" did you sell to your clients after June 22, 2007?

DAN SPARKS: Mr. Chairman, I don't know the answer to that. But the price would have reflected levels that they wanted to invest...

SEN. CARL LEVIN: Oh, of course.

DAN SPARKS: ... at that time.

SEN. CARL LEVIN: But you didn't tell them you thought it was a shitty deal.

DAN SPARKS: Well, I didn't say that.

SEN. CARL LEVIN: Who did? Your people, internally. You knew it was a shitty deal, and that's what your...

DAN SPARKS: I think the context, the message that I took from the e-mail from Mr. Montag, was that my performance on that deal wasn't good.

SEN. CARL LEVIN: How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal? Does that bother you at all; you sold the customers something?

DAN SPARKS: I don't recall selling hundreds of millions of that deal after that.

Levin was just as tough on Blankfein, reiterating the same question over and over again: "Is there not a conflict when you sell something to somebody, and then you bet against that same security, and you don't disclose that to the person you're selling it to? Do you see a problem?"

At first, Blankfein acted like he'd never considered the question before, as if "putting himself in his client's shoes" was something that never even entered his mind. His look of utter bewilderment was revealing. Then he launched into the excuses, the evasions, and the elaborate, long-winded ruminations that one expects from schoolboys and hucksters. But Levin never gave and inch. He kept pushing until Blankfein finally gave up and responded.

"No," he stammered, "In the context of market-making that's not a conflict."

Blankfein's answer was a triumph for Levin, and he knew it. To the millions of people watching the sequence on TV, Blankfein's denial was as good as an admission of guilt. It showed that Wall Street kingpins don't share the same morals as everyone else. In fact, Blankfein seemed genuinely confused that morality would even be an issue. After all, it wasn't for him.

Levin covered some old ground, pointing to Goldman's dealings with Washington Mutual's Long Beach unit which was a "conveyor belt" for garbage subprimes which frequently blew up just months after they were issued. It's clear that Goldman knew the mortgages were junk that were “polluting the financial system”, but that made no difference. Goldman feels that it's responsible to its shareholders alone, not the people who bailed it out.

All in all, it was a bad day for the holding company that's come to embody everything that's wrong with Wall Street. Goldman entered the hearings as the most successful financial institution in the country, and left with its reputation in tatters and its future uncertain. Its CEO came across as shifty and jesuitical while his executives seemed arrogant and uncooperative. At no point during the hearings did any of the Goldman throng look at ease with themselves or their answers. They remained rigid and sullen throughout. On top of that, they were unable to defend themselves against the main charge, that they don't mind sticking it to their clients if it means a bigger slice of the pie for themselves.

The truth is, the Golden boys were handled quite capably by an elderly statesman who took them to the woodshed and gave them a good hiding. Levin's stunning performance is likely to draw attention to the upcoming SEC proceedings and, hopefully, build momentum for more subpoenas, indictments, arrests, and long prison sentences.