A Republic If You Can Keep It

Image by kjd

Image by kjd

On this Independence Day, let us not just remember those who died that America might have its freedom, but also what they died for.  The truest respect for sacrifice is not to hold a parade, to speak of gratitude or to say fond words; no, the truest respect is to value that which the dead fought for and to continue their fight.

America’s founders fought for freedom, we’re told, and there’s a lot of truth to that, though it wasn’t, then, freedom for all.  In the context of the 18th century freedom meant some of what it means today: all men equal before the law, no taxation without representation, freedom to worship as you chose, and so on, but it also meant freedom from the aristocracy, and freedom from inherited power.  "All men equal before the law" was a strike, not against slavery, but against the nobility.  No man should have more rights than another; no man should have power because of who his father was.

America is the land of opportunity, it was said.  Some still say this, and perhaps it’s still true.  But the deeper truth is dying.  Inherited wealth and inherited power are on the rise.  For centuries, indeed until somewhere between 10 and 20 years ago, America, amongst all the nations in the entire world, had the most inter-generational mobility.  To put it another way, no matter who your father was, or who your mother was, you could make it in America.  More than in any other nation, in America you had a fair shot.

Now no one would say you can’t still make it in America.  No one would say that opportunity isn’t still available in the land of the free and the home of the brave.  But the fact, the sad fact, is that amongst Western nations the US now has the most income inequality and the least inter-generational mobility (along with Britain, the nation which follows American policies most closely).   In America it now matters more who your father is, who your mother is, how much money your family has and how many connections it has, than in any other Western nation.  The old European nations are now the land of opportunity, the land where who your parents were matters least.

The reasons are simple enough. (more…)

FDL Book Salon Welcomes Barry Ritholtz – Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy

barry-ritholtz-bailout-nation-cropped.thumbnail.jpgIn Bailout Nation, econoblogger and analyst Barry Ritholtz asks how America turned into a country where those who don’t manage risk properly are bailed out from the consequences of their own decisions and stupidity.  Clocking in at 300 pages, the answer isn’t short, but Ritholtz’s combination of wit and clarity makes the book an enjoyable read.  I’ve gone through a number of books on the crisis, and this one is the clearest and easiest to understand, yet it remains accurate.  Ritholtz keeps it simple, but he doesn’t oversimplify.

I’ve been following this crisis for, well, long before it existed, at least as far back as 2002 (when it became clear Greenspan’s policies would lead to a housing bubble).  I’d say I know a fair bit about how the crisis came to be, but Bailout Nation had a number of insights and many facts I wasn’t aware of.  

Perhaps the best thing about Ritholtz’s narrative is that Barry puts current events in context.  Not only does the book have a brief history of the central banks in America, it runs through the New Deal, the post war period and deals with past bailouts.  Ritholtz notes that the era of bailouts actually started in 1971…

The rescue of Lockheed in 1971 ($250 million) led to loan guarantees for Penn Central in 1974 ($676.3 million in loan guarantees), which paved the way for the $1.5 billion rescue of Chrysler in 1980 and then Continental Illinois Bank in 1984 ($1.8 billion loss). This led to the original mother of all government insurance payouts—the savings and loan (S&L) crisis of the early 1990s (total taxpayer cost: $178.56 billion), which led to the stock market rescue of 2000, and so on.

Now that may strike some as a big claim.  That’s where Ritholtz’s review of the New Deal comes in.  Because here’s the odd thing—the New Deal didn’t include bailouts.  Yes, the New Deal helped people who needed it, and even helped corporations; but it did not seek to bail out specific corporations from their own failures.  

Traditional American style intervention in the economy wasn’t about bailing out failures…


Does Obama Plan to Give Up a Little Liberty to Get a Little Safety?

obama-change-poster.thumbnail.jpgObama today, on giving up liberty to get safety:

Finally, there remains the question of detainees at Guantanamo who cannot be prosecuted yet who pose a clear danger to the American people. I want to be honest: this is the toughest issue we will face. We are going to exhaust every avenue that we have to prosecute those at Guantanamo who pose a danger to our country. But even when this process is complete, there may be a number of people who cannot be prosecuted for past crimes, but who nonetheless pose a threat to the security of the United States. Examples of that threat include people who have received extensive explosives training at al Qaeda training camps, commanded Taliban troops in battle, expressed their allegiance to Osama bin Laden, or otherwise made it clear that they want to kill Americans. These are people who, in effect, remain at war with the United States.

In other words, people who have committed no crime which can be proved in a court of law, including the crime of conspiracy, will be held indefinitely without a trial. Note that Obama wants to use military commissions to try some detainees, which means that these detainees can’t be found guilty of anything even under military law. This is tantamount to punishment for a thought crime. It is also strikingly similar to the rationale used by the Bush Administration.

And, Obama said something else which is nothing more than a continuation of Bush Administration excuses:

In the midst of all these challenges, however, my single most important responsibility as President is to keep the American people safe. That is the first thing that I think about when I wake up in the morning. It is the last thing that I think about when I go to sleep at night.

Now, this is simply wrong. Here’s the Presidential oath of office, as enumerated in the Constitution:

"I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States."

Nothing about the most important duty being to keep Americans safe. The first duty is to preserve, protect and defend the Constitution. What’s the Constitution have to say about punishing people without a trial? Well, the Fifth Amendment says:

No person shall be deprived of life, liberty or property without due process of law.

In other words, you get a trial. What about the idea that civilian courts shouldn’t have jurisdiction? (more…)

Iraq’s Papered-Over Problems Flare Up As the Iraqi Endgame Starts

Image by a62a68

Image by a62a68

The "surge" worked, mainly, not because of more troops, but because of more money and weapons. The Sunnis needed money and guns to fight their insurgency. They got those, in part, from Al-Q’aeda in Iraq, but by the time of the surge, AQ had overstepped itself and tried to get control. It started assassinating Sunni leaders and it engaged in very indiscriminate killing, which the Sunnis didn’t like. along with engaging in some violations of the norms of war as the Sunnis saw it.

Into this steps the US and says, "we can give you money and weapons, and all you have to do is take out the AQ people who are trying to get control of you by assassinating your leaders." This then was the "Awakening"—guns and money for dealing with AQ, and for peace afterwards.

Since the endgame in Iraq was about who would control Iraq after the US left, which was indicated by the fact that Iraqi government forces were under heavier attack than the Americans (who were attacked just enough to keep the cost high), the Sunnis said "sure." By accepting the money and arms they got to build up to be in a better position when the Americans left—either for negotiation, or for war.

But the Shia central government is aware of this, and in the past few months, they’ve started arresting and assassinating Sunni leaders, in preparation for when the Americans leave. Remember, the Shia government forces aren’t that impressive. Their last independent major operation was in Basra against the Sadrists, and until American forces intervened and Iranians played diplomat, they were losing.

So, Maliki is trying to get his licks in and weaken or break the Sunnis before the Americans leave. (more…)

Evaluating Geithner’s Stress Test

Timothy GeithnerWith the release of the stress test methodology (pdf), let’s take a look at what the stress test is, what it isn’t, and how it’s done.

What the Stress Test Is, is a test of whether the 19 bank holding companies with more than $100 billion in assets have enough income and reserves to survive till the end of 2010, with enough reserves left at that time to make it through 2011. Banks were required to report their expected income for the next two years, then that was compared to their reported expected losses for the duration.

The Stress Test Is Not, is a test of whether or not, if a given bank holding company were liquidated right now, it would be worth more than zero dollars. As such, it is not, primarily, about mark-to-market accounting. The question is not "are the banks solvent?" The question is "can they keep operating, and, if not, how much money do they need to keep operating?" In household terms, think of it as "can they pay their bills," not "what is their net worth?"

The assumption is thus that all loans will be held to maturity and not sold on the market. What matters, then, is the income on those loans and how likely those loans are to default. Income is thus loan income minus defaults, taking into account any ability to recover losses. (For example, if a homeowner defaults on a mortgage, how much will the bank receive when it seizes and sells the house?)

Something over 150 people worked on the test on the government side. They were divided into teams by asset and income areas, such as "Commercial Real Estate Loans," "First and Second Lien Mortgages," and "Credit Cards and Other Consumer Loans." Each of these teams evaluated the submissions off all the Banks for that area.

Using the Banks Own Models

An initial criticism of the stress test was that it used the banks own financial models–the same models which didn’t predict this mess in the first place. (more…)

The Geithner Plan’s Unpleasant Consequences

The Geithner Plan, combined with the other steps taken by the Federal Reserve and the Treasury, make fairly clear the Obama administration’s plan. The sardonic summary would be "to continue the work of Hank Paulson," but the more serious one would be, "we’re going to throw money at this problem until it goes away." The likely end result will be riptide inflation, and an economy that suffers from the Japanese sickness, where the good times just never, ever, seem to return. Here’s why this is the case.

Though it’s unclear how much money has been spent, guaranteed and loaned at this point. Given that back in February the number was $9.7 trillion, and that trillions have been committed since then, I think it’s safe to say that we’re over $12 trillion. This is, well, a lot of money. The entire US GDP for 2008 was about $14 1/2 trillion.

The Fed has even decided to buy treasuries, which is the absolute definition of "printing money" since it amounts to one part of the government funding the other part of the government.

All of this money is going to land somewhere. What we are going to see is another bout of riptide inflation, where some parts of the economy (such as wages and housing prices) are in deflation, while other parts are inflating. My guess where the money is going to land? Oil prices again. It’s already begun. Put all that money into the hands of speculators and they have to park it somewhere.

Likewise, when America buys its own treasuries, that means that the treasury bubble is going to start deflating. Private investors aren’t going to want to invest in a Ponzi scheme which is coming to an end. The US dollar has also very likely peaked, and we’re going to see it deflate over the next year.

All of this was avoidable. What should have been done was to take steps to deal with oil inflation: such as a 55 mph speed limit, 3 day weekends at major corporations, and so on. Such steps should have been instigated the second Obama took office, or put into the bailout bill or the stimulus bill.

The result instead is riptide inflation/deflation combined with a falling dollar and more difficulty financing this expansion in any way that isn’t nakedly printing money. (more…)

What Geithner’s TALF Plan Teaches Us

american-dollar-toilet-paper.thumbnail.jpgI’m going to discuss the administration’s plan to take toxic assets off the banks, then talk about what this and other moves this week (such as the Fed announcing $1.15 trillion in new spending) tell us about the administration’s plans for the financial sector and the economy, and how I believe they’re going to play out, as well as what the political power realities now are.

There are three parts to the plan to take toxic assets off the bank’s hands, of which, we mostly have the details of the first part, where the FDIC will form "private/public" partnerships to buy up assets. The plan has the FDIC loaning up to 85% of the cost of purchase as a non-recourse loan, which is backed up only by the value of the loan. Of the remaining 15%, the Treasury will lend up to 80%. The remaining 3% of money must be put up by the private partners. The government will share in any profits or losses of the underlying security, though we don’t know what percentage goes to the private investor or the public.

Think of this in simple terms. If I want to invest in securities, why would I want a 3% partner whom I have to split the return with? If the government is investing 97% of the money, why are they even bothering with private partners? Why not just pony up another 3%? Oh sure, there may be some occasions on which the private partners put up more, but if the government thought they could get more, why are they offering 97% financing, with 85% being a complete write-off, if the asset goes down rather than up?

There are two possible answers I can see: (more…)

Another Giveaway? The Sad Truth about the Geithner TALF Plan

by Admit One

by Admit One

This may sound a little hyperbolic, but my jaw did drop when I read SEIU Treasurer Anna Burger’s succinct description of Geithner’s plan for convincing private investors to buy up assets:

Secretary Geithner’s proposal for the Term Asset-Backed Securities Loan Facility (TALF) would enable private equity firms and hedge funds to buy up higher quality loan securitizations, including auto, consumer, student and small business loans. The Federal government would provide low-cost financing for up to 95% of the purchase price, with private firms putting down as little as 5% and the securitizations as collateral. The hope is then to expand this proposal to include toxic mortgage-backed securities.

Each of these programs could cost taxpayers up to $1 trillion. If the private firms make a profit from the deal, they keep all of it. If they end up losing money, they are only on the hook for the nickel or two of equity they put in. The taxpayers would then assume the rest of the losses. Even worse, subsidizing the purchase up to 19-to-1 will drive up the price of the assets…

There is no reason to do this. If the government is providing 95% of the money, the government might as well provide 100% of the money and just take the profit as well as the risk. Under Geithner’s plan, the government accepts all the risk and none of the profits and puts up almost all of the money?

This is ideology run rampant at the cost of common sense. What conceivable reason would Geithner have to pitch something like this? Could it be because he doesn’t believe government should make a profit, or that private investors should take losses? Or, worse than that. . . (more…)

The Administration’s Proposed “Pension” Plan: Because What People Want Now is More Ways to Invest in Mutual Funds

Via Lambert, I read that Obama’s pension plan would permit people to have Investment Retirement accounts. Such accounts allow you to invest, tax free, compounding merrily, until retirement.

The budget “lays the groundwork for future establishment of a system of automatic workplace pensions, to operate alongside [ultimately replace?] Social Security, that is expected to dramatically increase” retirement and personal savings, Obama’s Office of Management and Budget said in its outline, without giving details on the costs.

The plan would force employers that don’t offer retirement plans to enroll employees in a “direct-deposit IRA account,” with the option for workers themselves to opt out. Currently, 75 million working Americans, or about half the workforce, lacks employer-based retirement plans, according to the administration.

Now, there’s nothing really wrong with IRAs. But, as Lambert points out, the odd thing is that there isn’t a third option: a public plan you can invest in. Want more social security income by paying more in? Why not allow that as a possibility?

Also, as eCAHNomics has noted, what this plan will do is shift savings from tax paying accounts to non-tax paying accounts. Since the government is thus paying (in reduced taxes), this means overall savings in the economy might actually go down. Which is to say, this isn’t a stimulative change. At best, it’s neutral; at worst, it might even effectively lower overall savings, since government savings would be down.

Fundamentally, though, this isn’t a fix for the problem. Americans already have plenty of options for tax-deferred savings. To the extent that they don’t take them, it’s largely because the American savings rate has spent the last thirty years in precipitous decline, which is because American wages for ordinary people have stagnated. Americans are starting to save more, mind you, but that’s because they’re paralyzed with the fear that they may lose their jobs. That’s exactly the wrong type of savings. (more…)

Obama’s Healthcare Plan: True Universality?

Image by mnd

Image by mnd

Ezra Klein is stating that universality will be a goal of Obama’s healthcare plan. At $634 billion, over 10 years (that’s $63.4 billion a year) it’s hard to see how Congress is going to turn Obama’s plan into real universal healthcare because that simply isn’t enough money. One hint is in the use of the phrase "individual mandates", which means that, similar to car insurance, you will be required to buy insurance.

The majority of the known details of the plan are what might be best characterized as Medicare cost savings, as Stirling Newberry pointed out last night. Costs are contained by forcing competitive bidding in regions and using the average, by paying hospitals who readmit patients too often less than hospitals who fix the problem the first time, by simple reductions in payments, and so on. Since private insurers charge more for Medicare services, in general, than the normal Medicare costs, they are also going to be forced into line with more general costs. All of this is good and smart: there’s no reason to pay private insurers a premium to do the same thing that the public system can do for less.

However, as Newberry points out, what this means is less money for insurers. They have two options, they can eat the reductions and be less profitable, or they can increase prices on their non-Medicare clients. I’m sure we can all guess what they’d prefer to do.

Which brings us back to individual mandates. I generally don’t like individual mandates. It’s not that they can’t be done well, various European countries have individual mandates, and they work fine, but that’s because they place very strict cost controls on insurers for ALL patients. Exactly what must be covered by the basic plan and what the rate of profit is on the basic plan is strictly regulated. Patients must be accepted even if they have pre-existing conditions and they can’t be charged more.

If a government doesn’t do this, two things can happen: (more…)