FDL Book Salon Welcomes Sheila Bair, Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself

Welcome Sheila Bair (Fortune article) (We Are Headed For Another Crisis – article) and Host James K. Galbraith (Univ Texas Austin) (Fiscal Cliff – article)

Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself

From June 2006 to June 2011 Sheila Bair served as Chairman of the Federal Deposit Insurance Corporation – in which position for a time she held the fate of America in her hands. The FDIC is not normally a high-profile agency. But beginning in August 2007 it was our flood-wall against waves of financial panic, our source of confidence that whatever happened on Wall Street working Americans would not lose their deposits and the payments system would not fail. Chairman Bair was the custodian of that confidence.

Who is Sheila Bair? We were young contemporaries on Capitol Hill, she the protegée of Senator Robert Dole, a conservative of another age. Later she served in the Treasury, and then went to the University of Massachusetts in Amherst to teach, before President Bush asked her to replace an FDIC nominee whose confirmation had run into problems. There is here no trace of power-hunger or greed. Sheila Bair is best seen as capable, hard-working, successful – yet in these and other respects essentially an ordinary officer of the state.

Bull by the Horns is the story of financial calamity seen from the perspective of this public servant, rendered from detailed notes. We learn with whom she met, what was said, what decisions taken, and how things turned out. She begins with the battles over deregulation of the banks (Basel II), with the gathering sub-prime storm, and proceeds through the disaster: WaMu, Wachovia, Citigroup, Bank of America, AIG, Citigroup again. And then the battles of the aftermath, over among other things Dodd-Frank, Basel III and the robosigning frauds. This is a book for aficionados of infuriating detail.

Yet beneath the froth of facts courses an epic struggle. It pits Sheila Bair and the civil servants of the FDIC on one side and… who… on the other? Not the bankers who dominate the tale of an Andrew Ross Sorkin; not the mortgage crooks portrayed by Bethany McLean and Joseph Nocera; not the short-sellers celebrated by Michael Lewis; not Matt Taibbi’s Goldman Sachs. No. On the other side of the struggle, we mainly find other high officials. And first among them, the President of the Federal Reserve Bank of New York and then Secretary of the Treasury, Timothy Geithner.

Geithner emerges in these pages bit by bit, meeting by meeting. The key difference between him and Bair is first stated on page 99:

“He did not want creditors, particularly bondholders, in those large, failing financial institutions to take losses. I did. For years, those poorly managed institutions had made huge profits and gains from their high-flying ways, and large institutional bond investors had provided them with plenty of cheap funding to do so. … the implied assumption [was] that if anything went wrong, the government would bail them out. But we do not have an insurance program for big bond investors. They are sophisticated and well heeled and can fend for themselves. There is no reason for the government to protect them.”

It was not merely bond investors that Geithner determined to protect. As Bull by the Horns unfolds, it emerges that there was one company, above all, around which his policies were built. Citigroup. Here for example is Bair’s account of a crucial meeting, over whether Wells Fargo or Citi would take over Wachovia:

“During the Friday evening call, Tim Geithner was apoplectic. He wanted us to object to the Wells transaction and support Citi in making an enhanced bid… which was a huge stretch for it. It was amazing to me that Tim wanted us to take that additional exposure when there was another offer on the table that required no government support. He used that familiar saw: if we didn’t support Citi, it could destabilize the system. I was incredulous.” (p. 105)

Or when in early 2009 the government confronted the need to restructure Citi – including the weakness of its CEO, Vikram Pandit, a man with no commercial banking experience. In Treasury’s press release “There was no mention of dealing with Citi’s trouble assets, nor was there a hint of management changes. It was unbelievable to me how little Treasury was asking of the institution to right itself.” (p. 167). Bair was prepared at least to discuss putting Citi through receivership, using the powers already vested in the FDIC by law.

Not that Geithner helped only Citi. There was the day in 2008 that Paulson, Bernanke and Geithner (then still at the NY Fed) tried to get Bair to guarantee all the liabilities of the banking system, ambushing her in Paulson’s office with a prepared statement.

“It was overreach of the worst sort, and there was no doubt in my mind that Tim Geithner was the instigator. For months, he had been arguing that the federal government should guarantee all the debt of the U.S. financial system, but no one had taken him seriously – until now.” (p. 111.)

No wonder that, as she writes, that when “a few weeks later, Obama announced his choice of Tim Geithner to become Treasury Secretary. It was like a punch in the gut. Tim Geithner had been the bailouter-in-chief during the 2008 crisis. If it hadn’t been for my resistance and the grown-up supervision of Hank Paulson and Ben Bernanke, we would have spent even more money bailing out the financial bigwigs and guaranteeing all their debt.” (p. 142.)

Not that Geithner always won. When he lost, it could be interesting:

“On Friday, July 31 [2009], he summoned all of the major agency heads to his conference room and proceeded to give us an expletive-laced tongue-lashing about talking to people on the Hill. The arrogance and disdain he showed for the agency heads, who also included Ben Bernanke and Mary Schapiro, was astonishing… I patiently listened to his rant and then pointedly told him that the problem was one of his own making…” (p. 191).

This is the Secretary of the Treasury? Later as the cleanup went on, Bair writes, “I couldn’t think of one Dodd-Frank reform that Tim strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments, he had worked to weaken or oppose them all.” (p. 229).

To be sure, Geithner isn’t alone. The leaders of the Office of Comptroller of the Currency and the Office of Thrift Supervision were disasters. Steven Rattner, the car czar, “clearly thought that he was entitled to whatever help he wanted from the FDIC…” (p. 177) On housing Larry Summers carried water for the “free market economists” of the Bush Treasury (p. 147) and sought to freeze Bair out of the policy process – as not a team player. Some team! Most of them were protegés of Robert Rubin, who also hand-picked Pandit for Citi and was, in Bair’s words, “indifferent to his culpability.” (p. 122).

What’s happened here? We can see: the money-power in American government has been handed over to a coterie of boys – boys who work for other boys, to whom the public purse is what the truffle is to the pig. Bair does not quite say this, but, really, she doesn’t need to.

Not everyone in high office should be tarred with this brush. Henry Paulson and Ben Bernanke retain Bair’s respect. Elizabeth Warren is an ally; Barney Frank is someone she has “always liked and respected.” There are others. Yet overall, Sheila Bair’s strength in crisis came from the government’s professionals – the people who know their mission, do their jobs, live on their pay, and expect no greater rewards. She is in spirit very much one of them.

And for that reason, it is an honor – a great honor – to host this event, and to welcome Sheila Bair, former Chairman Extraordinary of the Federal Deposit Insurance Corporation, to Firedoglake.

James K. Galbraith served as Executive Director of the Joint Economic Committee of the US Congress in the early 1980s; he teaches at the University of Texas at Austin and is the author, most recently, of “Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.” (more…)

FDL Book Salon Welcomes Bruce Bartlett, The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take

Welcome Bruce Bartlett (Economix), and Host James K. Galbraith (Professor, University of Texas, Austin)

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions. Please take other conversations to a previous thread. – bev]

The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take

I’m delighted to welcome Bruce Bartlett to Firedoglake Book Salon.

Bruce’s new book, The Benefit and the Burden is an extended essay on taxes and tax reform. It provides a breezy survey of the central issues of tax policy, with excursions into history and international comparison, and a keen eye on the political angles and how they’ve been played by both parties in recent years.

The Benefit and the Burden begins with a short history of American taxation and a description of the core issues in the definition of income. It follows with some discussion of the principal economic arguments that have flowed around the relationship between taxes, growth and fairness, and then proceeds to examine the issues surrounding preferences in our tax code – for housing, for charitable contributions, for capital gains, and the problem of taxing corporate profits. It ends with a discussion of reform proposals, and Bruce makes his case for a VAT to close the revenue gap and fund the government that we will need, among other things, to support an increasingly elderly population.

The book is not a partisan tract. Bruce has become well-known – and highly respected – for the rare trait of not-singing to any ideological choir. Open-minded readers of all persuasions will learn from this book, whether they are persuaded by the program, or not.

On a personal note, Bruce and I first met in 1981 – possibly the very end of 1980 – when I was the (much too young) newly-installed staff director of the Joint Economic Committee, under Representative Henry Reuss of Wisconsin, and he was the (equally young) deputy director, appointed by Senator Roger Jepsen of Iowa.

Ideologically, we were opposites. I was a committed Keynesian; Bruce was a supply-sider who had helped to draft Jack Kemp’s tax cut plan and was the author of a newly-published book, Reaganomics.

There was a certain amount of mutual suspicion at first. And yet, for two years we worked together, in a spirit of fair play and open debate. We helped the Joint Economic Committee to achieve a remarkable moment in its history, not through fatuous bipartisanship, but through spirited combat, carried out in hearings, studies and reports. It was great fun, and Bruce and I have been friends ever since.

Bruce left the JEC to work in the White House under President Reagan, and served in the Treasury under President George H.W. Bush. In the mid 2000s, he managed to get himself fired from the conservative National Center for Policy Analysis for writing Impostor, a magnificent tract on the non-conservatism of George W. Bush. In writing that book, he exhibited the true bravery of an independent spirit.

Recently Bruce has achieved a wide readership through regular postings at The New York Times and at The Fiscal Times, where he writes most frequently on taxes and tax reform. In that capacity, he has honed the skills on display in this fine small book.

I am therefore very pleased to note that Bruce and I have known each other for 31 years, and that – on this my 60th birthday, it’s my privilege to celebrate by hosting the Firedoglake Book Salon on his new book.

Bruce, welcome.

FDL Book Salon Welcomes Bruce Bartlett, The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take

Welcome Bruce Bartlett (Economix), and Host James K. Galbraith (Professor, University of Texas, Austin)

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. – bev]

The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take

I’m delighted to welcome Bruce Bartlett to Firedoglake Book Salon.

Bruce’s new book, The Benefit and the Burden is an extended essay on taxes and tax reform. It provides a breezy survey of the central issues of tax policy, with excursions into history and international comparison, and a keen eye on the political angles and how they’ve been played by both parties in recent years.

The Benefit and the Burden begins with a short history of American taxation and a description of the core issues in the definition of income. It follows with some discussion of the principal economic arguments that have flowed around the relationship between taxes, growth and fairness, and then proceeds to examine the issues surrounding preferences in our tax code – for housing, for charitable contributions, for capital gains, and the problem of taxing corporate profits. It ends with a discussion of reform proposals, and Bruce makes his case for a VAT to close the revenue gap and fund the government that we will need, among other things, to support an increasingly elderly population. (more…)

FDL Book Salon Welcomes Robert D. Auerbach, Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank

Roberrt D. Auerbach - Deception and Abuse[Welcome Robert D. Auerbach, and Host, James K. Galbraith.  Please stay on topic during the salon, and take off-topic comments to the previous thread. Thanks – bev]

Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank

James K. Galbraith

Robert D. Auerbach began his career as a cab driver.   A chance ride with Abram Lincoln Harris, a leading professor in the economics department at the University of Chicago — and its only African-American member — catapulted him into graduate school. (When he went to be interviewed, he still had his changer on his belt.) There he became a student of Milton Friedman, completing a dissertation in 1969. Then it was on to the staff of the Kansas City Federal Reserve Bank – the beginning of a lifelong no-love-lost affair with the central bank.

Arriving at American University in 1976, Bob gravitated into the orbit of Wisconsin Congressman Henry Reuss, the new Chair of the House Committee on Banking, Finance and Urban Affairs.  An ardent monetarist in those days, he believed the Fed controlled inflation through the money supply.  For a counterweight to this reactionary view, Reuss had me.  I was between graduate schools – twenty-four, just back from a year at Cambridge, a dabbler in Keynes and as un-monetarist as one could get. Possibly for the fun of it, our staff director made us share an office.

By the grace of God, our secretary had nerves of steel. (more…)

FDL Book Salon Welcomes Bruce Bartlett, The New American Economy: The Failure of Reaganomics and a New Way Forward

Bruce Bartlett - The New American Economy[Welcome Bruce Bartlett, and Host James K. Galbraith – bev]

The New American Economy: The Failure of Reaganomics and a New Way Forward

In January 1981, Bruce Bartlett and I took over direction of the staff of the Joint Economic Committee – he on the Republican and I on the Democratic side. Our situation was unique: a bicameral committee, evenly divided between Democrats and Republicans, no majority either way. This, at the start of the Reagan revolution, which he favored and I opposed.

Bruce was a resolute supply-sider, having drafted the Kemp-Roth tax cuts. I was a resolute Keynesian, who had helped draft the Humphrey-Hawkins Full Employment Act. His specialty was taxation, mine was monetary policy. We were both twenty-nine years old.

Stalemate would have been possible but we took a different path, creating flexible subcommittees and turning the JEC into an open forum on every economic issue. The result was an exceptionally productive two years, and an enduring friendship – though we agreed on nothing then and not all that much even now.

Bruce’s views are, in my view, romantic: he is (or was, until this book) a small-government conservative and a fiscal hawk. But he thinks deeply and writes honestly – something that is not easy to do without tenure. For his apostasy in the matter of George W. Bush, some years back, Bruce paid with his job. (more…)

Funding the IMF: White House Should Honor Left’s Critique, Allow for Conditionality Review

This is an old song. . . .

Back in 1982, at the start of the debt crisis, the International Monetary Fund was up for a quota extension, favored by the Reagan administration, but opposed by right-wing Republicans who accused the IMF of trafficking with communists — meaning Hungary and Yugoslavia. The threat was that the NRCC would attack Democrats who supported the quota extension for being soft on communism. Though skeptical of the IMF, the Dems were prepared to support Reagan’s request but not at the price of being attacked by Reagan’s own minions for doing it.

Chris Matthews (then working for Tip O’Neill) and I got the message across (in my case, to Bart Rowen of the Washington Post): no IMF unless Reagan wrote a personal letter to each Democratic member asking for their support, in the national interest. Reagan did so, and the quota passed. I’ve often thought since that I could have pulled the plug personally on the IMF at that time, and wondered whether the world might not have been better off.

So, here we are again. The Washington Post editorial is right: until just recently, the IMF was effectively without a mission. Most countries in the world ceased doing business with it after the fiasco of the Asian crisis — it was out of Latin America altogether, and most of Asia. Now it is coming back to life in Eastern Europe, somewhat reformed, somewhat better led, but still with much the same wholesale approach to conditionality. The East European governments are taking the deals, because, shockingly, they are somewhat less stringent than the alternative on offer from the European Union. A sad situation, but one in which it may be better to have the IMF than not to have it.

That said, the liberal critique of the conditionality exercises is a sensible one, and particularly for E. Europe where there are important strategic considerations. (Though having said that, why the IMF should be bailing out the EU and doing its work for it is an interesting question. One can go back and forth on the merits of this for a long time…)

Overall, and taking everything into account, the IMF probably cannot do the same damage now that it did in the 1980s and 1990s, and, in broad support of the administration, I’d be inclined to keep it going. The way to achieve this would be for the White House to make a sensible concession to the liberal critique. For example, one might insist on the creation of an autonomous commission to review conditionality in particular cases in real time, so as to help ensure against the kind of reckless deflationism that overtook Asia in 1997. One might establish a high-level review group on the functioning and future of international monetary institutions. In short, there must be something that would work toward a better outcome than either the defeat of the IMF bill or a blank check for the same old policies.

Funding the IMF: White House Should Honor Left’s Critique, Allow for Conditionality Review

This is an old song. . . .

Back in 1982, at the start of the debt crisis, the International Monetary Fund was up for a quota extension, favored by the Reagan administration, but opposed by right-wing Republicans who accused the IMF of trafficking with communists — meaning Hungary and Yugoslavia. The threat was that the NRCC would attack Democrats who supported the quota extension for being soft on communism. Though skeptical of the IMF, the Dems were prepared to support Reagan’s request but not at the price of being attacked by Reagan’s own minions for doing it.

Chris Matthews (then working for Tip O’Neill) and I got the message across (in my case, to Bart Rowen of the Washington Post): no IMF unless Reagan wrote a personal letter to each Democratic member asking for their support, in the national interest. Reagan did so, and the quota passed. I’ve often thought since that I could have pulled the plug personally on the IMF at that time, and wondered whether the world might not have been better off.

So, here we are again. Emanuel is right: until just recently, the IMF was effectively without a mission. Most countries in the world ceased doing business with it after the fiasco of the Asian crisis — it was out of Latin America altogether, and most of Asia. Now it is coming back to life in Eastern Europe, somewhat reformed, somewhat better led, but still with much the same wholesale approach to conditionality. The East European governments are taking the deals, because, shockingly, they are somewhat less stringent than the alternative on offer from the European Union. A sad situation, but one in which it may be better to have the IMF than not to have it.

That said, the liberal critique of the conditionality exercises is a sensible one, and particularly for E. Europe where there are important strategic considerations. (Though having said that, why the IMF should be bailing out the EU and doing its work for it is an interesting question. One can go back and forth on the merits of this for a long time…)

Overall, and taking everything into account, the IMF probably cannot do the same damage now that it did in the 1980s and 1990s, and, in broad support of the administration, I’d be inclined to keep it going. The way to achieve this would be for the White House to make a sensible concession to the liberal critique. For example, one might insist on the creation of an autonomous commission to review conditionality in particular cases in real time, so as to help ensure against the kind of reckless deflationism that overtook Asia in 1997. One might establish a high-level review group on the functioning and future of international monetary institutions. In short, there must be something that would work toward a better outcome than either the defeat of the IMF bill or a blank check for the same old policies.

James K. Galbraith Reponds to Geithner’s Toxic Asset Plan

I’ve just been reading the NYT report.

The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government’s loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. IndyMac lost $10.8 bn on a $15bn portfolio (and if you count the wipeout of equity, the total loss is about $12bn). That’s an 80 percent loss.  It’s possible that recovery rates at other banks will be better, but how can we know?  No one is examining the loan tapes.

The NYT article points out that pools of RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents — either because they really think the loans will experience only a 40 percent loss rate, or because they fear that  acknowledging market value will put them into insolvency.  Which it might very well.

The way to find out who is right is to EXAMINE THE LOAN TAPES. An independent examination of the underlying loan tapes — and comparison to the IndyMac portfolio — would help determine whether these loans or derivatives based on them have any right to be marketed in an open securities market, and any serious prospect of being paid over time at rates approaching 60 cents on the dollar, rather than 30 cents or less.

Note that even a small loss of capital, relative to the purchase price, completely wipes out the interest earnings on the Treasury’s loans, putting the government in a loss position and giving the banks a windfall.

If I’m right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn’t participate in the garbage-loan frenzy.

This will not achieve the stated goal, of bringing on new lending, for reasons already explained at length.  It’s all about not-measuring true asset quality at the big banks, permitting them to escape a clean audit, and therefore preserving them as institutions, while forcing the inevitable shrinkage of the financial sector to occur elsewhere. In short, the plan seems to me to be a very bad idea.

But the way to determine whether Geithner’s and the banks’ stated view of the toxic assets has any merit, is to demand an INDEPENDENT EXAMINATION OF THE LOAN TAPES, particularly looking to establish the prevalence of missing documents, misrepresentation, and fraud.  This can be done by a sufficient sample.  If the tapes look bad, it will be very difficult to justify the bank/Treasury view that the RMBS actually have value, which is somehow not realizable on the marketplace today because of "liquidity shortages" or "fire-sale conditions."  Maybe there actually was a fire.

In response to a question from Congressman Lloyd Doggett (D-TX) at Budget Committee on March 5, Geithner agreed to look into the possibility of EXAMINING THE LOAN TAPES. What response he gave the Congressman for the record is not yet known. Whether he has ordered any action is not yet known.

If I were a member of Congress, I would offer a resolution blocking Treasury from making the low-cost loans it expects to offer the PPIPs, until GAO or the FDIC has conducted an INDEPENDENT EXAMINATION OF THE LOAN TAPES underlying each class of securitized assets, and reported on the prevalence of missing documentation, misrepresentation, and signs of fraud. In the absence of a credible rating, this is the minimum due diligence that any private investor would require.

I hope what I’m driving at, here, is clear…

Economist James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

What is to be Done? Next Steps for Economic Recovery

where_next_sign.thumbnail.jpgThe compromises necessary to pass the recovery bill in the Senate damaged it in several ways. The overall size of the package was reduced, evidently for the cosmetic purpose of keeping the top-line number below $800 billion. And funds urgently needed to stabilize state and local governments and for construction were cut back, along with the credit against the payroll tax – evidently to make room for a rollback of the alternative minimum tax, a step with a strong political constituency but a weak economic rationale.

In my local paper Thursday morning, I read of $20 million that will be cut from our city budget next year, including a day labor center, public library hours, and overtime for the police force. Cuts like that – and in many places they are far deeper than here – are going on everywhere, and the bill as passed will help but it will not stop them. Contrary to Grover Norquist’s comment in this space, police, libraries and day labor are part of the productive economy, as much as anything else.

It is difficult to know what the so-called moderate Senators were thinking. Do they have special insight into this crisis? Do they have their own forecasters, with deep understanding and good track records in these matters? Do they have their own models? Do they have, in other words, any ground for believing that less than $800 billion, spread over two years, will be enough to bring the economy back? If so, they weren’t saying so, so far as I could tell. (more…)

Due Diligence, Damn It!

The Great Depression and the New Deal: A Very Short Introduction by Eric Rauchway is an exceptionally valuable pocket summary of the major actions of the New Deal. It solves a big problem for those with small pockets: how to keep enough facts at close hand to answer, with authority, all the anti-Roosevelt nonsense and disinformation in circulation these days.

But Rauchway is also very good on Hoover. He is especially good on the illusions and self-delusions of the Depression’s first years. Chief among these was the optimism, the ritual statements that things would soon get better, that prosperity is "just around the corner." This false optimism we don’t hear expressed so much today; President Obama knows to avoid it.

But false optimism is, nevertheless, still present. It has become a mental habit. It is institutionalized and embedded in the professional economic forecasts, notably the official baselines of the Congressional Budget Office. These cannot admit the possibility that we are at the start of a new Depression, because there is no similar experience in the statistical record on which they draw. It will take time, grim experience, and determined argument, before the President and Congress come to grips with this.

A second feature of the Hoover years was his desire to revive credit, lending and the operations of the banks. There was a touching faith in the institutions that had brought so much prosperity in the 1920s. And the people who had enabled the boom were in no position, mentally or politically, to admit their errors and change their views.

So it is today, obviously. The new Treasury, like the old one, remains in a Hoover mind-set, fixed on the chance of a top-down solution that would, in a phrase we hear constantly, "get credit flowing again." The idea is to stuff the banks with money, in the hope that they will burst and the manna will rain down.

But banks are not moneylenders! They do not need money, in order to lend! Banks create money. And they do it, when they want to. They lend, in other words, when there is a reason to lend. And not otherwise. The testimony of the bank chiefs this week made this very clear. (more…)