Economic Causes

Obama Must Toss the Bums Out of Treasury, End the Wars and Start Leading

dlindorff — Thu, 19 Nov 2009 12:13:46 -0500

By Dave Lindorff

If you are sitting in class taking a test, and you’ve chosen to sit
amongst your bone-headed, slacker friends, don’t turn to them for help
when you can’t figure out of any of the answers. They may all tell you
the same thing, but they’ll all be wrong.

That’s the situation President Obama finds himself in today in the
White House. Having surrounded himself with the very Wall Street con
men who set up the crooked game that led to the current financial
crisis and economic collapse, and finding that the lousy advice they
have been giving him since last January has left the country still
mired in deepening economic decline, with the banks still not lending
and unemployment still mounting, and with growing signs that instead of
bottoming out and starting to recover, the economy is threatening to
fall a second time, to new lows and higher unemployment, Obama has
turned to the same rotten advisors for answers.

A few days ago, in an interview with Fox-TV while he was in China
off all places (a country that has made a stupendous stimulus
investment to create domestic jobs!) Obama warned, for the first time,
that America faces the possibility of a “double-dip” recession. That’s
fine as far as it goes. I agree. But what did he say the risk was? Not
that the government has been failing to put significant numbers of
people back to work, but that the government keeps piling up deficits.

This has to be the lamest economic thinking since Herbert Hoover
started tightening the screws on government spending at the onset of
the Great Depression in 1930.

Clearly the American government needs to do just the opposite of
worrying about deficits. The only growth the US economy has seen to
date has been the result of government funding—the cash-for-clunkers
program gave a brief restoration of pulse to the auto industry, and the
$8000 tax credit for buying a first home kicked up home sales briefly.
We know this because when the clunkers program ended, auto sales
crashed, and when the deadline approached for the end to the new home
tax credit, home building plunged almost 11%. The hundreds of billions
of dollars poured into so-called “shovel-ready” state and local
projects like roads, schools, etc., may have added or saved as much as
a million jobs, but the economy lost many times that many jobs over the
same period.

The problem with these stimulus programs is that they are
inefficient ways to create jobs or preserve jobs. If roughly one
million jobs were created through the stimulus spending of say $200
billion (assuming that the February $800-billion stimulus program, to
mollify Republicans, consisted of one-half tax cuts and only one-half
actual federal spending, and that this federal spending was spread
evenly over a two-year period, that’s $200,000 per job!

If, instead, Obama had chucked the dunces at Treasury and in his
Council of Economic Advisors, and instead asked your Labor Secretary to
initiate a wide-ranging $200-billion-per-year jobs program, hiring the
unemployed at perhaps $20-25,000 per person to do everything from teach
in overcrowded urban schools to laying high-speed rail trackbeds, from
cleaning up parks to putting insulation in homes, he could have given
jobs to close 8 million people—people who would have then spent their
money on goods and services and helped rally the economy from the
bottom up.

Deficits? Who gives a damn about deficits at this point! The
country is up to the gills in debt without creating any jobs. (It’s
kind of like my mortgage. Why would I worry about using my credit card
to buy food for the week if I was low on cash, when my mortgage has me
deep in the red for the next ten years? Obama’s financial advisors, on
the evidence, would tell me I should let my family go hungry, because I
need to worry about my total debt load.) If you’re worried about
deficits, Mr. Obama, end the god-damned wars in Iraq and Afghanistan.
It is costing one million dollars a year to send one lousy grunt to
Afghanistan or Iraq. And you want to have at least 100,000 guys over
there. That’s $100 billion a year right there—enough to hire four
million unemployed Americans back here at home!

This president is well on the way to rescuing President Hoover from
history’s crap heap by one-upping him in the realm of economic
mismanagement. We already have Obamavilles springing up around the
country. We haven’t started calling them that, but Naming Day isn’t far
off.

At least Hoover didn’t mire the country in another war while the economy was collapsing around him.

President Obama is on a short leash at this point. His fans, and I
was one of those who was willing to give him a shot last November, are
mostly giving up on him. Activists are already turning on him. My union
friends are disgusted. My African-American friends just shake their
heads in dismay. Liberal friends act embarrassed. A leftist friend,
retired, who devoted a month to campaigning for Obama full time in
Pennsylvania last fall now writes angry letters almost weekly to
Obama’s former campaign manager David Plouffe and others, blasting
Obama’s handling of the bank crisis and his Afghan War plans. Clearly
Obama cannot continue to appease Republicans and cater to Blue Dogs in
Congress and expect to be re-elected in 2012.

Indeed, if he doesn’t toss the crooks and charlatans in the Fed,
the Treasury and his Council of Economic Advisers out, and doesn’t stop
listening to the self-serving crazies in the military, he won’t even
have a Democratic majority in Congress by the end of next year.

President Obama, aren’t you tired of being an embarrassment to your
friends and family? Aren’t you tired of being mocked by your foes?

Come on. We’re sick of your speeches! Suck it up, be a
leader.finally and kick some butt. Do something unconventional and
daring. End the wars, bring the troops home, announce a huge jobs
program, issue an executive order expanding the Medicare program, raise
taxes on the wealthy to back where they were in the 1960s, and let’s
get the country moving forward again.
__________________________

DAVE LINDORFF is a Philadelphia-based journalist. His latest
book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work
is available at www.thiscantbehappening.net

Unemployment Up Dramatically! Stocks Rise! Huh?

dlindorff — Fri, 06 Nov 2009 22:29:34 -0500

By Dave Lindorff

Ordinary, average, struggling Americans might be scratching their
heads over the news today, as the Labor Department reports that
unemployment is up by four-tenths of a percent for the month to a
record 10.2%, fully three-tenths of a percent higher than economists
had been forecasting, and stocks do what? Rise by a quarter of a
percent!

What’s going on here?

Well, the tube analysts are quick to say, unemployment figures are
a “lagging” indicator. That is, employment generally lags the overall
economy, with layoffs coming after a recession kicks in, and hiring
waiting until a recovery is well underway.

But that isn’t true with a deep recession like this one, because at
some point—and we’re well past that point—high and prolonged
unemployment leads to reduced demand for goods and services, and to a
psychology of fear and consumer withdrawal. Once people feel that they
aren’t going to find a new job soon, and once those who still have jobs
feel that their employment is not secure, they no longer buy things
except what they absolutely need. And in an economy where fully 72% of
economic activity is consumer spending, that is no longer a “lagging
indicator.” High, prolonged unemployment becomes a causal factor in the
economic downturn.

If people aren’t buying stuff, then companies won’t make it, which
means that they stop hiring, and even lay more people off, and so
unemployment becomes a downward spiral of cause and effect.

But what about the stock market rise? Why would investors think that a worse-than-expected jobs report is a good thing?

There are several explanations for this ugly phenomenon. First of
all, rising unemployment—particularly sharply rising unemployment—means
that the Federal Reserve will definitely not, for the foreseeable
future, raise interest rates. A rise in interest rates would hit
companies hard, and always batters the stock market, and the government
and the Fed don’t want to do either of those things. So investors
almost always jump into the market and push stocks up when they get
some signal that the Fed is going to lower, or at least hold the line
on interest rates. With rates effectively set at 0, the Fed can’t lower
them, but it is saying, no doubt with the bad news about unemployment
in mind, that it won’t be raising them anytime soon.

But there is another reason high unemployment may excite investors.
Current layoffs are likely, for many workers, to be permanent. A recent
report that productivity—work output per worker—was up at a 9.5 annual
rate in the Third Quarter, is an indication that those companies that
haven’t shut down operations are making or doing more with fewer
workers. That kind of thing happens in recessions, because as
joblessness gets worse, those workers who still have jobs become more
docile and are willing to be worked harder by management. Of course,
you get more on-the-job injuries, more stress-related illness, etc.
along with that kind of speed-up, but over the shorter term, it looks
good on the books if you’re cranking out more product with a lower
payroll.

Of course, longer term, this is all a disaster, not just for
laid-off and afraid-to-be-laid-off workers, but for the country as a
whole. You can’t rebuild an economy with more than one-in-ten workers
unemployed. And remember, that’s just the people who are our of a job
and still looking for one; it doesn’t count those who have been out of
work for so long, or who work in professions that are so gone (like
construction or maybe manufacturing Saturns) that they’ve just given up
looking, or those who have taken part-time jobs in ice-cream parlors or
selling apples to survive but who want to be fully employed again. If
you add those people into the mix (which is the way the US used to
count unemployment until the 1980s), you get an unemployment rate
closer to 20%, or one in five! And you sure can’t rebuild an economy
with one in five workers unemployed.

That’s what makes all the happy talk in the news and in Washington
about the recession being over because last quarter showed a 3.5%
annualized jump in the so-called Gross Domestic Product so ridiculous.

Most of that rise was the result of government subsidies to
car-buyers and first-time house buyers. It was a one-shot stimulus that
pushed forward spending, but it was no indication of a recovering
economy, just a spasm of spending using taxpayer money. Furthermore, an
excellent article in Businessweek by Michael Mandel noted that fully
one-percent of that GDP gain was the result of a failure by government
economists to account for a collapse in corporate spending on research
and development and on training and retaining intellectual assets (a
complicated way of saying that engineers, scientists and technology
workers were being laid off at a higher rate than other workers, and
much R&D work was being shipped overseas for good), So really the
“growth” of GDP in the third Quarter should have been at a 2.5% rate,
and even that was largely government pump priming, not recovered
economic activity.

The truth is, we’re falling deeper into recession, and apparently,
according to the October unemployment figures, at an accelerating rate.
And there is no indication that the Obama Administration or the
Democratic Congress are planning any significant jobs-creation program.
They seem to be happy with this.

So quick, run out and buy some stock! It’s the American thing to
do. Probably not a bad idea either, since those dollars you are using
will keep sinking in value as long as the Fed is constrained from
jacking up interest rates.
______________

DAVE LINDORFF is a Philadelphia-based journalist. His latest book is
“The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net

Economic Financail Terrorist

pilot.blake — Thu, 05 Nov 2009 01:09:43 -0500

Regulation of the financial System currently Zero!

I said it when it was happening in California with the Enron rolling blackout by terrorist traders or should I say "economic terror attacks" by US corporations. Who will learn from this modern day play book of carpet baggers and financial "HIT-MEN" aka Financial Terrorist. enlisted and hired by all the "To Big to Fail" Corporate terrorist groups) the (T.B.T.F) TBTF use this play book of (terrorist tactic) now. It's "Standard Reading" "Standard Operations Procedures" (SOP) it's wide-open blatant Play-Book of greedy practices and procedures. The players may be different but the game is the same by using to: Fear, Kill, Rob, Steel, Bribe, take Hostages, make Customers-Slave, hoard it, move it, hide it, control it... all!. It's the big shell game, and its done by all the big corrupt company's (TBTFs) like Exxon, shell, AGI, Enron, Citi corp, Credit Card Banks, K-Street Lobbyist, Mortgage banks. But insurance industry does it better than them all. Even better than the big Drug and Agra-Business. just point your finger. The east Coast Casino- (Wall St.) -Traders of commodity's fake insurance "Instruments" "tools" of CDO/CDS Co-lateralization (Debt) default Obligation (offerings) /Credit-Default-Swaps?!. (all Just JUNK BONDS!.) The floor is littered with them. Corruption and turmoil hides the facts of the crime and the TBTFs big shell game is working to hide and confuse our government from understanding how to control/regulate this Drunken Gorilla Terrorist Organization. This allows the bankers and house casino bosses holding us hostage for ransom for notes (Money) & bills (Law)to "Appear out of thin air". its not gambling if the house is rigged! it's STEELING! duh... you say, oversight!... only if the public masses are aware, awoken and control laws made for us, by us, to use against the TBTFs. Only then can we make them clean-up and dismantle their massive mess of "Financial Weapons of Mass Destruction". and make them except their blame and new definition Term of "FINANCIAL TERRORIST" which they falsely directed at us for being naively and gullible trusting; "The Masters of the Financial Universe" we the People are partly to blame due to our trusting nature the "desire to believe" in the "Fast Buck" helped us ignore actions being taken against us by the Financial predatory con men manipulating the "Shell Game". In-plane sight to steel our Money and dismantle our Protection system.
The Legal rules to the game and regulations slipped from our view as unimportant cumbersome to the "Free Market Casino Game" we the people, wrongly trusted the Con-Man shell game dealer. The No-Rules, New House-Gambling-Rules are: "The Corporate-State House Casino ALWAYS WINS!. If the Free Market Casino can write the rules and laws to the game, that say: "we win always", "you lose alway", and "you have no right to complain", or "ability to change the rules", "because we; the free market casino says-so"! -go-to-hell!, "give me your money and shut-the-F-up"! (sound like Robbery to me?)
Rules/Laws, they have not a worry - ZERO to date.
Get Pissed my friend! its the only legit action response... wakeup take action, educate yourself, and your friends and fight them.
If we don't kill, stop-block, and remove the legal loop holes that the corporate Lobbyist created to help corrupt Corporate Front Groups flow of funds to pass laws to control us- "their customers" "we the people" become simply "there consumers" aka (Hostage Slaves) or simply their TV watching Pigs! lead to the troff to eat the crap thy feed us!.

reinstate Anti-trust laws and seprate Banks from Casinos investment gabbling houses - Regulate The TBTFs to Hell! and give back my Trillions of dollars, if not, PUT THEM IN JAIL! Take away their Freedom and Power, Just as they take ours, which makes us Hostage and Contract Slaves paying High Ransoms.

I do not believe in or support Socialism being used to support rich capital terrorist corporations today. Currently the poor people in this country are forced to pay (Bail-out) TBTFs. The now Socialized Debts of the "Too Big to Fail" Parasitic Corporate Terrorist Groups in the USA must stop.

The crimes of these Corporate Terrorist should not be rewarded, but they are. We must stop them Now! or we will become a Fascist Capitalistic Corporate State. Ran by the corporation for the corporation.

We the citizens of the United States of America need to join in the fight to take back our freedoms and our government of the people from the corrupt corporate terrorist that now hold us and our government as financial hostages Demanding high ransom from the slaves.

Freedom NOW! from the dictatorship of Corporate ran Terrorist State Power.

Redicus

'Capitalism' Opens Today at a Theater Near You! ...an invitation from Michael Moore

davidswanson — Fri, 02 Oct 2009 09:13:48 -0400

From Michael Moore:

For two months, we've sat and watched the rabid right achieve the
unimaginable: Derail universal health care and send the Democrats in
Congress running for cover. Many have asked, "How did this happen? How
could a small minority of angry people control the public agenda? Where
is the majority's response? Why the silence?"

I don't have the answers to all these questions. But I do know
this: I've had enough. As far as I'm concerned, Tea Bag Nation ends
today -- at noon to be precise. For that's when I set loose, on a
thousand screens across this great land, a movie I've made that's so
relentless, so dangerous, so damning in its humor, that it will -- I
can only hope -- do what no movie has done before: Take them down, take
them all down, once and for all.

The days of the majority of Americans being ignored and played
for chumps are over as of right now. This weekend, consider your local
cinema the REAL town hall meetings! Come and spend two hours with
hundreds of other people who are fed up and in need of a bit of
inspiration -- and a good hearty laugh at the expense of all the
S.O.B.s who've wrecked our economy and laid ruin to our democracy.

I'm personally inviting you to come see what many critics are
saying is my best film yet: "Capitalism: A Love Story." You will not be
disappointed. I will show you things and tell you things about how the
captains of corporate America have stolen our country from us. No one
on the nightly news is bringing these truths to you. Beginning at noon
today, I pull back the curtain and reveal who's responsible for the
calamity we're in. That's right -- I name names and I explain why this
economic system we have is nothing more than legalized greed, and Wall
Street is nothing more than a crime syndicate in suits. You will be
blown away by what you see, but you will not leave the theater in a pit
of despair. I'm counting on your response to be one of exhilaration and
determination. I've watched this movie in sneak previews with audiences
from Pittsburgh to L.A. and I've never seen more hooting and hollering
during a documentary in my life. There are actually standing O's during the movie! Weird. Cool. Down in front!

Please see "Capitalism: A Love Story" this weekend. Take a bunch of
friends and make it an event. Last weekend in New York and L.A. many
shows sold out (making "Capitalism" the biggest per screen average at
the box office for 2009), so get your tickets early. And if you get a
chance, send me a photo of what opening night looks like in your city and I'll post it on my website.

C'mon, friends -- RISE UP! This is our moment. And it comes with popcorn! Not bad!

Thank you so very much for all your support and encouragement over the years.

Yours,
Michael Moore
MMFlint@aol.com
MichaelMoore.com

P.S. For a list of theaters and to find the nearest one to you showing "Capitalism: A Love Story," click here.

Thoughts on Saving an Old Barn

dlindorff — Wed, 16 Sep 2009 16:05:22 -0400

Corporations have no more place in a democracy than carpenter ants and mold have in the beams of an old barn.

By Dave Lindorff

For the last two weeks, I’ve been contemplating the mysteries of a post-and-beam barn, trying to work out how to rescue the long-ignored structure from the fate of many barns of its vintage (probably about 150 years old), which is total collapse.

This particular barn was left unattended for years by its last owner, and I am guilty of continuing that neglect for the 12 years that I have owned it. I knew that the shingles on its roof had long passed their sell-by date. When we first bought the property, the shingles had that telltale roughness that announced that they were eroded and brittle. The chronically wet ground floor was also a pretty convincing sign that the roof wasn’t doing its job of keeping the rain out. But the real evidence of looming disaster were the plants that began to sprout right out of the roof this wet summer. Big plants. Even a few young trees. And the mushrooms growing out of the ends of exposed beams. Not a good sign.

I made my way gingerly up the rickety stairs to the second floor in August, and looked around at the underside of the roof. Someone had obviously once re-roofed the structure perhaps two decades ago or more, using plywood sheathing over the old slats, but the plywood from the front wall on up halfway to the ridge was all rotten. One corner of the roof had actually fallen in, so there was an eight-foot-by-four-foot unimpeded view of the sky. Several rafters were so rotten they had cracked and were sagging downward, held up only by the rusty nails coming down into them from the gimpy plywood and slats above them.

I’ve never attempted anything this big, but I decided I simply had to rescue this sad old building. Someone had once put an enormous effort into its hand-hewn ten-inch-by-ten-inch beams (probably chestnut), notched and pinned together by wooden pegs. There had probably been a community barn-raising to erect the thing, once upon a time.

There’s no community today to do this kind of work, unless you’re part of one of the Amish communities in central Pennsylvania or Ohio. I have a few friends I could probably get to hold a ladder, or maybe help me hoist some shingles to the roof, once I get to that point, but nobody would likely want to devote a week or two to the hard labor of rebuilding a dangerous old barn, just for the sake of community spirit or camaraderie. Those days are gone. People are just too busy trying to get by.

So I’m doing this project myself.

I started from the ground up, using a hydraulic house jack to lift giant floor joists whose tenons had rotted away, and installing heavy uprights posts made of treated lumber, to fend off the inevitable carpenter ants that are attracted to damp wood like bees to clover. Then I moved to the second floor, and began replacing the planking that had rotted away to the point that it could no longer hold a child’s weight. (It didn’t help things that the last owner of the property had let a flock of chickens inhabit the second floor, and that, until I had cleaned it out, it was four or five inches deep in desiccated chicken shit.) Once I had a sound second floor, so I could walk around freely without having to test each board before stepping on it, it was time to tackle the roof.

That’s when I first noticed that the front of the barn was actually tilting forward, as if poised to take a dive.

Uh-oh.

This was an urgent fix. I raced out to Deck’s, an old family-owned hardware store in the next town—a throwback to an earlier time, with floor-to-ceiling cabinets that had the items inside mounted on the doors, so you could see what you were looking for, instead of having to struggle to explain to the shop personnel the shape of some item, the name of which you could never, in a million years, recall, if indeed you had ever known it. In my case, it was a humongous turnbuckle—a device with welded eyes at either end on threaded bolts, one reverse-threaded. By attaching this turnbuckle to an eye-bolt that was put through the sill beam and clamped down with a nut and a large washer on the outside, and attaching one end of a big cable to the other, with the cable stretching to another eyebolt running through the opposite sill beam, I could crank the thing around and shorten the cable, pulling the barn together, I figured.

When I got back to my barn and assembled this apparatus, drilling the holes through the two sill beams, and began the cranking process, I could see immediately that the tilted upper story was pulling back, but then it dawned on me: How did I know I wasn’t also pulling the other ood wall over with the bad one? I checked it out with a level, and it was still nice and vertical, but obviously I couldn’t count on its staying that way. I needed to put in some angle braces against the opposite sill to keep it from moving.

But there was still something I hadn’t anticipated. I kept cranking in the outer wall, and managed to mover its top about four inches back towards true. It was still leaning out about four inches though, and the cable was getting disturbingly taut. Then I noticed that the eyes of the huge eyebolts I had put through the sill beams were starting to pull away from their nice round shape!

Damn! I should have found bolts with welded eyes, or taken these to be welded.

I couldn’t bring myself to re-loosen the cable, so I gave the turnbuckle a couple more careful cranks, checked the eyes, and then decided that was as far as I could go.

Later, I was talking with a contractor who does renovations of old houses about the problem, and, after first declaring me “crazy” for attempting a project of this scale on my own, he explained that unbeknownst to me, when I was cranking the wall back, I was also trying to lift the entire roof of the barn with that turnbuckle. It was actually the slumping and spreading of the heavy roof’s angled rafters that was forcing the front wall out. In trying to pull it back, I was actually trying to force the roof back up to its original angle.

Can’t be done. If I wanted to really pull the wall back to true, I’d have to get a few big jacks and jack up the peak of the roof at the same time, to take the pressure off the wall.

Good enough, I decided. Mine would be a crooked barn. At least it wouldn’t fall over now.

Next it was time to tackle the rafters. There was a total of 12 of these. Two had to be completely replaced, or else I had to run a double alongside of them—the option I chose. Again I used treated lumber—two 14-foot lengths of beam that I bolted through the good wood I could find in the old rafters.

The other rafters all had varying degrees of rot, but all of it seemed to be near their lower ends, where most of the rain water had settled over the years of my and others’ neglect. That made reinforcing them a little easier, but it created another problem: the rot had extended out past the wall to the eaves, which were starting to fall off the barn as a result.

I would have to replace the ends of the rafters, right out to the end of the eaves.

What this meant was bolting new sections of rafter to the good wood of the old rafters, and extending each one out past the wall to the length of the desired eave—about 14 inches.

Once I had done this all the way across the length of the barn, it was time to get up on the roof to start replacing the rotten plywood. But with 1 15-foot drop to the ground from the edge of that roof, I didn’t want to be up there without protection, so I had to construct a scaffolding that would both give me a platform to work on at the base of the roof, and a fence strong enough to hold me back if I were to accidentally slide off the roof at some point.

My answer to this challenge was to nail several 2X4 beams horizontally along the inside of the wall, just below the sill beam, and to then cut holes through the wall every four feet large enough to run other 2X4 beams out through them projecting out about three feet from the wall. Inside the barn, I let these latter beams extend about six feet, and then tied them into upright studs that extended from floor to ceiling. These solid horizontal beams would support a couple of 2X10 planks just below and beyond the eaves. I then hung 18’ lengths of 2X4 from the ground up past the planks and linked them with several runs of 2X4s to make safety railings. Lower down, I ran cross ties in to the barn wall to keep the uprights from moving inward if the fence were hit, and also diagonally from one upright to the next, to stabilize these “legs” of the scaffold.

With the barn structure completely reinforced, I’m now pulling up the rotten plywood roofing and am replacing it with god plywood. I’ll cover that with tarpaper and then a layer of 30-year shingles, which should, since I’m 60, guarantee that it’s the last roof I have to do in this life.

With luck, I’ll have the whole project completed before the first frost.

Saving an old barn is an immensely satisfying activity, even for someone like me with only basic carpentry skills. It also makes one think about other things that need saving and repairing.

Take our political system. The old US political system is, like my barn, shot through with rot and in imminent danger of collapse. We Americans have been busy with our lives for too long, and have allowed the whole structure to decay. Greedy corporations and individuals, like mold and carpenter ants, have infested every post and beam and have been eating them away for years. Now, as we start to become aware of the extent of the rot, many of us are saying that fixing the mess will be just too difficult. Many just turn away and focus on smaller things. Others suggest that just tearing the whole thing down and building something new would make more sense. But I think that given the effort that went into constructing the thing in the first place, we owe it to ourselves and the people who came before us to try and fix it.

That means first of all cutting away all the rot. Corporations deserve absolutely no place in the process of politics and governance. The Constitution refers to We the People, not to We the People and Corporations. Indeed, the whole idea of corporations is profoundly antithetical to democracy. Corporate law was designed to separate ownership from personal liability, and to free owners and managers from personal responsibility for their actions. You cannot have any kind of decent political or governmental system where organizations that are free to act recklessly and without regard to consequences can influence decisions, anymore than you could allow a barn to be built—or repaired—by someone who had no responsibility for the finished project (that’s why contractors have to be, or should be, bonded).

It also means thinking ahead in a long-term way. I doubt that I’ll be living on this property and owning this barn 20 years from now. If we are lucky, my wife and I will be living in some tropical paradise when we’re in our 80s. But I could not live with myself if I just put 10 or 15-year shingles on this barn roof, making it likely that it would start leaking again before long, again putting the long-suffering framing at risk. No, it never occurred to me to do anything less than put the most durable type of 35-year shingle on the roof. In fact, I would have opted for slate if I could afford it.

Yet, in our politics, we Americans keep refusing to think long-term. We refuse to pay for anything, whether it’s schools or wars, preferring to borrow for everything, and passing on a country buried in debt to our children and grandchildren. The fiscal soundness of a nation is no less important than the structural soundness of a barn, and we ignore that truth at our, and especially our children’s peril.

I fixed my barn myself, but no one can fix this country by her or himself. It’s got to be a collective effort.

The first step is recognizing the problem.

That shouldn’t be hard. When you look at the corrupt process underway in Washington today as the White House and the Democratic Congress try to produce what they are euphemistically calling a “health reform” bill, you can see the problem. The whole process is being distorted and controlled by the very corporations that have produced the dysfunctional system that we have today. It’s as if one were expecting the ants that were eating away the beams to rebuild my barn.

When you look at the war in Afghanistan, which is getting bigger and uglier by the day, even as nearly two thirds of the public says they want it to be ended, you can see how little democracy we have left in America. The only ones really benefiting from this war are the war industries—and of course the military, which keeps eating up more and more of our collective wealth.

The way I see it, it’s time to take matters back into our own hands. We need to get out the wrecking bars, the hammers and the saws, and start ripping out the rot and the decay, and rebuilding the structure with solid, durable materials. We don’t have to rebuild it the way it was—installing solar panels would make sense, and maybe we could add more windows to make the whole thing more visible than it used to be.

We should however, vow this time to keep all the manure down in the stalls in the basement.

No more chicken shit on the upper floor.
_________________

DAVE LINDORFF is a journalist and sometime carpenter living outside Philadelphia. His latest book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work can be found at www.thiscantbehappening.net

economic -

ehschoenberger — Tue, 08 Sep 2009 13:25:08 -0400

Economic meltdown : real causes

I have completed a vehement accurate book about the context and fundamental causes - "How We Got Swindled by Wall Street Godfathers, Greed and Financial Darwinism." From 40 years in the securities business I know how fallacious economic postulates from Financial Darwinists who based theories on the irrational and ludicrous notion that the market is rational have fueled millions of jobs lost and trillions of retirement investments down the drain. Unless i am missing something it seems that market (financial or otherwise) is made up of human beings and mans history of irrationality is as long as the history of man. It is self-evident that the martket is an "Emotional Bandwagon;" therefore everything that follows the crazy rational market theory is wrong. Deregulation in the name of effective free markets that self correct and has been an excuse to tear down the firewalls of Glass-Steagal and the 1956 Bank Holding Company Act which protected Mainstreet from unbridled, unfettered greed. And I expose all the primary culprits and provide a prima facie case for a federal prosecutor to investigate why this, in the opinion of some prominent securities attorneys constitutes fraud. My book clearly demonstrates why the underlying problem has been Financial Darwinism, which is a derative of Social Darwinism. And my insiders view is too close to the truth for publishers and agents who search for a book to fill a simple genre slot instead of an important book to help their fellow Americans. The proposed financial regulatory solutions will not work against greed and self-interest. We need to return to barriers against greed and down size banks. The financial innovation for fees must be curtailed - transparancy is not even close to enough and it makes no sense to ask the culprits if they are in agreement with proposed solutions! I need help to get the Truth out. My blog is - www.howwegotswindled@blogspot.com my phone is 216-831-6388.

"Looting of America" Author Sees Opportunity in Meltdown

davidswanson — Wed, 27 May 2009 12:41:13 -0400

By David Swanson

I've just interviewed Les Leopold, who blames the recent financial disasters on trends that began over 30 years ago, explains how a great deal of Wall Street's "investing" has had as much connection to the real economy as fantasy baseball has to baseball, diagnoses the failures of labor and the left to resist the financialization of the economy, views the current situation with genuine optimism as a rare moment in which we might be able to make necessary changes to regulate finance and to shift money from a tiny group of billionaires to the rest of society, and explains why that latter step is needed to stabilize any economy.

With teach-ins planned everywhere on June 10th and people trying to educate each other on exactly what just happened to trillions of our children's dollars, you could do a lot worse than to gather some friends together, read or listen to, and discuss, this interview, and then take appropriate actions.

Here's the audio in an mp3. It's a little under an hour.

David Swanson interviewing Les Leopold:

DS: This is David Swanson from AfterDowningStreet.org and Democrats.com and elsewhere, and I am very privileged to have here for this recording Les Leopold who has co-founded and directed both the Labor Institute and the Public Health Institute, who helped to form the Blue-Green Alliance which brings labor together with environmental activism, and who is the author of an award-winning biography, The Man Who Hated Work and Loved Labor: The Life and Times of Tony Mazzocchi, and of the book we are going to be talking about this evening, The Looting of America. It’s a long title, but it’s worth it: The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity and What We Can Do About It.

Les, great to have you.

LL: Well, thank you very much, David. I’m very glad to be here.

DS: Thanks for being here. It is a wonderful book. It’s not too long. I greatly enjoyed it, and it explained some crazy-sounding things to me from Wall Street that I had no idea what they could possibly be. Things liked “cubed, collateralized debt obligations,” and so forth. I don’t know if we have time on this, in this interview, for you to explain all the terms to everyone. They can get it from reading The Looting of America, but use your judgment and explain what we need.

But maybe if I could I’d like to start here: There is sort of a basic rule of economics that you say you and others have been taught. That is that when productivity goes up, the workers pay goes up. Not just that it should, but that it does, as some sort of a rule. And yet that hasn’t been true for quite some time. Can you discuss what has happened?

LL: Basically from World War II to the mid-70’s if you look at the productivity index, and we should define productivity – it’s the amount of output per worker hour. And the wealth of nations is basically determined by the value of output per worker hour. The more valuable that worker hour, the greater the prosperity of the nation. So it’s what is beneath pumping up the line of gross domestic product and other things like that. And our standard of living.

The productivity index and the average hourly wage of the non-supervisory production worker (which is something that is tracked in the statistics books, the government statistics books), those two numbers went up virtually in tandem from World War II to the middle of the 1970’s, and the thinking was that as productivity goes up, corporations make more money, they then hire more workers, which drives up the price of labor, and, the real price of labor after you take into account inflation, and as the two go up together, prosperity within your country goes up. And this was one of the reasons American capitalism was such a shining example around the world. The standard of living in the post-World War II period was phenomenal for the average working person, virtually throughout the country. There were exceptions – farm workers, African-American farm workers in the south, etc., - but overall there was a wonderful increase in the standard of living.

Something very strange started to happen in the mid 1970’s that, the two got de-coupled. It was no longer, what we thought was automatic turned out not to be automatic. In fact, there were other factors involved, and productivity continued to rise and, but the average worker’s wage after inflation went flat and started to go down. And this created an enormous change in the American economy, because the gap between those two lines first was hundreds of billions of dollars and now trillions of dollars, and that money had to go somewhere. It was no longer going to the average working person. In fact, it went to the very, very top of the income ladder. And that’s the source of our current crisis. A huge amount of money going to a very few people at the top.

DS: Now that seems relevant and interesting and disturbing and maybe even offensive, but I’m not sure it’s going to be clear to everybody right away how that 30-year trend could have caused the recent financial disaster. What’s the connection?

LL: It wasn’t clear to me either. And your listener or reader should be skeptical. So what. The money goes to the top, and the theory was when the money goes to the elite - and this was sort of the theory of the deregulatory, Reaganomics era – it started actually with Jimmy Carter, deregulation started then and some other trends we’ll talk about in a minute – but the theory was that the investor class, the elite, would be the investor class, and they would take that money and they would plough it back into new industries and this would lead to, you know, even more growth and productivity, even more jobs, even higher standard of living. And up to a point, that’s true. But there was so much money that floated to the top that there actually, the amount of investments that could be found that were moderate, you know, that were relatively good, solid investments began to get used up.

And the “Wall Street Journal” refers to a “wall of money” that existed out there that was looking for investments. And that wall of money, you could only buy, look, you could only invest so much, you could only spend so much on yourself. I mean, how many homes, how many cars, etc. The rest of it was still seeking investment opportunities. And Wall Street is not stupid. They became very aware that there were literally trillions of dollars out there seeking a home. And they came up with it.

They invented financial instruments to meet that demand. And the instruments they created are so amazing it would take, it took a book to kind of unwind it all, but they are so phenomenally detached from reality, they literally became a series of bets. And those chickens finally came home to roost on a lot of those bets. That’s the third piece of it.

So the first piece was the productivity got detached from real wages. Money drifted to the top, and those people ran out of places to invest it and they start to invest in what I call “vanity finance.”

DS: Can we stop at step two for a minute because I don’t know if that’s going to be clear to everybody right away. I don’t know if it’s clear to me. You say in the book as well, there’s a line on p. 17 that stopped me when I read it that says: “There was so much money roaming the globe that it ran out of real economy investments. Instead, much of this massive surplus found its way into high finance.”

And yet, we’re trained, I think, to think of entrepreneurs and the investing class as driving innovation. Why some handful of these people 30 years ago couldn’t have thought to create investments in infrastructure or in green jobs in better schools or in mass transit. What prevented the creation of real economy investment?

LL: That’s a good question. But some of the things that you mention there are public real investments. That’s not what, you don’t invest in infrastructure and schools, education if you are a private investor. And you’re also not likely to be able to by yourself break through on clean energy. That usually, you know, those, or alternative energy operations. That usually requires massive government investment.

What you’re looking for as a private investor is a good investment and you’ll be willing to speculate some on venture capital, and money did go there. In fact, the dotcom boom was fueled precisely by the money that was looking for a home.

But there was too much of it. You can only absorb in the private sector a certain amount of investment at a time. Otherwise it gets very, very risky, and if it’s your money, that’s not what you want to do. What you want is something that looks much safer, or at least moderately safe.

And so that financial instruments created by the financial community looked a lot safer. So, yeah, you put some money into new industries, into the dotcom boom, into securitized subprime mortgages as well, and then you start drifting into securities based on subprime mortgages that were designed to look like they were AAA-rated securities. That money, those kind of instruments attracted a whole lot of money.

Where that money could have gone, could have, should have gone, is precisely in infrastructure investment, education, energy, health care reform, but that’s what the public sector is supposed to do. And the public, if you recall, taxes were dramatically cut, especially on the wealthy, so the money to do those wonderful investments wasn’t there.

DS: So these investors who were looking for a safer place than risky new energy technologies or schools or things that tend to be public investments found investments that they thought were relatively safe but perhaps were not, were concocted with some fudging of numbers and some tricks and some fancy footwork that’s discussed in your book, The Looting of America, that perhaps in the way that some victims of predatory mortgage loans were taken in, the highest level of investors were taken in. Am I reading that correctly?

LL: It’s amazing, virtually everybody involved was taken in except the people who were, even the people actually who were marketing this stuff. See, the money is made by creating, packaging, selling, and reselling these instruments. The fees are embedded in it, so you make the money up front. And this was incredibly lucrative for the financial community.

Step by step the large financial institutions started making money hand over fist off the fees that these things generated, and as long as the economy was booming, especially the housing market going up and up and up, which turned out to be that which was being bet upon mostly during this period, but other things as well, as long as these things went up there was little chance of people losing their money, and the fees being made were enormous. The profits of the financial sector started to hog, became the most profitable sector of the economy, and it, I think at one point it almost hit 40 percent of all the corporate profits were in the financial community.

But it turns out as we’re learning now, these profits were phony. For example, the nine largest financial institutions had, according to the New York times, in the three years prior to the crash this fall, had earned quote/unquote 300 billion dollars. And now they’ve lost all that. It’s all gone. Except it was paid out. In other words, those companies are now, have now gone in the red equal to all the money they previously made. Of course, the money they previously made has already been paid out, half of which has gone to, you know, bonuses and salaries within those companies. And we’re now making up the difference through the TARP program, and trying to salvage the economy from a great depression.

So, but it was phenomenally successful as it was going on. And the reason that the investors invested in these instruments was (1) that they had these good ratings and they paid a little bit more than, they were constructed that they paid a little bit more than a super-safe government investment, or comparable government bond. And when you’ve got a lot of money and you can make a half a percent more, you’re making a lot more money.

DS: Right.

LL: They couldn’t sell them fast enough. And they kept inventing new ways to create them, even when there were no underlying assets that were attached to them, which is, you know, a mind-blowing concept that I ran into as I was working on this book.

DS: Right. Investing in bets on investments actually owned by completely other people. I mean, these layers of phoniness so that this is not an economy in any way connected to the production of actual valuable products or services. Explain to people why this phony, fantasy finance economy couldn’t simply be allowed to fail without actually worsening the real economy.

LL: Well, I need to give a, maybe, let me try to explain a little bit more how these instruments work by going to the analogy of fantasy sports, fantasy baseball.

DS: OK.

LL: Because it’s a, fantasy baseball is a synthetic derivative. In fantasy baseball, you and 12 other people get together and form a league and you draft real baseball players onto your team and you get ranked by how many home runs, RBIs, stolen bases, etc., your team has. And you own players, but you don’t really own them. The person, the real major league baseball player, if I have Derek Jeter on my team, Derek Jeter doesn’t know he’s on my team. In fact, he’s probably on a couple of thousand or 15,000, or 20,000 fantasy baseball teams right this very moment. Nobody owns him other than the New York Yankees, but he’s part of all these fantasy leagues.

And there is betting taking place right in these various leagues. The winner gets a certain amount of money, second place gets a certain amount of money. And money will exchange hands at the end of the year, and there are books that you can buy based on, you know, how to play fantasy baseball. There are stat services that track this every day for the teams involved. So there’s a whole enterprise surrounding fantasy baseball, which is all, it’s a game based on owning real players but you don’t really own them. You just track their statistics. Your team is derived, a derivative, a synthetic one, based on real major league baseball.

Well, imagine the same thing based on housing. And you can play, you can do the same thing. You can make all kinds of bets, and you can own all kinds of housing without actually owning it. You can play fantasy housing bets. And that all works really fine, except let’s go back to real baseball. What happens in fantasy baseball if the real major leagues go on strike? If the real thing has a problem and goes on strike, all the fantasy baseball leagues collapse, entirely. They are worth nothing. You can’t play. You can’t do anything. All the books and stats services collapse. They all go under, because they are built like a pyramid on top of the real thing.

Well, the same thing happened in housing. The housing market that all these bets, these betting leagues were based upon, all these fantasy finance securities were based upon, hit a limit. At a certain point prices couldn’t go up any more and they started to go down. It was the equivalent of going on strike. And when they did start to go down, all these betting leagues, securities that were based on it in the superstructure, just like fantasy baseball, all those instruments started to crash in value. And when they crashed, everything around it started crashing, and you had an enormous implosion of financial worth.

There is a school system, there are five school systems in the Milwaukee area that got snookered into buying $200 million worth of these fantasy finance securities. Kenosha, for example, spent $37 million, and they were doing this to try to raise money for a retiree benefit fund. And that $37 million when the crash took place is now worth, in one year it went from $37 million to under $1 million. That’s how far it crashed, the fantasy finances had crashed. And this is what happened all over the globe.

Now, your question is, why couldn’t we let this happen? Well, if we just let, here’s the situation we were in: The banks had not only created and sold these fantasy finance instruments, but they kept a lot of them as well. The ones they couldn’t sell they kept on their books because they looked very valuable. Other people wanted them. And so, and they had these offshore, off-book connections where they set up these things in the Cayman Islands, these separate little corporations that were basically where the game was being played. They had those, too.

Well, once the crash started, their books were littered with these valueless, if they sold them they would be worth the same thing as the Kenosha school system. They would go from $37 million to less than $1 million. And then if, if they did this, then the bank itself would be insolvent. It would go under. It would have to file for bankruptcy which is kind of what happened, which is exactly what happened to Bear Stearns and it was merged away and then it happened to Lehman Bros., and the markets all over the world started to collapse.

And it was about to happen to AIG. And I’ve got to tell that story because then you’ll see what would happen if we let it collapse.

DS: OK.

LL: AIG decided that what it was going to do was insure other people’s bets. In other words, it would be like if I had a fantasy baseball team and it would say, OK, we’re gonna, if you finish in the bottom two out of 12, we’ll make up the difference. We’ll provide insurance, financial insurance for you. And you’ll pay us a certain amount four times a year and a certain amount up front and we’ll get those fees and if something goes wrong with your team, we’ll insure it.

Well, they figured if they insured enough different teams, enough different speculative securities, they couldn’t all go south at the same time. So they would, so they decided to insure more and more. And they figured out that this was a gold mine, because they had a AAA rating themselves, and as a result, in their contracts, their insurance contracts (they don’t call it insurance because that would be illegal, that’s regulated; they call them credit default swaps, that’s not regulated – still not regulated), so they issued these insurance policies basically on these risky financial securities. And they figured, we’ll do enough of them and we’ll make a huge amount of money because we don’t have to put up anything in return. We have a AAA rating, we will get all these fees, this was the most profitable of any of the divisions within AIG. They were going to get all these fees without putting up anything in return. Cost them almost nothing.

So they issued $450 billion worth of insurance. Well, when the economy started to go down, the housing market collapsed, and these various fantasy finance instruments started to get into trouble, they had to quickly come up with money to cover their bets. Well, very quickly they didn’t have enough money, and once they didn’t have enough money, their rating agencies were about to switch their rating from, or did switch their rating away from AAA which meant that the people who were on the other side of the bets were allowed to then take their assets, or AIG had to quickly sell the assets.

Now, if AIG, AIG didn’t have, couldn’t possibly raise enough money in time, and no one is going to lend them any money, so they would have gone under. If they went under, and they were about to go under, they would have owed $450 billion to all these other financial institutions all over the world. Had they not paid their bets, those institutions would have gone under. Those institutions also did the same thing. They had bets to other institutions. They wouldn’t have been able to pay off their bets. And you would have seen a domino situation right around the globe.

We were a millisecond away from that massive meltdown, and, you know, whatever criticisms I may have of how it was done and what, you know, the various administrations were up to, the Bush administration in the end, had they not acted on AIG, we’d be selling pencils on the street right now. It would be a disaster. Bank after bank after bank after bank would have folded.

DS: And not just banks but school districts and pension funds, and . . .

LL: Oh, all kinds, everybody that took out insurance would now be insolvent or close to being insolvent. You would have had a massive crash. I mean, it was bad enough as it is, but it would have been, I think, by a factor of ten times worse. JP Morgan would have gone under, I believe. You know, a lot of the other Wall Street firms would have gone under because they were counting on that insurance. Uh, anyway, so . .

DS: And this would have impacted real people in the real economy.

LL: That’s another thing I think that needs to be better understood. People kind of view the finance community as another sector. It’s not another sector. It’s the kind of the heart and lungs of the economy. It breathes. It’s everywhere. Uh, virtually every single financial institution, school district even, rely on financing, on a periodic basis or on a daily basis. Every aspect of the economy relies on . . . The way I like to picture it is, imagine the globe. On the surface of the globe is real production. The air is finance. You need a certain, you need the right amount of air for the real economy on the surface of the globe to prosper, and if the air gets too thin or it gets too stormy, you have, all hell breaks loose on the surface of the globe.

And what happened was, once these institutions started to fail and the values started to crash and these fantasy finance instruments that were, you know, based on not much more than fantasy baseball, once the crash took place, the strike took place, as it were, you had an implosion of credit problems. Banks were afraid to lend to each other, for starters, because, think about it. They knew how much toxic, how many toxic assets they had on their books. They knew every other bank had toxic assets on their books, and they knew how close they were to going under. They’re not going to give money to another bank that is also about to go under. They needed their own capital to be able to stay solvent. So bank after bank after bank after bank held onto their money.

The money market funds froze up. And money market funds are absolutely invaluable because that’s what corporations use to make payroll. They depend on selling paper for 30 or overnight or for 30 days and then rolling it again and again and again. They use that money to make payroll and they use their earnings for higher return investments in their company and elsewhere.

So all of that started to freeze up. And once the credit system freezes up, the economy, when they talk about the economy falling off the cliff, that’s what happens. It just stops functioning. It starts sputtering. People can’t get credit to buy things. Companies can’t get credit to buy things. Then the people that are waiting to sell things can’t sell them. They start laying off people. Everybody starts laying off people. Everybody stops buying things as well, and you get a downward spiral, a deflationary spiral.

This is what happened after 1929, after the crash then, and it was mismanaged as well at that time by the federal government in the Hoover administration, or so the literature suggests. But anyway, once that credit freeze starts going into the real economy, you get a dramatic, instantaneous recession. I mean GM and the Big Three auto companies would have problems anyway, but nothing like what they are facing now. I mean Toyota, everybody is seeing, witnessing a humongous drop in sales. That’s not because all of a sudden people got poor. It’s because the credit system froze up. And when it freezes the entire economy in a sense comes to a halt just long enough to cause chaos, and it’s happening on a global level. Virtually no country is immune.

DS: And I think we should make clear, as your book does, I think, if I’m reading it right, that the world of finance out there in the atmosphere doesn’t just impact the real world and the real economy when and if it collapses, but is for better and worse and often for worse interacting with the real economy all along and in many ways driving us to the cliff that we then are in the position of being about to fall off. And so, in regards to the housing market that you suggested was central to this, and you said that the housing market hit a limit. It was interesting in reading your book and others that in some ways the housing market was driven to that limit by the world of finance.

So, you know, I used to work with a community group called ACORN, and we would try to prevent predatory loans, and eventually we got to the point of trying to hold accountable the companies that were buying the predatory loans, and so I sort of viewed it from that direction, in that sequence, and yet in some ways it may have gone the other way – that the people throwing all this money around to buy these securitized packages of reshaped predatory loans were driving the creation of more and more and more of these subprime loans out there.

LL: You’re absolutely right. Think about it this way. Very interesting phenomenon occurred. Remember we talked about the productivity kept going up and wages didn’t go up?

DS: Yeah.

LL: Well, the response, both of the financial community and by the average consumer, was to take on more debt. The average ratio up until the splitting of the two lines was about 60 cents on the dollar. Every dollar you earned, on average, people had about 60 cents in debt. Well, as wages stopped going up and some of this fabulous wealth of the super rich got recycled back to consumers in the form of debt - credit card debt, mortgage debt, car loans, student loans, on and on and on. Well, the ratio went from 60 cents on a dollar to $1.20 per dollar! It doubled. Virtually the debt load on the average consumer doubled.

DS: Borrowing what we had earned had our pay been based on productivity.

LL: Well, there’s a limit to how much debt a consumer can take on. There’s just a limit. You know, at some point you can’t service the debt. And that means if your indebtedness was driving up, let’s say, the housing market, and everybody was thinking, “Well, if I get into trouble, prices are going up, I’ll sell my house and I’ll still be able to pay off my debt,” at some point it isn’t going to work any more. I mean, it’s obvious it wasn’t going to work anymore.

If you look at the price of houses, it followed, housing prices followed gross domestic product almost exactly until about six, seven, eight years ago, and then it shot up like a rocket, straight up, had no connection any more to gross domestic product. You know, that couldn’t last.

But, you know what, I don’t want the listener to get a misconception. You could take all the subprime mortgages that happened and all the predatory lending, you could take that entire problem and all it all up, and at most it is a $300 billion dollar problem. You could pay off everybody’s mortgage and clean up that problem for about $300 billion.

DS: And that’s two percent of household net worth, you say in the book.

LL: Yep.

DS: Two percent, so . . .

LL: But that wasn’t the problem. The problem was that they basically sold, securitized, those same subprime mortgages again and again and again. It was like selling the Brooklyn Bridge over and over and over again. So that $300 billion turned into $1.2, $1.5 trillion of toxic waste and not it’s scattered all over the place.

That’s, when the TARP money had to be used it wasn’t to take care of the subprime mortgages, it was to take care of all that, to try to deal with all those toxic assets. They’re still trying to figure out how to deal with the toxic assets. It’s such a thorny problem. Because . . .

DS: Right.

LL: . . . nobody wants to realize the losses on those things. So we, with the selling of it again and again. Look, it became, funny thing was, it’s true that the market for subprime mortgages was driven by the financial community, not by, you know, a conveyor belt was set up. They wanted those subprime mortgages as fast as possible to package and make the huge fees and sell to investors. But, you know what, that got to be too much of a pain in the butt. So the figured out how to do that without ever even owning the mortgages. Because to get title to a thousand mortgages and put them in a pool and do all the fancy things they did became too time consuming. So they invented a way to do it without owning them at all. That’s called synthetic. And that’s how they created synthetic collateralized debt obligations. That’s where it got to be like fantasy baseball.

They just created new securities that were tracking subprime mortgages without owning subprime mortgages.

DS: Yeah.

LL: And people bought them and they had value and they borrowed money against them as well. So you started to have a pyramid of mortgages based on nothing and then loans taken out against those mortgages that are based on nothing. So even a small hiccup in the actual housing market below would cause a cascading set of problems.

DS: So the actual problem in the housing market is $300 billion. Here we are having shelled out trillions with a “T” of our children’s money with no end in sight, and the problem is still there. So, as I think you explain extremely well in the book The Looting of America, it wasn’t just, this can’t be just blamed on poor people who bought too big a house.

LL: Oh, god, yeah. That’s what I think folks would, you know, like, Wall Street would probably like us to believe that, but I, I actually think that those people who are watching this thing know better. And what the fundamental problem comes down to is the financial free markets left to their own devices, in other words, pure, free market financial capitalism left to its own devices doesn’t work. It will crash.

We are witnessing a real time experiment in what happens when we deregulate high finance and let it go do its own thing. Left to its own devices, sooner or later it’s going to create fantasy finance instruments because it’s profitable to do so. We broke down, starting in the 70’s, we started to get rid of as many controls, all the New Deal controls virtually were undermined or eliminated in the 70s and 80s and right on through the 90s.

And attempts to regulate these instruments were actually beaten back. Phil Gramm did a masterful job in passing legislation, it wasn’t actually signed, that made it illegal to regulate the credit default swap market, this illegal, this insurance that we described.

By the way, the reason, if it was called insurance it would never be allowed, is in the insurance industry you have to have a material interest, well, a couple of things. You have to have real assets to cover your insurance policies if you are an insurance company. And second of all, there has to be a tangible interest. You can’t insure your neighbor’s house if you don’t own your neighbor’s house. And thirdly, 10,000 people can’t insure your neighbor’s house, because the insurance company knows if you do stuff like that, well, the temptation to burn down your neighbor’s house, have a suspicious fire there, goes up because there are a lot of people betting on it to go down.

Right now, 10,000 people can bet on the demise of GM. No problem. There are more than 10,000 people who will bet on the demise of GM. It’s OK to do that and totally unregulated.

But anyway, the, this is the result, this game, this casino . . . Historically, one of the things I found fascinating is the idea of finance, high finance being a casino is something that has been discussed for the last 200 years. There has always been a question of, “How do you get finance to do what it needs to do in the economy without it turning into a casino? How do you separate the utility that it provides from the speculation and gambling? Where is the line? How do you do it?” Very difficult to do, and we tried, now we’ve just tried an experiment in virtually total deregulation and it was an unmitigated disaster. That’s the lesson we have to learn here.

DS: And the . . .

LL: You can’t rely on the free market to police itself.

DS: And all of those bets on the demise of GM, there clearly is some acceptance among some elites in this country of the possibility of the demise of GM, did anyone bet on the demise of AIG?

LL: Probably. But you know, we won’t know because the settlements take place after the bankruptcy. That’s when the money gets totaled up, the best on both sides. And a lot of them wash out.

DS: Sure.

LL: And a lot of people bet both ways, whether they went, you know, long on the stock and they used the credit default swap to go short, you know, that kind of stuff. So you don’t know how it all, how much with AIG.

I suspect that, and I haven’t tried to do this . . . I did it with GM. You could actually, if you Google, you can get the price of a credit default swap for GM. The last time I looked it was something like, you had to cover $10 million worth of bonds you had to pay, for insuring it, you had to pay $8 up front and then some phenomenal amount of money.

DS: Wow.

LL: My guess is there’s something similar with AIG. If you want it, someone will sell it to you.

DS: So, this craziness, in this conversation you’re citing deregulation and you do in the book, too, and you propose a Financial Produce Safety Commission that would actually ban products that do no good and do harm, these crazy instruments we’re talking about, but the impression I get from reading the book is that you don’t think we could ever regulate sufficiently to count on avoiding a repetition, and that in fact we should be charging for financing disaster insurance – a sort of tax on . . .

LL: I’ll take it one step further. I’m not convinced that we have the wherewithal, let’s put it this way: We now, we now know that when these financial institutions get large enough we can’t let them fail. I mean, there are people out there that say, “Oh, let them go down. Let them go under.”, etc., you know. They would have loved to let them go under, but, you know, we’d be in a great depression if we let them go under.

Not like, in fact it’s not like letting any real company quote/unquote go under. It’s like, you know, suffocating a huge, you know, a huge piece of everybody’s economy when you let these big things go under.

So what do you do with them? Some people say, “Well, you should break them up into smaller entities.” Well, you know, I wonder if you can really get away with doing that. I’m wondering whether ultimately they have to be regulated like a public utility. That they have to be, you have to literally regulate it. I’m not saying the government necessarily has to own it lock, stock, and barrel, but you have to regulate it for the public good. That the idea of letting these folks just, you know, pay themselves whatever they want to pay themselves, go in whatever business they want to go into, create whatever insurance they want to create, those days have to be behind us.

The financial disaster insurance is, I’m basically making the argument that two things have, maybe I did it kind of klutzily in the book, but simply put, I think I did this properly at the end of one of the chapters, two things have to happen: we have to move money from the financial sector, the bloated financial sector into the real economy, and we have to move money from the top of the income ladder, the tippy, tippy top, to the middle class and working people and the poor. Those are the two most important things that need to happen to stabilize the economy.

Every time we’ve let money drift up to the top, in a very short period of time you go into a major depression. That’s what happened in the 20s and it’s happened again now. A disaster. And there’s no . . . one way to move money from the financial sector into the rest of the economy is to put a very small fee or tax (I call it insurance) on every single financial transaction. So if people want to zing money all over the world in a hurry like every nanosecond, they’ve got to pay a little bit into the fund. They want to do all these credit default swaps, or if we regulate them they’ll come up with another way to do these kinds of transactions and bets of one kind or another or currency bets or whatever they want to do – every time you do, 0.3 of one percent of the value of the transaction goes into, you know, the public sector. It pays us back for all the money we put in now and it protects us the next time around, and it helps move money from the financial sector into the real economy.

There is no reason in the world why we should ever let a financial executive make, you know, $10, $20, $30, $50, $100, $200 million dollars for pushing money around. I mean, it’s been proven now that what they did had no social utility, and we’re bailing them out. Now. Yet, all that, there’s just no economic reason ever to pay people that much money for doing that kind of work. It has to stop. And the sooner we get there, the better.

DS: Well, I love Sam Pizzigati’s idea of a maximum wage and even tying it to a minimum wage, and you mention such things in the book as well as raising the minimum wage and permitting re-unionization with the Employee Free Choice Act, creating single-payer health coverage, using progressive taxation, etc. I mean, these seem like the standard left positions, but you’re making an argument that all of these are needed to avoid financial disaster.

LL: Yeah. I don’t have to make this argument. As a matter of fact, Sam is more radical than I am on this.

DS: He is, and I agree with him, but . . .

LL: I’m saying we don’t even have to think about doing this outside the financial sector. If we just capped wages in the financial sector . . .

DS: Right.

LL: . . . president’s wage cap. To any institution that receives federal money or federal support. That would be an incredible signal for people, you know, to start going into other professions. If you want to, you know, earn a decent living don’t keep thinking that, you know, you’re going to graduate from college and in three years you’re going to be making a million dollars. I mean, . . .

And then the system crashes and we have to bail out your institution. That doesn’t seem like a very smart thing, smart way to run your country.

So, I’m willing . .

DS: So in the financial sector we cap salaries at the salary of the US president, and I would add to that that we limit radical increases of the salary of the US president because I wouldn’t put that past anybody.

LL: Well, that would be very interesting. But I, the point being is we’re not talking about radical conservative here. We’re talking about do you want the system to operate, or do you want it to continually crash. That, you’ve got to prove to me that you have another way to stop, I think that the burden of proof is now on the free marketers and the partial regulators. You’ve got to prove to me that we’re not going to, it’s not going to, they’re not going to work their way right around those regulations and we’re going to be into, move into another crash.

The sector is too big and there is too much money at the top of the income scale. Until we do something about those two things, and if you don’t like the proposals that I’ve put forward then come up with your own, but until we move money from the financial sector to the real economy, from the top to the middle and the bottom, and the tippy top. I don’t care about, you know, people making, you know $500,000 a year. I’m not even concerned. I’m talking about, you know, $10, $20, $30, $50, $500 million. I’m talking about billionaires. It’s obscene to let that go on and it’s not obscene just from a moral point of view. It is dangerous, absolutely dangerous to our economy to allow that to happen.

And, look it’s happened twice in 70 years, and with the interconnected global economy as it now stands, you know, it doesn’t take much to disrupt it. If we’re going to keep letting it happen it’s going to happen again with more severity. And we’re not out of this one yet. We don’t really know how we’re going to pay it all back.

DS: And I would just add I think it is as dangerous to our representative democracy as it is to the economy, and I think your book lays out an incredible vision and a wide range of systemic reforms that I’m wondering if there’s anything you see on the horizon at the moment. Have there been any bills introduced, are there any proposals that have the beginnings of any sort of legs that you would encourage people to support.

LL: Well, you know, there was talk of wage caps on Wall Street. But, you know, the Obama administration is very reluctant to do it. Congress is pushing harder. You know, there’s talk about dramatically limiting some of these derivatives. Actually there’s talk about product safety stuff, but, you know, there are loopholes in it.

What’s missing now which makes me a little, which makes me worry, is not what the Obama administration is doing because they are trying to do something. What worries me is that there is no articulate voice outside the administration that is calling for dramatic change. There is a line from the Roosevelt administration where, it goes something like: some progressive labor people came in and made all these demands . . .

DS: A. Philip Randolph.

LL: Was it A. Philip Randolph?

DS: Yes.

LL: And Roosevelt told him, “OK. Go out there and make me do it.”

DS: Yeah.

LL: Well, that’s what has to happen. If there is no pressure coming, there’s some coming from the Congress, but there’s no, what’s missing now, for example, is a labor movement that has an articulated alternative vision that had popular support that could say, “Look. These are the things that have to happen now.” Everyone is kind of relying on Obama to do it for them, and I don’t think that’s possible unless the spectrum of debate changes.

What I fear most happening now is a certain kind of financial amnesia is going to set in. We’re going to forget how we got here, and we’re going to look at the problems at GM, and the right is going to come in and start blaming Fanny and Freddie, and they’re going to blame big government, and it’s going to get to be a muddle. And that’s what happens when you don’t have, you know, popular organizations. In fact, there’s really no left, at least that I can see, that is laying out an alternative platform.

Actually, one of my critiques of the left is, at least large swaths of it, just ignored the financial sector. You know, it was all about bosses and workers in the real economy and kind of finance, finance was kind of like another sector off to the side.

But anyway, something needs to, some kind of popular, for us not to, you know, go through all these things again and again we’re going to have to see an alternative vision get put forth on the popular level so that there’s pressure on Obama not to cave into, you know, what . . .

DS: ... people who paid for his campaign want. The, I want to let you go, but there are a couple of quick questions on this point. There’s a sort of an ad hoc, grassroots coalition put together called A New Way Forward with a web site http://www.anewwayforward.org In their list of proposals, you know, is sort of general themes and there’s good overlap with your proposals, and if I’m correctly informed you’re going to be speaking at one of the events. They are organizing events everywhere on June 10. Is this a good tool to try to enlarge and move forward.

LL: Sure. I’m for anybody trying to, you know, if they can pull it off and attract people to it, that would be fantastic. Becomes a great place for a dialogue, a great place to develop a deeper, broader understanding of how we got here so we don’t forget, and how we, you know, where we want to go in the future. Yeah, that’s a nice formation.

I kind of wish that the larger institutions - environment, labor and others – saw the need to also participate more fully in this kind of thing, but you know, it’s relatively early, so let’s see how it unfolds. I wish them all the best. I’m going to do what I can to support them.

DS: I think you’re absolutely right, and my hope, of course, is that people will go to these teach-ins and organize more of them on June 10 and then reach out to labor unions they are part of and other groups they are part of and create a bigger movement. And there is at http://www.anewwayforward.org a nice little video that people can show at these teach-ins that goes into some of these issues, but I would strongly recommend that between now and June 10th people get copies of The Looting of America by Les Leopold and then discuss it at these teach-ins on June 10.

Let me just ask you about two pieces of legislation before I let you go because I do know of a couple of bills that seem at least tangentially to address what we’re talking about here. We haven’t talked a lot about the Federal Reserve, but, you know, more of, you know, the biggest chunk of this money that has been handed out in these bailouts has gone through the Federal Reserve, and yet Congress isn’t allowed to see what’s happening there, even though it is public money, and so there’s a bill that, at this point has some Democratic support but more Republican support that’s called the Federal Reserve Transparency Act. It has about 180 co-sponsors and, you know, you only need 218 to pass a bill. Is that a good . . .

LL: Look, transparency is obviously a good thing. You know, the American people can’t be in the dark. It’s kind of interesting that you’re saying that, the Republicans obviously think this is a kind of a wedge issue that they can embarrass the Obama administration with. I support it but not, you know, for that reason.

DS: Well, of course.

LL: We need transparency. That’s a good thing.

DS: The other one – there are a number of bills, and the strongest one may be Sen. Bernie Sanders’ bill, but on the question of usury, of, you know, traditions that date back for millennia, of not allowing lenders to lend at exorbitant rates. And Sen. Sanders’ bill would cap the interest rates on credit cards and so forth at 15 percent. Now, I don’t know . . . there may be some argument out there that people can only do good business if they can charge 20 or 30 or 500 percent interest, but I, I don’t grasp that. What do you think of those sorts of . . .

LL: Give it at try. I mean, at this point, it seems to me all the free market arguments, there are dozens of free market arguments I believe that would say why it is that you shouldn’t cap interest rates.

DS: But they were in the past, right? We have tried it and it worked better?

LL: Well, nothing has worked worse than what we just went through.

DS: Yes.

LL: So, I’m for, again, I think the burden of proof goes the other way. I say, “Try it.” The argument is going to be, you know, credit will dry up, etc. I go, “So what?” Credit will dry up, you know, consumer credit, predatory consumer credit will dry up a little bit more.

I’m with Bernie on this when I say, “Give it a shot.” There is a long history. This history is 5,000 years old and then some about how to deal with basically predatory lending, you know, high usury. It’s been an issue for 5,000 years. It’s very, very difficult. Doesn’t seem to go away. So I think it’s a very good period in which to experiment.

You don’t get these opportunities that often. I feel like I’ve been unshackled from sort of an ideological post that had both my arms wrapped around it and tied behind my back. You know, you couldn’t, the free market was, you know, in finance with miracle workers, you know, the people that were making all this money were donating it here and there and were viewed as gods. You know, you’re supposed to, like, you know, worship them. And it turns out that what they were doing was running a high class casino that went bust. And now we can talk about what really went on which is those markets don’t work that way, so if we want to try to put a cap on interest rates, usurious interest rates, let’s give it a shot.

DS: Well, that is a wonderful, optimistic note to end on the account of what does not seem a very optimistic story, and so I think it’s wonderful to see this as a time of hope for more fundamental change. And I think this story is told as well as I’ve seen it anywhere else in the book of our guest.

We’ve been speaking with Les Leopold. The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity and What We Can Do About It from Chelsea Green Publishing and you can get it anywhere online or at your local book stores.

Les, thank you very much for taking so much time with us.

LL: Oh, it’s my pleasure and thank you for all the wonderful work you’re doing. You’re a terrific writer and commentator and I wish you all the best.

DS: Thanks for that.

TAKE ACTION:

Financial Fiasco Teach-Ins on June 10th
How did we get here? What has the government done so far? What should our economy look like?
A New Way Forward is encouraging people to hold "teach ins", video screenings on June 10th! Go here!
http://www.anewwayforward.org/demonstrations
Here's a terrific 35 minute video to download and show at home (or at the public library or other event location).
Read Fantasy Finance and Real Fixes.

Interview transcribed by Linda Swanson.

Fantasy Finance and Real Fixes

davidswanson — Fri, 22 May 2009 12:48:16 -0400

By David Swanson

If you're like me you find it at least a bit disturbing that we're giving trillions of dollars to save the economy to the very people who wrecked it, and more disturbing that we're doing so without any solid basis for expecting to get much of it back and without making fundamental changes to prevent a repetition. But if you're like me, you also aren't 100 percent certain how a credit default swap works with a cubed collateralized debt obligation, much less whether such a monstrosity needs to be eliminated or reformed. What to do?

Well, a coalition of concerned citizens called "A New Way Forward" ( http://anewwayforward.org ) is organizing teach-ins everywhere on June 10th ( http://anewwayforward.org/demonstrations ) and if you don't have people who feel up to the role of teachers, or even if you do, there's a terrific video at that website to download, show, and discuss. Just doing this much will make you more confident in discussing the single largest transfer of wealth any of us have seen, and it will connect you with others who share your concerns as well as your hesitations. There is also a wonderful collection of articles and books available on the right hand side of this page: http://anewwayforward.org/blog

A New Way Forward has digested this information and arrived at three proposals:

"NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function."

I'm inclined to agree with those general ideas, but I've also just read an excellent new book that takes a broader view and offers broader solutions while calling into doubt the idea that the fixes listed above will be sufficient on their own. I recommend adding to any financial shenanigans reading list "The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity, And What We Can Do About It," by Les Leopold. The introduction to this book ends thus:

"And then there's the subprime-mortgage puzzle. The financial media has all but concluded the crash was caused by risky mortgages taken out by poor people and deadbeats who couldn't afford them, and issued by reckless lenders who should have known better. About $1.3 trillion worth of such mortgages are out there. Of that, about $300 billion are in default or nearly so…. Please, can someone explain how that amount (about 2 percent of household net worth, could devastate the world's financial system? To date, the taxpayer has put up about $2 trillion in bank bailouts and loan guarantees. Why didn't that take care of the problem long ago? Like some perverse modern-day miracle of fishes and loaves, how did $300 billion of bad debt multiply into trillions of dollars in financial toxic waste? Poor people did all that? In this book I go after these questions -- and I hope the answers will tell us a good deal about our economic woes and what to do about them. At the very least, I hope to contribute modestly to our collective financial literacy. In short, if I can understand this crap, so can you."

And you really can and it's really worth doing. The bulk of "The Looting of America" is devoted to the explanation of what's happened. And the root cause turns out not to be deregulation or oversized banks or a lack of accountability for fools and crooks, although all of those things helped. The tragic flaw in the system turns out to be the now-thirty-year-old divergence of productivity and income, the denial of a steady share of our own earnings to working people, the gradual transfer of great sums from the rest of us to a very small group of extremely wealthy people. Of course, such a transfer of wealth might seem offensive, but how could it actually cause the situation in which we needed to transfer another huge pile of wealth to the same people through our government? Well, essentially we created a situation in which investors couldn't find anything in the real economy to invest in anymore. All the real stuff was already invested in. Had someone created a way to invest in new industries, infrastructure, green energy, and mass transit, we might all be smiling about it now. Instead, investors figured out ways to invest in fantasies, to make bad investments look good, and to gamble other people's money on the fate of yet other people's investments without investing in anything real at all.

Credit: http://www.dilbert.com

So, when Leopold comes to his recommendations at the very end of the book, some of them may sound familiar and others harebrained, unless you've read the preceding chapters, in which case they all sound sensible or newly strengthened. The recommendations include (in a list I've created by pulling ideas out of the text):
1-Financial disaster insurance: we should collect premiums (or taxes) from all financial transactions to sure up the real economy against the next collapse of the fantasy one by investing in infrastructure and all the useful real investments that those with too much money on their hands don't always manage to find or create on their own.
2-Without expecting that we can prevent the next bubble and burst, we should attempt to lessen it by establishing a Financial Product Safety Commission that would ban dangerous financial "products" like collateralized debt obligations. Any product too difficult for skilled regulators to comprehend would be banned for that reason alone.
3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage.

Another central concern for many worried about our financial fate is the role played by the Federal Reserve, which someone rightly remarked is no more federal than Federal Express. It's a private company running our financial policies and inventing and distributing money. Not only does the Constitution place such powers in Congress, but the Congress is currently not even permitted to know what the Fed is up to. It would be, however, if H.R. 1207, the Federal Reserve Transparency Act of 2009, were to pass the House of Representatives and an unprecedented avalanche of public pressure force the Senate to miraculously go along. The House bill has 179 cosponsors plus one sponsor. That's almost unheard of. No bill has that many cosponsors. It only takes 218 votes to pass. So, if we could get 38 more cosponsors we'd be getting somewhere. Here's a page on which to take action:
http://action.firedoglake.com/page/s/Fed1207

(And, by the way, applause to my congressman Tom Perriello who has signed onto this -- the second thing he's ever done that I applauded.)

There's also a particular regulation that ought to be enforceable and in fact used to be enforced fairly well, that would limit the ability of the non-working class to rip the rest of us off. I'm talking about a ban on usury. There are bills in both houses of congress to limit the interest that creditors can charge. Senator Bernie Sanders' bill (S. 582) would limit interest to 15 percent. Even those who believe we would all perish if billionaires had to fly on the same airplanes as other people and couldn't purchase that third yacht might support the idea of limiting the interest on their own credit cards to 15 percent. Surely the masters of the universe can make a dishonest living at 15 percent the same as at 22 percent or 400 percent, right? Now would be a good time to call your senator and representatives.

The Great Conflation

Bob Fertik — Fri, 24 Apr 2009 12:49:24 -0400

Atrios nails it as always:

I really do hope that Larry and Timmeh get that turning the machines back on and returning to a world where massive amounts of cheap credit are available regardless of ability to repay is actually a bad idea.

And this idea that banks just need to lend more... to whom? For what?

The whole massive bailout program was sold to the American people on the idea that there was an unprecedented and catastrophic "credit freeze." That was narrowly defined as banks refusing to lend to each other because they didn't believe each other's balance sheets and didn't think they would get their money back. And that problem was described as mestastasizing outward to denial of credit to creditworthy businesses who couldn't get short-term loans to make payroll or ship goods, thus bringing the real economy to a screeching halt.

And for a few months after the collapse of Lehman Brothers last September 16, there was in fact a "credit freeze" that could be measured in terms of LIBOR rates and LIBOR-OIS spreads and other arcane measurements that only Atrios and CalculatedRisk understand (see graphs below from FinancialStability.gov).

But over time that "credit freeze" actually thawed according to those same measures. CalculatedRisk used to update them daily, but now those updates are becoming as rare as Black Swans.

So we no longer have a "credit freeze." What we have instead is a pullback in risky lending to both businesses and consumers who aren't creditworthy enough for lenders who have naturally - and rightly - become more conservative in their lending standards.

So the "credit freeze" is over and we are now in an entirely different "credit pullback." But you'll never hear Tim Geithner, Ben Bernancke, or President Obama say those words. Why? Because of what Atrios says: they want to "turn[] the machines back on and return[] to a world where massive amounts of cheap credit are available regardless of ability to repay."

The deliberate confusion of two entirely different issues - credit freeze and credit pullback - could be called the Great Conflation.

And it's a terrible strategy that needs to stop now or the economic crisis will continue at infinite cost forever.

Update 1: Here's the data. I think the LIBOR x-axis labels are off by a year. The LIBOR-OIS spread shows the "credit freeze" pretty much ended at the start of 2009.

LIBOR Rates

The London Interbank Offered Rate (LIBOR) is an indicative interbank borrowing and lending rate. It provides a measure of the cost of dollar-based credit.

LIBOR-OIS Spreads

Another indicator of funding market pressure is the difference between LIBOR and Overnight Index Swaps (OIS). The difference between these two rates is an indicator of counterparty credit risk and liquidity pressures, with a lower spread suggesting diminished concerns about credit risk.

Politicized Accounting: No End to the Scams

dlindorff — Tue, 07 Apr 2009 11:55:46 -0400

By Dave Lindorff

The accounting profession might seem like the last place that you’d
find serious political hanky-panky going on, and it’s probably not on
very many people’s A-list of fun subjects to read about, but the
Financial Accounting Standards Board, a quasi-governmental body that
has statutory authority to regulate and establish the rules by which
public companies, including banks, do their books, has just caved in to
pressure from those banks and from the large number of members of
Congress who pocket huge piles of campaign swag and perks from those
banks and other public companies, and gravely undermined the integrity
of corporate balance sheets.

This may sound incredibly arcane, but what the FASB has done is
declare that assets held by companies (including banks) on their books
will no longer have to be valued at their current market value. Under
new guidelines, effective retroactively to March 15, these assets can
now be valued at what the corporate managers think (or pretend to
think) they will be worth at some time in the future when they might
try to sell them.

Think about it for a minute. Say you own a house, which you might
have bought 10 years ago for $200,000, using a $180,000 mortgage.
Today, depending on where you live in the country, that house might be
worth as little as $100,000. If you still owe $100,000 on your
mortgage, that would give you a net worth of 0 (a lot more than what
Citibank and Bank of America are worth today). Now let’s say you want
to go out and buy a $20,000 car on credit. The auto dealer, before
extending you a car loan, will want to know what your net worth is.
Under market-to-market accounting rules, you would have to say that
your net worth is 0, and you probably wouldn’t get a loan—especially if
your employment, like that of many Americans, is iffy, and you’re
carrying a big balance on your credit cards. But under the new FASB
guidelines, if you were to be treated like a bank, you could estimate
the value of your house as $200,000 (the price you paid for it), or
perhaps even $250,000 (the price you “expect” it to get when you decide
to sell it). You have no real way of knowing whether your house will
ever return to being worth $200,000. For all you know, it could fall
further over the next five years to $75,000 or $50,000, but that
doesn’t matter. You, the owner, are saying that your “reasonable
expectation” is that this asset of yours is “worth” $200,000. And
bingo, thanks to the magic of modern FASB-approved accounting, your net
worth, instead of being 0, is now $100,000. You can buy your car.

This is what the FASB is now saying banks and other companies can do.

If you are an investor, or a potential investor, you now have to be
very wary. After all, how are you top establish what a company is
really worth, if the management is able to play games with the value of
its assets? The answer is you really can’t know. Things get much worse
when it comes specifically to banks, which after all, are all about the
assets.

Remember those “toxic” assets—the alphabet soup of debt products
with initials like CDO, CDS, SIV, all composed of diced and sliced debt
that for the most part is close to worthless? Well, thanks to the
FASB’s accommodating change in the rules, instead of valuing those debt
holdings (remember, loans are assets to a bank) at what they are worth
on the market today, the banks are now able to value them at what they
supposedly think they will be worth at some future date when the bank
might want to sell them. This is a wholly fictional figure, of course.
Nobody knows what, if anything, these crap debt instruments are going
to be worth, but it’s a fair bet that most of them won’t be worth any
more a decade hence than they are worth today (and maybe less). But who
cares? The important thing is that now the banks, who have huge black
holes in their balance sheets, can now fill those holes with
artificially inflated assets and make themselves look a whole lot
better financially than they really are.

There’s an irony here. The big banks that hold most of the toxic
debt (and especially the five largest banks that hold 96% of the
garbage) desperately wanted this FASB rule change because they wanted
to prettify their balance sheet in hopes of boosting their share values
and of maintaining the pretense that they are not zombies. But in doing
this, they are undermining a key goal of the Obama administration and
of Treasury Secretary Tim Geithner and Federal Reserve Chair Ben
Bernanke, who wanted to have the government and private investors start
buying those trillions of dollars’ worth of toxic assets off of the
banks’ hands.

Remember, if the banks declare that the toxic assets on their books
are worth some fictitious amount, they have to sell them at that price,
or stand accused of faking their books, i.e. fraud. But investors, like
hedge funds and other institutional investors, are not going to want to
buy those assets at anything but distressed bargain-basement prices,
because even with the government assuming 92 percent of the risk, they
are not going to buy these trash assets unless they see the chance for
a significant upside.

So with the new rule, the banks will end up being stuck holding the
very toxic assets that have sent them into a tailspin in the first
place.

The vote to end market-to-market accounting rules was controversial
even on the five-member FASB board, which ended up narrowly voting 3-2
in favor of the measure. One member who voted against the change,
Thomas Linsmeier, decried what he said was “pressure” on the board to
act. A House committee had threatened to introduce legislation that
would force the change if the FASB didn’t act on its own.

The US budget has long been a work of fiction. Now the books of the
nation’s banks and of many of its public companies will also be pure
works of fiction.

As columnist Jonathan Weil wrote in Bloomberg.com last month as the
FASB was considering making this change in its rules, “The FASB ought
to change its name to the Fraudulent Accounting Standards Board.”

The road to ruin, it turns out, is not paved with good intentions
after all. It is paved by powerful lobbyists buying short-term benefits
at the public’s expense.

By the way, if you think Citigroup is solvent, I have a great deal on a house for you.
________________________

DAVE LINDORFF is a journalist based in Philadelphia. His latest
book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work
is available at www.thiscantbehappening.net