Wednesday, August 10, 2011

Deficits Schmeficits - Economic Illiterates: What Happened to "Forgotten" Toxic Assets Still On Everybody's Books? And What About The Public Interest?

Rather than being a left-right split, this is a top-bottom split. There is a bipartisan consensus among the elites that these programs should be cut. The guiding philosophy of this drive is that public money that goes to programs for middle-income and poor people is money that could be in the pockets of the wealthy. For this reason, Social Security, Medicare and Medicaid are an offense to their sensibilities. They are programs that help ordinary working people, not the rich, therefore these programs conflict directly with their philosophy of government.*
I grow so tired of hearing about investors' and the bond market's importance to international well being. As if these concepts (yes, responsible historically for vast wealth building - of the have mores) haven't been revealed in all their gloriousness now as somewhat easily manipulated gauges of wealth creation but not particularly decent civilization creators. After all, 15th century Florence was overwhelmingly lavishly endowed for the De' Medici - and other banking interests - (leading to many assassination attempts against them) and paid for by the surrounding slums and serfs forced to support it. In the modern world we are supposedly concerned at our high level of knowledge and aesthetics with building decent countries and protecting the public's interest (from thieves and others who would abuse the trust given to those temporarily in charge). We are left today aren't we wondering about all those people who had worked hard to build these lovely international villages for their descendants and themselves, who were not living at the top of the mountains in the golden palaces, but who instead did the work that helped construct the edifice? Are we today in the 21st century or the 15th (or 16th or 17th)? Has there really been no progress in determining how to run countries to benefit most if not all of the citizenry? As Shakespeare said, "Must give us pause." And yes, Elizabeth Warren and Sheila Bair (the only people left with any integrity or concern for the American lower classes in the administration) have been jettisoned by our Obie. AND GEITHNER STAYS!!!!!!!!! AAAARRRGGGHHHH!!! Welcome to the Monkey House! Capitulation, Not Compromise, Led to a Debt Deal
Paul Krugman, Krugman & Co.

President Barack Obama signed an agreement on August 2 that raised the United States’ debt ceiling. (Photo: Philip Scott Andrews / The New York Times)

What would I have done?

That’s the question President Obama’s kinda-sorta defenders keep asking; it’s supposed to be a conversation-stopper.

But the answer is clear: I would have made a statement declaring that giving in to this kind of blackmail would constitute a violation of my oath of office, and that my lawyers, on careful reflection, have determined that there are several legal options that allow me to ignore this extortionate demand.

Now, the Obama people say that this wasn’t actually an option.

Well, I hate to say this, but I don’t believe them.

Think about the history here; think about all the misjudgments, all the reasons this administration has come up with not to act — not to act against the bankers, not to act on taxes, and down the line.

Think of the colossal misjudgment over Republican intentions on debt. Why, at this point, should anyone trust these people when they say that they did all they could?

It’s much, much too late for Mr. Obama and company to say, “Trust us, we know what we’re doing.”

My reservoir of trust is now completely drained. And I know I’m not alone.

Very Serious Suckers

Jonathan Chait at The New Republic wrote an excellent online article documenting the way in which what he calls the establishment, and I call Very Serious People, misjudged the way the debt ceiling thing would play out: “The failure to understand the crisis we were entering was widely shared among centrist types. When Republicans first proposed tying a debt ceiling hike to a measure to reduce the deficit, President Obama instead proposed a traditional, clean debt ceiling hike,” Mr. Chait wrote July 29. “He found this position politically untenable for many reasons, one of them being that deficit scolds insisted that using the debt ceiling to force a fiscal adjustment was a terrific idea, and that connecting the deficit debate to a potentially cataclysmic financial event was the mark of seriousness.”

Mr. Chait then goes on to show how the usual suspects — The Washington Post’s editorial page, the Committee for a Responsible Federal Budget, the Concord Coalition, etc. welcomed a crisis over the debt ceiling in the belief that it would lead to fiscal goodness.

This was terrible policy, even if it had worked: now is not the time for fiscal austerity, and the way the Very Serious People have shifted the whole conversation away from jobs and toward deficits is a major reason we’re stuck in the Lesser Depression.

But it also showed awesome political naïveté.

As Mr. Chait said in his article, the first thing you need to understand is that modern Republicans don’t care about deficits. They only pretend to care when they believe that deficit hawkery can be used to dismantle social programs; as soon as the conversation turns to taxes, or anything else that would require them and their friends to make even the smallest sacrifice, deficits don’t matter at all.

(Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including The Return of Depression Economics (2008) and The Conscience of a Liberal (2007).)

The Economic Illiterates Step Up the Attack on Social Security and Medicare* Dean Baker

Standard and Poor’s downgrade of U.S. debt should be seen as the joke it is. The rating agency, which gave investment grade ratings to hundreds of billions of dollars of subprime mortgage backed securities, made an accounting error of $2 trillion in doing its assessment of the U.S. financial situation. However, when this error was called to S&P’s attention, it still went ahead with the downgrade. Just like the war in Iraq, the policy was decided in advance of the evidence.

The nonsense with the S&P downgrade is yet another distraction – after 4 months of haggling over the debt ceiling idiocy – from the real problem facing the country: a downturn that has left 25 million people unemployed, underemployed, or out of the labor force altogether. Tens of millions of people are seeing their career hopes and family lives wrecked by the prospect of long-term unemployment.

The incredible part of this story is that the people who are responsible are all doing just fine, and most of them are still making policy. Furthermore, they are using their own incompetence as a weapon to argue that we have to take even more money from the poor and middle class, this time in the form of Social Security, Medicare and Medicaid benefits.

The basic story is that the economy needs demand. The housing bubble generated more than $1.4 trillion in annual demand through the construction and consumption that it spurred. Now that this demand is gone, there is nothing to replace it. President Obama’s stimulus was replaced some of the lost demand, but it was nowhere near large enough. We tried to fill a $1.4 trillion hole in annual demand with around $300 billion in annual stimulus in 2009 and 2010. In 2011, most of this boost has been exhausted and the economy is coming to a near standstill.

If we had serious people in Washington, they would be talking about jobs programs, about rebuilding the infrastructure, about work sharing, and any other measure that could get people back to work quickly. However, instead of talking about ways to re-employ people, the fixation in Washington is reducing the deficit.

This concern with the deficit is absurd on its face (if the markets were panicked about the deficit, the U.S. government would not be able to issue long-term debt at less than 3.0 percent interest), but it has the backing of powerful forces. Wall Street investment banker Peter Peterson is doing a full-court press, paying any budget analyst he can find to say how terrible the deficit problem is. The Washington Post and National Public Radio are also doing the full-court press, abandoning any pretext of objectivity as they highlight all the deficit news all the timeusing a healthy dose of Peterson-funded experts to make the case.

The real goal of this hysteria is the dismantling, or at least scaling back, of the core social programs that working people depend upon: Social Security, Medicare and Medicaid. It is important to realize that this is not a traditional left-right battle. Polls consistently show that people across the political spectrum overwhelmingly support these programs and do not want to see them cut. Even the vast majority of Tea Party Republicans support these programs [CNN poll].

Rather than being a left-right split, this is a top-bottom split. There is a bipartisan consensus among the elites that these programs should be cut. The guiding philosophy of this drive is that public money that goes to programs for middle-income and poor people is money that could be in the pockets of the wealthy. For this reason, Social Security, Medicare and Medicaid are an offense to their sensibilities. They are programs that help ordinary working people, not the rich, therefore these programs conflict directly with their philosophy of government.

The remarkable part of this story is that elites are effectively using their incompetence in managing the economy as the core of their argument for cutting these social programs. After all, no one was talking about cutting these programs until the deficit exploded and the reason the deficit exploded was that the collapse of the housing bubble wrecked the economy.

If these elites had a clue about the economy, they never would have allowed the bubble to grow to such dangerous levels. The economy would not have collapsed, the deficit would be manageable and no one would be discussing cuts to Social Security and the other programs.

In other lines of work, incompetence on the job gets you fired. In policymaking in Washington, incompetence means more responsibility and power. Now that London's in flames, what can we do to take the U.S. public's attention off of their impending poverty? (Time to invade Iran? Syria? Lebanon?)

It's Time To Put the Euro Out of Its Misery

Mike Whitney August 08, 2011 We all know the drill. Bond yields start to spike in one of the smaller countries in the EU, and before you know it, the bigger countries are called in to bail them out. We've seen the same rerun over and over again. This time, Italy and Spain are in the crosshairs. Jittery investors have fled their bond markets for the safety of German Bund, US Treasuries and precious metals. The selloff has sent Italian bond yields into the stratosphere making it more expensive for the government to fund its operations. So, the debts and deficits get bigger and the downward spiral begins. Same old, same old. That's why the ECB called an emergency meeting of the EU's Governing Council on Sunday to cobble together another 11th hour bailout before the markets opened on Monday. If they had ignored the problem, it would have been Lehman Brothers all over again; plunging stock markets, panicky bank runs, and a full-blown global financial crisis. Here's a summary from Bloomberg: "European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis. Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 at 10:30 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday. With governments failing to act swiftly enough to stop contagion fromGreece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move." (Bloomberg) Okay, so Italy's bond market get's a breather, but for how long? After all, investors aren't stupid. They know that Italy has the 3rd biggest bond market in the world ($2.6 trillion) and that if ECB chief Jean Claude Trichet is serious about bailing them out, he'll have to convince the other members to triple the size of the emergency fund. (The European Financial Stability Facility currently holds 440 euros) That has no chance of flying in Germany, where the vastly unpopular bailouts have already ravaged Chancellor Angela Merkel's Christian Democrats and changed the political landscape altogether. So, whether this action calms the markets or not, it may not matter, because the monetary union is headed for a crackup anyway. Here's a clip from an article in Nasdaq that helps to explain: "Germany's government thinks Italy is too big for Europe's rescue fund to save, Der Spiegel magazine reports in a preview of an article to be published Monday. The government doubts whether even tripling the size of the rescue fund, known as the European Financial Stability Facility, would enable it to save Italy because the country's financing needs are so enormous, the magazine reports without naming the source of its information. European Commission President Jose Manuel Barroso this week suggested increasing the size of the EFSF, which currently has a planned lending capacity of EUR440 billion ($622.9 billion), to help stem Europe's worsening debt crisis. German government finance experts believe euro-zone states couldn't guarantee Italy'sEUR1.8 trillion of sovereign debt without markets considering Germany to be overstretched, Der Spiegel reports. Germany's government therefore insists that Italy push through savings and reforms to help it exit the crisis, the magazine reports. It thinks the EFSF should only be used to rescue small and mid-size countries, the magazine reports." ("German Government Thinks Italy Too Big For EFSF To Save -Spiegel", Nasdaq) So, yes, Germany is going through the motions and trying to sooth the markets, but, behind the scenes, policymakers think it's futile. The European Financial Stability Facility (EFSF) would have to be increased by more than $1.5 trillion and, even then, there would be no guarantees that the weaker members would comply with the deficit guidelines or grow their way out of their ECB-imposed slump. So, what's the point? Either all 17 members sacrifice some of their own sovereignty and form a stronger fiscal union or they abandon the euro project altogether. But what does a "stronger fiscal union" really mean? More power to the unelected, self-serving gangsters at the ECB? No thanks. The best way forward is to jettison the euro and start from scratch. However painful and disruptive that may be, the alternative is infinitely worse. Just look at the way the financial crises have been handled. In every case, the interests of the bankers and bondholders have taken precedent over the interests of the people. And, in every case, the working people have been expected to bear the brunt of the losses in terms of austerity measures. That's led to the shredding of the social safety net, higher unemployment, and privatizing of public assets. Why? Because policy is dictated by the ECB, and the ECB's primary duty is to make sure the banks don't lose money. Here's how the Financial Times sums it up: "Italy can afford to ignore rising bond yields for months. Europe’s banks cannot wait. Worries about the banks, measured by the gap between euro forward rate agreements and overnight indexed swaps, are now worse than at the height of last year’s panic over Greece. Eurozone bank shares were last this low in April 2009, just after the market bottomed." ("Dr Trichet’s medicine leaves bitter after-taste", Financial Times) So, Trichet's bond purchasing program is not really about Italy at all. It's just another bank bailout. And the reason the banks need another bailout is because they're going to lose tons of money on the dodgy bonds they bought during the bubble years. This is from The Independent: "The problem is that all the European banks have lent huge amounts of money to each other – Italy has lent Spain $31bn, Germany has lent $238bn to Spain and Italy has borrowed $511bn from France. The worry is that it is like a pack of cards – once one goes they will all fall. And the banks are scared that if political leaders agree a new package many of them will be forced to take losses on their loans." ("Worried about the worldwide crisis? Our experts explain what's going on", The Independent) This just confirms what we've been saying from the very beginning, that it's all about the banks. If bond prices fall too sharply, so what? The countries effected have to restructure their debts, that's all. Sure, it's a painful process, but it's not the end of the world. In contrast, it WOULD be the end of the world for a lot of the banks, because they don't have enough capital. That's why the ECB is intervening, so it can artificially prop up bond prices. It's basically a subsidy to the banks that's paid for by the taxpayer. Can you recall a time when the ECB or the Fed ever did the same for ordinary working people? Like with housing? No way. The average homeowner took it in the shorts for $8 trillion when the housing bubble burst wiping out most of his savings and leaving the economy high-and-dry. Only the banks get favors.Bold If they win, they keep the profits. And if they lose, they get a bailout. And, of course, all of this has terrible consequences for the real economy because diverting capital to failing financial institutions constricts growth and prolongs the slowdown. It's no coincidence that the massive bank bailouts have been accompanied by belt-tightening measures that have pushed the broader economy to the brink of another recession. Propping up toxic assets is a costly business that results in chronic high unemployment, flagging demand, and slow growth. Just look at the data. This is from an article in The Economist: "Concerns over bank funding are on the rise, as European banks in particular find it difficult to get hold of short-term funding. Analysts are keeping a close eye on the Euribor-OIS spread, which, in effect, measures how nervous European banks are about lending money to each other: that gauge is widening again. The amount of cash that euro-area banks deposited with the European Central Bank (which means, of course, that it is not being lent out to other banks) hit a six-month high this week. Across the Atlantic, investors withdrew $66 billion from money-market funds in the week ending August 3rd, according to data from Lipper, a research firm. That is the second-largest net outflow on funds are pushing down hard on maturities. One European bank boss said privately this week that he had never seen risk aversion this intense. In response the ECB announced yesterday that it was reintroducing six-month unlimited funding to banks that wanted it, up from three-month loans currently." ("High Anxiety", The Economist) Get the picture? The money-grubbing activities of the banks have put us all in harm's way again. The whole worm-infested financial apparatus is beginning to shimmy and shake just like 2008. The banks are hoarding cash overnight at the ECB, investors are pulling their money out of the money markets, the gauges of market stress are blinking red, and interbank lending is starting to sputter. If liquidity freezes up; it's Game Over. The EU financial system will grind to a halt and the global economy will go into freefall. That's why Trichet stepped in despite objections from German members of the ECB's governing council. It was the only chance he had of heading off another catastrophe. But what does that say about the state of democracy in the eurozone? Do people really want the landsharks at the Central Bank dictating economic policy? Not likely. So, is the euro really worth saving? We'll let economist Mark Weisbrot answer that question: "It appears that much of the European left does not understand the right-wing nature of the institutions, authorities, and especially macroeconomic policies that they are facing in the Eurozone..... The problem is that the monetary union, unlike the EU itself, is an unambiguously right-wing project. If this has not been clear from its inception, it should be painfully clear now, as the weaker Euro-zone economies are being subjected to punishment that had previously been reserved for low- and middle-income countries caught in the grip of the International Monetary Fund (IMF) and its G-7 governors. Instead of trying to get out of recession through fiscal and/or monetary stimulus, as most of the world’s governments did in 2009, these governments are being forced to do the opposite, at enormous social cost. The insults added to injury, as with the privatizations in Greece or “labor market reform” in Spain; the regressive effects of the measures taken on the distribution of income and wealth; and the shrinking and weakening of the welfare state, while banks are bailed out at taxpayer expense – all this advertises the clear right-wing agenda of the European authorities, as well as their attempt to take advantage of the crisis to institute right-wing political changes." ("Why the Euro is Not Worth Saving", Mark Weisbrot, CEPR) Repeat: "...the monetary union.... is an unambiguously right-wing project." Amen, to that. It's time to put the euro out of its misery and start over.
And you thought the dollar had problems. ____________________


Tom Harper said...

Elizabeth Warren had to go. She might have made a difference. Obama could have found a way to appoint here if he wanted to. Instead, he was "Oh, gosh, I wanted to put her in charge but those mean Republicans wouldn't let me."

Suzan said...

Don't worry too much about Obie, Tom, as he'll give in to the 'thugs quickly every time (and they make bets on how quickly, which Boehner collects on, once again, on the floor of the Senate) as he doesn't want to get hurt.

But he will.

Cause that's what bullies do, and cowards never figure it out, do they?


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