About 6 months ago, I started warning about the potential for a really bad electoral cycle for the Democrats in the 2010 midterms. I feared that by not taking the big banks on more aggressively, not doing more to create jobs in a really bad economic period for job creation, and letting the health care bill drag on and get too compromised in terms of taking on the insurance industry, that Democrats would be badly hurting ourselves with both our base voter turnout and with swing working class voters getting hammered in this economy. A lot of the Democratic establishment said folks like me were over-hyping, that while it wouldn't be an easy year, there were all kinds of reasons to think it wouldn't be so bad. To my great chagrin, my predictions were proved right with a vengeance in the first three big elections of this cycle in NJ, VA, and MA: base vote turnout was terrible, and working class swing voters turned dramatically against us. Now, the conventional wisdom has turned and just about everybody in the Democratic party is in full scale doomsday mode.
That's why I was so heartened to see David Plouffe's well reasoned analysis piece in the Washington Post on Sunday, laying out a strategy on how the Democrats can survive 2010 without getting slaughtered. Because what is needed now in the Democratic party is that kind of calm, steady thinking. As worried as I have been now for these last 6 months, I am equally convinced that if we do the right things politically and policy-wise (the two are in sync), we can surprise people in the 2010 elections and do a lot better than the pundits and the panickers think.
The reason I believe this is that I have been involved in several elections where good things happened against all the predictions of the conventional wisdom. Let me take you back to some elections in the past where Democrats came back when things looked really dark for them:
The Treasury Department claimed earlier today that the latest scandal surrounding Tim Geithner's sweetheart deals to AIG doesn't matter, because AIG is on track to pay back the loan. Even if it were true, that response is still highly offensive, because it assumes that a few billion dollars of Fed money--rather than, say, a crashed economy and government collusion to protect the people who crashed the economy--is all that made people upset about the bailouts.
But what's more, the Treasury Department's claim that AIG will pay back the full loan is completely false. The New York Fed forgave $25 billion of the loan to take an ownership stake in AIG that meant no actual control. From a letter Representative Alan Grayson sent to Ben Bernanke:
The New York Fed's entire loan was $25 billion. On top of low interest payments, no limits on executive pay, and other sweetheart deals, the New York Fed allowed AIG to be forgiven for 30% of the entire loan for utterly meaningless concessions in return. So, even though the Treasury Department's response to the latest scandal would have been offensive even if it were true, it isn't true at all.
Oh, and here are some more results of Geithner's decision to allow AIG to regulate itself. Most of the bonuses AIG execs promised to give back in order to avoid legislative action were not actually given back (hat-tip reader JD):
When word spread earlier this year that American International Group had paid more than $165 million in retention bonuses at the division that had precipitated the company's downfall, outrage erupted, with employees getting death threats and President Obama urging that every legal avenue be pursued to block the payments.
New York Attorney General Andrew M. Cuomo threatened to publicize the recipients' names, prompting executives at AIG Financial Products to hastily agree to return about $45 million in bonuses by the end of the year.
But as the final days of 2009 tick away, a majority of that money remains unpaid. Only about $19 million has been given back, according to a report by the special inspector general for the government's bailout program.
I am angry about this not just as someone who finds the policies involved abhorrent, and not just as someone who has taken a really big hit because of the Great Recession. I am pissed about all of this as a Democrat. Watching the Obama administration and center-right Democrats in Congress continue to collude with the financial services industry is sickening (even apart from the bailout, check out the outcomes of the mortgage reform, student loan reform, and financial regulation fights). They are pissing away our generational opportunity to really help people, and seriously imperiling the Democratic Party at the ballot box in the process.
As Natasha reminded me earlier today, we worked as hard as we could to put these people in charge, and these are the results we are getting. It turns my stomach. What a waste.
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer's payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008.
That is bad enough. The Treasury Department's offensive response to these revelations shows just how clueless and pro-Wall Street they actually are (emphasis mine):
The Treasury's response this morning is, essentially, no harm no foul. Meg Reilly, a Treasury spokeswoman, released a statement: "In the transaction at the heart of this dispute... the FRBNY made a loan of $25 billion which is on track to be paid back in full with interest so that taxpayers will be made whole. Somehow that fact that the government's loan is 'above water' gets lost in all the consternation despite its mention on page 2 of the SIG-TARP report (and weekly updates on the FRBNY's web site."
Here is my response to this response, which is hardly the first of its kind around the nation: fuck you. Made whole? Seriously, fuck you. And then fuck you again.
Geithner and the Treasury Department seem to think that the only thing Americans care about in this deal is that AIG pays back their loans. What they care about is that the economy was crashed by people like AIG. What they care about is that these fuckers are not only not being punished for fucking millions of people, but that they are getting deals from the federal government that preserve their bonuses and offer them interest rates no individual American could ever receive.
Tens of millions of Americans are facing crushing debt payments because interest rates on the loans they received are so high. They are losing their jobs. They are losing their homes. They would love to get the kind of help that people like AIG got. Loans with little or no interest would be fantastic. Loans like that could actually be repaid by Americans facing crippling mortgage, college, credit card and other debts.
However, the only people getting deals with loans large enough, and at low enough interest rates, and with direct-possibly illegal--assistance from the government, are the same fuckers who crashed the economy. Those people are being helped by the government. Everyone else is still suffering. It reeks of an unholy alliance between big business and big government designed to frock over everyone else.
Made whole? Fuck you. You just don't fucking get it at all.
A couple of items in the financial sector, but both can be summarized in these words: the powerful and greedy continue to run things with impunity in the financial world.
First there's the news that Goldman Sachs is making record bonus payments for the first half of the year. Let me repeat that: RECORD bonus payments. Bigger than 2004 or 2005 or 2006 or 2007. Bigger than at the height of the bubble. In spite of all the toxic assets they have created. In spite of all the government bailout help. In spite of all the stunning damage to the American and world economy. In spite of all of that (or maybe because of some of it), for the very, very short term, the company has good profit numbers. Ergo post hoc, they are giving out really awesome bonuses to their big enchiladas.
Then, there is the massively infuriating article entitled "Treasury's Got Bill Gross on Speed Dial". It seems that Bill Gross is extremely happy these days. Everybody in government seems to hang on his every word. The plan that he helped develop, the Public-Private Investment Program (the PPIP for short), which would coincidentally make him billions of dollars, is being pushed by Tim Geithner.
Read these two articles back to back; and if you are not sputtering with rage at the end, you must truly be the most pro-corporate libertarian around.
Hey, I know it takes a heck of all ill wind not to blow somebody some good. And I knew that when the Summers-Geithner policy of resuscitation of the financial system rather than restructuring it was adapted, that lots of people would make money off the deal. But reading these two articles really does make you wonder who won the election, and how these greedy folks can get away with doing whatever they want.
Check out this absolutely terrific post by Drew Westen, one I had really wished I had written because it's so on target. I want President Obama to succeed more than I've ever wanted anything politically, but it's not going to happen unless he (a) wrenches the control of the economy away from the greedy, and (b) confronts the greedy directly. You have to decide which side you are on, Mr. President: the struggling tens of millions barely hanging on, or not hanging on at all, in this dreadful economy. Or the greedy bankers and health insurance executives. I trust that you have good values and instincts, and I want to be on your side in these fights. I appreciate the good things you've done so far on the stimulus, the budget, health care, the environment. But at some point, you are going to have to confront the greedy, or you are not going to inspire and you are not going to win.
Fight the good fight, Mr. President, and there will be tens of millions of us who will fight it with you. Avoid these fights, and your Presidency will be adrift, with neither set of allies fighting for you or big legislative victories.
A New Way Forward is doing nationwide video and town hall discussions of the banking issue and overall economic picture the entire week. Tomorrow morning I'll be speaking ona panel on the same topic, with the esteemed Simon Johnson, Nancy Cleeland, and John Taylor. It's at 9 AM in the Rayburn House Office Building, near the Capitol South metro. You can RSVP here and stop by for a good discussion of the overall picture and what we can do about it.
A New Way Forward is hosting a live webstream of a discussion on the banking issue and overall economic picture tonight at 7 PM EST, in NYC, with Leo Hindery, Les Leopold, and Alice Kessler-Harris You can watch by clicking here.
Other events webcasted this week are:
San Francisco, 6/10 at 6:30 PM PST with Ernesto Dal Bo, Doug Rucskoff, Donald Goldmacher at Mechanic Library
New York City, 6/10 at 7 PM EST video screening with Danny Shechter, New Roosevelt Institute, Working Families Party at Le Poisson Rouge
Washington DC, 6/11 at 9 AM EST with Simon Johnson, John Taylor, Nancy Cleeland, and me
As many of you know, I have been involved in getting A New Way Forward off the ground and working to re-organize the banking system. They are kicking off a series of forums and town hall meetings next week for Americans to learn about the crisis and get involved in making the system more decentralized and progressive. The first is Monday, June 8th at 7 PM EST in NYC with my friend Leo Hindery, Les Leopold, and Alice Kessler-Harris. It's at The Tank in NYC, a great non-profit performing arts space where I have one of my most fun and interesting book events, and I'll post the video here. You should go if you are in the city.
If you're in DC, on Thursday June 11th at 9 AM, I'll be doing my part at a discussion right at the heart of it, on Capitol Hill at the Rayburn House Office Building (the Gold Room, Room 2168A). Joining me will be Simon Johnson, Nancy Cleeland, and John Taylor. RSVP here.
You can also organize your own video screening or town hall meeting with their help. On a problem this big, with the banking lobby probably the most powerful in the country, we're only going to make progress if we generate momentum everywhere.
Tim Geithner's "Buy America" tour of China was always more or less a joke, but the "bankers' best friend" almost avoided getting laughed off the stage (mainly because of the legendary Chinese deference to visitors) until a student at China's top university asked Geithner about the safety of Chinese assets in the United States.
In response to a question after his speech, Mr Geithner told the student audience that "Chinese assets are very safe", drawing loud laughter from his student audience.
But how did Geithner summarize his adventures in China for American reporters?
"What I sense is a fair amount of confidence, not just in the basic underlying strength and resilience of the U.S. economy, its dynamism, but in our capacity not just to solve this crisis, get growth back on track, but to go back to living within our means," Geithner said.
Harharharhar!!!
And even while China's student elite was laughing down Geithner and his pitiful currency, the official attitude was much grimmer...
Though opinion is divided sharply over the necessity to buy more US treasury bonds, few Chinese would think that the country's vast holdings of US financial assets are secure as long as the dollar's long-term value is in doubt.
A cartoon in the same issue of China Daily is even bleaker... for us.
Snooze on, America!
You won't like what you see, when you finally wake up.
Most of us who have been working on the banking issue from the restructuring side of things (meaning put the big banks into receivership and break them up into smaller components that are no longer too big to fail), including people I know far closer to the administration's economic team than I am, have come to the conclusion that the administration's policy regarding the big Wall Street financial institutions is fairly set for the time being. There are a variety of reasons Obama has chosen this path - the fact that Geithner and Summers really believe it is better to resuscitate the big banks rather than to fundamentally restructure them, the belief (reinforced by the Senate's recent failure on cramdown legislation) by senior administration officials that despite the populist anger among the general public that there is no political will in DC to take on the big banks, the reality that most of the media's shallow interpretation about whether something works is whether the Dow Jones goes up the day the plan is announced. But regardless of the reasons, this is the reality we are living with. Obama has clearly chosen a path, and those of us with a different idea about how to work on these issues have to live with the fact that we have lost the debate, for now, inside the administration. The question now is: what do we restructuring advocates do now?
So I know this may be a little twisted, but there are a few things more fun for me than being attacked by right wingers. I consider it one of the greatest honors of my life that I have been attacked by Rush Limbaugh (4 times by name), Sean Hannity, Cal Thomas, and Paul Weyrich, and even had an "expose" of me done by National Review. I get a little thrill every time it happens.
It happened again today, this time as a way of attacking the New Way Forward movement, and as usual, they got the most basic facts in their article wrong. A reporter named Judi McLeod, whose work (according to her byline) has appeared on the aforementioned Limbaugh along with Newsmax.com, Drudge, Fox News, and Glen Beck, "broke" the following news flash:
I agreed this week to become an honorary co-chair of A New Way Forward, a spontaneous grassroots movement that is reminding me of the early days of MoveOn.org. This impressive group of passionate organizers got involved because they were listening to progressive economists and business leaders talk about alternatives to the Geithner plan on re-building the banking system, and they decided to get involved. Some of these organizers are old hands like Joe Trippi (who truly is an old hand - I met Trippi when he was helping Walter Mondale in Iowa in 1983, and he already seemed like an old hand then) and Zephyr Teachout of Dean campaign fame, and some are relative youngsters like Tiffiniy Cheng.
I agreed to become a co-chair in part (of course) because I strongly support the principles for banking policy that they have laid out - the same ones supported by all of the economists and economic policy thinkers I respect the most, people like Paul Krugman, Dean Baker, Joe Stiglitz, William Greider, Simon Johnson, Jamie Galbraith, Leo Hindery, and Rob Johnson. But I also agreed to help because the spontaneous passion and obvious organizing skill, completely unsupported with money or institutional DC help, reminded me of the early days of MoveOn.org. Before there was ever the online organizational giant of MoveOn.org, it was a simple internet petition written and put online in the living room of Wes Boyd and Joan Blades and forwarded to a few of their friends. Wes and Joan didn't know anything about how Washington, DC works, or how a PAC operated, or how a poll was conducted. They didn't have any money or institutional support when they started, although a few of us in DC recognized their potential and lent a helping hand. All they had was their passion about an issue (in that case, the impeachment fight) and great instincts about online organizing.
While A New Way Forward does have some old hands at online organizing involved, their spontaneous passion about their issue and their creating a protest with national implications with no financial or institutional support reminds me exactly of MoveOn.org's launch 11 years ago. It also reminds me of the practically spontaneous mass street demonstrations done in 2005 on the immigration issue by prominently young Hispanic organizers mostly driven by text messaging.
One of the reasons I am so excited about A New Way Forward is that this approach to organizing a campaign around the banking issue is exactly what is needed. Traditional DC organizations were always going to be reluctant to get into this fight. For one thing, very few DC organizations work on banking and finance issues. For those that do, they are deeply engaged in working with the White House to get the budget and health care reform passed, and don't want to throw cold water on that White House relationship.
Here is the information about the April 11th rallies. I will be speaking at the one in DC, but please don't let that discourage you from coming. My message will be simple: I support Barack Obama, support his budget and his agendas for health care and climate change and immigration reform and the Employee Free Choice Act. But on banking policy, we need A New Way Forward.
The way Tim Geithner has structured the banking plan, the Obama administration will, sooner or later, almost certainly be facing another AIG bonuses type of outrage. For example, Dean Baker told me that his biggest fear is that some sleazy character will make a fortune off the leverage given by the government, or that a bank will arrange an insider deal under which a front buys its assets at an inflated price, leaving the government with a big loss.
If this happens, I can already hear the cries of the faux populists in the Republican Party, those same folks who created this crisis with their opposition to regulatory oversight of Wall Street. If they were still in charge, we'd be having one of these kinds of scandals every week. But they will be full of howling indignation that Obama let this happen.
Those of us who are opposing this bank plan, in part because we are worried of just these kinds of scandals described above, will need to restrain ourselves from doing too much I-told-you-so-ing, because we will need to be helping to save the Obama team from themselves. We need to be ready, though, to step into the moment with our own very aggressive plan to put the banks into receivership and break them up. No matter how populist Republicans will want to pretend they are, they will never be willing to actually do something that progressive. If Obama is willing to go there, and do it decisively, it will help Obama to get over all the recriminations and saber-rattling that inevitably happens in such a moment.
I very much wish that Obama was moving bolder and more progressive in dealing with the banking crisis. To paraphrase a friend, I feel like he is giving mouth-to-mouth resuscitation to a system that needs to die. But if we are to get through the problems that will almost inevitably come from the Obama/Geithner plan, those of us who want to save Obama's agenda need to be ready with a strategy to turn things around ASAP when another scandal flares. Unlike Bush, Obama is smart enough to change direction when something isn't working, and progressives need to be ready to help him when that day comes.
We Americans dwell in a consumer plutocracy, and the plutocrats don't even bother to be cute about it any more. Barack Obama, hailed by the geniuses of new media as a populist saviour, has surrounded himself with a team that was already bought and paid for by the financial services industry before they ever walked into the White House.
"And just in case you ever get a big job in Washington, Larry, remember who your friends are!"
George W. Bush remembered his friends who paid him $15 million on a $600K investment in a baseball franchise, and Barack Obama remembers his friend Penny Pritzker, the Queen of Sub-Prime Lending, chief financial officer of his Senate and Presidential campaigns, and Rahm Emanuel remembers his friends among the investment bankers at Wasserstein Perella, who paid him $16.2 million for two years of "work," and it isn't easy to figure out exactly what "work" that was, because Rahm Emanuel was a speech and communication major at Sarah Lawrence and Northwestern, and never had any training whatsoever in accounting, or business, or finance... but he always knew how to follow the money, as a fundraiser for Richard Daley and Bill Clinton, and now Rahm has followed the money all the way to his current job as Chief of Staff and gatekeeper outside the Oval Office.
"If you ever get a big job in Washington, Rahm, remember your friends!"
And the friends remember, too. They remembered Bill Clinton for signing Gramm-Leach-Bliley, and paid him $40 million for speaking, in 2007, alone, and the same friends already remember Tim Geithner.
Tim Geithner is "[a] very unusually talented young man...[who] understands government and understands markets," says Henry Paulson, who gave away more money to the banks than anybody in the history of the world... except Tim Geithner, Larry Summers, Rahm Emanuel, and Barack Obama.
Some new data suggests Americans hold a negative opinion about the state of the country and are optimistic as well. How can this be? At least two explanations are possible and there's data for each:
1. People are unhappy about how things are going now but hopeful about the future.
and/or
2. The country is split. Some optimists, some pessimists.
The latter split, according to one report, is not along party lines but a split between populists and the "ruling class." Details ahead.
Over the past few weeks, it's been pretty common for people like me, who have favored bank take-overs, to be portrayed as favoring a more "radical" approach to dealing with the financial crisis--and in one sense, that's certainly true. "Radical" comes from the Greek "radic", meaning "root", and radicals are those who want to solve problems at their roots. While bank takeovers might not really get at the roots of the problem, they'd certainly get us closer to the roots, so in that sense, it's a more radical approach.
But it's also a more conservative approach, too. How can it be both? Simple: this problem we face is severe and systemic. The most prudent, conservative thing to do is it to take action now, not just to repair damage and correct past mistakes, but to ensure against a repeat. And to do that, mere tinkering will not suffice. From The Compulsive Theorist:
Why a second best bailout may not be good enough
....
Two things about the aetiology of the crisis stand out. First, perverse incentives for agents within the financial sector played a central role in bringing about the crisis. Second, there were (and remain) issues of poor system design in the financial sector: even perverse incentives might have had limited consequences in a robust system. The problem with the Geithner plan is that even [if] it works in terms of stabilizing the economy in the short-term, it does relatively little (the uncharitable would say almost nothing) to correct either incentives or system design. But the business and cultural norms and system-wide conflicts of interest which form the backdrop to the crisis run deep, and will not change without substantial impetus. It is precisely these deeper issues that we must address if we are to reduce the risk of a re-run of the crisis, probably on a larger scale, in a few years time....
This case can be put very simply: if we do not use current political momentum to fundamentally reform a system which has shown itself to be unstable and even dangerous, a second opportunity may come at a very high price. And this is not a gamble I wish to see our leaders make.
Not gambling: that's being conservative. That's me.
Furthering my point, this same essay links to an article in the Financial Times...
We buy a humongous amount of toxic assets from AIG and its playmates, and pass all their possible losses along to ourselves! What's not to like?
A bad bank makes you and me the patsies for the meltdown. We get the bad stuff. Banks keep the good stuff.
Booooooooo!!!
But in order to save our dear little friends at the banks, all those toxic assets must be bought and sold again somehow, and nobody wants to buy them, except at prices that trigger yet another unimaginably huge crash of derivatives.
Those things are still alive, and they are very, very big. How big?
The total value of traded securities (debt and equity) denominated in U.S. dollars is estimated to be more than $50 trillion, and the global value of traded securities is about $165 trillion.
Financial derivatives can eat the Planet Earth!
So the monster must be quelled, and "bad bank" is made out of simple monosyllables that even the public can understand. Me no like 'em!
Tim Geithner won't give us bad bank. Bad bank went bye-bye. What we get instead is bad bank in drag!
We get a "partnership" of public and private money, and the only real problem with this particular "partnership" is that we lend our partners almost all the money they need to buy in.
We lend our partners 84% of their half of our "partnership," and guarantee that all they can possibly lose is their 16%. No further exposure! All the rest of the risk of those monstrously risky "toxic assets" belongs to you and me.
So private investors get 50% of the possible upside, and if the wheels come off, they can only lose 16% of their half, which is 8% of the package, but we can lose big time! Toxic assets are toxic because they entail obligations that nobody thought they would ever have to pay... and they didn't! We paid instead.
But under all that pancake make-up and all those petticoats, this is still a "bad bank," except a whopping 8% of the capital supposedly comes from private investors, with limited risk, if they go for it.
But what if they don't?
What if bailout number three is a total non-starter, like bailouts one and two? And this is the beauty part of Tim Geithner's beautiful dream!
Today the Dow Jones was up almost 500 points and that means Tim Geithner and Barack Obama are geniuses. I went to Sean Hannity's site expecting a tribute to our market-moving heroes and all I found was an ad for a Reagan movie produced by Newt Gingrich and a 2012 election countdown clock. Not sure why they're counting down the days to another ass kicking but they are. Seems they're just conceding the 2010 races because there's no countdown for that.
So I went to Rush Limbaugh's site to see if he was tipping his hat to the President but it seems he is still talking about Obama's Special Olympics flub and may have overlooked the greatest day in Dow 2009 history. Wait, isn't he the guy who mimicked Michael J. Fox's Parkinson's symptoms? Yup.
The biggest drag on the market is still the Fox Business Channel which continues to pull the market in a predominantly negative direction. On Oct. 14, 2007, the day before their debut, the Dow stood at 14,093. The next day Fox Business goes on and the market drops 100 points. That was a key indicator of the negative power of Fox Business News. Every week since the market has lost an average of almost 100 points.We won't get a full Dow recovery until we get Fox Business Channel off the air. We need a countdown clock for that.
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
In a later post, Krugman went on to further clarify: there are two basic reasons for bank failures--the run on a sound bank is just one of them, and it's the one the Geithner plan is based on. But it's not the problem we're facing:
Why was I so quick to condemn the Geithner plan? Because it's not new; it's just another version of an idea that keeps coming up and keeps being refuted. It's basically a thinly disguised version of the same plan Henry Paulson announced way back in September. To understand the issue, let me offer some background.
Start with the question: how do banks fail? A bank, broadly defined, is any institution that borrows short and lends long. Like any leveraged investor, a bank can fail if it has made bad investments - if the value of its assets falls below the value of its liabilities, bye bye bank.
But banks can also fail even if they haven't been bad investors: if, for some reason, many of those they've borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank's debts
Behind all the complex razzle-dazzle, this is the basic question here: what kind of bank failure do we have? And there really doesn't seem to be much question about that. The term "toxic assets" gives you all the answer you need: the problem is the assets themselves, not a run on basically sound banks. That's why the troubled banks can't be saved as they currently exist.
Much of the news these days--the AIG fiasco, Geithner's flawed bailout plan, the financial crisis itself--points to a single essential truth: Wall Street rules. The GOP's subservience to Wall Street is longstanding and unmatched. But Wall Street also holds power over the purported party of the people, most notably in form of Robert Rubin and his acolytes. It's fair to call Wall Street, as Robert Kuttner does, the Democratic Party's most powerful interest group. Which would be horrrendous even if Obama weren't trying to solve a financial crisis that Rubin and his acolytes helped to create.
