Archive for category Economic crisis

Greece and the EU

Greek protesters in support of the Syriza party, a left wing party that dominated last month's elections.

Greek protesters in support of the Syriza party, a left wing party that dominated last month’s elections.

In 2008 the global economic crisis unmasked the structural weakness of the economies of southern Europe.  Greece was by far in the worst shape.   In 2010 the EU brokered a bailout deal for Greece, predicated on the country embracing a very painful austerity program.   In 2012 Syriza campaigned against the cuts and urged Greeks to chart a course not dictated by the EU.   Greek voters, skittish about loosening ties with Europe, said no, and Syriza won just 78 out of 300 seats.  Three years of painful recession later and the Greeks have had enough – Syriza won 149 seats, just short of an absolute majority.  The left wing party joined in a coalition with ANEL, a small right wing conservative party to form a government.

Greece has a debt of about $500 billion, 180% of it’s GDP.   60% of that debt is owed to the Eurozone, so a default would have serious, though not disastrous implications.   Very little of that debt is held by Greece.   After the election Greece’s 10 year treasury bond yield skyrocketed to over 10%, meaning rising the debt would be prohibitively costly.

Syriza’s leader, new Prime Minister Alexis Tsipras, vows to keep this campaign promises, all of which violate the conditions of the bailout.  These include increasing the minimum wage, cutting property taxes, increasing pensions, rehiring fired public sector workers, and giving free electricity to those “suffering the most.”   Since he doesn’t want more debt, the only way to do that is to print money – but Greece is in the Eurozone and monetary policy is controlled by the European Central Bank (ECB).   So what next?

Syriza's leader Alexis Tsipras

Syriza’s leader Alexis Tsipras

One might wonder if Tsipras is out of touch with reality, wanting to increase spending to get out of debt.   But he makes a good point that austerity simply increased the scope and depth of the recession.  The ‘bailout’ benefited Eurozone banks more than the Greek people.   He believes his policies would stimulate the economy so that Greece will be able to pay back its debts and show itself to be solvent.

Unfortunately the Greek economy was built on sand – debt and public sector employment hid the fact the Greek economy is structurally flawed.  Just ending austerity won’t change that, nor alter the dynamics that created the crisis in the first place.

Last week Tsipras and his Finance Minister Yanis Varoufakis visited European leaders to try to assure them that they weren’t going to rush out of the Eurozone, and to convince them to support a bridge loan to fund the government through September.   On Sunday Tsipras said that the Euro was a “fragile house of cards” and if the Greek cards were pulled it would collapse.   On Wednesday Eurozone finance ministers are meeting to discuss what to do next.

The Euro is not likely to disappear whatever Greece does.

The Euro is not likely to disappear whatever Greece does.

Tsipras is playing a game of chicken – pushing the EU to accept his policies and offer help in exchange for Greece holding on to the Euro.  More importantly, if he were to leave the debt owned by Eurozone banks would become toxic, threatening a banking crisis.

Still, the threat to the Euro is much smaller than it was back in 2010, or even during the election of 2012.   At that point high bond yields threatened a number of countries, especially Spain and Italy.    Today Italy’s bond yield is 1.76%, while Spain’s is 1.38%.   Those are below the US yield of 1.94%!  This suggests the fears of contagion no longer exist and Greece is being treated as an isolated case.   With 19 countries now using the Euro – Lithuania joined last month – it could withstand a Greek departure.

But the Prime Minister does not want to leave the Eurozone, and therein lies the rub.   Greeks know that leaving the Eurozone would put them on a path towards increased isolation and continual crisis.    He’s betting he can arrange a bridge loan through August, and that while Greek debt is high, the Greek economy is small.   The cost to the EU member states would not be prohibitive.

While some European leaders are sounding cautiously optimistic about making a deal with Tsipras, German Chancellor Angela Merkel is having none of it.   While not dismissing anything out of hand, she says it’s up to Greece to come up with a plan.   Tsipras has said he’s working on further reforms designed to mollify EU critics, but it’s unlikely he’ll convince Merkel, who fears this will simply enable Greece to go back to its old ways.

Tsipras and Merkel will meet for the first time this week.

Tsipras and Merkel will meet for the first time this week.

My predictions:

1.  Those predicting the end of the Euro will be disappointed.   Countries are politically committed to monetary union as the best way to assure economic stability.   Businesses and banks – the people who really run the show – are almost unanimously in favor of it.   Now that Italy and Spain are no longer seen as “the next to go” if Greece leaves, the Euro is not in existential danger.

2.   Tsipras and EU leaders, particularly German Chancellor Merkel and French President Hollande, will engage in tough negotiations, but are likely to reach a deal.   It’s in their interest.   The EU leaders do not want their banks to suffer due to the Greek debt they hold, nor do they want instability associated with the first departure from the Eurozone.   Prime Minister Tsipras knows that the Greek economy would be severe crisis if he actually tried to go back to the drachma, perhaps worse than the last few years of recession.

3.  The agreement might work.   Merkel needs to be firm on the need of Greece not just to stimulate their economy, but to restructure it.   Greece needs to develop a productive and sustainable economy.  They do not have one now.  Tsipras has to recognize that reality..

The telling point is that nobody involved wants Greece to leave the Eurozone.   It is in their interest to maintain it, even strengthen it.   It is in the EU’s interest to have Greece develop a sustainable, productive economy.   The bailout and austerity program didn’t work – even though the Greek voters gave it a chance back in 2012.   With some creative thinking, it may be that contrary to expectations, the victory of Syriza may end up being good for the EU.

 

 

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An American Hero: Alayne Fleischmann

fleischmann

Alayne Fleischmann is risking her career and all her assets by going public with information about the fraud perpetuated by JP Morgan Chase, a Wall Street bank.

If you really want to read about how dirty the big banks are, take the time to read through this piece, published in Rolling Stone by Matt Taibbi.  Here’s a very condensed version.   Everyone knows that the 2008 economic crisis was caused not by the real estate market or sub prime loans, but by a nearly $700 trillion dollar per year market in unregulated derivative bonds.

The banks were making so much money with these bonds that they got in bed with dirty mortgage brokers (i.e., the biggest ones) who engaged in inflating the incomes of people applying for loans, approving without documentation, and creating wild mortgage packages that would have payments low the first two years then kick in to incredibly high rates.   All of this created a massive bubble, as people saw prices rising and wanted in.  The banks then doubled down and made more money.   By 2005 these bonds were backed by mortgages that would never be repaid.

Note how fast over the counter (unregulated) derivative trade increased after 2000 - it was the motor of the economic crisis, and still could be hiding financial shenanigans.

Note how fast over the counter (unregulated) derivative trade increased after 2000 – it was the motor of the economic crisis, and still could be hiding financial shenanigans.

In short, the crisis of 2008 was a free market creation, caused by unregulated big Wall Street banks selling bonds they knew were bad – leaving investors from schools, fire departments, retirement accounts and the like holding the bag.  Moreover it caused a massive recession and structurally weakened the world economy.   Never has there been a more convincing case that proves capitalism does not work without regulation, and that big money will game the system thinking only of itself if allowed the opportunity.

Yet there is more.   Once the collapse hit, the US was faced with the real possibility of a credit crunch that would not only hit banks and the mortgage market, but also even the ability of consumers to buy cars or use credit cards.   That was a looming threat in October 2008, and the immediacy of that threat was handled through TARP – the so called bail out.

So act one: bail out the players who gamed the system, whose executives made billions, leaving both investors and the world poorer.  Yet not to bail them out would have intensified the crisis to the point of causing a great depression.

Act two: the Justice Department of the new Obama Administration would work with the banks to try to avoid them having to pay massive fines, or have the extent of their corruption made public.   That’s what Fleischmann’s case shows.   Rather than go after the big banks for their fraud and crimes, Attorney General Eric Holder choose to get in bed with them and help them cover their tracks.   Why?

Again, to avoid a credit crunch and not to gum up the recovery.   With the big banks on the ropes, the recovery could fade.  If trust in the remaining financial institutions started to fail, we again would risk depression.   The big banks were not only too big to fail, but too big to even hold accountable.

Consider this brief monologue from the film Syriana in which corruption is defended – it’s a more common view than we might want to believe:

In Syriana the government wants the merger of two oil companies to go through, despite clear corruption.   “We’re looking for the illusion of due diligence,” one attorney declares.  But because increasing access to oil is so important, they really don’t want to dig.  In this case, the settlements with Chase and other banks created only the illusion that the Justice Department wanted to keep the banks accountable.  Fleischmann’s revelations we know how deep and thorough the corruption had become.

So what next?   Will JP Morgan Chase set out to destroy Fleischmann as an example for anyone else who might want to come forward?  Will others come forward to give her cover and tell the full story?  Will her courage create a desire to really dig to the bottom of what happened?

Alas, this stuff is complex.  That’s why so many people don’t get the reality of what caused the crisis, and find it easy to blame things like government policy on home loans.   Yet the more we learn, the more we see that Wall Street has immense control over US policy, in part because of their dominance of the economy.  If the banks fail, the world economy is in peril.

Yet this is unsustainable.   As the big banks again gain record profits, with only a meager effort to regulate them after the collapse, we’re setting up the next big crisis – perhaps worse than the last one.  One can only hope that heroes like Alayne Fleischmann show the courage to tell the world what’s really going on, and how whether Republican or Democrat, no one has the guts to take on Wall Street.

 

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Obama the Republican?

obamagop

The American Conservative, an often refreshing publication espousing classical conservatism, has a rather provocative article out suggesting that President Obama is really a Republican, heir to Richard Nixon rather than Saul Alinsky (photo above is from their article).  I had to google Alinsky, he was an mid-20th Century radical.

The piece goes issue by issue, noting that Obama has undertaken essentially conservative policies, ones much in line with traditional conservative thought.  He has been hawkish on national security, yet skeptical of jumping into wars.   His economic policies have dramatically brought down the deficit, and he has been fiscally conservative, much to the consternation of his own party.   He still enforces tough drug laws, even as states decriminalize.  It took him a long time to voice support for gay marriage, even as his party was leading the way.

Corporate profits have risen, he hasn’t done much to address the imbalance of wealth between blacks and whites, he’s been hawkish about security leaks, and even his health care reform was based on Romney’s plan in Massachusetts (and is less bold than Nixon’s proposal back in the 70s).

Obama has probably decreased deficits more than a Republican President would have.

Obama has probably decreased deficits more than a Republican President would have.

So why does the right have such outlandish personal attacks on Obama?  By any objective standard he’s been a competent, centrist President.  Yet he gets called a radical.  He gets labeled “incompetent,” and his successes are swept under the carpet.  He gets blamed for things like ISIS – an absurd claim, but one those on the right fall over themselves to make.  Though the Center for Disease Control is one of the most respected health organizations in the world,the cautious and successful approach they’re taking to ebola gets criticized.  In fact anything wrong in government (and left and right can agree there are always some problems in government) is laid at his feet.

Up until now I thought the reason for this antipathy was because some on the right think Obama is different.  Not just racially, but he’s urbane, cosmopolitan, has a strange name, and doesn’t seem to be the kind of good old boy Americans were used to.   He symbolizes a transformation of the country that many fear but are powerless to stop.

However, there are two other factors.  One, given the treatment of Bush by the left, it might be that any President these days will be vilified by the other side, especially given the prevalence of inbred media (blogs, media, and other sources populated by only one part of the political spectrum). But more importantly, if someone is a competent centrist, all you really have are personal attacks.

The President surrounds himself with Wall Street insiders who would be just as comfortable in a Republican administration.

The President surrounds himself with Wall Street insiders who would be just as comfortable in a Republican administration.

To true partisans of the left, the news that Obama governs from the center isn’t new.   Much of his disapproval rating comes from the left side of the political spectrum.   The biggest criticism of his Presidency is that he’s too cautious, too willing to work with Republicans and concerned more about finding solutions that appeal broadly, rather than fighting for a cause.    From fracking to the trans-pacific partnership and the Canadian oil pipeline, Obama has been slow to act.   A liberal activist would govern much differently.

Partisans of the right might grumble that it’s only because of Republican opposition that Obama could not get more done.  They may take credit for forcing him to govern from the center.  Yet that doesn’t explain his style – even during his first two years with a Democratic Congress he showed a penchant for pragmatism.

So is this a good thing?  With all due respect to my liberal activist friends, I still believe Obama will be remembered as one of the great Presidents in large part because of his pragmatism.   It’s not that I agree with him on everything – I don’t.  Yet agreement with me isn’t the measure of a President!

The country is in the midst of a radical transformation.  The economy is deep in debt, and the financial meltdown Obama inherited shows deep structural flaws in our economic system.  Transformation in the Mideast, the source of our cheap energy for last half of the 20th Century, creates real security threats.   Environmental problems are real, even if people want to close their eyes to them or embrace some wild theories to deny global warming.

obamatweet

The only way we’ll get through the next decades without paralyzing political gridlock is if we find a way to work together.   Not just here at home, but internationally (and Obama retains very high respect abroad).   That means compromising even on important issues- that’s how the world works.  While Republican hyperbole and obstructionism may tempt Democrats to use executive power to its fullest extent, Obama has been moderate in its use.  He believes in being President to all Americans, even those who call him names.

We are undergoing a profound cultural and demographic transformation.  As the tea party fades and Republicans finally start to work against extremists in their party, the stage is set for compromise in the future.  No matter who wins the midterms, the conversation has shifted away from the radical rhetoric of 2010.   Obamacare is entrenched – it may be changed, perhaps improved, but not gutted.  The power of Grover Norquist, while still real, has declined.  Tax increases are thinkable as part of a budgetary compromise.  Even climate change denial is shifting as the weather patterns make clear something real and potentially dangerous is happening.

So the left may be dissatisfied by Obama’s centrism while the right finds all sorts of absurd reasons to try to cut him down.  But quietly and effectively, he’s been a steady force in a country under going a fundamental transformation – a fact that will become much more evident in hindsight.

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The Ones that Saw it Coming

wallstreet

Although Wall Street got away with creating the worst economic crisis since the Great Depression, there were some who saw it coming, sniffed out the true nature of the mortgage backed bonds and the craziness of an out of control under-regulated housing market.    Those people are the subject of the Michael Lewis book The Big Short mentioned in the previous post.

They cover a range of character traits.  There is the self-promoting Greg Lippmann whose desire to spread the news in bombastic fashion helped convince a number of people that the housing market was a bubble and the securities backed by those mortgages were toxic.  Then there is Steve Eisman, a blunt, honest hard nosed investor who would offend just about everyone he met.   He started as a conservative Republican but realized as he learned about the game on Wall Street that the real mantra was “fuck the poor.”

Mike Burry of Scion Capital was the first to really understand the scope of coming crisis

Mike Burry of Scion Capital was the first to really understand the scope of coming crisis

The first one who really sniffed out what was happening was a one eyed doctor turned stock blogger turned investor, Michael Burry.  He read through the material with an almost superhuman patience and attention to detail.  He realized that the investments were crap, especially the bonds backed by subprime mortgages.   When his son was diagnosed with Aspergers syndrome he realized he had it too.  That had given him the focus to figure out what everyone else was missing as early as 2003 – and also explained the lack of social skills that alienated his investors who were planning to sue him before suddenly his bets paid off.  They never thanked him.

Ultimately they figured out that not only were the big banks creating mortgage backed bonds that seemed to pass off risk, but when they didn’t have enough of those they packaged the bonds into CDOs that, thanks to rating agency incompetence, would magically turn BBB mortage backed bonds into AAA investments.   Then they took it a step further with synthetic CDOs.   To Burry, Eisman, Lippmann and a few other characters Lewis describes, this was blatant fraud.  For Eisman it was a moral cause – the big banks were pulling in billions, earning their traders bonuses in the tens of millions – because they were able to create bonds so complex that the rating agencies didn’t realize they were crap.  Investors thinking they were getting very low risk bonds were being fleeced.

CDO's were a method by which banks could take low rated bonds and package them to create a AAA rated toxic bond

CDO’s were a method by which banks could take low rated bonds and package them to create a AAA rated toxic bond

The thing that shocked them, however, is that when the inevitable collapse hit, the big banks themselves were exposed.  They had rigged the game, but played the sucker anyway.   Corporate leadership didn’t understand the way this new derivative bond market operated, and individuals looking only to maximize their bonuses didn’t care about the long term.  At some point they had to keep playing because that was the only way to keep the game alive.   But it was unsustainable.

What I find intriguing is the personality characteristics of those who figured it out.   They share a few traits.  First, they were honest and not afraid of what others thought of them.  In a world where most people seek approval from others and want to be liked/appreciated, these guys didn’t care.  Eisman would blurt out comments offending powerful CEOs giving a talk, not care what he wore to the golf course, and genuinely didn’t seem to mind what others thought of him.

Second, they were remarkably self-confident.   If it were me figuring out the insanity of the derivative market and how the big banks were setting the entire world economy up for disaster, I’d say “wait, these are the most intelligent big institutional investors on Wall Street – they must know something I don’t.”   And while the thought crossed their minds now and then, they had confidence in their analysis and conclusions.  They were willing to place multi-million dollar bets on an outcome the media, Wall Street and government dismissed as impossible.

Some of most entertaining moments in Lewis' book are the ways in which Steve Eisman would confront the big players on Wall Street and tell them their products were crap

Some of most entertaining moments in Lewis’ book are the ways in which Steve Eisman would confront the big players on Wall Street and tell them their products were crap.  Eisman’s latest crusade is against for-profit on line universities

Finally, they were oddly moral.   For Eisman it was righteous indignation at how big money was not only screwing the small investor but also putting democratic capitalism at risk.  For Burry it was a strong sense that the truth mattered, and he needed to follow it.  Lippmann was grandiose and self-promoting, but was up front trying to help others see what was happening.   In fact, they all tried to shout out warnings only to find that the rich and powerful either responded like deer in a headlight or laughed them off.

Jamie Mai, Charlie Ledley and Ben Hockett, who created Cornwall Capital and discovered first that even the AAA rated CDOs were certain to fail, were pre-occupied by what this meant for society as a whole.   The system was sick, could it potentially fall apart?

Those traits:  honesty, lack of concern for what others think (as long as you’re being honest), self-confidence and a strong moral streak gave them the capacity to truly comprehend what was happening.  They were not intimidated by the big names in media and on Wall Street who dismissed such concerns, did not feel like “I must be wrong because the big guys all say differently,” and stoked a sense of moral outrage and purpose.

Once considered an economic guru, Greenspan's cheap credit and anti-regulatory stance now make him a villain in this story

Once considered an economic guru, Alan Greenspan’s cheap credit and anti-regulatory stance now make him a villain in this story

There is something to learn from this example.   These traits gave them the capacity to avoid the hypnotic effect that culture, media and “conventional wisdom” can have on people.   All around experts repeated the mantra that “the bonds are safe, housing prices won’t fall, this is real, the money will keep growing…”  They did not fall victim to the power of those suggestions; instead, they saw through the facade and ended up turning a huge profit.

They not only saw through it, but it was obvious to them.   Now whether one reads the book by Micheal Lewis or one of the others out there dissecting the crisis (The End of Wall Street by Roger Lowenstein, All the Devils are Here by McLean and Nocera, House of Cards by Cohan about the end of Bear Stearns, etc.), it is so obvious in hindsight that one has to ask “how could they have been so stupid?  How did more people not see it coming?”

The answer: groupthink and a kind of cultural hypnosis due to the power of pervasive suggestion.   The only way to keep one immune from falling into such a trap is to foster true honesty, not worry what others think if acting honestly, be self-confident, and have a moral core.   Not only might one see through scams and thus make money (or avoid losing it), but one will also live a life less controlled by the hypnotic suggestions permeating our culture and media, and instead develop the capacity to be true to oneself.

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They Got Away With It

The new semester is underway and I’m teaching an honors course:  “Consumerism, Politics and Values.”  We start with the book  The Big Short by Michael Lewis, describing the housing bubble and derivative market mania that caused the collapse of the economy in 2008.

bigshort

The housing bubble and subsequent crisis was created by the big banks who were able to pull off the equivalent of a high stakes ponzi scheme and get away with it.  Alan Greenspan, onetime devotee of Ayn Rand, even admitted that events had proven his “markets get it right” philosophy wrong.

Markets don’t always get it right; unregulated, markets can create calamities.   We shouldn’t forget what happened.

Back in 2000 we entered a recession thanks to the puncturing of the dot.com bubble.  It had been a classic bubble and when the bubble burst the economy went into a needed recession to balance out the excesses of the late 90s.  Then on 9-11-01 al qaeda attacked the US with a devastating blow to the American economy.  The blow wasn’t a direct result of the terrorist attack, but an indirect one – the federal reserve decided to offer extremely cheap credit to help pull us out of the recession.  That turned out to be poison.  That is the one area where the government shares the blame – bad monetary policy.  But that alone could not have created this crisis.

The housing bubble was also not a sub-prime lending problem, nor one related to Fannie Mae and Freddie Mac.  They had their faults, some extreme, but nothing they did could have caused the economic collapse.   What happened can best be viewed by considering risk and incentives.

It doesn't take a genius - this is adjusted for inflation home prices since 1890 - look at the insane bubble after 2002!

It doesn’t take a genius – this is adjusted for inflation home prices since 1890 – look at the insane bubble after 2002!

Risk:  Between 2002 and 2005 virtually all risk was removed from the mortgage market – or so it seemed.  Banks and mortgage brokers knew they’d sell their mortgages to one of the big Wall Street banks.   That meant they had no risk – so every home loan was a win for them, regardless of whether the lender could pay it back.  The banks then took the mortgages and turned them into mortgage backed derivative bonds which they sold, pushing the risk to the investors.  These bonds received a AAA rating from the rating agencies, meaning they were viewed as the safest form of investments.  98% of mortgages get repaid.   Investors gobbled them up, thinking they were essentially risk free.   There was, it seemed, no risk!

Incentives:  Mortgage brokers thus had incentive to cheat – to make loans they knew couldn’t be repaid.   This started the housing market booming.   As prices went up, banks, brokers and buyers had incentive to create risky mortgage instruments.  Since value was going up so fast, it appeared that if you could buy a house at $100,000, it would be worth as much as $150,000 in two years.  So if you couldn’t afford a standard mortgage, you could buy one with artificially low payments for two years.   At that time the house would be worth more, you could refinance at a standard rate and take out a home equity loan for easy money.   Everyone wins!   Meanwhile, the banks gobble up more and more mortgages as they are making massive amounts of money – hundreds of trillions of dollars in mortgage backed derivatives!

Derivatives include futures markets and anything where the value is derived from something else.  But the huge spike in derivative trade from 2000 to 2007 was due to unregulated mortgage backed bonds

Derivatives include futures markets and anything where the value is derived from something else. But the huge spike in derivative trade from 2000 to 2007 was due to unregulated mortgage backed bonds

As with any bubble, everyone thinks all is great until it pops.   Housing prices started to drop in early 2007.  The first pain was in the worst loans, the subprime market.   No one panicked – that market wasn’t big enough to cause a crisis.   Little did people realize that the entire derivative bond market, even bonds with the best loans, were toxic.

Soon prices started to drop.  Thanks to the people at CNBC and the other business “reporting” networks, people had the belief that real estate prices might level off, but wouldn’t go down.   While some like Peter Schiff had been warning people, most of the media were predicting real estate price growth as late as 2007.  People simply didn’t believe the party was ending.

Many people were directly affected.  People who had adjustable mortgages planning to refi with a higher value ended up bankrupt.  People who bought the AAA ranked derivative bonds ended up losing their entire investments.  This included groups like fire departments and school systems which thought a AAA bond was no-risk.   People who had been doing real estate speculation thanks to the rising prices went from being nouveau riche to old fashioned poor.  Those who simply bought houses at record high prices ended up under water – they often owe tens or even hundreds of thousands of dollars more than their homes are worth.

Of course, this all lead to massive loses on Wall Street and an economic downturn that is still with us today.   People totally outside the housing market lost their jobs or their investments when the economy tanked.  The ones who suffered the most were the poor.  The wealthy can take a hit on their portfolio and still enjoy nice homes and an easy life style, after all.

Yet the ones who did this – the ones who created the derivative bonds and then worked to disguise or avoid risk, taking massive short term profits even knowing that in the long run everything could collapse – they’re doing well.  No one had to repay their bonuses or their income from the bubble years.  Most simply found new work.   Sure, Bear Stearns, Lehmann Brothers, and a number of other banks went under.  Yet the people working there found other work.   Some  probably ended up with a dramatic downsize in lifestyle, but prison time or actual penalties?  Nah, they were just doing business.

Many people are still livid about the lack of accountability, but that’s the its always been.   The wealthy have power and clout, and can usually avoid accountability, especially if they’re in the financial sector.  In this case both Democrats and Republicans accepted the free market mantra and refused even modest regulation.  Yet tighter regulation might have avoided the collapse and we’d be at 5% unemployment now.

During the Clinton Administration Brooksley Born tried to regulate the derivative industry; Greenspan, Summers, and Rubin led the attack to stop her, documented in the PBS special "The Warning."

During the Clinton Administration Brooksley Born tried to regulate the derivative industry; Greenspan, Summers, and Rubin led the attack to stop her, documented in the PBS special “The Warning.

It’s also proof – absolute proof – that the ideology that the market is always best is dead wrong.   It is just as wrong as the Communist belief that a state run economy is more fair.  Ideologies delude more than enlighten. Reality is messy, ambiguous and paradoxical.   People enslaved by simplistic ideological beliefs tend to interpret reality in a way that suits their beliefs and avoid cognitive dissonance at all costs.  We need accountability, rule of law, and transparency — especially in the market.

So now six years from the collapse we’re still reeling, trying to correct imbalances that could have been avoided.  The people who created the mess and made huge profits off the bubble got away with it.

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The 2nd Inaugural Address

Obama is sworn in during a private ceremony on January 20, 2013

Obama is sworn in during a private ceremony on January 20, 2013

I have long felt that President Obama is destined to be remembered as one of the great Presidents in US history.   He came into office during a crisis, he is governing in a period of intense national and global transformation, and has true challenges to overcome.

In his second inaugural address President Obama made it very clear he’s not just looking to defend accomplishments of the past or stop Republicans from undermining social security or medicare.  Instead he made the case for moving forward, and tackling problems such as climate change, advancing causes like gay rights, and working to undo the slow deterioration of the middle class as wealth gets every more concentrated at the top.

Obama’s speech — and his re-election — might ultimately be remembered as the time when the US shifted from the path of deficits, tax reduction and distrust in government towards a new progressivism, rooted not in ideology but American values.

Abraham Lincoln is one of the few Presidents whose second inaugural address is more memorable than his first

Abraham Lincoln is one of the few Presidents whose second inaugural address is more memorable than his first

A few important snippets from Obama’s speech:

“For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class. We know that America thrives when every person can find independence and pride in their work; when the wages of honest labor liberate families from the brink of hardship. We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else, because she is an American, she is free, and she is equal, not just in the eyes of God but also in our own.”

This is a clear indication that over the next four years the President isn’t just going to cut spending and/or raise taxes, but challenge Congress to rethink the core of our economic policies.   The path we’ve been on has lead to the most severe crisis since the Great Depression, and has left the middle class battered and bruised.  We must rethink economic conventional wisdom for an era of globalization.   Another:

“We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms. The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries – we must claim its promise. That is how we will maintain our economic vitality and our national treasure – our forests and waterways; our croplands and snowcapped peaks. That is how we will preserve our planet, commanded to our care by God. That’s what will lend meaning to the creed our fathers once declared.”

People have been bemoaning the lack of attention given by the President to an issue many consider the most important of our time – preserving the planet for coming generations by preparing for already evident climate change.  There is no reasonable way to deny human caused climate change.  There is a self-contained alternative narrative that tries to posit everything from scientists as being frauds to get government funds or cherry picked data, but even one time skeptics are admitting that the evidence is overwhelming.   Moreover, not acting will cause us to fall further behind the development of future technology.  Another:

Our journey is not complete until our gay brothers and sisters are treated like anyone else under the law – for if we are truly created equal, then surely the love we commit to one another must be equal as well.

inauguration

The President’s words, coming after a reminder of the message of Martin Luther King 50 years ago, makes gay rights just as important a civil rights issue as any.   Just as you don’t deny marriage, housing, service or care to people on the basis of color, the days are ending when bigotry against gays was tolerated because people thought there was “something wrong” with them.

Finally:

We cannot mistake absolutism for principle, or substitute spectacle for politics, or treat name-calling as reasoned debate. We must act, knowing that our work will be imperfect. We must act, knowing that today’s victories will be only partial, and that it will be up to those who stand here in four years, and forty years, and four hundred years hence to advance the timeless spirit once conferred to us in a spare Philadelphia hall.

A recognition that movement forward will often be slow, and in small steps.   That even if we set goals, we cannot get there unless we are pragmatic, and recognize that change builds over time.   Some activists see pragmatism or compromise as surrender, a violation of principle.  The President is telling those activists that’s not how our nation works.   We move slowly, and we always have.  Partial victories beget more partial victories, and with issues such as gay marriage change grows until it becomes inexorable.

President Obama has the chance to grab the mantel of greatness in his second term.   His vision is there, his leadership has been proven effective, and the country is in the midst of transformation.    I wish for him the wisdom to make the right call in ambiguous situations, to use the Presidency as a bully pulpit to continue to talk about American values, and to forge a path forward into the 21st century!

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Welcome 2013!

2013

The world did not end on December 21, 2012 and the country averted the so-called fiscal cliff.   But perhaps the end of the Mayan cycle does symbolize change:  the world has been on an unsustainable path and the direction is shifting.

Politically, the US is becoming more progressive.   Ronald Reagan and Barack Obama are both larger than life Presidents, disliked by their opponents but pragmatic.  Each compromised – Republicans forget the types of compromises Reagan made during his term – but focused on shifting the country’s direction.   Reagan succeeded – for thirty years taxes have been going down and the debt has been going up.   The growth in social welfare projects was halted, while social conservatism grew.

Those days are over.  With states rapidly approving gay marriage, drug laws shifting (remember the vindictive nineties when Newt Gingrich was advocating the death penalty for even selling pot?), and the internet creating a more open and tolerant public, the culture wars are over.   The social conservatives lost.  A new generation is emerging less repressed, less convinced by social conventions, more willing to experiment and be open.

Republican infighting grows as the nation shifts from center-right to center-left

Republican infighting grows as the nation shifts from center-right to center-left

With the fiscal cliff deal people accept that tax reform is necessary to bring more revenue and stop living beyond our means.   The only reason the debt’s gone up under Obama is the recession — something he didn’t create.   Recessions radically increase the cost of government programs, decrease tax revenues and require spending to stimulate the economy.   But Obama has signaled structural reform that will turn around the budget mess, even if the results won’t be clear until the economy is growing.

Until recently concern about global warming was losing support in public polls.   That’s turned around.   Things like Sandy, droughts, and historically high temperatures are convincing the public this is an issue.   A generation of children are coming of age who learned environmentalism and science in the schools.  Environmental activism is becoming cool again.

Beyond that the fossil fuel era is ending.   Despite promising finds of natural gas and tar sands, global consumption has been rising fast and new finds will not be enough — though they make the transition easier if we are proactive.   Saudi Arabia is past its peak and likely to become an oil importer by 2030.    Right now the recession has kept oil prices low, but even with the world in the economic doldrums oil is near $100 a barrel.  If growth returns, oil prices will rise dramatically.

Even with oil sands and fracking for natural gas, the fossil fuel era is ending

Even with oil sands and fracking for natural gas, the fossil fuel era is ending

Luckily, led by the EU, the rise of green technology is dramatic.   Still, higher energy costs will force a shift in life styles.  I doubt it will be the collapse predicted by some, but the days of cheap energy are ending.

The biggest shift is in technology.   Social media and the internet started a revolution in the Arab world that will take years to play itself out.   Those who think this is bad – or could have been prevented – are sorely mistaken.   The regimes relying on fear and bureaucratic control are going to find that people are becoming informed and empowered, able to rise up.    This started back in 1989 with the fall of Communism in Europe, but will grow and spread.

Even in Africa, where a genocide in 1994 and numerous wars involving some of the worst atrocities of recent history went unnoticed, a new activism is emerging.   Though Kony 2012 faded, the connections people are making across borders make it likely that over the next few decades the African continent will have a rebirth.  They own many of the scarce resources that the rest of the world needs; corrupt dictators are starting to fall.

Old political notions of sovereignty, national self-interest, and fear based policies are slowly giving way to interdependence, shared interests and hope.   The world is waking up, change is coming.   It will not be easy, there may be decades of instability and uncertainty before we see a better reality.    But a new world is coming.

The biggest barrier to peaceful change are those who cling to old ways of thinking – fear, anger, greed, self-interest at the expense of others, and a ‘them vs. us’ mentality.    The old mentality will not work in the world that’s emerging, and following the path of fear will yield crisis and conflict.    But change is coming, yesterday has past, now let’s all start living for the one that’s going to last.

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Say No to Berlusconi

Mario Monti, Italian Prime Minister since Nov. 2011

Mario Monti, Italian Prime Minister since Nov. 2011

Mario Monti announced he was resigning from the office of Prime Minister of Italy despite a heroic year in which the Italians did what most people thought couldn’t be done.  He stabilized their finances and help brighten the outlook for the EU and Euro in the on going financial crisis caused by southern European lacking fiscal discipline.

Monti’s resignation, which will become official after the 2013 budget is passed, came as a surprise, sending shock waves through financial markets and the Italian political system.  This sets the stage for a critical election in February.

When Monti came into office interest rates for Italian bonds were above 7%, and Italy’s budget deficit was growing quickly.   Monti has managed to lower rates to 4.4% (meaning borrowing money is cheaper), though on news of his resignation it shot up to 4.8%    Total debt has stabilized at 125% of GDP.   Monti’s reforms  included budget cuts, reform of the labor market and other policies not always popular with the public.   As it became clear that Italians had the political will to deal directly with their problems, confidence in both the Italian economy and the Eurozone grew.

So why is Monti resigning?   Monti’s government is a ‘government of experts’ designed to make pragmatic decisions with as little politicization as possible.    Back in November 2011 Silvio Berlusconi resigned as Prime Minister after losing his majority, with international markets showing no confidence in Italy’s policies or leadership.   Monti was chosen as a technocratic leader both left and right could agree on, but one without a political mandate.

On Thursday December 6 Berlusconi withdrew his party’s support from Monti’s government.  Monti had always said that without broad political support a technocratic government was untenable.     But this sets up a potential showdown.

Silvio Berlusconi, one of the worst leaders in post-war European history

Silvio Berlusconi, one of the worst leaders in post-war European history

In my opinion, Berlusconi has been a disaster for Italy.   First elected Prime Minister in 1994 in the wake of the collapse of the Italian first Republic and the party system that defined it, Berlusconi promised to chart a new course for the country.  He said his party Forza Italia (forward, Italy!) would make Italy a modern well governed state, absent the corruption and undisciplined economic policies of the old system.    Despite being Prime Minister three times — from 1994 – 1995, 2001 -06, and 2008-11, he has not followed through.

In fact, Italy’s performed best when Berlusconi was not in office, including the job Romano Prodi did on economic policy in the late 90s to get Italy into the Eurozone.   As Prime Minister Berlusconi mirrored the corruption of the first republic (he was convicted of fraud in October — he’s out free as he appeals, but that’s just the tip of the iceberg of his questionable and likely illegal actions), and the Italian budget mushroomed.

Unfortunately the Italians may vote him back into office.   He claims he wants to stand again, and as media mogul he has the capacity to shape the narrative of the short election campaign.   Despite his faults, his personality and appeal to conservatives means he’ll win a lot of votes.

Pier Luigi Bersani, who will represent the center left in Italy's election

Pier Luigi Bersani, who will represent the center left in Italy’s election

Ironically global markets would be happier if a former Communist, Pier Luigi Bersani, were to defeat Berlusconi.   Bersani’s center-left coalition has pledged support for Italy’s commitments and vowed not to go back to the kind of politics and spending of recent years.   Berlusconi, however, has been skeptical of Italy’s commitments and has hinted that he wants to increase spending and undermine the work done last year by Monti.

Of course, Monti might himself run.   He could hope to get support from centrists and moderates who want to transcend the polarized politics of the left vs. right, and reward Monti for the work he’s done the last year.    Monti would not have the backing of a major party organization, but Italian campaigns are short, intense, and not that expensive.

A Monti victory would not only keep him in office, but give him something he now lacks – a political mandate.   A technocratic party is supposed to avoid political controversy.    When Monti pushed through labor law reforms, he met considerable opposition from Italy’s strong labor unions.   Rather than picking a fight he negotiated with them and a compromise set of laws passed.    With a political mandate, Monti’s hand in such negotiations would be stronger, though it’s unlikely he’d seek political confrontation.

The Italian parliament

The Italian parliament

This election is important for both Italy and the EU.  If Monti were to win, there would be an enthusiastic response from markets and renewed optimism that the worst of the Euro crisis is passed.  If Berlusconi were to return, Italian bond yields would rise and both Italy and the EU could be thrown back into a deep crisis.   Moreover, Italy’s path out of a flawed and corrupt system of governance would be halted; Berlusconi represents precisely what Italians must reject.

Signs are good that Berlusconi’s shine has worn off.   He’s down in the polls, and even he wanted more time to prepare for the next election.   His fraud conviction and his record as Prime Minister overshadows his media appeal and charisma.  By hanging on he deprives Italian conservatives of a viable alternative.    When markets prefer a former Communist to a successful capitalist businessman, that says something!

Still, Berlusconi has had a remarkable capacity to come back and no one should underestimate his Machiavellian political skills.    His return to power would be a disaster for Europe and Italy.

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Going Over the Cliff!

Going over the fiscal cliff?

Warnings are everywhere that we must avoid the fiscal cliff or else face recession.    The fiscal cliff is a series of tax hikes and spending cuts resulting from an inability to achieve targets on deficit reduction set in 2011.   The spending cuts hit 1000 government programs, touching ones dear to both Republicans (military spending) and Democrats (Medicare).

Most of the cliff involves repeal of the payroll tax cut (which expires in December) and the Bush tax cuts (which expire January 1).   The argument is that the mix of tax increases and spending cuts will seriously damage the economy and cause growth rates to plummet into recessionary territory.

The impact of the “cliff”

All this is set up by the negotiations around the debt ceiling back in 2011.   The Republicans refused to raise the debt ceiling unless budget cuts were made to halt the increase in the deficit.    President Obama entered into negotiations with House Speaker John Boehner to try to reach a grand bargain to do just that.   The talks failed.  The “grand bargain” that the Republicans walked away from would have been about 85% spending cuts and 15% tax increases.

Republicans rejected any tax increase, making a deal all but impossible to reach.   236 of the 242 House Republicans, and 40 of the 47 Republican Senators have signed a pledge to Grover Norquist’s “Americans for Tax Reform” organization promising not to raise taxes ever.    Many Republicans figured that if they held out they could take the Presidency and Senate in 2012  and then craft their own measure with no need to compromise or raise taxes.

At the time people thought the Republicans had bested the President.   He was ridiculed by progressives as having been naive, willing to bargain with Republicans when their goal was to do whatever they could to defeat him in 2012.   He was called spineless for not invoking the 14th amendment to circumvent Congress and raise the debt ceiling unilaterally.  Obama’s lowest ratings were in the wake of the breakdown of those talks.   In retrospect Obama looks like a strategic genius – the Democrats have set up a situation where they hold the best cards, thanks to the sequestration deal and the automatic expiration of the Bush tax cuts.

So will the fiscal cliff cause a recession?   Perhaps, but the damage will be limited.  A couple charts:

Note how quickly the economy recovers after the sharp dip

And:

Note that the damage is mostly in Q1 2013, cliff or no cliff the prognoses for the rest of 2013 are similar

Beyond that, growth after 2013 is robust, even if we go over the cliff:

By 2014, things could be improving dramatically

Going over the cliff could enforce a kind of restraint that would yield long term benefits.  At the very least it would unclog the gridlock preventing real solutions to the budgetary and economic crises.   Letting the Bush tax cuts expire would render the pledge to Norquist meaningless — taxes would go up automatically and any agreement to cut taxes to the middle class would be a tax cut, not a tax increase.

So why all the alarm?

Besides the fact that the slow down in 2013 would be real, there is concern about the cuts themselves.   Many important government programs will be cut, angering the left.   Defense spending will be cut, angering the right.   Good!  This will force them into meaningful negotiations.

The Republicans essentially demanded no tax increases or defense cuts, but steep cuts to entitlements, social welfare programs, education and programs Republicans disliked (such as PBS).   In the heady days after the 2010 election that might have seemed feasible, especially if they were going to win back the Presidency and Senate.   Now it’s a pipe dream.

President Obama was re-elected, the Democrats remarkably gained two Senate seats and even though the Republicans still hold the House, the majority is smaller and overall Democratic candidates for the House received more votes than did the Republicans.    The Democrats have every incentive to make a deal now, while the Republicans would prefer to come up with a piecemeal deal to push the issue down the road to when political conditions are more favorable.   The farther they can get from the 2012 election the better it will be for them.

If we go off the fiscal cliff, the GOP will be forced to deal quickly.  To prevent tax increases on the middle class there may be a will to increase capital gains taxes – something that could raise significant money.   Those low tax rates are why Warren Buffet pays a lower rate than his Secretary and why Governor Romney  thought it more harmful to release his tax returns than to keep them secret.

Nothing should be off the table.    Each side could recover from political hits by the 2014 election, better to act sooner rather than later.   Going over the cliff will make both sides eager to reach a deal.

Expected tax increases should we go off “the fiscal cliff”

The danger in that is that the Democrats could make the mistake the Republicans did and overplay their hand.    In 2014 it is unlikely the Democrats will gain the House, and if this deal goes bad due to Democratic intransigence the Republicans could have another big off year election.    The Republicans blew it by not making a deal when they were in a position of strength, the Democrats can’t afford to make the same mistake.

It could be that the cliff is the only thing that will force both sides to actually make structural reforms that can lead to a sustainable budget.     It’s not just about the money.   The Democrats can “give” on issues like taxes and defense in part in exchange for tougher regulations on Wall Street and less resistance on appointments to agencies like the FHFA (Federal Housing Finance Agency).

Perhaps the Monster has a good heart?

Ultimately we all lose if there isn’t bold action as quickly as possible to get the government to a sustainable budget with a modicum of bipartisan support.    Fear of the cliff stands in the way of making bold choices and creates the danger of kicking the can down the road to deal with at a later date.   Go off the cliff.   Face reality.   A sharp down turn will be short and followed by growth.   The pain will be limited, and it just might force the politicians to make difficult choices.

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The importance of the Presidential Debate

The first Presidential debate in 1960 is credited with having helped Kennedy win a narrow election against Richard Nixon

The first Presidential debate on October 3rd is important.   Even if it comes off bland and boring, it will have been important.     Here’s why.

Mitt Romney is down, but not out.   He finished September with a crawl, having two very bad weeks after the month started with the Democratic convention outshining the Republican show from Tampa Bay.   If this had been an election held in normal economic times, Romney would be in Mondale territory, a sure loser.

But it’s not a normal election.  The global economy remains stagnate, unemployment is over 8% and Obama hasn’t lived up to the hope people had for him in 2008.  It may be that no human could have met those expectations, but people are willing to vote the President out – if they think the other guy would be better.

Mitt Romney has yet to provide a compelling reason to think he should be entrusted with the Presidency.   Yes, he’s a successful business man, but we have oodles of those in the US in both parties; that alone isn’t enough to think he should lead the country.   Romney needs to use the first debate to shift the conversation and give people a reason to vote for him, not just against Obama.   If the Republican insiders decide Romney is an almost certain loser, money will start flowing down ticket and the Presidential campaign will become secondary to GOP efforts to win the Senate and keep the House.

But that hasn’t happened yet.    If he is to avoid that fate he needs to start the turn around on October 3rd.   The headlines the next day must indicate that Romney had a strong debate performance, the President didn’t seem quite up to the task, and that the defining moment(s) of the debate (the sound bites those tens of millions who don’t care to sit through 90 minutes of political banter will hear) broke for Romney.

Ronald Reagan’s late October debate with President Carter helped turn a narrow Reagan lead into a blowout.

If he can pull that off, he’s back in this thing and the poor polling weeks of September will not have been a death knell, but a trial by fire that the candidate overcame.

This makes it an especially difficult debate for both men.    Romney will go after the President with everything he has, and will do his best to surprise and maybe bother a President that can show irritation.   If the race were close, both candidates would play it safer.   That would mean it would be better scripted, but also that neither would be hit by something completely unexpected.   But with Romney needing to go for a big win, he can’t play it safe — and that makes it more dangerous for the President as well.

The 1976 debates between Ford and Carter started the current tradition of Presidential debate. Those early debates were less scripted and rehearsed.

What to look for?

1)   Body language.   If President Obama becomes stiff and more distant, it will show that Romney’s getting under his skin and pushing him off his game.    The President has to look at ease and comfortable.  Romney on the other hand has to appear genuine.  If his smiles look forced or he moves nervously, it’ll be a sign he’s struggling.   Both need to look in control and Presidential.  If one of them doesn’t, then that may do more to influence perceptions than anything they say.

2)  New Ground.   Both candidates might stake out new ground in the debate.   Governor Romney almost has to – he needs to give people a reason to believe he won’t simply go back to the policies of the GOP before 2008.   President Obama may offer some tantalizing new specifics too — choosing to introduce them here rather than at the convention.  New ground can force the other candidate off script because it provides something unexpected (though, of course, both try to anticipate what the other might do).    If Governor Romney can provide something new that is exciting – a headline of the debate – and Obama is unable to respond effectively, it could be break through moment.

When Bush glanced at his watch in the 1992 debate with Perot and Clinton, his apparent disinterest helped fuel Clinton’s rise

3)  Foreign Policy.   With all due respect to neo-conservatives and other hawks, Governor Romney does not want to come off sounding like he’s ready to channel President Bush’s tough unilateralism.   This is a country still gripped by an “Iraq syndrome,” leaning isolationist and concerned more about home than abroad.    If Romney attacks Obama with a hawkish claim that Obama’s not being tough enough, Obama will say “Ask Bin Laden if I’m tough enough,” and then point out where tough talk and careless use of power led the country under the previous administration.   Romney should avoid foreign policy or trying to turn Libya into a scandal – that’s meat for the GOP base, but it won’t help him overall.

4)  Social issues.   Governor Romney has a dilemma.  If he could come off as an open minded moderate many independents would find him more appealing and he might alter the “gender gap.”    The trouble is that if he opens up on something like birth control, abortion or gay rights he might turn off a base that he needs out in force come November.  If he can create the impression he’s not a “severe conservative” on these issues without turning off his base, it’ll help him.

Reagan’s charm and delivery – such has his promise not to use the ‘you and inexperience of his opponent for political advantage’ in response to concerns about the 73 year old’s age – helped him use debates to his advantage.

5)  Zingers and one liners.   No doubt Governor Romney is practicing many of these, and President Obama may be focusing more on the response than trying to land a zinger.   It sounds like a good idea, and writers can come up with loads of possibilities.   The key is timing and delivery.  An ill timed zinger can seem weird, telegraphing that someone gave him this line and he wanted to use it.   It has to be delivered in a believable manner.   President Reagan is known for saying “there you go again, Mr. President” to Jimmy Carter in a way that made it seem Carter was exaggerating and Reagan was trustworthy.

But that line, if delivered with irritation or too understated might have seemed whiney or irrelevant.  Reagan delivered it masterfully and it is remembered to this day.   Walter Mondale did the same in his primary debate when he dismissed Gary Hart’s new ideas with “where’s the beef.”

6)  President Obama’s focus.  The President should focus on communicating to the people, almost as if Mitt Romney was not in the room.  If he can avoid letting himself get sucked into a one on one against Romney, he can play on his own turf, not Romney’s.   He needs to answer the questions, not get sucked into, well, a debate!

What not to look for:  a real glimpse at what either of them will actually do when elected.   Right now for both candidates the debate is about the horse race and focus groups.   That may sound cynical, but it’s true.   If either of them can convince people he is speaking with true substance and honesty, that candidate will do very well.   It’s the first rule of politics: “sincerity is key, and once you learn to fake it, then you’re home free.”  (Styx – “Fallen Angel”)

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