Whose side is Obama, on?. His constituents or the big banks who have been the recipients of Bush and Cheney’s and his administration’s largesse?
Rhetorical question, right?
Yes, but the novelty is that the outline (at least) of Obama’s betrayal is recorded in the NYT, in a front page story on how the banking lobby removed the “centerpiece” of the Helping Families Save Their Homes Act, namely giving judges the power to lower the amount owed on a home loan. (See excerpts from the Times story below.)
Never mind that keeping families in their homes is an important key to stabilizing neighborhoods and perhaps also to the nation’s economic recovery.
You’d think such a provision would be a priority for this government. But the sad story is that the banks and Secretary Geithner didn’t like it and so the Obama administration didn’t push for it, leaving a vacuum that the banks and the Republicans were all too happy to fill. In the void left by Geithner/Obama, the banks had little trouble rounding up a gaggle of Senate Democrats to seal the deal.
Selections from: The New York Times
June 5, 2009
(Ailing, )Banks Still Field Strong Lobby at Capitol
By STEPHEN LABATON
http://www.nytimes.com/2009/06/05/business/economy/05bankrupt.html?_r=1&sq=ailing%20banks%20still%20field%20strong%20lobby%20at%20capitol&st=cse&scp=1&pagewanted=print
Throughout it all, the banks took advantage of the Obama administration’s seeming ambivalence. Despite its occasional populist rhetoric, the White House was conspicuously absent from weeks of pivotal negotiations this spring.
“This would have been a much different deal if Obama had pressed it,” said Camden R. Fine, head of the Independent Community Bankers of America and one of the chief lobbyists opposing the bankruptcy change. “The fact that Obama effectively sat it out helped us a great deal.
”Surprising Ease
In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did they defeat the cramdown provision, but the banks walked away with billions in new bailout money.
Housing advocacy groups argued that it was unfair that bankruptcy judges have had the authority since 1978 to modify mortgages on vacation homes, farms and even luxury yachts, but not on primary residences. They also argued that a string of federal programs to help reduce foreclosures had been ineffective because of resistance by lenders and investors who own pools of loans, all of whom stand to lose money when a mortgage is modified.
Those arguments won the day in the House, which adopted the legislation on March 5 by a 234-191 vote.
In the Senate, where Republicans were looking for a chance to recoup after narrowly failing to block Mr. Obama’s huge stimulus package, the banks argued that the proposal interfered with their contractual rights.
But the real threat was to their profits. The proposal would have shifted negotiating power to the millions of troubled homeowners who could use the threat of bankruptcy to wrest lower monthly payments from lenders. The banks claimed that that would force them to raise rates.
That claim is in dispute. For one thing, the legislation would not have applied to new mortgages….
While Mr. Obama reaffirmed his support for the proposal shortly after becoming president, administration officials barely participated in the negotiations, a factor that lobbyists said significantly strengthened their hand. Lawmakers who have discussed the issue with the administration said that the president’s senior aides had concluded that a searing fight with the industry was simply not worth the cost.
Moreover, Timothy F. Geithner, the Treasury secretary, did not seem to share Mr. Obama’s enthusiasm for the bankruptcy change.
Mr. Geithner was lobbied by the industry early. Two days after he was sworn in, he invited Mr. Fine from the community bankers to his office for a private meeting. The association, with influential members in every Congressional district, is one of Washington’s most powerful trade groups.
A senior adviser to Mr. Geithner said the administration supported the cramdown proposal, but it preferred that distressed homeowners seek to modify their loans through the Treasury’s new $75 billion program, which rewarded banks if they modified home loans, rather than through bankruptcy court.
Mr. Durbin acknowledges that it was a mistake not to call on the administration for help.
“If I would have known how it would unfold, I would have called on the White House earlier to get involved,” he said….
There was no counterweight to that legislative muscle. Bankrupt homeowners do not have a political action committee or lobbyists.
Mr. Fine reports that the political action committees run by his association alone have built a war chest of nearly $2 million, a 40 percent jump over the last year, even though members have had to cut other expenses in the recession.
“The banks get it,” Mr. Fine said. “They understand you need a strong political action committee to get access to the fund-raisers. That’s where the lawmakers are.”
Showing posts with label economic policy. Show all posts
Showing posts with label economic policy. Show all posts
Sunday, June 07, 2009
Wednesday, February 11, 2009
William Black (Huffington Post) Geithner (Obama) Continues Bush's corruption
With Bush it was malevolence, with Obama it's apparently stupidity and ignorance. Stupidity for believing that Geithner had some answers even though he contributed to the Bush plan that many could see would only help the most corrupt elements. And ignorance in thinking that listening to such discredited veterans as Lawrence Summers would do any good. It's not too early to see that Obama is way off base and has chosen in too many cases, for reasons which are not entirely clear, people who will contribute to failure in too many critical policies. We hoped for change and we got someone in training wheels. We're wondering now if Hillary could have done any worse. --RB
***
William K. Black
Associate Professor, University of Missouri; Senior regulator during S&L debacle
February 10, 2009 |
Huffington Post
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.htmlThe Audacity of Dopes
We are being played for chumps. The Bush and Obama plans could only have been designed by failed bankers -- for their principal beneficiaries are failed bankers. We already know enough to confirm that the Bush administration made us the "fool" in the market by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee" program. The bankers that caused the crisis designed both programs. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation.
Worse, Mr. Geithner, the senior public official who, with former Treasury Secretary Paulson, designed the failed Bush plan is the architect of the disastrous Obama plan. Indeed, as theNew York Times has just revealed, it should be called the Geithner plan. He overcame intense opposition within the Obama administration and designed a plan that is even worse than the failed Bush program. Geithner's gifts to the bankers that caused the crisis include: a unnecessary taxpayer bailout of "risk capital," a massive coverup of their banks' insolvency, gutting the proposed limits on executive compensation, and devising a "guarantee" mechanism designed to hide the expenses of the unprincipled bailouts from the American public. Remember, executive compensation is not "merely" a fairness issue. Executive compensation and the compensation systems used for appraisers, accountants, and rating agencies were designed, and served, to create the perverse incentives and ethical rot that caused the ongoing financial crises by producing a "Gresham's dynamic" in which fraudulent and abusive lending and accounting practices drove good practices out of the marketplace.
Here's the amazing part -- the bankers are so arrogant that they bragged to a sympathetic CNBC commentator they are playing us:
"
There are proven ways to resolve the crisis that are far cheaper and more effective because they don't subsidize bankers and "risk capital." We know how to resolve failed banks. The Federal Deposit Insurance Corporation (FDIC) can place even the largest banks in "pass through" receiverships on Friday at the close of business and reopen them as "New Federal" bank Monday morning with minimal disruption to customers and creditors and retain "going concern" value. This is how the Reagan administration resolved failed S&Ls during the debacle.
The FDIC appoints a senior manager to ensure that "New Federal" is run prudently. There is plenty of unemployed banking talent available. Hundreds of good bankers lost their jobs during the financial bubble because they refused to make bad loans. Research has shown that its sister agency, FSLIC, appointed receivership managers that greatly reduced losses during the S&L debacle. Leaving the managers in charge of failed banks that they led into insolvency is suicidal. The new senior leader is picked based on expertise in prudent lending and integrity. If we want failed banks to return promptly to making prudent loans and help lead an economic recovery an S&L style "New Federal" is the best possible device. The existing managers have terrible incentives -- to cover up existing losses and to make bad or even fraudulent loans that produce the greatest (fictional) accounting income and to "live large" through bonuses and perks. (The Obama compensation limits are political cover. The bankers have designed the "guarantee" plan to ensure that the compensation limits will be illusory.)
The FDIC managers have the correct incentives to finally produce an honest evaluation of which assets are toxic and how much they are worth. This transparency is essential if we are to end this crisis. Under the Bush and Obama plans we retain the existing managers that have overwhelming incentives to cover up the losses. The bankers have designed the guarantee plan to encourage banks to continue to cover up their toxic assets and not recognize their losses. These cover-ups make a financial crisis last longer and increase the taxpayers' costs.
The FDIC managers preserve the going concern value by making prudent loans and get the "New Federal" in shape to be acquired. By providing reliable information about the toxic assets the managers reduce acquisition risks, which expands the number of bidders and reduces the financial assistance required to aid the acquisition.
"New Federal" receiverships dramatically reduce cash needs. Most costs are deferred until the New Federals are sold.
Pass through receiverships save the taxpayers money and prevent perverse managerial incentives because they do not subsidize "risk capital" when banks are insolvent. Common and preferred stock and subordinated debt in banks are "risk capital." Their holders are supposed to receive nothing if a bank becomes insolvent, but the Bush and Obama plans reward them. There is no need to do this. Subsidizing risk capital and maintaining the failed managers at insolvent banks creates the worst possible incentives. It will cause future crises. It will delay the recovery from the ongoing crises. It robs the U.S. taxpayers and primarily benefits the wealthy -- many of them non-U.S. citizens. The contract they made was that they would get nothing if the bank failed. It has failed, and they are often complicit in those failures. The bankers have convinced the Bush and Obama administrations that the taxpayers should be looted to bail out risk capital. We should stop listening to the folks that caused the crisis and have interests hostile to our interests. Let's stop them from using us as chumps.
Read more:
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.html
William K. Black, Associate Professor of Economics and Law, University of Missouri - Kansas City. He held senior regulatory positions during the S&L debacle and is the author of "The Best Way to Rob a Bank is to Own One" (2005)
***
William K. Black
Associate Professor, University of Missouri; Senior regulator during S&L debacle
February 10, 2009 |
Huffington Post
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.htmlThe Audacity of Dopes
We are being played for chumps. The Bush and Obama plans could only have been designed by failed bankers -- for their principal beneficiaries are failed bankers. We already know enough to confirm that the Bush administration made us the "fool" in the market by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee" program. The bankers that caused the crisis designed both programs. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation.
Worse, Mr. Geithner, the senior public official who, with former Treasury Secretary Paulson, designed the failed Bush plan is the architect of the disastrous Obama plan. Indeed, as theNew York Times has just revealed, it should be called the Geithner plan. He overcame intense opposition within the Obama administration and designed a plan that is even worse than the failed Bush program. Geithner's gifts to the bankers that caused the crisis include: a unnecessary taxpayer bailout of "risk capital," a massive coverup of their banks' insolvency, gutting the proposed limits on executive compensation, and devising a "guarantee" mechanism designed to hide the expenses of the unprincipled bailouts from the American public. Remember, executive compensation is not "merely" a fairness issue. Executive compensation and the compensation systems used for appraisers, accountants, and rating agencies were designed, and served, to create the perverse incentives and ethical rot that caused the ongoing financial crises by producing a "Gresham's dynamic" in which fraudulent and abusive lending and accounting practices drove good practices out of the marketplace.
Here's the amazing part -- the bankers are so arrogant that they bragged to a sympathetic CNBC commentator they are playing us:
"
What a delicious irony this is--last week, just as President Obama was publicly bashing the stupidity of the banks ... his economic team [was] privately begging for input from Wall Street. The administration was conducting around-the-clock discussions and interviews with senior Wall Street executives, including many from the same firms he was theoretically appalled with, about how to fix the lingering financial crisis. "
There are proven ways to resolve the crisis that are far cheaper and more effective because they don't subsidize bankers and "risk capital." We know how to resolve failed banks. The Federal Deposit Insurance Corporation (FDIC) can place even the largest banks in "pass through" receiverships on Friday at the close of business and reopen them as "New Federal" bank Monday morning with minimal disruption to customers and creditors and retain "going concern" value. This is how the Reagan administration resolved failed S&Ls during the debacle.
The FDIC appoints a senior manager to ensure that "New Federal" is run prudently. There is plenty of unemployed banking talent available. Hundreds of good bankers lost their jobs during the financial bubble because they refused to make bad loans. Research has shown that its sister agency, FSLIC, appointed receivership managers that greatly reduced losses during the S&L debacle. Leaving the managers in charge of failed banks that they led into insolvency is suicidal. The new senior leader is picked based on expertise in prudent lending and integrity. If we want failed banks to return promptly to making prudent loans and help lead an economic recovery an S&L style "New Federal" is the best possible device. The existing managers have terrible incentives -- to cover up existing losses and to make bad or even fraudulent loans that produce the greatest (fictional) accounting income and to "live large" through bonuses and perks. (The Obama compensation limits are political cover. The bankers have designed the "guarantee" plan to ensure that the compensation limits will be illusory.)
The FDIC managers have the correct incentives to finally produce an honest evaluation of which assets are toxic and how much they are worth. This transparency is essential if we are to end this crisis. Under the Bush and Obama plans we retain the existing managers that have overwhelming incentives to cover up the losses. The bankers have designed the guarantee plan to encourage banks to continue to cover up their toxic assets and not recognize their losses. These cover-ups make a financial crisis last longer and increase the taxpayers' costs.
The FDIC managers preserve the going concern value by making prudent loans and get the "New Federal" in shape to be acquired. By providing reliable information about the toxic assets the managers reduce acquisition risks, which expands the number of bidders and reduces the financial assistance required to aid the acquisition.
"New Federal" receiverships dramatically reduce cash needs. Most costs are deferred until the New Federals are sold.
Pass through receiverships save the taxpayers money and prevent perverse managerial incentives because they do not subsidize "risk capital" when banks are insolvent. Common and preferred stock and subordinated debt in banks are "risk capital." Their holders are supposed to receive nothing if a bank becomes insolvent, but the Bush and Obama plans reward them. There is no need to do this. Subsidizing risk capital and maintaining the failed managers at insolvent banks creates the worst possible incentives. It will cause future crises. It will delay the recovery from the ongoing crises. It robs the U.S. taxpayers and primarily benefits the wealthy -- many of them non-U.S. citizens. The contract they made was that they would get nothing if the bank failed. It has failed, and they are often complicit in those failures. The bankers have convinced the Bush and Obama administrations that the taxpayers should be looted to bail out risk capital. We should stop listening to the folks that caused the crisis and have interests hostile to our interests. Let's stop them from using us as chumps.
Read more:
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.html
William K. Black, Associate Professor of Economics and Law, University of Missouri - Kansas City. He held senior regulatory positions during the S&L debacle and is the author of "The Best Way to Rob a Bank is to Own One" (2005)
Monday, September 22, 2008
Mark Crispin Miller (emptywheel) NO! to bailout + urls + Alex Cockburn etc
How many people think that Cheney and Bush are distressed by the devolution of our financial system and are seriously trying to make it right? They are just as distressed by the thousands of dead young people who have already come home in bodybags -- perhaps the smallest symbol of the ongoing horror.
OK, I see you're all with me on this one.
Fewer I suspect agree with me that the reason that they are chortling while we piss our pants is because they actively want to destroy the possibility of civil life everywhere, in order to exercise their power of destruction. What's the use of having nuclear weapons unless you're going to use them? Their agenda of permanent war is the vehicle for their goals.
Let's examine one piece of evidence. A couple of months before Eliot Spitzer's career blew up in scandal, he testified before Congress regarding his initiative and that of one or two other governors to rein in some of the burgeoning abuses of the home mortgage system in their states. Spitzer testified that the Cheney-Bush administration used their power to stop him and the others from putting an end to some of the abuses. .
Now why would Bush and Cheney do that?
Ronald
***
Here's a brief piece circulated by Mark Crispin's Miller and see his links below to more strong pieces.
No!
By: emptywheel
September 20, 2008
http://emptywheel.firedoglake.com/2008/09/20/no/
CR has posted the "bailout plan," as it currently stands.
Glenn Greenwald has an important response, as does gjohnsit over at DKos.
But here's all you need to know. Hank Paulson is asking for $700,000,000,000. That's $2,333 from every man, woman, and child in the United States.
In exchange for that money, Paulson is unwilling to accept any demands to make markets more transparent, limit executive compensation, or assist homeowners fighting foreclosure. The sole purpose of that $700,000,000,000 is to bail out Wall Street and only Wall Street, but not to fix it, or our larger economy.
He is asking to be absolutely unbound by any law when he spends that money.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
The only "string" attached is a semi-annual Congressional report--one in which they would have zero leverage to influence his choices.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Paulson didn't even have the class to call this a "review"--which underscores the degree to which he wants to be unbound by any and all review, legal, congressional, or anything else.
Hank Paulson--one of the CEOs who got us into this mess--is asking each and every American to give him $2,333 to do with as he sees fit, with absolutely no strings attached.
No.
--~--~---------~--~----~------------~-------~--~----~
For more News From Underground, visit http://markcrispinmiller.com
Glenn Greenwald at Salon:
http://www.salon.com/opinion/greenwald/
James Moore at HuffPost:
http://www.huffingtonpost.com/jim-moore/a-nation-of-village-idiot_b_127340.html
gjohnsit at DailyKos:
http://www.dailykos.com/story/2008/9/20/145129/341/61/604055
William Greider in The Nation:
http://www.thenation.com/doc/20081006/greider
Here's Alex Cockburn's take, in less than a sentence, on what they're doing to us:
"... a bailout program designed to bail out the thieves running our financial system, and stick middle America with the pricetag – heftier than you can imagine"
And Cockburn's recommendations for further reading.
For the practicalities and implications of the thievery on Wall Street I highly recommend the pieces on our site this weekend by Michael Hudson, Pam Martens and our other writers
***
See also Democracy Now last week for the segment with Michael Hudson who explained very clearly that indeed we're bailing out the thieves as well as carrying the economic destruction forward. --RB
OK, I see you're all with me on this one.
Fewer I suspect agree with me that the reason that they are chortling while we piss our pants is because they actively want to destroy the possibility of civil life everywhere, in order to exercise their power of destruction. What's the use of having nuclear weapons unless you're going to use them? Their agenda of permanent war is the vehicle for their goals.
Let's examine one piece of evidence. A couple of months before Eliot Spitzer's career blew up in scandal, he testified before Congress regarding his initiative and that of one or two other governors to rein in some of the burgeoning abuses of the home mortgage system in their states. Spitzer testified that the Cheney-Bush administration used their power to stop him and the others from putting an end to some of the abuses. .
Now why would Bush and Cheney do that?
Ronald
***
Here's a brief piece circulated by Mark Crispin's Miller and see his links below to more strong pieces.
No!
By: emptywheel
September 20, 2008
http://emptywheel.firedoglake.com/2008/09/20/no/
CR has posted the "bailout plan," as it currently stands.
Glenn Greenwald has an important response, as does gjohnsit over at DKos.
But here's all you need to know. Hank Paulson is asking for $700,000,000,000. That's $2,333 from every man, woman, and child in the United States.
In exchange for that money, Paulson is unwilling to accept any demands to make markets more transparent, limit executive compensation, or assist homeowners fighting foreclosure. The sole purpose of that $700,000,000,000 is to bail out Wall Street and only Wall Street, but not to fix it, or our larger economy.
He is asking to be absolutely unbound by any law when he spends that money.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
The only "string" attached is a semi-annual Congressional report--one in which they would have zero leverage to influence his choices.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Paulson didn't even have the class to call this a "review"--which underscores the degree to which he wants to be unbound by any and all review, legal, congressional, or anything else.
Hank Paulson--one of the CEOs who got us into this mess--is asking each and every American to give him $2,333 to do with as he sees fit, with absolutely no strings attached.
No.
--~--~---------~--~----~------------~-------~--~----~
For more News From Underground, visit http://markcrispinmiller.com
Glenn Greenwald at Salon:
http://www.salon.com/opinion/greenwald/
James Moore at HuffPost:
http://www.huffingtonpost.com/jim-moore/a-nation-of-village-idiot_b_127340.html
gjohnsit at DailyKos:
http://www.dailykos.com/story/2008/9/20/145129/341/61/604055
William Greider in The Nation:
http://www.thenation.com/doc/20081006/greider
Here's Alex Cockburn's take, in less than a sentence, on what they're doing to us:
"... a bailout program designed to bail out the thieves running our financial system, and stick middle America with the pricetag – heftier than you can imagine"
And Cockburn's recommendations for further reading.
For the practicalities and implications of the thievery on Wall Street I highly recommend the pieces on our site this weekend by Michael Hudson, Pam Martens and our other writers
***
See also Democracy Now last week for the segment with Michael Hudson who explained very clearly that indeed we're bailing out the thieves as well as carrying the economic destruction forward. --RB
Monday, September 03, 2007
WSJ: Hold the line Bernanke
When was the last time you agreed with a WSJ editorial, of all things? But when they're right they're right.
Except of course for their last paragraph where they call for tax cuts, by which they mean forcing the middle and lower classes to pay an even greater proportion of the taxes that are collected. Of course tax cuts for the middle and lower classes should be enacted and the money raised from those with more than say, $5 million of net income. Would that be fair?
Check out the useful graphs (available on the Web) which I've seen on the net but not the NYTimes which only printed a confused and misleading version. One look at the graph of the price of houses should make clear how perversely asleep were the regulators. It doesn't take a Ph.D. to recognize that something should be done -- as in raising interest rates -- when housing prices go to say 10 times their historical averages.
Ronald
http://desip.igc.org
Wall Street Journal
August 31, 2007
REVIEW & OUTLOOK
The Song of Bernanke
August 31, 2007; Page A8
And so did a cry of lamentation arise from the multitudes unto Bernanke: Spare us, Oh Lord, from the wrath of subprime.
From the House of Countrywide wailing was heard, from the land of Dodd and Schumer there was gnashing of polls, and from the Kingdoms of Bear, Lehman and Cramer the rending of fine Italian garments: Set your righteous hand, glorious and merciful Fed, against our enemies among the rating agencies, the risk-averse and short-sellers. In your power and majesty, you need only say the word and interest rates shall fall, liquidity like manna shall descend from the skies, and easy credit shall flow once again across the parched and barren land.
Try as we might, we can't find this passage in the Old Testament. But you wouldn't know it from the increasingly desperate pleas for Ben Bernanke and the Federal Reserve to save the economy, if not all of mankind, from the August credit crunch. Judging from the media incantations, you'd think Chairman Bernanke could simply cut the fed funds rate and credit worries would crumble like Jericho.
We think, instead, that Mr. Bernanke has been doing well these last few weeks by resisting this belief in the Fed as Yahweh. The central bank has been doing good work in its role as a financial system plumber, plugging leaks as they spring up, and in reassuring banks that its liquidity window is open. Mr. Bernanke has done especially well to resist being bullied by Wall Street, the homebuilders, automakers and easy-money editorialists into opening the broader credit spigots. When he speaks at the Fed's annual Jackson Hole retreat today, Chairman Bernanke -- who favors transparency -- has a chance to explain how the central bank contributed to the current problems, and why it can't be anyone's savior.
Mr. Bernanke is in part a hostage to the legacy of the Alan Greenspan era, when the Fed seemed to ride to the rescue during every financial crisis. This is the famous "Greenspan put," which is as much legend as reality. The current market and media pleas to Mr. Bernanke are in part an attempt to get the new Fed chief to behave as if it is something of a guarantee. But the Fed doesn't have the same flexibility now, in part because its reckless policy in the early part of this decade helped produce the credit excesses we are now trying to work off.
As Dallas Fed Governor Richard Fisher has candidly acknowledged, the central bank kept interest rates too low for too long. For much if not all of 2003 through 2005, short-term interest rates were below the observed rate of inflation. This is a subsidy for debt creation. And debt certainly was created, flowing into the housing markets and causing a boom in prices out of all historic proportion. The first chart suggests the magnitude of the housing bubble relative to median family income.
The same incentive for debt fed the boom on Wall Street, where creative minds found all sorts of new ways to package and sell mortgage assets. There was nothing corrupt in most of this, and given the low cost of credit it made sense at the time. Everyone loved the boom while it lasted, except that home prices can't increase at 10% to 20% a year forever. The Fed was feeding inflationary expectations that hadn't been seen since the late 1970s. The price of gold is one rough proxy for those expectations, and the second chart suggests the magnitude of its mistake.
It hardly matters, as some claim in defense of the Fed, that officially measured inflation only rose to 3.4% from 1.9% from 2003-2005. What matters is the magnitude of the increase and altered expectations. The U.S. didn't arrive at 13% inflation in a single leap during the 1970s. It got there step by step, as the Fed was called upon again and again to save a sputtering economy with easy credit, and it eventually lost all credibility. That's one risk the Fed faces now as it confronts the lamentations of the bubble boys. A reckless reflation runs the risk of bigger problems down the road if it results in a global loss of confidence in Mr. Bernanke, or in the dollar as a store of value.
The Fed's first obligation isn't to reflate the bubble but is to protect the larger economy and especially price stability. One economic reality today is that the Fed's debt subsidy led to a misallocation of resources into real estate and certain debt instruments that is in the process of being worked off. The losses are real, and someone will have to pay them. Housing prices will fall in some markets for some time to come. There is no joy in saying so, but this is what happens when credit is no longer subsidized and markets change their risk assessments.
One question looking forward is how much the housing recession will affect consumer spending and thus the overall economy. The same commentators who said only two months ago that all was well now say that housing will tank everything if the Fed does nothing. Yet the economy entered this period on an upswing, as yesterday's upward revision of second quarter GDP to 4%, from the preliminary 3.4%, shows. Corporate profits rose smartly, and last week's industrial production numbers were good. Weekly jobless claims have been climbing, but the overall labor market has been healthy.
The Fed may well have to act if the economy does begin to stumble. But if that happens, the Fed isn't the only or even the best policy lever. Fiscal policy is also available, which means the Bush Administration and Congress should be considering another tax cut. A tax cut could revive incentives for risk-taking among those feeling burned by the housing fallout. The federal deficit is heading down to 1% of GDP, and nothing would be worse for tax receipts than a recession.
We realize tax cutting is taboo in today's Washington, but if the Presidential candidates aren't considering a tax cut proposal, they should be. The entreaties of Wall Street notwithstanding, the Federal Reserve is no miracle worker.
URL for this article:
http://online.wsj.com/article/SB118852121338714146.html
Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only.
R
Except of course for their last paragraph where they call for tax cuts, by which they mean forcing the middle and lower classes to pay an even greater proportion of the taxes that are collected. Of course tax cuts for the middle and lower classes should be enacted and the money raised from those with more than say, $5 million of net income. Would that be fair?
Check out the useful graphs (available on the Web) which I've seen on the net but not the NYTimes which only printed a confused and misleading version. One look at the graph of the price of houses should make clear how perversely asleep were the regulators. It doesn't take a Ph.D. to recognize that something should be done -- as in raising interest rates -- when housing prices go to say 10 times their historical averages.
Ronald
http://desip.igc.org
Wall Street Journal
August 31, 2007
REVIEW & OUTLOOK
The Song of Bernanke
August 31, 2007; Page A8
And so did a cry of lamentation arise from the multitudes unto Bernanke: Spare us, Oh Lord, from the wrath of subprime.
From the House of Countrywide wailing was heard, from the land of Dodd and Schumer there was gnashing of polls, and from the Kingdoms of Bear, Lehman and Cramer the rending of fine Italian garments: Set your righteous hand, glorious and merciful Fed, against our enemies among the rating agencies, the risk-averse and short-sellers. In your power and majesty, you need only say the word and interest rates shall fall, liquidity like manna shall descend from the skies, and easy credit shall flow once again across the parched and barren land.
Try as we might, we can't find this passage in the Old Testament. But you wouldn't know it from the increasingly desperate pleas for Ben Bernanke and the Federal Reserve to save the economy, if not all of mankind, from the August credit crunch. Judging from the media incantations, you'd think Chairman Bernanke could simply cut the fed funds rate and credit worries would crumble like Jericho.
We think, instead, that Mr. Bernanke has been doing well these last few weeks by resisting this belief in the Fed as Yahweh. The central bank has been doing good work in its role as a financial system plumber, plugging leaks as they spring up, and in reassuring banks that its liquidity window is open. Mr. Bernanke has done especially well to resist being bullied by Wall Street, the homebuilders, automakers and easy-money editorialists into opening the broader credit spigots. When he speaks at the Fed's annual Jackson Hole retreat today, Chairman Bernanke -- who favors transparency -- has a chance to explain how the central bank contributed to the current problems, and why it can't be anyone's savior.
Mr. Bernanke is in part a hostage to the legacy of the Alan Greenspan era, when the Fed seemed to ride to the rescue during every financial crisis. This is the famous "Greenspan put," which is as much legend as reality. The current market and media pleas to Mr. Bernanke are in part an attempt to get the new Fed chief to behave as if it is something of a guarantee. But the Fed doesn't have the same flexibility now, in part because its reckless policy in the early part of this decade helped produce the credit excesses we are now trying to work off.
As Dallas Fed Governor Richard Fisher has candidly acknowledged, the central bank kept interest rates too low for too long. For much if not all of 2003 through 2005, short-term interest rates were below the observed rate of inflation. This is a subsidy for debt creation. And debt certainly was created, flowing into the housing markets and causing a boom in prices out of all historic proportion. The first chart suggests the magnitude of the housing bubble relative to median family income.
The same incentive for debt fed the boom on Wall Street, where creative minds found all sorts of new ways to package and sell mortgage assets. There was nothing corrupt in most of this, and given the low cost of credit it made sense at the time. Everyone loved the boom while it lasted, except that home prices can't increase at 10% to 20% a year forever. The Fed was feeding inflationary expectations that hadn't been seen since the late 1970s. The price of gold is one rough proxy for those expectations, and the second chart suggests the magnitude of its mistake.
It hardly matters, as some claim in defense of the Fed, that officially measured inflation only rose to 3.4% from 1.9% from 2003-2005. What matters is the magnitude of the increase and altered expectations. The U.S. didn't arrive at 13% inflation in a single leap during the 1970s. It got there step by step, as the Fed was called upon again and again to save a sputtering economy with easy credit, and it eventually lost all credibility. That's one risk the Fed faces now as it confronts the lamentations of the bubble boys. A reckless reflation runs the risk of bigger problems down the road if it results in a global loss of confidence in Mr. Bernanke, or in the dollar as a store of value.
The Fed's first obligation isn't to reflate the bubble but is to protect the larger economy and especially price stability. One economic reality today is that the Fed's debt subsidy led to a misallocation of resources into real estate and certain debt instruments that is in the process of being worked off. The losses are real, and someone will have to pay them. Housing prices will fall in some markets for some time to come. There is no joy in saying so, but this is what happens when credit is no longer subsidized and markets change their risk assessments.
One question looking forward is how much the housing recession will affect consumer spending and thus the overall economy. The same commentators who said only two months ago that all was well now say that housing will tank everything if the Fed does nothing. Yet the economy entered this period on an upswing, as yesterday's upward revision of second quarter GDP to 4%, from the preliminary 3.4%, shows. Corporate profits rose smartly, and last week's industrial production numbers were good. Weekly jobless claims have been climbing, but the overall labor market has been healthy.
The Fed may well have to act if the economy does begin to stumble. But if that happens, the Fed isn't the only or even the best policy lever. Fiscal policy is also available, which means the Bush Administration and Congress should be considering another tax cut. A tax cut could revive incentives for risk-taking among those feeling burned by the housing fallout. The federal deficit is heading down to 1% of GDP, and nothing would be worse for tax receipts than a recession.
We realize tax cutting is taboo in today's Washington, but if the Presidential candidates aren't considering a tax cut proposal, they should be. The entreaties of Wall Street notwithstanding, the Federal Reserve is no miracle worker.
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