A government shutdown once again loomed, and familiar deadlines and ultimatums flew around Washington. And Congress just used the threat to loosen the rules created in the wake of the financial crisis, a victory for Wall Street banks in their constant and well-funded campaign against reform.
The rules they have targeted are designed to reduce the risk of another financial meltdown, like the one that drove us into the Great Recession and could have been much worse. Though the repeal has been styled by some as a technical amendment, nothing could be farther from the truth.
Think about the best way to decide legislative policy in the devilishly complex and risk-laden area of derivatives. These are the financial contracts that brought down AIG, the event that triggered the crisis. You might imagine careful deliberation and debate, leading to a thoughtful vote in Congress in which elected representatives must stand up and be counted so that they could be held responsible for a difficult decision.
Of course, that is not how the House of Representatives works, especially not the current lame duck version. A 1,600 page Omnibus Spending Bill appeared Tuesday night and passed the House late on Thursday night. We have become familiar with these spending bills that have replaced reasoned budgeting and serially risk shutdowns just so the administration can be bullied every few months.
This time around, House sponsors attached a provision amending the Dodd-Frank financial reform law. They did this in the dead of night and at the last minute. Lobbyists, who are paid to make certain that the banks can continue to do as much risky business as possible despite the new regulatory regime, pushed to have a provision repealing the “swaps push-out” section of Dodd-Frank slipped into the spending bill so that any resistance to the repeal would risk another shutdown. Citigroup lobbyists wrote 70 out of 85 lines of the original bill.
That’s Washington style representative democracy for you.
The swaps push-out provision requires banks to transact their swaps business in separate subsidiaries. The concept is that any bank swaps business should be done outside the bank itself, which is backed by FDIC deposit insurance and the many supports provided by the Federal Reserve.
Swaps are complex derivatives contracts requiring payments in the future that change as markets prices for stocks, bonds, oil and many other traded assets change. Thus, they create large and volatile financial obligations going back and forth between a bank and its contract “counterparty,” either a company (like AIG), a government or another bank.
Counterparties to the banks who rely on the banks’ performance of its obligations can rely on these federal supports and can assume that the government will step in if a problem occurs. This can embroil the government in any bank default making a bailout more likely, good news for bank creditors like the swap counterparties. To avoid this, the swaps push-out requires a separate corporation, not entitled to the federal supports, to create a firewall, insulating taxpayers from the riskiest trading.
Though swaps were regulated in Dodd-Frank, there were plenty of loopholes, so a great deal of that business will go forward just as before. The swaps push-out section now under threat was already watered down in the original Dodd-Frank deliberations. Nonetheless, it still provides important protection. With swaps push-out, there’s some possibility that the federal government wouldn’t be dragged into a bank default because of the bank safety net.
But members of Congress, urged on by big money from Wall Street, decided that this sensible buffer between casino-like derivatives trading and the American taxpayer was such a bad idea that it had to be discarded through surreptitious and disguised means.
The banks have been out to kill the swaps push-out from the beginning. That makes sense for them since the capital needed to back a subsidiary would cost them more than their basic capital. Banks can raise general capital cheaply since investors have learned that failure is not a concern for banks that are too-big-to-fail. Capital funding for a subsidiary that is separated from this safety net is more costly because a bail out is less likely.
The banks also got some of their customers who often enter into swaps with the banks to urge repeal. The customers complained that their swaps would cost more. Of course they would, since the bank subsidiary’s capital backing the swaps would cost more. But the customers, as contract counterparties, have been relying on the too-big-to-fail safety net. Like investors in the banks, these customers simply should not benefit from a pipeline to the American taxpayers. Any additional cost is an element of elimination of that benefit, nothing more.
In Washington, banks have been allowed to set the terms of the regulatory debate. The financial crisis provides many lessons, but one of its central was that allowing banks free reign leads to disastrous results for all Americans. Six years after the onset of the financial crisis, it’s too soon to forget that lesson and revive too-big-to-fail.
By: Wallace Turbeville, The American Prospect, December 12, 2014
Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more, because interest rates can’t go below zero. On Dec. 16, 2008, the Fed set its interest target between 0 and 0.25 percent, where it remains to this day.
The fact that we’ve spent six years at the so-called zero lower bound is amazing and depressing. What’s even more amazing and depressing, if you ask me, is how slow our economic discourse has been to catch up with the new reality. Everything changes when the economy is at rock bottom — or, to use the term of art, in a liquidity trap (don’t ask). But for the longest time, nobody with the power to shape policy would believe it.
What do I mean by saying that everything changes? As I wrote way back when, in a rock-bottom economy “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.” Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.
This may all sound wild and radical, but it isn’t. In fact, it’s what mainstream economic analysis says will happen once interest rates hit zero. And it’s also what history tells us. If you paid attention to the lessons of post-bubble Japan, or for that matter the U.S. economy in the 1930s, you were more or less ready for the looking-glass world of economic policy we’ve lived in since 2008.
But as I said, nobody would believe it. By and large, policy makers and Very Serious People in general went with gut feelings rather than careful economic analysis. Yes, they sometimes found credentialed economists to back their positions, but they used these economists the way a drunkard uses a lamppost: for support, not for illumination. And what the guts of these serious people have told them, year after year, is to fear — and do — exactly the wrong things.
Thus we were told again and again that budget deficits were our most pressing economic problem, that interest rates would soar any day now unless we imposed harsh fiscal austerity. I could have told you that this was foolish, and in fact I did, and sure enough, the predicted interest rate spike never happened — but demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.
We were also told repeatedly that printing money — not what the Fed was actually doing, but never mind — would lead to “currency debasement and inflation.” The Fed, to its credit, stood up to this pressure, but other central banks didn’t. The European Central Bank, in particular, raised rates in 2011 to head off a nonexistent inflationary threat. It eventually reversed course but has never gotten things back on track. At this point European inflation is far below the official target of 2 percent, and the Continent is flirting with outright deflation.
But are these bad calls just water under the bridge? Isn’t the era of rock-bottom economics just about over? Don’t count on it.
It’s true that with the U.S. unemployment rate dropping, most analysts expect the Fed to raise interest rates sometime next year. But inflation is low, wages are weak, and the Fed seems to realize that raising rates too soon would be disastrous. Meanwhile, Europe looks further than ever from economic liftoff, while Japan is still struggling to escape from deflation. Oh, and China, which is starting to remind some of us of Japan in the late 1980s, could join the rock-bottom club sooner than you think.
So the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time to come, which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. The intellectual leaders of the new majority in Congress still insist that we’re living in an Ayn Rand novel; German officials still insist that the problem is that debtors haven’t suffered enough.
This bodes ill for the future. What people in power don’t know, or worse what they think they know but isn’t so, can very definitely hurt us.
By: Paul Krugman, Op-Ed Columnist, The New York Times, November 23, 2014
In the last couple of months we have seen the country whipped up into near hysteria over the virtually nonexistent threat of Ebola.
While the only people who contracted the disease in this country were those who treated a man who died of the disease, tens of millions of people became convinced they were in danger on airplanes and public buses and even routine visits to the supermarket.
Politicians have sought to exploit the same sort of fears with their rants about regulations and high taxes sinking the economy. These complaints have as much foundation in reality as the Ebola threat.
The regulation screed usually focuses on the number of pages in bills like the Affordable Care Act and the Dodd-Frank financial reform bill. While lengthy bills are unfortunate from the standpoint of the trees cut down for the paper, the length bears no relationship to the amount of regulation.
To take one example, the Volcker Rule, which prohibits banks with government insured deposits from engaging in risky speculation, ended up more than three times its original length as the industry carved out an array of exceptions. The greater length was associated with less regulation, not more.
Dodd-Frank was about curbing the sorts of abuses that gave us the financial crisis. Is the argument that we need corrupt banks to foster growth?
The screams over the ACA are equally misguided. The rules have little impact on large firms, the vast majority of whom already offered insurance that met ACA requirements. It might have been expected to affect mid-sized firms that did not previously offer insurance, but none of the complainers has yet presented any evidence that these mid-sized firms have been especially hard hit in the last few years.
The tax complaints require some serious amnesia. Tax rates were higher for most people in the 1990s when we saw the strongest growth in almost three decades. We then lowered taxes in 2001 and saw a weak recovery followed by the collapse in 2008.
The explanation for the continuing weakness is not a surprise to those of us who warned of the housing bubble before the crisis. The bubble had been driving the economy both directly through its impact on construction and indirectly through the impact that $8 trillion of housing bubble wealth had on consumption. When the bubble burst, the economy lost its driving force.
The building boom of the bubble years lead to enormous overbuilding of housing. When the bubble burst, construction didn’t just fall back to normal. It fell to the lowest levels in 50 years, costing the economy more than four percentage points of GDP, amounting to $700 billion annually in lost demand. The loss of housing wealth meant that consumption fell back to more normal levels.
While both housing and construction are up from their low-points in the recession, they are not going to return to bubble peaks, at least not without another bubble. This means that the economy continues to have a huge shortfall in demand. Cutting taxes and reducing regulation will not magically fill this gap in demand.
There are essentially two ways to increase demand. One is directly through more government spending. This is currently taboo in Washington since we are all supposed to hate budget deficits.
The other is by reducing the trade deficit. The way to reduce the trade deficit is to make U.S. goods more competitive with a lower-valued dollar. Talk of a lower dollar is also taboo in political circles.
In short, it is not difficult to find ways to boost the economy; the problem is that politics prevents them from being discussed. Instead we get silliness about taxes and regulation.
By: Dean Baker, Co-Founder of the Center for Economic Policy and Research; The National Memo, November 20, 2014
Perhaps it’s a sign of the times that one man’s act of altruism has attracted national attention. Raymond Burse, interim president of Kentucky State University, has given up more than $90,000 of his annual salary in order to boost pay for the lowest-paid workers at the college, some of whom earn as little as the minimum wage of $7.25 an hour. His donation will bump their wages to $10.25.
Burse has noted that his sacrifice will hardly leave him impoverished. He is a retired General Electric executive (as well as a former president of the college) with good benefits, as he told the Lexington Herald-Leader. While his job as interim president is “not a hobby, in terms of the people who do the hard work and heavy lifting, they are at the lower pay scale,” he said.
Yet, Burse is not Mitt Romney rich, and he could easily have kept his entire $349,869 annual paycheck without raising an eyebrow among his peers. As acting head of a historically black institution, he’s not in the growing circle of college presidents whose annual compensation tops a million bucks. Still, his act of generosity shines a spotlight on the growing divide between the haves and the have-nots, the well-off and the working stiffs, the 1 percent and the rest of us.
The nation’s growing income inequality is one of its biggest challenges, a widening rip in the social fabric. The United States is not held together by a common religion or language or ethnicity, but by its promise of equal opportunity for all. While that’s always been a bit exaggerated, the nation has generally made good on the ideal that those who work hard can at least provide for their families.
But that notion has been less and less true since the 1980s, as globalization and technology starting stealing the factory jobs that paid good wages and gave average workers a toehold in the middle class. Then came the financial meltdown of 2008, which sped the decline. It’s no wonder that 49 percent of Americans, according to a new NBC-Wall Street Journal poll, think the country is still in a recession.
The Great Recession, though, just put rocket-boosters on a trend evident for decades. The problem is systemic. We’ve managed to create an economy that makes the rich richer while most others struggle to get by. Those with college degrees generally fare better than those with high school diplomas, but there are lots of twenty-something college grads working part-time jobs and living with their parents. They can’t afford to rent an apartment.
The economic climate isn’t the fault of Congress or the president. This globe-shaking dislocation is a mega-trend — the sort of frightening reordering of the universe that shook millions at the start of the Industrial Revolution. It’s not necessarily a bad thing that thousands of bank tellers, for example, are slowly being replaced by smart ATMs, but it does signal the disappearance of jobs that paid a decent wage.
Most Americans, however, aren’t buying the mega-trend explanation. They place the blame for their economic decline squarely on the shoulders of their elected leaders. The NBC-Wall Street Journal poll, conducted late last month, found that “seven in 10 adults blamed the malaise more on Washington leaders than on any deeper economic trends,” the Journal said.
That is easy enough to understand. Even if political leaders didn’t instigate a tectonic shift in the economy, they have done next to nothing to ease the dislocations. Indeed, a dysfunctional Republican Party, now comfortable in its role as enabler to the rich, will barely acknowledge the growing income gap.
Democrats, for their part, have recognized the problem but present few long-term solutions. Yes, raising the minimum wage would help, but it’s just a start. The nation needs an overhaul of its educational system, cheaper college costs and a public works program that pays a decent wage.
Burse’s noble sacrifice could help a few workers, but it’s not clear that it will stay in effect after he leaves. Still, his gesture is a step in the right direction. Too few men and women in his position have even noticed the plight of their poorly paid workers.
By: Cynthia Tucker, Visiting Professor, The University of Georgia; The National Memo, August 9, 2014
On Sunday The Times published an article by the political scientist Brendan Nyhan about a troubling aspect of the current American scene — the stark partisan divide over issues that should be simply factual, like whether the planet is warming or evolution happened. It’s common to attribute such divisions to ignorance, but as Mr. Nyhan points out, the divide is actually worse among those who are seemingly better informed about the issues.
The problem, in other words, isn’t ignorance; it’s wishful thinking. Confronted with a conflict between evidence and what they want to believe for political and/or religious reasons, many people reject the evidence. And knowing more about the issues widens the divide, because the well informed have a clearer view of which evidence they need to reject to sustain their belief system.
As you might guess, after reading Mr. Nyhan I found myself thinking about the similar state of affairs when it comes to economics, monetary economics in particular.
Some background: On the eve of the Great Recession, many conservative pundits and commentators — and quite a few economists — had a worldview that combined faith in free markets with disdain for government. Such people were briefly rocked back on their heels by the revelation that the “bubbleheads” who warned about housing were right, and the further revelation that unregulated financial markets are dangerously unstable. But they quickly rallied, declaring that the financial crisis was somehow the fault of liberals — and that the great danger now facing the economy came not from the crisis but from the efforts of policy makers to limit the damage.
Above all, there were many dire warnings about the evils of “printing money.” For example, in May 2009 an editorial in The Wall Street Journal warned that both interest rates and inflation were set to surge “now that Congress and the Federal Reserve have flooded the world with dollars.” In 2010 a virtual Who’s Who of conservative economists and pundits sent an open letter to Ben Bernanke warning that his policies risked “currency debasement and inflation.” Prominent politicians like Representative Paul Ryan joined the chorus.
Reality, however, declined to cooperate. Although the Fed continued on its expansionary course — its balance sheet has grown to more than $4 trillion, up fivefold since the start of the crisis — inflation stayed low. For the most part, the funds the Fed injected into the economy simply piled up either in bank reserves or in cash holdings by individuals — which was exactly what economists on the other side of the divide had predicted would happen.
Needless to say, it’s not the first time a politically appealing economic doctrine has been proved wrong by events. So those who got it wrong went back to the drawing board, right? Hahahahaha.
In fact, hardly any of the people who predicted runaway inflation have acknowledged that they were wrong, and that the error suggests something amiss with their approach. Some have offered lame excuses; some, following in the footsteps of climate-change deniers, have gone down the conspiracy-theory rabbit hole, claiming that we really do have soaring inflation, but the government is lying about the numbers (and by the way, we’re not talking about random bloggers or something; we’re talking about famous Harvard professors.) Mainly, though, the currency-debasement crowd just keeps repeating the same lines, ignoring its utter failure in prognostication.
You might wonder why monetary theory gets treated like evolution or climate change. Isn’t the question of how to manage the money supply a technical issue, not a matter of theological doctrine?
Well, it turns out that money is indeed a kind of theological issue. Many on the right are hostile to any kind of government activism, seeing it as the thin edge of the wedge — if you concede that the Fed can sometimes help the economy by creating “fiat money,” the next thing you know liberals will confiscate your wealth and give it to the 47 percent. Also, let’s not forget that quite a few influential conservatives, including Mr. Ryan, draw their inspiration from Ayn Rand novels in which the gold standard takes on essentially sacred status.
And if you look at the internal dynamics of the Republican Party, it’s obvious that the currency-debasement, return-to-gold faction has been gaining strength even as its predictions keep failing.
Can anything reverse this descent into dogma? A few conservative intellectuals have been trying to persuade their movement to embrace monetary activism, but they’re ever more marginalized. And that’s just what Mr. Nyhan’s article would lead us to expect. When faith — including faith-based economics — meets evidence, evidence doesn’t stand a chance.
By: Paul Krugman, Op-Ed Columnist, The New York Times, July 6, 2014