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“Wall Street’s Threat To The American Middle Class”: Do We Really Need To Be Reminded About What Happened Six Years Ago?

Presidential aspirants in both parties are talking about saving the middle class. But the middle class can’t be saved unless Wall Street is tamed.

The Street’s excesses pose a continuing danger to average Americans. And its ongoing use of confidential corporate information is defrauding millions of middle-class investors.

Yet most presidential aspirants don’t want to talk about taming the Street because Wall Street is one of their largest sources of campaign money.

Do we really need reminding about what happened six years ago? The financial collapse crippled the middle class and poor — consuming the savings of millions of average Americans, and causing 23 million to lose their jobs, 9.3 million to lose their health insurance, and some 1 million to lose their homes.

A repeat performance is not unlikely. Wall Street’s biggest banks are much larger now than they were then. Five of them hold about 45 percent of America’s banking assets. In 2000, they held 25 percent.

And money is cheaper than ever. The Fed continues to hold the prime interest rate near zero.

This has fueled the Street’s eagerness to borrow money at rock-bottom rates and use it to make risky bets that will pay off big if they succeed, but will cause big problems if they go bad.

We learned last week that Goldman Sachs has been on a shopping binge, buying cheap real estate stretching from Utah to Spain, and a variety of companies.

If not technically a violation of the new Dodd-Frank banking law, Goldman’s binge surely violates its spirit.

Meanwhile, the Street’s lobbyists have gotten Congress to repeal a provision of Dodd-Frank curbing excessive speculation by the big banks.

The language was drafted by Citigroup and personally pushed by Jamie Dimon, CEO of JPMorgan Chase.

Not incidentally, Dimon recently complained of being “under assault” by bank regulators.

Last year JPMorgan’s board voted to boost Dimon’s pay to $20 million, despite the bank paying out more than $20 billion to settle various legal problems going back to financial crisis.

The American middle class needs stronger bank regulations, not weaker ones.

Last summer, bank regulators told the big banks their plans for orderly bankruptcies were “unrealistic.” In other words, if the banks collapsed, they’d bring the economy down with them.

Dodd-Frank doesn’t even cover bank bets on foreign exchanges. Yet recent turbulence in the foreign exchange market has caused huge losses at hedge funds and brokerages.

This comes on top of revelations of widespread manipulation by the big banks of the foreign-exchange market.

Wall Street is also awash in inside information unavailable to average investors.

Just weeks ago a three- judge panel of the U.S. court of appeals that oversees Wall Street reversed an insider-trading conviction, saying guilt requires proof a trader knows the tip was leaked in exchange for some “personal benefit” that’s “of some consequence.”

Meaning that if a CEO tells his Wall Street golfing buddy about a pending merger, the buddy and his friends can make a bundle — to the detriment of small, typically middle-class, investors.

That three-judge panel was composed entirely of appointees of Ronald Reagan and George W. Bush.

But both parties have been drinking at the Wall Street trough.

In the 2008 presidential campaign, the financial sector ranked fourth among all industry groups giving to then candidate Barack Obama and the Democratic National Committee. In fact, Obama reaped far more in contributions from the Street than did his Republican opponent.

Wall Street also supplies both administrations with key economic officials. The treasury secretaries under Bill Clinton and George W. Bush – Robert Rubin and Henry Paulson, respectfully, had both chaired Goldman Sachs before coming to Washington.

And before becoming Obama’s treasury secretary, Timothy Geithner had been handpicked by Rubin to become president of Federal Reserve Bank of New York. (Geithner is now back on the Street as president of the private-equity firm Warburg Pincus.)

It’s nice that presidential aspirants are talking about rebuilding America’s middle class.

But to be credible, he (or she) has to take clear aim at the Street.

That means proposing to limit the size of the biggest Wall Street banks;  resurrect the Glass-Steagall Act (which used to separate investment from commercial banking); define insider trading the way most other countries do – using information any reasonable person would know is unavailable to most investors; and close the revolving door between the Street and the U.S. Treasury.

It also means not depending on the Street to finance their campaigns.

 

By: Robert Reich, The Robert Reich Blog, January 26, 2015

February 2, 2015 Posted by | Big Banks, Campaign Financing, Wall Street | , , , , , , , , | Leave a comment

“Joe Scarborough Is A Total Hack”: But Don’t Take My Word For It

In his latest salvo in his back-and-forth with Paul Krugman over the significance of the national debt, Joe Scarborough, writing in POLITICO today, displayed such a foul misunderstanding about economics, Krugman must have choked on his oatmeal laughing as he read it.

In “Paul Krugman is wrong – but don’t take my word for it,” the MSNBC host made the following point:

Investors may be growing skittish about U.S. government debt levels and the disordered state of U.S. fiscal policymaking.

From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.

It also may have been because space aliens raided the Treasury in the dead of night because Nicholas Cage and Chuck Norris were off duty, having been contracted by the Navy to fight a flotilla of krakens in the Caribbean the week before. Scarborough may as well have argued that, because it would have displayed a better understanding of how foreign exchange markets actually work. The value of the dollar is determined by foreign countries’ demand for it and our supply of foreign exchange. And while foreign investors in 2002 may have begun to fear widening debt that was eventually caused by a recession in 2008 — despite the fact that the housing bubble was far from inflated in 2002 and that these investors eventually failed to foresee the crash itself — it’s more likely that the value of the dollar fell because our current account deficit essentially doubled between 2002 and 2006 (but don’t take my word for it).

Scarborough continued to make arguments that could be debunked by a remedial high school economics teacher shortly after:

More troubling for the future is that private domestic investment—the fuel for future economic growth—shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.

While it’s true that government borrowing can “crowd out” private investment by bidding up interest rates, it isn’t currently happening — interest rates remain low. Furthermore, investors seem to have more confidence in U.S. Treasuries than they do in the market (but don’t take my word for it, “investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter”). The real reason that private investment and government debt appear to have an inverse relationship, both now and during any recession, is that economic contraction causes both tax revenue and private investment to fall.

So whose word should we take?

If you believe that I am wrong and Paul Krugman is right…then take it up with the RAND Corporation whose senior economist wrote everything you have read here other than this concluding paragraph. The debt crisis is real and waiting another decade to fix it is not an option. Anyone who suggests it is operates well outside the mainstream of where serious economists reside.

If the recent financial crash has taught us anything, it’s that “the mainstream of where serious economists reside” is less credible than a bootleg DVD salesman convention. But what’s even more troubling about Scarborough’s column — and POLITICO’s decision to publish it — is that he doesn’t even say whose words we should take or what those words actually are. Scarborough names neither the “senior economist” nor the study or studies that he is citing. Nor does the RAND Corporation even have a single “senior economist” — a search for “senior economist” on RAND’s website indicates that the think tank has at least a dozen “senior economists” on staff. So we can’t even debunk the man inspiring Scarborough to spew such noxious filth. At least we can debunk him.

 

By: Samuel Knight, Washington Monthly Political Animal, February 16, 2013

February 17, 2013 Posted by | Budget, Deficits | , , , , , , , | Leave a comment

   

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