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Out Of The Shadows: Bush And Cheney Remind Us How We Got Into This Mess

Thank you, George W. Bush and Dick Cheney, for emerging from your secure, undisclosed locations to remind us how we got into this mess: It didn’t happen by accident.

The important thing isn’t what Bush says in his interview with National Geographic or what scores Cheney tries to settle in his memoir. What matters is that as they return to the public eye, they highlight their record of wrongheaded policy choices that helped bring the nation to a sour, penurious state.

Questions about whether President Obama has been combative enough in dealing with the Republican opposition — or sufficiently ambitious in framing his progressive agenda — seem trivial when viewed in this larger context. Obama is tackling enormous problems that took many years to create. His presidential style is important insofar as it boosts or lessens his effectiveness, but its importance pales beside the generally righteous substance of what he’s trying to accomplish.

It was the Bush administration, you will recall, that sent the national debt into the stratosphere and choked off federal revenue to the point of asphyxiation. Bush and Cheney decided to fight two wars without even accounting — let alone paying — for them. Rather than raise taxes to cover the cost of military campaigns in Afghanistan and Iraq, Bush opted to maintain unreasonable and unnecessary tax cuts.

So far, the wars and the tax cuts have cost the Treasury between $4 trillion and $5 trillion. If Bush had just left income tax rates alone, nobody except Ron Paul would be talking about the debt.

My aim isn’t to attack Bush but to attack his philosophy. When he was campaigning for the White House in 2000, the government was anticipating a projected surplus of roughly $6 trillion over the following decade. Bush said repeatedly that he thought this was too much and wanted to bring the surplus down — hence, in 2001, the first of his two big tax cuts.

Bush was hewing to what had already become Republican dogma and by now has become something akin to scripture: Taxes must always be cut because government must always be starved.

The party ascribes this golden rule to Ronald Reagan — conveniently forgetting that Reagan, in his eight years as president, raised taxes 11 times. Reagan may have believed in small government, but he did believe in government itself. Today’s Republicans have perverted Reagan’s philosophy into a kind of anti-government nihilism — an irresponsible, almost childish insistence that the basic laws of arithmetic can be suspended at their will.

The Bush administration also pushed forward Reagan’s policy of deregulation — ignoring, for example, critics who said the ballooning market in mortgage-backed securities needed more oversight. When the 2008 financial crisis hit, Bush did regain his faith in government long enough to throw together the $800 billion TARP bailout for the banks. But he failed to use the leverage of an aid package to exact reforms that would ensure that the financial system served the economy, rather than the other way around.

Faced with similar circumstances, would today’s Republican leadership react at all? Or is it the party’s view that the proper role of government would be to stand aside and watch the world’s financial system crash and burn?

This is a serious question. Just a few weeks ago, the Republican majority in the House threatened to force the United States government to default on its debt obligations — a previously unthinkable act of brinkmanship. Everything is thinkable now.

The Bush administration took Reagan’s tax-cutting, government-starving philosophy much too far. Today’s Republican Party takes it well beyond, into a rigid absolutism that would be comical if it were not so consequential.

We face devastating unemployment. Many conservative economists have joined the chorus calling for more short-term spending by the federal government as a way to boost growth. But the radical Republicans don’t pay attention to conservative economists anymore. The Republicans’ idea of a cure for cancer would be to cut spending and cut taxes.

Perhaps they’re just cynically trying to keep the economy in the doldrums through next year to hurt Obama’s chances of reelection. I worry that their fanaticism is sincere — that one of our major parties has gone completely off the rails. If so, things will get worse before they get better.

Having Bush and Cheney reappear is a reminder to step back and look at what Obama is up against. You might want to cut him a little slack.

By: Eugene Robinson, Opinion Writer, The Washington Post, September 1, 2011

September 3, 2011 Posted by | Class Warfare, Congress, Conservatives, Debt Crisis, Deficits, Economic Recovery, Economy, Elections, Federal Budget, Financial Institutions, GOP, Government, Government Shut Down, Ideologues, Ideology, Jobs, Lawmakers, Middle Class, Mortgages, Neo-Cons, Politics, President Obama, Public, Regulations, Republicans, Right Wing, Tax Increases, Tax Loopholes, Taxes, Teaparty, Unemployed, War, Wealthy | , , , , , , , , , , , , , , | Leave a comment

Personal Parachutes: How Elites Could Profit From A U.S. Debt Crisis

Have you developed a hedging strategy to protect against America’s rapid decline? Or repositioned your portfolio to take advantage of orphaned Treasury securities? Or stashed some cash so you can buy distressed assets from the newly bankrupt?

If you’re like most Americans, the answer is, of course not. But if you work on Wall Street, the man-made debt crisis that’s brewing in Washington might represent a surprising opportunity to make money. As the whole world knows by now, the U.S. government will no longer be able to borrow money as of early August, unless Republicans and Democrats swallow their vitriol and come up with a compromise deal that will begin dealing with America’s oversized debt and allow the government to function normally. The nation’s mushrooming debt load is a big problem, but abruptly halting all federal borrowing would transform it into a disaster, since it would require vast government spending cuts that would promptly trigger another recession.

The ongoing assumption is that legislators will puff and posture until the last second, then congratulate themselves for making a deal that should have been in place months ago. But even if politicians avert the worst-case scenario, the size of the debt and the deep dysfunction in the nation’s capital are likely to cause other trouble. It’s increasingly likely, for instance, that rating agencies like Moody’s and Standard & Poor’s will cut America’s credit rating from AAA—the top rating, which the United States has held for decades—to a notch or two lower. That would force thousands of institutional investors to determine whether they can keep holding Treasury securities or whether they need to dump them. Even small spending cuts that come as part of a deal to raise the federal borrowing limit could cut into weak economic growth, especially if they go into effect immediately.

The knock-on effects of a U.S. debt downgrade, sharp spending cuts or a “policy mistake” in Washington could rattle financial markets, depress hiring and drive confidence back down to recessionary levels. But smart investors know that one man’s crisis is another’s opportunity, and the monied class is planning how to profit if America goes bust. As the New York Times reported recently, some hedge funds are stockpiling cash, to buy U.S. government securities at fire-sale prices if there’s a credit downgrade and conservative investing vehicles like pension or money-market funds are forced to dump Treasuries. Others are trying to identify institutions that might be damaged by a U.S. debt crisis and forced to sell assets that vulture investors could buy on the cheap. Another way to gamble on America’s collapse is to invest in credit-default swaps that would pay out if the United States defaults on its debt. The price of such insurance has doubled recently, indicating a lively market for bets against America.

The modern financial markets are sophisticated casinos that allow steely investors to gamble on almost anything, including gloom-and-doom scenarios that could potentially harm millions. Though it might sound unctuous, betting on the likelihood of adverse events is a healthy part of a free market, because it creates an even stronger incentive for those who would suffer from bad outcomes to prevent them—and punishes those who destroy value, such as CEOs who mismanage their companies. But it doesn’t always work that way, and besides, this kind of gambling is generally open only to professional investors or those wealthy enough to have experts handling their money.

In his 2010 financial disclosure forms, for instance, House Majority Leader Eric Cantor listed a small investment in a fund that bets against U.S. Treasury securities and would benefit if the U.S. government defaulted or something else happened that devalued Treasuries. That became controversial, since Cantor is one of the key Republicans involved in the debt negotiations and a conservative stalwart who insists there should be no new taxes as part of a deal. Cantor’s office says the fund is in his wife’s and his mother-in-law’s name and amounts to less than $4,000, while the vast majority of Cantor’s retirement savings are invested in conventional securities that would lose value if there were a true U.S. debt crisis. But Cantor’s portfolio is probably similar to those of other affluent Americans, with traditional investments offset by a hedging strategy meant to minimize losses if something profoundly bad happens.

Ordinary Americans who lack investment funds or live paycheck-to-paycheck don’t have much of a hedging strategy, however, which makes them directly vulnerable if Washington wrecks the economy and jobs gets even scarcer. Some economists think the drawn-out debt drama—and the near-total absence of action on other big problems, like the foreclosure epidemic or sky-high unemployment—is already causing harm. Businesses, for instance, have virtually stopped hiring while they await the outcome of the Washington Follies. A sliding stock market reflects jittery investors who can’t figure out if they should invest in a global recovery or gird for Armageddon. “Washington is locked in a budget war that will determine the U.S. economy’s fate, not only for this year and next but for generations,” writes economist Mark Zandi of Moody’s Analytics. “Lawmakers may well misstep on this path to fiscal sustainability.” If they do, many of them will no doubt have their own personal parachutes. If possible, get your own.

By: Rick Newman, Columnist, U. S. News and World Report, July 22, 2011

July 24, 2011 Posted by | Capitalism, Class Warfare, Congress, Conservatives, Consumers, Debt Ceiling, Debt Crisis, Deficits, Democrats, Economic Recovery, Economy, Federal Budget, GOP, Government, Government Shut Down, Ideologues, Ideology, Income Gap, Jobs, Lawmakers, Middle Class, Politics, Public, Republicans, Unemployment, Wall Street | , , , , , , , , , , , , , , | Leave a comment

Standard And Poor’s Should Be Embarrassed

The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

The Standard & Poor’s rating firm should be embarrassed. If there is any political judgment at work here, it is S&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.

Every time Japan tried to lower its public-debt-to-gross-domestic-product ratio by cutting spending, the resulting drop in economic activity actually made that ratio worse. We are seeing the same results in Ireland and Latvia. The United Kingdom tried the same experiment 10 times in the last 100 years, and every time it got the same results: cutting spending to reduce budget deficits results in a fall in G.D.P. that makes the debt burden worse, not better.

The remedy should be to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts. But S&P instead would have us do the economic equivalent of trying to cure an infection by using leeches.

Misguided cures killed a lot of patients and are killing a lot of economies.

By: Yves Smith, Writer for Naked Capitalism. Original article appeared in The New York Times, April 18, 2011

April 19, 2011 Posted by | Capitalism, Congress, Conservatives, Corporations, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Lawmakers, Lobbyists, Media, Mortgages, Politics, Pundits, Standard and Poor's | , , , , , , , , , , | Leave a comment

Note To Banks: It’s Not 2006 Anymore

Nostalgia is running high on Wall Street for the days when junk mortgage underwriting and opaque derivatives trading juiced bank profits. As regulators continue to devise the machinery of the Dodd-Frank regulatory reform law, major financial institutions are working overtime in Washington to bring the good times back again.

Unfortunately for taxpayers, some of these efforts are gaining traction, particularly regarding the regulation of derivatives and mortgages.

As you may recall, Dodd-Frank was supposed to shed light on derivatives trading so that the risks and costs of these instruments would be clear to regulators and market participants. To this end, the law required derivatives to be cleared and traded on exchanges or through other approved facilities. But Dodd-Frank contained a big loophole: the Treasury secretary can exempt foreign-exchange swaps from the regulation.

Currency trading is enormous: on average, about $4 trillion of these contracts change hands each day. Major banks are huge in this market. According to the Comptroller of the Currency, trading in foreign-exchange contracts generated revenue of $9 billion in 2010 at the nation’s top five banks. That’s more than was produced by any other type of derivative.

No one was shocked when the banks began pushing the Treasury to exempt these swaps from regulatory scrutiny. From last November through January, Treasury officials met to discuss foreign-exchange swaps with 34 representatives of large financial institutions, the Treasury’s Web site shows.

A spokesman for Timothy F. Geithner, the Treasury secretary, said last week that Mr. Geithner had not made up his mind on this matter. If Mr. Geithner sides with the banks, he will have bought into their argument that foreign-exchange swaps are different from other derivatives, that this market performed ably during the financial crisis and does not need additional oversight.

Others disagree. Testifying before the House Financial Services Committee in October 2009, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said: “Any exception for foreign-currency forwards should not allow for evasion of the goal of bringing all interest rate and currency swaps under regulation to protect the investing public.”

Dennis Kelleher, the president of Better Markets, a nonprofit organization that promotes the public’s interest in capital markets, said he was dubious of the contention that the market for foreign-exchange contracts performed well during the turmoil of 2008. Mr. Kelleher said that the only reason this market did not seize up like others was that the Fed lent huge amounts — $5.4 trillion — to foreign central banks through so-called swap lines during the fall of 2008.

“We suggested that Treasury hire truly independent experts to look at the data and provide the secretary with advice on whether or not the FX market performed well in the crisis and whether the exemption should be granted,” he said.

The analysis could be done within 60 days, he said. The Treasury told him it was confident that it had all the information it needed. “Their response was, ‘Thank you,’ ” he said.

Big financial institutions are also eager to return to the days of lax mortgage lending, judging from two initiatives being discussed in Washington. Both are intended to get the home loan market moving again — and to buoy falling home prices.

One relates to how regulators define a “qualified residential mortgage,” a term of art in the Dodd-Frank law. Issuers of asset-backed securities that are made up of such loans needn’t keep any credit risk of those securities. But sellers of loan pools that don’t consist of qualified mortgages are required to retain some of the risk in them. This provision was meant to eliminate the perverse incentives of the mortgage boom, when packagers of loan pools were encouraged to fill said pools with toxic waste because they had little or no liability for the deals once they were sold.

What constitutes a qualified mortgage has become a battleground issue because of the risk-retention rules under Dodd-Frank. Qualified mortgages should be of higher quality, based upon a borrower’s income, ability to pay and other attributes to be decided by financial regulators.

The board of the Federal Deposit Insurance Corporation will hold an open meeting on Tuesday to discuss qualified mortgages and the risk-retention rule. Among the questions to be considered is how much of a down payment should be required in a qualified loan, and whether mortgage insurance can be used to protect against the increased risks in loans that have smaller down payments.

The use of mortgage insurance during the boom effectively encouraged lax lending. Investors who bought securities containing loans with small or no down payments were lulled into believing that they would be protected from losses associated with defaults if the loans were insured.

But when loans became delinquent or sank into default, many mortgage insurers rescinded the coverage, contending that losses were a result of lending fraud or misrepresentations. When they did so, the insurers returned the premiums they had received to the investors who owned the loans. Lengthy litigation between the parties is under way but has by no means concluded.

Clearly, for many mortgage securities investors, this insurance was something of a charade. So any argument that mortgage insurance can magically transform a risky loan into a qualified residential mortgage should be laughed off the stage. And yet, mortgage insurers are making those arguments vociferously in Washington.

The final front in the mortgage battle involves a plan to restart Wall Street’s securitization machine with instruments known as covered bonds. Here, too, the big banks and the housing-financial complex are arguing that if private investors are to return to the mortgage market, we must create a new instrument that will let the good times roll again.

Covered bonds are pools of debt obligations that have been assembled by banks and sold to investors who receive the income generated by the assets. The bank that issues the bonds, meanwhile, retains the credit risk. If losses arise, the bank that issued the covered bonds must offset the loss with its own capital. That could push troubled banks closer to the edge.

If an asset in the pool defaults, a separate entity would be required to remove the assets from the bank’s control. The assets would then be out of reach of the F.D.I.C. should the bank fail and the agency step in as receiver. The investors who bought the covered bonds would have first call on the assets, ahead of the F.D.I.C.

This structure would wind up bestowing a new form of government backing to the major banks issuing the bonds, raising the potential for losses at the F.D.I.C. insurance fund, which protects savers’ deposits.

Equally troubling, the covered bond structure favored by the banks would let the pools invest in risky assets such as home equity lines of credit. These loans have been among the worst-performing assets out there. Covered bonds issued overseas, by contrast, typically consist solely of high-quality loans.

“The industry is trying to do an end run around the F.D.I.C.,” said Christopher Whalen, publisher of the Institutional Risk Analyst. “This proposal is about restarting the Wall Street assembly line for selling toxic waste to investors.”

Clearly, the battle for the safety and soundness of the nation’s financial markets is far from won. The issues are complex and confounding — by design, in many cases — and financial institutions have armies of advocates in Washington. The taxpayers do not, which makes monitoring of these crucial proceedings all the more essential.

By: Gretchen Morgenson, The New York Times, March 26, 2011

March 27, 2011 Posted by | Banks, Financial Institutions, Financial Reform, Foreclosures, Mortgages, Regulations, Wall Street | , , , , , , , , , , , , | Leave a comment