Morphing the Conversation

One of the things that I’ve found profoundly upsetting about the last several decades is how successfully movement conservatism has confused and morphed policy conversation into a mishmash of labels which in no way describe what used to be general understanding of policy. Movement conservatism has reframed many definitions that were used as the basis for policy discourse. In a reaction to this, movement progressivism has reframed the reframe rather than try to shift the conversation back to what used to be common ground and common definitions. The terms “socialism”, “liberal”, and “Keynesian” are now completely divorced from reality–if I can use that word–and from their traditional meanings. Shared definitions and discussion of one’s assumptions are important for civil debate. Civil debate is necessary for successful policy implementation. Our discourse is so inflamed these day that we no longer even share the process by which we have historically entered into dialogue. Screaming ill-defined frames is now de rigueur.

Movement conservatism–its media outlets and thinktanks– has moved the Overton Window so far off the ruler that even former Reagan officials are coming forward to press the reset button. Movement progressivism has borrowed from their play book and is now doing the same. Several TC readers have brought up some really good examples recently.

My personal hypothesis is that both Democrats and Republicans have the same agenda which is to feed the hand of the industries and interests that can keep them in power. They play on different teams with different sponsors but their basic goals are the same. That would be to return money to people that provide money to them. The rhetoric we see in ads and speeches are positioned to keep us on the hook and tagging along. Ever so often they throw us a few things like a study on getting rid of DADT or a law that looks like it may get rid of job place discrimination. These are mostly symbolic and have very little real effect. The right does the same thing. They throw a few restrictions on abortion rights or pull together funds for an government agency that lets churches proselytize through social services. Nothing changes in the big policy realm except the continuation of laws that concentrate media, economic, and political power into the power brokers of each party’s choice. This is something that many of the ‘tea-partiers’ as well as those drawn to the move-on movement share; a sense that government moves when one set of interests that fund politicians asks it to do so. We get wars when the Oil industry needs its interests protected. We get bail outs when the finance industry needs its interests protected. Meanwhile, the rest of us get fed hype that something is happening in our best interests as they reframe discourse with their best Madison Avenue gestalt.

Yesterday, I tried to approach this problem from the sociopolitical concepts. Today, because of some down thread links folks pointed out, I’m going to switch to the socioeconomic. I tag these things with ’socio’ on the front, because I do believe that most of this comes from differences in class more than differences in anything else. Today’s populists are spewing the words ‘elite’ when I think what they are really sensing is they are far removed from the bonus class of Wall Street, the political class in Washington, and the cultural class in Hollywood. There is nothing elite about them other than their ability to attract money and power through a velvet schmooze and a public platform.

Why, oh, why, can’t we have better dialogue on Political Philosophy?

I’m not sure why I even to bother read articles with provocative headlines that ensure you know the conclusion before the discussion even opens. This Washington Post Article by a conservative political science professor Gerard Alexander (also associated with the American Enterprise Institute) just rang all the bells and whistles implied by the title “Why are liberals so condescending?”. If I were to write a similar piece–which come to think of it I’m about to–it would be titled “Why are conservatives so close-minded?”

Okay, right from the get go, he starts with the presupposition that his conclusion is the right one which is pretty much the problem I have with conservatives. They start with the conclusions being firmly grounded in some truth they’ve devised and then let the arguments spew from there. Facts be damned! Full speed ahead! My argument is already moot because of his first paragraph. I’m already trapped by having to argue the argument from the label ’smug’. I have to prove I’m not smug before I get around to proving him wrong. But what’s worse, being smug or being hypocritical?

Yes, I believe conservatives adhere to ideology over evidence. Still, I try to argue based on fact and reason and expect the deduced conclusion to be so resonant it is self evident. How is this ‘intellectual condescension”? Better yet, how can I successively argue with some one who is so convinced that they’re right from the get-go and from whom you can expect no real evidence? You’re doomed to be the only one that recognizes you’re right in that situation. All you get is argument based on ideological presuppositions with which you disagree. Yes, mind closed. Straw man erected. Straw man knocked down. Argument over.

Every political community includes some members who insist that their side has all the answers and that their adversaries are idiots. But American liberals, to a degree far surpassing conservatives, appear committed to the proposition that their views are correct, self-evident, and based on fact and reason, while conservative positions are not just wrong but illegitimate, ideological and unworthy of serious consideration. Indeed, all the appeals to bipartisanship notwithstanding, President Obama and other leading liberal voices have joined in a chorus of intellectual condescension.

To me, this article is just wrong from the get go and let me tell you why. Let’s just say I take issue with labeling President Obama ‘liberal’ (or socialist or marxist) when he his clearly no such thing. Most conservatives spit the word liberal through the teeth in such a pejorative way that you can’t help but wonder if they even read from the same dictionary. Most liberals–like me– don’t consider Obama to be one of us.

Let me borrow from another liberal economist whose words caught me on a similar subject.Oregon Professor Mark Thoma has a thread called Why is the Left More Successful in Europe? based on an article at the Boston Globe by Edward Glaeser, a professor (economics) at Harvard. Thoma had issues with this statement by Glaeser in the cited article: “A year ago, I wondered if the Obama victory signaled the declining significance of race and an American lurch to the left.” This is Thoma’s response.

What’s new is the observation that the Obama victory didn’t signal a lurch to the left as he thought it might.

People who believe Obama is a far left populist type haven’t been paying attention. Obama himself is no lurch to the left. The far left has been quite disappointed as they’ve unwrapped the gift they received last November. It wasn’t what they asked for or, in may cases, what they thought they were getting. But it shouldn’t have been a surprise.

The election wasn’t so much a lurch to the left as it was a movement away from the right (a different sort of movement conservatism). People didn’t want four more years of anything resembling George Bush. Sure, there’s been some reversion to the mean, there always is with midterm elections, but the election did ratchet our collective politics to the left. Moving the nation further to the left might might very well be a long, slow process, i.e. the long fight predicted above. And Republicans do manage to make lots of noise when they engage the enemy. But they are struggling to hold on to what they have rather than trying to take new ground. It’s the Republicans, not the Democrats, who need to worry about fighting to hold on to their party.

Americans do tend to be a conservative lot, but not quite in the way that either Glaeser argues in his article or Alexander argues in his. There’s a dialectic going on here that seems to me to miss a bigger picture. When I read the rant on the dismissive attitudes of liberals cited by Alexander, I find utter hypocrisy. He dismisses liberals in the same way he accuses liberals of dismissing his sociopolitical arguments. Then, when I return to the Glaeser article where he tries to explain what slow changing people Americans really are, all I can think is these two guys spend way too much time either on the east coast or in their offices at their respective campuses.

There’s an oversimplification here on both sides on the motivation of the American electorate who, to me, is just figuring out who they can trust after years of bamboozling by both sides. Who even knows what most people think being liberal or conservative represents after years of framing based on political ads and talking heads? How can you have civil discourse when every one is name calling instead of defining themselves?

Let me demonstrate the essential Alexander argument with this quote from the article. He borrows not only from Obama but the big giant talking Cheeto; another person whom I believe is NOT a liberal in the traditional sense of the word. He also quotes Paul Krugman, Howard Dean, and Jon Stewart as examples of condescending, liberal elites. Of course, he trots out the ultimate Obama snafu made during the campaign of speaking of bitter working folks clinging to god, guns, and bibles. Offensive yes? Liberal elitist? I don’t think so. It’s just your basic class snobbery.

Stupid Banker Tricks

I have a really great guy in our library that takes care of the business college that digs up some of the most interesting reports and

http://www.mcclatchydc.com/politics/story/66795.html

sends out the links. It’s kind’ve like having my graduate assistant back but on a different level. He doesn’t do grades, but he keeps me current on things I used to follow when I spent more time at my desk and less time in my car driving across bayous and lakes.

I became aware of all the issues surrounding the unbanked, predatory lending practices, check cashing companies, and abusive credit card fees when I spent 5 weeks in Omaha right after Hurricane Katrina.  A very old friend of mine–a math teacher at the community college I once taught at for a few years when my eldest was a toddler–took me to a seminar filled with social workers who were complaining how many of their clientele were being gamed by fraudulent lending practices.  I returned to New Orleans to spend a lot of time researching things and predicted it was one big house of cards that would bring down the economy eventually.  The research was interesting but turned out to not be ‘glamorous’ enough for publication.  The other thing was I was basically told my assertions that these practices would bring down the economy part was over the top because, well you know, financial innovation is such a handy dandy thing and these sweethearts were just offering up much needed services to under-served consumers. Yeah, right.

So, this study from the Center for Responsible Lending showed up in my email this morning. I admit to having spent a huge amount of time looking at their studies about 4 years ago, but was told to quit the line of research by my peers. I switched to something more marketable. This report is very useful and it outlines a lot of the new tricks that credit card issuers are using to get around credit card reform. Banks are taking steps to ensure we continue our indentured servant status.  I’ve now torn up all by two credit cards and I’m on the verge of just saying no to all loans and credit cards; big or small. Here is a list of ways they’re getting around new legislation to curb their excesses. The name of the report is Dodging Reform and you should at least read the Executive Summary and check out the charts. (Yes, I like nifty charts as well as nifty graphs.) Here’s the stated purpose of the study.

Faced with pending and proposed reforms designed to protect consumers from a series of unfair charges, credit card issuers have established or expanded the use of at least eight hidden charges across more than four hundred million accounts. The May 2009 Credit CARD Act addressed the hidden and deceptive pricing strategies that had been the most costly to credit card users. However, some issuers appear to be working to compensate for part of this lost revenue by instituting or accelerating new practices that increase hidden costs on consumers. Some of the tactics discussed here are not well known, while others are known.

Since the FIRE Lobby has us all in a state of borrower beware, I’d like to outline some of the worst of these new abusive practices for you. These are hidden charges that will cause your credit card balance to compound and keep you paying them forever.

The first practice is called “pick-a-rate” and impacts around 117 million accounts according to the study. This is basically a practice that puts you on a variable interest rate. Since the FED has signaled their willingness to return to higher interest rates within a the year, do not get on one of these plans! Your rate is bound to increase if it hasn’t already. The trick though, is that the APR actually is computed in a way to be higher than the rate you pick and the details about the rate are buried in the fine print. These are the problems according to the study.

• Hidden “pick-a-rate” pricing charges consumers APRs 0.3 percentage points higher ona verage than traditional pricing.
• Pick-a-rate results in a total cost to consumers of $720 million per year and may reach $2.5 billion per year if the practice becomes the industry standard.

There are a lot of nifty graphs that show the impact of interest rate changes on the pick-a-rate plans. These things will get incredibly more expensive as we return to a more normal set of interest rates and monetary policy.

A second practice is that of using Minimum Finance Charges. This practice is aimed at the people who partially pay off their balances every month.

In 2001, the minimum finance charge for 7 of the Top 8 issuers was $0.50. By 2009, most issuers charged a dollar or more as their minimum finance charge, with the highest being $2.00. Currently, they average $1.28.6 Borrowers pay more than $430 million annually as a result of minimum finance charges and that figure is rising as these charges are increased.

Again, the graphs in the study will say everything you need to know here. These charges are expected to skyrocket this year for the top 8 issuers. As this market gets more concentrated into the hands of those eight top issuers, their practices are becoming more in sync with each other in keeping with the game theory model of rivalry. (The McClatchy graph up top will show you exactly how concentrated this market is becoming.) You’ll not be able to avoid these if you EVER take a cash advance on your credit card so DO NOT DO THIS.

These minimum finance charges take effect when a consumer borrows money—a cash advance—on their credit card, but the amount borrowed is low enough (or the interest rate is low enough) that the finance charge would normally be below the minimum. For example, if a consumer charged $50 on their credit card, had an interest rate of 12% and did not pay the balance in full, they would normally owe 50 cents in finance charges. But if the issuer had a minimum finance charge of $1.50, they would instead be required to pay this amount

Variable rate floors are the third practice to worry about. Basically, your issuer will tell you that your interest rate is “variable,” but it only goes up from its starting value and never down. Again, in a situation where interest rates are probably going to increase, this is a bad situation. Don’t get a card with these terms.

Other practices to watch include compression of balances categories into tiered late fees. This practices applies the highest late fee amounts to smaller balances and is predicted to cause in 9 in 10 consumers to pay the highest fee. Inactivity Fees are now being instigated which charge you an annual fee if you do not use a card. They are aware that closing an account impacts your credit card rating so many folks just keep them open for that reason or for precautionary purposes. You’ll now pay for that privilege.

They are also a series of fees being planned for balance transfers, cash advances, and international transactions. The deal is that none of these practices were addressed by the Credit Card Act of 2009 which effectively makes the new law behind the times already. The proposed Consumer Financial Protection Agency would have the ability to identify these practices and control them. I’m not sure if you remember me mentioning recently in the news that Senator Dodd is now actively considering dropping the clause in the proposed financial reform that would create this entity. This is really bad news.

Senate banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) has discussed jettisoning plans for a standalone Consumer Financial Protection Agency, as part of an effort to secure bipartisan support for legislation to reform financial regulation, said people familiar with the matter.

One possibility raised during recent talks between Dodd’s staff and Republican counterparts would be to assign new consumer protection powers to another agency. Such a compromise might offer an opportunity for Dodd to preserve the goal of expanding safeguards while appeasing Republicans who have chafed at any suggestion of a new agency.

“If there’s a bipartisan deal, that’s likely how it’s going to come out,” said one Democratic aide, who was not authorized to speak on the record about the discussions.

President Obama proposed last June the creation of an agency to protect consumers against abuses in mortgages, credit cards and other forms of lending.

It remains unclear if the President will fight to keep the agency in the legislation. I shudder every time I see the the words “secure bipartisan support” because that usually means that congressional Democrats will cave to their Republican counterparts at the first sign of disagreement. The banking industry appears to have both parties captured.

“This is the litmus test about whether Congress is serious in their efforts to overall financial regulation,” said Travis Plunkett, legislative director for the Consumer Federation of America. “If they can’t take consumer protection out of the hands of regulators who failed” at that task before, he added, “then they’re not really serious about doing things differently than in the past.”

Heather Booth, executive director of Americans for Financial Reform, a coalition of nearly 200 consumer, labor and civil rights organizations, on Friday urged Dodd “not to cave to the big banks and their armies of lobbyists.”

Given my take that they’ll cave under the least bit of pressure, it is definitely a borrower beware environment. Again, find out what opportunities you may have with a credit union in your area that is mutually owned by its depositors and see what arrangements it has made with a credit card provider if you must have credit cards. Check out this report and be sure to look for these things in the fine print. You can’t afford not to examine these details because you’ll be indentured to these jerks for a long period of time if you miss the imposition of these terms and fees.

Market Manipulation 101 or How to Rob Fort Knox in front of a Congressional Panel

Every day, as the AIG saga unfolds, I have to wonder if there is any vestige of a functional regulatory scheme left in this country. I’ve already decided that there is no shred of decency left in any one whose hand came close to unraveling the insurance giant and its deals. I know this is an area where eyes glaze over, but really, it’s like solving a crime that even Miss. Marple couldn’t fathom. Ladies and Gentlemen, we’ve been robbed.

It may be too complex for most journalists to report about, but the financial blog realm, full of individual investors, academics and pissed off Americans is keeping the story alive. The headline today from the Atlantic is there are $100 Million More in AIG bonuses. Don’t forget, we basically OWN this company so this is OUR money. Most voters are wise enough to know that this alone does not pass the threshold of decency. You don’t have to have a PHd with an emphasis on corporate governance to figure out that something is very wrong when people can bankrupt a company one year, and still collect bonuses the very next.

In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that’s likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called “guaranteed bonuses” that were in place before AIG’s collapse still must be honored by law. This is a regrettable situation, and speaks loudly to the messy problem that bailouts pose.

This is the headline today in many of the mainstream papers. This includes the NY Times that reports those bonuses may have been lowered by$20 million to lessen the blow. This is a mere trifling compared to what was pilfered from the dying AIG by Goldman Sachs as it was in the throes of death. Those Revenuers let Goldman Sachs pick clean the dead body of AIG before we got the bill for the funeral.

“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”

A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.

The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

So, the bonuses plays into the theme of the moment–Populist Outrage–which is driving everything from angry teabots to high ratings for media screamers like Glenn Beck. It hides a bigger problem. What is going on behind the schemes in the books and the deals as we attempt to bailout a group of bad gamblers is far worse. Yves Smith of Naked Capitalism lays out some of the issues on HuffPo as well as a series of thread at her own blog. While we rage at the bonuses, the real crime happened behind the curtains, where you’re not supposed to notice Timothy Geithner, pulling the strings and blowing the steam from the giant talking head of Glenn Beck.

Although the focus of press and public attention has been the decision to pay out “100%”, this issue has not been framed as crisply as it should be. Remember, the underlying transactions were crap CDOs that the banks (or bank customers, a subject we will turn to later) owned, and on which the banks had gotten credit default swaps from AIG. The Fed in fact paid out WELL MORE than 100% on the value of the AIG credit default swaps by virtue of also buying the CDOs.

That is one simple paragraph to describe the scheme behind the bailout of AIG. The facts are nearly beyond belief and as Congressman Dennis Kucinich put it, the testimony provided by Timmy-in-the-Well-again Geithner and among others doesn’t “pass the smell test.” I’m not sure how you miss the smells coming from an open, festering mass grave. But, the majority of Americans, and Congressio Critters, seem to think it could be just a few dead birds in the attic. The evil is the ledger accounts at the New York Fed.

Smith says the details show the FED as either captured regulator exhibiting ‘crony behavior’ or the behavior of Geithner was duplicitous and merits legal action. That is even mild. Her Huffpo article lays out the arguments for both scenarios. Either way, Giethner’s NY Fed comes off badly and Paulson and the Bush Treasury come off as co-conspirators to a heist.

Another article which demonstrates palpable anger at both the ineffective Fed and Congress is written in the financial/investment blog Money Morning by Shah Giliani who is a retired Hedge Manager. Again, the lack of knowledgeable staff could be the reason the pieces to the puzzle are being put together outside of the mainstream media. It could be the story is too complex to be glamorous and deemed beyond the reach of the average 5th grade reading level achieved at most major newspapers. It’s even possible no one wants to take on the financial industry. The deal is what happened as outlined in the testimony–had some one on that Congressional Panel actually had a background in something other than professional politics subsidized by the FIRE lobby and a plethora of worthless law degrees and knew finance–should’ve caused outrage around the country and sent subpoenas flying out of the justice department and the SEC. The central players in this are Goldman Sachs and the New York Fed whose people are so entrenched now in the Treasury and the West Wing that you have to wonder if there ever will be enough justice left in this country to counteract what should be the cries of lynch mobs. Following through with the legal obligations to pay out the bonuses–with the smallish $20 million concession–is just the sprinkles on the cake. Perhaps it’s easier to pay them than to have the AIG financiers talk about the details as the FED and Treasury unwound their deals.

The rationale for what is essentially the breaking of so many laws is the rescue of the U.S. and the world from another Great Depression. There are always ignoble deeds, however, done in the name of the most noble causes. This should go down in the press and in history as The Great U.S. Treasury and Financial Market Heist. The last two secretaries of Treasury-Paulson and Geithner–should be hauled before a government tribunal and stuck in Gitmo with the rest of the terrorists and enemies of the state. The dirty details follow the fold.

A Dismal Outlook from ‘Not a gay Science’

“Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.”

I’ve been perusing several economic sources for better news since this Monday’s GDP growth announcement for the 4th quarter was higher than anticipated.  This was mostly due to a better of inventory re-ordering and really didn’t set any one’s hair on fire.  The markets were up so I was thinking maybe the budget announcement today was going better than I thought possible.  Serves me right to try to be an optimist among dismal scientists.  I think I would characterize the market today as slap happy.  What I found in the devilish details follows and, of course, mostly sourced from the British Press whose economy is so wrapped up with ours they could hardly be wishing us harm.
I introduced you to the Volcker Rule which is a modest attempt at reviving something akin to the Glass Steagall Act of 1933. The Financial Times is reporting that the Senate will either ’significantly modify’ or drop the rule. Evidently the new spirit of bipartisanship is the same as the old spirit of bipartisanship, the Republicans say no to everything responsible and reasonable and the Democrats cave immediately. As I said, the proposed regulations are tepid by the old standards but still too much for the laissez-faire Republicans who would rather enable monopolies than promote true market capitalism. I thought we had basically had it with the excesses of Reagan Bush Crony Capitalism and voted the buggers out. Silly me!

Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

However, Shelby said he expects to hold a meeting with Banking Committee Chairman Chris Dodd (D-CT) regarding the way forward on regulatory reform in two weeks time. A Democratic banking committee staffer confirmed that the meeting between Dodd and Shelby will be critical as Dodd needs to determine the level of bipartisan agreement and the timing of bringing the bill through committee and on the Senate floor.

With the election of Republican Scott Brown to the Senate, the Democrats no longer have the necessary 60 votes to force through a Regulatory Reform package, and any bill will need at least some Republican support to pass. A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

“Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.”

The Democratic staffer said there is an ongoing debate among members of the banking committee about whether the Volcker rule would effectively push risk out of regulated markets and thus ultimately create more risk to the financial system.

HuffPo is even reporting that Frank Luntz is penning memos that demonstrate a willingness to kill any attempt to regulate anything in the financial services sector which is akin to showing the barbarians the secret location to your daughters and silver during a Viking raid. It’s a virtual talking points instruction memo for enabling moral hazard via active promotion of information asymmetry.

Nine months after he penned a memo laying out the arguments for health care legislation’s destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.

In a 17-page memo titled, “The Language of Financial Reform,” Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.

“If there is one thing we can all agree on, it’s that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated,” Luntz wrote. “This is your critical advantage. Washington’s incompetence is the common ground on which you can build support.”

Luntz continued: “Ordinarily, calling for a new government program ‘to protect consumers’ would be extraordinary popular. But these are not ordinary times. The American people are not just saying ‘no.’ They are saying ‘hell no’ to more government agencies, more bureaucrats, and more legislation crafted by special interests.”

If these things come to pass, you might as well give Bernie Madoff a get out of jail free card. His crimes and misdemeanors will seem paltry compared to what will come. If you were hoping to buy yourself out of indentured servitude from your privateering financial middle man with your own well paying job (we should all have those $100,000 million dollar bonuses for acting on government tips), forget it. CEA Chair Christina Romer has dropped the other shoe on the unemployment data. I knew that structural unemployment was bad, but I had no idea until this came out. (Yes, it’s The Economist, again. Why oh WHY do I have to consult the foreign press to get to the bottom of things?) I have no idea where they are going to find customers for businesses or tax receipts for government with this nasty bit of data.

OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president’s Fiscal Year 2011 budget. Ms Romer explained the economic assumptions underlining the budget forecasts. She noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections.

She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.

Deficit reduction has a lot to do with the strength of the economy.  It also has a lot to do with people finding jobs so they pay taxes and buy things that also come with taxes.  Balancing the budget with this kind outlook for unemployment is playing Russian roulette with more than one bullet in the chamber.   Increasing taxes is likely to choke off a recovery but so is any increase in interest rate that could come from a skittish market that doesn’t fell comfortable with the Orzag scenario presented today of a budget deficit coming in around 10% of output eventually even though the Obama administration says that level is unacceptable and wants to bring down to 3%.  However, we put the national defense budget off the table along with medicare and social security so there’s really no place to go.  Even sunsetting the Bush tax cuts that went to households over $250,000 at this point isn’t going to cut it.  We’ve had 8 years of two wars and no war bonds sold to any one.  The silly thing compounds, you know, even when the interest rate is low.  Where’s Cheney with his deficits don’t matter mantra now?

If this is the most likely or the best scenario, consider my investment advice to be a gun and a rocking chair for the front porch. Oh, and make a big ol’ fort like fence around your Michelle Obama Organic Nutritious Great Recession Victory Garden. You’re going to have to use the butter and eggs money for your bullets.

Of Bankers and Men

From the Economist: The administration is “trying to legislate by shouting,” Steve Bartlett of the Financial Services Roundtable, an industry group, told NPR radio, pointing out that when Mr Obama unveiled the Volcker rule he devoted more words to trashing banks than to outlining the plan. But bashing banks is good politics: a majority of Americans say Wall Street should not have been bailed out.

Former Fed Chair Paul Volcker (appointed by Jimmy Carter and reluctantly reappointed by Ronald Reagan) is the person most responsible for a horrible recession in the 1980s that put to bed our high rates of inflation. My first house loan in 1980 was for a whopping 16.8% at the time. I was also getting raises twice a year that usually fell somewhere between 15-20% (yes, in banking). It was a whole different world back then.

Volcker is an imposing man both intellectually and in appearance. He towers over nearly every one in a room. He also has the ear of President Obama who placed him in charge of the analysis and planning for policy to rid the country of the systemic risk that characterizes our financial system today. The Glass-Steagall Act (GSA) of 1933 set the regime for the post-depression banking system. The Gramm-Leach Bliley Act (GLBA) of 1999-2001 removed that regime. The Volcker Rule seeks to remove the excesses of the GLBA. It is not quite GSA, but its goal is to return to separation of commercial banking from investment banking and hedge fund speculation, tighter capital controls, and a less concentrated industry.

The first details of Volcker’s suggestions are being made public. The Banker Pinata picture came from The Economist which is running a series of articles on The Volcker Rule. Right now, they’re interested in the Wall Street Reaction. I also woke up to an Op-Ed in the NYT by the man himself on How to Reform Our Financial System. Dodd is already showing signs of caving to the FIRE Lobby and is considering removing some of the language and the agency that would most protect consumers. This doesn’t surprise me because I expect him to be in the FIRE lobby by a year from now and he’s undoubtedly already beefing up his post-Senate credentials. We’ve seen Obama’s leadership method which is basically to give the right wing everything they want without doing a thing. He retreats at the mention of challenge. Volcker will not retreat. However, he’s in the process but outside the system so how truly effective can he be?

Volcker’s op ed is a concise call to action to stop the excesses of regulation capture, monopoly formation, and extraordinary profits and bonuses that resulted from the removal of transparency and oversight.

A large concern is the residue of moral hazard from the extensive and successful efforts of central banks and governments to rescue large failing and potentially failing financial institutions. The long-established “safety net” undergirding the stability of commercial banks — deposit insurance and lender of last resort facilities — has been both reinforced and extended in a series of ad hoc decisions to support investment banks, mortgage providers and the world’s largest insurance company. In the process, managements, creditors and to some extent stockholders of these non-banks have been protected.

The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.

As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. We need to find more effective fail-safe arrangements.

There are substantial differences–and I’ve said this a million times in this forum–between the roles of commercial banks and the roles of investment banks in a modern economy. Commercial banking should be boring and operate on a very slim margin. It consists of pooling the funds of households and businesses and placing them into loans for mundane things like inventory and cars. Just because the government now insures those deposits doesn’t mean the banks should be allowed to gamble with them. If you want to play high stakes financial engineer, got to an investment bank and go to one that doesn’t have an implicit guarantee not to fail when you screw up royally which you eventually will because the role of randomness in the financial markets is huge. You’ll get more of a sure thing in Las Vegas where the population of cards and the distribution of aces, tens, and sevens is known. The Volcker rule recognizes and respects these differences. It codifies it once more in a way not unlike the GSA but not exactly the same.

The article referenced from The Economist is the one that looks at the banks’ reaction and it is as expected. I lifted the table for your reference and the article describing the political dance around the Volcker law is referenced within the quote. (I have to tell you, there is a lot I would give up before I gave up my subscription to The Economist.) You can see exactly who the vampire squid in the room is in the graph. No wonder they own the Treasury and the White House lock, stock and FIRE bought barrel.

Though widely characterised as a return to the Glass-Steagall act, the plan falls far short of the Depression-era law that separated commercial banking and investment banking (and was repealed in 1999). Banks can continue to offer investment-banking services to clients, such as underwriting securities and making markets. The plan’s aim, say officials, is narrow: to stop Wall Street from gambling in capital markets with subsidised deposits.

The timing of the proposal—two days after Mr Obama’s party suffered a thumping Senate-election loss in Massachusetts—looks nakedly political. But it was not dreamed up overnight. Last year the president’s economic lieutenants had seemed content to shackle the banks with tougher regulation and higher capital ratios, rather than limiting their activities. In recent months, though, they warmed to the ideas of Paul Volcker, a former chairman of the Federal Reserve, who was advocating more drastic action—and after whom the new rule is named (see article).

Banks have been scrambling to estimate the potential damage. Despite the lack of detail, for most the impact looks manageable. Officials admit that new limits on non-deposit funding are designed to prevent further growth rather than to force firms to shrink. Banks were already scaling back their proprietary-trading activity sharply as a result of the crisis: some say its contribution to revenue has fallen by more than half in the past three years. Prop trading now typically accounts for a mere percentage point or two of firms’ revenues (see table)—if it is defined narrowly to exclude risk-taking related to client business. Drawing a line between the two will be horribly difficult, but that will be the regulators’ problem.

This article from the Economist on Obama’s Economic Team goes more into depth about the relative coziness of Geithner and Summers to the Wall Street Bonus class and the one thing Obama can ride back to above 50%: hatred of bankers. There may be a growing disconnect here that bodes well for the Volcker Rule. While it’s unlikely we’ll see capped bonuses, it is possible for a rework of the GSA and the so called firewall in a less intense sense. Oddly enough, Biden is a friend of Volcker’s and is playing a role in pushing the spine-challenged Obama in the direction of the Volcker Rule. There are some really odd political dynamics to this game.

I know how hard it is to get folks interested in economics and finance as I’ve now chosen this as my occupation rather than sitting inside these institutions doing the strategic planning and the overall asset-liability alignment that I used to do back in the days when my house loan was nearly 17% instead of the 7% I’ve got today. I have no idea why I find it a fascinating game of detective. Perhaps it’s something I inherited from my central banker grandfather. Perhaps it’s just one of the many quirks I’ve developed over the years. I do know, however, that now is not the time for you to go all glassy-eyed over complex derivatives. What this suggests is a way to make commercial banking boring again so that almost any one could do it and still have time for that ABA game of golf on a Wednesday afternoon.

Watch what happens to the proposed Volcker Rule. It could very well be the difference between real change and chump change. Lobby your senator and congressman because you know the FIRE lobby will be doing so vigorously and with a lot more money than you and I will ever have.

Financial Engineering the American Nightmare

I frequently listen to the Reading radio for the Blind and Print Handicapped station here in Southeastern Louisiana(WRBH88.3 FM) on my way home from work. I had the absolute pleasure yesterday to listen to an article on the FIRE lobby and the huge amount of power it wields in the beltway from the last issue of Mother Jones. I did a little Google research on the topic since both the Davos World Economic Forum and the meaningless rhetoric delivered last night in the last SOTU have some hint of a call for financial market regulation. Of course, you know, as an ex banker, ex central banker, and a financial economist, I’ve got more than a passing interest in what used to be the boring little business of taking in small savings accounts and making loans for houses, businesses, and cars. It used to be funding the American dream. Since the 1980s, they’ve been financial engineering an American nightmare and making a tidy profit to do so. It’s just one big game of passing the trash to a higher bidder in a fixed game of who can leverage themselves into the highest arbitrage profits by creating false momentum now.

The chart here (you know me and my love of nifty graphs) shows a most interesting modern trend that fits in easily with the time line when politicians and regulators completely left financial institutions to police themselves. You can also see the 2008 crash and the current return to business-as-usual for extraordinary profits of Financial Institutions vs. the rest of the industries in the U.S. economy. Lenin would love this. It shows a complete siphoning of money from everything else to banks. It also shows that they damn near brought the U.S. and global economy to their knees and they’re happily doing it again. Now, this graph is from the Financial Times. As usual, I have to go to European sources these days to find worthwhile journalism. The numbers themselves and the analysis actually comes from the Deutsche Bank. The graph was first introduced in an article back in 2008 but was just recently updated. The bottom line of the analysis (based on the statistical technique called mean reversion or regression toward the mean) was astounding then but is appalling now given everything we’ve been suffering.

The US Financial sector has made around 1.2 Trillion ($1,200bn) of “excess” profits in the last decade relative to nominal GDP.

So mean reversion would suggest that $1.2 trillion of profits need to be wiped out before the US financial sector can be cleansed of the excesses of the last decade.

Basically, the article concluded that the banks were getting extraordinary profits on a historical basis starting around 1991 up until the financial crisis. It’s particularly interesting because it compares banking profits to profits from doing business in any other industry. They were unique. They made money like successful bandits and thieves.

So that article concluded that perhaps we’d seen the correction needed to bring the financial institution profits back to their historical trend. No such luck. The new graph just shows they’ve been able to go right back at it again. So, why should we believe that the incredible amount of leverage and risk-taking it took to create this giant bubble of profits isn’t going to repeat itself? At the moment, nothing really, because we’ve yet to see the changes in legislation that we need to remove the sources of systemic risk. These essentially are the risk from market concentration (i.e. several players going under brings down the entire industry because the top 10 players or so make up the majority of the market) and from being able to leverage themselves beyond reason (i.e. removal of strict capital requirements in the early 2000s) and also there’s the fact nearly all of them are out there running giant speculative hedge funds; even the ones with fiduciary responsibility. The only difference now is that they are using tax payer funds and low interest money compliments of the Federal Reserve Bank.

So this brings me back to the series of articles in Mother Jones and rent seeking. There was a concerted effort on the part of the FIRE lobby (financial institutions and real estate) to ease their way out of strict regulations that resulted from the last time they brought the U.S. and world economy to a grinding halt. That would be, of course, the period of the Great Depression. That is also where their rent-seeking activities paid off handsomely in the profits generated as illustrated by that nifty graph. That’s a terrific ROE illustrated up there in that graph. The U.S. Congress, the SEC and the FED, Fannie and Freddie and the lot of politicians who write state and local banking laws were very good investments.

I listened to Kevin Drum’s “Capital City” read aloud and was appalled at the flagrant examples influence peddling. He takes the story of the crash of 2008 and puts it purely into the world of political lobbying and investing in politicians. I’m now convinced nothing will really change until we rid the world of Senators like Chuck Schumer. Chuck Schumer is on the top of my list. Thankfully, Dodd’s gone and Biden is carefully tucked into a job where he can do no real harm. Please read the article and be prepared to be appalled.

THIS STORY IS NOT ABOUT THE origins of 2008’s financial meltdown. You’ve probably read more than enough of those already. To make a long story short, it was a perfect storm. Reckless lending enabled a historic housing bubble; an overseas savings glut and an unprecedented Fed policy of easy money enabled skyrocketing debt; excessive leverage made the global banking system so fragile that it couldn’t withstand a tremor, let alone the Big One; the financial system squirreled away trainloads of risk via byzantine credit derivatives and other devices; and banks grew so towering and so interconnected that they became too big to be allowed to fail. With all that in place, it took only a small nudge to bring the entire house of cards crashing to the ground.

But that’s a story about finance and economics. This is a story about politics. It’s about how Congress and the president and the Federal Reserve were persuaded to let all this happen in the first place. In other words, it’s about the finance lobby—the people who, as Sen. Dick Durbin (D-Ill.) put it last April, even after nearly destroying the world are “still the most powerful lobby on Capitol Hill. And they frankly own the place.”

But it’s also about something even bigger. It’s about the way that lobby—with the eager support of a resurgent conservative movement and a handful of powerful backers—was able to fundamentally change the way we think about the world. Call it a virus. Call it a meme. Call it the power of a big idea. Whatever you call it, for three decades they had us convinced that the success of the financial sector should be measured not by how well it provides financial services to actual consumers and corporations, but by how effectively financial firms make money for themselves. It sounds crazy when you put it that way, but stripped to its bones, that’s what they pulled off.

Kevin Drum’s article is a must read for ANYONE that lives in the shadow of the U.S. financial industry. It is both a historical narrative as well as a cautionary tale. Much of our national treasure is no longer going to actually producing goods and services. (I had to laugh when I read the SOTU speech and the promise of the return to an export economy. What are we going to sell other than our natural resources and people?) The high rates of return are based on loan shark returns from things like overdraft protection and making arbitrage profits when big players with enough clout force small enough moves in market momentum–that when leveraged to incredible levels–create incredible bonuses and profits.

There are some high profile people–including Paul Volcker one of my personal heros–trying to prevent a repeat of this catastrophe. (See the Volcker Rule.) However, the depressing thing is that it appears that the FIRE lobby owns so much of the Congress and Executive Branch– and possibly SCOTUS given that damnable ruling last week–that it will be hard to pull them back to size. Perhaps the international community will be able to do it on a global basis and the Davos forum could lead to a new Basel Accord. That still leaves us here in the United States hopelessly indentured to the banking system.

Now, I could be a good researcher and run a really great little econometrics model specifying something to the effect like dollars spent on lobbying by FIRE = f(bank profits, decreased capital requirements, exotic unregulated derivatives, regulator capture, market concentration) and a huge amount of other variables that are basically not in the public interest but in the bankers’ interest but low and behold, I found one done by the IMF just recently released. Surprise, surprise–the primary investigators were WOMEN economists. Here’s a link to Lobbying and the Financial Crisis at VOX EU. Notice again, I’m having to go to European sources since the media industry here is financed by the US banking industry, they certainly don’t want their financiers to turn off their cash spigots and access to seasoned equity offers.

If regulatory action would have been an effective response to deteriorating lending standards, why didn’t the political process result in such an outcome? Questions about the political process, through which financial reforms are adopted, are very timely now that the US Congress is considering financial regulatory reform bills.

A recent study by Mian, Sufi and Trebbi (forthcoming) shows, for example, that constituent and special interests theories explain voting on key bills, such as the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008, that were passed as policy responses to the crisis.

A number of news articles have reported anecdotal evidence that, in the run up to the crisis, large financial institutions were strongly lobbying against certain proposed legal changes and prevented a tightening of regulations that might have contained reckless lending practices. For example, the Wall Street Journal reported on 31 December 2007 that Ameriquest Mortgage and Countrywide Financial spent millions of dollars in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat anti-predatory-lending legislation.

There has, however, been no careful statistical analysis backing claims that lobbying practices may have been related to lending standards. In a recent paper (Igan, Mishra and Tressel, 2009), we provide the first empirical analysis of the relationship between lobbying by US financial institutions and their lending behaviour in the run up to the crisis.

This is the academic equivalent of the Mother Jones’ article. Here’s one more NIFTY GRAPH and here’s the explanation to go along with it.

The striking picture is that financial institutions lobbying on specific issues related to mortgage lending and securitisation adopted significantly riskier mortgage lending strategies in the run-up to the crisis.

We considered three measures of ex-ante loan characteristics: the loan-to-income ratio of mortgages, the proportion of mortgages securitised, and the growth rate of loans originated. The loan-to-income ratio measures whether a borrower can afford repaying a loan; as mortgage payments increase in proportion of income, servicing the loan becomes more difficult, and the probability of default increases. Recourse to securitisation is often considered to weaken monitoring incentives; hence, a higher proportion of mortgages securitised can be associated with lower credit standards. Fast expansion of credit could be associated with low lending standards if, for example, competitive pressures compel lenders to loosen lending standards in order to preserve market shares.

We find that, between 2000 and 2006, the lenders that lobbied most intensively to prevent a tightening of laws and regulations related to mortgage lending also:

• originated mortgages with higher loan-to-income ratios,
• increased their recourse to securitisation more rapidly than other lenders, and
• had faster-growing mortgage-loan portfolios.

These findings suggest that lobbying by financial institutions was a factor contributing to the deterioration in credit quality and contributed to the build-up of risks prior to the crisis.

How does it feel to know that you’re an indentured servant and that all the businesses you work for or do business with are dependent on entirely legal group of thieves and extortionists?

GET YOUR MONEY out of BIG BANKS now. You’re helping to finance your own contract with the devil. They’re throttling democracy and making a huge buck off of it in the process. Try to primary and remove ANY politician who has been heavily financed by FIRE. Spread this message far and wide.

Barack Hoover Obama and the Curse of the Long Term Unemployment Rate

When I wrote the morning thread at The Confluence last night, I couldn’t imagine any justification for an economic policy proscription of spending freezes coming from any one except maybe the American Enterprise Institute. Basic macroeconomic theory states that during a recession with high unemployment, the government’s fiscal policy should either consist of tax cuts or spending increases. Theory also shows that during these horrible times, budget deficits grow naturally through automatic stabilizers. Tax receipts go down because folks lose their jobs and businesses lose customers. Government spending goes up because unemployed people rely heavily on social safety net programs like unemployment insurance.

There really are no philosophical differences between conservative or liberal economists on these theories. What you usually see are arguments from both sides on which policy prescription to apply. Republicans favor tax cuts. Democrats usually go for increased spending that targets job creation. That’s been the way it’s been for a long time until THIS President who appears to believe he can rewrite economic theory the way a fundamentalist preacher rewrites geology, anthropology, cosmology, biology, and reality.

I woke up to a chorus of Barack Hoover Obama this morning coming from Economic Blogs all over the web.  It is here from Paul Krugman.

A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?

It’s appalling on every level.

It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

It’s bad long-run fiscal policy, shifting attention away from the essential need to reform health care and focusing on small change instead.

It is here from Brad Delong who mentions that even deficit hawk economics find this a laughable policy.

There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)–that’s only $25 billion a year in a $3 trillion budget and a $15 trillion economy.

But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion–employment lower by 350,000 or so–and in 2012 GDP will be lower by $70 billion–employment lower by 700,000 or so–than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year…)

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

Here’s more from Mark Thoma and one from Naked Capitalism. That’s just some of the more high profile economist blogs. I didn’t even go for the dozens of links from business bloggers or the political sites. I want to put this all in perspective and I’ll use a Jan. 16 article from The Economist to do so. It’s one of the latest articles I intend to use in my classes and it’s called The Trap.

When teaching about unemployment statistics, economics professors like Krugman, Thoma, DeLong, and little ol’ me all emphasize that it’s not the big rate so much as the underlying trends and details within the rate that drive a policy. Cyclical unemployment–the type of unemployment that comes from a recession–eventually clears up on its own when the economy improves. Usually, the folks impacted by cyclical employment will not have problems finding jobs in a good economy.

There are some pervasive types of unemployment that are much more deeply rooted and take more targeted, specific job policies to eliminate. Structural unemployment is one of those phenomena that take job retraining programs or helping the labor force move where the jobs are being created (either location or industry change). You can usually spot this type of unemployment in the Long Term Unemployment Rate. These folks have been in industries or jobs that are no longer valid in the modern economy and without some refitting, they stay unemployed. If you look at the graph I posted above from The Economist, you’ll see exactly how disturbed the labor market really is right now. This unemployment is not going away and it requires some serious policy to deal with it. Until then, we will see lower tax receipts and higher need for safety net programs. Obama’s policy totally ignores the reality on the ground and goes for a quick political message. We’re not seeing solutions for the real problem at all.

The Economist article calls this the ‘curse’ of long term unemployment. This is the real problem left to this administration from the Bush years. Other than shove the young unemployed into the military, there has been no program aimed at the lackluster job creation coming from the U.S. economy since Bill Clinton left office.

THE 2000s—the Noughts, some call them—turned out to be jobless. Only about 400,000 more Americans were employed in December 2009 than in December 1999, while the population grew by nearly 30m. This dismal rate of job creation raises the distinct possibility that America’s recovery from the latest recession may also be jobless. The economy almost certainly expanded during the second half of 2009, but 800,000 additional jobs were lost all the same.

It took four solid years for employment to regain its peak after the 2001 recession. With jobs so scarce, wages stagnated even as the cost of living rose, forcing households to borrow to maintain their standard of living. According to Raghuram Rajan, an economist at the University of Chicago, this set the stage for the most recent crisis and recession—a crisis, ultimately, caused by household indebtedness. If the current recovery is indeed jobless, wages will continue to lag. Since they are now virtually unable to borrow, households will have to make do with less, and reduced spending is likely to make the economic recovery more uncertain still.

So which is it to be: jobless or job-full? Of paramount concern is the growth in long-term unemployment. Around four in every ten of the unemployed—some 6m Americans—have been out of work for 27 weeks or more. That is the highest rate since this particular record began, in 1948. These workers may forget their skills; and many began with few skills anyway. Just as troubling is a drop of 1.5m in the civilian labour force (which excludes unemployed workers who have stopped looking for work). That is unprecedented in the post-war period. If those who have stopped looking were counted, the unemployment rate would be much higher.

The only sectors that have been growing recently are the health care industry (like demand for nurses) and the education sector. I can tell you as a participant in the education sector, state-level balanced budget requirements are about to change those statistics. Both the Health and Education sectors require government funding, if that dries up, the jobs dry up even though the demand remains high.

The Obama administration has been verbal about green sector jobs, but frankly, jobs are not going to come from ethanol subsidies, that’s only going to create food shortages. The basic question, then, is where do the jobs come from, and what policies do we use to encourage job creation? It is obvious that our infrastructure needs a huge amount of rework to me and like FDR, this is one area where we could start programs to rebuild interstates, networks, and buildings. Just refitting buildings to meet earthquake or hurricane standards could be one potential area. We also don’t have enough refineries and power plants. It is possible we could subsidize the private sector in major infrastructure projects if there’s no will for a public work project. All of the highways, dams, and electrical grids are aging and in need of repair. We’ve seen realization of these problems but no policy prescriptions.

Where are the jobs of the future and how can government create an environment for their creation if we defund job training and education and fail to fully fund repairs to the infrastructure that supports job creation in the future?  Do we really need a spending freeze in this jobless century? Where are the real economists in this administration?

Influence Peddling is not a First Amendment Right

If you want to figure out what’s wrong with our government you need only look at how money enters the process. The Supreme Court just enabled influence peddling on an entirely new level this week. Campaign Financing laws all over the country will now be challenged by conservative and pro-business rent seekers. Consumer, workers, and the policy process will be much worse off, if that’s even possible to imagine.

Economist Jeffrey D. Sachs has piece at SciAm worth viewing. It’s called Fixing the Broken Government Policy Process; Greater transparency and limits on lobbyist influence would promote better long-range strategies. He believes there are four sources that have broken down the government policy process.

First is a chronic inability to focus beyond the next election. “Shovel-ready” projects squeeze out attention to vital longer-term strategies that may require a decade or more. Second, most key decisions are made in congressional backrooms through negotiations with lobbyists, who simultaneously fund the congressional campaigns. Third, technical expertise is largely ignored or bypassed, while expert communities such as climate scientists are falsely and recklessly derided by the Wall Street Journal as a conspiratorial interest group chasing federal grants. Fourth, there is little way for the public to track and comment on complex policy proposals working their way through Congress or federal agencies.

Most of his examples come from the policy area of sustainable development. I’ve been railing on about the ridiculousness of the ethanol subsidies going to corn for some time. I’m certain it will eventually lead to food shortages and it certainly is a costly way to creating alternative energy programs. Sachs ably explains this policy mishap well. The desire for sustainable development and new energy is a good one, but the ethanol industry and it’s influence peddling/rent seeking waylaid tax dollars for its constituents at the cost of effective policy. He explains how the private sector can waylay many good public welfare policies.

These failings take a special toll on the challenges of sustainable development because there is no quick fix, for example, for the challenge of large-scale reductions in greenhouse gas emissions. Instead of getting long-term strategies for adopting low-carbon energy sources, upgrading the power grid, encouraging electric transportation and so on, we are getting cash for clunkers, subsidies for corn-based ethanol, and other ineffective and highly costly nonsolutions delivered by large-scale lobbying.

Some free-market economists say sustainable development should be left to the marketplace, but the marketplace now offers no incentive to reduce carbon emissions. Even putting a levy on carbon emissions, either through a carbon tax or carbon-emission permits, will not be sufficient. The development and deployment of major technologies potentially crucial to more sustainable energy—such as nuclear power, wind and solar power, biomass conversion and transport infrastructure—are matters of systems design requiring a mix of public and private decision making.

Herein lies the policy challenge today. When we let the private sector enter into public decision making, we end up with relentless lobbying, money-driven politics, suppression of new technologies by incumbent interests and sometimes miserable choices devoid of serious scientific content. How can business and government work together without policies falling prey to special interests?

As we’ve seen more and more money pour into politicians, we’ve seen more and more policies benefit specific industries at the cost of the treasury and long term, effective policy that would benefit the nation. In light of this recent Supreme Court decision that basically adds accelerants to the already massive fire, what’s a citizen to do?

Sachs suggests that we should at least push for more transparency in the lobbying process. This is of course something this administration promised and then left on the campaign floor with the confetti pretty quickly. They went behind close doors with Big Pharma nearly immediately and went running for friendly audiences the minute that townhall meetings turned ugly. It’s difficult for any administration that tries to control their message and their image to really wallow in the democratic process. This is especially true when the Pol in question finds the only thing clean about the process to be prepackaged speeches in front of adoring crowds. Sach’s suggest we look to the web to find ways to bring the public into the policy process.

He also suggests that the government get busy writing laws to keep lobbyists in check. Actually, he suggests that laws be written to ensure they cannot write checks.

Currently lobbyists are still allowed to contribute massively to congressional campaigns and to political action committees. The largest lobbying sectors—including finance, health care and transport—have spent billions to promote policies that favor narrow interests over broader public interests. A major step toward reform would be to prohibit campaign contributions by individuals employed by registered lobbying firms. The right of individuals to make campaign contributions would not be infringed, but they would have to make a choice between their lobbying activities and their personal financial contributions to the political process.

SCOTUS has just turned the world of campaign finance reform upside down. At the moment, Obama has publicly recognized the issue. Will he give the issue more than just casual lip service? We need to start forcing the issue. I can’t believe that any group of people that came out of the Chicago Way are going to suddenly develop allergies to influence peddling.

Campaign Payola Lives On

In one of the most disturbing Supreme Court decisions in some time, 5 justices voted to overturn Campaign limitations for huge corporations and unions.

The 5-to-4 decision was a doctrinal earthquake but also a political and practical one. Specialists in campaign finance law said they expected the decision, which also applies to labor unions and other organizations, to reshape the way elections are conducted.

“If the First Amendment has any force,” Justice Anthony M. Kennedy wrote for the majority, which included the four members of its conservative wing, “it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”

Justice John Paul Stevens read a long dissent from the bench. He said the majority had committed a grave error in treating corporate speech the same as that of human beings. His decision was joined by the other three members of the court’s liberal wing.

I’d personally like Justice Kennedy to explain to me how a huge multinational corporation is an ‘association’ of citizens. The ruling literally opens the floodgates to big money. Here’s two responses from two very different politicians. This quote comes from the NYT article referenced above.

Senator Mitch McConnell of Kentucky, the Republican leader and a longtime opponent of that law, praised the Court’s decision as “an important step in the direction of restoring the First Amendment rights of these groups by ruling that the Constitution protects their right to express themselves about political candidates and issues up until Election Day.”President Obama issued a statement calling on Congress to “develop a forceful response to this decision.”

“With its ruling today,” he said, “the Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”

Politico suggests the decision will help more Republicans than Democrats to raise funds.

The decision, handed down in a special session of the court, is generally expected to boost Republicans more than Democrats, because corporations and corporate-backed outside groups tend to align with conservatives and also often have access to more money than unions or liberal outside groups.

“No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporation,” Justice Anthony Kennedy wrote for the majority.

In a stinging dissent, Justice John Paul Stevens wrote that the ruling “threatens to undermine the integrity of elected institutions across the nation. The path it has taken to reach its outcome will, I fear, do damage to this institution.”

NPR points to one part of campaign finance reform that remains.

At the same time, NPR’s Peter Overby points out that one important limit remains intact: Corporations still cannot give money directly to federal candidates or national party committees. That limit dates to 1907. The justices also upheld some other restrictions, including disclosure requirements for nonprofit groups that advocate for political candidates.

The original case before the court seemed an improbable vehicle for such a dramatic re-examination of campaign funding regulations.

Brought by Citizens United, a nonprofit group, against the Federal Election Commission, the case presented a seemingly straightforward question: Do campaign finance restrictions on corporate spending apply to Citizen United’s plan to run advertisements for an anti-Hillary Clinton documentary at the peak of her 2008 presidential run?

But the high court ended up in a much broader examination of constitutional issues that questioned the entire system that has been built up over decades to regulate the role of corporate money in politics.

Marc Ambinder at The Atlantic explains what this means to our current financing system which brought about the creation of PACs.

This basically eliminates a middleman: before today, corporations and unions had to set up PACs (political action committees), filed separately with the IRS, that would receive donations. And they did. Corporations and unions spend millions of dollars on elections. Now, however, the accounting firewall is gone, and Wal-Mart or the Service Employees International Union, for instance, can spend their corporate money directly on candidates.

We might as well borrow the jacket labeling idea from NASCAR and assign each candidate a corporate sponsor logo. This is just one more step towards ensuring we’ll all be slaves to big Oil, big Defense, Big Finance, and Big Medicine. Who owns your Senator and Representative?