Our National Ponzi Scheme

Doctor Doom, Nourielle Roubini, an economist and professor at NYU, always manages to turn an interesting phrase when making his trademark pessimistic forecasts. He’s really done it this week in Forbes.

I wrote about the Federal deficit last week and covered the major points of why we are on an unsustainable path for our taxes and spending and when that could be a problem. The Obama administration continues to revise its spending and deficit estimates upward as an act of surprise over how deep the recession has been. I’ve raised a Spock-like eyebrow over that and have been lighting candles on my alter to the wisdom beings that, hopefully, the White House will get more real. Well, nothing makes things more real than a splash of freezing water in the face while sipping the first cup of the day’s coffee. Roubini is his fully alarmed self. He basically accuses our political class of running one big Ponzi Scheme and we are the suckers.

The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%–that’s an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.

Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to raise taxes, or cut spending, or monetize the debt–or most likely do some combination of all three.

Wow! If those estimates are right, just about every one with hands on the budget from the last 4 congresses to the last two Presidents should be in the jail cell next to Bernie Madoff. The information coming from the CBO is really what started ringing the death knell for health reform last spring. It should be completely obvious to any one that has followed the last stimulus package, what currently passes for ‘health care reform’, the escalation of ongoing wars, the Bush medicare pharmaceutical giveaway, bail-out bonanzas, and all those Bush tax cuts from the beginning of his term, that our fiscal policy actions need to be renamed nails in our collective coffin. We simply have to re-arrange our priorities or we will be assigned to the rubbish heap of failed empires. I can’t even image the People’s Republic (our banker) even relishes that outcome. I really, at this point, am incapable of optimism that any of this will be turned around in time. We continue to elect leaders that are either completely out of touch with reality or don’t care about it. We have VooDoo Government.

If Dick Cheney’s evil plan was to bankrupt the Federal Government, it’s working.

Too Much Optimistic = Damned Lies!

Are we beginning to see the omnipresent reification of the Obama hope/change theme recognized for what it is? All of the memes on superior judgment have been an abstract campaign mantra with no basis in reality. Who but a few among us have recognized this? Are we seeing the first signs of a satori from the all too real realm of the economy and Americans who are losing everything because they have no job? All I can say is it is about damned time and I’m praying that it isn’t too late to get fooled again.

Today’s Pit Boss (Jeanne Cummings) at Politico brings the perspective to inside the beltway where grasping reality has always been a Herculean task. The blog piece is called “Some economists warn Barack Obama’s economic predictions too optimistic.” This economist just calls their prediction lies, lies and more damn lies.

This time, however, the new forecasts — if they are anything like what many outside economists expect — could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.

Higher deficit figures also would arrive at a critical moment in the health care debate, as lawmakers are already struggling to find a way to pay for the president’s nearly $1 trillion reform package.

Alternately, if Obama clings to current optimistic forecasts for long-term growth, he risks accusations that he is basing his fiscal plans on fictitious assumptions — precisely the sort of charge he once leveled against the Bush administration.

White House officials rebuff such suggestions, saying the midyear correction is precisely intended to keep their economic program reality based.

But a series of POLITICO interviews in recent days with independent economists of varied political stripes found widespread disdain for Obama’s first round of assumptions, with some experts invoking such phrases as “rosy” and “fantasy.”

Obama’s current forecasts envision 3.2 percent growth next year, 4 percent growth in 2011, 4.6 percent growth in 2012 and 4.2 percent growth in 2013.

Let me continue with the translation of “experts invoking such phrases as “rosy” and “fantasy” and just call them lies, lies, and more damned lies! Clear enough? Following my theme yesterday, I offer what we economists call the stylized facts to offset the varnished untruths wafting through Big Brother’s media screed.

An Economic Exercise in Wishful Thinking

Warning: Do NOT use before making economic policy.

In today’s NY Times, David Leonhardt is very clear about the role of hope and wishful thinking among the Obama economics team. They got the unemployment numbers very, very wrong and as a result, we got a stimulus package that was underdesigned and oversold. If you read me or for that matter, Paul Krugman or Joseph Stiglitz, you were warned about the likely result. While this m.o. among Obama and his minions comes as no surprise to folks here, we’re beginning to see the resulting shock and awe as every one else awakens to policy based on the empty rhetoric of hope and no real change. Precious time, political majorities and capital are being wasted on an enhanced status quo.

In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.

To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.

We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.

There are some fundamental things in the labor market that the Obama Team somehow overlooked. The first is the unwinding of the automobile network and all the supporting infrastructure around the supply and sales chain. The second is the impact on the states of low tax revenues and high unemployment insurance payouts. Some how, in focusing on the impact of the financial crisis, they appeared to haven forgotten some basic underlying macroeconomic dynamics. At least, that is my take. They may have kept their eye on the ball, but they failed to look around the bigger field of play.

Leonhardt points to two possible explanations as to why so many very bright people got it so wrong. He argues that because the stimulus package was designed poorly and hurried through with the rosy scenario coloring the numbers, that it is possible that the stimulus package has done nothing and that as a result, things are getting worse. That’s hypothesis number one. His second hypothesis is the more likely one in both his and my opinion. That is that the economy is deteriorating further and this is despite of the stimulus. Again, this would be due to a bad forecast and an even worse policy prescription. So he’s laid out the ground work for the big question while giving a slight nod to some potential for the stimulus plan.

The stimulus package does seem to have helped. But its impact has been minor — so far — compared with the harshness of the Great Recession.

Unfortunately, the administration’s rose-colored forecast has muddied this picture. So if at some point this year or next the White House decides that the economy needs more stimulus, skeptics will surely brandish that old forecast.

Worst of all, the economy really may need more help.

Well, you know, on the one hand, on the other hand. However, whichever hand you choose, this is a policy failure we couldn’t afford.

In Remembrance of an Angel

Farrah Fawcett (February 2, 1947 – June 25, 2009)

Some how, every generation of woman has their own girl next door with which to compete and identify.  Just like the iconic picture of Betty Grable’s legs during World War 2 and Marilyn Monroe’s restless white dress during the 1960s, those of us who went to university during the 70s most likely dealt with a boy who’s dorm was decked with Farrah. I never tried to get that Farrah do, but I knew many girls that spent hours with perm solutions, dyes, and rollers, trying.  If there was ever a living barbie doll, Farrah was it.

Then, as usual, we find out there is more to the pin-up girl than the pin-up alone.  As we grew up, we found out she actually could act (The Burning Bed, 1984) and she was a woman of substance.  (If not substance abuse,  if you remember that David Letterman interview).  Some how,  Farrah always proved the survivor. The actress recently has received acclaimed from her very public fight with  cancer. 

Fawcett made a heartfelt documentary in 2008 entitled “A Wing & a Prayer: Farrah’s Fight for Life“, which follows her battle with Cancer and is a must watch, very touching…

Oddly, enough, as the announcement of her death pinged from my blackberry across the room, I was standing at one of those infernal machines that causes my breasts to hurt for days and saves many, many women’s lives.  As a cancer survivor myself of 19 years next month, each time some we lose another person, I realize how much farther we need to go in handling this problem.  My dad started radiation this week for a lump on his neck.  It’s always a reminder of how close I was and we all our to a battle for our life.

Farah was 62.  Her long time significant other Ryan O’Neill was with her at the time.  They have a son,Redmond, together who like many other things in her life, has proved a challenge.  Ryan was on tv as recently as last week insisting that Farrah had decided that she would finally marry him and was hoping to get Redmond released for a short visit.  From all accounts, she died peacefully this morning.

Obama and the Enhanced Status Quo

We were promised changed. What we are getting is perpetuation of the status quo. Let’s try this headline at the Guardian on for size “Goldman Sachs to make record bonus payout”.

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company’s prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm’s second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company’s shares in January, has already made a $1bn gain on his investment.

The bold part says it all. There continues to be a systematic elimination of competition from merger mania in the financial sector which has created two classes of too-big-to-fail institutions. We now have those that function completely with government funding and those that function by funding candidates for government. Goldman Sachs is benefiting immensely from both.

“The Public Option is not your Enemy”

Finally, if we are to win the battle that is now going on around the world between freedom and tyranny, the dramatic achievements in space which occurred in recent weeks should have made clear to us all, as did the Sputnik in 1957, the impact of this adventure on the minds of men everywhere, who are attempting to make a determination of which road they should take. Since early in my term,our efforts in space have been under review. With the advice of the Vice President, who is Chairman of the National Space Council, we have examined where we are strong and where we are not, where we may succeed and where we may not. Now it is time to take longer strides-time for a great new American enterprise-time for this nation to take a clearly leading role in space achievement, which in many ways may hold the key to our future on earth.

President John F. Kennedy, May 25, 1961

Why can’t we put the same determination that put a man on the moon into finding a solution for affordable health care for all?   What are the sticking points?

Some of the first efforts toward that goal were put into play yesterday.  We had the usual Presidential teleprompter read before the American Medical Association yesterday.  It was characterized this way by Sam Stein.

“The public option is not your enemy, it is your friend,” Obama declared at one point.

His prepared remarks were a bit more detailed:

If you don’t like your health coverage or don’t have any insurance, you will have a chance to take part in what we’re calling a Health Insurance Exchange…. You will have your choice of a number of plans that offer a few different packages, but every plan would offer an affordable, basic package. And one of these options needs to be a public option that will give people a broader range of choices and inject competition into the health care market so that force waste out of the system and keep the insurance companies honest.

Back in the world of where the rubber hits the road, the Congressional Budget Office (CBO) returned an estimate of the Affordable Health Choices Act that was proposed by Dodd and Kennedy.  Ezra Klein of WaPo used the adjective “devastating”.

According to the agency, the bill would cost a hefty trillion dollars over 10 years and extend insurance to a mere 16 million people. That’s a lot of money to spend if you’re only going to achieve a third of your goal. Frankly, I was pretty surprised by the results.

And so, it turns out, were the people writing the bill.

A couple of months ago, the Health, Education, Labor, and Pensions Committee sent the CBO a sketch of a draft of its legislation. And the CBO sent the members back a stab at an outline of an estimate. It was all very early, and very rough. But CBO’s response was encouraging. The total cost was a bit higher, but the number covered was much higher. More like what you’d expect. More like what health reform is trying to achieve.

The draft the CBO examined last week, however, was in certain respects even less complete than the outline they were given months ago. In an effort to buy some extra time to negotiate with Republicans on the committee, the Democrats on HELP left out some of the more controversial policies in the hopes of reaching a bipartisan agreement sometime this week. The public plan, the employer mandate and the individual mandate were all absent from the proposal the CBO examined. The employer and individual mandates — the first of which pushes employers to offer coverage and the second of which force individuals to purchase coverage — are particularly key to increasing the number of Americans with health insurance.

You might ask what the HELP Committee was thinking, sending Swiss cheese legislation to CBO. Well, the HELP Committee’s expectation was that the CBO, in crafting its preliminary score, would assume something similar to the outline it had seen months before. The CBO didn’t. In fact, it did the opposite. CBO ran its estimates with no employer mandate and an individual mandate with a laughably small penalty.

“Swiss cheese legislation”, is this what the American people deserve?

Dead Bank Walking

The Treasury just gave ten big banks the okay to repay their Tarp Funds.  The gang of ten includes J.P Morgan, Goldman Sachs, Morgan Stanley, American Express, Bank of New York Mellon, US Bancorp, Capital One Financial Corp, and Northern Trust.  This basically gives positive identification to our zombie banks.  The three most worrisome are Citibank, Wells Fargo, and Bank of America Corp essentially creating a two-tier banking system.   The second tier banks had to give the Treasury their plans to raise capital, while the other banks turn back their funds.

As part of the bank bailout program, known as the Capital Purchase Program, the 10 institutions eligible to repay TARP have the right to repurchase warrants the Treasury holds at fair market value.

The 10 financial institutions already paid $1.8 billion in dividend payments to the Treasury over the last seven months, bringing the total of all dividend payments to $4.5 billion.

Proceeds from the repayments go to the Treasury’s general account, which is used to reduce Treasury’s borrowing and reduce the national debt. The funds could also be used to provide further capital to troubled financial institutions as part of the TARP program.

Other smaller banks have also returned bank bailout funds, bringing the total in returns to $70 billion.

As part of the program, J.P. Morgan is eligible to return $25 billion in TARP funds, Goldman Sachs, $10 billion, and Morgan Stanley, $10 billion.

BB& T plans to repay $3.1 billion in TARP funds it received, according to a statement from the institution Tuesday. U.S. Bancorp announced plans to buy out $6.6 billion in TARP capital, the bank reported Tuesday.

Other eligible institutions include American Express, $3.4 billion, Bank of New York Mellon, $3 billion, and State Street Bank, $2 billion.

The Zombie three have began some encouraging steps like removing a few board directors.  The FDIC (Sheila Bair) is encouraging a shake up of top management. Citi plans to exchange some preferred securities for common stock. But will these steps be enough? Can we really trust so much of our economy’s lending and spending power to zombies?

One Person One Vote Died a Year Ago today

In an important landmark case Reynolds v. Sims, 377 U.S. 533 (1964), the Supreme Court established one of the most significant voting rights rulings impacting our Republic since the enfranchisement of woman and the election of U.S. senators by popular vote. Both of these occurred earlier in the century.  Basically, Reynolds v Sims established the means to ensure  that the United States was a truly representative form of government.  It provided a legal way to enforce the idea that legislatures are those instruments of government elected directly by and directly as representatives of the people. Because of this, all elected officials should be elected in a free and unimpaired fashion. One Person one vote is a bedrock of our political system.

That was until one year ago today, when the Democratic Rules and Bylaws Committee declared the voters of Michigan and Florida to be one half of a person. This decision, done in a closed room behind close doors, was done in the name of party unity and led to the famous “party unity my ass” uttered at The Confluence that led to the PUMA movement. It led to spontaneous outrage across the country.

What began as a Democratic Party initiative to change the caucus and primary schedule to appease some special interest groups, wound up as a means to disenfranchise two states as Florida and Michigan were selectively punished for their decisions to change the dates of their primary caucuses. While other states similarly changed their dates, these two states were singled out for retribution. This was a stinging indictment of our entire political system for those of us that supported Hillary Clinton and were still stinging from the earlier disenfranchisement of Florida under the Bush v. Gore ruling that essentially gave us a President who mostly likely did not win the election. Every one knows how well that worked out.

Here are some reports from the day. This one is from MSNBC’s Chuck Todd called Nothing is fair about Florida and Michigan. Here was his suggestion for the situation at the time.

Why not consider punishing the party leaders and not the voters? Couldn’t the committee take away the states’ superdelegate votes? After all, it wasn’t the voters who demanded the states break party rules, but rather the leaders of the respective state parties.

Of course, this is too logical. The likely ruling on Saturday will probably highlight the party’s inability or reluctance to punish the superdelegates. There is a challenge from a Florida superdelegate claiming the party violated its own charter by stripping the state of both pledged delegates and superdelegates. Most members of the Rules Committee I’ve talked to indicate that he may be right. Keep in mind members of the Rules committee are all superdelegates themselves.

The Golden Rule could apply: Do unto other superdelegates as you would want done unto you.

The second idea the committee should be considering but isn’t reflects everything we’ve learned throughout this long primary season.

As many have noted, census data for each state have been remarkably determinative of results since Super Tuesday. In fact, the support groups for the two candidates have been incredibly stable. Why not apply what we’ve learned about the support groups of both candidates and split the delegates accordingly?

Of course, we found out soon enough that the party leaders did have their agenda and it was to ensure that we had their Candidate. We’re still unraveling the reasons for this travesty. We endured sexism, misogyny, and race-baiting through out the entire election cycle. We will be paying for this most undemocratic of decisions for years to come. We could have had a President that supports Abortion Rights and Universal Health Care. We could have had a President that refused to vote for FISA. We could have had a President that wasn’t controlled by lobbyists, Wall Street Fat Cats, and was a policy wonk extraordinaire. Instead, as Ted Ralls of Common Dreams, puts it, we got this:

We expected broken promises. But the gap between the soaring expectations that accompanied Barack Obama’s inauguration and his wretched performance is the broadest such chasm in recent historical memory …From healthcare to torture to the economy to war, Obama has reneged on pledges real and implied …Obama is useless. Worse than that, he’s dangerous. Which is why, if he has any patriotism left after the thousands of meetings he has sat through with corporate contributors, blood-sucking lobbyists and corrupt politicians, he ought to step down now–before he drags us further into the abyss.

I don’t know about you, but I WILL NEVER FORGET THIS DAY OF INFAMY.

The Wrong Right Wing Stuff

I inadvertently stepped on a right wing meme back last September when I implied that Fannie and Freddie did their share in contributing to the current financial meltdown. I used figures to show that the problems in the mortgage market were occurring equally in the subprime as well as the prime market. What happened is that I said was associated with the oft -repeated Republican talking point that the CRA (Community Reinvestment Act) caused the meltdown in the mortgage. I still think that was a wild shark jump, but I was called things I won’t repeat here because of that big leap.  I was channel surfing last night and heard Glenn Beck (Mr. Emotional Basketcase) repeat this nonsense yet again. So, let me use real research to put clip the right wings off of that one.

Today’s WSJ overviewed a study by the Minneapolis Fed (yes, the peer reviewed, use data kind, not the say what you want to get ratings type of study) and concluded that the CRA did not contribute to the mortgage market meltdown. Let me just add here that I worked for the Fed and the Minneapolis Fed has one of the more conservative research agendas and economists.  Most famously, they’re home to Robert Lucas and Thomas Sargent’s work on Rational Expectations.  These guys are freshwater economists.

At the center of much of the shouting is the the Community Reinvestment Act (CRA), a 1970s-era law that pushed banks to lend to low-income households. Some — mostly conservatives — contend that the government program, coupled with securitization from Fannie Mae and Freddie Mac, played a role in the surge in risky home lending that formed the root of the financial crisis. Liberals counter that the Fannie/Freddie/CRA argument is a red herring that tries to pin a market failure on government interference.

A report from the Federal Reserve Bank of Minneapolis took a look at data on subprime — referred to as “high-priced” — loan originations and performance at CRA-regulated lenders and their affiliates and institutions not covered by the law. Here’s one of the central findings:

In total, of all the higher-priced loans, only 6 percent were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders’ CRA assessment areas, which are the local geographies that are the primary focus for CRA evaluation purposes. The small share of subprime lending in 2005 and 2006 that can be linked to the CRA suggests it is very unlikely the CRA could have played a substantial role in the subprime crisis.

This report doesn’t represent the first time the Fed has tried to bat down the notion that the CRA played an important role in the subprime mess. Late last year, then Fed Governor Randall Kroszner, a University of Chicago economist and former Bush administration official, echoed the findings of the report saying only about 6% of all subprime mortgages to low-income households trace back to banks that had to meet CRA standards. (Although this Investor’s Business Daily editorial is skeptical.)

Heaven has Fjords

When ever I hear folks rant and rave on the evils of European Social Democracies and how horrid they are, I always ask them to name the country that comes up consistently with the highest literacy rates in the world, lowest infant mortality, and much higher the the USA GDP per capita, and at the same time has  what you would probably call the world’s most complete cradle-to-grave welfare state.  Of course, no one knows the answer because so many folks here have been brainwashed into thinking productivity, budget surpluses, high standards of living, and great education and health care are not possible in socialist states.  Well, they are really wrong.

Without a doubt, the best country to live in the world these days going strictly by the statistics (and not the weather) is Norway.  Take a look at the CIA fact book for all the good stuff on Norway then take a look at  the United States.  Norway has bested the USA fn standard of living for quite some time.  The United States keeps dropping on all lists and just in GDP per capita is now sitting at number 10.  Norway is ranked first on the Human Development index of 177 countries, so essentially they are number one country for living the good life.  It is second, only to Luxembourg, for GDP per capita.

Today’s New York Times covers the little country that can and its stellar economic performance in today’s global economic crisis.    A lot of credit is goes to Norway’s socialist finance minister Kristin Halvorsen.  She’s in charge of Norway’s $300 billion sovereign wealth fund that has been steadily buying stocks since March and is used to build a decent standard of living for every one in that country.  Norway likes its government and its government works well. The Times article contrasts the economics of the U.S. and Norway and the U.S. comes up way short.