It’s not often that you get enough evidence of rent-seeking you can actually find it entered into a public record. Leave it to Stupakistan to show the incredible power of insurance and other nondepository financial institutions to leave their fingerprints without shame on the public policy debate over the healthcare payments system. It looks like the middle men are definitely winning on this one. Check out this article at the NYT today by Robert Pea with damning headline “In House, Many Spoke with One Voice: Lobbyists’. “

We have to get corporate money out of politics.  It’s essential to preserving our republic with its aspirational democratic roots.

In the official record of the historic House debate on overhauling health care, the speeches of many lawmakers echo with similarities. Often, that was no accident.

Statements by more than a dozen lawmakers were ghostwritten, in whole or in part, by Washington lobbyists working for Genentech, one of the world’s largest biotechnology companies.

E-mail messages obtained by The New York Times show that the lobbyists drafted one statement for Democrats and another for Republicans.

Notice that it’s an equal opportunity rent-seeking opportunity.  Lobbyists are carefully crafting their message to play to whatever base will fall for it.  If there ever is evidence that public policy is being high jacked by parasites of the market–those third party payers that bring no value and only layers of costs and confusion to the process–this is it.  Unfortunately, people are so dependent on their insurance companies, they fail to see they need to rid themselves of the fleas.

The lobbyists, employed by Genentech and by two Washington law firms, were remarkably successful in getting the statements printed in the Congressional Record under the names of different members of Congress.

Genentech, a subsidiary of the Swiss drug giant Roche, estimates that 42 House members picked up some of its talking points — 22 Republicans and 20 Democrats, an unusual bipartisan coup for lobbyists.

In an interview, Representative Bill Pascrell Jr., Democrat of New Jersey, said: “I regret that the language was the same. I did not know it was.” He said he got his statement from his staff and “did not know where they got the information from.”

Yea, right.  You’re so frigging business with things and you have so few staff you can’t actually read the bills, get information on the problems in the market, and find solutions for yourself.  You just have to rely on people with stakes in the status quo.

In recent years, Genentech’s political action committee and lobbyists for Roche and Genentech have made campaign contributions to many House members, including some who filed statements in the Congressional Record. And company employees have been among the hosts at fund-raisers for some of those lawmakers. But Evan L. Morris, head of Genentech’s Washington office, said, “There was no connection between the contributions and the statements.”

Mr. Morris said Republicans and Democrats, concerned about the unemployment rate, were receptive to the company’s arguments about the need to keep research jobs in the United States.

Maybe RD can clear up the connection between what they’re demanding congress keep in their cookie jar and the outsourcing of science jobs to the cheapest market, but my guess is it’s just a convenient excuse unless you actually force them to keep the jobs IN THE COUNTRY in the wording of the legislation.  They’ll go where the cheapest options are because corporations have ONLY one goal.  That is MAXIMIZING PROFIT.  Renting seeking and ruthless cost-cutting play right into that.  Also, gaining market share and power so you can manipulate the price and quantity–especially on a price insensitive (inelastic) item like drugs and health care.  When you need them you need them and you’re likely to rearrange your budget and everything else to get them; especially if it’s a matter of life and death.

My guess is we have a lot of gullible shills in Stupakistan.

Mr. Brady’s chief of staff, Stanley V. White, said he had received the draft statement from a lobbyist for Genentech’s parent company, Roche.

“We were approached by the lobbyist, who asked if we would be willing to enter a statement in the Congressional Record,” Mr. White said. “I asked him for a draft. I tweaked a couple of words. There’s not much reason to reinvent the wheel on a Congressional Record entry.”

Some differences were just a matter of style. Representative Yvette D. Clarke, Democrat of New York, said, “I see this bill as an exciting opportunity to create the kind of jobs we so desperately need in this country, while at the same time improving the lives of all Americans.”

Representative Donald M. Payne, Democrat of New Jersey, used the same words, but said the bill would improve the lives of “ALL Americans.”

Mr. Payne and Mr. Brady said the bill would “create new opportunities and markets for our brightest technology minds.” Mr. Pascrell said the bill would “create new opportunities and markets for our brightest minds in technology.”

My guess is these brains in congress were the same ones that talked their brainy class mates into sharing their homework and rephrased it just enough to pass the professor’s scrutiny or most like the professor’s grad student’s scrutiny.

There is something incredibly wrong in our governing process when a group of powerful nonvoting constituents get to write the voice of public policy.  If your congressman is on this list, find an alternative, FAST!!!

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In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that REAL GDP grew by approximately 3.5% in the third quarter of 2009. That is up from the second quarter growth of .7%. It appears that the economy may be rebounding from the so-called “Great Recession”. However, as with everything, the devil is in the details and the details show that this occurred because of government support. This will be good news for those folks that supported the Stimulus Plan. Details underlying the growth still show that the private sector, however, has yet to pick up slack. This means the growth has not worked its way through the economy in a way that makes it firmly sustainable. The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers. These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.

Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.

“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”

There has yet to be any signs that improvements will be permanent. The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.

A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.

There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.

(It’s a bit wonky so be forwarned.)

As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?

This is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems. The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep. The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”

The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury. The problem is where it’s going. Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth. This is the same bubble-producing activity that brings us to no good ends. We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.

This comes back to the policies of Geithner and the necessary Fed butt kicking that should go along with the cheap tax payer funds. Let’s just look at the most recent example where the Funds are coming but I doubt they’ll be accompanied with an agreement with teeth. We’re basically nationalizing another finance sector behemoth GMAC. Here’s the news from the FT of England. (Funny how I always have to go abroad to get the bottom line on these big taxpayer-funded wall street welfare deals, isn’t it?)

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

Companies receiving huge injections like this should be prepared for more than just a government partner and taxpayer funds. Funds should come with HUGE strings attached and not just restraints on executive pay. We should not be financing M&A activity or arbitrage profits. We need these funds to go where they will create long term REAL value. Geithner keeps giving these guys they keys to our cars without any parental instructions. We already know they’ve crashed the car a few times. Why aren’t we providing the guidance and ground rules to prevent another disaster? We are we perpetuating the conditions that led to failure the first time out?

Oh, and this is an even more interesting question … now that we’re heavily subsidizing parts of our economy will our trading partners and debt holders continue to smile and hold the bag? Another eye opener from the FT.

China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government, according to people familiar with the matter.

The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tyres last month. Many warned this would prompt Beijing to retaliate.

Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington.

US labour groups have long accused Beijing of unfairly subsidising its exporters. However, through a “countervailing duties” investigation, China would assess whether the US was open to the same charge. The investigation could lead to import duties.

Every one seems to recognize that the Treasury is setting up a system of monopolies that are not healthy for the long term prospects of our economy. Without the systemic changes I harp on continually, we’re bound to get some improvement in the big names, while the underlying fundamentals will belie real change. Is this the game plan? Make the big picture look good while setting up the same house of cards while no one is looking? Economic policy as slight of hand?

Here’s where the smart people are seeing the need to change the system that’s currently under construction by the Treasury Department and the administration economic wonks.

Key officials and lawmakers are reaching a “growing consensus” on the need for a strong mechanism that would allow the government to dismantle troubled financial giants, the chairwoman of the Federal Deposit Insurance Corporation said on Monday.

Sheila C. Bair said administration officials, top bank regulators and lawmakers all agreed that so-called resolution authority needed to be a priority so financial firms do not take on excessive risk, thinking the government will save them, Reuters reported.

“We need to end ‘too big to fail,’ ” Ms. Bair said in remarks to the American Bankers Association annual convention.

The Obama administration plans to send new language to lawmakers shortly on resolution authority, which is seen as a potential deterrent to banks growing too big and complex.

So, the law is in the works, but will it be the usual symbolic effort with no real teeth to it?

The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may remove some language that would allow for temporary bailouts.

The strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm’s outstanding loans, an administration official said.

Ms. Bair also said she wanted bank regulators to have input in the proposed Consumer Financial Protection Agency, which would have broad power to protect consumers from risky financial products like high-interest mortgages and credit cards with excessive fees.

“I’m hoping that bank regulators can have some say in those rules,” Ms. Bair said.

The C.F.P.A., as proposed, would have the power to write and enforce rules for both banks and nonbanks that provide financial services. It would strip the current bank regulators of their consumer protection roles, which Ms. Bair has opposed.

We need to watch this proposal carefully and ensure that when the sausage gets made, it’s the pigs that go into the ingredients and not the taxpayers and consumers.

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There was ease in Casey’s manner as he stepped into his place;
There was pride in Casey’s bearing and a smile lit Casey’s face.
And when, responding to the cheers, he lightly doffed his hat,
No stranger in the crowd could doubt ’twas Casey at the bat.

Casey at the Bat

By Ernest Lawrence Thayer Taken From the San Francisco Examiner – June 3, 1888

Op-Ed Columnist Charles M. Blow actually went to the Great Louisiana football school of Grambling, so maybe I should’ve used a football metaphor, but mighty Casey seemed mighty apropos here. So many had so much hope in one person and as far as I could tell from the crowd at the old UNO basketball area on Thursday, many still do when it comes to our President. So many folks in love with one person as a symbol of so much. There was one elderly black woman wandering out side on a sidewalk sayin’ “We can go anywhere now! Anywhere we want!”

So, here’s a little taste of Charles Blow’s op-ed column from October 16th at the NY Times.

When, Mr. President? When will your deeds catch up to your words? The people who worked tirelessly to get you elected are getting tired of waiting. According to a Gallup poll released on Wednesday, Americans’ satisfaction with the way things are going in the country has hit a six-month low, and those decreases were led, in both percentage and percentage-point decreases, by Democrats and independents, not by Republicans.

The fierce urgency of now has melted into the maddening wait for whenever.

There is a list there, one we are all familiar with here at The Confluence of things that folks with a liberal bent to their disposition desire. Things promised and as of yet, undelivered no matter what apologies the apologists have provided.

Take health care reform. Because of the president’s quixotic quest for bipartisanship, he refused to take a firm stand in favor of the public option. In that wake, Democrats gutted the Baucus bill to win the graces of Olympia Snowe — a Republican senator from a state with half the population of Brooklyn, a senator who is defying the will of her own constituents. A poll conducted earlier this month found that 57 percent of Maine residents support the public option and only 37 percent oppose it.

Poll after poll show that people really want that public option. Just exactly who is the constituency that must be appeased by both Republicans like Senator Snow and the democratic leadership including President Obama? Who are we appeasing to go against the will of the majority?

Ah, but there’s more to list and more chances to ask that vital question WHEN?

On the same weekend that gay rights protesters marched past the White House, the president again said that his administration was “moving ahead on don’t ask don’t tell.” But when? This month? This year? This term?

Yup, wasn’t there the absolute promise to get rid of don’t ask don’t tell? Wasn’t there that firm commitment –at the very least of repealing DOMA–to civil unions, to full recognition of one’s human right to completely love, commit and protect another.

Oh, but there’s more, as Mr. Blow so brilliantly opines.

As we prepare to draw down troops from the disaster that was the war in Iraq, we may commit more troops to the quagmire that is the war in Afghanistan and the government may miss its deadline for closing the blight that is the prison at Guantánamo Bay, Cuba.

You would think, perhaps, he would end there, after all this is quite a list. But just as we’ve written thread after thread here, there is more on that list of broken promises.

Obama pledged to stem the tide of job losses and foreclosures and to reform the culture of the financial sector. Well, the Dow just hit 10,000 again while the national unemployment rate is about to hit 10 percent. And the firms we propped up are set to dole out record bonuses while home foreclosures have hit record highs. Main Street is still drowning in crisis while Wall Street is awash in Champagne. When will this imbalance be corrected?

And now we’re back again to my home town–New Orleans–and the promises made and broken here.

Candidate Obama pledged to make the rebuilding of New Orleans a priority, but President Obama whisked into the city on Thursday for a visit so brief that one Louisiana congressman dubbed it a “drive-through daiquiri summit.” The president spent more time on the failed Olympic bid in Copenhagen than he did in the Crescent City.

At the town hall in New Orleans, Obama appealed for patience. He said, “Change is hard, and big change is harder.” Is that the excuse? Now where have I heard that before? Oh, yeah. From George Bush.

If I could deliver thunderous applause Mr. Blow, I would. Thank you for printing in the New York Times what is on the mind of so many of us around here. Symbols are nice but wins are much better!

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Any one who thinks the Democratic Party or the Democratic President represent the interests of the little guy in this country can’t be reading any newspapers. I’ve always thought that the Republican Party overly favored big business and was out to set up monopolies for all its cronies. It’s hard to believe anyone aligning themselves with liberal interests  or even a real conservative could support the continuing infusion of cash, tax cuts, and legal breaks to industries that are squeezing the profits out of both workers and businesses that actually make something or do something. The middlemen are now running the country and snatching its wealth.

First, there’s this Politico Story where even the headline offends my sensibilities of justice and fairplay: Dem officials set stage for corporate-backed health care campaign. The President’s undisclosed meetings are reminding me more and more of the Dubya/Cheney years.

At a meeting last April with corporate lobbyists, aides to President Barack Obama and Sen. Max Baucus (D-Mont.) helped set in motion a multimillion-dollar advertising campaign, primarily financed by industry groups, that has played a key role in bolstering public support for health care reform.

The role Baucus’s chief of staff, Jon Selib, and deputy White House chief of staff Jim Messina played in launching the groups was part of a successful effort by Democrats to enlist traditional enemies of health care reform to their side. No quid pro quo was involved, they insist, as do the lobbyists themselves.

The result has been a somewhat unlikely alliance between an administration that came into power criticizing George W. Bush for his closeness to Big Business and groups such as the Pharmaceutical Research and Manufacturers of America and the American Medical Association.

The previously undisclosed meeting April 15 at the offices of the Democratic Senatorial Campaign Committee led to the creation of two groups — Americans for Stable Quality Care and a now-defunct predecessor group called Healthy Economy Now — that have spent tens of millions of dollars on TV advertising supporting health reform efforts.

No sooner had I read that then I went to WaPo and found this one: Bailed-Out Banks Raking In Big Profits.

The nation’s largest banks, preserved from failure by federal aid and romping in markets revived by federal aid, are racking up vast profits even as the broader economy struggles to emerge from recession.

While loan losses continue to mount, the banks are making it up on Wall Street, trading in stocks, bonds and other financial instruments, and collecting fees for services such as helping companies raise money.

Goldman Sachs and Citigroup reported third-quarter profits Thursday, joining J.P. Morgan Chase in outstripping the expectations of financial analysts and solidifying their places as among the banks that have benefited most from the government’s massive rescue of the financial industry.

Of course, I’ve been advocating for better control of the shadow banking system for as long as I can remember. These guys are now  out in the day light and acting like the financial crisis never even happened. They’re in better market position than they have ever been and are now using it to sell portfolios back and forth to run up paper profits. Not only that, the so-called defenders of the little guy are not only doing nothing, they’re doing worse than nothing. HelenK brought my attention to this one from the NY Times: Bill Shields Most Banks From Review. Just when you thought their loanshark-like lending practices which contributed so heavily to the bad economy and so many job losses would be exposed, Barney the Congressman (not the Dinosaur) shows where his bread is buttered.

Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans, The New York Times’s Stephen Labaton reported.

The carve-out in legislation overhauling the regulatory system would prevent the new consumer financial protection agency from conducting annual examinations of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

Earlier in the day, the committee completed its work on a different contentious provision of the legislation when, on a nearly straight party-line vote of 43 to 26, it approved tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses.

The exemption for the banks was endorsed by the chairman, Representative Barney Frank of Massachusetts, who saw it as necessary to win support for the overall bill from the committee’s moderate and conservative Democrats. Their support is particularly important because the Republicans are unified against the legislation.

How much longer can our national wealth and legislative process support people that basically do nothing for a living but act as cost inducing middle men in markets? Insurance companies and Investment bankers have very little value added. They just run up costs between the real customers and the real producers of the goods and services. Why are they being protected and why is their profit grabbing ability being enhanced by the democrats in Washington?

Just so you know where the real damage lies, take a look at the USA today headline: Wages tumble toward 18-year low.

Average weekly wages have fallen 1.4% this year for private-sector workers through September, after adjusting for inflation, to $616.11, a USA TODAY analysis of Bureau of Labor Statistics data found. If that trend holds, it will mark the biggest annual decline in real wages since 1991.

The bureau’s data cover 82% of private-sector workers but exclude managers and some higher-paid professionals.

“Wages are usually the last thing to deteriorate in a recession,” says economist Heidi Shierholz of the liberal Economic Policy Institute. “But it’s happening now, and wages are probably going to be held down for a long time.”

Insurance companies and financial middle men do nothing but stand between the consumer and the producer. They add tremendous levels of cost and confusion to those markets and have no gone from helping businesses manage risk to creating more of it. They are anomalies or so-called frictions in a market economy. We does our President and our Congress keep feeding the Sharks and the Vampire Squids?

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Bruce Bartlett has just released a new book–and a mea culpa of sorts– for supply side economics (SSE). As an ex-aide to the late Jack Kemp and author of a book on Reaganomics, Bartlett’s got an interesting perspective from having a seat near the table. He also takes a few undeserved potshots at some Keynesians that were slow to embrace a few ideas that later proved to be good ones. As an example, Bartlett mislabels the District’s discovery of the importance of monetarism as something that could be credited to supply-siders. Reaganuts frequently try to take credit for that even though credit should rightly go to President Jimmy Carter and his appointment of Fed Chair Paul Volker.

There’s also a bit of clinging to that magical marginal tax rate idea the Laffer curve which has been seriously debunked by empirics during the Reagan and Clinton years. However, I will give the Kemp-Roth tax bill–and hence, Bartlett and his Supply Side–credit for two positive policies. The first was a Keynsian style spending/tax fiscal policy during the last bad recession we had back in the 1980s. The other is the realization that it’s good to provide tax incentives for long term supply curve enhancement. This would be tax credits for re-capitalization for industry which should actually be more part of a national industrial plan, but I’ll just leave it at that. The other would be the idea of tax sheltering money for retirement. 401(k)s were a good innovation. The Clinton administration was also instrumental in sheltering long term savings from current taxes. These two things do help with long run economic growth and capital formation which are lofty and necessary goals.

However, for the little bit of good coming from SSE, also came a lot of bad. I found it interesting that in Bartlett’s piece today he reveals the bad with almost what appears to be relish. That is how most Republicans turned the idea that you can promote long term economic growth with some good, targeted tax policy into the mess that Dubya/Cheney wrought with the frightful combination of tax cuts are good for everything that ails you and deficits never matter as long as you spend the money on wars and enriching the military industrial complex.

During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts–the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a “tax cut.”

I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it. As a consequence, we now have a tax code riddled with tax credits and other tax schemes of dubious merit, expiring provisions that never expire, and an income tax that fully exempts almost on half of tax filers from paying even a penny to support the general operations of the federal government.

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora’s Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d’être. In particular, the idea that tax cuts will “starve the beast” and automatically shrink the size of government is extremely pernicious.

It’s a great read for any one that wants to understand the economic policy making of the last 30 years or so. This was the best part for me, the stalwart Keynesian when it wasn’t popular. He actually mentions that Keynes isn’t all about government spending and budget deficits all the time. That is the part that the Dubyas and Cheneys of the world always conveniently or ignorantly overlook.

So basically the book is about the rise and fall of Keynesian economics followed by the rise and fall of SSE. Although the Keynesian part of the book was originally intended to flesh out my model of the rise and fall of economic theories, it turned out to have very valuable lessons for today. Indeed, the circle appears to have come around to where Keynesian theories are now the best ones we have for dealing with today’s economic crisis.

Maybe Bruce, who now writes for the Daily Beast and was fired from a conservative think tank for writing a book that criticized Dubya, has found that with age comes wisdom. Also worth a read are two Bartlett’s pieces from the blog new majority. The first is Tax Tea Party Fantasy from last spring and Why I Am Anti-Republican from late this summer. It seems old dogs do occasionally learn new tricks.

Elinor Ostrom became the first woman to achieve a Nobel Prize in Economics. She shares this year’s prize with Oliver Williamson. That’s forty years of prizes gone by. Both winners research areas that are somewhat out of the mainstream. Ostrom studies the problem of the commons. Williamson researches governance issues. Both are relevant areas given the state of the world’s resources and that of financial and economic markets.

This is from CNN.

The award was a “great surprise… I’m still a little bit in shock,” she said by phone at the news conference announcing the prize.

Ostrom, a professor of political science at Indiana University, was praised “for her analysis of economic governance, especially the commons.”

Ostrom’s work shows that local communities often manage common resources — such as woods, lakes and fish stocks — better on their own than when outside authorities impose rules, the committee said.

“Bureaucrats sometimes do not have the correct information, while citizens and users of resources do,” she said to explain the significance of her work.

The committee highlighted her research on a dam in Nepal as an example, saying her research has moved analysis of nonmarket institutions “from the fringe of economic analysis to the very center.”

Marginal Revolution has an interesting thread up on Williamson’s work. Here’s a link to Williamson’s most recent work that supports earlier work done by Ronald Coase. More information on both winners can be found here at the NY Times.

I’m just relieved Fama didn’t win yet again and this is a bit of a slap at his EMH too!

The Mercatus Center at George Mason University has an interview with laureate Ostrom on their site called: Rethinking Institutional Analysis: Interviews with Vincent and Elinor Ostrom which is really interesting.

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Economist Andy Xie says Lehman Brothers died in vain and that it’s just a matter of time before we get hit by another deadly bubble. His guest post at Caijing Magazine is just so dead on that you must go read it.

There has been plenty to learn from last year’s miserable economy and near collapse of key financial markets but U.S. policy makers appear to rebuilding the same system with the same ghastly mistakes in place. We cannot afford to be complacent about this because if it’s done, another huge mishap can’t be far behind. Xie explains that the entire financial system is one big Lehman now and has become much more costly to bail out.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

‘Absolutely no progress’ may actually be an optimistic estimate of the current situation. No progress would mean, to me, we’re not rebuilding the same time bomb. Xie’s article is remarkable in that it deconstructs the arguments one-by-one that we’re hearing that things are really changing, What we actually have is the proverbial shuffling of the chairs on the financial Titantic.

Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

This, of course, leads to the most fundamental question of all. What happens when the government funding disappears? I admit that I see no end to that infusion unless the Fed or some other central bank becomes spooked by the possibility of inflation. These institutions would have to be rebalancing their portfolios in lieu of all the M&A activity they’ve undertaken this year to be able to live with out cheap government funds. Some of them may be repaying the TARP funds, but the real deal happens when Quantitative Easing and ZIRP ends. We’ve had no indication from the FOMC or Bernanke that that’s in the works any time soon but I can tell you, one little glimpse of inflation and the game ends there.

Now, here’s my favorite point. It’s this bull market where the shadow banking system profits from churning and running up your own portfolio by selling it back and forth between the parent and subsidiaries to create a false sense of momentum.

…financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.

Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What’s occurring now is another bubble that is again redistributing income from the masses to the few.

Yup, there it is. The idea that many of the bigger players are just trying to run up the market enough to entice the suckers back near the top. Catch the one about redistribution? We’re basically using cheap money to finance the reverse Robin Hood scenario one more time.

…financial supervision has not changed. After the Lehman crash, most governments were talking about strengthening financial regulations and regulatory agencies, and possibly establishing an international regulatory body. The developments in the past year have actually made financial supervision worse. To support financial institutions, the U.S. government suspended mark-to-market accounting rules for assets on the books of financial institutions, which has allowed them to report profits.

Revamping the financial system has been reduced to political moves over regulating banker salaries. If this could be done, incentives for financial institutions to manufacture bubbles would be removed. But it can’t be done. Financial professionals can be based anywhere in the world, and there will always be some countries willing to host them. Because of such competitive concerns, a global consensus on regulating pay for financial professionals is unlikely.

I think the ultimate objective for financial reforms is to make leverage transparent.

Nothing changes if nothing changes. Most of what we see are trading tricks and creative accounting procedures that let them mark to whatever rather they wish rather than what the current market price of the asset.

More than anything, financial markets thrive on transparency and the less transparent we make the U.S. markets, the more likely the capital will flow to the countries eager to embrace reform. I can trade and work a portfolio from a cave in Nepal and avoid all the nice little executive pay regulations set up by anyone’s czar in the Beltway. Any stock traded in any U.S. market, however, needs to meet certain requirements. If those requirements for a consistent process and transparent reporting are better in the Eurozone, that is exactly where my portfolio will go unless I have some type of insider information where I want the rest of the market ignorant.

We learned a lot about how ’safe’ even the ’safest’ investments were here in the good ol’ USA as last year’s biggest surprise sink hole turned out to be Money Market Funds. Yup, that’s those things every one puts their pension and rainy day funds into because, well, they’re so darn safe and liquid.

These funds are supposed to be ultra safe for buying triple-A, short-term, liquid debt instruments. The problem was their demand for liquidity. Self-manufactured liquidity provided a false sense of security despite the risks of underlying securities, such as short-term paper issued by investment banks. When that false sense of security was jolted by the Lehman collapse, all rushed to exit at the same time. Without government support, they wouldn’t have been able to get their money back.

This brings Xie to a really good point. It’s not so much our banking system as it is our shadow banking system that’s the problem. That’s where the regulation is required and so far, we’ve seen no new regulations. That’s what the proposed Consumer Financial Protection Agency is supposed to do for is and that’s exactly why the Great Vampire Squid and the other shadowy players are lobbying hard to nix it or cripple it. This is the one good piece of economic policy I’ve seen coming out of the Obama administration and I really don’t want it to fail. Here’s the latest on that via the WSJ.

Ratcheting up his drive to create a new consumer financial protection agency, President Barack Obama took direct aim at the industry groups who oppose his regulatory overhaul, calling their criticism “completely false.”

“Predictably, a lot of the banks and big financial firms don’t like the idea of a consumer agency very much,” Mr. Obama said in remarks prepared for delivery at the White House.

He pointed to a campaign by the U.S. Chamber of Commerce that claims small businesses would be hurt by the new agency.

“This, of course, is completely false — and we’ve made clear that only businesses that offer financial services would be affected by this agency,” Mr. Obama said. He also shot down concerns that the agency would restrict consumer choice and innovation in the financial arena: “Nothing could be further from the truth.”

The consumer agency is one of the main components of the regulatory revamp Mr. Obama wants lawmakers to pass before the end of the year. But it has come under fire from Republicans and Wall Street.

The banking sector has been lobbying to weaken the legislation to strip the agency of the ability to enforce the rules that it writes. Mr. Obama, however, signaled that the agency must be given the teeth to be effective.

Back to Xie for why we have to see this through, even though things appeared to have “settled down”. Remember, things have settled down only because the government is the biggest player in the financing market right now. Xie believes that this current market rally is a bubble and I agree completely. (Just for disclosure purposes, I’ll let you know I pulled my portfolio out of U.S. stocks over the weekend.)

Many investors today think a bubble is inevitable and, when it bursts, another can be created quickly to keep on going with life as usual. What has occurred over the past six months seems to validate this viewpoint. History, however, is not kind to this view. Serial bubble making leads to a bigger economic crisis later. What occurred in the United States in the 1930s and Japan over the past two decades are good examples in that regard. If a new bubble were always available for bailouts, we’d have the ultimate free lunch. But there is no free lunch.

Our serial bubble making began 10 years ago with the Asian Financial Crisis. It led to loose monetary policy in developed economies, especially in the United States, and undervalued exchange rates in developing economies. The inflationary force from this loose monetary policy was kept down by excess capacity or capacity creation in developing economies. The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.

When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles.

Exactly, I can’t see Bernanke and the FOMC allowing inflation again. I also can’t see the Chinese (or the Japanese) propping us up if we start monetizing the debt or tolerating inflation again. The bill is already over due. We need stop the bubbles before they completely stop us. We need improved regulation over the shadow banking system before they do is in again.

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If your answer included any of number regulators or congress with its oversight duties or the traditional media with its watchdog of the public duties sorta answer, that would be a wrong answer. There were so many articles today about past and present Wall Street tomfoolery that I almost forgot to check the Wall Street Journal or The Hill. Instead, I”m relying on my subscriptions to things I’m supposed to be reading in the bath tub with Chopin playing in the background and a glass of Pinot Grigio nearby. Today, the best read came from Vanity Fare and was written by Andrew Ross Sorkin. (My Vanity Fare showed up today along with my latest copy of The Economist with the cover shouting “After the Storm: How to make the best of the Recovery.” ) My bottom line is still that Wall Street caused this and they are not only NOT cleaning it up, they are not being cleaned up.

I’m also checking out Matt Taibbi and TaibBlog now that his infamous vampire squid article in July’s Rolling Stone defined the shadowy world of Goldman Sachs better than just about any thing I’ve recently read. Matt’s blog today takes on naked selling or ‘naked swindling’ in the succinct framing of the Wall Street Deal that I now consider better jargon than that of the derivatives blah blah blah that I was taught in any of my PhD level corporate finance or investment classes. I may be able to do the proof for the Black Scholes formula but I will never be able to prove its social usefulness.

Actually, this takes me back to the Grey Lady and my first read of the day about the now bankrupt Simmons Bedding company that was the cash cow purposely inflicted with mad cow disease. Now days, it’s still more about the arbitrage deal and the leveraged deal that produces dividends than it is about what a company produces and the lives of the workers and long time managers who produce valuable stuff. It’s no longer build it and they will come. It’s leverage it to the hilt, take your dividends now, and find the next sucker with the next model that can hyperactivate the milking machine. It’s another real life example of Gordan Gekko and the greed is good speech. Spend some time with the Simmons story before you hit Taibblog and definitely the Sorkin article in Vanity Fare. It’ll put you in the right frame of mind.

The Sorkin article in Vanity Fare is excerpted from his new book “Too Big to Fail” due out shortly. We know the players. A year after the Lehman meltdown, we know them as well as we’ve known any two treasury secretaries since Alexander Hamilton and any Fed Chairman. The drama is palpable and the scent of desperation in the actions of grumpy old white men can’t be be missed. This should’ve been the Waterloo of the investment bank and the hyperleveraged deal. Instead, they’re at it again, big time, and tucked behind the tax payer funded, cozily regulated world of the staid traditional banker with money so cheap it that it shoulda come from eBay or your neighborhood Dollar General.

The bomb didn’t explode then. It’s just been reset to go off at a later time with the infusion of hard earned dollars of the American taxpayer and the jobs of 10% of the American labor force that is facing some of the worst job market numbers ever while the curtain folds on their American Dream. We still got naked short sells. We just are short of about 15 million jobs.

These are the same folks that every one trusts with the insurance policies also. Why are we tolerating this like a herd of narcoleptic sheep?

Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between the implosions of Bear Stearns and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that.

And so Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment. “The only way to stop this thing may be to come up with a fiscal response,” he said.

Well, that is the drama and the players who strut on the stage fretting away their precious few hours. Behind the scenes there is this explained by the likes of Matt Taibi on is blog in a video.

This doesn’t sound all that dramatic and as video sequences go, it sure as hell isn’t the Paris Hilton sex tape. But this is an example of how naked short-selling can happen. If you don’t need to actually find the stock before you sell it, there’s no real brake on speculative naked short-selling. If a clearing firm will give you a locate no matter how big your request is, there is no real barrier out there to stop this kind of activity.

Why does this matter? Let’s say there’s a big company that is coming under attack by short-sellers — let’s take Bear Stearns for example. Let’s say it’s March 11, 2008, and Bear stock is trading at $62, but dropping. Once the run begins and the stock price begins to fall, you might see day traders piling on. If they don’t need to actually locate Bear stock, they can simply sit there and batter the hell out of it all day long by continually selling short without locating the shares first.

The best explanation I’ve seen of this problem comes from John Tabacco, the founder and CEO of Locatestock. Full disclosure: Tabacco’s company offers services designed to avert the problems of naked short-selling by using a new technology (invented by Tabacco) that provides real and legal locates to traders. So he has a financial interest in outlining these problems. He’s also a garrulous right winger who has a Sean Hannity-style TV show and probably doesn’t agree with me about anything outside finance. But he’s a great guy and has taken a lot of time to talk to me about Wall Street in recent months.

Tabacco gave a speech about this issue back in April in which he talked about the effect of day traders repeatedly hitting a stock without locating the shares first. He speculates that some of this played a role in the Bear and Lehman episodes, among others.

“The more artificial intra-day selling pressure is impacted on a single stock, the more the pool of real shares is diluted,” he said. This, in turn, creates a “cyclical spiral” in which the issuer’s “real shares are detrimentally harmed, and in some instances that we’ve seen lately, beyond repair.”

Or you can read Naked Capitalism with today’s big Question: Why is Goldman allowed to game the system? OR for that matter you can look into how we were gamed by the folks out there paid to protect us. This is from ABC: Government Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not Healthy: Senior Officials Had Financial Concerns About Nine Bank Institutions Receiving TARP Funds.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (SIGTARP), says that despite multiple statements on Oct. 14 of last year that these nine banks were healthy and only receiving government funds for the good of the country’s economy, federal officials knew otherwise.

“Contemporaneous reports and officials’ statements to SIGTARP during this audit indicate that there were concerns about the health of several of the nine institutions at that time and, as detailed in this report, that their overall selection was far more a result of the officials’ belief in their importance to a system that was viewed as being vulnerable to collapse than concerns about their individual health and viability,” Barofsky says.

Then riddle me this, why is all the real news coming to me via The Rolling Stone and Vanity Fare? Meanwhile, look over there … Rio’s going to host the Olympics while I’ll be eating at the restaurant at the end of the Universe. Oh, and did I mention that Letterman abuses his celebrity and status to sleep with interns? Wanna see some REAL extortion, go read the Sorkin article.

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It’s national BREAST CANCER AWARENESS MONTH YOU IDIOT!!!!  Keith Olbermann, today’s biggest boob in the world!!!

Well, the NFL was trying to do something nice by supporting Breast Cancer Awareness month with their Real Men Wear Pink Campaign. Leave it to Keith Olbermann to something completely Freudian on National TV.

You may remember back in January that I was not happy and very outspoken about the size of the Obama Stimulus plan. I was not impressed by the content or with the mix between tax cuts and direct government spending. You may recall that the Blue Dogs interminable resistance to do anything that might wake their sleeping Republican voters and the desire on the part of POTUS to appease the unappeasable remnants of the Republican party led to a very watered down plan. At the time, all that I could hope was that it might be enough to get the ball rolling. However, I felt that the historical multiplier –especially for taxes– was not going to kick in the way it had in the past.

The release of the miserable unemployment data yesterday (not all that unexpected as you’ll recall) as well as an estimate of our output gap now clearly squares with my earlier view as well as the earlier views of Brad deLong, Paul Krugman, Mark Thoma and Joseph Stiglitz among others. The stimulus was clearly not the blue pill the economy needed. (That last link is from me saying this same thing in July.)

The Washington Monthly says the decision to appease centrists and Republicans looks even worse in retrospect. Now, the media gets it. Color me completely unsurprised because I told you so back then that it wasn’t going to be enough. I even mentioned it recently when it appeared the stimulus plans of German, France, and Japan had already lifted those economies from the worst of it last spring. These countries emphasized direct government spending. We mostly shuffled a few funds as stop gaps and the created a bunch of tax cuts that no one really needs right now.

In February, when the debate over the economic stimulus package was at its height, a handful of “centrist” Senate Republicans said they’d block a vote on recovery efforts unless the majority agreed to slash over $100 billion from the bill.

The group, which didn’t have any specific policy goals in mind and simply liked the idea of a small bill, specifically targeted $40 billion in proposed aid to states. Helping rescue states, Sen. Collins & Co. said, does not stimulate the economy, and as such doesn’t belong in the legislation. Democratic leaders reluctantly went along — they weren’t given a choice since Republicans refused to give the bill an up-or-down vote — and the $40 billion in state aid was eliminated.

At the time, it seemed like a very bad idea. That’s because it was a very bad idea.

In the past, government hiring had managed to somewhat offset losses in the private sector, but government jobs declined by 53,000, with the biggest number of cuts on the local and state levels. Even the Postal Service, which is included in the public-sector job statistics, dropped 5,300 jobs.

“The major surprise came from the public sector, where every level of government cut back,” Naroff said. “The budget crises at the state and local levels have caused an awful lot of belt-tightening.”

Atrios of Eschaton reminds every one that the first thing that the centrists eliminated was state aid. The majority of government spending is spending by state and local governments. They provide essential services like teachers, police, road maintenance, firefighters, and then of course, unemployment insurance and aid to families suffering health care problems, hunger, and other job loss related issues. Atrios links to an article in the Philadelphia Inquirer which brings the state budget problems down to the Pennsylvania level but you can go to any state and see the same situation. California is perhaps the most hamstrung of all the states in the union.

States–because they completely hogtied themselves with balanced budget amendments as part of the post Reagan idiocy– no longer can pass bond issues or borrow to cover cyclic shortfalls. They passed these insane laws that encourage them to run wild during times when revenues are flush and states LEAST need to be spending. Then, when the states are experiencing downturns, they must do everything in their powers to make things worse. That would be raise taxes or cut benefits and spending to every one including the newly unemployed and struggling businesses. They basically force their citizens over the edge while making them pay for it. It’s some of the most irresponsible policy I’ve seen in the last several decades.

So, most of the economists that I mentioned above along with some others are quick to join the I told you so chorus today. Here’s Brad deLong’s take on the disturbing unemployment data. It includes a long list of folks and links that said Obama’s stimulus was weak and toothless.

God! I really wish that I were not so smart!

Brad DeLong, March 25, 2009:

The Stimulus Package Looks a Lot Smaller Now…: We are going to need a bigger one in September, which means it has to be put into the budget resolution now…

Well, we didn’t. And now when it would be very nice to have a very large state aid program ready to be dropped into the fall reconciliation bill–and when it would be very nice to have a government-paid health corps starting up now as part of health care reform–we don’t.

So, you’ll also notice DeLong links to Mishell, Baker, Krapja and Rappeport. Stiglitz was all over the FT at the same time all of these quotes came out. Here’s the Krugman I told you so. Krugman’s blogpost is the one that my second link above mentions. I characterized then as Krugman inkles the D word. I linked to the post he mentions a few days after I said, sheesh, this thing isn’t going to be big enough and has way too many tax cuts! Every one was all over it back then. This is one time that Washington D.C. can’t say that the economists got it wrong.

Obama’s Anzio

I’m late on this, due to festschrifting. But another bad employment report yesterday. I’m feeling pretty bleak about this.

And the worst of it is that it was more or less predictable. I went back to my first blog post — January 6, 2009 — worrying that the Obama economic plan was too cautious. I wrote:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

Ed Harrison of Credit Writedowns explains why government spending is necessary yet again for those that didn’t get it the first time out in his startling article at Naked Capitalism “The Recession is over but the Depression has just Begun”.

The government plays a crucial role here because of the huge private sector indebtedness. In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector must pick up the slack. Why do I say must? It’s because of an accounting identity which comes from the financial sector balances model. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade. But, of course, the G20 and the IMF are all talking about global re-balancing. This cult of zero imbalances is something Marshall first brought forward back in April. And it ignores the accounting identity inherent in the financial sector balances model. I highlighted this model in my post, “Minsky: Turning neoclassical economics on its head.” However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively – a recent cartoon shows why. It is this knee-jerk aversion to what is viewed as fiscal profligacy which is at the core of the cult of zero imbalances.

Okay, so this is the deal. The states need to dump their balanced budget amendments for laws that force them to run surpluses when the revenues are flush and the good times are rolling. Then, they should be allowed to run deficits when recessions force them into imbalances. Until those balanced budget amendments get dumped, the Federal Government has to step in and step in big. THEN, we need to discuss why we let the both Bushes and Reagan run up such huge fiscal deficits playing revamp the military during good economic times. That’s an issue, as I’ve said, too. Just because the tax dollars pour in during a good economy doesn’t mean you have to spend them and continue running a deficit. The Clinton administration was the only administration to get this right. After the boom of the 1990s, they handed Dubya an economy that was in pretty good shape to weather just about anything or so we thought. That was until what remained of any regulation was either gutted, ignored, or underfunded to dysfunction. Now, we have both federal government and state governments that exacerbated potential problems to the point that this isn’t something that can be corrected with marginal leadership.

Unfortunately, marginal leadership appears to be what we have right now and that can’t be blamed on Dubya. If this stimulus fails as badly as it looks like it will, and that creates a political backlash, Obama must own this as his first huge mistake.

Why oh why, can’t we get some real Democrats back in charge of the economy?

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