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October 16, 2012 10:45 AM

The corruption of the executive class

Posted by Jon Talton

Vikram Pandit became chief executive of Citigroup in December 2007, after the giant bank bought his hedge fund, Old Lane LLC, for $165 million. He was hand-picked by interim Chairman Robert Rubin to replace the failed Charles "One Buck Chuck" Prince, nicknamed for the trajectory of the bank's stock under his highly compensated tenure. If things are starting to sound familiar...

Rubin, of course, was Bill Clinton's Treasury Secretary, who pushed hard for banking deregulation, including the 1999 repeal of Glass-Steagall. Rubin came out of Goldman Sachs (where he was a high-flier along with another guy at large, Jon Corzine of the failed MF Global). Rubin was very tight with Sandy Weill, who, along with Jamie Dimon, now in charge of JPMorgan Chase, built Citi into a giant "financial services" conglomerate, breaching the walls between commercial and investment banking even before full deregulation. You remember Sandy: The banker/stock hyper for Enron.

Along with Goldman, Citi was most responsible for the subprime bubble and collapse, along with the dodgy derivatives schemes that nearly brought down the world financial system. This was nothing new. As Simon Johnson of MIT wrote, "Citibank (and its successors) has been at the center of every major episode of irresponsible exuberance since the 1970s and essentially failed -- i.e., became insolvent by any reasonable definition and had to be saved -- at least four times in the past 30 years (1982, 1989-91, 1998, and 2008-09)."

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September 27, 2012 9:59 AM

Sheila Bair gets revenge; we still lost WaMu

Posted by Jon Talton

Sheila Bair, head of the Federal Deposit Insurance Corp. during the financial crisis, has a new book out, Bull By the Horns. I haven't read it, but early reports have it especially twisting the shiv into Tim Geithner, president of the New York Fed under Bush and Treasury Secretary under Obama. Geithner "looked like a scared little boy" at a 2009 press conference laying out the stress tests. Also, he was way, way too close to Citigroup.

Bush Treasury Secretary Hank Paulson gets some score settling as well: Among other things, for pulling a "bait-and-switch" on taxpayers for claiming that TARP wouldn't allow funds to be used for mortgage-loan modifications. She slams the Obama administration's 2009 initiative to help struggling homeowners as little more than a public-relations stunt. She gets some revenge for, in her view, being shut out of the Paulson-Bernanke-Geithner boy's club. Who wouldn't want to see this bunch taken down?

The Naked Capitalism blog offers up more about the book, and it's tempting to see Bair as the truth teller who wanted to stop the big banks but was foiled. Meanwhile, Felix Salmon of Reuters pushes back against some of Bair's charges.

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September 14, 2012 10:05 AM

Vote: Are you better off than 4 years ago?

Posted by Jon Talton

This is the question that Ronald Reagan used to devastating effect against Jimmy Carter in 1980, when inflation was nearly 14 percent and interest rates were around 21 percent. This time, the question is not so simple, as the New York Times pointed out. Ezra Klein of the Washington Post considers it a dumb campaign question.

Four years ago, the world financial system was headed into meltdown. Actions by the Bush and Obama administrations, as well as the Federal Reserve, prevented a new great depression. The Obama stimulus also worked to keep the collapse from being much worse. The remains of the safety net and the FDIC, put in place beginning with the New Deal, prevented financial ruin for many millions.

On the other hand, saving the banks didn't bring financial reform. The banksters got away with it. The 30-year slide of the middle class has continued even as the plutocracy has gained even more political power. The Military-Industrial Complex and national security state are even more entrenched. For all this, the Republican Party has nominated a feckless character who has supported any position to "close the deal" and this week showed himself profoundly unprepared for the presidency (his "Lehman moment").

So I'll try to keep the poll simple. And you have the comments section to vent your spleen and say how I don't know Econ 101. Constructive comments would be welcome, too.




Read on for the best links of the week and the haiku:

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June 13, 2012 9:50 AM

Jamie Dimon and 'Old Testament' justice

Posted by Jon Talton

Testimony before the Muppets of the Senate Banking Committee by JPMorgan Chase Chairman and Chief Executive Jamie Dimon has taken a break for lunch. It's a chance to take stock. First, some givens. The "banks own the place," as Sen. Dick Durbin famously said (too-big-to-exist bank stocks are rallying). ProPublica details the cozy relationship here. Second, Dimon is smart, smooth, persuasive and, when he wants to be, charismatic. He gets what he wants (e.g., Washington Mutual).

Apparently, Dimon's defense of the $2-billion-plus trading loss is that "Basel made them do it." Basel being the international banking regulations that were set to make banks do a more rigorous assessment of their assets and setting aside capital to protect against trouble. Dimon said before the glazed eyes of the Muppet-senators:

In December 2011, as part of a firm-wide effort in anticipation of new Basel capital requirements, we instructed (Chief Investment Office) to reduce risk-weighted assets and associated risk. To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions; instead, starting in mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks. This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it.

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June 4, 2012 9:34 AM

The bullish fed to BofA shareholders in Merrill deal

Posted by Jon Talton

Here's a fresh reminder of the Obama's administration's failure to enforce the rule of law when it came to the big banks and Wall Street. The New York Times today reports that Bank of America management knew losses from acquiring Merrill Lynch would be astronomical -- and they failed to disclose this to shareholders who voted for the deal:

Days before Bank of America shareholders approved the bank's $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies' earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.

The only reason we know this now is that it has emerged in a civil suit. Attorney General Eric Holder, a high-powered corporate lawyer, and regulators have displayed little curiosity about this and other questionable deals (read Washington Mutual/JPMorgan Chase) handed out during the Great Panic.

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May 22, 2012 10:20 AM

Peak Fool: Facebook and JPMorgan

Posted by Jon Talton

The business news while I was gone was dominated by two big stories: JPMorgan's loss of $2 billion ($5 billion? $6 billion?) in an exotic derivatives bet gone wrong, and the much-hyped IPO of Facebook, which quickly spiraled into disaster. Here's what they have in common: The mania for unearned riches from foolish behavior. As with peak oil, just because we reached Peak Fool in the housing bubble, it doesn't mean we're out of foolishness. It will just be more costly, whether for JPMorgan shareholders and depositors (and potentially U.S. taxpayers) or those who bought Facebook stock hoping to make a killing.

Facebook is a nice toy for reconnecting with schoolmates or stalking old girlfriends or boyfriends, and Mark Zuckerberg sure looks cute in the now mandatory adolescent uniform of business, but does any sane person believe this is a company that could justify a market cap of nearly $100 billion? It could only do so in a casino economy where idle capital -- and the savings of average investors looking for unearned riches -- can be sucked in quickly before reality intervenes. Only the insiders and sharpies get rich.

Sure, the initial public offering was botched in many ways. But ultimately, this isn't 1999.

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April 27, 2012 9:45 AM

Vote: How would you regulate the banks?

Posted by Jon Talton

Considering the response to yesterday's post on Treasury Secretary Geithner's Portland speech, there's still plenty of outrage about the "They Got Away With It" banking industry.

How would you re-regulate the banks? Vote below -- you can make multiple selections.


Read on for the best links of the week and the haiku:

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April 26, 2012 9:30 AM

Geithner in Portlandia, still not getting it

Posted by Jon Talton

Treasury Secretary Tim Geithner came to the Northwest Wednesday to deliver a speech to the Portland City Club. (Fortunately, he didn't mention Washington wine). Apparently during the Q&A, he made this remark reported by Reuters: "You can't legislate away stupidity and risk-taking and greed and recklessness. What you can do is make sure when it happens it does not cause too much damage and to do that you have to make sure you have good rules against fraud and abuse, better protections and you force banks to hold more capital against their risk."

Herein lies the great divide over the behavior that led to the great crash. On the one side are the financial elites, feeling quite persecuted and inadequately appreciated, who essentially say, "Stuff happens." Geithner has bought into this from the get-go. On the other are people without hundreds of millions in lobbying money, who rightly believe this was the result of widespread criminality by the toffs.

And they got away with it. No major kingpin has been prosecuted or been forced to give back the obscene compensation he received as a direct incentive for ginning up the bubble. The too-big-to-fail banks are bigger than ever.

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March 27, 2012 11:20 AM

Professor Bernanke leaves a few holes in his lecture

Posted by Jon Talton

Federal Reserve Chairman Ben Bernanke gave his third lecture on the functioning of the central bank today, this time focusing on the great panic of 2008 and the measures taken to avoid another great depression. If you've watched, you see Bernanke is very comfortable in the classroom (perhaps wishes he were back there), but today his voice was a little shakier. And no wonder. This was the worst financial crisis of our lifetimes (we hope) and the Fed's actions, often frantic improvisation, were highly controversial.

He offered a fine layman's survey. A walk down nightmare memory lane: Bear Stearns, Lehman Brothers, AIG, Washington Mutual. Too much private debt, banks' inability to monitor risks, exotic instruments such as credit-default swaps. Poor regulatory oversight, "not enough attention to forcing banks to manage risks," not enough attention paid by regulators to the financial system as a whole. Fannie Mae and Freddie Mac permitted to operate without adequate capital to cover losses, a danger known for a decade. The freeze-up of short-term credit, a modern bank run. When money market funds "broke the buck." And AIG, which provided credit insurance for Wall Street's mortgage-backed-securities house of cards. Said Bernanke, "The Failure of AIG would have been the end. We would not be able to control the crisis."

But they did and we avoided the worst. I've heard from very intelligent readers who argue the mess should have been allowed to collapse. Maybe they're right. But the results would have hurt average folks and the poor far worse than the bankers. Bernanke, our foremost scholar of the Great Depression, got it halfway right. (You can download the slideshow that accompanied the talk here.)

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March 22, 2012 9:47 AM

Did W. save the economy from total collapse?

Posted by Jon Talton

With the economy mending, Republican challenger Mitt Romney has shaken up his etch a sketch and come up with this, "I keep hearing the president say that he's responsible for keeping America from going into a Great Depression," Romney said. "No, no, no. That was President George W. Bush and [then-Treasury Secretary] Hank Paulson."

It's not entirely untrue. Accounts of the great panic in the fall of 2008 show a largely detached Bush, although he warned, "If money isn't loosened up, this sucker could go down," referring to Congress' initial rejection of the $700 billion bank bailout. Paulson, then New York Fed President Tim Geithner and Federal Reserve Chairman Ben "Whatever it Takes" Bernanke, desperately improvising, were really the key players in averting total collapse.

GOP presidential candidate John McCain froze in the headlights. Barack Obama was supportive of the measures taken that fall and continued them into his presidency. He added a stimulus which, although too small, also helped avoid another great depression. But what's striking is the continuity between administrations.

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March 20, 2012 11:52 AM

Four years later, the end of WaMu, but not the questions

Posted by Jon Talton

Washington Mutual is now WMI Holdings Corp. No, this isn't a 2008 blog post that suddenly popped up four years later. The remains of old WaMu that weren't plucked by JPMorgan Chase completed its Chapter 11 bankruptcy reorganization this week. According to Dow Jones Newswires, WMI "consists primarily of WM Mortgage Reinsurance Co., a legacy reinsurance business incorporated in Hawaii and funded by a $75 million contribution from some WMI creditors."

So that's that.

Four years later, downtown Seattle has recovered from the loss of a major corporate headquarters. The thousands of employees who lost their jobs and shareholders who were ruined -- probably not so much. Chase gained its nationwide network by purchasing the "good" part of WaMu. Like its too-big-to-fail/exist cousins, it is bigger than ever. Yet Seattle's relative isolation from America's media centers shows as this bookend to the biggest bank failure in American history goes largely unremarked.

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March 6, 2012 10:00 AM

Why are the banksters still at large?

Posted by Jon Talton

Earlier this week, Attorney General Eric Holder laid out his legal defense for the killing of a U.S. citizen abroad, stemming from the assassination of Anwar al-Awlaki, reputedly an American-born al-Queda operative, five months ago in Yemen. As Wired commented, "Here's Why the Government Thinks It Can Kill You Overseas."

Holder has yet to be pressed on another vital matter: Why the Obama administration has not prosecuted any major Wall Street figure or big banker for the swindles that brought on the Great Recession. For that matter, why is former Democratic senator and governor Jon Corzine still at large after the massive fraud at MF Global? The damage that Bernie Madoff did was nothing compared with the leaders of the too-big-to-fail banks, the shadow banking system, AIG, etc. And Washington Mutual. And yet Holder, a former corporate lawyer, has done nothing. Iceland is putting its former prime minister on trial for the financial crisis. It would never happen here.

In an unrelated (?) story, Bill Clinton will help President Obama ramp up his fund raising from Wall Street, according to Bloomberg. Clinton, a favorite of the banking industry when he was president, joined with Republican Sen. Phil Gramm to repeal Glass-Steagall in 1999, setting the stage for the deregulated looting and crash to follow.

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February 23, 2012 9:53 AM

Killing Volcker: Heads the banks win, tails the taxpayers lose

Posted by Jon Talton

In the continuing saga of "They Got Away With It," the Volcker rule is in danger of being undone by the complexity larded onto it by the bank lobby. As the New York Times reports, the goal of prohibiting taxpayer-backed banks from trading on their own accounts, instead became something where "bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity of hopeless complexity and vagueness."

The report goes on:

They couldn't kill the rule. Instead, they are getting Congress and regulators to render it morbidly obese and bedridden. Of course, that is no accident. The biggest banks, which are in business today only because taxpayers bailed them out, want to protect their valuable franchises.

So much for the supposed power of Occupy Wall Street. It's nothing compared with the more than $400 million the banking industry spent on lobbying last year. This is your money, by the way, via the bailout of the "financial services" sector in the wake of the collapse its risky swindles brought on in 2008.

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February 10, 2012 9:55 AM

Vote: Mortgage deal settlement or joke?

Posted by Jon Talton

The $25 billion settlement between banks and states over abusive and fraudulent mortgage practices has its upsides, especially for the banks. They get out from under a huge legal liability and enjoy headlines that imply progress is being made. Boosters of the deal claim it won't just help a million house owners who owe more on their mortgage than the value of their property, but it will actually cause the deeply wounded housing industry to recover.

Critics, including me, say the banks get off with little punishment. They and Wall Street (and their government, regulatory and political enablers) have done much damage to the rule of law and gotten away with it. The settlement won't help many people and will be extremely difficult to track and enforce. Some of the best analyses can be found here, here and here. About the best I can say is that the attorneys general of California and New York held out for a deal that will allow prosecution of other abuses. But federal and state authorities have shown little stomach to go after the biggest suspects in the gigantic theft called the bubble and Great Recession. Money talks.

So, today's poll:



Read on for the week's links and haiku:

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February 7, 2012 9:45 AM

Chrysler, Dirty Harry and the bailout

Posted by Jon Talton

Clint Eastwood's powerful and moving "Halftime in America" Super Bowl ad for Chrysler has been denounced by some Republican operatives as partisan shilling for President Obama. Eastwood and Chrysler deny it. What's undeniable is that Mr. Obama, despite tremendous political pressure to do nothing, used federal money to keep Chrysler and General Motors out of bankruptcy liquidation. (Help for Chrysler began in the waining days of the Bush administration). Challenger Mitt Romney opposed the bailout, an irony coming from this son of the man who rescued American Motors.

Playing counterfactual history is always risky, but what if Washington had done nothing? Ford didn't need federal help. The Japanese transplant factories were also safe. Still, it's unlikely that GM and Chrysler could have gone through Chapter 11 proceedings like an airline and come out fine. Union-haters would have enjoyed seeing the United Auto Workers decertified and pensions eliminated (and this helps the middle class...how?).

But the auto industry is much more than two or three companies. Had GM and Chrysler shut down, an entire economic ecosystem of suppliers would have been destroyed and the damage might well have taken Ford down, too. It would have devastated a Midwest already reeling from bad trade deals and offshoring of jobs. Millions of jobs might have been at risk.

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December 28, 2011 10:05 AM

Looking back: Fannie and Freddie frauds

Posted by Jon Talton

Continuing the look at events readers say will have consequences beyond 2011. Ann Crickmer of Seattle writes, "Finally making available the "trail of evidence" that charges that Fan and Fred were 'at the heart of the housing bubble.' In an effort to meet HUD MANDATES to serve "credit-impaired" borrowers they degraded their underwriting standards. The WSJ review of the SEC investigation notes 'Expanded Approval' of very high-risk loans and that they hid this risk from investors. I keep asking who was head of HUD to impose this mandate, and which congressmen sheparded it through Congress. Please. Before the next election we need to know."

The problem is that Fannie Mae and Freddie Mac didn't cause the bubble or the financial collapse. Joe Nocera of the New York Times performs a good takedown of this Big Lie. The Atlantic's David Min provides further facts.

The housing bubble and financial collapse were cooked up on Wall Street, greased by easy Fed money, outlandish profits and deregulation of the banking industry. As I've written before, Fannie and Freddie were late to the subprime game and got into it because they were losing profits and market share to the likes of Countrywide and Washington Mutual. It might be a pleasing morality play to imagine this calamity was brought on by poor people, mostly minorities, getting mortgages they didn't deserve. But it just isn't so.

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December 27, 2011 9:55 AM

Looking back: Privatized profits, socialized losses

Posted by Jon Talton

Most of the respondents to Friday's poll said the eurozone crisis would be the event of 2011 that most of us later look back on as the most important development of the year. The jobs crisis came in second. I was a little surprised that more didn't vote for the turmoil in the Middle East. Between Iran's nuclear quest, the Arab Spring destabilization and Iraq quickly falling into sectarian infighting after most American troops exited, the potential consequences for oil prices are profound.

Some weren't satisfied with any of the answers. I'll blog on a few of their topics this week. "Mud Baby" quotes a Reuters story: "Multilateral institutions, particularly the IMF, have responded by pumping an unfathomable amount of financing into Europe [the Fed has done the same in the US]. But, instead of reversing the disorderly deleveraging and encouraging new private investments, this official financing has merely shifted liabilities from the private sector to the public sector."

Mud Baby goes on: "This describes what is at the heart of this disaster. The private financial institutions are still running the show, and the perpetrators of the collapse are still running roughshod over everyone else (let's call them the 90 percenters) with no end in sight. The shift this set in motion that is tilting modern society toward neo-feudalism could well be the story of our lifetimes."

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December 16, 2011 10:54 AM

Fannie, Freddie and...?

Posted by Jon Talton

The Securities and Exchange Commission has brought civil fraud charges against six former executives at Fannie Mae and Freddie Mac for allegedly providing misleading information about the subprime mortgages held in the portfolios of these giant government-sponsored entities. What took so long?

The bigger question is where are the successful civil and, especially, criminal charges being brought against the big Wall Street investment banks that took the liar-loan subprimes and bundled them into dangerous derivatives that were sold to investors. Most of these loans and all of these derivatives were originated in the big financial services outfits, from Golaman Sachs to Countrywide and Washington Mutual. The executive compensation and profits that the mortgage bubble produced were astronomical, but ultimately the edifice was just another fraud bubble, albeit the largest in history. When does their perp walk happen? Oh, and don't forget the feared ratings agencies, the captured regulators, and the Federal Reserve.

If recent history is any guide, not much will be forthcoming. Just ask Kerry Killinger. Reinstating Glass-Steagall or even the original Volcker Rule? Dream on. The big banks get every penny for their lobbying money.

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December 13, 2011 12:13 PM

So did they get away with it?

Posted by Jon Talton

While Occupy was trying to shut down the Port of Seattle and damage it's thousands of well-paying blue-collar jobs, the FDIC was reaching a settlement with three former Wasshington Mutual executives, including former CEO Kerry Killinger. The $75 million deal will apparently be paid mostly from the bank's estate and insurer. Once again, the Obama administration has shown itself unwilling or unable to bring to justice the kingpins that brought on Depression 2.0.

If you just rolled into town, Washington Mutual was once one of Seattle's most important corporate headquarters. It was for nearly a century a thrift engaged in the boring but safe business of taking deposits and making loans. Under Killinger, it became a powerhouse, a major financial institution. Unfortunately, most of that growth came from the dodgy subprime mortgages that were then sold to Wall Street and turned into swindles called derivatives. when the reckoning finally came, Washington Mutual became the biggest banking failure in American history. More than 4,000 jobs were lost and shareholders were wiped out.

The pattern in the aftermath is familiar: A strange lack of curiosity on the part of the Justice Department, a barely pursued and quickly stifled criminal probe, the too-big-to-exist banks got bigger and none of the bigwigs who cooked up the calamity were required to return their outlandish compensation. A taxpayer bailout sent the message that such behavior will be backed by Uncle Sam if the risky business goes sideways. Nobody went to jail.

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November 28, 2011 10:00 AM

Secret Fed bailout data show how banks saved status quo

Posted by Jon Talton

Bloomberg fought for years to obtain 29,000 pages of Federal Reserve documents detailing the largest bailout in American history. They make for the must-read of the day, the month, the year. In its January issue, Bloomberg Markets magazine reports:

The Fed didn't tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn't mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed's below-market rates.

Saved by the taxpayers, the banks were able to effectively lobby against real regulation, such as a new Glass-Steagall Act. And:

While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

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September 29, 2011 9:45 AM

Occupy Wall Street vs. the banksters

Posted by Jon Talton

For almost two weeks, protesters have been rallying in New York's financial district under the name Occupy Wall Street. They have numbered from a couple of hundred to about a thousand, and have been peaceful despite a group being pepper sprayed by an NYPD officer. Smaller Tea Party rallies received wide media attention while this event has barely been covered by the main-stream media -- but this doesn't have the powerful corporate backing of the Tea Party.

Like the Tea Party, Occupy Wall Street is an entirely predictable outcome from the events of recent years, where the corporate evil doers, enabled by a 'fixed' government, got away with it while millions of Americans suffer unemployment, loss of their homes and downward economic mobility. As the economy continues to suffer, expect more unrest.

The goals are nebulous or evolving, depending on whom one talks to. Is it to protest the enormous social costs and economic damage caused by the swindles of the banksters? Or call attention to high income inequality? Call for real financial regulation? Or seed a movement that can go nationwide?

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September 26, 2011 10:00 AM

Dimon fights for American (bankers') values

Posted by Jon Talton

In case you missed it, earlier this month Jamie Dimon, chief executive of JPMorgan Chase, called new international bank rules "anti-American." Those rules, Basil III, would require banks, especially large institutions, to build up a bigger buffer of capital against crises such as, oh, you know, what happened in America in 2008 and is occurring in Europe now.

Dimon told Financial Times: "I'm very close to thinking the United States shouldn't be in Basel any more. I would not have agreed to rules that are blatantly anti-American. Our regulators should go there and say: 'If it's not in the interests of the United States, we're not doing it'."

A man not known for his easy-going temperament, Dimon apparently blew up last week during a meeting with Bank of Canada Governor Mark Carney over the same issue. FT reports "The atmosphere was so bad after the meeting that Lloyd Blankfein, chief executive of Goldman Sachs and head of the Financial Services Forum bankers' group which arranged the session, emailed the central banker to try to smooth relations, people familiar with the matter said."

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September 22, 2011 9:04 AM

The Fed and the markets: What you need to know

Posted by Jon Talton

Two developments are driving the fear in the markets today.

First, Wednesday's statement by the Federal Reserve's policy-making Federal Open Market Committee contained these words: "There are significant downside risks to the economic outlook, including strains in global financial markets." Second, China's manufacturing sector is on track to contract for a third straight month, its worst performance since the recessionary trough of 2009.

For months, as the economy has slowed and data have emerged showing the Great Recession was much worse than previously assumed, the conventional wisdom has clung to Ben Bernanke's measured assurances that recovery was just around the corner. The FOMC statement finally dashes those hopes. (This is the same guy who said don't worry about subprime just before that explosion).

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September 16, 2011 10:00 AM

Rogue trader, rogue banks

Posted by Jon Talton

So UBS suffered a $2 billion loss because of a "rogue trader"? That assumes that the big banks are normally engaged in the sober business of assembling capital for productive enterprises that create jobs. They're not. "Trading" has been their source of big profits for years and is part of the universe of derivative swindles that helped cause the Great Recession and remain with us.

Matt Taibbi of Rolling Stone made the salient points:

But the reality is, the brains of investment bankers by nature are not wired for "client-based" thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.


Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking -- historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there -- turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you're not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you've cooked up, then you won't make it on today's Wall Street.

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June 22, 2011 10:05 AM

Dead in the water with Chairman Ben

Posted by Jon Talton

Just sit right back
And you'll hear a tale
A tale of a fateful trip
That started in the stormy times
With Ben steering the ship...

Today's statement from the Federal Reserve's policy-making Federal Open Market Committee contained a couple of laughers. "The economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected." Also, "recent labor market indicators have been weaker than anticipated." And, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters..."

The headline for all this at the Wall Street Journal is, "Fed on hold amid slow recovery." The FOMC signaled it would do no more than keep interest rates low and complete the $600 billion QE2. Barring another panic, there will be no QE3. So the Fed has shot its wad and failed in both its mandates.

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June 20, 2011 10:00 AM

Tax holiday is just another way for big corporations to get away with tax evasion

Posted by Jon Talton

So let me get this straight: Big corporations nominally based in America want a "repatriation holiday" for the vast profits they have parked overseas. Microsoft alone has $29 billion. Under the plan being pushed by big business interests, the government would drop the tax rate from 35 percent to 5.25 percent. It's being billed as a "stimulus" because it would allegedly give the government at least a short-term boost in revenue.

Many things are wrong with this idea. When it was tried under the Bush administration, almost all the profits went to stock buybacks and dividends. Far from using the money to hire Americans, as the current proposal is being sold, the corporations last time were busy cutting U.S. payrolls and hiring overseas.

In addition, large corporations have huge departments whose only job is ensuring that they pay as little in taxes as possible, as detailed in David Cay Johnston's must-read book, Perfectly Legal. As a result of these evasion schemes, a General Accountability Office study found that between 1998 and 2005, 55 percent of large corporations paid no tax at all. Few pay the statutory 35 percent. General Electric, whose CEO Jeff Immelt is President Obama's economic advisory panel, paid no federal taxes last year. (GE Capital was one of the biggest beneficiaries of the TARP bailout, with much fewer strings than were placed on banks).

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June 9, 2011 10:10 AM

Jamie's whining: The reality of bank non-reform

Posted by Jon Talton

While you were being distracted by Weinergate, the real issues on which America will succeed or fail continued to percolate under most of the media radar. One example: JPMorgan Chase CEO Jamie Dimon's confrontation with Federal Reserve Chairman Ben Bernanke on Tuesday.

Dimon, who bought Washington Mutual for half a song to extend his banking empire nationwide, complained that new banking regulation goes too far and will hurt the recovery. He ran through a list of corrective actions the banks have already taken. Among them: Higher capital and liquidity, subprime mortgages are gone, mortgage underwriting has become more conservative, "most of the bad actors are gone" and "most of the very exotic derivatives are gone."

Now, before you go "huh?!" about the last two points, stay with me. Dimon wondered if someone writing a book 10 or 20 years from now will point to increased regulation of banks and conclude they held back recovery. Some 300 new rules are coming, he said, then asked Bernanke, "Do you have a fear, like I do, that when we look back and look at them all, that they will be a reason it took so long that our banks, our credit, our businesses and most importantly job creation started going again? Is this holding us back at this point?"

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June 7, 2011 9:45 AM

Austan Goolsbee: International man of economic mystery

Posted by Jon Talton

Today let's reflect on a guy with a funny name who must have regrets. And I don't mean the one who's at the center of the latest "America, look over here!" distraction.

Austan Goolsbee is leaving his post as chairman of President Obama's Council of Economic Advisers to return to the University of Chicago Graduate School of Business. A longtime Obama adviser, Goolsbee "brought a mix of levity and a teacher's sensibility to the job, using the White House blog, Facebook or YouTube to illustrate tax cuts, trade, or the auto industry resurgence on a dry-erase board with a dry wit and a gravel voice," according to the Huffington Post.

Rupert Murdoch's Wall Street Journal gave this valedictory: "Mr. Goolsbee was one of several liberal economists on Mr. Obama's team at the start of the administration, and he was the only one left after the departure of his predecessor at the Council of Economic Advisers, Christina Romer, and Vice President Joe Biden's economic adviser, Jared Bernstein. Mr. Goolsbee turned out to be more of a pragmatist than Ms. Romer and Mr. Bernstein."

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June 6, 2011 10:10 AM

For 'embattled' Goldman, the fix is already in

Posted by Jon Talton

In 2009, when the real reform of financial markets that had been promised as part of the massive taxpayer bailout stalled, Sen. Dick Durbin said of the Senate, that banks "frankly own the place." That's why it's rich that Goldman Sachs is laying plans to fight a damning Senate report about the bets the firm was placing against complex mortgage derivatives even as it was peddling them to clients, even as the bubble was on the verge of popping.

"The securities firm is considering releasing documents about its mortgage bets that are aimed at showing what Goldman officials claim is sloppy math and incomplete analysis by the Senate Permanent Subcommittee on Investigations as the panel sifted through tens of millions of documents turned over by Goldman," according to the Wall Street Journal.

When the report came out, New York Magazine's Nitasha Tiku wrote, "It only took a two-year Senate investigation into the mortgage crisis and 5,901 pages of confidential e-mails and documents to figure out what everyone already knew: Investment banks sold collateralized debt obligations (of risky mortgage loans) without letting investors know that it sure would help Wall Street out if the value of those CDOs plummeted."

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May 23, 2011 10:15 AM

O'bama should check roots of Irish economic troubles, too

Posted by Jon Talton

President Obama is in Ireland looking into his family roots. Might he take the time to discover the roots of the Irish economic crisis and what they tell America? The story has been told before, but it's worth repeating. Unlike southern European countries that overspent in the boom years backed by the Euro drawing in new capital, and unlike Greece which has a broken tax-collection system, Ireland enjoyed a strong fiscal standing before the Great Recession. It was done in by its banks.

Ireland prospered by luring tons of foreign direct investment in the 1980s and 1990s, playing off its closeness to continental Europe, lower tax rates and a highly educated population. The Irish Industrial Development Agency was a model for a governmental economic development outfit. By the turn of the century, Irish leaders realized they would inevitably lose some of their manufacturing and assembly jobs to cheaper countries. So they set up Science Foundation Ireland, with my friend Bill Harris as chief, to turn research into promising ventures. The government's finances were fine.

What happened to consign the Celtic Tiger to one of the PIGS? Ireland went on a real-estate binge, backed by its major banks with all the dodgy deals, complexity and swindles of its American counterpart right down to poor regulation. When the roof fell in, the Irish government stepped in to save the banks, including Anglo Irish Bank, at a horrendous cost. Now, in exchange for outside help, it has embarked on severe "austerity," which of course is just prolonging the bust.

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March 31, 2011 10:20 AM

Underneath the TARP: The cockroaches are bigger than ever

Posted by Jon Talton

Treasury Secretary Tim Geithner says the TARP bank bailout is yielding a profit for the federal government. We'll see. The facts will take time to come out, and require the efforts of a decimated press corps. But it's not surprising. The rescue, if it worked half right, was always expected to produce such results.

That's not the problem.

TARP was always seen by its smartest proponents, including candidate Obama, as half the solution to keeping the financial panic from turning into a deep depression. The other half, fundamental reform of the system, never happened, despite all the whining of bankers over the mild Dodd-Frank bill.

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February 2, 2011 9:30 AM

What Great Recession? Wall Street compensation hits new record

Posted by Jon Talton

Imagine a new president's first day on the job. Does he or she, after learning the nuclear launch protocols, find out what really happened in the JFK assassination? That alien bodies and a spaceship are sitting in an Area 51 warehouse? Alas, the reality is more banal and frightening. The new chief executive learns that his or her real bosses are Wall Street and the big banks.

That's worth pondering as compensation and benefits at publicly traded Wall Street banks and securities firms reached a record of $135 billion last year. This, according to an analysis by The Wall Street Journal that came out today, less than a week after the release of the Financial Crisis Inquiry Commission's report on the causes of the panic and Great Recession. As many working Americans ask, "what are benefits?" and millions have lost jobs because of the crash, remember that Wall Street, big banks and their captive regulators were most to blame.

Our near-death economic experience just a little more than two years ago led to few significant reforms. The too-big-to-fail banks are bigger than ever. Derivatives, securitization of thin air and incentives, including sky-high compensation, for excessive risk? Still in place. Moral hazard? Added -- now even the most irresponsible of the playerz know the government (that's us, most of whom have seen out pay stagnate or fall) will bail them out. More "regulatory" powers have been given to the regulator that failed the worst in stopping this "avoidable" crash, the Federal Reserve.

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January 27, 2011 9:55 AM

Why our era's Pecora Commission is going nowhere

Posted by Jon Talton

In the wake of the 1929 stock market crash, the Republican-controlled Senate established an investigation into its causes and the subsequent Great Depression. It received fresh momentum when Franklin Roosevelt was elected in 1932 and Democrats took control of the Senate. Under the leadership of New York assistant DA Ferdinand Pecora, the commission unearthed the many unsound and fraudulent practices that caused the calamity. The report led to such reforms as the Securities and Exchange Commission and the Glass-Steagall Act separating commercial from investment banking -- reforms that kept the markets safe for decades.

Our Pecora Commission is the Financial Crisis Inquiry Commission, led by Phil Angelides, who established a reputation as a fearless advocate of taxpayers as California Treasurer. After months of hearings, it released its final report today. You can download it here. The blog Zero Hedge nicely summarizes many of the findings in chart form.

People who have been paying attention won't be surprised at the findings. The primary culprits are regulators captured by a deregulated financial sector, the Federal Reserve's easy credit and lax oversight, and the reckless risk-taking, over-leverage, bad incentives, lack of transparency and outright swindles by the banks and shadow banking system. The crisis was "avoidable."

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December 27, 2010 10:20 AM

For AIG, credit where credit is due...we hope

Posted by Jon Talton

American International Group this morning announced $4.3 billion in credit lines from 36 lenders. Chief Executive Officer Robert Benmosche, in a prepared statement, called the deals "another important vote of confidence by the market in AIG."

He went on, "These credit facilities, combined with the debt offering and contingent liquidity facility, demonstrate that AIG has momentum and has made substantial and impressive progress this year. As we approach year's end, we believe we are close enough to completing our recapitalization plan that we can see the finish line."

Yes, it's that AIG. The one taxpayers partly own, although most of us won't get invited to summer parties at the Hamptons. We own it because the company's near meltdown in 2008 posed such a danger to the entire financial system that the feds had to bail it out with $85 billion -- although the total federal backstop provided as the crisis unfolded was much higher.

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December 2, 2010 8:50 AM

Keep your government hands off my bank's Fed bailout money!

Posted by Jon Talton

For "healthy" banks that claimed they didn't need no stinkin' federal help, Goldman Sachs and JPMorgan Chase certainly partook generous portions of the credit facilities the Fed made available during the great panic.

Details of the previously secret bailouts were disclosed Wednesday, as required by the Dodd-Frank legislation. Goldman Sachs, which was heavily involved in the speculation and risky behavior that helped cause the crash, consistently claimed to be strong enough to survive the panic that took down Lehman Brothers. And executives have intimated they needed no federal help.

In fact, according to Bloomberg, Goldman was a regular borrower from the lending facilities. On Oct. 15, 2008, Goldman borrowed $24.2 billion.

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December 1, 2010 9:50 AM

The Fed's secret $3 trillion bailout sees sunshine

Posted by Jon Talton

The most controversial actions of the Federal Reserve during the Great Recession, especially in the panic of the fall of 2008, were the secret lending facilities it made available to banks, investment houses and corporations. They are secret no more, thanks to the Dodd-Frank financial overhaul bill. Today the Fed released details on 11 programs totaling $3.3 trillion.

Some 21,000 transactions are in the report, which lists the borrowers and the amounts involved in the transactions. The legislation was partly aimed at seeing if conflicts of interests in the powerful financial industry distorted Fed policy. The central bank claims it has faced no losses on programs that have been shut down and doesn't expect any on the others. We'll see. Like WikiLeaks documents, this will require some scrutiny. Nor is it likely to stop a bipartisan effort for an audit of the Fed.

The Financial Times Alphaville blog is first out with a guide to the Fed dump.

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November 15, 2010 9:21 AM

Checking out the Fed bashers

Posted by Jon Talton

I've done my share of criticizing the Federal Reserve under Ben Bernanke. It didn't apply proper oversight to the casino of swindles and fast money called the "financial services sector." It failed to provide transparency as it took perhaps trillions in toxic "assets" off the books of the biggest banks. It has been a foot-dragger on real reform. Bernanke's Fed has done too much to help those who caused the collapse instead of the other way around, as Nassim Taleb (he of The Black Swan) and others have observed.

On the other hand, if it hadn't acted with dispatch to provide liquidity during the great panic of October 2008 and fight deflation since, the Great Recession would look like the roaring '90s. The latest round of Fed action, so-called QE2, is aimed at pumping more money into an American financial system that remains weak. This has brought out new platoons of Fed bashers.

In his usual flashy style, former Fed Chairman Alan Greenspan implicitly criticized Bernanke and QE2 in a Financial Times op-ed, writing that Washington was deliberately weakening the dollar. He could be writing the briefing papers for our trade partners, who are also steamed (including serial currency manipulator China)

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November 4, 2010 10:00 AM

The limits of monetary policy

Posted by Jon Talton

Imagine if Herbert Hoover had won re-election in 1932, along with commanding majorities of conservative Republicans and Democrats in Congress. Or if Franklin Roosevelt had followed his true inclinations to balance the budget instead of being a shrewd experimenter? That's about where we are now.

The tragedy of the Federal Reserve's quantitative easing is that it can't overcome the new orthodoxy of "austerity" in Washington (but, of course, not in defense and "homeland security" spending). The private sector is broken as a jobs machine for now. And the only way out is deficit spending on infrastructure and cutting-edge industries, which would repay themselves. This, by the way, is not the path President Obama took with his stimulus, which was largely wasted in small tax cuts and backfilling state government crises. It's not going to happen, so the Fed is left as the stimulator of last resort.

But merely flooding the system with dollars translates into hot money bouncing around the world's capital markets (that's what's driving the stock rally today). And the Fed already wasted precious resources bailing out the big banks, which in the Depression had to eat their bad bets and swindles.

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November 2, 2010 9:40 AM

The Fed prepares to start the presses, but new money won't buy happiness

Posted by Jon Talton


You can't push on a string.
-- John Maynard Keynes

The Federal Reserve's policy-setting Federal Open Market Committee sat down today with one big agenda item: QE2. That would be "quantitative easing," where the central bank tries to stimulate lending and spending by purchasing Treasury securities. How can it do that, you ask, dear reader? By printing more dollars.

The private sector is either sitting on huge amounts of cash or skating on thin ice, and few companies see big demand ahead. The housing boom is kaput. The White House and Congress are paralyzed on further stimulus (just wait until January, too) and the original stimulus too small and badly targeted. That leaves the Federal Reserve. Chairman Ben Bernanke, one of our foremost scholars on the central bank and the Great Depression, is determined to avoid the mistakes of the 1930s. That was when the Fed kept credit tight and accelerated a deflationary spiral (this was Milton Friedman's most important contribution to economics).

Bernanke has a fragile coalition on the FOMC that agrees deflation -- not inflation -- is the biggest threat to the economy. And, by extension, that QE2 not only won't worsen price stability, it could help with disastrous unemployment, a faltering recovery, etc. Watch for how much easing -- will $500 billion be too little? Too little has also been seen on infrastructure investment, job creation, foreclosure relief, etc. It seemed the only time the right amount of power was applied was when we saved the bacon of the big banks and the shadow banking system.

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October 21, 2010 9:50 AM

In the backyard with POTUS and the economy

Posted by Jon Talton

If I were invited to the backyard gathering today in Seattle with President Obama, I'd love to get some answers. He's a busy man, leader of the free world and all that. So let me be brief:

1. Mr. President, any regrets about making health care your top priority after assuming office. I realize you walked and chewed gum at the same time, pushing the stimulus, continuing the Bush bank bailout, but HCR sucked up all the oxygen in the room. And what we got was a complex bill with giveaways for the insurance industry and still no universal health care. Would you have done it the same way, or focused on jobs?

2. Why did your administration allow so much of the risky "financial services" industry to continue operating as before? Too-big-to-fails got bigger. Losses will be socialized and profits privatized as before. Obscene bonuses are worse. No major criminal prosecutions have been undertaken. With respect, sir, are you afraid of the big money of this industry?

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October 18, 2010 9:55 AM

Still waiting on justice for the kingpins of the Great Recession

Posted by Jon Talton

Few individuals more personified the mortgage bubble than Angelo Mozilo, chief executive of Countrywide Financial. At the lender's peak in 2006, it was taking in revenue of $11.4 billion, much of it built on subprime and liar loans that were the bundled and sold to investors on Wall Street for huge profits. Last week, three years after the subprime fraud collapse started the economy into the biggest collapse since the Great Depression, Mozilo copped a plea. He would pay $67.5 million to settle a civil fraud suit by the Securities and Exchange Commission.

That was the quick news, and people could be forgiven for thinking that the Obama SEC and Justice Department, led by white-shoe corporate lawyer Eric Holder, had finally begun to bring the figures behind the costliest swindles in history to a reckoning. Hardly. For one thing, this is chump change to Mozilo, whose compensation from 2000 to 2008 totaled more than half a billion dollars. Further, as Gretchen Morgenson of the New York Times reported, $20 million of the fine will be paid by Bank of America. BofA acquired Countrywide and picked up the indemnification of Mozilo against lawsuits.

Mozilo remains the only major figure behind the financial collapse who has faced prosecution. The Obama team makes the Bush administration's treatment of the kingpins of the 2001-1002 fraud-fest look like the Untouchables. Oh, there was that $550 million settlement by Goldman Sachs, the Jabba the Hutt of the Great Panic. Goldman's annual net income after taxes: $13.4 billion and CEO Lloyd Blankfein remains in charge. Obama anti-business? Give me a break.

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September 22, 2010 11:17 AM

Larry Summers' legacy: Reassure, not reform

Posted by Jon Talton

The departure of Larry Summers as President Obama's chief economic adviser will provoke no tears on this blog, but more about that later. Before we bury Summers, let us praise him.

We may forget now, but, to paraphrase Wellington on the Battle of Waterloo, the Great Panic and the months after it were a near run thing. The financial collapse was so large, contagious and complex that the global economy might have ended up in a depression that made 1930 look like a mild downturn. The Bernanke Fed, along with Bush Treasury Secretary Hank Paulson, Tim Geithner as New York Fed President and then Obama Treasury Secretary, and Summers, the protege of Robert Rubin, as Obama's most powerful policy man, can claim much credit that the sum of all fears was avoided.

As with Afghanistan and Iraq, Mr. Obama was eager to convey continuity and stability. Wall Street loves Rubin and Summers. And by "Wall Street," I mean the world capital markets whose destruction could have brought on so much more pain than we now see. To hear UC Berkeley economist Brad DeLong tell it, Summers is also best at the essential functions as presidential adviser.

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August 26, 2010 10:20 AM

The double-dip recession: No longer so far fetched

Posted by Jon Talton

Goldman Sachs has increased its odds of a double-dip recession to 25 percent. Mark Zandi of Moody's Economy.com sees a 1-in-3 chance, vs. 1-in-5 just a few weeks ago. Short of an outright financial panic, however, a double-dip might look much like the "recovery" to millions of Americans. The Bush and Obama administrations, along with the Federal Reserve, committed trillions to save the financial sector that caused the disaster. The Obama stimulus, while averting an outright depression, was never enough to make up for the lost output from the crash, nor was it targeted enough to job-creating infrastructure investments for the future.

The "recovery" was an increase in GDP that never translated into much new hiring. The vast overhang of debt and bad bets from the bubble are still holding back real recovery. So are fifty fiscal crises in the states and thousands in local governments. Many companies laid off workers because of the recession; some used it as an excuse for radical downsizing. Even though corporate America is sitting on large amounts of cash, it's not hiring, whether because of uncertainty, low demand from frightened consumers, antipathy to the Obama administration -- or a new business model of fewer workers, more offshoring, etc. The old housing Ponzi scheme lies in ruins. We're a poorer country after this binge, and unemployment is the worst in decades.

So here we are. As anyone who has ridden a roller-coaster knows, it takes a real rise to lead to a dip.

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August 25, 2010 9:29 AM

Channeling the ghost of Herbert Hoover and other Depression frights

Posted by Jon Talton

Let's play counterfactual history. What if the Harding, Coolidge and Hoover administrations in the 1920s had presided over and expanded a large federal government, prosecuted two wars, while still encouraging a huge bubble based on speculation, fraud, deregulation and feral greed. In 1929, it all crashed down, sending the world financial system to the brink of collapse.

Treasury Secretary Andrew Mellon led an aggressive plan to rescue the banks and speculators, and a panicked Congress went along. Even so, Hoover lost the 1932 election to "pro-business" Democrat Al Smith, Franklin Roosevelt losing out at the convention for being a "closet socialist." As president, Smith continued Mellon's policies, even though conservatives denounced him for his Catholic faith and wondered whether he was even an American citizen. He put through a stimulus, but it was too small to make up the loss of output caused by the crash. Meanwhile, the Fed, confronted with high unemployment and deflation, sat on its hands, tapped out from bailing out Wall Street -- which was quickly back to its old speculative ways.

Would we be in a much different place than today?

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July 28, 2010 10:05 AM

Did Bush and Obama prevent another depression? Influential economists say yes

Posted by Jon Talton

A new study by Alan Blinder, the distinguished economist and former Fed vice chairman, and Mark Zandi, chief economist of Moody's Analytics, finds that the federal response to the Great Recession almost certainly averted a second Great Depression. They write:

The U.S. economy has made enormous progress since the dark days of early 2009. Eighteen months ago, the global financial system was on the brink of collapse and the U.S. was suffering its worst economic down- turn since the 1930s. Real GDP was falling at about a 6% annual rate, and monthly job losses averaged close to 750,000. Today, the financial system is operating much more normally, real GDP is advancing at a nearly 3% pace, and job growth has resumed, albeit at an insufficient pace.


From the perspective of early 2009, this rapid snap-back was a surprise. Maybe the country and the world were just lucky. But we take another view: The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers.

You can read a summary of the paper here, and it's also available for download on Dismal Scientist.

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July 15, 2010 10:10 AM

The financial reform bill that couldn't

Posted by Jon Talton

Neither the talking points of critics of the financial reform bill nor those of its backers get at the heart of the matter. Will it make credit harder to get? Unlikely, considering the banks are already doing that on their own, both because some are hoarding cheap money to gamble through their trading desks while community banks are drowning in bad commercial real-estate loans. A "sweeping" reform that will prevent a replay of 2008? Hardly.

The bill is extremely complicated, adding to the risky complexity of the financial system. Much of it must be written as rules by the Federal Reserve and policed by this same independent, bank-owned, opaque entity. Too Big to Fail Banks remain in place, as do most of their risky practices, including the ability to gamble ("trade") with taxpayer money. The shadow banking system, another big contributor to the meltdown, is barely touched. Incentives to trade with taxpayer money or derivative swindles remain, as do those for obscene bonuses.

By contrast, the reforms of the Great Depression were simple. Risky investment banks couldn't engage in commercial banking and vice versa. Period. Average depositors were given a federal guarantee for a portion of their money, providing stability for the system. Regulators kept banking simple, honest, sound. Prosecutors and the Pecora Commission exposed the criminal speculation of the banksters in the 1920s and put an end to it for decades.

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July 6, 2010 10:15 AM

Beach reading about the great meltdown and the way forward

Posted by Jon Talton

A reader asked, what are the best books that can help us understand how we got into this economic mess -- and maybe how we can get out. Here's my short list (and as part of getting out of the Great Recession, I urge you to buy them at your local bookshop):

In Fed We Trust: Ben Bernanke's War on the Great Panic, by David Wessel. This is a fascinating account of the decisions made by the Fed chairman, then New York Fed President Tim Geithner and then Treasury Secretary Hank Paulson during the worst of the fall of 2008. Bernanke's biggest goal was to avoid the mistakes of the Depression-era Federal Reserve. In doing so, however, did he undermine democracy?

Freefall: America, Free Markets and the Sinking of the World Economy, by Joseph Stiglitz. The Nobel laureate economist looks at the roots of the collapse in market failure, perverse incentives, ideological blindness and careless deregulation. None of these problems have been corrected by the Obama administration.

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July 6, 2010 10:15 AM

Beach reading about the great meltdown and the way forward

Posted by Jon Talton

A reader asked, what are the best books that can help us understand how we got into this economic mess -- and maybe how we can get out. Here's my short list (and as part of getting out of the Great Recession, I urge you to buy them at your local bookshop):

In Fed We Trust: Ben Bernanke's War on the Great Panic, by David Wessel. This is a fascinating account of the decisions made by the Fed chairman, then New York Fed President Tim Geithner and then Treasury Secretary Hank Paulson during the worst of the fall of 2008. Bernanke's biggest goal was to avoid the mistakes of the Depression-era Federal Reserve. In doing so, however, did he undermine democracy?

Freefall: America, Free Markets and the Sinking of the World Economy, by Joseph Stiglitz. The Nobel laureate economist looks at the roots of the collapse in market failure, perverse incentives, ideological blindness and careless deregulation. None of these problems has been corrected by the Obama administration.

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June 25, 2010 10:00 AM

Financial 'reform': Big bankers cry all the way to the...

Posted by Jon Talton

I regret to inform you that the financial reform will require quotation marks. As in, financial "reform."

The most promising real reform, the so-called Volcker Rule, which would have prohibited banks from speculating with their own capital and taking stakes in hedge funds, was gutted late in the night. This trading activity is ultimately backed by taxpayers, both because of the FDIC guarantee and easy availability of cheap money from the Fed -- and it's a major profit center for the big banks. Also watered down: A measure that would have forced the big banks to move derivatives trading into subsidiaries with their own capital support.

MIT's Simon Johnson, one of the best chroniclers of the meltdown predicted as much earlier this week: "At the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit cycle."

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June 24, 2010 10:29 AM

Ghosts of recessions past

Posted by Jon Talton

Not knowing the future, we look to the past. What is this thing called the Great Recession and what can we expect from a recovery? Unfortunately, as much as economists and others try to find comparisons, they're ultimately unsatisfying. As Mark Twain would put it, history doesn't repeat itself but it rhymes. Let's look at a few.

Recent history: The 2001 downturn shared a burst bubble, in that case the dot-com, as well as corporate criminality with the likes of Enron. But it was short-lived and saw nowhere near the damage of the Great Recession. It did see a "jobless" recovery, however -- an ominous portent. Only 1 million net new jobs would be created in the expansion that followed. And the big money moved out of dot-coms and into real estate, beginning the mania that would help being on our current calamity.

The S&L downturn: Like the Great Recession, this 1991 event grew out of a financial collapse and one where regulators were forced to look the other way by politicians and ideology. It was also the first sign of the increasing financialization of the economy that had begun in the 1980s. But it's small potatoes compared with today's mess and was contained to a small portion of the economy. It was followed by the most robust rebound of the post-World War II era. Today's globalization and China's entry as a major economic competitor were years away.

The 1980-82 recessions. These are often compared in severity with the Great Recession, but the differences are important. They began with high interest rates and high inflation and ended with the worst post-World War II downturn to date as Paul Volcker's Federal Reserve vanquished inflation. It was a Fed-induced recession, rather than the result of a financial or housing bubble. The American industrial base was largely intact and the middle class still strong. The U.S. trade balance was healthy. None of this is the case in the Great Recession. Most significantly, our latest downturn saw far faster job losses and has yet to even begin to see the rebound in employment chalked up after the end of the '82 recession.

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June 23, 2010 12:54 PM

The Fed runs up against a new kind of recessionary monster

Posted by Jon Talton

On the subject of interest rates in a slow economy, Alan Greenspan said, "You can't push a string." And this was when the then-Federal Reserve chairman was dealing with a relatively mild recession. It's a lesson Ben Bernanke is learning the hard way. Today the Fed's policy-making committee backed off earlier language of an economy that has "continued to strengthen," to merely saying a recovery is "proceeding." Record low rates will be held for an extended period.

As David Wessel made clear in his fascinating book, In Fed We Trust, Bernanke the Depression scholar was determined to avoid the mistakes of the 1930s central bank, which mistakenly tightened money in the face of deflation. It was Milton Friedman's insights into this catastrophic mistake that put him into the pantheon of great economists. Bernanke succeeded, but what now?

Low interest rates have avoided depression and a huge expansion of the money supply has fended off deflation. They aren't creating jobs, and the United States faces a long-term unemployment crisis that risks becoming explosive.

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June 3, 2010 10:05 AM

This magic moment: Why the recovery doesn't feel better

Posted by Jon Talton

In Sunday's Seattle Times, I wrote about the so-called great reset that many thinkers, notably Richard Florida, argue will emerge from the Great Recession. My question was whether the ruling interests and long-embedded custom can be so easily changed. To be fair to Florida, he says this is a multi-generational process.

So far, however, I'd say we're in a moment -- it may not last long, but who knows? -- that defies a sexy name. Call it the Frozen in Place and Slipping moment. The Great Recession was stopped at huge expense and unprecedented government action. This no doubt avoided another Great Depression. Yet it also propped back up much of the old order: The big banks, the shadow banking sector, the ratings agencies, etc. It enhanced the Federal Reserve. In other words, the playerz that most caused the economic collapse. Even Warren Buffett, the best example we have of a prominent honorable businessman, can only apologize missing the bubble and defend the Wall Street status quo.

Many of the economic imbalances that led up to the crash were also pretty much frozen in place, instead of the painful but ultimately healthy cleansing that recessions usually bring. More dolorous trends were accelerated, such as offshoring of jobs, increased used of temporary and contract labor, stagnant or falling wages, and rising income inequality. Atop this is piled the wreckage of countless lives and businesses that didn't get a federal bailout. State finances remain in wreckage, a drag on recovery.

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June 2, 2010 9:55 AM

When rating agencies attack: Warren Buffett's cred is on the line

Posted by Jon Talton

In a day of important talking, Warren Buffett trumps President Obama.

The president is traveling to Pittsburgh to give an update on the state of the economy. Last year, he promised to work to rebuild the economy on a "solid foundation." Yet it's an economy amazingly like George W. Bush's, except for the lack of a housing bubble and the illusion of growth. Oh, and millions of unemployed and underemployed people. To be fair to the president, events are increasingly out of his control. But we might have more confidence if his chief economic advisers were not members of the Wall Street elite.

The more interesting words might come from Buffett as he testifies before the Financial Crisis Inquiry Commission on the rating agencies and the financial crisis. He owns a sizable piece of Moody's but, according to WSJ Deal Journal, he's been reducing his stake in recent quarters. In live blogging, Buffett is continuing to say that the ratings agencies were among the many who missed the bubble (hmmm). Still hoping for some of the vinegary honesty of which the Oracle of Omaha is capable. This was the man who called derivatives "financial weapons of mass destruction" in 2003. Apparently the memo didn't get to Moody's.

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May 7, 2010 10:05 AM

For markets, the only thing we have to fear is...well, plenty

Posted by Jon Talton

Everybody has an opinion about the 1,000-point Dow nosedive Thursday and today's continuing market volatility. Here's mine: There's no single cause but the overriding vibe is lack of confidence. Wall Street has two emotions -- greed and fear -- and a very short memory. But somewhere in the reptilian brain of market activity is a kernel of memory about the year leading up to the panic of the fall of 2008.

Back then, only a few economists and business journalists were warning about the deep troubles of which the subprime mess was only the pre-quake. The "experts" assured us things could be "contained" (rather like BP in the aftermath of the rig explosion). Now, Europe lacks the tools to even credibly contain the sovereign debt crisis. And, as before, the market movers don't really know how the deeply interconnected global finance system will be affected. One of the sleeper issues has been the British election, which has resulted in potential paralysis as the U.K. faces its own economic troubles. Considering that America's economy is so financialized, it's difficult to believe we aren't heavily exposed to these risks, even if Greek bonds aren't in your portfolio.

It's the not knowing, the opacity and complex linkages, and, ultimately, the fragile nature of this recovery that are the biggest factors among the millions of bets, decisions and emotions at work on Wall Street right now. And all this risk and edginess is hooked together in a lightning-response electronic trading system like Skynet in the Terminator movie franchise.

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May 6, 2010 9:50 AM

The crisis of confidence in the Fed -- vote on whether it should be audited

Posted by Jon Talton

From the libertarian right (Ron Paul) to the left (Bernie Sanders), the Federal Reserve is facing its greatest criticism in decades. Sen. Sanders is bringing an amendment calling for regular audits of the central bank, one certain to be opposed by President Obama.

UC Berkeley economist Brad DeLong offers a thoughtful analysis on the issue. The Fed opposes the scrutiny because it might limit its latitude to manage the nation's money supply and credit, and more broadly might bring politics into central banking in a way not seen before. DeLong worries that the Fed's policy board is largely unqualified to deal with the economic challenges faced by the nation. Especially when Ben Bernanke is barely holding a consensus.

He writes, "That a good many of the people speaking and voting in the FOMC are the wrong people to do so did not matter (much) when the Federal Reserve was dominated by the incredibly charismatic (yes, I mean that) philosopher-central banker-princes of William McChesney Martin, Arthur Burns, Paul Volcker, and Alan Greenspan, but it matters now."

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April 29, 2010 10:10 AM

Republicans and financial reform -- where's the beef?

Posted by Jon Talton

After many weeks of delaying tactics, Republicans have cleared the way for the Senate to at least debate financial reform. "Concessions" have been given and more are expected. Hmmm. But let me take their talking points as sincere.

One is that the Democratic bill ensures taxpayer bailouts of too-big-to-fail institutions. The bill actually would attempt to do the opposite, by taxing the TBTFs to fund winding down a major institution in trouble rather than forcing the costs onto taxpayers. This has worked reasonably well, in another form, with the FDIC.

The kernel of truth in the GOP claim is this: The TBTFs are so big and interconnected that another panic-like situation might allow them to blackmail the federal government into a taxpayer rescue if the new bank-funded facility proved too small. Also, TBTFs such as Bank of America and JPMorgan Chase hold huge amounts of deposits insured by the FDIC -- way too much for the FDIC to cover if, to paraphrase President Bush, one of these suckers went down.

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April 26, 2010 10:14 AM

A cheat sheet for the bank reform rumble; Kerry played with Goldman's squid

Posted by Jon Talton

Cue West Side Story music, please. The Dems and the Reps are set to rumble on financial reform. The Dems haven't covered themselves in glory in the past, with Bill Clinton allowing casino capitalism to slip the leash and many legislators taking cash from Wall Street to do its bidding. The Reps are the gang of big business, and whatever their talking points, want to kill financial reform.

What to watch for to see if reform is real. Consider:

1. Derivatives. We must see real regulation of these "exotic products" which are not only often swindles, but carry heavy systemic risk. Real reform means they are transparent, regulated and traded on an exchange. It means they have to be close to something of real value, and not endlessly sliced into ever more meaningless slices of fraud. Custom-made derivatives, the most dangerous, should be outlawed or heavily curtailed.

2. Systemic risk. How does reform handle too-big-to-fail and the interconnections among the big players that nearly blew up with world economy. I'd like to see TBTF broken up and a new Glass-Steagall that separates risky investment banking from taxpayer-insured commercial banking. This, along with tax reform to discourage gambling and excessive compensation would be the best way to de-financialize the economy. That won't happen; the banksters own too much of D.C. The Dems' plan to require the TBTF institutions to fund their own protection is a step forward, but only if...

3. Regulators regulate. Real reform will change the culture, incentives and even structure of the federal watchdogs so they go back to insisting upon safety, soundness and accountability.

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April 19, 2010 9:30 AM

The slow jobs recovery begins, but relief for most isn't in sight

Posted by Jon Talton

When Washington state added 1,600 net new jobs in March, it was part of a broader national shift in employment. Weak, tentative, but nonetheless a rebound from the months of major job losses. According to the federal Bureau of Labor Statistics, nonfarm jobs increased in 33 states and the District of Columbia last month.

Again, the gains were small. Maryland led the nation with 35,800. Not surprisingly, unemployment rates were little changed or even a bit higher: A stronger labor market will bring more workers in, thus the effect on the rate. And not every state is benefiting: Michigan, Nevada and Florida led the ones that continue to see net job losses.

Nationally, 162,000 jobs were added in March, but 125,000 are needed just to keep pace with the natural growth of the workforce. Notably, the number of "involuntary part-time" workers grew by 263,000. A total of 26.4 million Americans are either unemployed or underemployed. It's a big hole, and at this rate will take years to dig out of, a reality that even Fed Chairman Ben Bernanke isn't arguing.

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April 16, 2010 9:30 AM

Pop quiz: Goldman faces charges, the market falls, do average investors matter?

Posted by Jon Talton

Goldman Sachs is charged with subprime mortgage fraud and the Dow plummets. What are the big players who move markets telling us? That alleged fraud is such an essential part of the market that without it one must hit the "sell" button?

In fact, getting to the bottom of the swindles, bad behavior and illegality that helped bring us close to a second Great Depression is essential to the health of the market. A market, that is, that generates capital for productive, job-creating activity and gives every investor fair, transparent and sound investment products. The Obama Justice Department, led by former high-powered corporate lawyer Eric Holder, has been bashful and late in prosecuting the obvious crimes that led to the Great Panic of 2008 and cost American taxpayers hundreds of billions of dollars. Its predecessors in the Bush administration were far more aggressive in going after Enron, WorldCom, Qwest, HealthSouth, etc.

Goldman is charged with failing to disclose critical information to investors about a complex collateralized debt obligation backed by subprime mortgages. A hedge fund "with economic interests directly adverse to investors in the (CDO), played a significant role in the portfolio selection process," according to the SEC complaint. The hedge fund boyz were betting against the investors who purchased the Goldman CDO. Even if those investors were large institutions, many of their customers were real people whose livelihoods were at stake. Goldman said the charges are unfounded.

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April 14, 2010 10:00 AM

Bernanke says the recessions over -- what do you think?

Posted by Jon Talton

Federal Reserve Chairman Ben Bernanke told Congress today that "a recovery in economic activity appears to have begun in the second half of last year." A big factor: companies have worked down inventories that stacked up during the Great Recession. That makes expanding production more likely.

Consumer spending is also picking up. "On balance," Helicopter Ben said, "the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters." The bad news: It won't be enough to make much of a dent in unemployment. A "significant amount of time" will be needed to make up for the millions of lost jobs. "I am particularly concerned about the fact that, in March, 44 percent of the unemployed had been without a job for six months or more. Long periods without work erode individuals' skills and hurt future employment prospects."

Still, economists have been reluctant to declare an end to the Great Recession. And with good reason. The labor market is the worst since the Depression; job recovery had begun by this time even in the dreadful 1981-82 recession. Debt levels remain high, along with continued risks to the financial system. State and local governments are still in trouble. And winding down the federal bailout of Wall Street contains many unknowns. Perhaps most serious: We lack another bubble to cloak the continued erosion of average people's living standards. What do you think?


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April 8, 2010 9:50 AM

Crisis committee: Rubin shows what comes out of the mouths of (very well paid) boobs

Posted by Jon Talton

One thing I always liked about Robert Rubin was his ability to make a perfectly knotted half-Windsor on his elegant ties. Alas, that's not much compared to the damage in which this "wise man" of Wall Street entangled the country. Along with Alan Greenspan, he of Ayn Rand and conservative market religion purity, Democrat Rubin is most responsible for the Great Recession.

Today he's testifying before the Financial Crisis Inquiry Commission, lacking even the decency of former Citigroup CEO Charles Prince, who offered what appeared to be a heartfelt and knowing apology. Nicknamed "One Buck Chuck" for the track of Citi stock under his high-paid leadership, Prince told the panel, "I'm sorry the financial crisis has had such a devastating impact for our country. I'm sorry about the millions of people, average Americans, who lost their homes."

Rubin was barely contrite and went back to his meme of "why knew?" adding the unintended comedic line about how leaders shouldn't be responsibility for the "granularity" of little things -- such as $40 billion in essentially fraudulent collateralized debt obligations. Rubin was being paid more than $100 million as a senior adviser to Citi while it headed toward collapse and a $45 billion taxpayer rescue. So "granularity" is in the eye of the beholder.

Commission vice-chairman Bill Thomas said, "Apparently you get to the top without having had to experience anything the people underneath you do. You don't have a comprehension. You're not informed, but you get to make all this money on the upside, but there's no downside."

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April 7, 2010 9:35 AM

Tiger Woods sex scandal!! (No, something more important in the financial crisis investigation)

Posted by Jon Talton

It's too bad that every time Americans -- and their media -- hear about the Financial Crisis Inquiry Commission, their minds can't substitute the phrase "Tiger Woods sex scandal." The commission, which began hearings today, is infinitely more important to the future of our living standards and national security than the host of distractions that crowd each day.

This should be our era's Pecora Commission, which was convened in 1932 by majority Republicans in the Senate to illuminate the causes of the 1929 market crash and Great Depression. It exposed the host of bad practices and swindling bankers that helped bring on the worst economic crisis of the century. And it led to real reform, among other things the Glass-Steagall Act which separated investment banking from commercial banking.

The new commission is off to a slow start and risks being consigned to the fate of the 9-11 panel. Today, former Fed Chairman Alan Greenspan is defending himself and saying banks are undercapitalized. We'll see how this goes (it's being carried on CSPAN-2), but Ferdinand Pecora wouldn't let Mr. Greenspan get away with that.

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April 5, 2010 9:45 AM

A rumble at the Fed and lessons from the Rio Tinto prosecution

Posted by Jon Talton

The Federal Reserve Board is holding a routine meeting this afternoon. But nothing is routine after a recession that has produced damage and unmasked distortions on a level not seen since the Great Depression -- and in many ways never seen. The Wall Street Journal has a story about a debate shaping up between two factions on the board as to the exit strategy from the mammoth amounts of money pumped into the system to prevent deflation.

One argues that the economy is still weak, with high unemployment dampening spending and low house prices, so deflation remains a danger. The other says inflation is being masked by some of these same factors and could break out if the Fed doesn't move faster to raise rates from essentially zero. Ben Bernanke doesn't have command of the board as did his predecessor Alan Greenspan, so this lack of consensus is telling.

Not everything is in the Fed's control. For one thing, demand for Treasuries fell in the most recent auction, a reminder that rates may have to rise to entice investors into U.S. debt. Also, as Greenspan said in the 1991 downturn, "you can't push a string." There's a limit to what interest rates and monetary policy alone can do when the economy remains fundamentally broken.

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April 1, 2010 10:20 AM

Hedge funds: Betting on recovery, or being welfare queens?

Posted by Jon Talton

It's not just the big banks that are doing very well. So is the unregulated shadow banking system, including hedge funds. According to the New York Times, the pay of the top fund managers made a staggering recovery last year. One made $4 billion betting on the recovery of...the financial sector. (No, this is not an April Fool joke).

How to take this? "We bet on the country's revival," the manager, David Tepper, said. Well, not really. He bet the assets of his elite clients on the fact that American taxpayers would be risking their living standards for years to come in order to rescue the bad bets and swindles of the banking sector. (And this is not a partisan concern: No. 2 on the list was George Soros, big backer of the Dems).

The problem is that it's difficult to know how these powerful players are using their money to actually encourage real recovery, or just trading bets and benefiting from the federal bailout (e.g., being corporate welfare queens, or the bankers to them). Hedge funds are famous for buying and merging companies, encouraging offshoring, etc., all of which destroy jobs. Meanwhile, they're barely overseen by regulators and played a significant role in the panic.

In any event, I'm sure the millions of unemployed and underemployed Americans, the people whose wages have stagnated for years and worry about job losses and foreclosures, wish them well.

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March 19, 2010 9:40 AM

Bair takes on too big to fail, but bank reform is too small to succeed

Posted by Jon Talton

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., today became the highest-ranking official to advocate against too-big-to-fail banks. In a speech before the Community Bankers of America, she said, "Job number one must be to level the playing field once and for all and to put an end to the doctrine of too big to fail."

She supports legislation that would levy an assessment against the biggest banks in an attempt cover their risk-taking if (when) things go bad, while allegedly protecting taxpayers. However, she warned about loopholes in the bill by Sen. Chris Dodd, D-Financial Services, "which seem to allow the potential for backdoor bailouts through the Federal Reserve Board's 13(3) authority."

The big banks can muster hundreds of millions of dollars to buy senators and House members to make reform a Swiss cheese of such loopholes. And as much as Bair's stance is welcome, it's still not enough.

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March 17, 2010 9:40 AM

Behind today's inflation numbers: How close we came to disaster

Posted by Jon Talton

The unexpected drop in wholesale prices for February is being hailed as a sign that inflation is in check and the Fed can keep interest rates low.

The real lesson from today's report is what a near-death-experience we had with 1930s-style deflation, arising out of the financial panic and the Great Recession. Deflation, a sustained drop in prices, would have driven the economy into full-out depression. For all his missteps, Fed Chairman Ben Bernanke was right to see deflation as a major threat and expand money supply to combat it.

That said, the Fed's other sins await atonement: the secret deals with the big banks, the toxic assets hidden away (for now), and the fiasco with AIG and others among the Wall Street boyz. These total into the trillions, they allow continued bad behavior and have prevented unwinding of huge amounts of leverage, and they represent an ongoing threat to recovery. Even necessary and good steps have unintended consequences: Hence, the Fed's expansion and easy credit policies have pumped the world economy full of hot money going into all manner of plays that have little to do with creating jobs or sustained productive enterprises. Meanwhile, the viability of U.S. debt means the Fed can't base its interest-rate decisions purely on inflation data. The T-bonds will, after all, have to keep attracting investors.

So, two cheers for Bernanke? One cheer? We'll see in a few years.

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March 15, 2010 9:25 AM

Dodd's big financial reform push looks smaller and smaller

Posted by Jon Talton

The regulatory bill being announced today by Sen. Chris Dodd, D-Financial Services, reminds me of Sarbanes-Oxley, the watered-down enforcement bill passed in the wake of the Enron/WorldCom/Etc. scandals. Lots of paperwork. No real change to corporate venality.

For example, the New York Times reports that it will make no major changes in the regulation of derivatives. Yes, the financial weapons of mass destruction, as Warren Buffet called them, will get to keep ticking. Derivatives, largely unregulated and opaque, were at the heart of the financial Great Panic that sent the system to the brink and cost American taxpayers trillions.

The too-big-to-fail banks would remain intact -- keeping another explosive armed and dangerous. No new wall between risky investment banking and the commercial banks backed by taxpayers. More power would be vested in the Federal Reserve, which did such a dandy job in seeing and stopping the mischief that got us into the worst downturn since the Great Depression -- and is essentially owned by the banks themselves. Consumer protection? Don't hold your breath. And yet Dodd's modest proposals will be heavy lifting. Something is very wrong here.

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March 12, 2010 9:35 AM

Lehman did in Lehman, but that's not the end of the story; Seattle lagging on venture map

Posted by Jon Talton

The headlines today out of the examiner's report into the collapse of venerable Lehman Brothers will point to an inside job. The company and its top executives, so well compensated for their incomparable management prowess, engaged in "materially misleading" accounting tricks to hide Lehman's troubles. Read deeper and the usual suspects are also mentioned, including the mortgage Ponzi scheme and rivals holding back needed loans.

It will be left to those paying attention to recall that most of Lehman's peers were doing many of the same things -- but Lehman was left standing when the Treasury stopped the game of musical chairs and allowed the investment bank to fail, thus setting off the Great Panic. Nor does the report really get to the heart of the matter: How regulators failed to regulate.

Meanwhile comes news of an exciting new way that the capital markets can avoid investing in productive economic activity that actually creates jobs: a futures, er, market where investors can bet on the likely success or failure of new movies. But we've seen this picture before and know how it ends.

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March 11, 2010 9:30 AM

Still no financial reform as the next Great Panic is quietly ticking

Posted by Jon Talton

A year and a half since the excesses and swindles of Wall Street and the banking industry nearly drove the world into another Great Depression, we still have no reform of these dangerous sectors. The huge sums of lobbying money deployed by "financial services" have ensured that the nation remains vulnerable to another panic and consumers continue to be victimized.

As Bob Dole said, where's the outrage?

Senate Banking Committee Chris Dodd says he will unveil yet another attempt at reform. The industry will be sure to fight against a consumer protection agency -- and few lawmakers are willing to cut to the heart of the matter. This would entail a new Glass-Steagall Act that separates risky investment banking from taxpayer-insured commercial banking. More: It would regulate derivatives, including swaps, and provide oversight and transparency of the shadow banking system. It would break up the too-big-to-fail institutions. Nothing has been done, and Wall Street is not only back to business as usual -- it had been emboldened to take more risks, loot greater amounts for executive compensation, believing taxpayers will always bail it out.

Republicans have fought reform at every step, which is to be expected. But Dodd himself received two sweetheart mortgages from the notorious Countrywide Financial -- an ethical lapse that even an old-time goobah could have sniffed out. The more honest assessment came from Illinois Sen. Dick Durban, that the big banks "frankly own the place," that is, the United States Senate. Meanwhile, President Obama has not spent a dime of political capital on financial reform, even though the next disaster, cooked on Wall Street, is quietly ticking.

The American people wrote a huge check on their future living standards to save the big banks. Perhaps things didn't get bad enough to allow an FDR-like approach to take down "the banksters," including prosecutions and a Pecora Commission to uncover all the frauds and hold the toffs accountable. Unfortunately, taxpayers lack the lobbyists to save the country from the bankers' continuing excesses.

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March 8, 2010 9:55 AM

Is Wall Street bullish on America -- or is a Greek tragedy opening soon?

Posted by Jon Talton

Only the paranoid survive, Andy Grove famously counseled. So is it too wild to wonder how long before Goldman Sachs, the Wall Street boyz and the shadow banking crew start shorting the sovereign debt of the United States?

We know this much: Goldman and others helped Greece conceal its debt, and were meanwhile betting against the country with their own trading, turning trouble into a self-reinforcing crisis. Funny, the stringent "austerity" measure that will affect average Greeks won't break a leaf of grass on the estates of the capital markets gang bangers.

We know another thing: With the "innovative" financial mischief that caused the worst recession since the Great Depression, we've come a long way from the era when an ad could proclaim, with credibility, "Merrill Lynch is bullish on America." Of course, Merrill doesn't even exist anymore as a free-standing outfit, nor does the old prudent ethic of the Street. With trillions in hot money moving around world markets, what do the boyz need America for -- except to save their bacon when the Ponzi scheme collapses?

Now saved, they are back to their old mischief with derivatives and swaps, including in sovereign debt. This may be one reason President Obama keeps Tim Geithner and the "Government Sachs" alums close to him (as in, keep your friends close and your enemies closer) -- a reason beyond wanting to convey continuity or even keep Wall Street campaign contributions.

Wall Street has reasons to "maintain," to use the gang language they would understand. Financial reform is all but dead. U.S. Treasuries are still the world's most stable. There's plenty of looting of productive American companies to be done through highly profitable M&A activity. But it may only be a matter of time before the boyz start shorting us. And it will have little to do with real economics (Wall Street didn't short the U.S. during the Depression or World War II). Will angry Americans, so desperate to place blame somewhere, anywhere, even realize what is happening?

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February 26, 2010 10:05 AM

The sickness inside America's capital markets, now a U.S. export

Posted by Jon Talton

Once upon a time, in a different America, the capital markets were all about providing the funding to start and expand businesses, improve productivity and, of course, create jobs. But since the 1990s, the biggest banks and the unregulated shadow banking system have found they can make higher profits by selling and trading exotic securities that have little, if anything, to do with the real economy.

If you've been watching the Greek crisis, you know Goldman Sachs and other big banks used derivatives to help Greece mask its growing debt, and all the time reaping huge fees. The New York Times reports that Goldman and others have also bought credit-default swaps - yes, the same instruments that nearly collapsed AIG and the economy -- to bet against Greece. "It's like buying fire insurance on your neighbor's house -- you create an incentive to burn down the house," Philip Gisdakis, head of credit strategy at UniCredit in Munich, told the newspaper.

As Greece's financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country's problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe's debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece's debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety -- and the whole thing starts over again.


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February 22, 2010 9:08 AM

Cantwell's fight against 'financial weapons of mass destruction' essential to avoid new collapse

Posted by Jon Talton

Top of the News: Let's hope that Washington Sen. Maria Cantwell persists in her effort to regulate derivatives and even restore separation between commercial and investment banking. Republicans the past year have shown how potent even one senator can be.

Most Americans don't realize that the Wall Street "innovation" called derivatives -- better labeled "financial weapons of mass destruction" by Warren Buffett -- continue to be employed. The profits are great for the big banks, and the risk to the financial system even bigger. We saw this with rotten mortgages bundled into derivatives and sold to foolish investors. Goldman even bet against the exotic investments it was selling its own clients. And AIG, insurer of derivatives, nearly brought the system to collapse, requiring a massive taxpayer rescue.

Yet nothing has changed. The casino is still open. We're now learning that Goldman Sachs used derivatives to hide Greece's deficit (and who says we don't have export industries). All the incentives, such as big bonuses, are still in place for risky behavior. And derivatives, as well as the entire shadow banking system, lack regulation or transparency. As Americans wake up poorer for having had to bail out Wall Street, they should understand this is not just a complex issue involving rich folk. If anything the financial system is more at risk than ever, and with it the fragile recovery.

Cantwell faces a financial lobby that can deploy hundreds of millions of dollars to prevent reform. With the recent Supreme Court ruling, you can bet they'll come after her when she comes up for re-election.

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February 19, 2010 10:10 AM

Penalty for early withdrawal? Bernanke dips his toe into raising rates

Posted by Jon Talton

Top of the News: The Federal Reserve has dipped a toe into its exit strategy from zero interest rates with a quarter-percentage-point increase in the rate it charges banks for emergency loans. So far, Wall Street, which has profited so mightily from the cheap credit -- even if many American businesses can't get loans -- is taking the news calmly.

The Fed made the move after the market had closed Thursday; so far this morning, the Dow has avoided a swoon. The central bank has emphasized this doesn't necessarily foreshadow more tightening ahead, but nobody thinks it can keep rates this low forever. Today's low inflation report seems to confirm that Chairman Ben Bernanke still has a window of low inflation -- so far.

Bernanke is no Alan Greenspan, who held nearly everyone in thrall to the economy's peril. Partly thanks to Greenspan's arrogant belief that markets would police themselves, and partly because of Bernanke's own missteps, the Fed is one more American institution that has been tarnished. Bernanke is also presiding over the kind of tenuous consensus on the policy-setting Federal Open Market Committee that never bedeviled Greenspan. The committee's deficit hawks are getting restless, abetted by December's lower appetite for Treasuries by China and Japan. Others realize if the Fed makes a misstep by raising rates too fast, it could send the economy into a double-dip recession.

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January 29, 2010 11:15 AM

Somebody enjoyed 5.7 percent GDP growth but most of us just got this lousy T-shirt

Posted by Jon Talton

Top of the News: So how does one square 5.7 percent GPD growth in the fourth quarter with real unemployment of 17 percent ("officially" 10 percent)? Part of it is a statistical fluke from lean inventories. Yet another issue is all the cheap money propping up the financial services sector, which is now larger than manufacturing.

I bet it will be revised down. The entire year saw the biggest contraction since 1946, when the wartime economy was winding down. In any event, we continue in uncharted and scary territory.

UC Berkeley economist Brad DeLong makes the point, "You expect 8 quarters over which real GDP has not grown to see a rise in unemployment of 2.78 percent -- and 8 quarters over which real GDP has fallen by 1.62 percent to see unemployment rise by 3.5 percent and not 5.2 percent A world in which the unemployment rate were not 10 percent but rather 8.3 percent would be quite a different world than the one we live in..."

The Fed has been unwilling to take on job creation, instead focusing on saving the big banks. As a result of this and other failings, 30 senators, including Sen. Maria Cantwell voted against Chairman Ben Bernanke's reappointment -- the biggest ever vote of no confidence for a U.S. central bank chief. Bernanke's bigger problem is the dissent rising in the Federal Open Market Commitee. This week's vote to hold rates steady was not unanimous. The Kansas City Fed president opposed the language of open-ended low rates. This is a very weakened Fed chairman.

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January 27, 2010 9:46 AM

Your money: What did Geithner know and when did he know it?

Posted by Jon Talton

Top of the News: Nevermind that he's 48 years old, Treasury Secretary Tim Geithner looks like the kid you wanted to beat up in high school -- even if you were a peaceful nerd who couldn't even get a prom date. If only that were his biggest problem.

Geithner is testifying before Congress today on the bailout, specifically the government allowing AIG's big-bank "counterparties" to be made whole on their risky swindles -- oh, I mean "innovative financial contracts" -- thanks to taxpayer money. So far, the kid is holding his own, defending, denying and deflecting.

Geithner was president of the New York Fed during the panic, one of the three most important players in the rescue, along with Hank Paulson and Ben Bernanke. It stretches credulity for him to claim ignorance about specifics of the AIG talks, especially about why no effort was made to negotiate for lower payouts to the banks, as was being done in private deals. Worse, the feds tried to keep the backscratch between D.C. and Goldman Sachs et al secret.

How long before he's thrown under the Change Bus: six weeks or six months?

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January 26, 2010 9:50 AM

President Obama channels the ghost of Herbert Hoover

Posted by Jon Talton

Top of the News: Herbert Hoover got a bad rap from history. He entered office on a wave of hope and optimism, a progressive Republican, one of the smartest men ever elected president. We know how things turned out. He was another president who obsessed about budgets and spending freezes (FDR promised a balanced budget, too, and thankfully fibbed).

President Obama has entered Hoover Country with his impending spending freeze. UC Berkley economist Brad DeLong calls it "a perfect example of fundamental unseriousness: Rather than make proposals that will actually tackle the long-term deficit - either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits - come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way."

The Baseline Scenario likens it to later Clintonism, where Bill tried to co-opt Republican programs and ended up with little to show for it.

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January 14, 2010 9:32 AM

Obama's tax on banks would nibble around the edges of real reform

Posted by Jon Talton

Top of the News: President Obama is proposing a tax on the biggest banks to more fully repay the government for the TARP bailout. That the bankers and their apologists are screaming bloody murder makes it seem like a good idea.

The one cogent argument against it that I've run across comes from the New Yorker's James Surowiecki, who worries that it could undermine the banks' capital base while the financial system is still shaky. Unfortunately, the big banks invite a tax by promising to hand out billions in bonuses, including to many of the same people who cooked up the crash.

My problem is that the tax idea, while politically popular, nibbles around the edge of real reform. That would include an orderly process and timetable for breaking up the biggest banks and industry consolidation in general; using the pieces of the big banks to rebuild larger, midsize banks nationwide; re-erecting a wall between investment and retail banks; regulating all derivatives and hedge funds; outlawing many "creative" "products" such as credit-default swaps; cleansing industry control of the regulators, and providing much greater transparency of the capital markets.

Also: severely limit lobbying by the big banks. And reinstate fair taxation of the rich -- there goes the bonus problem. Some vigorous prosecutions of banksters and serious jail time would do wonders to focus minds on Wall Street.

Oh, and at the risk of sounding like Ron Paul: Audit the Fed. The big banks offloaded who-knows-how-many toxic "assets" onto the Federal Reserve, and the Fed still resists showing the public exactly who benefited from trillions of dollars in lending "facilities" during the crisis.

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January 13, 2010 9:20 AM

New untouchables may not be able to avoid the heavy hand of the crash-causing bankers

Posted by Jon Talton

Top of the News: The bi-partisan Financial Crisis Inquiry Commission began its hearings today into the causes of the great crash. It should be one of the most important enterprises of 2010.

Unfortunately, the commission lacks the funds and public focus that helped the 1930s Pecora Commission formulate the reforms that helped keep the American financial system sound for seven decades.

Another big difference: Wall Street was in ruins along with the rest of the country after 1929. Today Wall Street is richer than ever and can deploy hundreds of millions of dollars lobbying against reform. It helps that their behavior has been bailed out and backed by perhaps trillions in federal tax dollars and Fed obligations.

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January 7, 2010 9:30 AM

Boeing's drop in orders shows recessions effects still linger

Posted by Jon Talton

Top of the News: The great recession may be only beginning to be felt by airplane makers. Although Airbus hasn't reported results yet, Boeing says it received just 142 commercial airplane orders last year. That compares with 662 in 2008 and 1,417 orders in 2007.

The business is notoriously cyclical and the airlines are in constant financial trouble, despite all manner of overt and hidden federal subsidies, as well as beneficial treatment in bankruptcy court. Still, the huge debt overhang from the credit bubble of the 2000s makes predicting the course of new orders particularly difficult.

For good-news seekers, Boeing deliveries at 481 matched expectations and were 29 percent ahead of the previous year. And orders for the new 787 remain strong. But given the weak worldwide recovery and airline demand already satisfied by previous orders, it may be too early to say Boeing's layoffs are over.

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December 17, 2009 10:10 AM

The person of the year is likely to keep his job -- too bad about you

Posted by Jon Talton

Top of the News: Give Alabama Republican Sen. Richard Shelby points for consistency. He was one of only 10 Senators to vote against the Gramm-Leach-Bliley Act of 1999. Now he's voted against a new term for Fed Chairman Ben Bernanke (who won Senate Banking Committee approval anyway).

Gramm-Leach-Bliley, recall, repealed the Depression-era regulations of banking, setting the table for the horrendous meal of the Great Panic and Great Recession, caused by the risky bets and outright swindles of the "financial services" industry. Both parties worshipped at the Church of the Self-Policing Free Market. Even Alan Greenspan admitted he was wrong. I'm waiting for the mea culpas of Bob Rubin and Bill Clinton.

How much Bernanke is to blame is questionable. He arrived late to the great speculative game and did an admirable job of crisis management, arguably preventing another Great Depression. His record, however, is not without its blemishes. The bailout has left a bad taste, huge commitments, uncertain safety. And Bernanke's Fed is deaf to the jobs crisis.

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December 14, 2009 9:55 AM

Obama gets stiffed by the bankers. Join the crowd, Mr. President

Posted by Jon Talton

Top of the News: President Obama told 60 Minutes that he "did not run for office to be helping out a bunch of fat cat bankers on Wall Street." Funny, could have fooled us. Matt Taibbi of Rolling Stone details the incestuous ties between Wall Street and the administration is an incendiary, must-read.

Obama wanted to do a Herbert Hoover this morning and get the lords of finance to the White House to talk them into reform. It didn't quite work out. The CEOs of Goldman Sachs, Morgan Stanley and the chairman of Citigroup couldn't attend because the weather grounded their jets in New York.

What? These brilliant minds that must be so lavishly compensated couldn't figure out they could take Amtrak's Acela to D.C.? Citigroup's CEO Vikram Pandit was "busy negotiating a deal," so stiffed the president. (Apparently JPMorgan Chase CEO Jamie Dimon figured out how to get to D.C., once again showing he's the smartest boy in class.)

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December 3, 2009 9:55 AM

Does Bernanke deserve another term? Do members of Congress?

Posted by Jon Talton

Top of the News: Should Ben Bernanke get a second term as chairman of the Federal Reserve Board? You can vote below, but we may be asking the wrong question.

After all, many of the worthy senators speechifying and grilling Chairman Ben happily went along with years of deregulation, industry consolidation and lax oversight that helped bring on the worst crash since the Depression. All of them had a chance to reel in the excesses of the past decade, and few even spoke out. Who should keep his or her jobs? Look in the mirror, folks.

Bernanke did many things well, skillfully playing the bad hand he was dealt by Alan Greenspan and the choir at the Church of the Self-Regulating Free Market. His "whatever it takes" strategy arguably prevented another great depression. (The best account of this is found in David Wessel's In Fed We Trust).

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November 17, 2009 10:15 AM

Depression avoided? Not so fast

Posted by Jon Talton

Top of the News: The not-especially-bearish UC Berkeley economist Brad DeLong argues that the U.S. faces a 5 percent chance of a depression-causing shock -- and a paralyzed government won't do much about it.

The significance, beyond DeLong's good reputation, is that for more than 2 years he has said there was no chance of repeating a Great Depression. And 5 percent is a small chance, but serious nonetheless given the widespread hope for a recovery.

"We could cushion the impact of another big downward shock by a lot more deficit spending," he writes. "unemployment, after all, goes down whenever anybody spends more...But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing problem after 2030."

Meanwhile, the rescue record of both the Bush and Obama administrations is controversial, to say the least: helping Wall Street socialize losses while keeping its party going. Remember AIG?

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October 28, 2009 9:55 AM

Echoes of another great crash -- and the lessons we refuse to learn

Posted by Jon Talton

Top of the News: This is the anniversary of Black Monday, the day in October 1929 when the stock market crashed. The Dow saw a record drop and things only got worse as the week progressed (there was a Black Tuesday, too).

It's clear now that the crash of that day was not the beginning of the Great Depression but its loudest symptom. Other areas of the economy had been faltering for years and income inequality was near record highs, but this was cloaked by the mania on Wall Street, back in the day when banks could engage in highly speculative trading.

Of course, that toxic environment was rekindled in our time by the repeal of the Depression-era Glass-Steagall Act in 1999, and we got just what the reformers of the 1930s would have feared.

Milton Friedman made his mark as a great economist (as opposed to a great polemicist) by work with Anna Schwartz showing how the Federal Reserve botched its response to the crash, turning what might have been a short-term panic into a deep depression. This was a lesson current Fed Chairman Ben Bernanke was determined to implement -- and indeed, Fed action pulled us back from the brink.

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October 22, 2009 9:40 AM

These Boeing jobs are going, boys, and they ain't coming back

Posted by Jon Talton

Top of the News: When Boeing executives announce a second 787 line in North Charleston, S.C., it will be the biggest non-surprise of the year. They've got the union in the Puget Sound region over a barrel, and secret talks for a "no strike" clause ultimately won't change minds in Chicago, even if they succeed.

Does this mean the aerospace industry will begin a slow death here? Perhaps. Capital and ownership are in control in today's economy, and workers have little bargaining power. Consider the thousands of highly skilled airline mechanics that have lost their jobs as American air carriers have outsourced their maintenance to Third World Countries. A riveting NPR investigation shows the safety hazards involved. But no matter. Make sure your tray tables are stowed and seat backs are in their full, upright and locked position.

Did the union over-reach? Did the state of Washington do too little? Is the cultural poison inside Boeing too deep to heal? Did Boeing executives need a scapegoat and and excuse? Did they leave their roots and loyalties behind long ago? There will be plenty of time to assign blame. I hope I'm wrong. But the new Dreamliner work will be done elsewhere. The next 737? Maybe in El Salvador?

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October 20, 2009 10:05 AM

A new bubble's here, and you won't even get the leftover change

Posted by Jon Talton

Top of the News: What's that noise? It's the latest bubble.

There's little mystery behind the Dow's rise, the huge profits for some Wall Street banks -- leading to plans to pay record bonuses -- or the "recovery," such as it is, of the housing market. It's a temporary and highly artificial boom caused by the enormously costly federal bailout of the financial sector, zero interest-rate lending to banks, the first-time house buyer credit and other desperate measures out of the other Washington.

If average Americans saw little gain from the last bubble, this one is even more exclusive. Aside from the small minority of house buyers -- if they can even keep paying their mortgages -- most of the gravy is going to the financial elite. "Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money," reported the New York Times.

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October 14, 2009 9:30 AM

Wall Street parties like it's 2007, while Main Street faces a long wait for recovery

Posted by Jon Talton

Top of the News: Happy days are here again. For some.

Big banks and investment houses are planning to award $140 billion in compensation this year, according to the Wall Street Journal. That would be a record. Employees would average $143,400 each, up $2,000 from 2007's previous record.

If ever there was a sign of the increasing divergence between Wall Street and Main Street, here you have it. Outside of these major securities firms and banks, the nation faces its worst joblessness since the early 1980s, and by many measures since the Depression. Foreclosures keep rising. Small businesses can't get credit. Many workers have seen sharp pay cuts. And despite economists' talk of a recovery, few see it as more than tepid, full of risk and taking years to even recover the jobs lost since 2007.

But on Wall Street, the stock market has improved. Thus, the reward -- as should happen in capitalism. After all, it's mere churlish envy to keep waving the bloody shirt of executive pay... There's just one problem.

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October 2, 2009 10:40 AM

Welcome to the 'new normal' and President Obama owns it, fairly or not

Posted by Jon Talton

Top of the News: We are seeing the "new normal" and it doesn't look pretty. The latest national unemployment rate has risen to 9.8 percent and will probably go higher. Worse, few economists see it going down quickly.

As I reported earlier this week, two veteran economists at Rutgers have looked at the ailing labor market and concluded it will not recoup the jobs lost in this recession until late 2017. "The once great 'American job creation machine' fully expired in 2008. It was replaced by the 'Great American Job Destruction Machine,' " wrote James Hughes and Joseph Seneca. Last year was the worst for absolute private-sector job losses since records began to be kept in 1939.

The new normal will include a 'reduced scale' financial sector; the end of easy credit; a consumer retrenchment that will "ripple through the economy"; "decelerating" house ownership, and a painful remaking of the commercial real-estate market. I would add: an unpredictable inflation picture, rising energy prices and China's stunning recovery -- or crash.

There will be unpredictable political consequences and instability all around. Never mind that much of the causes of the Great Recession were cooked up in the late Clinton and George W. Bush administrations. And never mind that the economic stimulus undoubtedly is preventing joblessness from being more serious. Many voters will remember the bailout of the banks (begun under Bush). They will ask the Ronald Reagan question: Are you better off today... President Obama will be tested as never before.

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October 1, 2009 10:27 AM

The Fed tries to convince it will be an effective regulator next time

Posted by Jon Talton

Top of the News: Fed Chairman Ben Bernanke seemed to offer a softer case today for make the central bank the super-regulator of financial institutions. Now he says there should also be "council of regulators" involved.

Anyone who has read David Wessel's In Fed We Trust probably comes away with an ambivalent view. On the one hand, the Fed was complacent in the years when the subprime mortgage crisis was building inside the very institutions it was already charged with overseeing. On the other hand, only the Fed had the power and assets to act quickly to keep last fall's panic from becoming a depression.

The real problem is the total breakdown of regulatory oversight and checks and balances in recent years. Enamored with the idea that the market would police itself, regulators, rating agencies and politicians set aside decades of successful practices, beginning with the Clinton era deregulation of financial services. Meanwhile, the unregulated shadow banking industry grew so fast and complex it had the power to take down the system with its bad bets -- and in the end the Fed and taxpayers were forced to save such bad actors as AIG.


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September 14, 2009 9:25 AM

Obama -- and Locke -- face their first major trade challenge

Posted by Jon Talton

Top of the News: America exports so much less to China than it imports that each administration now seems to have its Sista Souljah moment. George W. Bush imposed tariffs on imported steel as the domestic industry faced crisis. Now President Obama has decided to levy duties on Chinese tires to protect American rubberworker jobs.

The question is whether the move will be largely symbolic or begin a reset in U.S.-Chinese trade relations. I'm not holding my breath -- or my U.S.-made tire -- in anticipation of the latter. China is threatening retaliatory tariffs on some American imports and the case could end up before the World Trade Organization.

That China owns trillions in American debt complicates matters. But so, too, does China's own trade policies, which include currency manipulation and protectionism in numerous areas. All helps keep America's trade deficit high and the debt-for-stuff relationship unsustainable.. Commerce Secretary and former Washington Gov. Gary Locke faces a big task.

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July 28, 2009 10:00 AM

Ben and the Fed: The latest reality show

Posted by Jon Talton

Top of the News: After the shy, Yoda-like, bubble-puffing Alan Greenspan, Ben Bernanke is quite a contrast. Looking for a second term as Federal Reserve chairman, Bernanke is stumping like a politician.

According to the New York Times, the chairman has embarked "on a publicity campaign with a message: the central bank is here to help, and it is not as mysterious or menacing as people might think."

Menacing, hmmm. Other words and phrases come to mind: incompetent, bought and sold by Wall Street, asleep at the switch, enabler of the greatest bundle of swindles in history. Perhaps I'm being too harsh.

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July 21, 2009 10:00 AM

Ten questions we'd really like to have Bernanke answer

Posted by Jon Talton

Top of the News: Fed Chairman Ben Bernanke is testifying before Congress today. It's the usual snoozer that will get little attention unless he says something like "run for the bomb shelters, your bank accounts are worthless!" Here are some questions I wish could be answered for We the People:

1. Why has the Federal Reserve been so secretive about the real amount and the beneficiaries of perhaps trillions of dollars in lending facilities and other assistance beyond the TARP program? Who are these institutions and how did they use the money? How do you respond to the inspector general's report that the liabilities are $23.7 trillion, the program has been badly monitored and much of it was used by banks, not to lend but to grow bigger?

(after Bernanke recovers from fainting and is hauled back into the witness chair)...

2. Was the Fed stupid or complicit in failing to see the risks from the housing bubble and take appropriate regulatory and monetary action? This is a simple question, Mr. Chairman.

3. Did you and President Bush's Treasury Secretary Henry Paulson (and then New York Fed President Tim Geithner, now Treasury secretary) stampede this Congress into the poorly crafted bailout last fall? Why, more than a year after the August 2007 swoon, didn't the Fed and Treasury have a more thoughtful, effective and accountable emergency strategy in place?

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July 13, 2009 10:12 AM

Why Goldman's profits are a sign of continued economic trouble

Posted by Jon Talton

Top of the News: A new government report shows that the number of homeless families rose 9 percent between 2007 and 2008 -- and 56 percent in rural and suburban areas. All this before unemployment and foreclosures really gathered strength starting last December. I'm sure these folks, among millions of others, are gratified that things are looking up at Goldman Sachs.

Analysts are expecting second-quarter earnings of $2 billion from the investment bank when it reports Tuesday. Huge bonuses for top executives are sure to follow.

Yet happy days are not here again. Goldman's quick rebound, after its being saved by taxpayer TARP money, shows how the system remains sick. It epitomizes the institution so huge that it presents a systemic risk to the economy -- and one so politically connected to both parties that it can not only veto reform, but effectively dictate administration policy.

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July 6, 2009 10:22 AM

Misreading the economy, then and now

Posted by Jon Talton

Top of the News: The voluble Vice President Joe Biden made a remarkable statement over the weekend, saying the administration in January "misread how bad the economy was."

Remarkable because in the fall and winter, economists and politicians alike were agreed that we were seeing the worst collapse since the Great Depression. Defensible? Only in the narrow sense that the Obama administration's projections selling the stimulus didn't foresee unemployment rising so high so fast.

But it smells as if economic policy was being crafted by the very brainos who engineered the bubbles and the crash. The Republicans had their Goldman Sachs alums, notably Treasury Secretary Henry Paulson. The Democrats have theirs, the proteges of Robert Rubin.

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June 25, 2009 10:07 AM

'Did so!' 'Did not' -- Missing the larger problem of too-big-to-fail finance

Posted by Jon Talton

Top of the News: Ken says he was strong-armed by the Federal Reserve to take over Merrill Lynch. Ben says no such thing happened. The Lewis vs. Bernanke catfight misses the larger problem.

When an institution such as Merrill Lynch or Bank of America have become so large, thanks to industry consolidation, comatose antitrust regulation and compromised financial regulators, they pose systemic dangers to the economy.

Thus, the government necessarily intervenes in a heavy-handed way. But in a larger sense, these institutions became part of the government -- even before taxpayers had to fork over $20 billion to make the Merrill-BofA deal happen.

Unfortunately this systemic risk is not addressed in the Obama administration's financial reforms. Instead, they propose to give the Fed more power. With the political power of big finance, nobody dares suggest the obvious: An orderly breakup of these giants. Scattering their constituent parts back to cities from which the big institutions snatched regional banks originally would also be healthy for those metro economies.

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June 24, 2009 10:00 AM

Boeing isn't alone in business missteps, but that's little consolation

Posted by Jon Talton

Top of the News: If it gives Boeing any comfort, it hasn't yet reached the threshold of history's biggest business blunders.

Those would include the Edsel, a car perversely named after Henry Ford's much abused son, which cost Ford $400 million to develop. There was the $2 billion Mukluk dry hole drilled off the coast of Alaska in 1983 by Sohio, Diamond Shamrock and partners, which showed the U.S. was indeed past its peak and no amount of "drill, baby, drill" would change it -- price tag: $2 billion. And the disastrous Penn Central merger, where managers of the New York Central and Pennsylvania railroads battled each other while the company burned.

Did I mention New Coke?

Sometimes companies recover from such costly missteps -- sometimes not. The Mukluk disaster, for example, led T. Boone Pickens to start the shareholder revolution against big oil, resulting in consolidation of the industry. "They are cannibalizing their capital," he told me at the time. His big peeve: Imperial managers who faced no accountability for their failures.

Nota bene to Boeing (and that's not the name of a cheap Italian supplier).

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June 19, 2009 10:15 AM

Nearly every state saw unemployment worsen, but Oregon has special pain

Posted by Jon Talton

Top of the News: The federal Bureau of Labor statistics gives us a clearer picture of May unemployment today. Forty-eight states registered job losses, one state remained the same and only one state (North Dakota) saw an improvement. Washington reported earlier this week, 9.4 percent unemployment, but a slowing in the number of jobs lost.

The biggest monthly loser: California, dropping 68,900 jobs -- and 744,000 compared with a year earlier. The West saw the highest overall jobless rate, 10.1 percent -- the Rust Belt Midwest was at 9.8 percent.

The Pacific region posted its highest jobless rate on record (Oregon posted a 6.7 percentage point increase year-over-year, largest in the nation; by comparison, Washington's was 4.3 percentage points).

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June 9, 2009 10:40 AM

Why the bank bailout repayment leaves a bad taste

Posted by Jon Talton

Top of the News: If word that 10 large banks will begin repaying bailout money to the Treasury doesn't leave you in a celebratory mood, you're not alone. This is more about the big bankers wanting their freedom than the soundness of the financial system or the health of the economy.

Initial reports say the institutions will repay $68 billion. Some $200 billion was paid out to 500 banks under the Troubled Asset Relief Program, or TARP. The big banks want free of federal restrictions on executive compensation, dividends, etc. And their lobbyists have successfully blocked regulation of derivatives -- the swindles that helped cause this worst downturn since the Great Depression -- and water down other regulations.

So there's a strong sense that the banks that were at the heart of the disaster want to get back to business as usual as soon as possible. They remain "too big to fail." Profits were privatized and losses socialized. Many may still be close to insolvency, but we won't know.

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April 9, 2009 10:17 AM

Has Wells Fargo staged a turnaround for the banking sector?

Posted by Jon Talton

Top of the News: As we check out Wells Fargo's unexpectedly strong earnings announcement today, let's see what is is...and what it is not. It seems to confirm that Wells is an unusually well-run institution compared against the admittedly low bar of American money center banks. It never got as deep into the swamp of subprime mortgages and other junk as its peers. Management was consistently more conservative (and, again, the bar is pretty low here).

The earnings news does not clearly signal a recovery of the banking sector. Even Wells risks projecting too much optimism -- it hasn't really absorbed the financial death star that is Wachovia. At that former banking giant, a great institution run into the ground on subprime gambles, most of the huge layoffs have yet to fall in its very vulnerable headquarters city of Charlotte. Crosstown rival Bank of America faces continued weakness across the board, especially from its misbegotten merger with Merrill Lynch (Marry in haste, repent at leisure). Wells is trumpeting its big mortgage share gain from Wachovia, but it will be interesting to see how it manages Wachovia's troubles. (And Wells is a TARP recipient, $25 billion of your money).

In addition, as most Americans have learned to their dismay in the past year, we don't really have a "banking industry" that underpins the economy in the old-fashioned way. America, much more than Europe, depends on the broader capital markets -- everything from mutual funds and investment bank speculation to the powerful, unregulated shadow banking system. It's the capital markets that are sick and in need of repair, and Wells' earnings give us no indication they are on the mend. And "on the mend" won't be good if they return to the dangerous "privatize the profits and socialize the risk" models that caused the meltdown.

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April 8, 2009 9:46 AM

Taxpayer watchdog: Bailout would be better served by pink slips for bank CEOs

Posted by Jon Talton

Top of the News: While Obama chief economic adviser Larry Summers was making millions giving speeches to the financial industry and shilling for a hedge fund, Harvard Professor Elizabeth Warren was quietly studying the decline of the middle class. Her work wasn't always quiet in its findings: She led a breakthrough study a few years ago about the effect of inadequate health insurance in causing personal bankruptcies. Then Congress named her as chief watchdog of the bank bailout, and since then she's been at odds with the likes of Summers, Tim Geithner and their predecessors in the Bush administration.

Now Warren is warning Congress that the $700 billion bailout is at best producing mixed results, and it's relying on unrealistic economic assumptions. Her suggestion: Fire the top executives and carry out an orderly liquidation of the insolvent banks, according to Bloomberg, which first reported the story. You can read the congressional panel report here.

Warren has been outspoken in the need for more transparency in the way the Treasury and Federal Reserve are using taxpayer money to bail out large financial institutions. The need for this was underscored once we learned that bailout money for AIG went not only to bonuses, but also to "counterparties," many of which were already getting TARP money. This as average folks were facing deferred or destroyed retirement hopes as a result of the financial meltdown. Not surprisingly, she's critical of the Treasury's sudden desire to pump bailout money into insurers.

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