Your Party Affiliation Won’t Get You into Heaven Anymore

Gun control, homeland security, stem cell research, abortion. There are many heated debates among liberals and conservatives that are in no danger of being reconciled or solved. That’s good. It means the electorate is not asleep at the switch. As the power of the left and the right ebb and flow from one administration to the next, these issues usually find some sort of equilibrium, even if it’s usually an unhappy one for both sides.

The interesting part is to observe how carefully politicians tread these minefields, their utterances coming only after whetting a finger and holding it up to test the wind direction of the masses. That is why it is so stunning to watch the public stand mutely by while politicians of both parties have engineered the gutting of the public purse by the kings of Wall Street.

Setting aside hysterical partisan blaming, little healthy reasoned debate is heard, let alone a hue and cry that should be directed at outlaw bankers whose greed fest destroyed the economy. This is not a partisan issue, this economic meltdown is an equal opportunity destroyer. Shrinkage is affecting every sector, and Job losses go right from the factory floor to the management suites of executive America. Perhaps our outrage is held in reserve for fear of rocking the economic boat. For sure, the governments’ idea is to return to prosperity as quickly and easily as possible, even if it means a return to the same fantasy bubble economy that just imploded. That’s likely what we have in mind too.

Contrary to what many believe though, the so called prosperity of the last few decades has not been broadly based. It’s been concentrated almost entirely to the top 1% of earners, and even more so on the top 1/10th of 1%, who have seen their income rise by over 500%. For the rest of us? The average middle class income taken by itself and adjusted for inflation has stayed more or less flat for over 30 years.

Sure, we feel wealthier than we were in the seventies, but that’s primarily for two reasons: Firstly, almost all households with income over $75,000 have two wage earners now instead of just one. That alone is responsible for rising household incomes since the seventies. Secondly, much of our “stuff” was bought on credit. The 12% personal savings rate from the eighties has been reduced to almost zero, while consumers have taken on a staggering 11 trillion in debt, doubling in just the last decade. The 50% gain in worker productivity during the same time period hasn’t helped either. That benefit by-passed the middle class entirely.

The trickle down effect of tax cuts for the wealthy was supposed to be a rising tide that lifted all boats. But the last time middle class wages consistently rose was in the post war period, up to the mid seventies, the longest sustained broadly based prosperity ever. Middle class incomes, adjusted for inflation rose consistently for almost 30 years. And that was when tax rates for corporations and the wealthy were twice what they are now, and had been for almost 40 years, ever since FDR’s “New Deal” created the middle class after the great depression. Since the eighties, tax cuts for the wealthy have succeeded only in a huge concentration of wealth at the highest income levels while all other income levels stagnated.

That subtle redistribution of wealth happened while the middle class was comfortably numb in a credit induced stupor. The dirty little secret of the GOP: if you are a Republican and you are middle class, you voted yourself a pay freeze. And who is middle class? Almost all of us. Individually, only 2% make over $250,000, and only 7% make over $100,000. And most of these tax cuts happened at levels far above that.

Does that make Democrats the friend of the middle class? Not while the entire Obama economic team is comprised of Wall Street bankers. The two main players Geithner and Summers, are hugely guilty of creating the conditions for the crash. Tim Geithner, as chairman of the New York Fed was responsible for policing Wall Street. Summers, as Clintons Treasury Secretary, was among a handful who are responsible for refusing to regulate trading in derivatives, a major cause of the meltdown. The entire top level of Obama’s financial team are Wall Street alums who at the very least, aided and abetted Wall Street’s criminal behavior. Why would they be of any help now except to drive the getaway car?

If banks are too big to fail, that must make us too small to succeed. Both the outgoing Bush administration and the present Obama team sold an angry public the same ugly bill of goods: Salvation lies in propping up the existing flawed financial structure regardless of cost, or society will face financial Armageddon. But wait: isn’t this the same house of cards that sowed the seeds of its own (and our own) destruction? Has there been any assurance the business models have been recalculated or even updated? Has there been introspection or contrition? The geniuses who had no idea the havoc they were wreaking will now apparently lead us to a stable future. But first they need us to recapitalize their banks. It sounds almost as preposterous as that e-mail scam where a Nigerian prince wants you to help him transfer several million dollars of which he will give you 20%. But first you need to send him $10,000.

Have we learned anything? Mortgage lenders are already gaming the $8,000 first time home buyer credit, and have reportedly begun signing up another round of sub-prime borrowers, as if there were even any left. Banks are gaming the bailout, and many banks that should have been seized and the parts sold to the highest bidder, will come out stronger than ever in a few years. Instead of the business being spread out to smaller smarter banks, the bigger dumber ones will dragged to prosperity on our nickel. Competition in the banking sector will be reduced instead of enhanced, and the behemoth banks will still be “too big to fail.” But wait that’s not all: The taxpayers will be handed the tab for trillions of dollars. If “free enterprise” means the freedom to plunder the public at will, maybe next time we’ll try the “Armageddon” option.

What can we do? It is not correct to say politicians don’t listen to people. Witness the rise of “green”, even though it’s still more talk than action. No politician of either party can afford not to talk about green. That’s not because they want to talk about it. Not because there is a green lobby paying them to talk about it. It’s because we demanded the issue be addressed. Is it too much to demand a proper accounting of why our economy is so whacked out, and what we are going to do to really fix it? And sorry, re-inflating the bubble by throwing billions at idiot bankers does not constitute fixing it.

FDR’s New Deal ended the last banking reign of terror and helped to set the stage for the great middle class prosperity we all grew up in. That didn’t happen by accident. It was governments’ response to popular outrage. FDR created a middle class that never existed before the depression, by taxing the outrageous income of the robber barons of the day, creating conditions that allowed the middle class to flourish. Big business was outraged too, but at the New Deal policies, to which FDR quipped: “Why are you so mad at me? I’m saving you from yourselves.” He was right. Business ended up doing as well as the middle class in the great post war boom.

That’s the lesson for our situation now. There will be no broadly based return to prosperity with a shrinking middle class, for that is the engine of the economy. And this attempt to fix the economy from the top down by reimbursing wealthy investors for their lost equity is not going to do it.

At your next cocktail party debate, don’t bother blaming the “other” party for this meltdown. You are wasting your outrage on fellow victims while the bankers get away with murder. Your party affiliation won’t get you into heaven anymore.

Doug Friesen
5/25/09

Bank Stress Tests: The crazy Grandmother is still in the attic

It was abundantly clear long before the results of the so called “stress tests” report card, the object was not to see which banks where too weak to survive. The object was always to see how much money it will take to make them survive. Treasury has made clear that they will not allow any of the big banks to fail. It doesn’t matter how much money it takes. This is the new economy, where the government picks the winners and losers by decree.

The test contains two economic scenarios for the next several years, a baseline scenario and an adverse scenario. As Andrew Leonard points out in his May 7 Salon.com article, The biggest economists of the day, at least the biggest ones not being paid by someone to issue “happy talk” forecasts, Paul Krugman, Joseph Stiglitz, Simon Johnson, are all convinced that the biggest US banks are insolvent. According to them, the “adverse” scenario has already become the baseline, and it could get much worse.

That view is backed up by Elizabeth Warren, head of the Congressional Oversight Committee: “It looks disturbingly close to where we are now.”

The results indicate the banks in need of a further 75 billion immediately and perhaps 600 billion over the next several years. Nothing that investors don’t already know. But now they know the government will backstop the losses no matter how large they get. Whether that will instill confidence in the markets is an open question. Bank stocks have rallied in the last six weeks, so now investors will get to grade the report card itself. It will be interesting when that grade is handed down, which will be indicated by what happens to the banks’ share prices in the next few weeks.

Risk, more than any single factor, is what caused the meltdown, as in, inability to judge how much risk is prudent. So it seems like a good idea to introduce some risk controls, at least to protect capitalism from itself. Here’s the problem: Backstopping the risk by government fiat may backfire. Look at Fannie and Freddie, the two quasi government mortgage companies whose risk was backstopped by the government. That went well, didn’t it? They required the largest single bailout ever, because it was never their own butts on the line. Sebastian Mallaby of the Washington Post suggests the government’s unending bailout will transform all of Wall Street into Fannie and Freddie, and they will charge ahead, oblivious to risk.

I realize that Obama’s message here is that it can all be fixed, some banks are not weak and the ones that are weak can be strengthened. In this perfect world, at some point, when the banks are strong enough, the fantasy economy would be replaced by the real economy. I wish I believed that could work. But the economy can’t be tinkered with as if it’s a Swiss watch. It’s more ethereal than that. It’s all about uncontrollable things like trust, risk, belief and confidence, stuff that slips through your fingers.

Jaidev Iyer, a former chief of risk management at Citigroup, says taxpayers will ultimately be on the hook. “If there is no appetite to let losers fail, then the real losers are the market at large, the government, and the taxpayers.”

I continue to be perplexed by the lack of accountability for the meltdown. Consider the airline industry. When they have a crash, It is picked apart in excruciating detail, sometimes for years, then a report is issued. The airline industry has an incredible safety record. The economy, well that’s a whole different matter. In our dysfunctional economic model, the crash is the crazy grandmother in the attic; it will not be spoken of. Somehow we are going to build a new economy without really ever doing any detailed thinking about what went wrong with the old one.

Doug Friesen
5/08/09

This just in!!

Article about "The Age Of Entitlement" in May 1st edition of Duxbury reporter:

http://www.wickedlocal.com/duxbury/news/x845557666/Duxbury-businessman-Doug-Friesen-writes-book-on-financial-crisis

The Banksters ride again

The Banksters ride again.

During the heyday of the market run-up that led to the Great Depression, the last time tycoons hollowed out the economy, a new term was born: Banksters. The veiled reference to the mob aptly described the manner in which the barons of the day used deceit and fraud to accomplish what Capone did with a machine gun. William K. Black conjures up the reference to describe todays "banksters" fleecing the public. Black knows fraud, perhaps better than anyone. He wrote a book with the title “The Best Way to Rob a Bank is to Own One.” Black is the former director of the Institute for Fraud Prevention, and has caught some pretty big fish, including the “Keating five” which touched off the Savings and Loan scandal.

According to Black, the essence of fraud is creating a foundation of trust, then betraying that trust to get something of value. In an interview with Bill Moyers, Black makes it clear that most corporate failures result from calculated dishonesty by those the highest levels. The current meltdown is no different. CEO’s deliberately jacked up bad deals to create record profits and huge bonuses. In fact the bonus system is the mechanism by which companies’ internal checks and balances are defeated. Money buys out the morality.

Black goes on to talk about how the entire system, stripped of regulation, drifted to the dark side. There was no one looking in from outside, and from inside, well, it all just felt so good. Corporate culture being what it is, who is going to kill the golden goose? Case in point - one of the truly slimy aspects of the mortgage crisis: so called “liar” loans. No income verification, no job verification and no asset verification. The more you lie, the better deal you get. One bank, Indy Mac, specialized in these loans, and in 2006 resold 80 billion dollars worth of them into the securities markets. This company eventually recorded loses greater than the entire S&L debacle.

As Ronald Reagan said, trust, but verify. It was the lack of verification that allowed the fraudulent loan securities to be cleansed and passed along to innocent pension plans and the 401K’s of widows. That part of the laundering was done by the rating agencies, who have yet to adequately answer for consistently giving these toxic securities triple A ratings, when these investments went on to lose 60-80% of their value. Of course, by the time that scenario played out, the fraudsters have cashed their bonuses and are driving the getaway car over the proverbial state line. It was a classic Ponzi scheme in all respects but one: everyone knows who did it; no one is being prosecuted. In fact William K Black calls Bernie Madoff a “piker, he doesn’t even get into the front ranks of Ponzi schemes.”

The FBI warned the Bush administration way back in 2004 that there was an epidemic of mortgage fraud going on that would result in a debacle at least as large as the S&L. At the time Bush had re-allocated most of the white collar crime unit to counter-terrorism, and they were never replaced. Now, with a fraud a hundred times worse that the S&L, there are one fifth the number of available white collar crime specialists that worked the S&L.

After the S&L, congress passed a law called the Prompt Corrective Action Law. This law requires the government to put failed banks into receivership immediately, not to keep them alive on corporate welfare. What was called “Receivership” then, is now being called “nationalization” by the hotheads hoping to hang the socialist mantle around Obama’s neck. That mantle rightfully is shared by both parties, who both have ignored and are still ignoring what this law mandates them to do. That would be to make these banks rightfully eat their own losses, not hang them on the broke, beleaguered, and unemployed taxpayers for the purposes of recapitalizing millionaires.

Politicians of both parties have acted in consort with the Treasury and Fed to hide the true extent of the losses and to prop up the existing power structures. All done, I’m sure they would claim, to protect the system from panic and total collapse. But the net result is to protect criminals with taxpayer money.

There is another reason no one being prosecuted, or even being asked to account for their mistakes. It is because this Ponzi scheme is systemic. It’s not where do you start prosecuting, it’s where do you stop? When half of Wall Street is behind bars? That’s the dilemma. A proper accounting of what went wrong would require stomping on the patient (the economy) right when we are desperately trying to revive him. We won’t swallow that medicine either, because we all got mighty used to the prosperity and we want it back as soon as possible. In that way, we too, are playing our part in the world’s largest Ponzi scheme.

Doug Friesen
5/04/09