Posts tagged theyknownothing
The 2012 White House Budget Proposal. Who Will Survive In America?
Sigh. This is truly depressing.
In lieu of the doc, we’ve given you a handy data viz for the spending allocations. It’s illuminating.
So what’s the big deal? We reprint Jon Cohn in full…..
President Obama on Monday will release his budget request for the 2012 fiscal year. As you read commentary on it—or, if you’re as nerdy as I am, as you read the document itself—keep in mind that this is the first budget request he’ll be producing since the Republicans took over one house of Congress. It’s a huge difference and not merely in the obvious ways.
Obama’s previous budgets were the president’s way of signaling, to members of his own party, what initiatives he intended to pursue and roughly what resources he expected Congress to give him. He could expect some negotiation and pushback, from liberals on some issues and from centrists on others. But mostly he could count upon Congress, which Democrats controlled, to follow him.
The Republican House, of course, will do no such thing. They have their own, very different priorities and their own, very different ideas about how to pay for them. Accordingly, Obama’s budget is more of an opening bid in a tough, rancorous negotiation. That means you should evaluate the document as a signal of political strategy, not simply a statement of policy priorities. And that makes it tougher to judge.
Between the administration’s recent statements and a series of calculated leaks, we have a pretty good idea of what Obama is trying to do. He’s going to call for spending more money on education and other public investments, but he’ll also endorse enough cuts to keep overall non-defense discretionary spending at last year’s levels. Elementary and secondary school education, for example, should get a boost. But Pell Grants, for low-income college students, are going to take a hit, albeit a carefully crafted one.* There will be more money for building high-speed rail but less for helping low-income families pay their heating bills.
Is this a good thing? In absolute terms, clearly, the answer is no. The demand for Pell Grants is unusually high right now; among other things, cash-strapped states are raising tuitions at state schools just as cash-strapped students and families have fewer resources to pay them. Energy costs for next winter, when the cut in heating assistance would take effect, are likely to be higher than at any time since 2008. Unless the economic recovery quickens very suddenly, plenty of people will struggle to pay those heating bills. And those are just two examples of program reductions that will leave needy Americans even more needy.
But everything is relative, and that means judging these cuts alongside both the modest increases you’ll find elsewhere in this budget and the much larger increases you saw in previous ones. Robert Greenstein, director of the Center on Budget and Policy Priorities, will spend the next few days dissecting the Obama spending request and, as he does, he will likely find plenty not to like. But, during an interview, he also put disappointments in context:
I think [Obama’s] record is very strong — major expansions in refundable tax credits for the working poor, major expansion of student financial aid for low-income students so that more of them can go to and complete college, and of course, major health reform that will extend coverage to 32 million uninsured people. This is the most impressive record of any president since LBJ.
Obama’s spending request looks even better when you consider what the Republicans would do if left to their own devices. They haven’t committed themselves to a 2012 budget just yet. But they’ve said they want a far deeper freeze than Obama’s, reducing non-defense discretionary spending to what it was in 2008. On Friday, they offered a preview of that vision when they announced their proposal for how to finance government for the remainder of the current fiscal year.
They want far more severe cuts to Pell Grants and home heating assistance, plus reductions to such essential services as food inspections and the elimination of programs like Americorps. They also want to reduce spending on the Special Supplemental Nutrition Program for Women, Infant, and Children. That initiative, known as WIC, provides nutritional assistance to expectant mothers and newborns. As Paul Krugman notes, that cut will hurt today and tomorrow, since kids who grow up malnourished are more likely to have problems later in life.
The most important question about Obama’s budget, then, is how well it positions him and his allies in the coming debate over these sorts of priorities.
You could make a case that, by embracing the Republican narrative on the size of government and calling for a five-year budget freeze at present levels, Obama has effectively bid too low in the negotiation over federal spending—that he’s committed himself, and the country, to less government than it needs. (It’s happened before!) Or you could make the case that, by making “tough” proposals to cut programs he supports, he’s establishing the credibility with voters that he needs in order to marginalize the Republicans and to preserve more spending than might otherwise be possible. (It’s happened before!)
I really don’t know which argument is right. I’m not a political strategist and, besides, not even the political strategists can be sure about this sort of thing. But I know I’ll be hoping that Obama prevails in the coming standoff with House Republicans, even though a victory would still leave the government perilously underfunded.
*The details of Obama’s Pell Grant proposal are complicated and worth an item of their own, which I’ll try to write shortly.
So on the one hand, Obama makes a political calculation, cuts spending on things people NEED (like higher ed grants, food inspectors, heating oil for the poor). On the other, the GOP stands for nihilism.
Who will survive in America? Besides the rich?
#letthemeatcake #whowillsurviveinamerica
Michael Lewis chronicles the Irish debt crisis
Long-ish read, but riveting, as usual.
CRASH COURSEWhen Irish Eyes Are Crying
First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?
BY MICHAEL LEWIS•PHOTOGRAPH BY JONAS FREDWALL KARLSSONMARCH 2011
University College Dublin professor Morgan Kelly, in Hogans pub, in Dublin. He predicted the Irish Crash in 2006.
Are you detecting a theme over the last few years?
Here’s a hint: privative the gains, socialize the losses.
#theyarewhowethoughttheywere #greatmomentsinbankinghistory
The CDO Daisy Chain
ProPublica bringing the heat today. A long piece on some GREAT MOMENTS IN BANKING HISTORY….
Having told the tale of hedge fund Magnetar in April, Propublica and Planet Money have gone after even bigger game in their latest investigative piece.
The new article by Jake Bernstein and Jesse Eisinger describes, in salacious detail, how the composition of CDO buyers shifted from “real” investors like pension schemes to other CDOs — prolonging the boom in these securities and exacerbating the eventual fallout for the banks.
And the banks have themselves to blame. From the article, emphasis ours in all excerpts:
As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those. …
And how bad did it get?
An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.
And in a particularly impressive display of the lunacy that was Wall Street in the mid-2000s, CDOs started buying each others’ pieces:
The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the “bucket”) now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds.)
The ever-expanding bucket provided new opportunities for incestuous trades.
It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.
ProPublica’s analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.
Nor was there any shortage of bully tactics used by the banks to convince CDO managers to buy their crap bonds rather than another bank’s:
“I would go to Merrill and tell them that I wanted to buy, say, a Citi bond,” recalls a CDO manager. “They would say ‘no.’ I would suggest a UBS bond, they would say ‘no.’ Eventually, you got the joke.” Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it’s black.
The article goes on to names names, explains why the ratings agencies blew it, and gets into the wider fallout for the rest of the financial sector.
Worthwhile reading on a Friday afternoon.
The Economic Crisis: Lessons Unlearned
Thomas Frank signs off from the WSJ Opinion page. Needless to say, I’m disappointed. A pretty stinging assessment of the last 2 years. 50 hot ones, comin’ at ya.
This is my last weekly column for the Wall Street Journal, and writing it has naturally put me in mind of my first efforts in this space, back in the summer of 2008.
Those were the days when economic disaster was beginning to unfold; it hit a crescendo in September of that year when Wall Street teetered and the government came to the rescue with a TARP.
By November, the nation’s mood had soured enough that a senator from Illinois won the presidency even though he appeared to defy political convention in countless ways. And all the while, the front pages overflowed with shocking tales of the corruption of the old order, the gross venality of the subprime lenders, the sabotage of the regulators, and the manufacture of poisonous triple-A securities.
It was an awful time, but for someone in my situation there was also—please pardon the expression—hope to go along with the disaster. We were descending further into the worst recession I had ever seen, but at least we were finally going to be done with the farcical intellectual and political consensus of the preceding decades.
Never again, I thought, would journalists fall over one another to flatter CEOs, nor would pundits build careers by finding clever ways to equate the workings of markets to democracy itself. Management theorists would cease to be public intellectuals, and the political advice of stock pickers would henceforth be treated like the toxic sewage it clearly was.
“The market god has failed,” I wrote in this space in February 2009, and I thought its flop augured not only a massive reconfiguring of the relationship between investment banks and the rest of society but a complete overturning of the comfortable assumptions of the pundit class.
At first, there were reasons to believe such a thing might come to pass. Alan Greenspan’s famous October, 2008, confession of “shocked disbelief” at the lenders’ lapses sounded like a turning point to me, and it felt equally momentous when Richard Posner, a famous proponent of the Chicago school of economics, allowed that deregulation had gone “too far.”
But those were intellectuals, bound by a different code than politicians and pundits. Elsewhere, things scarcely changed at all. Yes, that new president and his partisans in Congress managed to pass an enormous health-care bill, but only after making sure that the big institutional players were on board and that the new law followed a business-friendly prototype. Then, a halfhearted stab at re-regulating Wall Street, and the audacity tank was just about dry.
As the right howled “socialism,” President Obama took pains to demonstrate his loyalty to the exhausted free-market faith. On trade issues and matters of economic staffing, he loudly signalled continuity with the discredited past. On the all-important issue of regulatory misbehavior—a natural for good-government types—he has done virtually nothing.
The real audacity has all been on the other side. Many Republicans chose to respond to the crisis not by renouncing the consensus faith of the last 30 years but by doubling down on it, calling for more deregulation, more war on government.
That they have partially succeeded with such a strategy in these years of financial crisis, mine disasters, and oil spills is testimony to their political brilliance—and to Democratic dysfunction. As is the burgeoning populist movement that now stands beside the GOP, transforming anger over unemployment into anger over the auto bailout and the good pensions enjoyed by public workers.
Where I most expected changes, though, was in the world of professional punditry, which had largely failed to raise questions about the disaster as it loomed. Today it’s two years on, and nobody has changed the water in the fish tank, as a friend of mine likes to say. Thomas Friedman of the New York Times still burbles about theories of creativity that were management clichés 10 years ago. The Washington Post prosecutes its undeclared war on Social Security by having former TARP czar Neel Kashkari explain why banks had to be bailed out but “entitlements must be cut.” The need to balance the federal budget is almost universally thought to be urgent. And bipartisanship still intoxicates the pundit mind with its awesome majesty.
On Wall Street, the road to hell is still lined with bonuses. And Washington feels the same as ever. The prosperous, well-educated people still tote their yoga mats around town, line up outside the special cupcake shops, and listen to NPR talk show hosts welcome the next generation of boring centrists into the glorious circle of the right-thinking. The lobbyists still gather at the tasteful restaurants du jour, doing their work on behalf of the forgotten men of the uppermost one percent.
As for me, it’s two cans of beer and the escape chute to terra firma. Goodbye and good luck.
The Magma Chart
From NYT’s Economix Blog. MBS. Nomnomnomnomnom.
Read any introductory economics textbook, and you’ll learn that the Federal Reserve has three primary benchmarks that it employs to control monetary policy: the federal funds rate, the discount rate and the reserve ratio. Today the Federal Reserve made history by adding a new benchmark: the size of its balance sheet.
Now the Fed’s balance sheet has always had some size, of course, but the Fed historically has not set a public target for it. (Steve Liesman made this same point on CNBC earlier this afternoon.) The Federal Open Market Committee statement released today said that
the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
Why is it such a big deal to tell the public that the Fed’s securities holdings are staying steady? Because the Fed’s balance sheet today is very different from what it looked like before the crisis. Behold, what one economist nicknamed the “magma chart”: the Fed balance sheet, courtesy of the Cleveland Fed.
Cleveland Fed
That fat navy chunk in the middle and the magenta strip just above it refer to the mortgage-backed securities and agency debt, respectively.
As you can see, there was little reason to pay attention to the size of the Fed’s balance sheet in those idyllic pre-crisis days, largely because it was much smaller and less multi-complected.
US Housing Bubble v2.0, charted
From FTAlphaville:
It’s no secret that the US government is trying to prop up house prices.
Its various programmes, Hamp, MHA, tax incentives, etc., have been explicitly linked to higher house prices before — most notably in Sigtarp’s first-quarter report to Congress. Raising house prices can be politically popular, and helps out the banks — at least in the short-term.
But if you want to see just how much of an impact federal initiatives have had on home prices, look no further. On Monday, the US Treasury and the Department of Housing and Urban Development (HUD) began publishing a monthly ‘Housing Scorecard,’ which lays it out pretty clearly.
Here’s the graphic:
The light blue line represents forecast house prices based on futures as of January 2009 — before President Obama began his various housing initiatives in February. The dark blue line is actual prices and projected prices based on June 2010 futures. The difference between the two is attributed by the US administration to its own housing programmes. It’s a wee (artificially propped) housing bubble.
The difficulty for house prices, then, is when the government’s efforts start slowing down.
Not to mention, as ever, questions over moral hazard.
Dead On Arrival: Financial Reform Fails
This is incredibly depressing. It really looked like meaningful reform had a chance. Dammit. If this is all the “reform” we’re getting, it’s just a matter of time till the next big blowup. Barring some miracle here in the homestretch, kid-gloves reform is a fait accompli.
I guess if you can’t beat ‘em, join ‘em. That’s my plan……
By Simon Johnson
The House-Senate reconciliation process is still underway and some details will still change. But the broad contours of “financial reform” are already completely clear; there are no last minute miracles at this level of politics. The new consumer protection agency for financial products is a good idea and worth supporting – assuming someone sensible is appointed by the president to run it. Yet, 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.
Go, for example, through the summary of “comprehensive financial regulatory reform bills” in President Obama’s letter to the G20 last week.
The president argues for more capital in banking – and this is a fine goal, particularly as the Europeans continue to drag their feet on this issue. But how much capital does his Treasury team think is “enough”? Most indications are that they will seek tier one capital requirements in the range of 10-12 percent – which is what Lehman had right before it failed. How would that help?
“Stronger oversight of derivatives” is also on the president’s international agenda but this cannot be taken seriously, given how little Treasury and the White House have pushed for tighter control of derivatives in the US legislation. If Senator Lincoln has made any progress at all – and we shall see where her initiative ends up – it has been without the full cooperation of the administration. (The WSJ today has a more positive interpretation, but even in this narrative you have to ask – where was the administration on this issue in the nine months of intense debate and hard work prior to April? Have they really woken up so recently to the dangers here?)
“More transparency and disclosure” sounds fine but this is just empty rhetoric. Where is the application – or strengthening if necessary – of anti-trust tools so that concentrated market share in over-the-counter derivatives can be confronted. The White House is making something of a show from Jamie Dimon falling out of favor, but all the points of substance that matter, Dimon’s JP Morgan Chase has won. The Securities and Exchange Commission is beginning to push in the right direction, but the reconciliation conference looks likely to deny them the self-funding – CFTC and FDIC, for example, collect fees from the industry – that could help build as a regulator. At the same time, the conference legislation would send a large number of important questions to the SEC “for further study”. None of this makes any sense – unless the goal is to block real reform.
The president also asks for a “more effective framework for winding down large global firms” but his experts know this is politically impossible. The G20 (and other) countries will not agree to such a cross-border resolution mechanism – and this was an important reason why Senators Sherrod Brown and Ted Kaufman argued so strongly that big banks had to become smaller (and be limited in how much they could borrow). Now administration officials brag to the press, on the record, about how they killed the Brown-Kaufman amendment. These people – in the White House and around the Treasury – simply cannot be taken seriously.
And as for “principles for the financial sector to make a fair and substantial contribution towards paying for any burdens”, this is a sad joke. This is not an oil spill, Mr. President. This is the worst recession since World War II, a 40 percentage points increase in government debt (attempting to prevent a Second Great Depression), loss of at least 8 million jobs in the United States, and a painfully slow recovery (in terms of unemployment) – not to mention all the collateral damage in so many parts of the world, including Europe. Could someone in the White House at least come to terms with this issue and provide the president with a sensible and clear text? Honestly, as staff work, this is embarrassing.
There is great deference to power in the United States, and perhaps that is appropriate. But those now calling the shots should remember that they will not be in power for ever and – at some point in the not too distant future – there will be a more balanced assessment of their legacies.
Simply claiming that the president is “tough” on big banks simply will not wash. There are too many facts, too much accumulated evidence, pointing exactly the other way. The president signed off on the most generous and least conditional bailout in world financial history. This is now widely understood. The administration has scrambled to create some political cover in terms of “reform” – but the lack of substance here is already clear to people who follow it closely and public perceptions will shift quickly.
The financial crisis of fall 2008 revealed serious dangers have developed in the heart of the world’s financial system. The Bush-Obama bailouts of 2008-09 confirmed that our biggest banks are “too big to fail” and the left, center, and right can agree with Gene Fama when he says: “too big to fail” is perverting activities and incentives.
This is not a leftist message, although you hear people on the left make the point. But people on the right also increasingly understand what is going on – there is excessive and abusive power at the heart of our financial system that completely distorts markets (and really amounts to a hidden, unfair and dangerous taxpayer subsidy).
This administration and this Congress had ample opportunity to confront this problem and at least wrestle hard with it. Some senators and representatives worked long and hard on precisely this issue. But the White House punted, repeatedly, and elected instead for a veneer of superficial tweaking. Welcome to the next global credit cycle – with too big to fail banks at center stage.
Courtesy of the Business Insider:
Even The Fed Admits Bernanke Is Crazy If He Thinks He Wants to End The (Monetary) Stimulus
Here’s research from the Federal Reserve of San Francisco (FRSF) itself, that argues for U.S. interest rats to remain ultra-low until 2012. It’s not the official position of the U.S. Federal Reserve as whole, but it provides a window into the thinking within one part of the Fed right now.
FRSF:
The dashed line combines the benchmark rule of thumb with the Federal Open Market Committee’s median economic forecasts (FOMC 2010), which predict slowly falling unemployment and continued low inflation. The dashed line shows that to deliver future monetary stimulus consistent with the past—and ignoring the zero lower bound—the funds rate would be negative until late 2012. In practice, this suggests little need to raise the funds rate target above its zero lower bound anytime soon. This implication is consistent with the Fed’s forward-looking policy guidance (FOMC 2010) that “economic conditions—including low rates of resource utilization, subdued inflation trends, and stable inflation expectations—are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
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