Dean Baker takes on NPR

This morning on my way in to work I heard a segment on NPR’s Morning Edition featuring the Wall Street Journal’s David Wessel, talking about tax fairness and the deficit. It started out fine, but then became a radically conservative editorial with Wessel arguing that there are lots of people out there who are upset because a small portion of the population, the very poor, pay no federal income taxes (though they do pay payroll taxes) and another portion which is even more poor that they pay neither income nor payroll taxes. Wessel doesn’t say he’s talking about the very poor, but that’s who he’s talking about. Dean Baker notes that this is a position which Wessel also does not provide evidence for anyone actually holding:

The segment also included the bizarre claim that there is widespread resentment against low and moderate income people who do not pay income taxes. It would be interesting if it presented evidence that supported this view. It is undoubtedly true that many people resent millionaires who use tax shelters in order to pay very low taxes, it is not clear that there is widespread anger over the fact that families earning $20,000-$30,000 a year are not paying income taxes (they do pay payroll taxes).

When this is applied to a conversation about the budget deficit, Wessel goes to the extreme implication that if we want to reduce it, we will need to raise taxes on the poor. Baker notes that NPR and Wessel’s entire framing around the budget deficit is wrong:

The first sentence of the piece refers to the “ballooning deficit.” In fact the deficit is actually shrinking. While NPR can argue that the deficit is larger than it would like it to be, the direction of change is wrong. It cannot accurately be described as “ballooning.”

There’s lots of deficit hawkery, but little of it is grounded in reality.

Sandy Weill & Banker Feelings

Yesterday Sandy Weill, former head of Citigroup and one of the people most primarily responsible for the repeal of Glass-Steagall and the rise of Too Big To Fail banks, came out in favor of breaking up big banks and separating investment banking from commercial banking. As a result, the world of finance has been knocked off its rocker. This is quite a big deal.

I wonder if part of the reason Weill has come out against himself (basically) is that though there have been no meaningful reforms or regulations put in place after Wall Street trashed the American economy in 2008 (and has kept us wrecked since then), there has been a marked rise in awareness that bankers are to blame. Being a banker is not quite the honorable profession it once was.

Jason Linkins at Huffington Post, writing on Neil Barofsky’s new book and a bad review of it by Jackie Calmes (the review was in itself bad in its inaccurate and lazy panning of Barofsky’s book), makes this observation:

If you’re living in America, and you can’t figure out why “Wall Street turned so hostile to President Obama’s re-election,” then you haven’t been paying sufficient attention. In the first place, people on Wall Street have made it pretty clear that their major beef with Obama is that he refuses to characterize them as all-knowing, all-wise, fully redeemed individuals. Instead, he has been critical of the role they played in the financial crisis. And that’s what hacks them off. As Jamelle Bouie of the American Prospect observes: “By criticizing Wall Street–and placing some blame for the crisis on their shoulders–Obama is diminishing the psychic rewards of working in the financial sector. People respect bankers far less than they did in the past, and that’s what Wall Street is reacting against.”

This could point to some of the reason Weill is getting on the regulation bandwagon now: he’s recognizing that he and his kind aren’t thought of highly and he doesn’t like that feeling.

Of course, while Weill’s comments are good in their validation of what lots of people have been saying for years, Yves Smith notes that it’s all a bit too easy for Weill to say these things now:

When I see someone like Weill or Dick Parsons putting a big chunk of their ill-gotten gains to fund lobbying or a think tank promoting tough-minded financial services reform, I’ll give the backers their due for making a sincere and serious effort to undo the considerable damage they have done. But absent that, this career death-bed conversion is a hollow and insulting gesture.


Nonetheless, Weill’s comments offer an opportunity to push breaking up the TBTF banks. If there were a major political party which supported this move, it might happen. But there isn’t, so it won’t.

Barofsky vs Treasury

Former Special Inspector General of TARP Neil Barofsky’s media tour around his new book release is producing lots of insightful and important revelations about the ways in which choices were made, many by the Treasury Department, that helped the banks as opposed to homeowners and the general public.

Barofsky did a powerful interview on CBS This Morning which David Dayen highlights today. Barofsky also has a strong op-ed in Bloomberg on how the policy choices that benefit banks have continued to hurt homeowners.

Treasury’s focus on TARP’s financial costs, of course, detracts from its significant nonfinancial costs, including the worsening of “too big to fail” and the lost opportunity to help struggling homeowners. But a separate cost — the loss of many Americans’ faith in their government — may still yield a major benefit.

The missteps by Treasury have produced a valuable byproduct: the widespread anger that may contain the only hope for meaningful reform. Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable. The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

I hope that Barofsky is right – that there will continue to be more and more anger at how the government has handled its response to the 2008 financial collapse and that anger could eventually compel the government to do more in response. Sadly I think it’s more likely that the anger will only reach a breaking point after another collapse happens, a collapse that only is possible because the government chose not to regulate the banks following the collapse of Lehman, AIG and Bear Stearns in 2008.

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.

Wall Street WATBs

Paul Krugman:

It’s no secret that, at this point, many of America’s richest men — including some former Obama supporters — hate, just hate, President Obama. Why? Well, according to them, it’s because he “demonizes” business — or as Mitt Romney put it earlier this week, he “attacks success.” Listening to them, you’d think that the president was the second coming of Huey Long, preaching class hatred and the need to soak the rich.

Needless to say, this is crazy. In fact, Mr. Obama always bends over backward to declare his support for free enterprise and his belief that getting rich is perfectly fine. All that he has done is to suggest that sometimes businesses behave badly, and that this is one reason we need things like financial regulation. No matter: even this hint that sometimes the rich aren’t completely praiseworthy has been enough to drive plutocrats wild. For two years or more, Wall Street in particular has been crying: “Ma! He’s looking at me funny!”

But never mind. Because the rich are different from you and me, many of them are incredibly self-centered. They don’t even see how funny it is — how ridiculous they look — when they attribute the weakness of a $15 trillion economy to their own hurt feelings. After all, who’s going to tell them? They’re safely ensconced in a bubble of deference and flattery.

Krugman’s analysis of Wall Street millionaires as oversensitive, coddled, whiny babies is spot on, though he completely soft peddles how much Obama is on their side despite their protestations and delusions of persecution. Be that as it may, we really are ruled by the worst people in the world.

A private memo

Apparently in response to learning of the Libor rate rigging, Tim Geithner, as President of the New York Federal Reserve Board, sent a private memo calling for changes to improve Libor’s “credibility and integrity.”

Before anyone jumps on Geithner for doing way too little in response to what is on its face a multi-trillion dollar scandal, let’s remember that private memos have been the appropriate and honored response for courageous patriots throughout American history:

  • Paul Revere has long been honored for sending a private memo to warn our Revolutionary forces that the British were coming;
  • President Eisenhower’s private memo on the growing power of the military industrial complex made quietly made clear of these risks, which were thus heeded throughout the 20th century;
  • Smokey the Bear’s repeated private memos have educated generations of wilderness-goers that only they can prevent forest fires.

Obviously Geithner should be in at least as high a regard as any of these American heroes for his private memo on Libor…

Regulatory failure

Marcy Wheeler spots a new survey of 500 American and British bankers which suggests that not only do a significant portion of them feel comfortable with the idea of acting illegally to be successful, but that they believe regulatory bodies such as the SEC and FINRA are incapable of deterring illegal behavior by bankers. Marcy notes:

The two details, together, are more important than in isolation. Not only do a significant proportion of finance execs admit they’d engage in wrongdoing if they wouldn’t get caught, but they also say the SEC and FINRA aren’t going to stop them.

No wonder the banksters keep crashing the economy.

This also gets at Bill Black’s repeated descriptions of culture within Wall Street banks as criminogenic.

Bankers believe that not only is it OK to break the law to make millions, but that there’s nothing regulators are going to do to stop them. Separate from the personal ethical failures and character flaws that this reveals in the banking community, it is clear that the regulatory regime governing the banking and financial sector is a complete joke.

Levitin’s immediate cramdown solution

Cramdown was once viewed as a major way to help homeowners who were deeply underwater keep their home by forcibly reducing the mortgage principal in court. This hasn’t been a considered solution for a number of years, in large part because banks deployed an effective “moral hazard” argument and legislators of both parties didn’t want to take action that risked banks’ existence.

Professor Adam Levitin has a new theory as to how cramdown could be achieved now, outside of the legislative process. Levitin writes:

For the past couple of years, I’ve been thinking that cramdown is dead as a policy solution. But I was thinking about cramdown as requiring legislation. It doesn’t. We could start doing it tomorrow. Under current bankruptcy law, a Chapter 13 plan may be confirmed only if secured creditors receive their collateral, receive the value of their collateral, or consent to the plan. The legislative proposals for cramdown all sought to enable involuntary modification of mortgages; cramdown was to be the stick that would encourage voluntary modifications.

But we could have voluntary cramdown under existing law and this could be done on a large scale staring immediately. Specifically, FHFA could require the GSEs to adopt a policy of consenting to Chapter 13 plans that have cramdown. (FHA/VA/Ginnie Mae could adopt a parallel policy for government insured loans.) Such a policy would address the two major objections that have been raised to principal reduction by the GSEs: the much dreaded (and overstated, imho) moral hazard problem and the second lien free-rider problem.

Levitin addresses how this solution would deal with moral hazard, as well as second liens, then asks, ” I can’t emphasize enough, all of this could be done tomorrow. So what’s Ed DeMarco’s excuse now? Shaun Donovan’s?”

Yves Smith takes a stab at answering Donovan’s excuse:

But it also happens that the Administration is well served having DeMarco in place as a house stooge. That way, the failure of Obama policies can be pinned on FHFA intransigence rather than a series of half-hearted remedies: HAMP, HARP, HAMP 2.0, and of course, the bank gimmie branded as a mortgage “settlement”. So Levitin’s clever approach is a reminder that there are lots of potential remedies to the housing mess. The problem is that any that solution that will do lasting good would reveal the near or actual insolvency of the four biggest US banks by forcing them to write down their second liens. Since that’s what both parties are determined to avoid, zombification, continued abuse of borrowers, and posturing will continue to be the order of the day.

The relevant portion here isn’t that DeMarco is useful for the Obama administration as a puppet master villain behind the housing crisis, but rather then reality that solutions which would fundamentally overturn the current banking system by revealing major US banks as insolvent will be rejected. Smith is right that this is a bipartisan position and one which is ensuring not only a continuously weak economy, but human suffering on a massive scale. And all of it is unnecessary.

Libor Manipulation Scandal

I had a long post written on the Libor manipulation scandal which is breaking, primarily in the UK, but WordPress ate it. For background, read Yves Smith at Naked Capitalism or Matt Taibbi at Rolling Stone. The good news is that this is starting to become a massive scandal in Britain, which could migrate across the pond over here.

If you’re wondering why banks colluding to manipulate Libor rates a few fractions of a percent is important, Duncan Black explains:

I don’t think it’s hyperbole to describe the LIBOR manipulation as theft at an almost unimaginable scale. One issue with too big banks, a too big banking system, and generally asleep regulators, is that the amount of money to be made by shifting any key rates by even a tiny unnoticeable amount is huge. A teensy percentage of a trillion dollars is still big money.

The costs to municipal governments in the US is likely in the hundreds of billions of dollars lost, if not more. Actual accountability for this crime would be lots of people going to jail and the banks responsible being levied fines so large as to bankrupt them, which would presage breaking up those banks and getting past Too Big To Hold Accountable. I won’t hold my breath that this happens, though.