Krugman Banishes Supply-Siders: Hooray?

Coming out swinging like a heavyweight prizefighter, Paul Krugman lands a series of devastating blows to the glass chins of all those Reagan-loving, Laffer-curving, supply side faith-healing conservative ideologues of the last three decades who elevated a bunch of carnival clown politicians to the heights of sainthood in order to squeeze them all into positions of power and control over America. Krugman proclaims the end of: "Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans."

But the time for rejoicing is not yet upon us as Krugman adds: "But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking."

To drive home his point, Krugman conjures up "a hypothetical bank" he decides to call "Gothamgroup, or Gotham for short." Krugman sets the terms of his example by saying that: "On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion." This establishes "Gotham" in Krugman's tale as "a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout."

Then Krugman questions the obvious: "Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?" Krugman dons his 'cap of bailout speculation' and comes up with the following possibility: "Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price."

Such an approach seems overly excessive, so Krugman places his right hand upon his Nobel and decries: "A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners."

Alas, Krugman laments: "The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first." Which leads Krugman to explain that: "Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?" Krugman returns to his fictitious bank and remarks: "In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer."

Krugman suggests that: "Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?"

Krugman cuts to the quick: "What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets."

Krugman is confounded and questions the governments actions: "Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks." This sort of Washingtonian-think approach hits Krugman squarely in the gut with a sharp blow reflective of the power of irrational thought and its incompatability with a useful and forward looking plan for economic recovery that forces a doubled over Krugman to unhappily admit: "Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job." Lets hope even Nobel winners can be drastically wrong; but from the smell emanating from Wall Street and the olfactory deficency that has overtaken Washington; things aren't looking so swell right now.

The Banks Need to Start Lending Out the Federal Bailout Money They're Sitting On

David M. Smick, author of "The World Is Curved: Hidden Dangers to the Global Economy" writing a column in the Washington Post reminisces on a conversation he once had with former Federal Reserve Bank Chairman, Alan Greenspan in the early 1990s in which Smick asked Greenspan "what he thought of the Reagan administration's economic program? Greenspan's reply surprised Smick: "Greenspan theorized that the paradigm shift that moved the 1980s toward greater optimism came largely from something unanticipated. In 1981, President Ronald Reagan fired striking air traffic controllers. This act could have instantly produced a nationwide transportation walkout with devastating economic consequences. Everyone held their breath. But the strike didn't happen. At the time, American businesses had been written off as competitive dinosaurs. But now they had the political green light to restructure and become lean and mean. Economic optimism became infectious." Smick uses this story to suggest that: "Barack Obama desperately needs his own paradigm-shifting spark." Smick observes that: "for the first time since the 1930s, we have entered a period of demand destruction. Increased fiscal stimulus is essential, yet new roads and bridges, more generous unemployment insurance, and tax credits hardly constitute "audacious" policymaking" because "American consumers are undergoing long-term retrenchment. They are forgoing spending in an effort to replenish the $10 trillion in collective household wealth they have lost. Consumption patterns may be returning to the lower levels of previous decades. That could mean that even a $1 trillion package may be far too small to do more than keep the contraction from worsening." Smick suggests: "... there's a larger point. Economies are driven by more than numbers -- the size of either stimulus spending or interest rate cuts. They are driven by psychology. Right now, psychologically speaking, Americans see the U.S. financial system and the larger global system as a bus racing down an icy mountain road toward a village -- with no one behind the wheel." Smick is prodding Obama to make "a big play. The place to begin is by confronting our banking system -- possibly even breaking up the financial behemoths considered "too big to fail." Our banks are sitting on mountains of capital. Taken together, their excess cash reserves normally amount to $3 billion to $7 billion. Astonishingly, those reserves today are estimated to exceed $800 billion, a portion of which is our bailout money. We have moved from reckless financial risk-taking to a situation even more dangerous: no financial risk-taking. Many suspect that this cash buildup indicates that the banks' off-balance-sheet debt exposure is far larger than acknowledged." Obama needs to knock the banks from their status as "noble institutions." Obama must make it crystal clear to the American public that: "Today's bankers have shown themselves to be devoid of leadership skills and, in some cases, common sense. Who, moments after receiving a bailout, would send their executives on a spa vacation? Or rush out to double their investment in a Chinese bank?" Obama has got to give the banks a hard and swift kick in the pants of their expensive business suits if he wants to gain the public's trust that he really cares about them and he must put some fear into the bankers to get moving and help the economy by using the power of the "bully pulpit ... to do with the bankers what JFK did with the steel executives. The bankers say they won't lend, or are imposing extraordinarily tough terms on borrowers, because 2009 will be a tough year. Urge them, at a minimum, to help reduce mortgage rates and increase refinancing. How? By using their Troubled Asset Relief Program bailout funds to buy Fannie Mae and Freddie Mac debt. There is no excuse for not doing so. The debt is now explicitly federally guaranteed." Obama cannot let: "The bankers say that government regulators are conflicted. Some demand further capital set-asides and less lending; others just the opposite. Given the collapse of the economy, we cannot afford this argument. It's time for a regulatory decision that encourages lending. Worry about bank capital standards after recovery begins." Obama must not allow Bankers to dictate their pace of lending. Loans are needed now and the banks have plenty of money in reserve to deny loans and stop demanding exorbitantly high interest rates on borrowers. When the banks blame their inactivity on "our financial architecture." And ask questions as to: "Who, globally, should decide how much financial leverage is too much vs. how much is dangerously inadequate? What is the future of securitization and can this process be standardized and made more transparent? Can a more reliable market for derivatives be established? Is there an alternative to today's hapless, conflicted credit rating agencies?" Obama must respond with decisive and specific answers that will put the onus on the banks for failing to provide loans that will help end the recession. Smick believes that: "Obama needs to lay out for the banks the potential political risk of the status quo." He has to implant "this scenario eight to 10 months from now" in the collective minds of the banking industry. Obama needs to make his point that if unemployment rises to 10% "with mountains of bankruptcies and the banks still not lending." there will be severe consequences imposed on the banks. Obama will allow the Democrat controlled Congress "to break up the banks -- and remove current management." Smick assesses the lead up to, and the current economic situation: "The financial crisis has entered a new phase. From August 2007 to August 2008, it was only a crisis. Since September, things have shifted to a full-blown panic. Nobody trusts anybody, or any institution. That is why Obama needs the big play, a policy with a psychological "wow" factor. He needs to shock the flat-lining patient. An expanded version of Washington's usual bag of fiscal tricks may not be enough." Smick's analysis and call to Obama to make "the big play." Should not go unheeded. The economy is in a precarious position at this time and only by convincing the banks to take action as a part of a well-planned strategy can Obama lead us out of the economic troubles that are causing our recession and to do so Obama needs to restore "economic optimism" again.

As the Recession Deepens the Need for Jobs! Jobs! Jobs! and an Economic Stimulus Gain Greater Importance Every Day

Writing in the New York Times, Bob Herbert comments on an increasingly worrisome problem for our nation: "Another month, another half-million Americans out of work. The ranks of the unemployed have now stretched beyond 11 million, and millions more are underemployed — working part time, for example, because they can’t find full-time jobs." And Mr. Herbert continues with some depressing statistics: "As bad as this sounds, the reality confronting working men and women is actually significantly worse. Some 2.6 million jobs have been lost since December 2007, and as the Economic Policy Institute tells us: “Just to keep up with the ever-expanding labor force, the economy would have needed to create 1.5 million jobs over the last 12 months. This means that the 2.6 million jobs lost leaves us over 4 million jobs short of what the economy required to provide employment for the American work force.” It's an obvious statement of fact; America needs to much better with job creation than just keeping up with the jobs that have been lost! The nation's listless job growth figures show unemployment at 7.2 percent. But those numbers, as bad as they are; just expose the tip of the iceberg when Herbert points out the even more depressing information that: "...more than one in every eight workers in America is jobless or underemployed. That’s 21 million people. And it’s not even counting the so-called discouraged workers, who have given up looking for a job." When it can be expected that jobs will generally increase in November and December in response to the holiday season, the statisticians tell us that over a million jobs were lost! And the trend of job loss will continue through 2009 unless something is done -- immediately! David Leonard tracks job information in Economix, one of the blogs published by The New York Times, which recently confirmed the nation's job crisis when Leonard wrote: “The share of all men ages 16 and over who are working is now at its lowest level since the government began keeping statistics in the 1940s. The share of women with jobs has fallen almost two percentage points from the peak it reached in 2000. At no other point in the past 50 years has the share of employed women fallen so much from its peak.” David Leonard gets it, and so does Bob Herbert! They're not overstating what the unemployment figures show; Herbert explains: "This is an emergency. There is one overriding mission for the incoming Obama administration when it comes to dealing with the economy, and that’s putting Americans back to work. Forget the G.O.P.’s mania for tax cuts. Forget, for the time being (but not forever), the ballooning budget deficits. Forget the feel-good but doomed-to-fail effort to play nice-nice with the rabid partisans of the right who were the ones most responsible for ruining the economy in the first place." Herbert understands the need for the federal government to take quick action: "Put the people back to work!" It's the nations top priority! Herbert recognizes: "To do that, Democrats will have to overcome their natural timidity. They will have to fend off the Republican opposition in Congress and set in motion an enormous surge of public spending aimed at creating jobs, jobs, jobs. Each new surge of job losses is an additional violent assault on the already profoundly damaged economy. Idle workers do not pay taxes and that ratchets up budget deficits at the federal, state and local levels. They draw down unemployment benefits and further strain the Medicaid rolls. In many cases, they are forced to turn to food stamps for their families’ daily bread. And, of course, they stop purchasing cars and homes, goods and services." And as for those Republican proposals to use stimulus rebate checks to put 'money directly into the hands of the American people.' That's nothing more than a trick directly out of the GOP playbook that is an overused 'feel good' ploy intended to simply spread around some instant gratification, that in reality will be spent by the poor to momentarily keep their heads above water; or saved by the more affluent who don't need it as badly for everyday expenses and will more than likely just drop it in their savings account or stock portfolio because they are more secure financially. Herbert elaborates on my point: "The economy will not be saved by putting a pitiful $500 into the hands of the average taxpayer. And it won’t be saved by gift-wrapped concessions to the G.O.P. in the form of business tax cuts that the president-elect is said to be considering. With credit tight, savings depleted, the stock market in the tank and home prices in a state of collapse, the only way to get real money into the hands of ordinary Americans (and thus back into the economy) is through employment. The way to truly stimulate the economy and save the jobs of anxiety-ridden workers who are still employed is to get the unemployed back to work as soon as possible." Hebert's call "to create jobs is through infrastructure investments (building and repairing roads, bridges, tunnels and water and sewer systems); and by investing in 21st-century clean energy initiatives, in public transportation systems, and in school construction; and by providing access to health care for the millions who don’t have it. In other words," Herbert argues: "by investing in the people and the enormous productive capacity of the United States." Someone else who gets it is "Senator Tom Harkin of Iowa" a self-professed liberal who "was blunt this week after he and other Senate Democrats met with Obama aides to discuss the president-elect’s stimulus package. “There is only one thing we have got to do in the stimulus, and that is how can we create jobs,” he said. Referring to Mr. Obama’s national economic adviser, Lawrence Summers, Mr. Harkin added: “I am a little concerned by the way that Mr. Summers and others are going at this in that, to me, it still looks like a little more of this trickle down. If we just put it in at the top, it’s going to trickle down.” Obama needs to be true to his campaign promise of restoring and creating jobs that flow upwards from the bottom rungs of the economy. 'Jobs from the bottom up' Obama liked to say while he campaigned. Obama must create lots of good paying jobs for the neediest Americans stuck at the bottom of the economy! Don't be fooled by the decades of propaganda that the Republicans have dished out since Reagan declared that "government is the problem!" Reagan is dead. And the self serving, deceitful propaganda that he spread about how the 'free market' can be counted on to bring prosperity to all Americans must be buried deep below the 'great communicator.' Don't believe any Republican, any Conservative or any other right wing ideologue that claims that government cannot create jobs because it only gets in the way of free enterprise. Right now, the government is the only entity with access to capital that can be used to create jobs. Americans need to remember that half of the $700 billion bailout that was appropriated for the Wall Street bailout that Bush and his cronies in the Treasury Department pushed down the American people's throats sits without any oversight rules or terms of accountability in bank vaults across the country paying executive bonuses and being used to send those same executives on pleasure trips to luxurious locations. And whats left of the $700 billion is being fought over by Bush officials and by Obama's economic team and Democrats in Congress who are hurriedly working around the clock to bring about the reallocation of the remaining $350 billion of financial aid that they intend to use to prevent foreclosures faced by homeowners; bring stability to the economy; and stimulate the credit markets to spur consumer and business loans. The importance of creating an abundance of good paying jobs that helps to rebuild the lower and middle classes while rebuilding the American economy cannot be overstated. Jobs! Jobs! Jobs! That's the only way that Obama can fulfill the promise of change he campaigned on. It's the only way we can fix our country's recession and prevent the coming of a second Great Depression. Meanwhile, David Cho and Lon Montgomery, staff writers for the Washington Post, report that: "Senior Bush administration officials, consulting with the Obama transition team, have prepared a plan to ask lawmakers for the second half of the $700 billion financial rescue package despite intense opposition in Congress, sources familiar with the discussions said." The remaining $350 billion would be used by the Bush Administration to complete funding of the administration's original plan that has garnered such intense opposition by the public and the Congress. The Washington Post reporters explain that: "Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress turns down the request, the president could veto the resolution and then the Treasury could proceed. The money would be blocked only if Congress overrides the veto, which would require a two-thirds majority in both chambers." Which many House members believes to exist. A noteworthy development of events would ensue if Bush decided to seek the funds which: "could create an unusual political scenario straddling the Bush and Obama administrations. If Congress were to vote down the measure, either President Bush or Obama would have to exercise a veto to get the money. "Obama officials would prefer that Bush exercise any veto rather than leave the new president with the unsavory task of rebuffing his fellow Democrats in Congress to advance a widely unpopular program, sources said. The White House has declined to say publicly whether Bush would be willing to issue the veto." The Bush administration explained that: "There have been discussions between the administration and the transition team on how to proceed should the president-elect determine that he would like President Bush to notify Congress on his behalf of the intent to use the remaining $350 billion so that it will be available early in the new administration," White House press secretary Dana Perino said. "No final decisions have been made." Cho and Montgomery report that: "Democratic Senate aides were notified in a meeting yesterday afternoon that the request could come as soon as this weekend and that a vote could be held as early as next week, said congressional sources, who spoke on the condition of anonymity because no decisions have been made." Without the existence of an agreed to plan by the incoming and outgoing administrations no decisions on the $350 billion can be easily executed and the monies represent an important means for aiding the economy. Congress is taking proactive steps: "Even as senior Bush and Obama officials consulted about how to access the rest of the money, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, unveiled a bill on Capitol Hill aimed at forcing the Treasury to use the money in accordance with lawmakers' wishes." And the Post reports that: "Many of the measure's provisions are being coordinated with Treasury Secretary nominee Timothy F. Geithner, who is planning to expand the scope of the rescue program well beyond the financial system to help ordinary consumers and homeowners, as well small businesses and municipalities. Frank said in a news conference yesterday that his bill might not be needed if the Obama administration promised to abide by its principles. "It doesn't have to be enacted. It would be helpful if it was," Frank said. "We have smart and cooperative people in this [incoming] administration, I'm willing to accept their word that they will act as if it were the law. Frank's bill would mandate that the Treasury allocate at least $40 billion for foreclosure prevention. Banks and other institutions that receive funds from the Troubled Asset Relief Program, or TARP, would be required to account for the use of the money. Clear limits on executive compensation would be imposed on all firms that take federal aid, including those that already received money." If Congressman Frank's bill passes, he hopes to convince fellow House members to release the TARP monies. Cho and Montgomery speculate that: "Without Frank's bill, House leaders are convinced that lawmakers would block release of additional funds to the Treasury, which is widely viewed by lawmakers as having rushed the bailout through Congress and then badly mismanaged the program." It has been common knowledge, explain the Post reporters, that: "A majority of lawmakers in both parties are strongly resistant to giving more money to continue the program, Democratic leaders say, adding that a request from either administration is likely to be rejected, making a veto almost unavoidable." And whether it is Bush, who, in his final days would find it easier to veto Frank's Democratic legislation; or if it is left to Obama to strike the veto against his own party, the results will hold extreme importance to the future course of the nation's economy.

Removing Stones from a Long Standing Stonewall

An editorial in the New York Times opines that: "True to its mania for secrecy, the Bush administration is leaving behind vast gaps in the most sensitive White House e-mail records, and with lawyers and public interest groups in hot pursuit of information that deserves to be part of the permanent historical record. E-mail messages that have gone suspiciously missing are estimated to number in the millions. These could illuminate some of the administration’s darker moments, including the lead-up to the Iraq war, when intelligence was distorted, the destruction of videotapes of C.I.A. torture interrogations, and the vindictive outing of the C.I.A. operative Valerie Plame Wilson." The missing gaps in "... history also includes improper business conducted by more than 50 White House appointees via e-mail at the Republican Party headquarters." Our first line of defense against such inappropriate attempts to hoodwink the American people that everything just went poof! are the historians and archivists who requested the emails some time ago and found their efforts unanswered and then told 'geez we lost everything.' Such juvenile excuses don't cut it with tech- savvy investigators. E-mails leave plenty of electronic traces behind on the many servers they pass through that are easily traceable and are then easy to reassemble into their original context. But it seems the Bushies were didn't really play by the rules; they never intended their e-mails to be seen by the public. They used private servers that belonged to the RNC; a highly inappropriate practice that openly suggests Bush's true intent to privatize his records. As the matter has played out and provided some interesting information has surfaced through the diligent work of "(h)istorians and archivists (who) are suing the administration. We should be grateful for their efforts. Entire days of e-mail records have turned up conveniently blank at the offices of President Bush and Vice President Dick Cheney." It is Cheney who continues the battle against the release of the rest of the e-mails; "he is fighting to the last the transfer of his records to the National Archives, as required by law. He recently argued in court that he “alone may determine what constitutes vice presidential records or personal records.” As in: L’etat c’est Dick" (The state it is Dick). Both Reagan and Clinton tried to avoid making some records public. "But the Bush team, from day one, has flouted the requirement to preserve a truthful record, ignoring repeated warnings from the National Archives. In government agencies, the public’s freedom-of-information rights have been maliciously hobbled." The National Archives also faces a significant challenge in the shear growth of electronic information since Clinton that is now associated with the Bush Administration. "It will take years to ingest before historians can truly get a handle on what is missing." Bush has covered his electronic tracks that suggest felonious intent. The Times concludes by expressing it's hope for change; that: "President-elect Barack Obama must quickly undo the damage by ordering that records be shielded from political interference, by repairing the freedom-of-information process, and by ending the abuse of the classification process to cloak the truths of the presidency."

Bush's Failed Health Care Legacy

A New York Times editorial praises President Bush for some worthy achievements in health care: " As we have argued in the past, Mr. Bush deserves high praise for significantly increasing American support for the global effort to control AIDS... there is little doubt that the president has played a key role in providing drug treatments or supportive care to millions of patients who would otherwise have gone untended." The Times editorial points out that: "It is a remarkable record for the leader of a party that had been reluctant in the Reagan era to deal with a disease whose victims at the time in this country were primarily gay men and injection drug users. Equally remarkable was Mr. Bush’s decision to push through a costly new prescription drug benefit under the Medicare program for older Americans despite stout opposition in his party to government-run health care. It was the largest expansion of Medicare in decades and it dragged the program, at long last, into the modern medical era, in which drugs are a cornerstone of treatment." The Times points out their objections "to many features of the program — the refusal to allow the government to negotiate with manufacturers for lower prices, shortfalls in providing subsidies to low-income Americans, a failure to protect many patients from high out-of-pocket costs. Still, it has achieved its main goal by reducing the percentage of older Americans who lack drug coverage, from 33 percent before the program started to only 8 percent in 2006.Less heralded was the Bush administration’s willingness to grant Massachusetts a Medicaid waiver to redeploy federal funds to help start a universal health insurance program... Another substantial health achievement came in the form of bricks and mortar, through the president’s vigorous support of community health clinics." These achievements, the Times notes do not absolve the Bush Administration for it's most glaring failures in health care, including: " its failure to address the problem of millions of uninsured Americans or stem the rising costs of health care, its refusal to expand eligibility for the State Children’s Health Insurance Program, its devious maneuvers to cut Medicaid spending, its support of unjustified subsidies for private health plans, to name a few." Regardless of the Times' list of Bush achievements, I believe that there is no doubt that President Bush deserves a low grade for his overall performance in matters of health care; his most glaring omission has been his failure to provide health care insurance to the millions of American's who must face each day of their lives without adequate and affordable heath care protection - a trip to the emergency room is not the way to solve our national health care shortfall. President-elect Obama has been left with many tasks that President Bush failed to accomplish. I hope that Obama's efforts will prove to be more productive than Bush's failures to act on issues of major significance regarding health care.