A New Way Forward – Restore the Economy in the Public's Interest

Summers Is Going But What Is Coming? Has The Media Moved On?

As the November election approaches, the White House seems to be ending its Rip Van Winkle-like slumber and has begun crawling out of the bubble of its own making. Many fear it’s a bit late.

The shakeup of President Obama’s economic team is long overdue. As Larry Summers slithers back to Harvard to save his tenure and write his book, he is likely to be replaced by exactly the wrong kind of person—a business executive, appointed to try to appease the Repugs and the Right. (Summers was paid $586,996-a-year at Hahvard and picks up all kinds of consulting deals on the side from Wall Street.)

This maneuver won’t work of course because nothing Obama does will ever please them because they need him as their piñata, and a symbol of failure. He claims to see that but just can’t seem to get his appeasement gene in check. Notes the Naked Capitalism blog:

“As much as some will be pleased to see Larry gone (he was a leading advocate of bank-friendly policies), his replacement is certain not to represent a change in philosophy…. he has made the cardinal mistake of trying to please everyone and has succeeded in having no one happy with his policies.

Journalist Robert Scheer hopes “Summers will have time to reflect on the dismal arc of his split tenure in government service. Thanks to the banking debacle he did so much to initiate back in the Clinton years, the nation now has more people living in poverty, 43.6 million of them, than ever in our history. Americans have witnessed the disappearance of $11 trillion of their net worth, $1.5 trillion in the second quarter; the debt has risen alarmingly; unemployment is stuck at 9.6 percent; and trillions of dollars in toxic pools of housing stock are still held by the banks to be thrown into the housing market fire sale anytime home prices promise to edge upward. Behold what brilliance has wrought.”

Financial journalist Michael M. Thomas believes that Summers like a gunslinger hired to clean up a town did what he was hired to do arguing, “Summers is leaving because he made sure real reform was discussed—but not accomplished.”

“Larry Summers was tasked with making sure the kind of backlash that in 1933 unleashed Ferdinand Pecora on Wall Street didn’t happen in 2009. I think Larry Summers was tasked with marginalizing Paul Volcker, who could thus serve the new administration as moral window-dressing without actually causing trouble. I think it was understood from the outset that any meaningful economics program must involve taking Wall Street to the woodshed, and that this must not be allowed to happen.”

Bob Woodward’s book on Obama focuses on an internal war over policy for the Afghan war. That may be mild compared to the revelations to come on the debates over what to do about the economy. (Woodward offers one telling detail about Obama’s approach describing how he laid out his plan in the form of a financial terms sheet used on Wall Street.)

To “balance” his appointment of Elizabeth Warren, the President has nominated Jack Lews to head the Office of Management and Budget. Bernie Sanders says he will not support him because “I found too many echoes of the failed policies of the past in his responses to my questions on trade policy, Social Security, deregulation of banks and other issues.”

Even as the rats jump ship. The National Bureau of Economic Research which took a year to admit that the country was in recession now says the Recession is over, a conclusion that is not widely shared especially because the structural, systemic and political problems that caused the crisis have not been remedied. The respected Chilean Economist Manfred Max-Neef says the US economy is ‘underdeveloping.” Others still fear a total collapse.

But now that recovery has been pronounced—even if there has been no job creation—the media has a good excuse to move off the subject, to assume the best, and avoid investigating how the crisis happened, who benefited and who lost and is still losing,

The issues I have been raising about the crimes of Wall Street have been brushed under the rug, even by filmmaker Oliver Stone from whom one might have expected a deeper critique in his new Wall Street Film, “Money Never Sleeps.”

The Village Voice who you would expect would welcome it says Stone lets the “bad Guys off the hook?’

“If barely prosecuted, the real players in our last crash face a long pop-culture pillorying. That is not, however, how Stone works; regarding power, his conclusions are best summed up by the hippie chick at the “Lincoln Memorial in Nixon: “You can’t stop it, can you? Even if you wanted to. It’s not you. It’s the system.” Floating off on a faux-naïve happy ending this time, one takes the lesson that there are no villains—or that villains are all there are.”

So a generic indictment of “the system” substitutes for any exploration of the way that system actually worked, not just to make greed good but to hurt millions of people worldwide who lost jobs, homes and hope, plunging millions worldwide and here at home into deepening poverty.

I personally gave Stone a copy of my investigative film Plunder The Crime of our Time months ago, but he seems to have brushed it off focusing instead on a miasma of slick Hollywood production values. (Disclosure: I made a documentary, Beyond JFK for Oliver’s company and he was in it, that was back in 1992.)

I have been getting some visibility for my DVD and companion book The Crime of our Time but not in mainstream media. Earlier this week, at a book launch, A Tea Party activist showed up for my spiel and took me to task loudly for being dismissive of her movement. But after we talked, I was pleased that she became open to my concerns and even, get this praised me as “fair and balanced.” I was surprised. You can hear some of our exchanges and a storm of debate on Between The Lines radio that I was also broadcasting over during my talk.

The Tea Party people, by and large, don’t seem very angry with Wall Street. And as for the Republicans, Huff Post reports, “The Republican Party’s 21-page blueprint, “Pledge to America,” was put together with oversight by a House staffer who, up till April 2010, served as a lobbyist for some of the nation’s most powerful oil, pharmaceutical, and insurance companies, including AIG.”

Short of a major deepening of the crisis in the next few weeks, the election will soon constitute all the news all the time.

While voters are said to be angriest about the economy and Obama’s failures to stem the tide, the media will not devote much time or energy to educating the public about the deeper issues. Not when so many pundits and election insiders are fighting for face time on TV. Political blather and polls are back.  Economic crime is downplayed.

Unfortunately, one of the most important stories of our time is about to be buried again.

News Dissector Danny Schechter made Plunder The Crime Or Our Time and wrote the companion book The Crime of our Time. See Plunderthecrimeofourtime.com.  Comments to dissector@mediachannel.org
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Cross-posted from News Dissector: Summers Is Going But What Is Coming? Has The Media Moved On?

Man is naturally a political animal…There is then in all persons a natural impetus to associate with each other in this manner, and he who first founded civil society was the cause of the greatest good; for as by the completion of it man is the most excellent of all living beings, without law and justice he would be the worst of all, for nothing is so difficult to subdue as injustice in arms: but these arms man is born with, namely, prudence and valour, which he may apply to the most opposite purposes, for he who abuses them will be the most wicked, the most cruel, the most lustful, and most gluttonous being imaginable; for justice is a political virtue, by the rules of it the state is regulated, and these rules are the criterion of what is right. — Aristotle, Politics

So, Australia had an election with no conclusion. The same thing happened in Britain a couple months ago, Germany and France in the last few years. In November, we’ll see the same thing in the US with the Reps taking control of the Congress, creating true stagnation, not the stagnation dressed as reform we’ve had over the last 18 months.

We are witnessing the death of industrial politics. One would be tempted to say Western politics is a dead medium, but that would be ahistorical. However, it would be completely accurate to say Western politics is insolvent, incapable at this point of meeting the challenges of the times, stuck in the clothes knitted for it two-centuries ago — representative government atop an industrial infrastructure. In fact, it is only in industrializing areas of the globe that politics seems, wrongly, to have any vibrancy, for it is in these areas industrial politics can incorrectly be construed as vital.

In the industrial West, politics has lost life. We have a politics of the status quo, upheld by “both” sides of the political spectrum. Western politics is controlled by large corporate interests, supported in the halls of government by a caste of political eunuchs. The cultural left and cultural right, indoctrinated in the same industrial pabulums, fight

over the disbursements of diminishing returns based on various slave identities, the only real disagreement by the two sides is how active a role the government should play in societal looting.

Presently, events are the only real politics in the West. They act as a growing violent tide, each successive wave pulling out more sand, undermining the foundation. In reaction, our politics futilely attempts to replace the sand. This process can continue for a long time, but without a revitalization of our politics, a rethinking of the foundations of industrial society, politics will become increasingly reactionary.

We are political animals, we need a healthy politics.

John Hussman has a nice piece on the recent testimony of Ben Bernanke and the Fed’s moves over the last couple years. It’s important to understand what’s happened here. Just as important, we need to understand most of the mortgage drek wasn’t put on the Fed’s books, but transferred to Fannie and Freddie. There’s too much garbage money out there and it needs to be dealt with, bondholders of garbage need to take a haircut. How much? Well let’s start with what the administration did with GM workers — 50%.

The nut of Hussman’s piece:

Last week, Ben Bernanke appeared before Congress for his regular Humphrey-Hawkins testimony. For most of that testimony, it fascinated me that every time the Bernanke said that the Fed has taken no losses on its operations, there was absolutely no remark that the reason the Fed has not lost money is that the Treasury, directly (Fannie, Freddie) or indirectly (AIG) has made the liabilities held by the Fed whole.

From that perspective, the critical part of Bernanke’s testimony was the following exchange with New Jersey Congressman Scott Garrett of the House Financial Services Committee. Importantly, Bernanke concedes that by placing two-thirds of its balance sheet into the liabilities of insolvent agencies (Fannie Mae and Freddie Mac), now under conservatorship, the Fed is essentially relying on Congress to make these institutions whole at taxpayer expense. The Fed has put the public on the hook to bail out the GSEs.

SCOTT GARRETT: You bought over a trillion dollars of GSE debt, and to that point, under normal circumstances, on the Fed’s balance sheet what you have on there are Treasuries, or if you had anything else on there, I assume you would have a repurchase agreement for those securities on your balance sheet. Now of course around two-thirds of that are in GSE debt.

BEN BERNANKE: Correct.

GARRETT: So right now, those are guaranteed – whether they’re sovereign debt or not, we don’t know – but they’re guaranteed by the U.S. government. But they’re only guaranteed to when? 2012, right? After that, Congress may in its wisdom make another decision, and at that point in time, you may be holding on your balance sheet – two thirds of your balance sheet – something that is not guaranteed by the Federal government. First of all, you don’t have a … do you have a repurchase agreement on those with anyone? No.

BERNANKE: I don’t know what you mean by a repurchase agreement. We own those securities.

GARRETT: You own those securities. Right. So there is no repurchase agreement outside to buy them back. You own them.

BERNANKE: Right.

GARRETT: So after 2012, if they’re no longer guaranteed, is it fair to say that you may at that point in time actually engage in fiscal policy, because you basically are creating money at that time? And I know that you’d agree that it would be an unconstitutional role for the Fed to engage in fiscal policy – so where will you be at 2012 if they had to take a haircut on those because they’re no longer guaranteed?

BERNANKE: Well, first from the government’s perspective, I, uh, such an act would, uh, there would, the Federal Reserve would lose money which the Treasury would gain. There would be no overall change to the position of the U.S. government. Secondly, the Federal Reserve act explicitly gives..

GARRETT: How would we be gaining? How is the Treasury gaining?

BERNANKE: Well, if there’s a bad mortgage and the Treasury.. it requires $10 to make it good, if the Treasury refuses to viagra sales do that then the Fed loses $10, so one way or another the government’s going to lose $10. But I would just say two things, one is that I think, uh…

GARRETT: But if you didn’t purchase them in the first place, it would just be a total – then what would have occurred? There would not have been the creation of that $10. Now that you’ve purchased them, and in essence if we don’t back them up, then you will have created that additional $10.

BERNANKE: Well, I hope that doesn’t happen, because I think it’s very important for financial stability and confidence that we, that we guarantee…

GARRETT: Let’s play out that hypothetical that it does happen.

BERNANKE: Well, then the Fed would lose money there. But let me just point out that the Federal Reserve Act, that we did not invoke any emergency or unusual powers to buy those agencies. It is explicitly in the Federal Reserve Act that we can buy Treasuries or agency securities and so we did not do anything unusual there.

GARRETT: In what status were they when you bought them? Were they in conservatorship at that point?

BERNANKE: Um, yes.

GARRETT: Is it normal practice for the Fed to buy agency securities when they’re in conservatorship? Was that ever done before?

BERNANKE: It’s never been in conservatorship before.

GARRETT: Well, there you go. So the normal practice is not what was followed here. It just seems to me that we may have gone down a different road than we’ve ever gone down in U.S. history, where the Federal Reserve has engaged in buying a security, it’s not Treasury, it’s not guaranteed by the full faith and credit of the United States for its lifetime, nor is there any repurchase agreement from any other entity that you purchased – that you have a trade with an agreement with – and that the Fed in essence could have created money if the government does not guarantee them. At least, that could be the situation we could find ourselves in 2012.

It’s important to understand that historically, the Fed has never actually “created money” out of thin air. What it has always done is purchase Treasury debt, paying for that debt by creating “Federal Reserve Notes” (see the top of your dollar bill). When it has purchased other types of securities, it has historically done so using “repurchase agreements.” These enable the Fed to sell those securities back at a known price, even if the security itself was to default. By restricting the vast majority of its purchases to U.S. Treasury securities, the Fed has always operated under a budget constraint: Congress has always had the sole, Constitutionally enumerated power to authorize the spending that creates government liabilities, and the Fed has merely affected whether those liabilities were held by the public in the form of Treasury debt or in the form of Federal Reserve Notes (money).

For example, if Congress votes on a billion dollars of spending, and the Treasury issues debt to finance this spending, the Fed might buy that billion dollars of Treasury debt and create a billion dollars of currency to pay for it. But notice that from the standpoint of the public, the end result is still a billion dollars of government liabilities, that was explicitly authorized by Congress. The Fed was never involved in spending decisions, which is fiscal policy.

Contrast this with what the Fed has done in this instance. It has taken its balance sheet up from about $800 billion two years ago (almost exclusively in Treasury securities) to over $2 trillion today, mostly in Fannie Mae and Freddie Mac liabilities. The government’s backing of Fannie and Freddie debt was always implicit – they do not have the full faith and credit of the U.S. for their full maturity. If Congress chooses to restructure that debt after 2012, the Federal Reserve will have created money without an offsetting asset of equal value on its balance sheet. It will have spent money out of thin air to pay off the holders of Fannie and Freddie securities. This would constitute a fiscal policy decision that was not actually voted on by elected representatives in Congress.

Cross-posted from Archein: on money and the fed