This article is written by our guest blogger and ANWF member, Robert Roth
The Three Stooges – Moe, Larry and Curly Joe – gave a comic definition to the term “stooge.” But one of the dictionary definitions of “stooge” is “one who plays a subordinate or compliant role to a principal” – “principal” meaning one who calls the shots. “Puppet” is said to mean the same thing. The dictionary I’m looking at even gives, to illustrate the definition of “stooging,” “congressmen who stooge for the oil and mineral interests.” So how apt is the use of the term for Ben, Larry and Curly Tim – Federal Reserve Chair Ben Bernanke, Larry Summers, director of the National Economic Council, the White House office that coördinates economic policy in the Obama Administration, and Treasury Secretary Tim Geithner?
In a general way, all three are stooges for Wall Street, in that their reaction to the near-collapse of the financial system that nearly brought us a Second Great Depression – and still could, in my view – has been to try to revive the institutions and practices that gave rise to the problem in the first place. In short, they have been representing financial interests, rather than Main Street. More specifically, Ben Bernanke supported and now continues the low-interest policies that helped inflate the Bubble Economy, enabled widespread fraud by failing to exercise the Fed’s regulatory powers while the Bubble was inflating, and has arranged trillions in backing for the credit markets, making more billions for Wall Street at the expense of the rest of us. And it seems entirely fair to give Larry Summers, as the chief advisor to the White House on economic policy, an ample helping of blame for Obama’s failure to fight for a more substantial jobs program. And there is evidence Tim Geithner arranged for a secret bailout of AIG when he was chairman of the New York Fed. Others have made the case in more detail – see, for example, Chris Hedges, “Wall Street Will Be Back For More” and the other sources cited below – but I think it’s clear the terms are apt, and a useful way to draw attention to the need for President Obama not only to do an about-face on the subject of financial regulatory reform, but to clean the White House of the influence of those who have until now served as stooges for Wall Street while occupying positions of public authority and trust. And a good start would be firing Ben, Larry and Curly Tim.
Perhaps in desperation after the Democrats’ loss in Massachusetts, President Obama has finally come out swinging at Wall Street. Previous “reform” efforts were a smokescreen, but there is potential for real change in the latest proposals. Those should be evaluated against our own program for fundamental restructuring of the financial system and the economy, and as their impact is complex and they will surely change, I don’t propose to evaluate them fully here. Suffice it to say that in adopting the proposals of former Fed Chief Paul Volcker, Obama may have taken a page directly out of the playbook outlined by Simon Johnson a few days previous. But as the dust flies and may not settle for some time, there are some things we can and should do to impact the situation. This article outlines some of those first steps and provides a toolkit of information resources for following the action.
First, Obama should conduct a clean sweep, and divest his administration of those who produced the near collapse of the financial system and the economy and have thus far been working to preserve the pre-crisis status quo. That means dumping the Three Stooges who laid so much of the groundwork for the recent near collapse of the economy and have worked ever since to preserve in its current form the financial system that caused it: Amid the talk of possibly replacing Bernanke at the Fed, Summers’ name has been floated as an alternative. That would be a change we could believe in – from the frying pan to the fire, or vice versa, take your pick. Instead, progressive forces should mobilize behind figures like FDIC Chair Sheila Bair or economists like Joseph Steiglitz or James K. Galbraith. And the few Senators who have thus far announced opposition to Bernanke’s reappointment – Oregon’s Jeff Merkley, Wisconsin’s Russ Feingold, and California’s Barbara Boxer – should hear from us in support, and the rest should hear from us in protest until they change their tune.
Second, something constructive should come out of the hearings of the Financial Crisis Inquiry Commission. Thus far, we’ve seen softball questions lobbed at the giants of the finance industry on heavily reported Day One, while the media all but ignored the second day, at which Sheila Bair and Illinois Attorney General Lisa Madigan, among others, systematically described the ways in which the Fed helped enable the rampant fraud that led to the crisis and proposed serious steps to avoid a repetition.
Third, we should understand generally Wall Street’s program at this point – so we can oppose it – and devise and promote specific steps toward genuine and effective reform. Ms. Bair’s testimony before the Commission is a wonderful resource for this purpose, and in reviewing it, we should also recognize that the People have a genuine champion in Sheila Bair. Ms. Bair deserves our thanks, praise and support for taking on the – literally – Old Boys network who have empowered Wall Street’s fraud machine and are working to preserve it.
I published last May a comprehensive assessment of the financial and economic crisis, and a set of proposals for restructuring the economy. Nothing in my assessment has changed, and I suggest it to your attention as a starting point if you want one. Fast-forwarding to the present, possibly the best short resource I’m aware of on the background to the current situation and how it is evolving is Michael Hudson’s “The Revelations of Sheila Bair: Wall Street’s Power Grab (CounterPunch, January 19, 2010).
There are some straightforward proposals, already on our table if not Wall Street’s, that we should keep sight of and continue to mobilize behind. Wall Street’s program provides a sort of mirror image of what they are and ought to be. First, the Old Boys want to be allowed to continue to gamble with other people’s money and the financial system as a whole, and they want the financial sector to stay as it is even though it is already too big a part of the overall economy and is full of institutions whose practices continue to pose systemic risk. Second, they want the proposed new Consumer Financial Protection Agency to be dumped. Third, they want to avoid any structural reforms like reenactment of Glass-Steagall. And of course, they want their own Three Stooges – Ben, Larry and Curly Tim – to remain in charge at the Fed, the Treasury, and the White House. So if they lost Bernanke at the Fed, for example, they’d want to replace him with Larry Summers. Flip those coins and we have the beginnings of our own program.
First, the big banks should be broken up. Too big to fail means too big to be allowed to exist. However, the financial system has evolved so that there are now institutions other than banks whose failure can pose systemic threats. That’s one reason Obama’s proposals are more complex than the old Glass-Steagall firewall between commercial and investment banking. There should be limits on the size of financial institutions. But just as importantly, any institution engaged in financial activity should be required to hold sufficient reserves to cover its deposits if it takes them, and its bets if it makes them. Simon Johnson recommends tripling capital requirements so banks hold at least 20-25 percent of their assets in core capital. Peter Boone and Simon Johnson, “A bank levy will not stop the doomsday cycle,” Financial Times, January 19, 2010. If implemented, such a requirement would make it more expensive for financial entities to expand beyond their usefulness or to pose systemic risk by making bets they couldn’t cover. Of course, such a rule would have to be vigorously enforced, and that would require a regulator with integrity as well as authority.
Another key proposal is creation of a Consumer Financial Protection Agency. On the need for it, see “Elizabeth Warren: Pass A Consumer Protection Agency Or Forget Regulatory Reform,” and Michael Hudson’s article including his report of Sheila Bair’s testimony. In the meantime, Connecticut Senator Chris Dodd, who has floated the idea of dumping such an entity or burying it in another agency in order to obtain, excuse the expression, bipartisan support, should hear from his constituents by all available means.
And the financial sector itself should be reduced in size to the point where it can serve the needs of the economy without putting it at risk. As Ms. Bair pointed out, “our financial sector has grown disproportionately in relation to the rest of our economy,” from “less than 15 percent of total US corporate profits in the 1950s and 1960s…to 25 percent in the 199s and 34 percent in the most recent decade through 2008.” While financial services are “essential to our modern economy, the excesses of the last decade” represent “a costly diversion of resources from other sectors of the economy.” In other words, what is spent on financial services is not available for investment in plant, equipment, research and development, training, or the production of goods, services and jobs outside the financial sector.
As the battles that have now been joined proceed, I’d suggest, among many excellent resources, those listed below, and the ongoing commentary of Simon Johnson, Michael Hudson, Mike Whitney (often posted on the website of CounterPunch, and others whose work appears here and on the home page of Progressive Democrats of America).
Robert Roth is a retired public interest lawyer who prosecuted marketplace fraud for the Attorneys General of New York and Oregon.
Other valuable reads from Robert:
Dan Geldon, http://baselinescenario.com/2010/01/20/how-supposed-free-market-theorists-destroyed-free-market-theory/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29″>“How Supposed Free-Market Theorists Destroyed Free-Market Theory”
For the worst of all conceivable systems(apart from the abuses of a fiat money which has lost all its
anchors) is one in which the Banking system fails to correct periodic divergences, first in one direction and then in the other, between investment and saving. – JM Keynes
The American economy has undergone a dramatic shift over the past three decades, call it the financialization of the US economy. This has been disastrous for the overall political economy, centralizing power and gain in a very small segment of society. Wall Street gained greater control over every aspect of Americans’ daily lives by indebting the nation. A free people are never an indebted people. The financialization process has mutated the monetary system, devaluing the dollar both domestically and internationally. It raises great questions about the monetary system for the future.
The financialization of the American economy was birthed in the 1980s, gained speed in the 90s, and reached hyper-velocity in the first decade of the 21st century. If one wanted to pick a somewhat arbitrary, though nonetheless significant starting point, it would in 1980, the Congress removing usury laws controlling interest rates. The removal of the usury laws gave a green light to the financial sector that more money could be made on money. This led to the promotion of debt and the infamous financial innovations initiated with the destruction of financial regulation in place since the 1930s New Deal.
Financialization is a money game, adding little value, and I would argue more accurately, no value to the real economy. It distorts the accounting of real value. Most importantly, it is simply a private tax on the rest of society for the profit of a small oligarchy. The true costs remain hidden until the system is inevitably forced into crisis.
The financialization numbers are simply staggering. In 1950, manufacturing represented 30% of the US economy, today it is down to 8%. At the same time, the financial sector rose from 10% of the economy to 20%. Even more shocking is corporate profits for the entire financial sector, including insurance and real estate, went from 10% of the economy to 45%, while manufacturing profits dropped to 8%.(Kevin Phillip, Bad Money)
Financialization is the creation of debt, and boy did Wall Street create debt! As wages stagnated and were replaced by debt, US household indebtedness rose from $2 trillion dollars in 1984 to $13 trillion twenty years later. The last leg of financializaton was the housing market. Mortgage loans went from 30% of bank loans in 1985 to 65% in 2005.
The creation of debt is the creation of money. With so much money flooding the system, Wall Street, being the clever folks they are, grabbed the opportunity to make more money on money using “financial innovation”. Two of the greatest of these innovations are securititaztion and derivatives. Securitization is taking existing debt and piling it into new debt “products”, so it can be sold again. The other great innovation was derivatives, which are simply bets placed on all existing debt and financial transactions. You don’t need a stake in the debt or transaction to place a bet, a true casino, where the house – Wall Street – makes money on each bet.
The FDIC reports annual mortgage securitization went from $110 billion in 1985 to $2.7 trillion in 2005. Meanwhile, the Bank for International Settlements states in 2008, derivatives represented $684 trillion in positions, on a global economy of $60 trillion. In its quarter-century of exponential growth, debt, depending on which sectors you choose, expanded by factors of anywhere from the tens to hundreds. While the US economy grew only 2.5 times larger, though this is a misleading figure as it accounts much, though not all of the financial bubble. What financialization has created is a massive money bubble on top of the real economy, which for various reasons doesn’t filter completely into the real economy. As Keynes writes,
But the volume of trading in financial instruments, i.e. the activity of financial business, is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption-goods.
Total debt in the US is somewhere over $50 trillion, which means compared to fifty years ago where each 1.5 dollar of debt represented a dollar of economic activity, it is now close to five dollars of debt for each dollar of activity. This whole process of greater indebtedness is a burden for the vast majority of the economy. Its massive profits are only realized by a few. Today, six institutions account for over 60% of the financial industry, which taken together with the growth of the financialization means a concentration of power unprecedented in American history.
The question is what does this mean for money. If we used Keynes’ arbitrary categories, we see a massive rise in Money of Account, which greatly distorts General Purchasing Power to a degree not yet quite understood. It has debased the monetary system as any sort of standard by which general economic activity can be accounted and valued. The easiest example of this is housing prices, but this butcher accounting and mis-valuation are both ubiquitous across the economy.
Now, the off-book, that is the true accounting of money has been in part brought onto the books due to the panic of the financial elite in the fall of 2008. Through the agencies of the Fed, Treasury, and Fannie Freddie, trillions of dollars of private debt has been transferred to the public books. In addition to this, the public sector has also created new debt, adding to the overall debt burden. Yet, there remains a tremendous amount of worthless debt, unaccounted losses, or dead money, on the banks books, government books and across the entire economy, which will hinder and distort future economic activity. We now have a massive debt load, continuing to devalue the monetary standard and as the dollar is the de facto global monetary standard, the distortion of economic value, that is, the monetary bubble has now spread across the globe.
As Unemployment Festers, A New Economic Strategy Team Needed
Danny Schechter is the author of “The Crime Of Our Time”
When a pitcher gets tired, starts throwing walks or being hit, most attentive managers take him out of the game. Lately, when policies fail, as in the case of the security system that didn’t work to spot the alleged Christmas bomber (who just pled “not guilty”), the President starts acting tough with bluster about the buck stopping here and orders to straighten out a failed system.
But when tens of thousands of workers, once again, lose their jobs, the people responsible get winked at, not wanked. The President is contrite, his rhetoric subdued, even as the recovery he keeps talking about goes south.
Yes, there needs to be a cabinet shake-up. It’s time to yank tiny Tim Geithner from the game along with Larry Summers. Their pro-bank, pro-Wall Street policies are failing. Isn’t it obvious?
The Establishment will lean towards a Republican to replace him like FDIC Chairman Sheila Bear who has proven to be far more competent and outspoken than her counterparts.
Geithner is a Trilateralist toadie, a servant and stalking horse for the people responsible for the meltdown. It’s time to say “sayonara,” and appoint someone with the people’s interest at heart. There is no shortage of capable and committed Democratic economists that can replace him. How about Elizabeth Warren or Joe Stiglitz or Brooksley Born or Simon Johnson or even, for op-ed’s sake, Paul Krugman?
Even Wall Streeters know Geithner is a dead man walking. Bruce Krasting, a foreign exchange and derivatives veteran writes on Naked Capitalism: “Tim Geithner has outlived his usefulness. He is too connected to the bailouts of 08. Bear, Lehman, AIG, TARP and even QE are all part of his legacy. That makes Tim a lightening rod. Too many Americans hate that part of our history.
“I don’t think the current flap relating to the deliberate ‘non-disclosure’ of information relating to AIG is that big a deal. When the full history of this period is finally told (it will take awhile yet) this particular transgression of Mr. Geithner will look small by comparison. The things that we do not yet know about the that ‘agreed to’ during the ‘crisis period’ are going to cause us to roll our eyes and bow our heads when all is said and done.”
Now, there will be hearings to see what Tim knew and when he forgot he knew it. MarketWatch says he is “ankle deep in the AIG quicksand.” A deceptive defense is being crafted, as Bloomberg reports.
“Timothy Geithner, the former Federal Reserve Bank of New York president, wasn’t aware of efforts to limit American International Group Inc.’s bailout disclosures because the regulator’s top lawyer didn’t think the issue merited his attention, according to a letter sent to lawmakers.
“Matters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner,” Thomas Baxter, general counsel of the New York Fed, said today in a letter to Representative Darrell Issa, a California Republican. “In my judgment as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president.”
Why is the media so quiet on the Geithner front? Cenk Uygur wrote about the way rightwing channels are giving him a pass:
“If it was anyone else that had screwed up one tenth of what Geithner has, it would be running on a 24/7 loop on Fox News. Geithner gave away over $62 billion to the top banks in the country in secret, tried to cover it up and at the very least overpaid these banks by $13 billion. And that’s just the latest in a series of scandals, with all the same theme – Geithner gives away taxpayer money to the richest (and most culpable) guys in the country. Ah, there it is.
If the right-wing goes after Geithner, then they’re going after the banks and the billions in taxpayer money they received. The right-wing media in this country have no interest in attacking big money, big corporations or big banks. So, while they’ll talk about how Janet Napolitano should be fired for misspeaking for ten straight days, Geithner is remarkably bullet-proof. Why? Because they actually love what he’s doing.”
And now the White House has joined the cover-up. Read this exchange between CNN’s Ed Henry and Obama news flack Robert Gibbs, and weep:
“Q: Robert, Does the White House believe that Secretary Geithner should testify on the Hill, turn over any documents he has, to sort of clear this up?
MR. GIBBS: Ed, I’d point you to the Treasury Department. I’m sure you’ve already talked to them. Secretary Geithner was not involved in any of these emails. These decisions did not rise to his level at the Fed. These are emails and decisions made by officials at an independent regulatory agency –
Q: But how do you know that he wasn’t involved? He was the leader of the New York Fed.
MR. GIBBS: Right, but he wasn’t on the emails that have been talked about and wasn’t party to the decision that was being made.
Q: Well, Republican Congressman Issa says there are probably thousands of more emails and he may not be on some that some people have looked at. In the interest of transparency would the White House want more — I mean, you run AIG now, essentially –
MR. GIBBS: I would point you to the Department of Treasury, which I think will tell you that –
Q: But what does the White House believe?
MR. GIBBS: I just gave you what the White House believes.
What should we believe? Perhaps another investigation that gets underway this week may offer some answers. Its lacks the power and zeal of the independent Pecora Commission appointed by FDR to probe the causes of the Crash of ’29, but it will at least raise some questions. It is, unfortunately, modeled on the 911 Commission which was subverted by the Bush Administration and ended up raising more questions than it answered.
Reports the New York Times:
“The commission, comprising six Democrats and four Republicans, has summoned four heads of big banks to testify on Wednesday at the panel’s first substantive hearing: Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.
“There is a deep hunger out there, on behalf of the American people, to understand what happened,” the commission’s chairman, Phil Angelides, said in an interview on Friday. “It arises out of anger, confusion and anxiety about their own future. This will be, in a real sense, the only public forum for examination of this crisis.”
The Times also reports that the banks and their lobbying arms have been working overtime to prepare testimony that will defect all the blame away from them. Will the commission and the media challenge this disinformation?
“Bank employees worked through the holidays preparing testimony and drawing up potential questions that will be asked of their chiefs. The hearings will occur in the middle of the 2009 bonus season, and executives are bracing for questions about the paychecks that many firms will dispense.”
And so it goes. Will the truth ever come out? Will the folks who screwed up our economy—in government and Wall Street—ever be held accountable?