Congress Debates the Federal Reserve: Reform or Abolish?

Wednesday, 09 May 2012
Written by  Alex Newman - New American

In a rare moment of bipartisan unity, lawmakers and economists on both sides of the aisle largely agreed on two points: The Federal Reserve System as it stands is hurting America and something must be done to stop it. Just what exactly needs to happen, however, was the subject of considerable debate during a Subcommittee on Domestic Monetary Policy hearing Tuesday chaired by sound-money advocate and GOP presidential contender Rep. Ron Paul (R-Texas). 

Dr. Paul, of course, has become famous around the world for his tireless efforts to audit, expose, and abolish the central bank. He even published a best-selling book in 2009 entitled End the Fed, a title that has become a rallying cry for millions of Americans angry about the institution’s multi-trillion-dollar bailouts, market manipulations, corruption, and debasement of the currency.

The subcommittee hearing, entitled “The Federal Reserve System: Mend It or End It?”, examined a range of different proposals to reform the nation’s monetary system — it was supposed to look at six different options emanating from both parties. One of the measures on the agenda was Congressman Paul’s own “Federal Reserve Board Abolition Act,” legislation to dismantle the central bank and restore sound money based on market principles.

“More and more people are beginning to understand just how destructive the Federal Reserve's monetary policy has been. I hope that this hearing will kick start a serious discussion on the need to rein in the Fed,” Chairman Paul said in a statement about the event. “A hundred years is far too long for Congress to have taken a hands-off approach. The Fed continues to reward Wall Street banks while destroying the dollar’s purchasing power and driving up the cost of living for average Americans. This reckless behavior must come to an end.”

Several experts who testified before the subcommittee agreed with Paul’s proposals. And while efforts to reform the central bank have persisted for a century, in the wake of the economic crisis — which saw the Fed shower trillions of dollars on domestic and foreign banks — popular outrage has forced the controversy back into the spotlight. 

“The Fed simply does not know the ‘optimal’ supply of money or the ‘optimal’ intervention in the banking system; no one does,” explained Dr. Peter Klein from the University of Missouri during the hearing, noting that central banks do not fight inflation — they create it. “Add the standard problems of bureaucracy — waste, corruption, slack, and other forms of inefficiency well known to students of public administration — and it becomes increasingly difficult to justify control of the monetary system by a single bureaucracy.”

Dr. Jeffrey Herbner of Grove City College, an economist, echoed those concerns, citing a vast body of available data on the effects of central banking. “Economic theory and historical evidence demonstrate that a central bank confers no benefit on society at large,” Prof. Herbner testified, knocking down pro-central bank arguments one by one using facts and logic. “The Fed should be abolished and a market monetary system of commodity money and money certificates should be established.”

Another proposal that was examined during the hearing was the Sound Dollar Act. The legislation, introduced by Republican Rep. Kevin Brady of Texas, seeks to reform the central bank’s mandate to focus only on keeping the value of the currency stable — as opposed to its current mission, which also includes maximizing employment.

Critics argue that the Fed has failed miserably on both counts — unemployment is out of control and the dollar has lost more than 95 percent of its value since the central bank took over. But under Brady’s bill, the Fed would face broad new restrictions in terms of what it could do. Its primary purpose, then, would be to ensure the stability of the currency’s value.

“Except in the very short term, monetary policy cannot boost real output and job creation,” Brady told the subcommittee. “The last four decades of U.S. monetary policy demonstrate the advantages of a rules-based regime over a discretionary one. During the 1970s, the Federal Reserve had ‘go-stop’ policies, in which monetary policy quickly swung from ease to tightness and back again. This incoherence produced a highly volatile real economy and a rising inflation rate.”

Brady later told reporters that he hoped fellow lawmakers would take action on the bill this year, but he acknowledged that his efforts may simply be building the foundation for legislative action on the issue next year. “While the dual mandate may be politically appealing, it makes no sense for Congress to charge the Fed with controlling what it cannot,” he noted.

Stanford economics Prof. John Taylor largely agreed with Brady’s proposal, saying nearly 100 years of experience had shown that giving central banks broad discretion in centrally planning the monetary supply does not work. "Multiple goals enable politicians to lean on the central bank to do their bidding and thereby deviate from a sound money strategy," he explained, calling for a rules-based system.

Democrat Rep. Barney Frank, on the other hand, saw different problems with the Fed — most notably, its domination by powerful financial interests. “The problem you have now is this: the regional Fed bank presidents are picked by bankers,” he told the subcommittee, blasting what he called “private sector government.” Other critics have seized on that point to describe the Fed as a banking cartel with a state-issued monopoly over the nation’s currency.

Frank’s proposal, H.R. 3428, would strip much of the policy-setting power from the 12 regional Fed chiefs by removing their votes on the Federal Open Market Committee (FOMC). The legislation would also give lawmakers and the federal government more oversight authority over the privately owned central banking system, an idea the Fed itself has fiercely resisted under the guise of protecting its “independence.”

“I cannot think of another element of American government where there is formal binding legal power given to the representatives of the industry that’s in question,” Frank complained during his testimony. “I don’t think the American people are aware of the undemocratic nature of this.” Indeed, the Fed banks themselves have acknowledged on numerous occasions that they are owned and run by private banks. 

Other Fed reform bills that were on the agenda Tuesday included the “Democratizing the Federal Reserve System Act” introduced by Rep. Marcy Kaptur and Rep. Dennis Kucinich’s bill known as the “National Emergency Employment Defense Act.” Another piece of related legislation that was considered, H.R. 245, was introduced by Rep. Mike Pence. The bill is similar in some ways to Rep. Brady’s proposal in that it would end the so-called “dual mandate” of the Fed by forcing it to focus only on inflation.

While activists and lawmakers tear into the secrecy shrouding the controversial central bank, however, the Fed has gone to unprecedented lengths in recent years to protect its interests. It has accelerated its distribution of pro-Fed propaganda, for example, going so far as to design “education” lesson plans and comic books for the youth. The central bank also hired a lobbyist, and more recently, announced that it was developing a program to monitor critics online.

Still, despite the institution’s unconventional tactics to drum up support, pressure for change and outrage at the Fed continue to grow across the political spectrum. States are already taking action. Last year, Congress was finally able to obtain an audit — albeit a severely limited one — after the public outcry became deafening. According to polls, about 80 percent of Americans said they supported opening up the Fed’s books. And that, activists say, was just the beginning.   

Usury (interest on loans) Has Always Been a Sin--What Happened?

What ever happened to the immorality (and illegality) of usury?

Given the numerous verses in the Bible explicitly forbidding it -- far more than all the scriptural references to abortion or homosexuality added together -- you'd think in a "Christian" society, with so many politically-engaged Bible-believers, usury would be a hot button issue.

The Prophet Ezekiel, for example, declared usury an "abominable thing" and put it in the same category as rape, murder, robbery and idolatry. (Ezekiel 18:19-13).

The Code of Hammurabi instituted regulations for interest-bearing loans. Both Plato and Aristotle considered usury to be immoral and unjust. The Romans had the "Twelve Tables" and capped interest rates at 8.3 percent.
The Quran says "those who take usury will arise on the Day of Resurrection like someone tormented by Satan's touch."

Hinduism and Buddhism have also historically frowned on the practice.

Even though neocons like to forget it, American religion has a long and distinguished tradition of usury prohibition. 

Adam Smith, the "father of the free-market capitalism" strongly supported the control of usury. While he wasn't against an all-out prohibition of charging interest, Smith argued for a cap on interest rates, thinking it would provide low-risk borrowers involved in socially useful investments access to necessary funds, even with "the greater part of the money...(being) lent to prodigals and projectors (investors in risky, speculative ventures), who alone would be willing to give (an unregulated) high interest rate."

At the founding of the nation in 1776, every state in the Union adopted a general usury law that capped interest rates at six percent. It wasn't until the early 1900s that a concerted push was made to relax usury laws, though the usury-be-damned mentality didn't really hit its stride until the Reagan Revolution, setting in motion a process of deregulation that led us right smack into derivatives, credit-default-swaps, and other "financial weapons of mass destruction" of the lending business, and voilà - the Great Recession.

The bailed-out banking industry could care less, of course. "Imposing interest-rate caps will deny tens of millions of Americans access to credit," says Ken Clayton, senior vice president and general counsel for card policy at the American Bankers Association. "Low- and moderate-income Americans, and small businesses, would suffer. This is exactly the wrong result if you want to increase lending."

Translation: unless lenders can gouge credit consumers, only the affluent will be served.

Whatever happened to usury and interest rate limits? It died in the Senate, just like Wall Street wanted, though it's hard to miss the irony of a "godless" socialist like Bernie Sanders being the one to lead the (unsuccessful) charge in the Senate to bring back that ole time religion. Sadly, it didn't have a prayer.

Banks on the Brink

The Mark-to-Market Fantasy

by ANDREW COCKBURN

 

“If the Occupiers start chanting ‘Mark to Market,’” an attorney highly conversant with the darker workings of the Wall Street-Washington complex told me, “we’ll know they’re serious.”  

Such a call would quickly presage the collapse of our “too big to fail” banks, for it would highlight the fact that a huge proportion of the assets of Bank of America, Wells Fargo, JP Morgan, and Citigroup consist of loans that will never be paid back and are therefore essentially worthless. The so called “recovery” of our leading financial institutions from the post-Lehman abyss has depended on a fraudulent valuation of these assets, but stripped of the fiction, the banks are insolvent.

Not long ago, accounting rules required bank assets, such as mortgage, credit card and other loans, not to mention the securities derived therefrom, to be “marked to market,” meaning that they had to be valued on the balance sheet  at what they might fetch if offered for sale on the open market.  This practice, enjoined by the Financial Accountancy Standards Board (FASB), was quite popular at a time when the bubble was still inflating, propelling house prices and the mortgage backed securities they supported in a pleasingly northward direction, and naturally carrying quarterly bonuses and other good things along with them.   However, such attitudes changed in a hurry once the housing bubble burst and the ratings agencies, albeit belatedly and reluctantly, began certifying that mortgage loans, as packaged and puréed into securitized instruments, were worth a lot less, or nothing at all.  In 2008 therefore the banks were forced to disclose write-downs of $175 billion.  By early 2009 not only were most of these institutions facing capital shortfalls that rendered them insolvent, they were close to having to admit the fact and head for the bankruptcy court.

Cries of rage and pain echoing round Wall Street were amplified in Washington DC by $27.5 million in bankers’ cash, funneled through lobbyists who focused their particular and generous attention on the capital markets subcommittee of the House Financial Services Committee.  The consequences were immediate and gratifying, at least from the point of view of the banks.  Hapless number crunchers from the FASB were hauled in front of the subcommittee on March 12, 2009,  and harshly instructed to change their rule, fast, or the congress would do it for them.  Results were immediate.  Instead of having to price their assets at a realistic level, ie one where someone might buy them, banks were permitted to use “substantial discretion” in their book-keeping.  “Mark to fantasy,” some called it, but suddenly Wall Street was booming again, along with bonuses.  Notional profits were further bolstered by shrinking “loan loss reserves” – money put aside against a rainy day – on the balance sheets.  Since all those assets were at healthy valuations again, who needed to provide for losses?

But of course the underlying reality never changed,  except for the worse.  Loans defaults continued their inexorable climb. Desperate to hoard whatever actual cash they did have, largely courtesy of Fed largesse, the banks eschewed anything as risky as actually lending money to businesses who might use it to give jobs to people.  No one, at least in government or on Wall Street, was prepared to admit the ongoing reality of major bank insolvency.

As one clear-eyed observer of Wall Street told me earlier this week: “Bank of America earnings were out today and you need an advanced degree in bullshit to understand half of it.  The whole thing is malarkey piled on crap. I don’t know how to separate the garbage from the decent and neither do (the banks). It’s the main thing that’s stopping any bank recovery, the denial and the inability or unwillingness to take their medicine.”

However, there is a way out of the morass.  Congress did pass the 2010 Dodd-Frank financial reform bill.  Though assiduously laced with loopholes and escape hatches, the law does contain one crucial element that would, if implemented, allow the seizure of the banks and the loans they control.   That’s the part of the 2010 financial reform act  that gives the FDIC the necessary authority “to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.”  It goes on to mandate that “creditors and shareholders will bear the losses of the financial company,” while management should not only be fired but also held personally liable (“bear losses consistent with their responsibility”)  for the wreckage they have caused.  God knows how this got past the lobbyists, but it’s on the books.  Let’s use it, dismantle JP Morgan, Wells, etc.  At that point the Federal Deposit Insurance Corporation would actually own all those loans that homeowners and other borrowers have been struggling to repay.  The banks have been obstructing any reduction of principal by allowing subprime borrowers to refinance at affordable rates.  But a government takeover, which is entirely in the administration’s power, would permit just that.  As a result, homeowners etc would be able to afford their payments, with cash to spare.

Too bad it won’t happen.

The Secret Republican

Obama Fails Wall Street “Conspirators” Too

by ANDREW LEVINE

 

“Conspiracy theories” have a bad press.  But sometimes conspiracies are real and sometimes conspiracy theories do account for what they purport to explain.  Whether they do or not is an empirical question.  Because real world politics is propelled by multiple, heterogeneous causes, and because political actors seldom rise to a genuinely Machiavellian level, the usual criteria for determining what the best explanations are – elegance, simplicity and the like – are of little use.  Evidence is all.

If no compelling evidence of a conspiracy surfaces, especially over many years and especially too if the purported conspiracy would have had to involve vast numbers of people, that’s an excellent reason to think that there was no conspiracy.   This is why it is more plausible than not, after almost five decades, to believe that Lee Harvey Oswald killed JFK on his own.  Only a decade has passed since 9/11 but the fact that no evidence of a conspiracy of the kind “truthers” argue for has yet to emerge is decisive in that case too, especially in light of the manifest incompetence of everyone connected with the alleged plot.

Thanks to the resurgence of what Richard Hofstadter called “the paranoid style” in American politics, conspiracy theories based on little or no evidence have multiplied alarmingly in recent years.   Many of them are manifestly implausible.  For example, the idea that Barack Obama is a secret Muslim is plainly false because it would explain nothing.  Obama has done as much to harm the historically Muslim world as any American president, including George W. Bush, so he would, at the very least, have to be a “self-hating” secret Muslim, an idea that runs counter to the paranoid drift of those who level the charge.  It would make slightly more sense to claim that Obama is a secret al-Qaeda operative, inasmuch as his policies are good for bringing recruits into the al-Qaeda fold.  But those policies are continuations of George Bush’s, and no one is paranoid enough to deem that hapless but villainous soul a double agent.

On the other hand, the idea that Obama is a secret Republican would explain a great deal.  His capitulations and displays of spinelessness, along with his lack of principled conviction, helped bring Republicans to power in the House of Representatives and in many state houses and legislatures.  Moreover, the policies he pursues have been, if anything, to the right of those favored by “moderate Republicans” back in the days before that species went extinct.  But then, of course, it wouldn’t just be Barack Obama who is a secret Republican.  The same could be said for almost the entire Democratic Party at the national level at least since Bill Clinton set the party on its rightward drifting course.

The claim that they are all Republicans, secret or not, expresses a certain truth, notwithstanding the fact that it is literally false.  We know it is false not because it doesn’t make sense of what we observe, but because all the evidence points the other way.

What this shows is not just that conspiracy theories can be true in a sense, even when they are wrong; it also shows that party identifications no longer indicate what democratic theory, in all its many varieties, maintains they should.

The seeds were sown long ago and they took root and thrived as the Cold War wore on.  But it was not until the consolidation of the so-called Reagan Revolution that real democracy all but disappeared from our political life.  We still have competitive elections, and probably always will.  But from that point on, competing parties – the two, semi-official ones — no longer operated in the way that justifying theories of democratic institutions claim they should.

They ceased to be vehicles through which the people or their representatives, aiming at a common good, engage in public deliberation and collective decision-making.  Instead, they became marketing agencies, bought and paid for by corporate interests, selling legislators eager to do their paymasters’ bidding to different (though fluid and sometimes intersecting) constituencies, and to a “moderate” middle, comprising less than 20% of a depoliticized and acquiescent electorate.

As marketers, Republicans and Democrats tailor their respective messages to different blocs of voters.  Republicans tailor theirs to their hardcore base, voters bereft of informed and considered judgment but full of passionate intensity.   Democrats tailor theirs to the apolitical middle.  This is why the celebrated “enthusiasm gap” of 2010 developed, but it may be a winning strategy in the presidential election this time around, given the field of Republican candidates.  Could there be a conspiracy among Republicans to play into Obama’s hands by fielding only dolts?  Not likely, of course; but that conspiracy theory too would explain a great deal.

* * *

In 2008, the financiers and corporate moguls who own both the Democratic and Republican Parties threw their weight behind Barack Obama.  No doubt, most of them would have preferred a Republican; hard as they have tried, Democrats have yet to win over the hearts and minds of our most nefarious “economic royalists.”  But the movers and shakers of our corrupted system, many of them, at least had the wits to realize that popular disgust with the criminality and incompetence of the Bush administration made Republicans more difficult than Democrats to sell even to an acquiescent electorate.

But that doesn’t explain why Obama got more Wall Street and corporate support than Hillary Clinton.  To answer that question, another conspiracy theory suggests itself – one that is more plausible than any of the ones suggested so far, though of course it too is literally false.

It was no secret, except perhaps to his most ardent and deluded supporters, that Obama was vetted and deemed fit to carry corporate America’s banner.   But Hillary Clinton was heir to a family tradition of doing precisely that, and she made no bones about her intentions.  Why not her?

Were our titans of finance and industry more clever than they actually are, and better able to collude, they might have reasoned as follows: “Hillary Clinton is the devil we know.  We can count on her.  But she is even less charismatic than her husband, and he still elicits more enmity than admiration.  On the other hand, Barack Obama is a Rorschach figure upon whom voters eager for “change” – in other words, eager to be rid of us — can pin their hopes.  Moreover, his appeal to the 18 to 25 demographic, and to people of color, is evident.  Therefore he can do what she cannot — disillusion an entire generation along with everyone else who can be rallied to his cause.  Now, what we need to fatten our purses and generally to have our way is a quiescent and therefore acquiescent citizenry.  This Obama is uniquely able to deliver, since nothing fosters quiescence better than disillusionment and cynicism.  Therefore, let us make him our man.”

Until last month, it looked like these imaginary conspirators were on to something, that their reasoning was sound.   Then the world changed.

The events last winter and spring in Wisconsin, Ohio, Maine and elsewhere, important as they were, were only a prelude to what has developed over the past four weeks as indignation again took hold of an awakened citizenry, this time in the belly of the capitalist beast – at Zuccotti Park, within spitting distance of Wall Street.  From there it has spread to countless cities throughout the United States.  At last, we in the Land of the Free – can one say those words these days without irony? –  have done what our brothers and sisters in north Africa and southern Europe and elsewhere, victims of the system in place, have been doing for months – renewing the struggle for equality and justice.

Try as Obama Democrats and their colleagues in the liberal commentariat might, the Occupy movement is not about to go away, and while it may interact constructively with the Democratic Party from time to time, it is not going to allow itself to be coopted by it.  Occupy Wall Street has yet to name the Obama administration an enemy; maybe it never will.  But its dynamic is at odds with the politics Obama, along with all his predecessors for more than three decades, has pursued.

And so Obama, who has failed every constituency that supported him in 2008, has also failed the constituency that sustains him and that he cares about most, the tiny fraction of the top 1% who plotted (not literally, of course) to make him the champion of their interests.  Yes, Obama has worked tirelessly in their behalf — beyond all expectations.   But when it came to promoting acquiescence he turned out to be a bust.

To be sure, the conspirators got what they thought they wanted.  Obama did disillusion multitudes, just as they expected he would.  But he did this by being “bipartisan” to a fault, and since his electoral competition was nothing if not obstinate, that meant ceding everything to them.  Meanwhile, the Republicans had decided that the way forward for them was to bring Obama down, and that the way to do that was to win back Wall Street and corporate America by offering them everything they could dream of and more, enlightened self-interest be damned.  And so it was, in one of those world-changing ironies of history, that Obama, the “change” president, helped make the prevailing situation so intolerable that the long overdue fight back finally came.

What the consequences will be is still unclear and is likely to remain so for a while.  All we can say for now is that politics, the real thing, is back, and that neither Wall Street and corporate America nor our decrepit political class will ever quite be the same.

To be sure, the capitalism that brought about our present sorry state is not about to give way to anything radically better any time soon; and, thanks to Mitt Romney or someone even more risible, Obama probably will win a second term.  But the alliance between corporate America and the American government that has deformed our democracy so profoundly is now shaken.  It may well be in its final days.

If Occupy Wall Street continues on its present track, as it shows every sign of doing, the short-term changes it brings can only be for the good.  As for what happens beyond the short term, all we know for sure is that the future is open and the possibilities endless.  In Greece, where they’ve been fighting back against even more rapacious banks than the ones afflicting our 99% for longer than we have, a general strike is now underway!  Who would have thought it possible?  Wall Street conspirators beware!

Bringing Transparency to Wall Street

The Bizarre Calls to Repeal Dodd-Frank

by DEAN BAKER

The calls for repealing the Dodd-Frank financial reform bill are more than a little bizarre. It was only three years ago that the whole financial system was at the brink of collapse, with President Bush warning us of a second Great Depression if Congress didn’t quickly approve a massive bailout bill.

This crisis was the result of a poorly regulated financial system that was issuing millions of mortgages that they did not expect to be paid off. It was packaging these bad mortgages in mortgage-backed securities and more complex instruments and passing them off to gullible buyers all over the world. And we had companies like AIG issuing hundreds of billions of dollars credit default swaps that they had no ability to support.

This is the pre-Dodd-Frank world. Is this the world that those demanding repeal want us to bring back?

Dodd-Frank is far from a perfect piece of legislation. It could have been much stronger. For example, it could have required that the too-big-to-fail banks break themselves up, so that they could no longer freeload on an implicit government guarantee of support if they get into trouble. It could also have reinstituted a strict Glass-Steagall type separation that prohibited banks that take government-insured deposits from engaging in risky investment banking or hedge fund type activity.

But it does make the risks of the financial system more transparent. And, it give regulators an alternative to bailouts to deal with the sort of Lehman-AIG situation we faced in 2008.

Given the economic disaster that was brought on by the mismanagement of the financial system, Dodd-Frank is actually a very mild piece of legislation. Its opponents have highlighted the paperwork requirements imposed by the law. In fact, smaller banks will not be forced to deal with most of the requirements since they are explicitly exempted. The Goldman Sachs and the J.P. Morgans of the world specialize in creating paperwork and therefore will have little difficulty dealing with the requirements of the law.

However, the more important issue is the logic of this complaint. There is plenty of needless paperwork in the Defense Department, by the logic of the Dodd-Frank repealers we should just shut it down and start from scratch.

That doesn’t make sense and it doesn’t make sense to repeal Dodd-Frank. The proponents of repeal should put their specific complaints on the table and argue the case. That is the way serious people do things.

Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's Derivatives Trades

The Daily Bail

This story from Bloomberg just hit the wires this morning.  Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers.  Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.  You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.
What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. 

Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon.  Bernanke is absolutely insane.  No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks.  His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.

---

Bloomberg

Excerpt:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Moody’s Downgrade

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.
Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

U.S. Bailouts
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill.

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
 
“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

Hit bankers where it hurts

My Advice to the Occupy Wall Street Protesters

By Matt Taibbi - Rolling Stone

October 12, 2011

I've been down to "Occupy Wall Street" twice now, and I love it. The protests building at Liberty Square and spreading over Lower Manhattan are a great thing, the logical answer to the Tea Party and a long-overdue middle finger to the financial elite. The protesters picked the right target and, through their refusal to disband after just one day, the right tactic, showing the public at large that the movement against Wall Street has stamina, resolve and growing popular appeal.

But... there's a but. And for me this is a deeply personal thing, because this issue of how to combat Wall Street corruption has consumed my life for years now, and it's hard for me not to see where Occupy Wall Street could be better and more dangerous. I'm guessing, for instance, that the banks were secretly thrilled in the early going of the protests, sure they'd won round one of the messaging war.

Why? Because after a decade of unparalleled thievery and corruption, with tens of millions entering the ranks of the hungry thanks to artificially inflated commodity prices, and millions more displaced from their homes by corruption in the mortgage markets, the headline from the first week of protests against the financial-services sector was an old cop macing a quartet of college girls.

That, to me, speaks volumes about the primary challenge of opposing the 50-headed hydra of Wall Street corruption, which is that it's extremely difficult to explain the crimes of the modern financial elite in a simple visual. The essence of this particular sort of oligarchic power is its complexity and day-to-day invisibility: Its worst crimes, from bribery and insider trading and market manipulation, to backroom dominance of government and the usurping of the regulatory structure from within, simply can't be seen by the public or put on TV.

There just isn't going to be an iconic "Running Girl" photo with Goldman Sachs, Citigroup or Bank of America – just 62 million Americans with zero or negative net worth, scratching their heads and wondering where the hell all their money went and why their votes seem to count less and less each and every year.

No matter what, I'll be supporting Occupy Wall Street. And I think the movement's basic strategy – to build numbers and stay in the fight, rather than tying itself to any particular set of principles – makes a lot of sense early on. But the time is rapidly approaching when the movement is going to have to offer concrete solutions to the problems posed by Wall Street. To do that, it will need a short but powerful list of demands. There are thousands one could make, but I'd suggest focusing on five:

1. Break up the monopolies. The so-called "Too Big to Fail" financial companies – now sometimes called by the more accurate term "Systemically Dangerous Institutions" – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.
2. Pay for your own bailouts. A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about. It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it's supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.
3. No public money for private lobbying. A company that receives a public bailout should not be allowed to use the taxpayer's own money to lobby against him. You can either suck on the public teat or influence the next presidential race, but you can't do both. Butt out for once and let the people choose the next president and Congress.
4. Tax hedge-fund gamblers. For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.
5. Change the way bankers get paid. We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later. It should be: You make a deal today, you get company stock you can redeem two or three years from now. That forces everyone to be invested in his own company's long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.

To quote the immortal political philosopher Matt Damon from Rounders, "The key to No Limit poker is to put a man to a decision for all his chips." The only reason the Lloyd Blankfeins and Jamie Dimons of the world survive is that they're never forced, by the media or anyone else, to put all their cards on the table. If Occupy Wall Street can do that – if it can speak to the millions of people the banks have driven into foreclosure and joblessness – it has a chance to build a massive grassroots movement. All it has to do is light a match in the right place, and the overwhelming public support for real reform – not later, but right now – will be there in an instant.

Too Big to Fail, Too Conflicted to Govern

Shameless on the Hill
By RUSSELL MOKHIBER

At a hearing on Capitol Hill this week on "too big to fail" banks, both corporate parties were posturing.

Strutting their stuff.

Ripping into each other.

But the reality?

When push came to shove, both didn't have the guts to do the right thing to prevent another bailout.

That would be – limit the size of the big banks so that they are no longer "too big to fail."

"Too big to fail" means exactly that.

The banks are too big to fail.

If they fail, we must bail them out.

Or the economy goes down in a spectacular flameout.

The six biggest banks in America?

Wells Fargo.

Citibank.

Bank of America.

JP Morgan Chase.

Morgan Stanley.

Goldman Sachs.

Together, they control assets equal to about 65 of GDP.

Twenty years ago, that number was about 15 percent of GDP.

The hearing yesterday was held by a House Financial Services Committee subcommittee chaired by Congresswoman Shelley Moore Capito (R-West Virginia).

Before the hearing got started, Public Citizen was passing out a letter calling on Capito to formally disclose that her husband now works for one of the those too big to fail banks – Wells Fargo.

She has so far refused to do so.

But the conflicts on the committee on both sides of the aisle are deeper than the horse crap at the back of any barn in Capito's Second Congressional District of West Virginia.

True, the Republican side is marinated in Wall Street cash.

Just as an example, Capito's number one contributor over her career is from another one of the too big to fail banks – Citibank.

But the Democrats are marinated in Wall Street cash too.

And therefore the hypocrisy on the Democratic side is as deep – maybe deeper – than the conflicts.

The best in show winner for posturing was Congressman Luis Gutierrez (D-NY).

Gutierrez used his five minutes to rip into the Republicans for being the party of Wall Street.

He ended pointing at his Republican colleagues and saying – "You should just tell people you're for big banks and make it clear and simple."

Then he got up and left.

Didn't want to contemplate of the hypocrisy of it all.

But Congressman Brad Miller (D-North Carolina) was shameless.

Miller understands – as does almost everyone on the committee – that the way you deal with the problem of too big to fail banks is to limit their size so that they are no longer too big to fail.

There actually was a vote on the Senate side in 2008 on an amendment – the Brown-Kaufman amendment – that would have done the trick.

Miller introduced a similar amendment in the House.

Miller put it this way:

"Senator Kaufman introduced an amendment on the Senate side that failed, that would limited the overall size of those -- of banks to 2 percent of the GDP. That's still like a $300 billion company. That's a pretty big -- pretty big bank, big enough to do pretty much anything, but it would have required that the six biggest firms be broken up into more than 30 banks."

"No Republican support for that law," Miller said. "I introduced the idea on the House side, but the fight was really over on the Senate side."

What is Congressman Miller not telling us?

He is not telling us that the Brown/Kaufman amendment was defeated by President Obama and his Secretary of Treasury Tim Geithner.

Neil Barofsky, who was the Special Inspector General for the TARP, told Corporate Crime Reporter last week that the Brown Kaufman amendment would have passed had the Obama administration gotten behind it.

Instead, Treasury Secretary Geithner lobbied against the bill.

"The reason it didn't pass was because the Treasury Secretary lobbied individual Senators to convince them to vote against this bill," Barofsky said.

And what is the result of that vote?

"The largest banks are now 20 percent larger today than they were going into the crisis," Barofsky said. "They are systemically more significant, they are bigger, they are more important. And we just haven't seen the political or regulatory will to take on the fundamental problems that are presented by these institutions."

"Standard and Poors recently put the U.S. government's credit rating on watch. And one of the things they talked about was the contingent liability to support our financial institutions. And they estimated that the up front costs of another bailout could be up to $5 trillion."

"And when you think about the focus on our budget issues, our deficit and our debt – what happens with the next crisis and we have to come up with another $5 trillion to bail out our system once again?"

"It's a terrifying concept. One of TARP's biggest legacies is that it emphasized to the market that the government would not let these largest banks fail. And we haven't done anything to address this problem. So, we are going to be right back where we were in late 2008 – if not in a worse position."

Too Big to Fail Redux?

Neil Barofsky on TARP, SIGTAP, IGS and Elizabeth Warren

By RUSSELL MOKHIBER

We spent $700 billion to bail out the too big to fail banks on Wall Street.

And yet, we might have to do it again.

Why?

Because the big banks are still too big to fail.

And next time, we might have to spend $5 trillion.

It ain't a pretty picture.

As Neil Barofsky knows better than most.

He was the Special Inspector General for the Troubled Asset Relief Program.

Known in Washington as SIGTARP.

He's now a adjunct professor at New York University Law School.

"The largest banks are now 20 percent larger today than they were going into the crisis," Barofsky told Corporate Crime Reporter in an interview last week. "They are systemically more significant, they are bigger, they are more important. And we just haven't seen the political or regulatory will to take on the fundamental problems that are presented by these institutions."

"Standard and Poors recently put the U.S. government's credit rating on watch. And one of the things they talked about was the contingent liability to support our financial institutions. And they estimated that the up front costs of another bailout could be up to $5 trillion."

"And when you think about the focus on our budget issues, our deficit and our debt – what happens with the next crisis and we have to come up with another $5 trillion to bail out our system once again?"

"It's a terrifying concept. One of TARP's biggest legacies is that it emphasized to the market that the government would not let these largest banks fail. And we haven't done anything to address this problem. So, we are going to be right back where we were in late 2008 – if not in a worse position."

During the debate over financial reform, the Senate voted on the Brown-Kaufman amendment, which would have limited the size of big banks – making them no longer too big to fail.

The measure was voted down, with only 33 Senators voting for it.

Barofsky says that it would have passed had the Obama administration gotten behind it.

Instead, Treasury Secretary Timothy Geithner lobbied against the bill.

"The reason it didn't pass was because the Treasury Secretary lobbied individual Senators to convince them to vote against this bill," Barofsky said.

And what was Geithner's argument against the amendment?

"As it was explained to me, it was – this was too blunt of an instrument to accomplish this. It would be better to give the regulators the power to treat the problem with a scalpel."

And your response to that?

"The regulators have failed spectacularly in the run up to the financial crisis," Barofsky said. "They have demonstrated that they are human beings. They are fallible as human beings. They, like the rest of the market, have repeatedly proven to be unable to see bubbles as they are being formed, and to comprehend the consequences of the concentration of risk and size."

"The reality of financial systems is such that there is no omniscient person who can understand and see around corners. Having a system that tries to see things before they happen and tries to deal with crises before they happen is doomed for failure."

"The FDIC's Sheila Bair has been very forceful about advocating for the use of Dodd Frank tools to address the size and significance of institutions, requiring them to spin off business, become less complex, have more capital. That is the one path that is out there. She is putting forth a path that has a chance at success. 

Unfortunately, she is stepping down in a few weeks."

Barofsky pushes back at the suggestion that there have been no major criminal prosecutions to come out of the 2008 financial crisis.

"I always like to take issue with the claim that there haven't been any big prosecutions," he says.

"At SIGTARP, we uncovered a multi-billion fraud that was being run by Lee Farkas, the chair of Taylor Bean & Whitaker – one of the country's largest non-depository mortgage companies," he says.

"It was an historic fraud. It's not that often that you run across multi-billion dollar criminal accounting frauds. Our agents uncovered that fraud. It had been going on for six or seven years. We already had seven convictions, including that of Farkas after trial."

"We got involved after they tried to steal $550 million of TARP funds through Colonial Bank, which was closely related to Taylor Bean & Whitaker."

"But the question you are referring to is this thirst for accountability for the largest Wall Street financial institutions."

"These cases and these investigations were really outside of our jurisdiction. Our jurisdiction started after the crisis ended. It started with the passage of the TARP funds in October 2008."

"So I was never privy to the evidence being gathered in those investigations."

"I'm always a little reluctant to make a judgment on whether the prosecutors looking at those cases are making the right or wrong judgment."

"Although there is a lot of smoke in these investigations – and there's Senator Levin's subcommittee's report – to really know whether there is fire underneath that smoke, you have to look at what the evidence is, what the defenses are, what the mitigating factors are, what the arguments are."

"We are talking about an extremely complex accounting fraud at a level that is far more complex than in past financial crises."

"The underlying representations and valuations of incredibly complex structured products are neither simple nor straightforward."

"And it's very difficult for me, without knowing the details of the evidence and the responses, to say they are doing a good job, a bad job, that there has been criminal activity, there hasn't been criminal activity."

"I do think there is something to the argument that much of this behavior, which seems strikingly unethical and inappropriate, may at the end of the day fall short of provable criminal liability."

"We created a regulatory system that blessed in many ways or gave tacit approval to activities that appear to be just downright wrong. But all of this activity has to be looked through that prism of the absence of regulatory activity and to some extent regulatory knowledge of what was going on."

"It may be a little bit too early to write the final story on this. There are ongoing investigations. These investigations by their nature take time. As the parallel civil cases make their way through the courts, there is going to be a lot of eyes taking a look at the same set of evidence, more evidence is going to be uncovered, and it's not impossible or improbable that we are going to see additional prosecutions."

"Whether the country is going to get what it wants – to get a CEO of a major bank – I don't think that is going to happen."

"This is far different from the savings and loan crisis. In that crisis, you had relatively straightforward fleecing of banks by senior executives.

This is a little bit more complex and difficult to prove."

Barofsky concedes that out of the more than 60 Inspectors General across the federal government, only a handful aggressively pursue criminal wrongdoing against the agencies they were set up to protect.

"It's unfortunate that we don't read or hear more from Inspectors General. So much is entrusted with these IGs in the oversight of these federal agencies. And they come in all different shapes and sizes, all different types of experiences," Barofsky said.

"You can have a relatively small shop, like the one run by David Kotz at the SEC. He is quite aggressive. And he gets a lot of information out there to Congress and to the American people. And then you have other agencies whose Inspectors General offices could be five or six or nine times the size of the SEC IG – and yet you never hear anything."

"It can't be that those agencies are just so perfectly run that there isn't a need or important value for those offices to fulfill in exposing misconduct, waste, fraud and abuse."

Barofsky believes TARP would have been better off with someone like Elizabeth Warren on the inside – instead on the outside looking in.

"It is striking how overwhelmingly the key decision makers in the TARP program came from Wall Street."

"When you look back on it, it shouldn't be that surprising that TARP, a program that was designed to help both Wall Street and Main Street, has done a phenomenal job in helping Wall Street and a terrible job in fulfilling its Main Street goals."

"This is not because the people who came from Wall Street were corrupt. It's not because they were out to screw the little guy. It's because of the lack of diversity. They did what they knew best and what they thought was best."

"But you had this uniform group of people from Wall Street – Hank Paulson from Goldman Sachs, the people who were running TARP who came from Merrill Lynch and Goldman Sachs, the investment officers came from a series of Wall Street banks, right down to the housing person who came from Bank of America."

"So, it's not that surprising that your policies reflect Wall Street's priorities."

"Think about how much different this program would have been had Elizabeth Warren – instead of being appointed to provide oversight of TARP – was instead put inside the bubble and was part of the decision making process in designing TARP's response."

"You'd see a much different and a much better program."

And Barofsky is critical of the Obama administration for not appointing Warren to head the Consumer Financial Protection Bureau.

"If the President made the decision that Elizabeth Warren was the right person to stand up this agency, which he essentially did in appointing her as an advisor, then he should have nominated her for the position," Barofsky said. "This was her idea. I got to know and work with Elizabeth when she was chair of the Congressional oversight panel, which also provided TARP oversight. She is doing a terrific job in her more limited role right now.

And she would be a terrific nominee and a terrific director for that agency. By not getting 100 percent behind her early on, they put themselves in a very difficult position. Now, it's going to be difficult to even have a recess appointment – whether it is Professor Warren or whether it is somebody else."

Too Big to Jail

Tuesday, May 24, 2011 by CommonDreams.org

by Danny Schechter

 

This week the financial crisis finally went prime time in the form of a big budget HBO docudrama called “Too Big To Fail.”

It was a well-acted docudrama focused on the BIG men and some women in the banks and in government who tried to put Humpty Dumpty back together again up on that wall to prevent a total economic collapse when panic dried up credit and financial institutions faced failure.

Based on the work of a New York Times reporter, it offered a skillfully-made but conventional narrative which, like most TV shows, showcase events but miss their deeper context and background.

We heard all the explanations, save one.

There was greed, ambition, ego and money lust. There were personal rivalries and ideological battles, parochial agendas and narrow self-interest. There was panic on THE Street and in the halls of mighty institutions. In many ways, the program recycled and made an official narrative compelling viewing. In the end, everyone was to blame so no one was to blame.

But... what was missing was any notion of intentionality and premeditation, almost no mention of systemic fraud and CRIME, that one word that sums up what really happened for those millions of Americans who have lost jobs and homes. We never saw victims or felt their pain and bewilderment. We were never shown how a shadow banking system emerged or how the finance industry worked with their counterparts in finance and insurance to transfer wealth from the poor and middle class to the superrich.

When I was but a precocious lad, my elementary school encouraged students to take out a savings account at the nearby Dime Bank in the Bronx. We were each given a bankbook and taught to put in $.50 a week to show us how to build wealth by being thrifty. It was with a sense of pride that I watched my balance grow.

It may have been peanuts in the scheme of things, but to me, at the time, it was the way to plan for the future.

At the same time, in those year I watched TV shows glamorize the bank robbing antics of a man named Willie Sutton who also staged jail breaks wearing masks and costumes. When he was asked why he robbed banks, he responded famously, “That’s where the money is.”
And it still is, except in our era, it is the banks that are robbing us.

That’s because what’s now called the “financial Services sector” has gone from about 30 percent of our economy to over 60 percent. Through a process called financialization, they have transformed how all business is done.

Making money from money soon began to surpass making money from making things. What we were never warned about was the danger of getting too deeply in debt, or how the economy was shifting from production to consumption.

Private equity, credit swaps, derivative deals and collateralized debt obligations soon drove the economy. Markets became captives of high performance trading by powerful computers.
When Wall Street became the defacto capital of the country, the bankers accrued more power than the politicians who they bought up with impunity. Their lobbying power deregulated the economy and decriminalized their activities. They killed many of the reforms enacted during the New Deal designed to protect the public. They built a shadow (and shadowy) banking system beyond the reach of the law.

And now, here we are, in 2011, five years after the meltdown of 2007, four years after the crash of 2008 and the passage of the TARP bailout that pumped money into their treasuries at taxpayer expense. Since then, there has been a steady parade of scandals and the disclosures that have come out since. Every week, more banks close and or consolidate and run into problems with regulators.

Take “my” old bank in the Bronx. It has been through as many changes as I have been. A website on bank histories runs it down:

Dime Savings Bank of New York, The
04/12/1859 NYS Chartered Dime Savings Bank of Brooklyn
09/10/1930 Acquire By Merger Navy Savings Bank
06/30/1970 Name Change To Dime Savings Bank of New York, The
09/30/1979 Acquire By Merger Mechanics Exchange Savings Bank
07/01/1980 Acquire By Merger First Federal S & L Assoc. of Port Washington
08/01/1981 Acquire By Merger Union Savings Bank of New York
06/23/1983 Convert Federal Dime Savings Bank of NY, FSB
01/07/2002 Purchased By Washington Mutual Inc.
01/07/2002 Name Change To Washington Mutual Bank

And then, of course, some years later, Washington Mutual itself, went bust and was bought up for a song by JP Morgan Chase. Here are some of the latest headlines about the bank now known as WAMU:

WaMu agrees on post-bankruptcy control -- report‎ - Reuters
WaMu, Shareholders, Biggest Creditors Said to Settle ...‎ - Bloomberg
WaMu shareholders are offered $25M-plus to drop claims

On the day I wrote this commentary, the New York Times reported:

“The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac.”

And to whom does the Times turn for expertise on the subject, but a key former operative at Washington Mutual who was with the bank in the go-go era of shoveling out subprime mortgages? Now, he gives advice on risk management:

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

What were people’s homes are now “inventory” to be stockpiled even though it has a negative cumulative effect on economic recovery of the housing market.

The banks that are increasingly despised and blamed for their role in engineering the financial disaster, are now trying to play nice to change their negative image.
Explains the Times:

“Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

So, they are still foreclosing, but with a smile. Is it a ‘lot different than it used to be’?
Just last month, Huffington Post reported:

“Top executives at Washington Mutual actively boosted sales of high-risk, toxic mortgages in the two years prior to the bank's collapse in 2008, according to emails published in a wide-ranging Senate report that contradicts previous public testimony about the meltdown.

The voluminous, 639-page report on the financial crisis from the Senate Permanent Subcommittee on Investigations singles out Washington Mutual for its decision to champion its subprime lending business, even as executives privately acknowledged that a housing bubble was about to burst.”

The truth is that most of the bigger banks have emerged from the financial crisis stronger than ever, with executives cashing in with higher salaries and bigger bonuses. That old saying about criminals who “laughed all the way to the bank” has to be revised because in this case they never left the bank.

More shocking has been the largely passive response by our government and prosecutors. At last, the Attorney General of New York is said to be investigating but none of the big bankers have yet gone to jail or suffered for the scams and frauds they committed. Most of the State officials who vowed to after the banks in the absence of aggressive federal actions have backed down.

So what can “we the people” do? We can do nothing and watch more of what’s left of our wealth vanish, or we can join others in demanding a “jailout,” not a bailout.

A well-known international banker was just arrested for a high profile alleged sex crime but not one of possibly thousands have been prosecuted for well documented financial crimes.

Where are the political leaders and activist groups willing to “fight the power” and demand accountability and transparency on Wall Street?

Why are so many us banking on a financial recovery to bring back jobs and a modicum of justice created by the very people and institutions responsible for the crisis?

And why didn’t I learn about these dangers when I first discovered the wonderful world of banking? Isn’t that what schools are for?

New CA Bill Would Fine Banks $20,000 for Each Forclosure

Wall Street's predatory lending practices are responsible for the mess we're now in. Why make severe cuts to state budgets even as Wall Street keeps making bank?
By Peter Dreier, AlterNet
Posted on May 2, 2011

The epidemic of foreclosures that began in 2008 has been devastating America’s families, communities and the state economy.

Nowhere is this more true than in California, where one in five U.S. foreclosures has taken place. Since 2008, more than 1.2 million Californians have lost their homes, and the number is expected to exceed 2 million by the end of next year. More than a third of California homeowners with a mortgage already owe more on their mortgages than their homes are worth.

As a result, home values in the state are estimated to plummet by $632 billion. That translates into a loss of more than $3.8 billion in property taxes. One foreclosed home in a neighborhood can reduce property values for the rest of the houses in the neighborhood, and a cluster of foreclosed houses compounds the physical, economic, and social devastation.

And just as local governments are starving for revenues, they are asked to deal with the increased costs - estimated at $17.4 billion over four years - caused by the foreclosure mess. These include public safety, maintenance of abandoned and blighted properties, inspections, trash removal, sheriff evictions, unpaid water and sewer charges, and the provision of emergency shelter.

We can't solve California's fiscal disaster without addressing the foreclosure crisis. It doesn't make sense to make severe cuts to state and local budgets only to allow Wall Street banks and their overpaid CEOs to drain billions more from our states. The banks created the housing crisis with toxic lending practices and they need to be part of this solution.

A bill sponsored by Assemblyman Bob Blumenfield (Democrat, Los Angeles) -- the Foreclosure Mitigation Fee (AB 935), which is currently going through legislative hearings - would require banks to pay their share of foreclosure costs. Backed by a broad coalition of consumer, community and labor groups, the bill would impose a $20,000 fine on banks for each foreclosure.

The $12 billion revenue over next two years would go entirely to local communities in order offset the multiple costs borne by our neighborhoods because of foreclosures and shared between public safety, public education, local governments, redevelopment activities and small businesses.

Los Angeles County alone will face an estimated 381,461 foreclosures through 2012, costing local governments $918 million in lost property taxes and $2.8 billion to pay for the problems. Riverside and San Bernardino counties have been particularly hard hit by the foreclosure earthquake. But no county, city, or small town in California has been spared the devastation.

Indeed, the foreclosure tsunami and the housing market crash are the primary causes of the severe budget crisis facing California's municipalities and counties, forcing local officials to slash services and lay off tens of thousands of employees.

But many Californians are asking, why should taxpayers and communities have to pick up the tab, and face such hard times, for a crisis they didn't cause? They - and the families caught in the maelstrom - are the victims of this human-made disaster.

And let's be frank. Wall Street's reckless and predatory lending practices were responsible for the mess we're now in. Bankers pushed homeowners into high-cost loans they couldn't afford. They engaged in deceptive and often illegal activities, like not informing consumers that they qualified for conventional loans, tricking them into more costly and risky subprime mortgages.

Wall Street banks bundled these risky loans into "mortgage backed securities" that were given the seal-of-approval of ratings agencies (Moody's and Standard & Poor), and then sold them to foreign governments, pension funds and other unwitting investors.

When the scam imploded and Wall Street's bets went sour, the bankers were bailed out by the taxpayers. Goldman Sachs got $53 billion in bailout funds; Bank of America received $230 billion; Wells Fargo pocketed $43 billion. Meanwhile, the top executives got outrageous compensation packages. Last year, for example, Wells Fargo CEO John Stumpf received $17.1 million in salary and bonuses.

But California residents lost billions in savings in their homes, neighborhoods were devastated, businesses crashed and laid off employees, and local governments spiraled downward into fiscal hell.

The largest banks - the Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup - are among the top lenders foreclosing on California families. Not surprisingly, these are among the banks that have been flooding Sacramento with political cash in order to thwart legislation designed to make them - the real culprits of the foreclosure massacre - pay for the suffering they've caused.

Since 2007, the financial industry has spent $70 million to buy political influence in the state Capitol - that's nearly $50,000 per day. Almost $46 million went for campaign contributions to candidates and elected officials, while more than $23 million went for lobbying expenses.

Six banks alone – B of A, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- have invested more than $9 million in political cash. Lobbyists and industry associations, like the California Bankers Association, the California Independent Bankers Association, and the California Mortgage Bankers Association, have doled out $4.5 million in what some call our system of legalized bribery.

The key organizations behind this pro-consumer bill include the Alliance of Californians for Community Empowerment, the Service Employees International Union, the California Reinvestment Coalition, the community organizing group PICO California as well as the California Council of Churches, California Association of Retired Americans, California Labor Federation, California Nurses Association, the Center for Responsible Lending, and the State Building and Construction Trades Council. They correctly believe that California's economy can't recover without addressing the cost of the foreclosure crisis.

AB 935 doesn't solve the entire foreclosure calamity. But it does have several very positive aspects. First, it may create an added incentive for banks to modify more loans so that families can remain in their houses. So far, most banks have pushed the pause button when it comes to renegotiating troubled mortgages with owners who could lose their homes through no fault of their own. Second, the revenues collected from the foreclosure fee will reimburse local governments for some (though certainly not all) of the costs our communities are now facing from foreclosures.

Until we make the banks pony up for the devastation they've caused, the taxpayers are left holding the bag, subsidizing the reckless behavior of excessively paid top bank officers, who threw a huge party for themselves and are making the rest of us clean up their mess. That’s not shared sacrifice.

Right now, Californians are bearing the full expense of the foreclosure mess. Shouldn’t the big banks be part of solution to the problem they helped create?

The Problem of Unemployment

Hating Keynes
By MIKE WHITNEY

Why do so many people hate John Maynard Keynes?

Anyone who spends time on the economics blogs knows that Keynes is blamed for everything from the Wall Street bailouts to quantitative easing. But, why? There's nothing in Keynes The General Theory of Employment, Interest and Money that suggests that he would have supported the bailouts or QE2. Yes, he would have made sure the financial system didn't collapse, but that doesn't mean he would have issued blank checks to insolvent financial institutions run by crooked bankers. He wasn't a moron nor was he a tool of big finance. He simply believed that when the economy was in freefall, it's crazy to worry about deficits. Put the economy back on a solid growth-path first, he thought, then rising revenues would lower the deficits automatically. It's a reasonable solution that's worked many times before. Only, now, the austerity zealots have grabbed the policy levers in Washington and shut off the fiscal stimulus spigot, so tried-and-true economic theory has been jettisoned to placate the nutballs. It's a real mess. 

Still, that doesn't answer our question: Why do so many people hate John Maynard Keynes?

Is it because they don't believe the government should ever meddle in the "free market" or is it because Keynes remedies usually involve a lot of red ink? Or is there a different reason altogether, a political objective that disguises itself as "principled Libertarianism" but, in fact, is an effort to crush the middle class and transfer more wealth to the uber-rich? Keep in mind, the GOP-led congress never had any problem running up deficits and doubling the national debt when G.W. Bush was in office. Only recently have they found religion. There's good reason to be skeptical.

Do Keynes critics know that he believed that budget deficits should be balanced during the good times? Of course not, because his most ferocious critics have never read anything he's ever written. They'd rather base their judgments on blog-blabber than give the man a chance and thumb through the original text. That's why they dismiss his many insights with a wave of the hand as if he was some big spending Democrat who didn't give a whit about the red ink he was generating. But that's baloney. Keynes is the best friend capitalism ever had. He put a human face on a system which--stripped of its niceties-- is little more than a bloody scrimmage for survival. His emphasis on full employment helped to strengthen the middle class and create the most prosperous and productive economy the world has ever seen. The General Theory was a path-breaking work that revolutionized economics. It wasn't an attack on capitalism or free markets, quite the contrary, it was an in-depth study of how the system could be made to operate more efficiently. The central idea was that the system works best at full employment because additional incomes generate greater demand which leads to more investment and a virtuous circle. Here's an excerpt from an article in the The Library of Economics and Liberty:

"Contrary to some of his critics' assertions, Keynes was a relatively strong advocate of free markets. It was Keynes, not Adam Smith, who said, "There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them." Keynes believed that once full employment had been achieved by fiscal policy measures, the market mechanism could then operate freely. "Thus," continued Keynes, "apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialize economic life than there was before" ("John Maynard Keynes", The Library of Economics and Liberty)

There's a lot in Keynes with which even the most ardent "hard money" tub-thumper would agree, but since his views have been reduced to "Keynesian this" and "Keynesian that", it's hard to convince people otherwise. But Keynes wasn't the spendthrift that many seem to think. In fact, he was quite conservative. And it's doubtful that he would have thrown his support behind "too big to fail" or the Fed's policy of shunting the losses of speculators onto the public's balance sheet. Neither of these are consistent with his views of a free market. Calling the bailouts "Keynesian" is not just unfair, it's ridiculous.

Obama's American Recovery and Reinvestment Act (ARRA), on the other hand, was clearly Keynesian. It provided fiscal relief directly to the economy and--according to the CBO---it substantially lowered unemployment, narrowed the output gap, and increased growth. The ARRA stopped the financial crisis from turning into another Great Depression, which proves that Keynesian stimulus works.

But there's more to Keynes than just fiscal stimulus. The man had a keen grasp of investor psychology, human nature and the workings of markets. Here's a clip from The General Theory that gives a sample of his thinking:

"Our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future....The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of the degree of our disquietude."

That's brilliant, and it explains why a sudden downturn in the market can quickly turn into a full-blown crash. Investors get scared, withdraw their money and hunker down. Pretty soon, the equity share supporting the markets vanishes and a bank run ensues thrusting the economy into a protracted swoon. And it's all because people lose confidence in their ability to anticipate what will happen in the future. Investment is all about anticipation; anticipation and confidence. Here's how Keynes summed it up:

"It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.

The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak.

The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention."

If Keynes is right, then what does that tell us about Bernanke's QE2, unquestionably the most misunderstood and contentious policy in the Fed's history? Has Bernanke fulfilled his role as steward of the system by reducing uncertainty and building confidence in long-term expectations, or has he merely added to investor anxiety by implementing programs that no one really understands? And, if confidence is not restored soon, then what will happen when the Fed ends its bond purchasing program (QE2) at the end of June. Here's what Keynes said on the topic:

".... a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation,.... Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.... Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die..."

This quote illustrates the difference between Keynes "the psychologist" and Bernanke "the technician". Fixing the economy is not merely a matter of moving the right lever at the central bank. Lowering interest rates and adding to the money supply can be helpful in effecting a rebound, but, by themselves, won't do the trick. "Animal spirits" need to be revived by reducing uncertainty as much as possible. Here's how Keynes summed it up:

"The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the quantity theory of money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."

This is really great stuff. The money supply alarmists have been pointing to the spike in base money as an indication that the country is quickly morphing into Zimbabwe, which is absurd because the transmission mechanism which the Fed traditionally counts on (the banks) is still on the Fritz. Yes, the banks are loaded with reserves, but households and consumers don't have access to those reserves and they're still deleveraging. Piles of money don't create inflation by themselves. Spending those piles does. At present, lending is flat and bank reserves are out of circulation. The danger of inflation is minimal.

Keynes could see that monetary policy alone could not restore confidence or put the economy back on track. He also knew that interest rates and credit easing did not provide an effective transmission mechanism for increasing demand, which is why the government needs to provide fiscal support when businesses slash investment and consumers are forced to increase their savings. Here's Keynes again from Chapter 12 of The General Theory:

"For my own part I am now somewhat skeptical of the success of a merely monetary policy..... I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment."

This is what fiscal stimulus is all about; helping the economy to recover by generating activity (eg. government spending) when consumers are on the ropes and businesses refuse to invest. 

The alternative is higher unemployment, lower revenues, falling prices, soaring defaults, slower growth and a reinforcing downward spiral. That said, we could see deflationary pressures reemerge as early as next month when Bernanke's QE2 ends and the flaws in the Fed's strategy become more apparent. Here's Keynes on the topic:

"The way to keep economies booming was by maintaining a high volume of investment and increasing the propensity to consume 'by the redistribution of incomes...so that a level of employment would require a smaller volume of current investment to support it." (Robert Skidelsky, "Keynes; The Return of the Master", page 68, Public Affairs, New York)

So Keynes supported redistribution? You bet. He had the foresight to realize that gross inequality leads to flagging demand. When workers no longer have sufficient wherewithal to keep the economy growing via consumption, then the system has to be rejiggered to shore up demand. It's not a question of Big Government "soaking the rich" to create a socialist Utopia. That's bunkum. It's a matter of recognizing the inherent shortcomings of the system and finding ways to make it operate more efficiently. And, that was Keynes strong-suit, transforming an unstable, crisis-prone system into a vehicle for widespread prosperity and wealth creation. 

That's why he devoted so much time to unemployment, because he knew that unemployment was symptomatic of a deeper problem, an unwillingness of the private sector to invest. When businesses withhold investment--because they see no growing demand for their products--then joblessness rises, spending falls and the economy slips into a deep funk. Keynes realized that this state of affairs (Depression) can last indefinitely unless the government steps in and fills the gap created by the absence of private sector spending. Thus, when consumers have to trim their spending and patch their balance sheets, and businesses cannot find profitable outlets for investment, it's up to the government to run deficits for as long as it takes to rev up the economy and create a self-sustaining recovery.

Keynes remedies will work if the right polices are implemented. Unfortunately, today's politics don't support the policies. So, when the Fed's bond buying program ends, economic contraction will likely resume and the country will face the prospect of another excruciating slump.