A chance for presidential leadership

What we need and what we haven't had is real Presidential leadership, involving toughness and risk-taking. So far Obama has ineffectually cajoled in public and bargained in private.

First, the President should unveil, in detail, a plan involving both spending cuts and revenue increases. This should embody the "balance" that he mentioned in his recent television address. Polls both before and after this address show that a very substantial majority of Americans support such a proposal. By following up on his speech, he can make it clear that it is not the Democrats who oppose a balanced approach, but the Republicans. By including tax increases on the wealthy, he not only comes across as favoring a fair approach with widespread support, but he will make it clear exactly who opposes it.

This plan must be presented as the final, take-it-or-leave it proposal, and he must ask both houses of Congress to put it to a vote immediately, since time is of the essence. All along, he must emphasize the compromise nature of his bill, and dare the Republicans to break from Tea Screamer tyranny and vote for the good of the country. He must emphasize the compromise part which includes budget cuts.

I think it is unlikely that Republicans care more about the dangers of default than they do about the TeaScreamers running candidates against them in the primaries. Nevertheless, the compromise nature of the President's proposal must be crystal clear.

If, as seems likely, the PTR won't go along with this compromise, the President must, on grounds of national emergency, invoke the 14th amendment to the Constitution and declare the nation's debt -- already incurred, as so few people seem to understand -- to be undeniably valid. He should dare anyone to sue him over his effort to save us from default, and ask the American people to note who argues for a law suit in the face of financial anarchy.

I believe that most of Wall Street would applaud and support this Presidential policy.

Let's see some Presidential spunk, action, and leadership for a change. It's what FDR would have done. If he can't find it in his heart to act with authority and courage, I don't think he is worthy of re-election. In fact, what would we be re-electing him to? The presidency of an emasculated, uncaring country in thrall to a handful of Screaming ignoramuses, themselves backed by a small group of unpatriotic and greedy corporate tycoons.

The "centrist" myth

Today's NY Times has yet another nonsense quote, this time from Carolyne Waite, a librarian in Dedham Massachusetts:

"They're acting like 6-year-olds pretty much on both sides."

This is in reference to the fight over raising the debt ceiling.

No, Ms. Waite, both sides are not acting like 6-year-olds: only the Republicans are acting that way. There isn't  a "bit of blame on both sides" here: the Republicans are willing to put tremendous pressure on the American economy in order to attain ideological and unpopular goals that they could never achieve at the ballot box.

But you might as well read the correct analysis from one of the Times' best columnists. Here is today's column by Paul Krugman: The Centrist Cop-Out.

The Cause of the huge deficit

Read here what Dean Baker, Co-Director of the Center for Economic and Policy Research, has to say about the deficit. (Namely that the hugeness is largely the result of the recession, not particularly any spending or tax cuts or programs.)


Nevertheless, if we ever get our economy back on track (highly unlikely when we start massively cutting programs that create jobs), the Bush Tax Cuts and unpaid wars and the drug program for Big Pharma will still leave us with trillions to pay back.

Can even the business community or the tiny group of at least partially sane Republicans in Congress rein in the Tea Screamers? I don't think so. Frankenstein's monster is out of control and turning on its creator.

No matter how you slice it, the current budget-cutting mania in Congress is absurd and counterproductive. Since our democracy is incapable of providing feedback correction in time, all we can do is sit back and let the farce play itself out.

The Bush deficits

The Sunday NY Times for July 24 published an article by Teresa Tritch: How the Deficit Got This Big. She shows, using facts from the Congressional Budget office, that two wars and the Bush Tax Cuts were by far the most important factors in changing the outlook of budget surpluses from the Clinton era to the prospect of huge deficits that we now face. Here are two important tables extracted from this article. The first shows the the dishonest budget projections made during the Bush era. It's important to remember that their estimates of the cost of the war in Iraq were phony from start to finish; in fact, as phony as their excuses for starting the war in the first place. The second chart is a breakdown of the various components of the budget deficits, by administration. Read the article, look at the charts, and judge for yourself.

The New York Times Sources: Congressional Budget Office; Center on Budget and Policy Priorities;

Reid's plan and the true Republican aims

Matt Yglesias has an interesting article on why the Republicans will likely oppose Harry Reid's plan for raising the debt ceiling. He points out that even though this proposal meets the two stated objectives of the Republicans, namely  cuts equal to the the rise in the debt ceiling and no new taxes, it doesn't meet their two hidden objectives: starting to dismantle Medicare and extension of the Bush tax cuts.


To these Republican aims I would add two more. The first is keeping Obama a one-term President. This is not really a tacit aim since it was stated many months ago by McConnell. (I don't have the reference handy but I cited it in a previous blog). The second, related to the first, is to make sure that the economy doesn't improve in any way that might benefit Democrats in the 2012 elections.

Finally, I'd like to repeat once again that the country's largest corporations (and wealthiest individuals) are flush with cash. Taxes are not an issue in revitalizing the economy; what is an issue is that ordinary people don't have a lot of cash or security, and so are reluctant to spend for anything beyond the necessities.

The Republicans' real goal

I believe that this blog from Winning Progressive pretty much captures the real spirit of the Republican party (i.e. the PTR or Party for The Rich).

Is it for the best?

I had great misgivings about whatever "deal" Obama and Boehner were, in private, supposedly about to make. Now it seems that the deal, whatever it was, is off.

I am not an economist nor a seer, so I can't tell with any approximation of authority exactly what effect a debt default would have on all the thousands of things it's supposed to have an effect on. But I do know that cutting vital social and regulatory programs will have a very serious effect indeed on the quality of life for a large number of Americans. The last time Geitner and company told us that the sky would fall, we bailed out the banks -- especially the investment banks -- and the sky fell for lots of people except the investment bankers and their pals.

Surely there is some limit to the kinds of things we will compromise on in order to keep things going the way they are now going, which isn't too great at all. My main financial advisor suggests that if the debt ceiling is not raised, Obama should go on national TV and announce that in order to avoid default, he will continue to pay the military and Social Security and a handful of vital services, but that all federal payments to the states will cease until funds are available; also, no checks will be cut to any members of the House or Senate. Since a lot of the states which take in more federal dollars than they pay out in taxes are actually Republican states, that may force some people who profess to hate government to give things a second thought. Ooops, I mean in many of their cases, a first thought.

As Obama himself has said, the creation of programs to help the less fortunate and less powerful  is part of who we are. If we cut these programs, then who are we?

There are moral defaults as well as financial ones.

Cloud cuckoo land

House leader Boehner said, for the umpteenth time: "The American people will not accept — and the House cannot pass — a bill that raises taxes on job creators."

This is exactly wrong. While we don't have governance-by-polls, the American people have said, loudly and with a clear majority, in every poll since forever, that they believe that wealthy people should pay more in taxes. While it is true that we all want job creation, only Tea Screamers and their PTR enablers believe that execs from, say, Goldman-Sachs, are by any stretch of the imagination, "job creators."

This is the pure and simple Republican use of The Big Lie: repeat an untruth enough times and people are likely to believe it. If the Democrats hold their ground on this I believe they will reap great political benefits. The question is: can Democrats actually hold ground on any issue these days?

I personally think that entrusting our parties to the mischief of a secret deal amounting to $ 4 trillion dollars or so is very dangerous. There are too many issues where the Dems are likely to sell out, trading small potatoes like mild "tax reforms" in exchange for vast and devastating cuts in vital social, regulatory, and infrastructure programs. In other words, Obama and the Dems are likely to trade away programs that might actually create jobs and restore the economy, in exchange for a handful of no-brainers like elimination of Ethanol subsidies or even a slight roll-back in the Bush Tax Cuts for The Rich. Taxes on the wealthiest 1- 2 % should be greatly increased, in fact, since they have been making out very well for decades while middle-class income has been basically flat. They can afford to pay a lot more without much discomfort.

I'd be inclined to say: Go ahead and follow the PTR's trickle-down economic policy -- you'll see once again what a crock it is and always has been. But: there are a lot of people who will get seriously hurt if this happens.

Unfortunately, like everyone else except for a handful of leaders meeting in secret, we have no knowledge of what's going on, no input, and no control of highly important issues that effect all of us. As I said to begin with, the Republicans are simply making up nonsense for sound bites, and the Dems are ... well, being Dems; and, there is no way that we can institute a vote of No Confidence if we don't like what these folks are planning for us.

This is not a very encouraging sign for Democracy.

Sheila Bair

It is worth reading the article about Sheila Bair, the former head of the F.D.I.C., by Joe Nocera. Click HERE.

Bair believed that depositors should be protected, but that investment banks and their clients and creditors should be prepared to take the consequences of their risks. It is interesting to read what she has to say, then compare it to the similar attitude of the Icelandic government, which seems to have saved its people from suffering the fate of Ireland, a country that followed the U.S. down the bailout route for its so-called "Too-Big-To-Fail banks."

Republican economics at work

 In an article from the National Journal, Ronald Brownstein writes:

During Bill Clinton's two terms as president, the median family income increased by 14 percent, the number of Americans in poverty declined by nearly 17 percent, and the number of children in poverty fell by almost one-fourth.

Since he left office in 2001, the median income has declined by 5 percent, or more than $2,500. The number of Americans in poverty has increased by 38 percent, or about 12 million. The number of children in poverty has spiked by one-third, or nearly 4 million. Few decades in American history have produced such economic losses.

The Clinton-era gains derived, above all, from a dynamic labor market that produced nearly 23 million new jobs from February 1993 to February 2001. Conversely, the stagnation of America's lost decade since then is rooted in a breakdown of job growth: Incredibly, nearly 1.5 million fewer Americans are working today than in the first full month after Clinton left office. The Great Recession that followed the financial meltdown of 2008 vastly compounded the problem but didn't create it. Even while the economy grew from 2001 through 2007, it produced, on average, only about half as many jobs annually as it did during the 1990s.

(To read the whole article, click HERE.)

Read that last sentence again: during the Bush "recovery," the economy produced "only about half as many jobs annually as it did during the 1990s." I've pointed this out before, but here it is again. And this is just a recovery, not even the debacle that started in 2008 (before Obama took office). Republican policies have been tried and found wanting. If we now listen to their discredited theories once again, we'll be asking for another kick in the face. 

How many times can you get fooled by the same nonsense? 

ANSWER: Apparently lots of times. Political and economic memory seems to last about a year at best. After that many people will believe anything if you say it enough times. Ordinarily one might say that we get what we deserve, but a lot of folks who aren't rich and who are informed voters are going to get shafted unfairly.

Obama and debt reduction deals

Like everyone else, I am waiting to see what comes of the negotiations among Obama, Dems and the PTR. As usual, these talks are in secret. Both parties and the President tell us that what they want is what we the people want and need. Nevertheless, none -- none! -- of them seem to be interested in letting us know exactly what they are negotiating for or against. Actually, of the three parties, only the PTR (formerly the GOP)  has given us much insight as to their position: No New Taxes -- not even any old taxes (which were removed or lapsed). Since their position, as I've stated many times, is beneath contempt, I won't go into it again.

But what is Obama willing to give away? I am very nervous about this, since he seems to be buying into the right-wing rhetoric that only debt is standing in the way of boom, and that cutting will lead to jobs and prosperity.  This makes very little sense, given the amount of cash that private industry is sitting on (waiting for demand), and given that the cuts and proposed cuts and imagined cuts have been causing the loss of many jobs in the public sector. These are very important and productive jobs: teachers, firefighters, police, infrastructure, regulation and inspection. Only the cynical right-wing policy of demeaning everything having to do with government has enabled many to overlook not only this disastrous loss of employment but also the fact that the important work these people would have done is not getting done, or getting done much more slowly and incompletely.

During the Great Depression, Roosevelt briefly and disastrously accepted this idea that trying to balance the budget and cut deficits would help the economy -- a Republican idea from the time when Republicans actually believed in balanced budgets (unlike the modern ones who, in every recent Republican administration, were more than willing to accept monstrous deficits in order to fight wars or help their wealthy patrons). This strategy simply made things worse, and for the same reasons that trying it again will make things worse.

In fact, large majorities of the American public have been making it clear in poll after poll that they favor taxing the wealthy more and cutting important -- and job-creating/preserving programs -- less. This is exactly the opposite of what the PTR claims, but they go on and on in their fantasy-land of tax cuts. (To be fair, some Democrats including, apparently, Obama, seem willing to buy into this as well.)

I hope that I am wrong, but I can see Obama mousetrapping his party by selling out once more to the intransigent Republicans. This would put his party in a bad position, since he is constantly projecting the image of himself as "above the fray" -- willing to make compromises of any and all sorts to save the (economic) Republic. If his own party subsequently demurs -- i.e. actually follows what seems to be the will of the people -- then the Dems could end up replacing the Republicans, in the eyes of the electorate, as the obstructionist  ones. Bill Clinton followed the same course -- refusing to work for his party or embrace its ideals fully -- and was rewarded with a second term, but at the expense of the loss of Congress -- the same Republican Congress that went on to impeach him.

We don't know what's going to happen until these closed-door, backroom deals (Do they still smoke cigars?) have been made. I am in the dark, as we all are, but I'm plenty nervous.

Iceland, Part II

A report in Bloomberg (click here) suggests that Iceland's reaction to its fiscal calamity was the opposite of Ireland's.

"Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product."

Within a week of the collapse of Lehman Brothers and its own financial institutions, Iceland briefly took over its three main banks. Although it never nationalized them, it divided each into two new banks. One of each of these pairs was devoted to local (Icelandic) creditors, and the other to overseas creditors. The Icelandic creditors were protected, but the parts of the three banks devoted to foreign creditors (the much larger part in each case) were placed into receivership -- similar to chapter 11 bankruptcy in the U.S. Except for actual depositors, creditors in these parts could expect to receive back only a small  percentage (less than half) of their investments.

Since I don't have access to the Icelandic press of 2008 or actual accounts of the debates in Reykjavik about these decisions, it is hard to tell exactly why the government decided to do this. Their stated purpose was to protect Icelanders from the ruin of having to pay back all the debt incurred in the international disaster. Because of the overvaluing of the Kroner and other factors mentioned in my previous blog, there was a lot of speculative money put into the Icelandic financial system, and certainly Icelanders, and probably their government, must have felt that the very nature of speculation is risk, so that their first duty was to preserve their own country. Here's how Arni Tomasson,  the president of Glitnir, Iceland's third largest bank, put it:

“Everybody was panicked -- depositors, creditors, banks around the world. The effort by all of us at the time was to make sure life could go on as normal.” 

To be perfectly fair, there really wasn't much choice. Iceland gross foreign debt was around 7 times its Gross Domestic Product -- though the total assets of the three banks taken down was more than the debt (but this included deposits either guaranteed or potentially guaranteed). The Central Bank of Iceland (CBI) had nowhere the resources to assume responsibility for this debt; in fact, the Icelandic banking industry had become much larger than the entire rest of the Icelandic economy. Thus, Iceland could either cut loose the foreign creditors, or try to borrow -- at very bad terms -- enough Euros (or dollars) to save the banks (Ireland's path); it chose the former.

To protect its own citizens, the UK, which had been bad-mouthing the Icelandic economy, seized the assets of Landsbanki (Iceland's second-largest bank) in Britain. The fact that it did this under a provision of its Anti-Terrorism and Security Act partcularly rankled Icelanders and their government, and very harsh words were exchanged publicly; one of the governors of the CBI said "we do not intend to pay the debts of the banks that have been a little heedless." The UK decided to guarantee its depositors -- later, CBI  agreed to help as well; nevertheless, hard feelings persisted (probably still do).

There were also criminal investigations (still continuing) into favoritism in loans by the big Icelandic banks. I don't get the feeling that this was anything particularly unusual in the financial community, but it became magnified because of the huge surge in the financial sector of Iceland during the boom years, and the resulting crash which outraged Icelanders. The small size of the country made their unhappiness with their banks quite evident. Large demonstrations in Reykjavik, attended by thousands -- a good chunk of the total population of about 300,000!
-- was reported faithfully by the press, and had a direct effect on the democratic government. Several measures involving repayment to lenders and creditors were defeated by the pressures of these public displays. Iceland has a very strong tradition of popular democracy.

Eventually, Iceland sought help from Russia, the IMF, and other Scandinavian countries (and Finland). The IMF, as usual, forced certain austerity measures on the Icelandic economy which created more unemployment (more than 10% which is very very high for the country); nevertheless, the money was needed to repair Iceland's credit.

The Kroner, after a period of free fall and drastic fluctuation, stabilized at about half its previous value against the Euro, while inflation also soared.

Then the situation began to improve. More favorable loans were obtained from other Scandinavian countries; the "Icesave" bill repaid  the UK and the Netherlands a large amount of money lost to depositors; and the GDP stabilized and even saw some modest growth. The prime minister during the boom and bust, Geir Haarde (shouldn't he be Geir Tomasson?), was forced to resign (the reason given was his health.); he was replaced by the Social Democrat Johanna Sigurtharddottir in 2009. She has been a strong advocate for full membership in the EU -- a policy which has helped Iceland economically and politically in Europe. Other European countries which had vowed never to lend or invest in Iceland have come around -- replacing "never" with "maybe in a decade," then "maybe in five years." In fact, in 2011, Iceland was able to raise $1 billion in an international bond issue.

The people of Iceland have very little faith in their now much scaled-down banks, but they realize that it's what they have, and they need them to regrow their economy. Unemployment, while still high, has not increased; there are some signs that it will soon come down. Most of Iceland's social programs, while undergoing cuts, remain in place, thanks to the refusal of the government to sell out everything to rescue its banks.

After only a week in the country we could not make any serious personal observations of the effects of the 2008 crisis. Prices are very high on almost everything (hamburgers are $12 in most places; paperbacks are $20; we couldn't afford the famous Icelandic wool sweaters). People seemed cheerful and we didn't see any of the noisy demonstrations common several years ago. At least one restaurant we ate at devoted a full page of its menu to a denunciation of the financial community. Although everyone we met spoke English, we couldn't decipher the newspapers we saw, which were in Icelandic. In any case, we went to do sightseeing, not make a political report.

Iceland is a unique and wonderful country, with very laid-back and hard-working people. Their disastrous experience with international finance has left them somewhat sadder, somewhat wiser, and a whole lot poorer. But things are getting better, and they didn't sell their future to bail out  international speculators: good for them.

Iceland, Part I

We just got back after spending a week in Iceland. It is a country remarkable for it unusual geology, climate, people, history and -- unfortunately for Icelanders -- its economic difficulties.

Since this is a political blog I'll just give a brief summary of Iceland's features. It is an island just south of the arctic circle. This time of year it never gets dark: the sun sets around midnight and rises a few hours later, so there is just a brief period of twilight interrupting daylight hours. The population is only about 300,000, with at least 2/3 living in the capitol Reykjavik. The main industries are, usually, fishing, farming, renewable energy (mostly geothermal and hydroelectric), some manufacturing (aluminum and woolen goods) and, in the past dozen years or so, tourism. I say these are "usually" the principal industries because, during the fiscal "bubble" that briefly existed before the world-wide economic disaster of 2008, many Icelanders became preoccupied with amateur "investment banking". That is no longer considered a worthwhile or even socially acceptable activity -- nor is banking in general among Icelanders. The feeling is, in some sense, mutual, since there is no love lost between the international investment community and the populace and government of Iceland -- as I'll explain below.

Aside from the stark beauty of its topography, two factors are very important to understanding Iceland. The first is its placement as an island in the middle of some very rich fishing areas. Historically, fish and other maritime products have been the source of about 3/4 of Iceland's exports. In the '70s a virtual war with England over fishing rights broke out, and was only resolved by a NATO compromise -- mostly in favor of Iceland. Also, Iceland's claim of  a 200 mile wide territorial fishing water has influenced its relations with both NATO and the European Economic Community.

The other factor important to Iceland is its volcanic activity. While this creates some problems -- e.g. the recent eruption of the volcano under  Eyjafjallajokull ("jokull" means glacier), it also helps tourism ("Geysir", somewhat northeast of Rejkjavik, is the original geyser). Even more importantly, it is the source of an immense amount of cheap and renewable energy. Just about all of the hot water in Iceland, for example, is produced from subterranean streams of volcanically-heated water.

Geography and natural resources have, over the centuries, been instrumental in keeping Iceland self-sufficient and relatively isolated. Immigration has been so low that both the gene pool and the Icelandic language have remained quite stable for a thousand years. So has the fishing and farming basis of its economy.

Stable, that is, until somewhat less than a decade ago when the "financial services" industry in Iceland began to take off. In particular, until the Icelandic banks began a period of aggressive investment expansion. I have read a number of articles trying to explain what happened; here is my take. If you have further info, or a different view, please comment.

First of all, in the early 2000s, the Icelandic Krona was considered overvalued; it was trading at about 60 to the U.S. dollar. Second, the Icelandic central bank was willing to issue easy "liquidity loans" to its banks, and the world economy was booming. Finally, there was an additional source of low-interest capital available: foreign inverstors, principally Japan. Thus, the banks found this a very good time to start a long-term investment policy, where they anticipated very good rates of return. They financed these investments via short term loans. Thus, to keep the money flowing to the more profitable longer-term projects, the banks had to keep "turning over" or reinvesting their short-term interbank loans.

The von Mises Institute calls this kind of investment strategy Maturity Mismatching and points out its main danger: If the short-term investments can not be readily turned over, due to some impediment to liquidity (the ability to exchange assets or cash for assets), the banks can be left undercapitalized due to their long-term commitments. Furthermore, the artificially low rates established by the Central Bank of Iceland forced the banks, in order to compete, to issue riskier and risker mortgages (since they couldn't offer lower rates).  Thus, though the derivatives business was not an important factor in Iceland, the banks still were involved in the equivalent of the subprime mortgage boom, and thus were vulnerable to the housing contraction that occurred in 2007-2008. Finally, the Central Bank explicitly committed itself to be the the "roller-over of last resort" for the banks, guaranteeing them short-term funds to protect their investments if it became necessary.

As the von Mises report states:

The ultimate problem with maturity mismatching is that there are insufficient savings available to finish the artificially high number of projects undertaken. Lenders have only saved for 3 months (i.e., the term of the commercial paper) or not saved at all (i.e., the term of the deposit), and not for 30 or 40 years (i.e., the term of the mortgage or capital project). Maturity mismatching deceives both investors and entrepreneurs about the available amount of real long-term savings. Hence, by borrowing short and lending long, long-term interest rates are artificially reduced. Entrepreneurs think that more long-term savings are available than really exist and accordingly engage in malinvestments that must be liquidated, once it becomes obvious that there are not enough real savings to sustain them to completion.

In the Icelandic case, the malinvestments were made mainly in the aluminum and construction industries. Both aluminum mines and residential and commercial housing represent long-term investment projects that were financed by short-term funds and not by savings of an equal term.

Meanwhile, the high rates of return that the Icelandic banks had been offering both domestically and internationally, had been so attractive that the entire financial services sector in Iceland  was seeing an unprecedented national boom. Ordinary Icelanders who had been involved in the traditional Icelandic industries of fishing, farming and light manufacturing began to take up finance and investment with their private savings. For a period of several years investment banking was the fastest growing industry in Iceland, with billions of Kronor (plural of Krona) being diverted into speculation as opposed to direct financing of productive industry.

Within hours of the fall of Lehman Brothers, the Icelandic banking industry went under -- its source of short-term capital having dried up almost instantly. Within days the three largest Icelandic banks were in receivership and the entire economy seemed in imminent danger of complete bankruptcy, due to the commitments of the Central Bank. The government had to do something very quickly to avert total disaster.

More next time.