Thursday, June 30, 2011


You seem to be inventing monsters so you can fight them.
Edwin Drood

So I was reading today's Daily Howler, and Somerby noted a piece in the Outlook section of June 4's Washington Post that purports to explain "How We Got Here", with reference to the current fiscal situation we face. The failure, in this instance, was the author's curious position, admitted up front, that the particular issues at which she looks - the Bush-era tax cuts, the wars in Iraq and Afghanistan, and the stimulus package in 2009 - only account for one-third of the total current fiscal shortfall. What about the rest of it? As Somerby makes clear for readers who may not have noticed, 67% of the problem remains "unexplained", at least according to the categories set forth in a piece of journalism purporting to explain the situation. A bit like explaining football by talking about special teams only. You know, all that offense, defense is kind of important, too.

Funny enough, the current fiscal situation is easy enough to understand if you have been paying attention. Of course, not everyone has been, which is why the kind of journalistic malpractice Somerby highlights is so important. While the tax cuts enacted in 2001 and 2003, the wars in Asia, and the stimulus have, indeed, contributed to the budget shortfall, the elephant in the room is the subject no one wants to talk about - persistent high unemployment, brought on, initially, by the financial sector crisis, then industrial sector crisis in the fall of 2008, and the resulting Great Recession that just doesn't seem to want to go away.

There is a great deal of information out there on all sorts of specifics concerning the collapse of the financial sector, most clearly and cogently the Financial Crisis Inquiry Commission Report (and its bizzaro-world minority reports), about which I wrote this past January.

No one has been better at making clear the choices we have faced over the past two-and-a-half years than Paul Krugman. While occasionally venturing forth in to the waters of splenetic venting about how stupid and/or venal our elected officials can be, by and large his columns in the New York Times have been both simple and consistent: We know, if we wish to accept it, what needs to be done - fiscal stimulus both larger and more diverse than was initially used in 2009, over a longer period of time.

Other facts, more tangential, yet important nevertheless, include the behavior of the large banks who would, without the federal government stepping in through the TARP legislation passed in the autumn of 2008 no longer exist. Rather than say, "Thank you," the way my parents taught me, they cry and whine and moan about how mean the Obama Administration has been, how terrible the Democratic Congress was in daring to pass legislation regulating parts of their behavior. After all, they proved they are trustworthy, right?

Oh, wait. . .

They continue to restrict borrowing in what might be considered a rational response to recent events. Except, of course, as the FCIC report details, their behavior over the period of the housing bubble was anything but either normal, or even in many cases legal. Using their own irrational behavior as an excuse, they continue to use TARP and other funds to pursue high-risk, high-yield investment opportunities, rather than return to a kind fiduciary responsibility and financial probity one hears ad nauseum is the thing banks really do.

There is no mystery why we are in the situation we currently enjoy. It isn't something I made up, nor is it the vague ramblings of some weird liberal types. We can dicker over details - more or less stimulus, more or less oversight of the financial industry - yet recent history should be clear enough: If we had the will to make our way out, we would. Too many stakeholders have too much to lose if the changes needed to fix the problems were enacted. Thus, we have the dog-and-pony show of legislative gridlock and sideshow freaks like Eric Cantor pretending to act on principle when, really, we know he just dances to the tune of them what called it in the first place.

UPDATE: It is serendipity, or synchronicity, or perhaps just coincidence that I came across this article today.
In a well-covered exchange, Jamie Dimon, JPMorgan Chase’s chief executive, challenged Ben S. Bernanke, the Federal Reserve chairman, about the costs and benefits of the Dodd-Frank rules. More attention has been paid to the banker’s audacity, but the response of the world’s most powerful banking regulator was more troubling. Mr. Bernanke scraped and bowed in apology without mentioning the staggering costs of the crisis the banks led us into.

So this is a good occasion to step way back to understand just how good the banks have it today.

The federal government, in ways explicit and implicit, profoundly subsidizes and shelters the banking industry. True since the 1930s, it is much more so today. And that makes Mr. Dimon no capitalist colossus astride the Isle of Manhattan, but one of the great welfare queens in America.


This bailout never ended. “In effect, we nationalized the biggest banks years ago,” Mr. Allison said. “We implicitly guaranteed them. The taxpayers are still the ultimate owners of the risk in those banks — they just don’t get equity returns for that ownership.”

So when taxpayers hear a bank chief, like Jamie Dimon, complaining, it’s worth keeping in mind that his 10-figure paycheck is largely coming courtesy of us.
As they say, read the whole thing.

UPDATE II: Apparently, there's nothing new under the sun:
Suppose we describe the following situation: major US financial institutions have badly overreached. They created and sold new financial instruments without understanding the risk. They poured money into dubious loans in pursuit of short-term profits, dismissing clear warnings that the borrowers might not be able to repay those loans. When things went bad, they turned to the government for help, relying on emergency aid and federal guarantees—thereby putting large amounts of taxpayer money at risk—in order to get by. And then, once the crisis was past, they went right back to denouncing big government, and resumed the very practices that created the crisis.

What year are we talking about?

We could, of course, be talking about 2008–2009, when Citigroup, Bank of America, and other institutions teetered on the brink of collapse, and were saved only by huge infusions of taxpayer cash. The bankers have repaid that support by declaring piously that it’s time to stop “banker-bashing,” and complaining that President Obama’s (very) occasional mentions of Wall Street’s role in the crisis are hurting their feelings.

But we could also be talking about 1991, when the consequences of vast, loan-financed overbuilding of commercial real estate in the 1980s came home to roost, helping to cause the collapse of the junk-bond market and putting many banks—Citibank, in particular—at risk. Only the fact that bank deposits were federally insured averted a major crisis. Or we could be talking about 1982–1983, when reckless lending to Latin America ended in a severe debt crisis that put major banks such as, well, Citibank at risk, and only huge official lending to Mexico, Brazil, and other debtors held an even deeper crisis at bay. Or we could be talking about the near crisis caused by the bankruptcy of Penn Central in 1970, which put its lead banker, First National City—later renamed Citibank—on the edge; only emergency lending from the Federal Reserve averted disaster.

You get the picture. The great financial crisis of 2008–2009, whose consequences still blight our economy, is sometimes portrayed as a “black swan” or a “100-year flood”—that is, as an extraordinary event that nobody could have predicted. But it was, in fact, just the most recent installment in a recurrent pattern of financial overreach, taxpayer bailout, and subsequent Wall Street ingratitude. And all indications are that the pattern is set to continue.
History adds perspective, including the perspective that the banksters are free-wheeling precisely because they know we will pull their chestnuts out of the fires they set, and never ask anything of them.

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