Tag Archives: banks

The Federal Reserve vs. the Tea Party

The Federal Reserve turned down its invitation to a Tea Party.  The Fed looked at the havoc Tea Party Republicans want to create with the U.S. budget and decided to put more sand bags in the economic dike.

Ben Bernanke and his fellow bankers decided on September 18 to keep buying $85 billion in mortgage bonds and treasury bonds, hoping they can keep the feeble economic recovery from collapsing into recession when the Tea Party Republicans refuse to raise the debt ceiling.

The good news is that Fed Chairman Ben Bernanke is trying to keep the economy on track as we head into a serious collision between the Democrats and the Republicans over the federal budget and the debt ceiling resolution – both of which have to be resolved in October.  The bad news is the economic expansion is so weak, a few weeks of political confusion might plunge us back into recession.

Buried in the back part of stories about the Federal Reserve’s decision was the grim news that the Fed’s economists have lowered their predictions for economic growth.  The new prediction is for tepid growth of 2.0 to 2.3 percent this fall – a rate that will not put many people back to work.  The Fed and the mass media have finally noticed what I pointed out last spring in this blog – much of the fall in the unemployment rate is coming from people dropping out of the labor force.

Look at this, the number of people in the labor force, that is, working full or part time or looking for work, fell by 312,000 in August.  As a result the labor force participation rate fell to just 63.2 percent – the lowest it has been since 1978, back when it was pretty common for only one adult in a household to be working.  The impact is staggering – the unemployment rate has fallen 2.7 percentage points from a peak of 10 percent in 2009 to 7.3 percent in August.  The majority of that decline, 1.8 percentage points is from the drop in the participation rate!

Enter the Tea Party/Republican Party.  In utter disregard for the spreading poverty around them, the House of Representatives voted 217 to 210 to slash $40 billion from the Food Stamp program.  This is the latest round in the right’s relentless push to re-distribute income through tax cuts for the rich and benefit cuts for the poor.  As usual, this subversive program is obscured by a fog of words proclaiming a moral crusade against deficit spending and the undeserving poor.  For example, Representative Marlin Stutzman of Indiana, who led the Republican push for the cuts, said “This bill eliminates loop-holes, ensures work requirements, and puts us on a fiscally responsible path.”

What nonsense.  The 44 million Americans, one in every seven of us, who have their income supplemented by food stamps and the 48 million Americans without health insurance are not causing our economy to stumble along.  The Republicans have been using this “blame-the-victims economics” for over a generation.

It only works if the rest of us are unable to see that the root causes of our problems lie in the selfish decisions being made by bankers, hedge fund managers, right-wing CEOs, and the political leaders they support with millions in political donations.  Don’t take my word for it, ask Ben Bernanke.  If the Federal Reserve Board is afraid of the political plans of the Republican Party, then we should be too.

The Stock Market and the End of the Bernanke Put – Part I

Since the 1980s, speculation in U.S. financial markets has been supported by first the Greenspan “Put” and then the Bernanke “Put.”  These puts – informal promises by the Federal Reserve Bank to protect the value of stocks and bonds and prevent destructive crashes, will come to an end if the Fed stops buying housing bonds and allows interest rates to rise this fall.

The wealthiest 1% of Americans, who own about 33% of the total value of stocks and bonds on Wall Street, are upset about the amount of risk they face without the Fed pouring money into the economy.

PART I  To understand why the stock market jumps up and down depending on what Ben Bernanke says, you have to understand the Greenspan “Put.”  In the 1970s, the post-WWII golden age of American prosperity came to an end.  The combination of staggering oil price increases, fierce competition from foreign imports, and resistance to wage cutbacks by unionized workers led to “Stagflation” – an unhappy world of slow growth and high inflation.

Profits for non-financial corporations were squeezed by these trends; in the late 1970s the rate alternated between 2% and 4%, less than half the profit rate of the 1950s and one third of the profit rate of the mid-1960s. 

In response to intense competition from modern factories in Germany, France, and Japan, U.S. industrial firms began what Barry Bluestone and Bennett Harrison wrote about in their ground-breaking book The De-Industrialization of America.  In a process that now seems commonplace to us, many companies closed old, unionized factories in the northeast and mid-west, moving them first to the south and then overseas.

Other manufacturing firms were purchased, their assets sold for cash, and the shell of the company then allowed to go bankrupt.  The blockbuster movie Wall Street captures the ruthless scramble to turn factories into cash in the 1980s.

With investment in tangible production assets becoming more risky and less profitable, American banks and investors began turning to financial speculation as a way to maximize their returns.  The newly elected Reagan administration was eager to help, persuading Congress to loosen regulatory restrictions on the savings and loan industry and stocking the government with regulators who looked the other way when new financial instruments like “junk bonds” appeared on Wall Street.

The explosive growth in these new financial products was fueled by a rapid and costly defense build-up which led to federal deficits of 6.1% of GDP in 1983, 5.2% in 1985 and 5.1% in 1986 – the largest peace-time deficits in U.S. history.  These deficits led to wild speculative excesses on Wall Street, vividly captured in Tom Wolfe’s novel Bonfire of the Vanities.

Alan Greenspan, formerly Chairman of Gerald Ford’s Council of Economic Advisors, was appointed chairman of the Federal Reserve in August of 1987, at a time when the roaring stock market had soared 44% in just one year.  Then, on October 19, 1987, a day after the Hong Kong the stock market collapsed, Wall Street stumbled into full financial panic, losing 22.5% of its value in a single day.  Greenspan immediately stepped in, providing large loans to banks and lowering interest rates.  He announced that the Fed “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Greenspan, over the course of five terms as Fed chairman, would demonstrate again and again that the Federal Reserve was ready to pump money into the economy any time the financial markets got into trouble.  This guarantee of support became known as the Greenspan “Put.”  In the world of finance, a “put” is a contract that gives its owner the right to sell a stock or bond at a certain price regardless of whether the market is falling – essentially a guarantee against severe losses.

With the Greenspan “Put,” banks and investment companies could take more risks.  In response, they began inventing the world of derivatives, hedge funds, sub-prime mortgages, and securitization of loans that proved so unstable in 2000 and 2008. 

Next week in Part II, I will look at two examples of the Greenspan “Put” and then show how Bernanke has done even more than Greenspan.

Postscript: Front page headline in the Wall Street Journal on Friday the 11th, the day after I put up this post: “Stocks Surge to Fresh Highs: Skittish Investors Gain Courage From Fed Chief’s Reassurance on Easy-Money Policy.”

Don’t Buy at the Top of the Stock Market

The Stock Market is reaching the end of a long rise in values, so heed the yellow caution signs. There are many indications that when the downturn comes, investors who brought their money late to the party will end up taking a financial bath.

It is not time to run, but it is time to put your cash in a safe place.

Our modern Stock Market is not deeply tied to the fate of the real economy; with hedge funds, e-trading, derivatives, and “shorting,” the markets have plenty of things to do with their cash without worrying about messy things like investing, manufacturing, and selling. However, there is one thing that gets everyone’s attention – the candy machine known as QE 3, the U.S. Federal Reserve program that injects $85 billion into the financial markets every month, providing cheap money for banks to use as they please.

The key is to remember that the third round of Quantitative Easing since 2010 (thus QE 3) does not consist of the Fed buying government bonds, which would facilitate deficit spending and stimulate the entire economy. Instead, QE 3 consists of the Fed buying housing bonds from banks and other bundlers of mortgage bonds, thus giving money to these financial firms to spend on stock market purchases, commodity speculation, and maybe a few bank loans. It is the trickle-down theory in a financial management disguise. Give money to the rich and let them do things that will get the economy moving.

In practice QE 3 has two results: (a) mortgage rates are very low, so if you have a good, steady job you can get a cheap mortgage and, (b) financial firms have a lot of money to invest in stocks. Thus, the stock market has steadily risen during QE 3.

So, when Fed Chairman Ben Bernanke told a Congressional Committee on May 22 that the Fed might decide to reduce the number of housing bonds it purchases at one of the “next few meetings” the stock market trembled. Then, the minutes of the April Fed meeting were released later that afternoon and people discovered that “a number” of officials wanted to begin reducing the program in June. Investors panicked. The Dow lost more than 80 points in two hours and other indexes fell, too. With wild rumors about the Fed’s intentions still flying about, the Dow lost 138 points on Wednesday the 29th and 240 points on Friday, May 31st.

These events essentially confirm what many people suspected; the vigorous rise in the stock market since last fall is primarily a function of the Federal Reserves’ stimulation policy. It must be, because the real world economy is in decline:

The Eurozone, the world’s largest economic unit, is trapped in its 7th consecutive quarter of declining growth;
China’s growth is slowing to less than 7% a year (the smallest rate since 1990);
Cuts in federal spending will reduce U.S. economic growth in the second part of the year; and
The gradually falling U.S. unemployment rate is largely a product of 6.5 million people leaving the workforce.

In this environment, stocks will continue to rise only as long as the Federal Reserve keeps pumping $85 billion dollars into the financial markets each month. A major cut-back in that subsidy is likely to lead to a drop of 10% to 20% in stock prices. That means that if you put money in the market when the Dow is at 15,200 and it rises to 15,500 and falls 20%, then it goes back to 13,000 or less and you lose a good chunk of your investment. Wait and buy at the next market bottom, when you see Washington and the Fed stimulating the real economy.

Tax Cheats are Forcing Painful Federal Cuts

Corporate profits have surged since the Financial Crisis, but these companies are using dozens of tax loopholes to starve the U.S. government of revenue – pushing up the deficit and forcing Congress into making painful budget cuts.

One sign of a dysfunctional political system is when major corporations refuse to pay taxes.

As we have every year since right-wing Republicans found that cutting taxes and creating deficits was good politics, there will be an enormous outcry about taxes this April. I propose we turn the spotlight on this county’s biggest tax cheaters – large corporations that think they are doing us a favor by operating in the U.S. instead of Switzerland or Dubai.

They claim to be job creators, but they certainly aren’t tax generators. The federal Joint Committee on Taxation estimates that in 2013 about $154 billion in special corporate tax breaks will be granted through 135 individual sections of the U.S. tax code. This staggering sum is nearly twice as much as the more than $80 billion in spending cuts taking place through “sequestration.”

One example is the Active Financing exemption for multinational banks and corporations, which was renewed as a little noticed part of the tax legislation passed to avoid the fiscal cliff. This exemption allows multinational firms to set up foreign subsidiaries that receive interest and insurance payments, and carry out financing activities for American exports. Citizens for Tax Justice says:

[The exception is one of the primary reasons General Electric has paid, on average, only a 1.8% effective U.S. federal income tax rate over the past ten years. G.E.’s federal tax bill is lowered dramatically with the use of the active financing exception provision by its subsidiary, G.E. Capital, which Forbes noted has an “uncanny ability to lose lots of money in the U.S. and make lots of money overseas.”]

The exemption, which was eliminated in the 1986 Tax Reform legislation signed by President Reagan, was re-enacted over President Clinton’s veto in 1997. It is renewed each year through the efforts of The Active Financing Working Group, a coalition of multinational companies that includes G.E., J.P. Morgan Chase, and Caterpillar. The Working Group paid $540,000 in lobbying fees to Elmendorf Strategies in 2012 according to Senate disclosure forms.

These tax subsidies continue to flow to corporations even as their profits have soared since 2009. General Electric has raked in $81 billion in profits over the last five years and received a $3 billion refund as a compliment to its tax lawyers.

This is not merely an issue of fairness – corporate tax avoidance, which goes on at the state and local level as well, is bleeding our nation’s ability to educate our youth, send kids to college, care for the sick, and support the elderly and the disabled. In an era of economic decline it is a crime.

The Big Banks, Big Media Screen Play

Big Banks and hedge funds usually have a cozy relationship with government regulators; a situation that Congress supports and the media seldom reveals to the public.

The term for this is “regulatory capture” and each actor has a role to play.

We begin our story with an article last week in the business section of the Boston Globe that was written by a journalist with the Associated Press. The article informed readers that Mary Jo White, the president’s nominee to be chairman of the Securities and Exchange Commission (which regulates stocks and bonds and the companies that trade them) is a former federal prosecutor. During her confirmation hearing before the Senate Banking Committee, she said “Strong enforcement is … essential to the integrity of our financial markets.” The article concluded that the president’s nomination of a former prosecutor sent “a signal that he wants the government to get tougher with Wall Street.”

However, readers of Truthout, a much smaller group of Americans, discovered that Mary Jo White left government more than ten years ago to join a Wall Street law firm and represent clients such as JPMorgan Chase, UBS, General Electric, and a former Goldman Sachs board member who is appealing an insider trading conviction. Her role at the firm was to “concentrate on internal investigations and defense of companies and individuals accused by the government of involvement in white collar corporate crime or Securities and Exchange Commission and civil securities law violations.”

While serving as SEC Chairperson, she will be receiving $42,000 a month in retirement pay from her former firm, Debevoise and Plimpton LLP, which pays partner retirement benefits out of its current operating income – i.e. fees from large banks and corporations.

The Senate Banking Committee did not find this apparent conflict of interest troubling. In fact, the Washington Post noted that no senator voiced opposition and some of the time was spent discussing Ms. White’s active recreational habits such as riding motorcycles.

After exchanging pleasantries with Ms. White, the Republicans on the Banking Committee spent the rest of the day attacking Richard Cordray, who the president re-nominated to head the Consumer Financial Protection Bureau. These ever aggressive defenders of big corporations and big banks denounced the Bureau and said they would filibuster Mr. Cordray’s nomination.

I believe this situation presents a good case study of regulatory capture in action. The less obvious, but still important things to note are:

(1) even Democratic liberals on the committee – including Sherrod Brown of Ohio, Jack Reed of Rhode Island, Robert Menendez of New Jersey, and Charles Schumer of New York – were not willing to challenge the president’s nominee or Wall Street influence, and

(2) voters who read only the Associated Press account of the hearing would have no idea of the compromised politics involved in the nomination.

I believe that regulatory capture, which happens everywhere in Washington, can only be prevented by interventions carried out by a political movement that pressures Democrats and demands media attention.  We can not wait for them to stand up to Wall Street and big business.

 

Not Really a Progressive

I went to hear George Packer, of The New Yorker fame, speak this week and was struck by his references to the Progressives; the real ones in 1905, not the vague term that people use today.  Mr. Packer said President Obama is like the Progressives in his passion for clean, open government; he deeply values a political system where issues are discussed in a spirit of good faith, where leaders struggle to work out what actions are in the best interest of the country.  This progressive, good government impulse is deeply embedded in the president’s “come, let us reason together” personality and is the source of his persistent attempts at bi-partisanship.

Mr. Packer also said that Obama, like the Progressives, believes in expertise and group discussion in order to reach the right policy prescriptions.  Once he reached the White House, Obama moved away from his campaign “man of the people” persona and adopted a more deliberative, expert-oriented, decision-making process.  While this was most evident during the three month process that preceded his decision to drastically increase military activity in Afghanistan, the same process was also used for major issues like saving the financial system, pushing for health care reform, and addressing climate change.

Unfortunately, the mere listing of those last three issues, banks-health care-climate change, highlights the dramatic way in which President Obama is not at all like the Progressives of the early 20th century.  Those reformers were passionately opposed to the abuses of large corporations and banks.  The “Robber Barons” were not loved by most Americans and numerous movements rose up to challenge their ability to exploit workers and consumers.  In fact, by the 1912 presidential campaign between Teddy Roosevelt, Woodrow Wilson, and Howard Taft, there was a fierce debate over whether big companies should be dismantled through anti-trust court action (Taft), closely managed through a system of powerful federal regulatory agencies (TR), or some combination of the two (Wilson).

Needless to say, Mr. Obama has never considered any of those alternatives.  Instead, following the advice of his experts, he, and the Democratic leadership in Congress, have attempted to purchase good behavior through open-ended bail-outs of financial firms, concessions that preserve the profits of drug and insurance companies, and subsidies and exemptions for dirty energy providers and users in the cap-and-trade bill that passed the House last summer.

Obviously, President Obama has been confronted by over-the-top belligerence from the Republican Party, but the policy choices he has made in an attempt to moderate their opposition and get cooperation from our modern day Robber Barons have added up to a demoralizing failure to promote the national interest.  Millions of his strongest supporters have been reduced to stunned disbelief.  Perhaps what we are seeing is the exhaustion of modern liberalism; a philosophy that was once guided by the principle of using government resources to improve the well-being of the great majority of the population.  Now the party of liberalism seems to have no political strategy other than using tax money to bribe rogue corporations and banks in the vague hope of moderating their behavior.

On Our Own

The business pages of the Boston Globe seldom have deep stories analyzing economic trends.  The main healines are reserved for stories about the ups and downs of local and regional businesses and the people who manage them.  However, buried in smaller stories are bits and pieces of information that, when put together, give us clues to trends in our dismal economy.

For example, on January 29th, a small A.P. story noted that durable goods orders (things that last a while like refrigerators and televisions) rose only 0.3% in December, far less than the 2% rise predicted by professional economists.  Traditionally, when our economy rebounds from a recession, durable goods orders jump as consumers begin spending again.  The latest number was a huge disappointment, given that durable good orders fell 20% during 2009.  The same article points to the reason – 470,000 people filed claims for unemployment benefits the week before – that is, even as government statistics show the GDP going up, nearly half a million Americans got laid off.

On January 30th, a small A.P. story reported that even if you kept your job during 2009, things got worse.  Overall, wages rose an average of 1.5% in 2009, far below the official (doctored-down) inflation rate of 3%.  On February 1st, a tiny Bloomberg News article reported that Nouriel Roubini, the economics professor who predicted the financial crisis before most “experts” noticed there was a problem, said that unemployment will remain over 10% even if statistics show the GDP is growing.  He said, “It’s going to feel like a recession even if technically we’re not going to be in a recession.”

On January 28th, Michell Singletary wrote about President Obama’s “Middle Class Task Force,” which has, after a year of study, recommended that debts for the Federal college Loan Program be forgiven after the student pays 10% of his or her income for twenty years – a reduction from the current 25 year requirement.  This minor change comes from an administration that has fully cooperated with the Bush administration’s handout of more than $600 billion to banks and hedge funds with no requirements for increased business lending, no requirements for renegotiation of mortgages with individuals who are facing foreclosure, and no significant limitations on management bonuses.  Highlighting the contrast, an A.P. article on the same day noted that the Federal Reserve reported that lending is still contracting.

I could go on, I clipped out a week’s worth of stories with the same message – the aftermath of the great financial crash of 2008 is not going to be a return to normal.  While GDP “growth” might be trumpeted in the news, our friends, neighbors, and family are going to be unable to find jobs and the purchasing power of those who keep jobs will continue to decline.  Meanwhile, the Obama administration, moving in slow-motion as it follows the advice of its Wall Street born and bred economic advisors, will only propose tiny changes at the margins, while right-wing Republicans in the Senate will howl about government deficits and bloc even those reforms.  We are on our own.