WASHINGTON (Reuters) – Amazon.com Inc has stopped hosting WikiLeaks’ website after an inquiry by the U.S. Senate Homeland Security Committee amid anger about the release of classified U.S. government documents on the site.
Quiz: What’s responsible for the lousy economy most Americans continue to wallow in?
A. Big government, bureaucrats, and the cultural and intellectual elites who back them.
B. Big business, Wall Street, and the powerful and privileged who represent them.
These are the two competing stories Americans are telling one another.
Yes, I know: It’s more complicated than this. In reality, the lousy economy is due to insufficient demand — the result of the nation’s almost unprecedented concentration of income at the top. The very rich don’t spend as much of their income as the middle. And since the housing bubble burst, the middle class hasn’t had the buying power to keep the economy going. That concentration of income, in turn, is due to globalization and technological change — along with unprecedented campaign contributions and lobbying designed to make the rich even richer and do nothing to help average Americans, insider trading, and political bribery.
So B is closer to the truth.
But A is the story Republicans and right-wingers tell. It’s a dangerous story because it deflects attention from the real problem and makes it harder for America to focus on the real solution — which is more widely shared prosperity. (I get into how we might do this in my new book, Aftershock.)
A is also the story President Obama is telling, indirectly, through his deficit commission, his freeze on federal pay, his freeze on discretionary spending, and his wavering on extending the Bush tax cuts for the rich.
Most other Washington Democrats are falling into the same trap.
If Obama and the Democrats were serious about story A they’d at least mention it. They’d tell the nation that income and wealth haven’t been this concentrated at the top since 1928, the year before the Great Crash. They’d be indignant about the secret money funneled into midterm campaigns. They’d demand Congress pass the Disclose Act so the public would know where the money comes from.
They’d introduce legislation to curb Wall Street bonuses — exactly what European leaders are doing with their financial firms. They’d demand that the big banks, now profitable after taxpayer bailouts, reorganize the mortgage debt of distressed homeowners. They’d call for a new WPA to put the unemployed back to work, and pay for it with a tax surcharge on incomes over $1 million.
They’d insist on extended unemployment benefits for log-term jobless who are now exhausting their benefits. And they’d hang tough on the Bush tax cuts for the wealthy — daring Republicans to vote against extending the cuts for everyone else.
But Obama is doing none of this. Instead, he’s telling story A.
Making a big deal out of the deficit — appointing a deficit commission and letting them grandstand with a plan to cut $4 trillion out of the projected deficit over the next ten years — $3 of government spending for every $1 of tax increase — is telling story A.
What the public hears is that our economic problems stem from too much government and that if we reduce government spending we’ll be fine.
Announcing a two-year freeze on federal salaries – explaining that “I did not reach this decision easily… these are people’s lives” — is also telling story A.
What the public hears is government bureaucrats are being paid too much, and that if we get the federal payroll under control we’ll all be better off.
Proposing a freeze on discretionary (non-defense) spending is telling story A. So is signaling a willingness to extend the Bush tax cuts to the top. So is appointing his top economic advisor from Wall Street (as apparently he’s about to do).
In fact, the unwillingness of the President and Washington Democrats to tell story B itself promotes story A, because in the absence of an alternative narrative the Republican story is the only one the public hears.
Obama’s advisors explain that the president’s moves are designed to “preempt” the resurgent Republicans — just like Bill Clinton preempted the Gingrich crowd by announcing “the era of big government is over” and then tacking right.
They’re wrong. By telling story A and burying story B, the president legitimizes everything the right has been saying. He doesn’t preempt them; he fuels them. He gives them more grounds for voting against raising the debt ceiling in a few weeks. He strengthens their argument against additional spending for extended unemployment benefits. He legitimizes their argument against additional stimulus spending.
Bill Clinton had a rapidly expanding economy to fall back on, so his appeasement of Republicans didn’t legitimize the Republican world view. Obama doesn’t have that luxury. The American public is still hurting and they want to know why.
Unless the President and Democrats explain why the economy still stinks for most Americans and offer a plan to fix it, the Republican explanation and solution — it’s big government’s fault, and all we need do is shrink it — will prevail.
That will mean more hardship for tens of millions of Americans. It will make it harder to remedy the bad economy. And it will set Republicans up for bigger wins in the future.
NEW YORK — Wall Street firms teetering on the verge of collapse pledged more than $1.3 trillion in junk-rated securities to the Federal Reserve for cheap overnight loans — almost a quarter of all the long-term securities pledged to the Fed with a credit rating — according to data released by the Fed on Wednesday.
The program, initiated to keep securities firms afloat during the height of a financial crisis that saw the collapse of two storied investment banks, the rescue of the world’s largest insurance firm and the largest banks, was designed, in the Fed’s words, to “improve the ability” of Wall Street’s biggest firms to “provide financing to participants in securitization markets.”
Essentially, the Fed gave Wall Street overnight loans with interest as low as 0.50 percent in order for the firms to have cash that they could then use to buy other securities or make loans. Those firms could trade with that cheap money and profit handsomely.
As collateral for those loans, Wall Street firms gave the Fed securities that were, in essence, junk.
Of the 50 overnight loans with the most speculative-grade securities pledged as collateral, 35 came from Citigroup. 11 of those loans were taken out by Morgan Stanley; two from Bank of America, and one each from defunct investment firm Lehman Brothers and Wall Street powerhouse Goldman Sachs.
The 18 firms, known as “primary dealers” because they’re authorized to directly trade with the Fed, pledged $1,315,863,900,000 in non-investment grade collateral for the loans from March 2008 to May 2009.
Overall, the firms pledged about $9.7 trillion in collateral, which came in the form of whole loans and securities. About $5.7 trillion of that came in the form of long-term securities with a credit rating. The totals likely include double-counting, as the firms may have pledged the same collateral on multiple days.
The loans totaled about $9 trillion because the Fed took excess collateral in case its Wall Street borrowers defaulted.
The fact that Wall Street was able to pledge junk to the Fed in exchange for cheap financing is likely to enrage lawmakers who view the Bush and Obama-era crisis programs as largely benefiting Wall Street while “Main Street” has been left behind.
Adding insult to the perceived slight, banks have ramped up their requirements for new loans to borrowers, making it ever more difficult for cash-strapped households and businesses to take out new commitments.
NEW YORK — The Federal Reserve on Wednesday reluctantly opened the books on its monumental campaign to save the financial system in the midst of the recent crisis, revealing how it distributed some $3.3 trillion in relief.
The data revealed that the Fed’s aid was scattered much more widely than previously understood. Two European megabanks — Deutsche Bank and Credit Suisse — were the largest beneficiaries of the Fed’s purchase of mortgage-backed securities. The Fed’s dollars also flowed to major American companies that are not financial players, including McDonald’s and Harley-Davidson, through unsecured short-term loans.
The measure, initiated in Jan. 2009 to stimulate the flow of credit and keep household borrowing costs low, led the nation’s central bank to purchase more than $1.1 trillion in mortgages packaged into the form of securities. The mortgage bonds are backed by Fannie Mae and Freddie Mac, the twin mortgage giants now owned by taxpayers.
Deutsche Bank, a German lender, has sold the Fed more than $290 billion worth of mortgage securities, Fed data through July shows. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.
The data had previously been secret. It was released Wednesday per the recently-enacted law overhauling the federal financial regulation. The Fed, ferociously backed by the Obama administration, fought lawmakers’ desire for full disclosure throughout the financial reform debate.
The mortgage purchase program has come under withering criticism by economists and financial experts who believe the Fed’s initiative has unnecessarily inflated the housing market, and prevented the cleansing that pretty much all experts believe is necessary for a full economic rebound. However, the program has also been heavily praised for preventing an Armegedon-type situation in which mortgage costs could have skyrocketed, collapsing the housing market and leading to even more foreclosures.
Data released Wednesday shows which Wall Street firms have been the biggest beneficiaries of the Fed’s bond buying program. The fact that foreign lenders benefited the most is sure to irk lawmakers.
The Fed effectively telegraphed its intentions to the Street before buying the bonds. Legendary money manager Bill Gross, who oversees more than $1.2 trillion at Pacific Investment Management Co. said last month during a television interview that part of his success over the last 18 months was due to buying securities in front of the Fed, and selling them to the Fed at a premium, allowing him to profit handsomely. Gross runs PIMCO’s $252.2 billion Total Return Fund.
Morgan Stanley sold the Fed more than $205 billion in mortgage securities from January 2009 to July 2010, while it’s much bigger rival, Goldman Sachs, sold $159 billion. Citigroup, the nation’s third-largest bank by assets, sold the Fed nearly $185 billion in mortgage bonds. Merrill Lynch/Bank of America sold about $174 billion.
It’s not clear how much these firms profited by engaging in the kind of activity that allowed Gross to profit so well, known as “front running.” However, it’s abundantly clear that they did turn a profit.
JPMorgan Chase, the nation’s second-largest bank by assets, sold the Fed about $153 billion worth of mortgage securities.
Other foreign banks with extensive Wall Street operations also profited from the program.
Barclays, the British firm that took over failed investment bank Lehman Brothers, sold about $123 billion in mortgage bonds. UBS, a Swiss lender, sold about $94 billion. BNP Paribas, a French bank, sold about $67 billion.
Marcus Baram contributed reporting.
A review of Inside Job, produced, written, and directed by Charles Ferguson, produced by Audry Marrs, 108 minutes, narrated by Matt Damon.
By Michael Shermer
In this disturbing and often infuriating look at the financial meltdown, the Academy Award-nominated (No End in Sight) documentary filmmaker Charles Ferguson promises viewers an inside look into the “inside job” (use intended to convey criminality) that he believes explains the financial meltdown and subsequent recession. Inside Job is a well produced, artfully edited, and dramatic reconstruction of the rise and fall (and rise) of the Wall Street financial industry. Most of us are painfully aware of what happened to the economy, so this film packs into less than two hours what took two years to unfold, and so the emotional impact is commensurate with the eye-blurring number of events tightly repackaged in cinematic gravitas.
With Inside Job I expected a Michael Moore-like liberal attack on all things free market, but that is not the case here. Instead, there is what is said and what is not said. In other words, there were no lies of commission, but there were some lies of omission. What is said in Inside Job (that I found to be accurate although Ferguson does not phrase it this way) is that, in fact, we do not practice free market capitalism because the government (both Bush and Obama administrations are indicted in the film) are in bed with Wall Street tycoons, reducing risk taking through the moral hazard of promised bailouts. The whole point of capitalism is to make a profit by taking risks. Low risk taking typically results in slow and steady growth, whereas high risk taking historically produces both high profits and steep losses. By entering the business of risk protection, the government is sending a clear signal to the market: don’t worry about taking big risks with your own and investors’ money; we’ll bail you out. In profits we’re capitalists, in losses we’re socialists. This is what Ralph Nader would call corporate welfare, and in the case of the financial meltdown and subsequent bailout he would be right.
What infuriates in particular in the film is just how much of an old-boys club Wall Street is (and what little chance any of us little guys have in competing fairly), and how much of the club roster includes prominent politicians and members of the Federal Reserve. It reminded me of my research on doping in sports, in which it has become abundantly clear that nearly everyone seems to turn a blind eye to the problem and former athletes are now running the sanctioning bodies and doping agencies are in the pay of said sanctioning bodies. When Ferguson reminds us that Obama left in place all the major players in the game–Bernanke, Geithner, Paulson, Sumners, et al.–it made me think of what would happen if Major League Baseball put Barry Bonds in charge of ending steroid use, or Marion Jones was the executive director of the World Anti-Doping Agency.
The greed of Wall Street bankers and financiers is the leitmotif throughout Inside Job, and there is certainly no shortage of it on Wall Street. As one trader noted, there is no point of going anywhere near that part of Manhattan if your primary goal is not to make a pile of money. But Wall Street greed is only half the story; the other half is Main Street greed. Those greedy bankers were giving questionable loans to greedy buyers, and everyone was hoping to cash in through escalating risk taking in financial and real estate markets.
Now, behavioral economists have demonstrated that humans are normally very risk averse. Specifically, the research shows that losses hurt twice as much as gains feel good. That is, in order to get someone to invest their hard-earned money you have to convince them that the potential gains are twice as much as the possible losses. So why weren’t all these Wall Street bankers and Main Street buyers risk averse? Two reasons: short term thinking and reduced risk signals. First, potential home buyers and investors mistakenly assumed that the increasing trend line in housing prices would continue unabated indefinitely. Two, loan officers and their financial institutions intentionally and deceptively reduced the normal risk signals sent to potential customers in hopes that the artificial bubble would not burst. It did, and here we are.
Since corporations and financial institutions are run by people, they should show the same risk aversion that individuals do when investing money and granting loans. Normally they do, but over the past decade something happened to remove or delay the risk. That something was a combination of government intervention into the financial marketplace and private repackaging and selling of loans to organizations too distant from the risk to feel averse to the potential loss. For example, in the spring of 1999 a pilot program was launched by Fannie Mae and Freddie Mac. Recall that Fannie and Freddie are government-run organizations that do not make loans directly to customers–they buy loans from banks, which make those loans directly. So, here already the risk was removed a step from the brains of the risk assessors, but risk aversion was further attenuated by government interference with the pricing mechanism that normally adjusts for risk.
In that pilot program the nation’s largest underwriter of home mortgages came under pressure from the Clinton administration in its desire to achieve an “ownership society,” along with insistence from the Department of Housing and Urban Development (HUD) that Fannie and Freddie increase their portfolio of loans made to lower and moderate-income borrowers from 44 percent to 50 percent by 2001. That meant granting loans to higher risk customers.
There’s nothing wrong with corporations and institutions taking higher risks, as long as they adjust for it by charging more. The higher price acts as a risk signal to both buyers and sellers, thereby dialing up their emotion of risk aversion. This is what Fannie Mae was already doing by only purchasing loans that banks made charging three to four percentage points higher than conventional loans. But under the new program implemented in 1999, higher-risk people with lower incomes, negligible savings, and poorer credit ratings could now qualify for a mortgage that was only one point above a conventional 30-year fixed rate mortgage (and that added point was dropped after two years of steady payments).
In other words, the normal risk signal sent to high risk customers–you can have the loan but it’s going to cost you a lot more–was removed. Lower the risk signal and you lower risk aversion.
None of this is part of Inside Job, and that’s a shame because it misses an opportunity for a deeper look into the well of human nature that can lead any of us down a greedy path of blind profit seeking through rent seeking–the term used by economists to describe actions of individuals or firms to seek profits through political manipulation instead of economic competition. The problem is not greed per se, since that is part of our nature that when channeled properly through clearly defined and strictly enforced rules can result in much human progress. The problem is the attenuation or elimination of risk signals that keep greed in check.
Read more: Greed, Freddie Mac, Hank Paulson, Hud, Wall Street, Tim Geithner, Inside Job, Behavioral Economics, Audry Marrs, Charles Ferguson, Risk Aversion, Fannie Mae, Main Street, Ben Bernanke, Matt Damon, Entertainment News
Winter is practically here. And this season, two major trends are impacting America’s cocktails and spirits of choice. On the one hand, retro cocktails are back with a vengeance. You can thank those swanky, fictional corporate types on Mad Men for that. On the other hand, you’re unemployed. (Thanks, non-swanky, non-fictional corporate types.)
So whether you’re cuddling with a loved one by a trashcan fire, or meeting your banker to go over final foreclosure documents, here are some classic drink recipes to bring a little warmth to your cheeks this season.
1. Pour into flask.
2. Sip angrily and often.
1. Unscrew cap.
1. Pull paper bag down to expose top.
3. Repeat until blind.
Mad Dog 20/20
1. Take off cap.
2. Try not to think about it.
1. Steal from store.
2. Drink under bridge.
1. Trade sips for uneasy truce with Sewer People under bridge.
1. Drink without breathing.
2. Use broken bottle to defend cardboard sleeping box.
2. Use broken bottle to slit Bearded Joe’s throat.
3. Don’t worry about Sewer People taking your shopping cart again.
Of course, there are many varieties to the above recipes. Pour anything into a half-empty plastic bottle of juice from the city dump and you’ve made a classic Hobo Sangria. And any drink automatically becomes an Ironic Sidecar if you drink it at the junkyard while sleeping in an actual sidecar.