when the insurers need insuring to insure the economy doesn't go totally belly up, that's what i call insurance

Joe Nocera of the New York Times wrote a great post today which adds more grist to the mill on the price discovery issue relating to AIG’s credit default swaps (CDSs). Not only does the government end up propping up the most destructive derivative behavior around, but it does so while allowing AIG to maintain the confidentiality of their shady transactions.

And guess who that protects? You’re spot on. It shields AIG’s counterparties, banks, investors, and lenders who were looking for a way to ‘insure’ themselves on the quiet while they pigged out at the trough just before the fall. Nocera makes the point that this doesn’t sit well with the President’s call for transparency and he’s right. But it’s yet another example of the contradictions that Obama seems to be displaying. High principle on the one hand and almost Bush-like duplicity with the status-quo on the other. It’s becoming increasingly clear that Tim Geithner is lurching from crisis to crisis just like his predecessor. But the situation is far worse now. Paulson was a stooge and everyone knew it, a placeholder and agent for the Street. Geithner is supposed to know better. But he doesn’t seem to be able to escape the shackles of hide-bound “group-think”. Wasn’t the President supposed to put a stop to this kind of thinking?

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Firstly, either the government should have let AIG die and backed their Credit Default Swaps, or else let the CDW’s lapse and allow legitimate price discovery for the CDOs on that basis. The CDWs prop up fictitious value at our expense which is exactly what we shouldn’t be doing. Secondly, last week Congress removed billions for education spending. This week it gives that money to AIG? We’re about to try and overhaul the healthcare system. The $150 billion that we’ve committed without accountability to a dead company could have been a useful downpayment on the single biggest drain on the US economy. Is Tim Geithner trying to be Hank Paulson, because his leadership at Treasury shares the same “making it up as he goes along” characteristics.

Obama is getting all squirly on us. First he signs up a centrist cabinet and give progressives like Robert Reich and Howard Dean the cold shoulder. Then he dumps bipartisanship in favor of a progressive budget. And now he gives yet another handout to the street by protecting their crazy CDOs. Who is he? The answer is we still don’t know.

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Robert Reich - Not Treasury Secretary

Howard Dean - Not HHS Secretary

Many left-leaning Democrats are asking the same question. Reich would have been a superb choice at Treasury and Dean an obvious choice at HHS. Both are tough, forward-thinking progressive politicians with total command of the briefs in question.  Many people inside and outside the Beltway are surprised that neither man was even in the running. Joe Trippi, a top Democratic consultant who ran Howard Dean’s 2004 Presidential bid, “I think Robert Reich would have been a better appointment than Geithner”.

And there are many others who agree.

So why aren’t they the nominees?

There are many, many reasons.

First, both Robert Reich and Howard Dean are liberals, and that means they don’t mesh with Obama’s all inclusive ‘new politics’ (or centrism as it’s otherwise known). They are mistakenly seen by the White House as skilled ideologues in a post-partisan world.

Secondly, both Reich and Dean would actually work to enact real change in the two most important domestic arenas in government. Simply put, they would define Obama’s presidency at home. Reich would lead the charge to right the economy by taking control of the banking system, tougher regulation and corporate realignment, while pushing hard for targeted infrastructure spending and less tax cuts, while Dean would crusade for the  universal healthcare system America needs. Is Obama prepared to put his first term in the hands of two guys who will actually do what’s necessary rather than what’s prudent? Naaah. Sadly, change is fast turning out to be a slogan, rather than a strategy.

Thirdly, the opposition to both Reich and Dean would have been deafening inside and outside the beltway. Installing Reich in Treasury would have been a huge red flag to Wall Street. And if one thing is becoming increasingly clear Obama is still clearly enthralled by the Street, despite the fact that it’s a huge part of why we’re on the edge of a worldwide depression. Put Dean in HHS and the sound you’d hear would be the health insurance lobby locking and loading their checkbooks for a long fight. Both these guys would signal that the Prez means business. As for the GOP, to suggest they’d be frothing at the mouth would be an understatement. Some of them might even cry.

Fourthly, there’s politics. Keeping two powerhouses like Reich and Dean out of the club might have seemed like a good idea to another powerhouse. According to some DC bloggers, Rahm Emmanuel has long been feuding with Dean and perhaps a word in Obama’s ear would have been enough to have the former Governor of Vermont and DNC chair frozen out of the health post. As for Reich, he remains an economic advisor to the President, but confirmed that he hadn’t been approached to be part of the Obama cabinet.

After the Judd Gregg and Daschle Debacles, HHS and Commerce remain open. There’s still time for Obama to do the right thing.

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let's hope the ambulance is coming because there is no time to waste

In today’s NYT, Paul Krugman wonders why we haven’t heard more about major healthcare reform in the first few days of the new administration. His concern is that the economic crisis will only make the oncoming healthcare catastrophe that much more severe. It’s a very good point. Krugman surmises that perhaps solving the economic meltdown is dominating the agenda to the exclusion of almost everything else.

But Krugman doesn’t go far enough. What he fails to mention is that solving the healthcare crisis will, over the medium term, will dramatically help overcome America’s deep economic weaknesses.

It goes like this. Regardless of the plan adopted, and it’s most likely to be a build on Obama’s idea of offering a competitive government plan that will release the grip on our healthcare held by profiteering private insurance companies, the new system will have a very significant downward pressure on healthcare costs.

Right now the US spends around 15% of total GDP on healthcare, and have around 50 million uninsured. In the UK, with its single-payer system that figure is around 8%. Nobody is uninsured. It’s a cheaper, more efficient system.

The difference between the US and UK GDP spend is around 7% of GDP. America’s GDP last year was around $13 trilliion. 7% o that is $910 billion. That’s money released back into the economy – to be spent somewhere else.

So now let’s get conservative. Let’s say that over time we’re only able to reduce US healthcare costs to around 11% of GDP. That would still put around $450 billion a year and maybe more back into the economy.

Everyone would have more money in their pockets which would enable them to pay off debts, restoring confidence in lending, and freeing them to spend which would restore economic growth. There are multiplier effects too. US businesses, freed from their legacy costs will be far more competitive in the global marketplace. Oh, and the ranks of the uninsured would be reduced to zero.

It will take a few years to reach this happy place, but for an investment of say $100 billion a year to build this new system for five years (didn’t we just opt for $300 billion in useless short term tax cuts as part of the absurd stimulus package), we’ll break even in a few years. After that we’ll see a major economic boost far into the future, helping to shore up the US economy well into this century.

One more thing. That $450 billion a year freed up by healthcare reform is not borrowed, or printed, it’s not inflationary at all, and it’s not raised from the Bank of China, or some oil-soaked sovereign wealth fund. Instead it’s earned through efficiencies forged right her in America.

Major healthcare reform is an investment in our people, and our economy. It won’t be easy, but the President must not waver, and must not succumb to the myth of bipartisanship that would water down the legislation and dramatically lessen its impact.

Obama needs to act decisively. Our children and grandchildren demand it.

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scotland the brave

It was British Labour Prime Minister Harold Wilson who coined the term “A week is a long time in politics”, and while Gordon Brown’s astonishing turnaround as British Prime Minister has taken a little longer than that, it has been truly remarkable.

When the British public turn on their leaders, they do it with a viciousness that’s positively medieval. A year ago, Gordon Brown was political poison. In the great tradition of British politics, his Labour Party was openly plotting his demise in the tea rooms and bars of Westminster. His demise was expected in a matter of weeks, and his stoic Scottish demanour combined with an almost uncanny lack of political savvy conspired to hasten it.

But then something happened. Gordon found his mojo. Starting with an unexpectedly stirring keynote speech at the Labour Party Conference in September, Brown began to take on his critics in the best way a leader can, by being exactly that – a leader. The speech was a dignified mea culpa of his mistakes and failings, combined with a cogent vision for the future, and it stopped the bleeding.

The speech was followed by another masterstroke. Amid the flailing response by Hank Paulson, the Bush Administration and Congress to the galloping credit crisis and precipitous market collapse, it was Gordon Brown’s plan to buy stakes in the UK banks that, overnight, calmed the waters. First, the Euro-zone and then, unwillingly, the US, followed the Brown plan, and the immediate panic dissipated, virtually overnight. Brown’s status as British political whipping boy was replaced by a standard grudging acceptance by the grudging Brits that he did, well, okay.

Of course, in blissfully naive America, it was the idiotic TARP program that got the credit (even though much of its success came from a watered-down application of the Brown capital-infusion plan), and Brown has hardly recevied the accolades he deserves. Part of the reason for that is that his personality is utterly unshifting. He’s the same measured, unflappable fellow whether Scotland had just won the World Cup, or whether the global econony is collapsing into chaos. To put it simply, he’s not by nature charismatic, nor particularly likeable. Up until now that was a black mark on the guy.

In foreign policy, Brown has signaled that by June of 2009, British troops, with the exception of a few companies of trainers, will be out of Iraq, and that long nightmare will be over. And yesterday, Brown continued his roll. By holding talks with leaders of both India and Pakistan, and putting forward some serious on-the-ground applications of UK counter-terrorism power, he showed what Obama has to do to calm the storm in South Asia. Of course, the UK has a special role in both India and Pakistan. It did, after all run India for centuries before independence and partition. But Brown’s power is not Obama’s. And yet, his calming, stoic influence is now seen as an advantage. He and Obama seem to share that same unflappability, although Obama could sell an Escalade to an environmentalist, and Brown could not.

The next election in Britain will probably be around the same time British troops return to the UK from Iraq, a nice capper for Brown’s comeback. Domestically, Labour should rise in the polls, despite the brutal effects of the recession in Britain. Already, the usual litany of by-election disaster seems to have stopped, and the timing for that turnaround is as good as it gets. There’s a good chance Brown and Labour will win in 2009. The Tories are losing their main talking points by the day.

Brown is a perfect recessionary leader. He was a very good chancellor in many respects (except for his mistake of letting the derivative, and mortgage market totally get out of control, as happened in the US), and his calm, unflappable demeanour is likely to become a huge asset.

Perhaps he will be Margaret Thatcher to Obama’s Reagan. They seem well suited to be close allies. Perhaps the special relationship does have one last hurrah, and together the US and UK can begin a more intelligent assault on the excesses of market capitalism, and in the foreign sphere, on Islamic Jihadism.

Brown is Back. Who would have predicted it. But politics is a funny old game, it really is.

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Take the term “Bailout”.

In economic terms it means ‘assistance to a financial or other institution in distress’. But assistance can mean anything from a loan that nobody else will give with very stringent terms to a total and utter gift.

There have been a ton of bailouts in the last few months. We don’t have to list them all, we’re just going to focus on two ‘institutions’, Citigroup and the Big Three Auto manufacturers.

Let’s look at what these two have in common. Both of them are vast with global reach and influence.  Both of them made awful business decisions in the short, medium and long term that led them to the brink of collapse.

Now let’s look at what people perceive they have in common, namely that both are “too big to fail”, another term of limited meaning. Citigroup is too big to fail because of the depth of its interconnected interests throughout the financial world. The Auto Industry is too big to fail because whole regions of the country depend on it for their economic welfare.

Finally let’s examine where they are different. Citigroup is a financial institution that buys and sells assets with client and depositor funds. It employs in the region 300,000 people worldwide. The Auto industry makes cars and trucks, is the backbone of US manufacturing and directly and indirectly employs around three million Americans.

It’s a tribute to how well the Finance, Insurance, Real Estate or FIRE sector has sold itself over the last twenty years of the Reagan Revolution that a bloated, shapeless and rudderless behemoth of a bank should be regarded so highly, while the jewel of America’s industrial crown should be treated as if it’s already on the scrapheap.

That contrast is perfectly reflected in the way that the United States Congress and the Administration has handled the ‘bailouts’ to Citigroup and the Auto Industry.

Citigroup received the largest bailout in history without getting grilled by Congress, or having to show any contrition whatsoever because the $700 billion TARP program had already been signed into law. It has received a total of $45 billion in TARP funds, and the Government will cover 90% of the losses from its gigantic, unknowable mound of toxic mortgage debt in its $335 billion dollar loan portfolio, after the company absorbs the first $29 billion. This is the key to the bailout. Without the Government guarantee, confidence in Citi would have disintegrated in a matter of days after the rot set in about a month ago. In short it would have been finished, and we’d have been in a second credit freeze that would have made us wish that more than anything we could have the first one back. And in return for totally saving Citigroup from total collapse, the Government get a $27 billion sliver in preferred stock or warrants, the bosses lose their bonuses or parachutes, and the Feds get an office in Citigroup’s HQ to watch over operations. Not a bad deal.

Total potential bailout: Around $300 billion.

The Auto Industry got an incredibly rough ride in Congress, where they essentially grovelled for some change, not once but twice. They were castigated and humiliated in a series of hearings that took their cue squarely from the Spanish Inquisition. In return for Government funds, the Industry has to completely change its business model, completely overhaul its working practices and product ranges, and take orders from a “Car Czar” who would have tremendous power over Auto Industry decision making, including sign-off rights on any expenditure over $25 million, or in other words, anything remotely important. Auto Industry executives also take a huge hit (including a no-fly zone for their private planes), and the Government also get massive equity stakes in GM and Chrysler, because their market cap is so pitiful. (Ford decided to go it alone and not take Government money).

Total potential Bailout: $15 billion.

Now, I’ve never been much of a whiz at math, but by my reckoning the entire Auto Industry potentially gets 5% of what Citigroup is potentially getting. If Citigroup had received $15 billion instead of $300 billion it would now be owned by some unknown businessman from Dubai, who’d have bought it at the financial equivalent of a garage sale as a present for one of his wives. But the Auto Industry has to make do, its unions have to basically stick a fingers in every member’s eye, and the people of Michigan, Ohio, Kentucky and Wisconsin have to be extremely grateful for not very much.

Now it’s important to mention that if Citi and the Auto Industry had to live without bailouts the world would not cave in on itself. Bailouts aren’t about protecting ‘the little people’ who actually work for these companies, they’re about protecting management and shareholders. Bankruptcy wipes out both.

But putting aside whether or not a ‘bailout’ in either case was justifiable or advisable, the difference in the way Citi and the Auto Industry have been treated is staggering both in magnitude and detail . Their experiences are so utterly different, and yet are both referred to as having been “bailed out”. The press hardly blinked when Citigroup got its massive infusion of cash and confidence. The biggest and most egregious of Paulson’s handouts to his golfing buddies was all over so fast. At the same time, every detail of the Auto Industry bailout has been dissected to the point of absurdity, down to the make of hybrids that the bedraggled CEO’s sat in for the drive from Detroit to DC for their Congressional do-overs the other day.

This seems like a massive and illogical case of double standards at play, and ‘bailout fatigue’ doesn’t really describe it. TARP was set up at a time when everyone was truly panicking, and panic is not exactly a reliable driver of good policy. It was also limited to the financial sector because the panic was in the financial sector. In one fell swoop, America dumped nearly a trillion dollars into bailing stuff out. So now they’re getting snippy about a mere $15 billion for the car companies. The ROI on the financial bailout is hard to measure but if the Auto Industry were to disappear, the states of the upper Mid West would go from being the ‘rust-belt’ states to the ‘no-belt’ states. They’d be lucky to find a piece of string to hold up their pants. Millions of people would lose their jobs, livelihoods, and futures. If Citi were to go down, the Financial succubus would survive as it always does by hungrily digging into the entrails of one of its erstwhile gods; shareholders, executives, bank tellers, and office cleaners be damned.

Both Citi and the Auto Industry are going to have been “bailed out”. One of the bailouts is a huge gift, the other is a loan-shark’s dream.  When the same word is used to describe polar opposites, it’s a word without meaning.

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a brand new bridge. this one's in france

Things are turned way around when Liberals are agreeing with quirky, flat-tax Steve Forbes, but when called Hank Paulson the “worst Treasury Secretary in living memory” there are few diehard progressives that would disagree.

But old Hank has at least done us one big, big favor. By steamrolling through the TARP at a cost of $700 billion and then doing precisely squat with it, he turned $700 billion into the new $7 billion. Suddenly, with the exception of the bailout for the once mighty now hopeless auto industry, fears of excessive spending seems petty next to the cost of TARP, the Citigroup, AIG, and Fannie and Freddie bailouts. We’re awash in borrowed money, and nobody seems to care. Another day, another dollar, or a hundred billion of them. Whatev.

So when Obama announced his massive public works program (let’s call it the New New Deal or NND) and didn’t even bother to mention a pricetag, the only Cassandra was the ever-predictable American Enterprise Institute. With the economy losing half a million jobs a month, the American people are ready for it. So don’t expect the whining from Club for Growth knuckle-draggers in Congress to be anything more than mumbled griping at worst.

America’s been crying for infrastructure changes for years, but the Bushies, bless ‘em, could hardly spell the word. Result, we’re way behind most other developed countries. And America being America, we wait until disaster is at the door before we do something about it.

But that moment has arrived, and thanks to the TARP and other blank checks, there’s no such thing as a pricetag we can’t afford anymore. It was Dick Cheney who said “deficits don’t matter”, and boy was he right. Of course he was referring to financing fruitless no-end-in-sight wars, but hey, that’s just a detail. The bottom line is that we’ve got way more important fish to fry than worry about making the numbers add up. The reason is simple. A T-Bill is still the safest debt around. Everyone wants ‘em, and as long as they do, hell, we can print ‘em. In a potentially deflationary environment, a little inflation goes a long way.

Businesses run on credit. It’s called investment, and you expect a return on it. America will be rebuilt on the same principle, brick by brick, schoolbook by schoolbook, hospital bed by hospital bed. You get the idea.

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feed me

There’s something diabolical about a creature that consumes itself. It seems so profoundly irrational, so utterly insane. We file stuff like that in some ‘unspeakable’ part of our minds.

Except that we live it every single day.

Capitalism is a great system in many ways, but it has a tendency to destroy itself if left unchecked. We’re seeing that all too clearly right now. There are two areas where capitalism is profoundly cannibalistic.

The first is how it handles credit.

The flow is pretty simple. Institutions offer cheap credit, which consumers and companies snap up. But at a certain point their ability to pay is reduced, and the value of the debt drops into the toilet. The institutions respond by raising rates, further reducing consumer and companies’ ability to pay. That starts a feedback loop which destroys both sides of the equation.

The second is in the real economy.

Let’s call this “The Walmart Syndrome”. Strong companies control costs, and grow. Large consolidated companies with efficent cost structures want to keep costs down, and demand more for less from their suppliers. This creates globalization, forces labor costs overseas, and jobs are lost at home. As the domestic economy weakens, the ability to afford goods is reduced, causing further cost reductions, and reinforcing the feedback loop which cripples both sides of the equation.

The two feedback loops begin to combine. Weak credit leads to a weak real economy, and downard costs. That’s how world depressions begin.

To restore equilibrium will require a massive ‘brake’ from government in the short term which will have to be deficit financed, and in the longer term, a new economic paradigm. Social Democracy, a mixed economy, strong regulations, and personal and corporate responsibility.

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Man With Plan

After nationalizing Fannie and Freddie, then letting Lehman Brothers die for no apparent reason, then bailing out AIG to the tune of $85 billion (now around $150 billion but who’s counting), Hank Paulson sat back to watch the credit markets unfreeze. But instead they just froze up some more.

Hank was totally bummed. “This job totally sucks”.

“The credit freeze just keeps on freezing”, he said to his posse of former Goldman Sachs hacks. “What the frick do I do?”

“You need one big plan”, said Neel Cash and Carry, “not just a whole bunch of little plans stuck together”. Hank nodded furiously. “Yes, yes, that’s right”. After scribbling a few notes on the back of a dry cleaning bill he looked up. “I’ve got it”.

It was so beautiful, so brilliantly simple. Bail out his pals on Wall Street by buying up all the junk they’d created that was sending them all over a cliff. His ex-Goldmans Treasury peeps loved the idea, so Hank canvassed around for a number on this unfathomable pile of shit.

Someone told Hank that all the ‘toxic mortgage securities’ on the books of financial institutions were worth a “don’t quote me on this ballpark” half a trillion, and another guy said they were “maybe, possibly, potentially” worth a cool but toxic trillion, so Hank did what any smart dude would do. He split the difference, thereabouts.

$700 Billion became a household number. The Troubled Asset Relief Program was born. And “Toxic” became the word du jour. Everyone outside Treasury thought TARP stank as an idea, but Hank said that without it we’d all be in the poorhouse. The situation was grim, and he and the President lathered us up into a right panic. It was so important that Hank was going to run it all by himself. But Congress didn’t like that. So after a lot of talk, a bucketload of pork was added and TARP got the go ahead, along with a few trimmings.

Hank sat back and waited for credit to start unfreezing. Except that it didn’t. It froze some more. “There goes my effing bonus,” said Hank, forgetting that he was a public servant.

Meanwhile, Gordon Brown, the British Prime Minister, instigated a plan that everyone really liked. His idea was to invest in the struggling banks so they’d start lending again. Brown demanded the heads of the bank CEOs and the stock he bought in the big UK banks gave the government a real say in how the banks were run. Suddenly, Europe came on board, and things got better on that side of the pond. UK and European banks were starting to look safer. Hank had to do something so US assets wouldn’t fly to London.

Earlier in the crisis, Hank had said no to a meeting with Gordon, probably because he was a “socialist”. But now Brownie’s idea was flying, Hank did what any smart dude would do, and he diverted some of the cash to a watered down version of the Brown plan. He didn’t exactly oversell the idea either, basically bad mouthing it as he enacted it (just the confidence builder we needed). The handout to the bank CEOs happened in a one hour meeting. Hank told the banks to start loaning out the money pronto, but instead they just hoarded it to buy weaker banks. More free money.

Today, Hank decided mortgage securities were out for good. Wall Street took another bath because that meant the spigot was turned off. Hank also decided to use some of the famous $700 billion to bailout consumers with credit card debt, the first time he’d even mentioned the poor bastards with the big screen TVs. Wall Street will rally tomorrow when they realize that bailing out consumers bails out banks who hold their debts.

As for dealing with foreclosures, Hank says that’s way too complicated, so he’s sticking to a new version of the half assed plan that totally failed to get any traction on the most important element of the financial crisis. Someone asked him about saving GM and Ford. “Naaah”, said Hank. “That’s not my deal”.

So what’s left of the original, incredibly vital plan? Just the name. It’s still called TARP, even though we’re not relieving troubled assets anymore.

Maybe it’s not surprising, considering the joke’s on us, but nobody is really talking about this as the farce that it truly is. A five year old could come up with a better plan than Hank Paulson did.

But we have to be grateful to Hank for one thing. If his handling the crisis hadn’t been so pathetic, the election might have been a lot closer. As it is, Hank’s last day at Treasury is January 20th.

Hopefully the world can hold out until then.

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