Audit the Fed

by Dollars and Sense

[FYI--May 1st came and went and our blog didn't explode as Blogger suggested it would...I still haven't managed to migrate it to either WordPress or an authorized Blogger format.]

Sen. Bernie Sanders has proposed an amendment to the financial reform bill that would allow the Fed to be audited. Our friends at BanksterUSA are promoting the amendment; their site can help you send a letter or email to your senator asking him/her to vote in favor of the amendment. Here's what they say about the amendment:

Senator Bernie Sanders is rallying the troops again for his amendment to the Senate financial reform bill to audit the Federal Reserve. While the Treasury Department is posting TARP bailout recipients and amounts on their web page, the Fed is quietly disbursing trillions more, but is not telling us who is getting the money or why. Sanders' bill parallels the Ron Paul-Alan Grayson language from the House bill. Now if Senate leaders would only put the amendment to a vote, we might find out where this money is going and what taxpayers are receiving in collateral.

For more info about Bankster's campaign, click here.

Meanwhile, Politico posted an article today that mentions Sanders' amendment and identifies it as part of a push by "the left" to shape financial reform. (I don't really like their use of the term "the left"--I mean, Sanders counts as on "the left," I suppose, but who else in the Senate really does? Maybe leftish...) Anyhow, here's part of the article:

Left sees chance to beef up bank bill
By EAMON JAVERS & CARRIE BUDOFF BROWN | 5/3/10 4:53 AM EDT

Sensing the political wind at their backs, activist groups on the left are planning a push this week to shape the Wall Street reform bill on the Senate floor—and they're hoping that fraud charges and a criminal investigation of Goldman Sachs will give them the momentum they need.

It's a sign of how the debate has shifted since Republicans last week allowed the bill to come to the floor—dramatically increasing the chances a Wall Street reform bill will pass this year.

While the early part of the debate was framed by the standoff between GOP senators and the Democratic majority, the debate now becomes as much a tussle between centrists and the left over how the bill will be shaped. The Obama administration is watching the left's moves warily, hoping to use the populist push to its advantage on some fronts and blunt it on others.

As the left maps out strategy, its focus is on amendments designed to wring secrecy and excessive risk from the system, two of the main problems that helped send the world's economy reeling in 2008. Liberals want to bring complex investment trades called derivatives into the light, expand the Securities and Exchange Commission's authority over billions of dollars in private equity trades and force brokers to be more upfront with their clients about risks.

"It's probably going to be a stronger bill than any of us imagined when we got into this," said Roger Hickey, co-director of the left-leaning Campaign for America's Future. "The biggest anger among everybody—including the tea party people—is that the bankers got away with ripping off the bureaucrats in Washington."

Senate Banking Committee Chairman Chris Dodd (D-Conn.) has told senators he'd like them to file any amendments to the bill by Monday to set up a shaking-out period in which hundreds of ideas will be considered.

The liberal bloc will face an uphill climb winning passage of any of these amendments—but the left hopes the onslaught can change the terms of the debate. And they acknowledge some are so-called messaging amendments designed more to make a political point than to win votes on the Senate floor, including efforts to ban Wall Street investment banks from trading with their own funds and to restrict the size and borrowing of major financial firms.

On the left, for example, Democratic Sens. Ted Kaufman of Delaware and Sherrod Brown of Ohio have written an amendment that would prevent banks from becoming too big to fail by placing strict limits on their size. That's one of the amendments that liberal backers say might not succeed, but it will attract a lot of attention. Under the proposal, banks would be prohibited from holding more than 10 percent of the country's total insured deposits and required to adhere to strict limits on the amount of debt they can issue.

As Doug Henwood, editor of the Left Business Observer (hi, Doug!) pointed out on lbo-talk, the White House doesn't want the "left" to push too far. This is from later in the Politico article:

Still, the White House is watching and has made clear it won't let Democrats go too far.

"Having the bill shift a little bit to the left or [be] tougher on the banks and on derivatives could be a good thing," a senior administration official said. "But we're going to resist stuff that we feel is interference with monetary policy." One measure that the administration will push back against, the official said, is a proposal to audit the Fed, which has attracted support from a disparate group of members of Congress.

Read the full article.

Labels: Bernie Sanders, Doug Henwood, financial reform, financial regulation, LBO Talk, Left Business Observer, politico.com, Sharrod Brown, Ted Kaufman, The Fed

 

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5/03/2010 02:21:00 PM 0 comments

 

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by Dollars and Sense

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4/30/2010 07:33:00 PM 0 comments

 

Charter Cities

by Dollars and Sense

An NPR interview with Stanford economist Paul Romer today caught my ear. He was talking about his “charter cities” project. The idea is to have rich well-governed countries create new cities on empty land either domestic or foreign by establishing the governing rules and institutions, then inviting people from poor, ill-governed countries to move there. Investment will flow in and enterprise will flourish, giving the migrants an opportunity for a better life.

Here is one of Romer’s hypothetical examples:

In a treaty that Australia could sign with Indonesia, Australia would set aside an uninhabited city-sized piece of its own territory. An official appointed by the Australian prime minister would apply Australian law and administer Australian institutions, with some modifications agreed to in consultation with the government of Indonesia.

People from Indonesia, many of them lower-skilled workers, could come live as temporary or permanent residents in this zone, but would remain citizens of Indonesia. A portion of their labor income could be taxed and return to the government in Indonesia. Levels of free public services and welfare support would be comparable to those in Indonesia. As citizens of Indonesia, the Indonesian inhabitants of the city would have no claim on residency or citizenship in Australia proper. They would be subject to the same immigration controls whether entering Australia from this zone or from Indonesia.

Highly skilled workers from all over the world would be welcomed as well, but would be subject to the same immigration controls they would face from their home countries. Australian citizens and firms would be able to pass freely between Australia proper and the new charter city.

The point he stresses is that poverty results from bad rules within a country—not from, say, international trade regimes, military force, the machinations of domestic elites, etc. etc. Naturally, the rules Romer suggests the well-governed countries would establish for their charter cities are all about “free” markets. For instance, he claims the reason many Haitians do not have electricity is because the law there gives public-sector utilities a monopoly; a charter city for Haitians (in Brazil, he suggests) would allow private corporations to provide electricity and thus solve the problem.

Not sure this is such a new idea. The Australia/Indonesia example above sounds suspiciously like a good old “free-trade zone,” for example, the FTZ we reported on back in 2002 in Haiti, where Dominican Republic textile companies could benefit from cheap Haitian labor without even having to let any Haitians into the DR.

Read more about Romer’s plan here.

Labels: Australia, charter city, free trade, free-trade zone, Haiti, Indonesia, Paul Romer

 

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4/29/2010 02:27:00 PM 0 comments

 

Can Invading a Small Third-World Country Stimulate the Economy?

by Polly Cleveland

Reviewing Reinhart and Rogoff's This Time is Different in the May 13 issue of the NY Review of Books, Paul Krugman and Robin Wells assert that, "…history can offer some evidence on the extent to which Keynesian policies work as advertised." After brief comments on work by the IMF and others, they proceed:

"An even better test comes from comparing experiences during the 1930s. At the time, nobody was following Keynesian policies in any deliberate way -- contrary to legend, the New Deal was deeply cautious about deficit spending until the coming of World War II. There were, however, a number of countries that sharply increased military spending well in advance of the war, in effect delivering Keynesian stimulus as an accidental byproduct. Did these countries exit the Depression sooner than their less aggressive counterparts? Yes, they did. For example, the surge in military spending associated with Italy's invasion of Abyssinia was followed by rapid growth in the Italian economy and a return to full employment."

WHAT? If this is the best case to be made for "Keynesian" economics (as opposed to what Keynes might have meant in his General Theory)--then it's past time to look for a new paradigm.

But let's assume Krugman and Wells are serious. What's the evidence, what's the logic and what's the alternative?

Start with Italy. If Italy really did recover quickly, crediting the Abyssinian invasion (1935-36) is still just a post hoc argument--no proof of causation. Besides, Mussolini was a very busy man--building new infrastructure, reorganizing Italy's notoriously corrupt and ineffective government along fascist lines, even supposedly making the trains run on time. Maybe Il Duce did some good for the Italian economy. But then we don't really know, as he tightly controlled the news and the statistics.

The "Keynesian" logic, as best I can explain it, holds that a crash makes people too frightened to spend money. Instead, they all try to save. This creates a downward spiral, in which lack of demand for goods leads to more decline, and more decline leads to more fear and more futile efforts to save. If the government steps in, borrowing and spending--no matter on what--that will reverse the downward spiral and restore the economy to normal.

An alternative paradigm runs as follows:

In ordinary economic times, businesses invest by combining labor, natural resources and capital equipment to produce goods and services. These goods and services then are consumed by the owners of the labor, resources and equipment, completing the little circle shown in Chapter One of every macro textbook. Money flows around the circle in the opposite direction, as businesses pay the owners, allowing them to buy the output. Public services and infrastructure--like schools and sewers--enhance production.

If something interferes with production, then there's less to consume. The shortfall must be rationed, --directly by rationing coupons, or indirectly by inflation, or by cutting off credit to marginal businesses, which in turn lay off workers. It's that simple.

What might interfere with production? Obviously natural disasters, like floods, earthquakes or volcanoes, or manmade disasters, like wars or oil spills--disrupt production. Less obviously, bad public investments like bridges and highways to nowhere also disrupt production; workers, resource and capital owners get paid--but the process creates no goods for them to buy. Military spending likewise fails to deliver the goods to compensate the producers. That's why nations at war institute rationing--to prevent inflation.

Even less obviously, bubbles disrupt production. As in the recent housing bubble, land appreciation makes homeowners feel they're getting richer so they don't need to save and invest. Simultaneously, housing and related industries build too much housing--with the same effect on the economy as bridges to nowhere or stockpiles of useless weapons. There's a shortage of goods people want, and that shortage must be rationed somehow.

When Wile E. Coyote runs off a cliff, he doesn't fall until he looks down. A housing bubble bursts when investors begin to look down, as in 2007, and recognize the growing mismatch between expectations and supplies. By the time the crisis hits, the damage has been done. (It's now conventional to blame the crisis on machinations of Madoff or Goldman, but the bubble made those machinations profitable, and hid them for years.)

So if invading a small third world country won't stimulate the economy, what will?

The "Keynesian" paradigm completely disregards the quality of government spending, borrowing and taxation. We need policies now to get production back on track. Priority should go to supporting small business, which provides the most employment and production per dollar invested. That means at the least making credit available and mitigating that great job-killer, the payroll tax supporting Social Security. (See my prior pieces on "Deficit Hawk, Progressive Style.")

Hey Paul and Robin, time to ditch the "Keynesian" paradigm and start over!

 

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4/29/2010 07:45:00 AM 1 comments

 

Who's Afraid of Debt and Deficits?

by Dollars and Sense

We just posted material from the May/June, 2010 issue of Dollars & Sense, including Marty Wolfson's article on myths of the deficit, and the table of contents of the issue. Enjoy!

Here's the editorial note for the issue:

The Big Bad Deficit
Sarah Palin held a Tea Party on the Boston Common across from the Dollars &
Sense office on April 14th, the day before Tax Day. As the local media noted, the
turnout was underwhelming, and many of those who showed up seemed to be
gawkers—Boston residents wondering who on earth these Tea Partiers are.

Tea Partiers are among those who are exercised about the federal deficit and
the national debt, but who exactly loses sleep over federal budget policy? In any
case, these folks don't seem to care about many of the biggest contributors to debt
and deficit, like Bush's tax cuts for the rich, or massive military spending (though the
Ron Paul fans among them may worry about the latter).

On the other hand, deficit hawks are good at exploiting the generalized anxiety
about the economy, telling stories about the big bad deficit that seem like common
sense but fall apart on closer inspection. Marty Wolfson (p. 7) dismantles two of the
key myths that lead people to suppose that it is more important for the government
to reduce the deficit now, rather than do what might actually alleviate people's economic
woes, e.g. spending money to create jobs.

Outside of the United States, Greece has become the poster child for deficits and
debt run wild. Mike Epitropoulos (p. 9) helps untangle a situation in which ordinary people
are being asked to pay for the deeds of a corrupt public sector that has been unwilling
to tax the rich. And Arthur MacEwan (p. 31) explains the class politics behind the
pressure that "the bond market”" exerts on the government in Greece and elsewhere.

National debts and deficits are tied into the international trade system, and in particular
to a kind of deficit that we should be wary of. As Katherine Sciacchitano explains
(p. 13), the U.S. trade deficit sends dollars spewing out into the world economy
to return not as demand for U.S. products, but as fuel for stock market and housing
bubbles. Forging an alternative global system "will be the work of generations."

Also in this issue: health care reform and redistribution, bankruptcy and impunity
at ASARCO, the true (military) costs of oil, and more!

And here's info about a "Counter-Conference" and teach-in about "fiscal sustainability," which is to counter this "Fiscal Summit" populated with deficit hawks. Hat-tip to LP for this.

A Teach-In Counter-Conference on Fiscal Sustainability
Submitted by joe on Wed, 2010-04-14 16:53

On April 28, 2010, the Peter G. Peterson Foundation is sponsoring a "Fiscal Summit" in Washington, DC. The purpose of the Conference, which is scheduled for the day after the first meeting of the President's recently constituted National Commission on Fiscal Responsibility and Reform (By the way, where the Conference is happening is a mystery not cleared up on the PGPF web site), and which includes many notables, is:

". . . to further a national dialogue on solving America's fiscal challenges through several moderated discussions with leaders on the issue from across the political spectrum. . . .

Robert Kuttner's comment on the Peterson-sponsored Conference is:

"This is billed as a 'national dialogue on solving America's fiscal challenges,' but spare me. This is a propaganda event. For the most part, the featured speakers follow the Peterson line. John Podesta, the closest thing to a liberal playing a headliner role, accepts that there is a serious deficit problem, but would entertain a value-added tax as part of the remedy. But the speakers' list is clearly stacked and there is no one to Podesta's left."

And for good measure, the left-right paradigm is not even very applicable here at all, because everyone listed In the PGPF's announcement, whether "liberal" or conservative, shares the neo-liberal assumption that Government spending in the United States is operationally constrained by the ability to tax or to borrow money from non-Government sources. Given this false assumption, all the participants in this so-called "national dialogue" will share the assumption that fiscal sustainability has something to do with Government deficits, debts, and the ratio of debt held by the public to GDP. There will be disagreements among them about how long the Government has to bring deficits down over time, or to moderate the trend toward increasing debt, or about what a "responsible" ratio of debt held by the public to GDP ought to be. But none will entertain or discuss the idea that deficits, debts, and debt to GDP ratios are inappropriate tests of fiscal sustainability, irrelevant measures of the degree of fiscal challenges we face, and, in fact, nothing more than a by-product of the real fiscal challenges facing us, namely achieving renewed economic growth and full employment. So, this Conference will take "off the table" any ideas about what fiscal sustainability, that don't center around a neo-liberal definition of this idea.

That's just intolerable. What is badly needed is an immediate answer to the President's Commission and the Peterson Conference. Our answer is entitled the Fiscal Sustainability Teach-In Counter-conference. We plan to hold it in Washington DC, on April 28, 2010, from 8:00 AM to 4 PM, at The Marvin Center of The George Washington University, Room 310, The Elliott Room and to make it a free event open to the public. Please get there early since the seating capacity of the room is 90.

The purpose of our conference and teach-in is to look at fiscal sustainability relative to public purpose, including full employment, and also to teach the new economic paradigm of Modern Monetary Theory (MMT) and its application to fiscal sustainability. We want to propagate an alternative message about what fiscal sustainability means, and to do that in the mainstream mass media, and in the blogosphere, on the same day as the Peterson Foundation Conference. Here is our tentative program schedule, topics and presenters as of 04/20/10.

Please make your plans to come to this Teach-In Counter-Conference. You will learn why the thinking and austerity posture of the deficit hawks is the single biggest threat to the American economy since the policies of Herbert Hoover himself, and why the new economic paradigm of Modern Monetary Theory provides a much better guide to our economic crisis than the "seven deadly innocent frauds," (the frauds themselves, not the linked book which is, itself an introduction to MMT) and other neo-liberal economic myths.

For more information, click here.

Labels: balance of trade, deficit, deficit hawks, Greek debt crisis, trade deficit

 

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4/24/2010 04:52:00 PM 1 comments

 

Follow Up on Poterba on Capital Markets

by Dollars and Sense

In my most recent blog post, about last night's event at the American Academy of Arts & Sciences, I said I'd wanted to ask James Poterba, the President of the National Bureau of Economic Research, a follow-up question, and that I'd let readers know if I heard back from him by email.

Well--I'm getting a somewhat better impression of him; he got right back to me. Here's my email and his response:

Dear Prof. Poterba,

I greatly enjoyed your remarks, and John S. Reed's remarks, at the American Academy of Arts & Sciences yesterday evening.

In response to the suggestion from a member of the audience that the federal government could do more to alleviate the "social costs" of the downturn (especially of long-term unemployment), e.g. by investing directly in certain industries, you said that it is hard for government to pick winners, and that "markets do a better job of allocating resources." (I believe I am quoting you verbatim.)

The question I'd hoped to ask--and your remark made me want to ask it even more urgently!--was this: Do you think that financial markets and financial institutions have done a good job of allocating capital over the past couple of decades? And my follow-up question would be: if you think that they have done a *good* job, what on earth would count as doing a bad job?

Best,

Chris Sturr, co-editor, /Dollars & Sense/ magazine

And his response:

Dear Chris -
I am glad that you enjoyed the session last evening. I do believe, as I said last night, that capital markets such as those in the US do, and have done, a reasonably good job of allocating capital. I don't know of any better mechanism. All best wishes.
Jim

So I have a good impression of him for getting back to me so quickly, but I still find it pretty astonishing and disturbing that the financial crisis and recession don't seem to have shaken his market fundamentalism one bit.

—CS

Labels: capital markets, financial crisis, James Poterba, recession

 

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4/16/2010 04:08:00 PM 1 comments

 

An Evening with Fancy Bankers

by Dollars and Sense

Chris Sturr, D&S co-editor, here.

A few weeks ago I received an invitation to attend the "1,954th Stated Meeting" of the American Academy of Arts & Sciences, on the topic of "Prospects for the Economy." The featured speakers were supposed to be John S. Reed, former Chair and CEO of Citigroup and former chair of the New York Stock Exchange; and E. Gerald Corrigan, Managing Director at Goldman Sachs Bank USA (the holding company of Goldman Sachs) and former Prez. and CEO of the Federal Reserve Bank of New York. They were to be introduced by James M. Poterba, Professor of Economics at MIT and President of the National Bureau of Economic Research (and also a member of the NBER committee that dates the business cycles).

The event happened last night. As it turned out, Corrigan couldn't make it, supposedly because he was "stuck on the tarmac" at a NYC airport, but one wonders whether his absence had something to do with the SEC filing suit against Goldman Sachs today.

The Academy, which dates back to 1780, included George Washington, Thomas Jefferson, Alexander Hamilton, and Benjamin Franklin as early members, and has included 200 Nobel laureates as members, according to Wikipedia. The vaguely Japanese-style headquarters is on a wooded campus of several acres in Cambridge, right on the border of Somerville, about a fifteen minute walk from Harvard Yard.

As soon as I got the invitation and accepted via email, I sent an email around to D&S folks to see what I should ask the "fancy bankers," if I got a chance to ask a question. D&S collective member, author, and economist Alejandro Reuss provided the suggestion I liked best. He thought I should ask thme: "Do you think financial markets and financial institutions have done a good job of allocating capital over the last couple of decades? If so, what on earth would count as not doing a good job?" Unfortunately, I didn't get a chance to ask my question in person, but I may get an answer to it yet.

The crowd was overwhelmingly white—I saw no black people whatsoever, and of three non-black non-white people, two were serving snacks and wine. Maybe 20% of the audience were women, and among audience members I think there might have been three or four people younger than me (and at 43 I'm not all that young); the median age might have been 60. There seemed to be lots of important people.

Here's what happened: Milling around the snacks, I met a nice older gent, a George T., who is an investment adviser in Belmont, a relatively ritzy suburb of Boston. He confessed that even though he is a life-long Republican, he is pretty disgusted with the results of banking deregulation. We chatted during the reception and sat together during the talk. (At the end of which he whisked me up front to introduce me to Louis W. Cabot, Chair of Cabot-Wellington LLC and Interim Chair of the Board of the Academy, and I think former head of the Brookings Institution, who had officiated at the whole event.)

I got a better impression of John S. Reed, whom I'd been prepared to dislike, than I did of James Poterba. Reed gave a short talk on the economic crisis and the recession. He downplayed the role of declines in consumer expenditures and personal disposable income in the downturn, claiming that both of these had already returned to where they were at their previous peak (which is hard to believe--I'm going to try to get my hands on the charts in his slides to confirm his numbers). And he downplayed the role of the subprime crisis per se, saying that the banking system was so over-leveraged that if the mortgage crisis hadn't precipitated the financial crisis, something else would have. He identified the precipitous withdrawal of business investment in the wake of the financial crisis as what most accounted for the downturn, and he also cited (but slighted, as a couple of audience members pointed out) the massive jobs downturn.

He said he was "fundamentally optimistic"; he predicted a "V-shaped" recovery, given that consumer demand is strong (contrary to "conventional wisdom"), exports are doing well, and he expects that business investment will pick up rapidly over the next couple of quarters. (As audience members pointed out, here's where his slighting of long-term unemployment is problematic: can the recovery be considered "V-shaped" if unemployment says near 10% for as long as it is likely to, and long-term unemployment continues to be a problem? He wondered aloud why this was "conventional wisdom," but he also didn't really seem to care--massive joblessness didn't seem to dampen his optimism.)

His two caveats were (a) that the Fed would have to be very careful extricating itself from the the monetary stimulus (e.g. super-low interest rates) it has set up (and the same would be true with governments globally); and (b) that he thought we could definitely expect a dollar shock, making it difficult for the U.S. to issue debt, over the next five years. Could it happen in the next five months? Who can say? he said. He likened the coming dollar shock to an earthquake in an earthquake-prone region: it is "predictable but not forecastable." [Keep your eyes out for a feature article on the dollar and the U.S. trade deficit in our May/June issue.]

What made me like the guy more than I thought I would? He said fairly forcefully that the criticism bankers were facing was justified, and he said they should be held accountable (though he didn't say how--confiscation of their wealth or imprisonment are probably not what he would recommend, alas). And in response to a question about what kind of (re-)regulation was warranted, he made some pretty interesting remarks. He admitted first of all--pretty explosively, I think!--that people shouldn't believe anything bank executives say in Congressional testimony, since they have a fiduciary responsibility to take stands that are good for their stockholders. (Did he really mean to say that the bank executives' fiduciary responsibility required them to perjure themselves?) Since he's a former bank executive, he is free to say what he actually believes, which is that the banks should be re-regulated, starting with capital requirements (not allowing banks to reach the levels of leverage they did before the current crisis); and he said he is in a strong financial consumer protection agency, because banks had been taking advantage of vulnerable and ignorant consumers for too long. (I guess it is easy enough to take these stances when you're essentially retired.)

What turned me off about Poterba? Mostly his responses to one pretty pointed question about industrial policy and the "social costs" of the mass unemployment that has come with the rapid business disinvestment Reed discussed. Shouldn't the federal government follow Europe's lead in addressing these social costs via direct investment in industry, as Europe had in Airbus and in the auto industry? an audience member asked. Reed acknowledged that there were social costs to unemployment. But when Poterba addressed them, all he could come up with was that long-term unemployment degrades people's job skills. He really seemed clueless about what's bad--for people and communities, not "the economy," or even simply for people's long-term earning power--about mass, long-term unemployment.

And in response to the idea of direct government investment in industries, he said that this was a problem, because governments have a hard time picking winners, whereas "markets do a better job of allocating resources."

So much for learning anything from the current economic crisis. Even Alan Greenspan seems to have learned more than James Poterba, for all he said last night.

The session ended before I was able to ask Alejandro's question, but I think Poterba gave his answer. I did email him the question—I will let you know if I hear back from him.

—CS

Labels: AAAS, E. Gerald Corrigan, financial crisis, Goldman Sachs, industrial policy, James Poterba, John S. Reed, recession

 

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4/16/2010 02:32:00 PM 0 comments

 

Breaking News: SEC Sues Goldman Sachs

by Dollars and Sense

Just posted to the NYT website:

U.S. Accuses Goldman Sachs of Fraud

By LOUISE STORY and GRETCHEN MORGENSON
Published: April 16, 2010

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against—the ones he believed were most likely to lose value—and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

"The product was new and complex, but the deception and conflicts are old and simple," Robert Khuzami, the director of the S.E.C.'s division of enforcement, said in a statement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Mr. Paulson is not being named in the lawsuit. In the half-hour after the suit was announced, Goldman Sachs's stock fell by more than 10 percent.

Read the full article.

Labels: Accounting fraud, Goldman Sachs, mortgage backed securities, SEC, subprime crisis

 

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4/16/2010 10:39:00 AM 0 comments

 

Several Items: Greece, Taxes, Bond Market

by Dollars and Sense

Today's items:

(1) Taxes: Since it's tax day, it's time to dispel some of the myths around taxation. For this purpose I like Mark Engler's recent post over at Dissent's "Arguing the World" blog, busting the myth of "Tax Freedom Day." Here is part of his post:

Military spending accounts for over half of our federal tax dollars after you add up the allocations for the Department of Defense, war appropriations, military components of other arms of the government, and debt from previous military ventures. This means that, unless they want to rethink the nature of their holiday, the “Tax Freedom” people should be spending January and most of February joining the picket lines of the War Tax Resisters.

Last I checked, the Tea Partiers weren’t interested in reeling in military spending. So what else is on the list? Well, the next big budget items are Social Security, Medicare, and Medicaid. While some on the far right want to privatize or eliminate them, these programs tend to be very popular with most Americans—so much so that fear-mongering about a government takeover of Medicare became a paradox-laden Tea Party talking point. Medicare, Medicaid, and Social Security total around 39 percent of the total federal budget. So once we take those off the table, we’re up above 80 percent of the federal budget that’s going untouched.

Are the Tax Freedom Day people celebrating freedom from functional national highways and bridges that don’t collapse? If not, that’s another $73 billion in taxes we can agree to keep.

Should there be a public response to public health hazards like the Swine Flu? Unless you believe that the rich should be vaccinated and the poor should go ahead and suffer the epidemic (a recipe for festering ever more virulent diseases), then you support some type of national public health system, which means funding the Center for Disease Control and related agencies.

Disaster relief? Unless you think people caught in floods and earthquakes should fend for themselves, keeping FEMA will shave another day or so off the “Tax Freedom” concept.

National parks? Some whack jobs might want to sell off Yellowstone and Yosemite. But red-blooded, Ken-Burns-loving Americans, not such much.

The list goes on. Keep in mind that Tax Freedom Day is not just about federal taxes, but also about state and local taxes. A lot of these go to services like garbage collection, local police, schools, and firefighting.

Read the whole post.

And David Leonhardt's column in yesterday's NYT targets the "47%" myth (which I'd never heard about—guess I don't listen to the right right-wing radio shows?), according to which 47% of Americans supposedly don't pay any taxes, unfairly burdening the remaining hardworking folks. Here's a sample:

The 47 percent number is not wrong. The stimulus programs of the last two years—the first one signed by President George W. Bush, the second and larger one by President Obama—have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here—federal and income—are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and investment taxes, among others. And, of course, people pay state and local taxes, too.

Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47.

On taxes, also check out United for a Fair Economy's Tax Pledge, which has been getting some attention in the national media.

(2) The Greek Debt Crisis: The spotlight on Greece and its debt crisis intensified this week, as European leaders finally agreed to a rescue package.

Yesterday we posted a comment by Mike-Frank Epitropoulos on the Greek debt crisis; Mike argues that Greece has become a demonstration project for other European countries with "overly" militant populations. Here's the beginning:

There has been an avalanche of coverage on Greece's economic situation in the past few months. Most of the coverage rightly attempts to diagnose the underlying problems of Greece’s dual deficits of the public sector and its national debt, and how this might affect the value of the euro and the integrity of the Euro Zone. But, as anyone who has followed this story knows, Greece is not alone in this precarious situation. They are lumped into a group of EU countries that have been labeled the "PIIGS"—Portugal, Ireland, Italy, Greece, and Spain. Additionally, it is known that some of the other countries have worse problems and are larger than Greece, which could have even greater negative impact on the EU and the value of the euro. So, why the focus on Greece?

Click here for Mike's analysis. Our May/June issue will also include an explanation of the kind of "pressure from the bond market" that the Greek government is facing. (On this topic, in connection with Greece and the financial crisis more broadly, see Kevin Gallagher's recent Guardian piece, The Tyranny of the Bond Market.)

Labels: bond market, David Leonhardt, Greece, Greek debt crisis, Kevin Gallagher, Mark Engler, Tax Freedom Day, taxes

 

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4/15/2010 11:48:00 AM 0 comments

 

Several Items: Citigroup/stimulus, TBTF, Quakes

by Dollars and Sense

I will continue to post in digest form (multiple items) for a while—no luck on migrating the blog just yet. Soon, though. Here are this week's items:

(1) From Dean Baker (hat-tip to Mike Prokosch, who says, "CEPR outdoes itself here"):

Profits on Citigroup Stock: Can They Be the Basis for Financing Stimulus?

April 2010, Dean Baker

Last month the government announced plans to sell the stock it obtained in November of 2008 as part of its bailout package of Citigroup. The media jumped on the fact that, at the stock's current market value, the government stands to earn an $8 billion profit on this stock. This profit was widely touted as evidence of the success of the bailout. In reality, the government's profit on Citigroup stock was primarily the result of its own willingness to back up Citigroup. The increase in Citigroup’s stock price was largely driven by investors’ realization that the government would not let Citigroup fail. [Read the rest (pdf).]

(2) From Robert Reich, from a while back on his blog, but still salient (hat-tip to L.F.):

Break Up The Banks

Robert Reich | Monday, April 5, 2010

A fight is brewing in Washington—or, at the least, it ought to be brewing—over whether to put limits on the size of financial entities in order that none becomes "too big to fail" in a future financial crisis.

Some background: The big banks that got federal bailouts, as well as their supporters in the Administration and on the Hill, repeatedly say much of the cost of the giant taxpayer-funded bailout has already been repaid to the federal government by the banks that were bailed out. Hence, the actual cost of the bailout, they argue, is a small fraction of the $700 billion Congress appropriated.

True, but the apologists for the bailout leave out one gargantuan cost—the damage to the economy, which we're still living with (witness the latest unemployment figures). Leave it to the Brits to calculate this. Andrew Haldane, Bank of England’s Financial Stability Director, figures the financial crisis brought on by irresponsible bankers and regulators has cost the world economy about $4 trillion so far.

So while the bailout itself is gradually being repaid (don't hold your breath until AIG and GM repay, by the way), the cost of the failures that made the bailout necessary totals vast multiples of that. [Read the rest of the post.]

(3) Mark Engler on free trade and quakes (starting with Bill Clinton's mea culpa, which we mentioned a couple of days ago); hat-tip to Mark E. ;) :

"Free" Trade Makes Earthquakes Worse
Mark Engler | April 7, 2010 2:00 pm

Here's something you don't see every day: One of the most influential promoters of market fundamentalist "free trade" policies admitting that he screwed up big time—and that as a consequence people in Haiti are starving. Amazingly, that's just what happened in the lead-up to last week's International Donor's Conference on Haiti.

Earlier in March, Bill Clinton—currently honing his elder statesman chops by working on Haiti disaster relief—made a remarkable apology for the failure of policies he once championed. His statement was put in context in an excellent article by Associated Press reporter Jonathan Katz entitled, "With Cheap Food Imports, Haiti Can't Feed Itself." The article hasn't received nearly the attention it deserves, so if you missed it when it first came out, do check it out. [Check out the rest of Mark's post.]

That's all I've got for now--may post something on the weekend.

Labels: bailout, bill clinton, Citigroup, Dean Baker, earthquake, economic stimulus, Haiti, Mark Engler, Robert Reich

 

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4/09/2010 04:39:00 PM 0 comments