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Recent scandals involving Wall Street banks and financial institutions, headed by some of the world's most well-paid managers, executives and analysts, have many Americans asking themselves whether this game is rigged. It is this sense of injustice, coupled with economic insecurity, that animates changes in Americans' attitudes toward Wall Street. It's not just a small number of Americans, those who are actually "occupying" Wall Street, who feel such injustice. That's just the tip of the iceberg.It was perfectly obvious by 2009 to the public that the financial collapse that occurred in the fall of 2008 was the direct result of extreme and reckless risk-taking by Wall Street bankers. It soon became equally clear that those banks considered themselves too big to fail, so they had been free to take insane risks with other people's money. They would get the winnings and the American taxpayers would take the losses.
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Americans have never exactly loved Wall Street stockbrokers or bankers—but we certainly didn't always hate them. Why this increasing hostility? The answer is a "perfect storm" of financial turmoil and a series of major scandals on Wall Street.
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According to ... Harris Interactive, the percent of Americans with a great deal of confidence in the people running Wall Street had already reached an all-time low of just 4 percent by February of 2009. These figures are not just a reflection of Americans' dissatisfaction with the size of their bank accounts — they also reflect the increasing belief that Wall Street is playing a game that only the bankers can win.
Economic hard times, such as global recessions, do tend to bring about small, but noticeable drops in the public's confidence in Wall Street, just as we might expect falling confidence in a military that is losing a war.
But when economic downturns coincide with major scandals, as in the savings and loan crisis of the late 1980s and early 1990s and our current dilemma, the biggest changes in public confidence result — changes that may have contributed to the protests we are seeing on Wall Street today. In other words, Americans really begin to get angry when there is evidence of systematic foul play.
To be sure, material hardships such as unemployment rates in the 9 percent range and the continuing high levels of foreclosures and bankruptcies undoubtedly set the stage for a public outcry. But this outcry has a distinctly moral tenor. The sentiments of the Occupy protestors holding signs reading "Blame Wall Street Greed," "People not Profits" and "Wall Street was the Real Weapons of Mass Destruction" certainly echo the wider American public's sense of moral indignation.
Just 26 percent of Americans in an April 2011 Harris poll thought the people working on Wall Street were "as honest and moral as other people" (for a point of comparison, the percentage was 51 in 1997). In that same poll, 67 percent of Americans agreed that "most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it."
Adoboli started at UBS in London as a trainee in March 2006, according to the Telegraph newspaper. On the LinkedIn profile, his title is listed as “Director ETF and Delta1 Trading at UBS Investment Bank.”The Slate Article describes how traders are supposed to deal with risk.
Investment banks’ Delta One operations trade securities that attempt to track an asset closely. Our Journal colleague Paul Sonne reported Adoboli has worked since 2006 in the European equities division of UBS, focusing on exchange-trading funds, or baskets of securities that aim to track a specific stock index or commodities.
Every trader is allowed to take on a certain amount of risk, and if he wants to exceed that value he must get the permission of his supervisors. ("Risk" refers not to the amount of money invested but rather the amount one might expect to lose on a particular gamble given the best available estimate of the odds.) Traders are said to have gone rogue when they've either made investments that are too risky, or invested much more money than they're supposed to.What did Adoboli do that went so wrong? It looks like he made some losing trades, then attempted to take riskier trades or larger trades that would cover his losses if he succeeded, but they also failed. Somehow UBS risk management system failed to identify the risks and their size, either because Adoboli concealed them or because the risk management system was inadequate. Here's more from Slate.
A starting employee at a bank like UBS might be allowed to take on risk measuring in the thousands, not millions, of dollars. As a trader gains experience—and demonstrates an ability to make a profit—his authorized risk would increase; a very senior person at a bank might even be permitted a billion dollars' worth of exposure. Nobody has reported just how much Adoboli had been trusted with, but the Wall Street Journal did report that he worked for an equities desk called Delta One that conducted relatively safe trades. Charges against Adoboli allege that he falsified accounting records going back to October 2008. That suggests he was hiding unauthorized losing investments for a long time, as opposed to making one gigantic, really bad bet.It has been reported that UBS' internal controls did not recognize that Adoboli was conducting unauthorized trades. He handed himself into UBS and told them what he had done, and only then did they realize that UBS had lost approximately $2 billion on his trades.
Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.The shock headline "Marx was right" ignores the fact that everything Roubini is reported here to have said is well-proven conventional modern macroeconomics. Everyone in the economics business and most honest bankers (there probably are at least two out there) know quite well that what Roubini says is true. The existing economic models all have this built into them! There is no honest argument!
Companies, Roubini said, are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.
Now, in current financial crisis, consumers, in addition to having less money to spend due to the above, are also motivated to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.
"Karl Marx had it right," Roubini said in an interview with wsj.com. "At some point capitalism can self-destroy itself. That's because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What's individually rational...is a self-destructive process."
Roubini added absent organic, strong GDP growth -- which can increase wages and consumer spending -- what's needed is large fiscal stimulus, agreeing with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion.
Absent additional fiscal stimulus, or unexpected strong GDP growth, the only solution is a universal debt restructuring for banks, homes (essentially households/families), and governments, Roubini said. However, no such universal restructuring has occurred, Roubini said.
Without that additional fiscal stimulus, that lack of restructuring has led to "zombie houses, zombie banks, and zombie governments," he said.
No Good Choices Outside of Fiscal Stimulus or Debt Restructuring
The United States, Roubini said, can in theory: a) grow itself out of the current problem (but the economy is currently growing too slowly, hence the need for more fiscal stimulus); or b) save itself out of the problem (but if too many companies and citizens save, the flaw Marx identified is magnified); or c) inflate itself out of the problem (but that has extensive collateral damage, he said).
However, Roubini said he did not think the U.S. or the world are now at the point where capitalism in self destructing.
"We're not there yet," Roubini said, but he did add that the current trend, if it continues, "runs the risk of repeating the second leg of the Great Depression" -- the 'mistake of 1937.'
In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things.We were told last week that there was a 40% chance of a double dip recession. I said then that the real chance was closer to 90%. Unless Krugman's solution is applied then 90% is also too low.
Fred R. Conrad/The New York Times
It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.
For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors — It’s the Greeks! It’s the tsunami! — that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.
But the economy wasn’t on the mend.
Yes, officially the recession ended two years ago, and the economy did indeed pull out of a terrifying tailspin. But at no point has growth looked remotely adequate given the depth of the initial plunge. In particular, when employment falls as much as it did from 2007 to 2009, you need a lot of job growth to make up the lost ground. And that just hasn’t happened.
Consider one crucial measure, the ratio of employment to population. In June 2007, around 63 percent of adults were employed. In June 2009, the official end of the recession, that number was down to 59.4. As of June 2011, two years into the alleged recovery, the number was: 58.2.
These may sound like dry statistics, but they reflect a truly terrible reality. Not only are vast numbers of Americans unemployed or underemployed, for the first time since the Great Depression many American workers are facing the prospect of very-long-term — maybe permanent — unemployment. Among other things, the rise in long-term unemployment will reduce future government revenues, so we’re not even acting sensibly in purely fiscal terms. But, more important, it’s a human catastrophe.
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To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away.
Of course, some players won’t change. Republicans won’t stop screaming about the deficit because they weren’t sincere in the first place: Their deficit hawkery was a club with which to beat their political opponents, nothing more — as became obvious whenever any rise in taxes on the rich was suggested. And they’re not going to give up that club.
But the policy disaster of the past two years wasn’t just the result of G.O.P. obstructionism, which wouldn’t have been so effective if the policy elite — including at least some senior figures in the Obama administration — hadn’t agreed that deficit reduction, not job creation, should be our main priority. Nor should we let Ben Bernanke and his colleagues off the hook: The Fed has by no means done all it could, partly because it was more concerned with hypothetical inflation than with real unemployment, partly because it let itself be intimidated by the Ron Paul types.
Well, it’s time for all that to stop. Those plunging interest rates and stock prices say that the markets aren’t worried about either U.S. solvency or inflation. They’re worried about U.S. lack of growth. And they’re right, even if on Wednesday the White House press secretary chose, inexplicably, to declare that there’s no threat of a double-dip recession.
Earlier this week, the word was that the Obama administration would “pivot” to jobs now that the debt ceiling has been raised. But what that pivot would mean, as far as I can tell, was proposing some minor measures that would be more symbolic than substantive. And, at this point, that kind of proposal would just make President Obama look ridiculous.
The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.
This might or might not work. But we already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t.
1980: Ronald Reagan runs for president, promising a balanced budgetUnless you are a Republican partisan practicing Tobacco Industry Executive-level blindness to facts this timeline clearly shows that the Republican Party is the party of profligate spending and refusal to pay government debts.
1981 - 1989: With support from congressional Republicans, Reagan runs enormous deficits, adds $2 trillion to the debt.
1993: Bill Clinton passes economic plan that lowers deficit, gets zero votes from congressional Republicans.
1998: U.S. deficit disappears for the first time in three decades. Debt clock is unplugged.
2000: George W. Bush runs for president, promising to maintain a balanced budget.
2001: CBO shows the United States is on track to pay off the entirety of its national debt within a decade.
2001 - 2009: With support from congressional Republicans, Bush runs enormous deficits, adds nearly $5 trillion to the debt.
2002: Dick Cheney declares, “Deficits don’t matter.” Congressional Republicans agree, approving tax cuts, two wars, and Medicare expansion without even trying to pay for them.
2009: Barack Obama inherits $1.3 trillion deficit from Bush; Republicans immediately condemn Obama’s fiscal irresponsibility.
2009: Congressional Democrats unveil several domestic policy initiatives — including health care reform, cap and trade, DREAM Act — which would lower the deficit. GOP opposes all of them, while continuing to push for deficit reduction.
September 2010: In Obama’s first fiscal year, the deficit shrinks by $122 billion. Republicans again condemn Obama’s fiscal irresponsibility.
October 2010: S&P endorses the nation’s AAA rating with a stable outlook, saying the United States looks to be in solid fiscal shape for the foreseeable future.
November 2010: Republicans win a U.S. House majority, citing the need for fiscal responsibility.
December 2010: Congressional Republicans demand extension of Bush tax cuts, relying entirely on deficit financing. GOP continues to accuse Obama of fiscal irresponsibility.
March 2011: Congressional Republicans declare intention to hold full faith and credit of the United States hostage — a move without precedent in American history — until massive debt-reduction plan is approved.
July 2011: Obama offers Republicans a $4 trillion debt-reduction deal. GOP refuses, pushes debt-ceiling standoff until the last possible day, rattling international markets.
August 2011: S&P downgrades U.S. debt, citing GOP refusal to consider new revenues. Republicans rejoice and blame Obama for fiscal irresponsibility.
S&P, which covered itself in a substance other than glory during the mortgage crisis, may have a poor record and strange methodology when it comes to sovereign ratings. France, which has a far higher debt per capita ratio than the U.S., still enjoys a AAA rating. And a downgrade, alone, doesn't mean U.S. interest rates will spike -- on Monday or at any time in the future. Japan's credit rating was downgraded several years ago, when the interest rates its government paid on bonds was already extremely low, and they've generally trended lower in the years since.The decision was more than just S&P's opinion of the politics, though. This was a clear political statement BY S&P itself!
Market conditions, the trajectory of economic growth and relative value can play as big -- if not a bigger -- of a role in determining interest rates than a rating.
But that doesn't mean we should ignore S&P's Friday evening shot across the bow. In downgrading the U.S.'s credit rating, S&P points out what has long been obvious: Washington's inability to come to an agreement on how to close the large fiscal gaps that have emerged since the recession began is troubling. Recent events have sapped the agency's confidence that the government can and will do what is necessary to align revenues with spending commitments. And it's difficult to escape the conclusion that America's credit rating was intentionally sabotaged by Congressional Republicans.
Officials from Standard & Poor’s provided documents to the Treasury Department, explaining the downgrade. Obama administration officials noticed a problem: the S&P numbers didn’t add up.S&P makes its evaluations supposedly on the financial records of the organizations issuing debt. If this were the case, then France would have a lower rating than the US, but France still as an AAA rating. S&P was incompetent during the mortgage crisis and it once again proved itself to be financially incompetent and a collection of wealthy political hacks.
On Friday, the company notified the Treasury that it planned to issue a downgrade after the markets closed, and sent the department a copy of the announcement, which is a standard procedure.
A Treasury staff member noticed the $2 trillion mistake within the hour, according to a department official. The Treasury called the company and explained the problem. About an hour later, the company conceded the problem but did not indicate how it planned to proceed, the official said. Hours later, S.& P. issued a revised release with new numbers but the same conclusion.
Got that? S&P prepared an analysis to justify a specific conclusion. The analysis was off by $2 trillion. Treasury explained to S&P that the analysis wasn’t even close to being accurate, which led the ratings agency to concede they’d made a mistake.
And a few hours later, S&P decided to reach the same conclusion anyway. The agency wanted to proceed with a downgrade; whether its numbers added up was irrelevant.
That certainly inspires confidence in the integrity of Standard & Poor’s decision making, doesn’t it?
As the stalemate over debt talks dragged on Wednesday, Congress and the White House may have passed the point of no return in avoiding a U.S. government debt downgrade.The deadline that counts is not August 2nd. The deadline that counts has already passed and now the US treasury interest rate will be going up. And every penny extra it costs will be tax money Americans have to pay for absolutely nothing except as a surcharge on the stupidity and greed of the Republican Party and it's tea bagger Republicans!
If Uncle Sam loses his coveted AAA rating, the cost of borrowing goes up, the economy slows further and jobs get even tougher to find.
With hopes fading for a broad deficit-cutting package of spending cuts and tax increases, the White House Wednesday signaled that President Barack Obama could support a short-term extension of the U.S. borrowing limit as long as it was part of a broader long-term deficit reduction deal.
"We are in the 11th hour," said White House press secretary Jay Carney, repeating what Obama had said Tuesday. "We need to meet, talk, consult and narrow down in fairly short order what train we're riding into the station."
Carney also said the president would be willing to support a short-term extension as a stop-gap measure, but not without "an agreement on a larger deal."
Story: Democrats, Republicans meet with president separately
Though the Treasury has said it has enough cash until August 2 to keep paying the government's bills, including interest payments on $14 trillion in debt, time is rapidly running out for a comprehensive deal. The most promising to date, proposed by the so-called "Gang of Six" senators, would involve painful cuts and controversial tax increases.
Even if a broad agreement could be reached this week, both sides would have to hammer out specific line items and then return to their respective caucuses to sell the deal.
The alternative is a deal that raises the debt limit temporarily to allow the Treasury to pay its bills. But bond rating agencies Standard and Poor's and Moody's have said such stopgap moves would jeopardize the government's top-notch AAA credit rating.
"With the clock ticking, we doubt there is time to reach agreement on a comprehensive plan," said Paul Ashworth, chief U.S. economist at Capital Economics. "Instead, we expect a smaller scale plan to be passed that cuts $1.5 trillion from discretionary spending over the next decade. ... But it may not be enough to satisfy the rating agencies. The federal government is therefore still likely to lose its AAA rating within the next three months."
" Ezra Klein had a good piece on this the other day.So if the tea baggers and similar Republican Know-nothings in Congress like Michelle Bachmann get what they want and cause the American government to default, what are they going to do afterwards about they disaster they caused? Think they will stand up and admit that they caused the disaster and admit they were warned?The first to fall will be “directly linked” debt. These are bonds that rely on payments from the federal government. Naomi Richman, a managing director in Moody’s Public Finance division, puts it bluntly: “There are certain kinds of municipal bonds that are directly reliant on Treasury paying or some other direct payment,” she says. “If those bonds don’t receive their payment, they have no other source of revenue.” So down they go.
Then there’s the “indirectly linked” debt. That’s debt from state government, local governments, hospitals, universities and other institutions that rely, in some way or another, on payments from the federal government. If Medicaid stops paying its bills, all the hospitals that rely on Medicaid’s payments become less creditworthy. If we stop funding Pell grants, then all the universities that enroll students who pay using financial aid become less creditworthy. And since the federal government passes one-fifth of its revenues through to the states, and the states pass those revenues through to cities, if the federal government stops paying its bills, all states and all cities are suddenly in worse financial shape, which will make it harder for them to get loans.
And then there’s everything else. Mortgages. Credit cards. Loans that businesses take out to expand. Much of the debt in the American economy, and in fact globally, is “benchmarked” to Treasury debt.
The entire credit infrastructure is premised on the notion that U.S. Treasuries are the safest possible investment — the full and faith and credit of the United States is impervious, and the nation’s credit rating is the best bet on the planet.
Or it was, right up until Americans thought it was a good idea to give confused Republican extremists control of the U.S. House of Representatives.
As Ezra noted in his piece, “If America’s credit rating falls, it’s taking a lot more than just Treasury securities with it.”
“I think Keynes mistitled his book,” Summers says. “The correct title would have been ‘A Specific Theory of Collapsing Employment, Interest and Money.’ What his book really was about was the proper understanding of the convulsive downturns to which a free-market economy is intermittently prone.”So Keynesian theory provides a solid basis for how to deal with the economic convulsion caused by the long housing bubble and the politically-oriented low interest rates that Greenspan engineered to reelect Bush. But the practical difficulties of applying the theory mask its effectiveness. It works, but it's not easy.
The idea, in other words, is not about whether the government spends money better than individuals. After all, a lot of the policies advocated by the Keynesians, like the Making Work Pay tax cut, put money into the hands of individuals so that they can spend it. The idea is that the government has a role to play when, because of a “convulsive downturn,” a crisis begins feeding on itself.
Keynes — and others who later elaborated on his work, like Hyman Minsky — taught us that although markets are usually self-correcting, they occasionally enter destructive feedback loops in which a shock to, say, the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system, which further persuades other economic players to hoard, and so on and so forth.
In that situation, the role of the government is to break the cycle. Because businesses and consumers have stopped spending, the government breaks the cycle by spending. As clean as that theory is, it turned out to be a hard sell.
The first problem was conceptual. What Keynes told us to do simply feels wrong to people. “The central irony of financial crises is that they’re caused by too much borrowing, too much confidence and too much spending, and they’re solved by more confidence, more borrowing and more spending,” Summers says.
The second problem was practical. “What I didn’t appreciate was the extent to which we only got one shot on stimulus,” Romer says. “In my mind, we got $800 billion, and surely, if the recession turned out to be worse than we were predicting, we could go back and ask for more. What I failed to anticipate was that in the scenario that we found we needed more, people would be saying that what was happening showed that stimulus, in general, didn’t work.”
And even if Congress was willing to green-light more money, spending it turned out to be harder than the Keynesians had hoped. “Anybody who is honest and knowledgeable will say it is harder to move money quickly and well in reality than it is in the textbook model. I don’t think the idea that lots more money could have been moved is credible unless there had been a whole set of prior planning,” Summers says.
Prior planning, it turns out, is important. Keynesianism might be a theory of crises, but it requires planning during non-crisis periods. And looking back, we weren’t prepared to go Keynesian. At all.
For one thing, if you’re going to spend during downturns, you have to save during expansions. That wasn’t a big part of George W. Bush administration policy, of course.
Another clear takeaway is that formulas are more reliable than Congress. It would be much better if federal support for programs such as Medicaid and unemployment insurance was explicitly tied to the unemployment rate. Hoping Congress will act responsibly over any extended period of time isn’t, as they say, a plan.
It would also be good to keep projects in “shovel-ready” condition when times are good so that federal money could be used effectively and quickly when times turn bad. Undeniably, the country’s infrastructure needs are great. If the federal government made a more explicit commitment to invest in infrastructure during downturns, states could be given the certainty and the incentives to keep a long list of projects ready to go.
But rather than improving on Keynes, the Republican Party has turned against him and the Democratic Party has stopped trying to defend him, much less continue to implement his recommendations.
“The polarization of fiscal policy is one of the worst legacies to come out of the recession,” Romer says, sighing. “Before the crisis, there was agreement that what you do when you run out of monetary tools is fiscal stimulus. Suddenly, it’s like we’re back in the 1930s.”
[Highlighting is by editor of WTF-o]
“The president’s team were fervent believers in the theories of a British economist called John Maynard Keynes,” wrote Majority Leader Eric Cantor (R-Va.) in his election-year manifesto, “Young Guns.”This clash of conservative ignorance and intransigence against the economic disaster they have caused is what is giving us the fake debt crisis and which is likely to cause further economic distress for America for a long time.
