Tea Party ‘fiscal responsibility’ rhetoric risking depression
Posted by WARREN MOSLER on January 13th, 2011
The Tea Party leadership needs to read ‘The 7 Deadly Innocent Frauds of Economic Policy’ and go public on the need for a higher debt ceiling and a larger federal deficit, before they do even more damage to the US economy:
Public strongly opposes debt level increase: Reuters/Ipsos poll
By Andy Sullivan and Richard Cowan
December 25 (Reuters) — The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs, according to a Reuters/Ipsos poll released on Wednesday.
Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase.
The poll underscores the tough task ahead for U.S. lawmakers as the debt nears its current ceiling of $14.3 trillion. Treasury Secretary Timothy Geithner last week warned that a failure to raise the borrowing limit in the coming months could lead to “catastrophic economic consequences.”
Brian Riedl, the lead budget analyst at the conservative Heritage Foundation, said the poll findings put “a lot more pressure on those who want to raise the debt limit to make a convincing argument to a very skeptical public.”
Republicans, who won control of the House of Representatives in November on a promise to scale back government, hope to pair any debt-ceiling hike with a commitment from President Barack Obama to reduce long-term spending.
Republicans have vowed to slash $60 billion from the budget as soon as March, but many of those cuts are not likely to be popular with the public.
The United States posted an $80 billion budget deficit in December. The government has now posted a budget deficit for 27 straight months, the longest streak on record.
A deal to extend tax cuts this year that was approved by Congress in December is expected to put a hole of more than $800 billion in the deficit over the next decade.
Obama wants broader tax reforms although it will be hard to get them through a divided Congress in the next two years. His administration is exploring ways to boost tax incentives for corporate investments, Geithner said.
WHAT TO CUT?
While the public apparently does not want Washington to keep borrowing more and more, it appears to lack a clear idea of how to cut spending.
“You get nervous,” Riedl said. “There is some contradiction: Historically the public wants a balanced budget but doesn’t show a lot of enthusiasm toward the policies to get us there.”
Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.
With the United States fighting wars in Afghanistan and Iraq, 51 percent supported cutbacks to military spending.
Less than half, 45 percent, support an expected Republican effort to pare enforcement of environmental laws.
Some 53 percent support cutting the budgets of financial regulators like the Securities and Exchange Commission, in spite of the widespread consensus that a lax regulatory atmosphere contributed to the financial crisis of 2007-2009.
And 47 percent support cutbacks to national parks, which were shuttered for several weeks during the budget battles of 1995 and 1996.
Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.
Some Democrats say that tax increases, especially on the wealthy, have to be part of any serious effort to control deficits, coupled with better enforcement of tax laws or streamlining those laws.
Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection — two very small lines in the massive federal budget ledger.
The poll of 1,021 U.S. adults was conducted between Friday and Monday. It has a margin of error of plus or minus 3.1 percentage points.
January 13th, 2011 at 11:52 am
It seems the real question is how much power the Tea Party folks who actually do care about the deficit wield within the Republican party? (I don’t follow politics enough to guess at the answer).
Krugman, while obviously partisan himself, has posted a lot on this topic recently, e.g.:
http://krugman.blogs.nytimes.com/2010/12/28/yes-theyre-frauds/
“House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric”
“…nobody, and I mean nobody, in a position of influence within the GOP cares about deficits when tax cuts for the affluent are on the line. Deficit hawkery is just a stick with which to beat down social programs”
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January 13th, 2011 at 12:12 pm
Ah, there is a difference between “lax regulatory” environment and too much or too little regulation writing. The “laxness” leading to the housing bubble and toxic melt down (and Madoff, Enron, Fannie, Freddie, etc) was not that there were not enough regulations, it was solely due to failure of regulators to regulate.
The simple rule in all these cases that was violated was that 10-K, 10-Q and other filings have to be honest. The SEC has plenty of regulatory authority to audit and police this activity.
Bear, Lehman, Enron, Fannie, etc filed false reports that any competent auditor could have spotted.
That is the core.
I think we only need one rule. Thou shall not lie. And an SEC doing its job to enforce that rule.
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WARREN MOSLER Reply:
January 13th, 2011 at 1:33 pm
unfortunately seems we’ve created more things to regulate in the financial sector than there are people in the world needed to regulate them.
see my proposals at http://www.moslereconomics.com/?p=8968 which greatly reduce what the financial sector can do and thereby dramatically reduce the regulatory burden as well.
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Tom Hickey Reply:
January 13th, 2011 at 3:01 pm
The idea of financial innovation was to commoditize risk, but risk is not a commodity.
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January 13th, 2011 at 12:41 pm
Warren, you should go to this
http://mit150.mit.edu/symposia/economics
A lot of big names you could beat up (verbally, of course).
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WARREN MOSLER Reply:
January 13th, 2011 at 1:35 pm
don’t think i could stay awake through any of it…
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January 13th, 2011 at 1:09 pm
Tea Party will be chewed up and spat out, just like every other right wing populist movement.
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Jim Baird Reply:
January 13th, 2011 at 2:41 pm
Yeah, you had a lot of similar stuff back in the 30s see http://en.wikipedia.org/wiki/Sentinels_of_the_Republic) – although many of them had more of a mix of left-wing ideas in them, along the lines of the fascist parties in Europe. There was Huey Long’s group, for example: http://en.wikipedia.org/wiki/Share_Our_Wealth.
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Tom Hickey Reply:
January 13th, 2011 at 2:46 pm
Mirabile dictu. Something else we agree on, Zanon. Does that make two, or is it three now? :)
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January 13th, 2011 at 2:45 pm
I read this article yesterday and it literally made me sick. Depressed as hell.
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WARREN MOSLER Reply:
January 13th, 2011 at 2:49 pm
depressed enough to buy 30 year 0′s?
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January 13th, 2011 at 4:18 pm
Has anyone seen the actual poll question(s)?
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January 13th, 2011 at 7:27 pm
Reading the above article
“Some Democrats say that tax increases, especially on the wealthy, have to be part of any serious effort to control deficits, coupled with better enforcement of tax laws or streamlining those laws.”
…..is misleading when……..
“a new poll shows that of all the hard options before them, Americans favor raising taxes on the rich, above cuts to programs like Medicare and Social Security. According to a 60 Minutes/Vanity Fair poll, 61% of Americans favor raising taxes on the wealthy in order to balance the budget. In contrast, only 20% favor cutting defense spending, only 4% favor cutting Medicare, and only 3% favor cutting Social Security.
Continue reading on Examiner.com: New poll shows Americans favor raising taxes to balance the budget – National Political Buzz | Examiner.com http://www.examiner.com/political-buzz-in-national/new-poll-shows-americans-favor-raising-taxes-to-balance-the-budget#ixzz1Axd71n97“
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ESM Reply:
January 14th, 2011 at 11:39 am
Ummm… talk about misleading.
First, the poll question was “To balance the federal budget, which of the following would be the first step you would take?”, which is not quite logically the same as favoring raising taxes on the rich over cuts in programs. As a first step, raising taxes is easier. Deciding how and where to cut Medicare and Social Security would require some study and might not make a good initial step.
Second, the poll is ridiculous, with the budget balancing question posed along with a bunch of non-serious questions. You always have to be suspicious when you get response rates as low as 3% or 4% for legitimate answers to a poll question. That tells me that the methodology had a systematic bias.
Compare with the question “What denomination comes after a trillion?” where the answers “Gazillion” garnered 12% and “Bazillion” garnered 7%.
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Winslow R. Reply:
January 14th, 2011 at 12:55 pm
If balancing the budget was at stake, would it be ‘ridiculous’ to infer you are for cutting medicare and SS and leaving raising taxes alone?
Democrat vs. Republican rhetoric doesn’t serve public purpose. There is a fight brewing on the tilted play field between the financial class and the non-financial class.
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January 14th, 2011 at 10:59 am
A few thoughts:
1) The fact that only 60% of Americans want to raise taxes on the wealthy when the tax increases would only affect 5 to 10% of the population means that 30-35% of Americans who won’t have their taxes raised still don’t want them raised on the wealthy. I saw Keith Olberman spouting off that raising taxes on the wealthy was a good idea because 60% of Americans think so. Of course they think so. They’ve been told by the media that tax cuts for the wealthy don’t “trickle down” and do no damage. And, they aren’t the people who have to pay the higher tax rates!
2) In 2006, Obama spoke on the Senate floor and stated that the need to raise the debt ceiling was an indication that the Bush administration had failed. Harry Reid supported then Senator Obama’s comments. Why now, when it is the tea party, is this rhetoric risking a depression but when it was the democrats, it didn’t draw this condemnation.
3) The tea party is far more opposed to a welfare state than they are to larger budget deficits.
4) S&P and Moody’s today warned investors that US debt ratings might be downgraded. How do these people have jobs and credibility in the markets? From the WSJ:
With attention focused on sovereign-debt worries in Europe, two major credit-rating firms reminded investors again that the U.S. has debt problems of its own.
Investors bought Treasury debt nonetheless, ignoring the comments, which echoed prior statements by the companies and may still be months or years away from having any practical meaning.
“The warning on the U.S. rating is well-founded,” said Brian Yelvington, chief fixed-income strategist at Knight Capital. “However, it will probably fall on deaf ears until the peripheral Europe story plays out.”
Moody’s Investors Service said in a report on Thursday that the U.S. will need to reverse the expansion of its debt if it hopes to keep its “Aaa” rating.
“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” Sarah Carlson, senior analyst at Moody’s, said.
“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Ms. Sirou said. “But that may change.”
Have a nice weekend!
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Peter D Reply:
January 14th, 2011 at 11:16 am
So, is there a “exorbitant privilege linked to the U.S. dollar”? What does MMT say about that? Are we indeed better off because dollar is the reserve currency?
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ESM Reply:
January 14th, 2011 at 11:46 am
The “exorbitant privilege” derives from the rest of world’s willingness to run trade surpluses with us. The dollar’s reserve currency status is merely a natural consequence of that according to MMT. So the causality is reversed from the way Ms. Sirou sees it.
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Peter D Reply:
January 14th, 2011 at 12:10 pm
I feel this is right, since other fiat regimes such as Australia or UK are still net importers without their currencies being “world reserve currencies”. But is there any additional benefit compared to, say, Australia deriving simply from the inertia of the world using USD as reserves (and not deriving from the fact that US economy is simply larger)?
ESM Reply:
January 14th, 2011 at 12:23 pm
There may be some effect, but it’s hard to separate out from the fact that the US is militarily and culturally influential to an extent which is out of proportion with the size of its economy.
For example, the US has 12 aircraft carrier groups to Australia’s none, and perhaps this gives people greater confidence in the stability of the US dollar versus the Australian dollar. Also, we have Lady Gaga.
WARREN MOSLER Reply:
January 14th, 2011 at 8:16 pm
agreed
Tom Hickey Reply:
January 14th, 2011 at 1:08 pm
The “exorbitant privilege” the US has as the issuer of the world reserve currency is neither a “privilege” nor an arbitrary accident. It is a consequence of the US being the world’s largest economy and the sole superpower. In another age, the a power like the US would just take what it wanted. Instead, the US is playing nice — more or less. The geopolitical game is still global domination.
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WARREN MOSLER Reply:
January 14th, 2011 at 8:15 pm
we are better off if the rest of world wants to net accumulate $US financial assets, because it allows us to net import and have taxes that much lower for a give size govt to sustain full employment type conditions.
however, we don’t realize taxes function to regulate agg demand and not to raise revenue per se, so for a given size govt we tend to grossly over tax ourselves and keep unemployment high.
so we should be better off but most often we don’t know how to make that happen
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ESM Reply:
January 14th, 2011 at 11:50 am
“3) The tea party is far more opposed to a welfare state than they are to larger budget deficits.”
Exactly. I have brought up this point before. I do not believe the Tea Party cares about deficits or debt per se. They care primarily about the size of government. Direct participation of the federal government in the economy is up to 24% of GDP, which is far higher than the long-run average of 19% of GDP.
You will not see Tea Party protests if taxes are cut without offsetting spending reductions. You will see Tea Party protests if spending increases happen, even with offsetting tax increases.
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Dan Reply:
January 15th, 2011 at 6:50 pm
Considering their name itself is an acronym for “Taxed Enough Already”, I think the level of personal taxation in VERY important to the Tea Party, and anecdotally its by far the largest complaint of the Tea Partiers I know personally (many of whom are on SS/Medicare, and suddenly get quiet when the topic of cutting them gets raised). Keep in mind these protests were nowhere to be found during the Reagan/GWB years of massive deficits and growing government. If the economy recovered solely through the massive tax cuts Warren and other MMTrs advocate, all but the Ron Paul/Autrians would slink back into the ether. You really think you’re getting 100,000 angry people marching on the Capitol with 3% unemployment? Dream on.
To put it simply; the jobs come back, the size of the crowds at the Glenn Beck rallies drop precipitously.
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Tom Hickey Reply:
January 14th, 2011 at 1:02 pm
“The tea party is far more opposed to a welfare state than they are to larger budget deficits.”
Not so sure, Ivan. A large majority of the Tea Party folks are either on SS and Medicare or close to it. They are only opposed to someone else’s welfare, not their own. :)
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beowulf Reply:
January 15th, 2011 at 6:02 am
Of course there’s a straightforward way to reduce welfare spending, raise the minimum wage. Most means-tested welfare programs really function as de facto wage subsidies used in lieau of keeping the minimum wage growing at the same rate of CPI, Wage Index or (God forbid) th rate of labor productivity.
The US and Australia have comparable per capita GDP except that our minimum wage is $7.25 an hour and theirs is $15.00 and their unemloyment is rate is 5.0% (ours is 9.4%).
A full time minimum wage worker with two children in the US qualifies for food stamps, federal, Section 8 housing voucher (though there’sa years long waiting list) and in some stats, Medcaid, day care subsidies and state EITC. A $15.00/ hr minimum wage make them too high an income to qualify for any of these (with the possible exception of Sect. 8 vouchers in high cost cities).
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Neil Wilson Reply:
January 15th, 2011 at 9:14 am
Minimum wage assumes a job. If you raise the minimum wage then you will reduce jobs.
What you actually needs is a minimum income divorced from the commercial structure of a job. To do that effectively requires a minimum wage and a constant supply of jobs – aka a Job guarantee.
beowulf Reply:
January 16th, 2011 at 5:02 am
Neil, you’re quite correct about the Job Guarantee. Thanks for making that point.
Also, in my original comment, after “qualifies for food stamps”, I meant to type “federal EITC.”
Andrew Reply:
January 17th, 2011 at 6:28 pm
Neil, in the US I don’t believe the evidence supports your assertion that raising the minimum wage reduces jobs.
Neil Wilson Reply:
January 18th, 2011 at 3:52 am
It does over time. It reduces the creation of jobs. I’ve personally not done projects because I couldn’t guarantee I could raise my prices as the minimum wage was raised while maintaining turnover. That was a risk too far and the project was scrapped.
With a job Guarantee that decision wouldn’t matter, but without it those people are on unemployment support rather than earning something between unemployment support and minimum wage.
Andrew Reply:
January 18th, 2011 at 5:37 pm
Your anecdote not withstanding, many studies have been done, and they have tended to show that increases in the minimum wage have lead to more employment, not less. Unintuitive, but true.
Best,
Neil Wilson Reply:
January 19th, 2011 at 3:58 am
I think that is selective. There are lots of studies that show the opposite. And surprise, surprise the answer usually reflects the political prejudices of the authors, funders, etc.
Just like the spending multiplier. It’s always over 1 if you’re a Keynesian, much less than 1 if you’re an Austrian.
Don’t get me wrong. The minimum wage should be increased – absent a job guarantee. Because it is right that it should be.
January 14th, 2011 at 11:31 am
I guess every forum has its critics but I have to say that the idea that any agency downgrades the US debt ratings, in my humble opinion, is a joke.
The Chinese did it and everyone smirked. If the US isn’t Aaa then what country is?
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Tom Hickey Reply:
January 14th, 2011 at 1:03 pm
Not to worry. Dodgy derivates will still be rated triple A.
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WARREN MOSLER Reply:
January 14th, 2011 at 8:15 pm
the rating is inapplicable for a currency issuer with regard to its own currency liabilities
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January 14th, 2011 at 1:32 pm
@ Warren, et al
I ordered the book. I received the book. I read the book. Good book. Well written, in fact.
Two things that struck me:
1. Warren spends a lot of time discussing (pp 110-112) the role of the military vis-a-vis public purpose. “…the world’s democracies are at risk of physical invasion and domination by nations with dictatorships and other related forms of totalitarianism…”
Seems to me that there are other “truths” at work here. I would encourage Warren (etc.) to examine the U.S.’s actions with regard to invasions of sovereign nations (including actions of our own intelligence agencies) over the past half-century.
2. On page 102, Warren states that, “…banks are subject to strict government regulation (vis funds)…and [that] the government continuously examines and supervises all of its member banks for compliance…”
We have surely seen that government regulation as such is a troubling issue. The government “regulates” based upon perceived needs and benefits, not based upon a real respect for legal (or supervisory) considerations.
MY POINT: Our government has proven, time and again, that they will act based upon what THEY PERCEIVE to be in the best interest of the nation. BUT, these actions are not based upon the ideals of public purpose writ large and global. They are also not based upon ideals of fairness and right action.
In my opinion, the government would be just as prone to allowing abuses and gaming of systems that reflected an understanding of operational truth and monetary operations, as they are today.
Summing up: I understand the operational truths being described by MMT. I think that MMT is naive in its belief that the ponzi system of finance, the one that predominates in our private sector, could be successfully and righteously reigned in.
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Tom Hickey Reply:
January 14th, 2011 at 1:55 pm
“In my opinion, the government would be just as prone to allowing abuses and gaming of systems that reflected an understanding of operational truth and monetary operations, as they are today.”
Yup. Some in the GOP — Laffer for sure — do in fact understand operations and use them to their advantage without saying what they are actually doing. The whole idea of going off gold and onto fiat was prosecution of the Vietnam war. Iraq and Afghanistan have also been put on the tab. “Reducing the deficit” is about cutting expenditure on social programs for ideological reasons. But when it comes to military or crony capitalism, that’s another story, also for ideological reasons.
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WARREN MOSLER Reply:
January 14th, 2011 at 8:22 pm
pretty much agree.
i do think no military would be a high risk proposition, as an observation of human nature.
and i have said many time regulation is necessarily a work in progress.
also, my proposals go a long way towards reducing what needs to be regulated, which will at least curb abuse in the things that no longer exist
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January 14th, 2011 at 1:35 pm
I know, I know: operational vs. political & normative.
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January 15th, 2011 at 9:51 pm
Re: i do think no military would be a high risk proposition, as an observation of human nature.
But why, Warren. Who de facto constitutes a genuine military threat to the US under any circumstances? Canada, Mexico, Guatemala, Honduras, Brazil? Obviously not? Russia, China? I don’t think so. We use the army for one thing, as Gen. Smedley Butler pointed out: to make sure our corporations get the resources they need and that “our way of life” presumably “needs”–that is, wants.
MacKinder: The great wars of history — we have had a world-war about every hundred years for the last four centuries — are the outcome, direct or indirect, of the unequal growth of nations, and that unequal growth is not wholly due to the greater genius and energy of some nations as compared with others; in large measure it is the result of the uneven distribution of fertility and strategical opportunity upon the face of our Globe. In other words, there is in nature no such thing as equality of opportunity for the nations. Unless I wholly misread the facts of geography, I would go further, and say that the grouping of lands and seas, and of fertility and natural pathways, is such as to lead itself to the growth of empires, and in the end of a single World Empire. If we are to realise our ideal of a League of Nations which shall prevent war in the future, we must recognize these geographical realities and take steps to counter their influence. [93]
Nazemroayah:
The nature of modern wars is based on usurping natural resources and the wealth of nations. Thus, these wars are materialist wars, either fought on strategic grounds to acquire wealth and power or to directly usurp it. Any ideological framework is used to deceive the masses. These wars are therefore criminal acts.
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WARREN MOSLER Reply:
January 16th, 2011 at 12:33 pm
you still haven’t convinced me that simply disbanding our entire military wouldn’t be a high risk proposition
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danw Reply:
January 16th, 2011 at 12:57 pm
I am a leftie, peacenik of a guy, and I agree with Warren. I have no doubt that if the USA disbanded the military, we’d be history, as it were. My point is that the United States, and our citizens, are no more (or less) enlightened than are are the governments and/or the citizens of other nations. While some nations employ blatant and unmasked dictatorship and thuggery in order to maintain order at home and to intimidate and undermine their neighbors, the U.S. government—and financial system—employs more secretive and slippery means toward similar ends.
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WARREN MOSLER Reply:
January 16th, 2011 at 5:00 pm
does anyone not think i’m a libertarian?
if so, on what basis?
January 15th, 2011 at 9:57 pm
Forgot one point: we will also be using the army more domestically in the future. Now that posse comitatus is no longer sacred and public uprisings are in the offing, we’ll use the army the way the Latin Americans do.
So between resource grabbing in the Mideast and police word at home,we probably will need an army.
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January 16th, 2011 at 12:08 pm
Most of the them are physicists and engineers. The government could put them to work with a JG developing alt energy systems. No sense letting needed talent sit with idle hands.
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January 16th, 2011 at 5:22 pm
Warren, would you kindly specify in what ways the elimination of the army would be “high risk,” or what it would mean, as one comment put it, that we would be “history.”
That aside, there are many people who think the world needs a good rest from the US military meddling and destruction in the world. Is there a more violent country than the US?
Perhaps by “high risk” you mean that without the army we could no longer be first at the trough for grabbing resources, which in turn would impact “our way of life?”
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jorgejrl Reply:
January 18th, 2011 at 1:25 am
“Warren, would you kindly specify in what ways the elimination of the army would be “high risk,” or what it would mean, as one comment put it, that we would be “history.”
Henry I’ll take a stab at it…
1-More radical Muslim terrorists would fly airplanes into our buildings.
2-there would be a significant increase of beheadings in Afghanistan etc.
3-we would no longer be first at the trough for grabbing resources, which in turn would impact “our way of life!
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ESM Reply:
January 18th, 2011 at 11:43 am
Henry,
My take on keeping the peace is here.
The bottom line is that it is not at all obvious that spending 4% of GDP on the military is too much. It is a form of insurance against war, and the rest of the world benefits greatly from US military expenditures.
Also, if you could give me some examples of the US using military force to grab resources in the last 100 years, I would be grateful. I have been trying to compile a list, and it is a very, very short one.
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January 17th, 2011 at 7:18 pm
Not sure why the issue is the total elimination of the US military. It could be reduced to, say, 10% of its current size and still provide a deterrent to possible foreign incursions into the US, assistance in true peace keeping missions, and seizures of US goods by pirates on the high seas. All foreign military bases, today numbering over 750, could be shut.
The real resources released would be huge and provide lots of health care, environmental protection, resources for the elderly, etc, etc.
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beowulf Reply:
January 17th, 2011 at 10:44 pm
If I remember correctly, the Constitution intended the Navy to be our only permanent service. Congress is limited to funding he Army two years at a time, while Naval appropriations are not so constrained. The Marine Corps is still part of the Dept. of Navy and the Air Force is an Army spinoff so in matter of appropriations terms, they’re treated the same as their parent services.
As you’d expet, the US Air Force is the largest air force in the world, curiously the second largest is the US Navy (whose submarine force have been the basis of our nuclear deterrent since the 1960s). The Marine Corps’s three divisions are each twice the size of an Army division, of which the Army has 10.
I don’t think we’d be any less safe (but could reduce defense spending by hundreds of billions) with leaving only the Navy and Marine Corps on active duty and transitioning the Army and Air Force units into state National Guard units manned by reservists.
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Ivan Reply:
January 18th, 2011 at 9:10 am
I’m somewhat stunned by those seeking to degrade the US military. Our military was degraded after WWI and the Japanese attacked Pearl Harbor. Our military was degraded during the Carter administration and the Iranians stormed our embassy and took hostages for over a year. Sorry guys…there are people in the world who don’t share our values and have no respect for human life. If anything, our current military is too small. Our nuclear arsenal is dangerously outdated as a deterrent. Most of our warheads are from the 60′s and 70′s. The world is a dangerous place. To suggest that we could go quietly into the night and leave everyone else alone would somehow encourage others to leave us alone is incredibly naive. Our enemies would strangle us economically and dominate us militarily. Our standard of living, as we now know it, would be toast.
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beowulf Reply:
January 18th, 2011 at 9:49 am
In military terms, we’re an island nation. The US Navy is larger than the next 13 Navies combined (and most of those are our allies). Any problem that requires putting boots on the ground that 3 divisions of Marines (and a fourth division of reservists stateside) can’t tackle it, by all means we should keep the Army National Guard (as well as the Air National Guard) equipped and manned by reservists.
As long as we have the most powerful Navy (with allies around the world), no one can strangle us economically or dominate us militarily. There’s a great line from the Napoleonic wars when Britain feared invasion, Admiral Jervis told the Board of Admiralty, “I do not say, my Lords, that the French will not come. I say only they will not come by sea”.
Exactly.
January 18th, 2011 at 11:38 am
Beowulf:
The Iranians can close off the straits of Hormuz, the Chinese have now developed torpedoes that can easily target our carriers at distance, and the North Koreans have missiles that can reach California. More importantly, a nuclear armed Iran can blackmail the entire gulf region, cutting off the supply of crude. Back in the days of the Napoleonic wars, Admiral Jervis knew that the only way to attack England was with a navy. That concept was outdated by WWII. Our navy is certainly powerful. Is it strong enough to prevent us from economic strangulation? I don’t think so. How was England’s economy during WWII? Aren’t they an island nation?
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Tom Hickey Reply:
January 18th, 2011 at 1:44 pm
The “next” war is already going on for control of Central Asia. See Mackinder’s Heartland Theory and The Geographical Pivot of History.
The “next” war is also being fought now, largely unconventionally — cyberwar, 4th Gen, and chiefly economic warfare. For example, Osama announced publicly that his strategy was to bankrupt the US, bleeding it chasing Qaeda all over the globe. Cheap for them, expensive for the US. The US and Israel apparently brought down Iran’s nuclear program with a super-worm that infected its computer network. The world is dividing into opposing economic alliances as resource shortages loom. Etc.
The US military-industrial complex was built to for the Cold War. When the Cold War ended, so did the need for it as it existed. But those heavily invested in the Cold War strategy that required this kind of a military-industrial complex are trying their best to rekindle it through policy using their political and economic leverage on government and the political process, and the revolving door for control. It’s an expensive and wasteful scam.
Every country has the right and duty to defend itself and its legitimate interests in the world. However, the US is projecting power as an empire using economic neoliberalism and political neoconservatism as its policy playbook. US policy under both party establishments is a recipe for neo-imperialism and neo-colonialism being sold as “freedom” — free markets and democracy.
This is just a disingenuous cover for global hegemony, the thinking being that if “we don’t do it, someone else will.” This is not exerting global leadership worthy of American ideals and if we continue pursuing it the US will cease to be “the shining city on a hill” and a beacon of freedom. International polls already show that the US is the most feared nation on earth.
This is not working in anyone’s overall interest but those heavily invested in perpetuating and extending the status quo.
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beowulf Reply:
January 18th, 2011 at 5:04 pm
Ivan, the only defense from being blackmailed over crude oil is achieving energy independence in North America. Whether via cars that run natural gas, electricity or synthetic oil from coal, unless we break free from our dependence on Middle East oil, it will always be our economic Achilles heel no matter how big our military is.
Beyond that, I haven’t suggested cutting US combat power, simply that we move towards a militia-based Army (while acknowledging that the US Navy, like a free bird, can’t be chained). That is, like the system used in Israel, Switzerland and Singapore. I do think universal military training (which all three have for men, for women as well in Israel) is a sound idea but not a necessary one. If we do go in that direction, Switzerland’s 4 months basic training plus 3 weeks a year reserve duty sounds more agreeable than Israel’s 2 to 3 year conscription plus reserve duty. :o)
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WARREN MOSLER Reply:
January 19th, 2011 at 6:34 am
long term contracts for crude with mexico and canada for openers, as previously suggested?
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JCD Reply:
January 26th, 2011 at 3:49 pm
I’m sorry but the notion of ‘energy independence’ is nonsense.
If we are to allow free trade in energy in the world, it stands to reason that one nation will have a comparative advantage in supplying it. Since market prices are set by the lowest offer (and the highest bid), that producer with the lowest marginal cost to deliver the next barrel will set the price. As Warren has pointed out that producer is currently the Saudi regime.
What would it matter if we didn’t import (or export) a single barrel of oil? Would the price of oil in the US no longer be determined by the global market?
Even if we could somehow make the US energy market immune to the global price of oil, every traded good (or service) that had a significant energy input would now be affected.
The search for ‘energy independence’ is the search for autarky. Germany sought it after the Allied blockade of World War I. The Soviet Union sought it after World War II. Even on a continental scale it fails.
We live in an interdependent world. Energy interdependence is here to stay. It is the world we live in. Get used to it.
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January 18th, 2011 at 2:20 pm
“International polls already show that the US is the most feared nation on earth.”
Those polls are so ridiculous. There are a number of silly reasons why people respond the way they do, particularly leftist Europeans, but it’s not because they actually fear the US.
There is nothing easier and safer to do than to walk down Pennsylvania Ave, or anywhere else in the world, shouting anti-US slogans, with a placard saying that the US is the spawn of satan.
Everybody knows that the US is the safest country in the world to criticize. In fact, it’s almost a necessity in most places on earth, including some places in the US itself.
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beowulf Reply:
January 18th, 2011 at 4:40 pm
ESM, that’s a good point. The most surprising part about the State Department cables Wikileaks released was how seeing that, for good or ill, the United States (at least under Bush) was often the only regime that would said publicly what it said privately.
It seemed from the news that the US was the only country (other than Israel) that wanted to use military force against Iran’s nuclear program, and that we’d somehow have to appease our Arab allies before we pulled the trigger. Except the leaked cables show that privately our allies– including Saudi Arabia, Qatar, UAE and Lebanon– were urging US diplomats to please attack Iran already.
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January 18th, 2011 at 2:51 pm
Re: However, the US is projecting power as an empire using economic neoliberalism and political neoconservatism as its policy playbook. US policy under both party establishments is a recipe for neo-imperialism and neo-colonialism being sold as “freedom” — free markets and democracy…This is just a disingenuous cover for global hegemony, the thinking being that if “we don’t do it, someone else will.”…This is not working in anyone’s overall interest but those heavily invested in perpetuating and extending the status quo.
I couldn’t agree more.
The objections are ludicrous; paranoia induced by the very effective propaganda of our mass media. ESM may be “safe,” but as one who has lived in over 15 countries around the world, I can assure you that the US government is indeed loathed, and well recognized–as Gen. Smedley Butler affirmed years ago–that it’s role is to make the world safe for US corporations to make lots of money, and hang the consequences for anyone else. There is no more violent government in the world, as MLK noted.
Don’t worry Ivan and ESM, I don’t think N. Korea will be sending missiles to California nor the Chinese torpedoing it either, in any near future. That is pure Hollywood.
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Ivan Reply:
January 18th, 2011 at 2:59 pm
No, Henry, they won’t. They won’t because our military is a deterrent and it isn’t in their (N Korea’s or China’s) economic best interest at the moment. I suppose the United States is and has always been the “bad guy”. In a dangerous world, I’d rather the US government be loathed, feared and respected than loved. That notwithstanding, this is an economic forum and the last thing we can afford to do is to downsize yet another major industry.
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January 18th, 2011 at 3:06 pm
Re: Not sure why the issue is the total elimination of the US military. It could be reduced to, say, 10% of its current size and still provide a deterrent to possible foreign incursions into the US, assistance in true peace keeping missions, and seizures of US goods by pirates on the high seas. All foreign military bases, today numbering over 750, could be shut.
The real resources released would be huge and provide lots of health care, environmental protection, resources for the elderly, etc, etc.
Yes, the voice of sanity. The idea was not the absolute elimination of the country’s ability to defend itself or its legitimate–legitimate–interests. It’s about dismantling it as the engine of a policy of global hegemony that also has very negative repercussions on the domestic reality. So I would add: not all foreign bases over 750, but all foreign bases, period. Why do Americans assume they have a divine right to squat militarily on land that is not theirs? How would we like a Chinese base in California or Washington, or a Russian base in Florida or Cuba? Ring a bell? And by the way, a big navy guarantees nothing. These are the days of asymmetric warfare.
At root, politics today is largely in the hands of very inferior human beings, when they are not outright criminals.
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January 18th, 2011 at 3:09 pm
Very well, Ivan. N. Korea hurls a missile -or 50–at California. Then what? It occupies it? What does it gain? What would be a reason for doing such a thing. Please. This is pure Hollywood at its most feverish and infantile.
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ESM Reply:
January 18th, 2011 at 4:13 pm
Henry, I don’t know if you are chess player, but I think that geopolitics is a lot like chess in that often overwhelming strategic advantages are built over time from the accumulation of very small positional victories. Of course North Korea wouldn’t hit the US with a nuclear missile without provocation. Neither would Iran hit Israel without provocation. But not only does the definition of “provocation” evolve with the geopolitical environment (and specifically, the relative military strengths of the competing countries), the very threat brings the threatener more freedom of action and the threatened less.
In questioning my assertion that we live in a dog eat dog world (whether we like it or not), one of my correspondent’s gave Norway as an example of a country which is not threatened even though it has tremendous oil wealth and very little military power. I countered that as a member of NATO, Norway was in fact protected by the United States, even though the ungrateful bastards (just kidding — I love the Norwegians!) keep giving us kicks in the leg (as they like to say).
I then laid out a plausible 20-yr scenario in which Norway would be forced to share its oil wealth with Denmark and Sweden, in order to fend off the hegemonic Russians. The Russians started things rolling with a dispute over fishing rights off the coast of northern Norway.
It is a game of carefully calibrated moves. Each transgression by the aggressor seems minor by itself and perhaps justified and not worth getting into a military scrap over. The weaker you are, the more you will be bullied. The more you are bullied, the weaker you become.
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Tom Hickey Reply:
January 18th, 2011 at 4:27 pm
ESM, the question is whether we as a species are going keep going down the same tunnel and never finding the cheese, but only more death and destruction, or looking down another tunnel with more promise of cheese in the form of actual freedom, you know, the ones that people like FDR and MLK, Jr. spoke of.
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Ivan Reply:
January 18th, 2011 at 4:46 pm
Tom, Henry:
The biggest mistake the US could make is to assume that our adversaries share our sense of right and wrong. Our enemies, many in the middle east, want to destroy us for wholly illogical reasons largely based in religion. They’ve been fighting these wars for thousands of years. Throughout history, there have been numerous empires. Not one of them voluntarily ceded their empire to those who hated them and would destroy them. And yes, they all did eventually fall. It’s nice to be in a position where we can all argue openly the benefits or costs of our military and our moral or immoral behavior. Most of those living elsewhere on this planet don’t have that luxury.
Tom Hickey Reply:
January 18th, 2011 at 7:28 pm
I don’t want to get into a discussion of geopolitics and geostrategy here since it is not the topic of this blog. Suffice it to say that the US needs to exert its global leadership as the largest economy, the world’s only superpower in a way that is consistent with its claim to being the “shining city on the hill” and the beacon of freedom.
The US is torn between doing this and representing the interested of its ruling elite. What ends up happening is that lofty representations are made in speech and writing, but actions belie these fine words. The result is hypocrisy instead of leadership.
When leaders don’t lead effectively, they get replaced. This will have social, political, and economic consequences for the US and humanity. We can do better.
January 18th, 2011 at 4:45 pm
ESM, Tom has it right. He is thinking like a human being, rather than like a cornered beast. Sooner or later, if we wish to survive as humans we have to acknowledge that we are all in this together and act accordingly and accept certain risks this implies in the way of good faith versus bad faith; and acknowledge this not as a demagogic ploy serving global corporate power or partisan interests, but as the simple realization of its truth. The simplest and deepest truths will have the last word.
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Ivan Reply:
January 18th, 2011 at 4:56 pm
By the way, North Korea’s nuclear blackmail has been tremendously profitable for them. In exchange for opening up to nuclear inspectors, the Clinton administration gave them a nuclear power plant….which is no longer open to inspection. History has taught us that it is very dangerous to ignore or appease megalomaniacs. The problem you’re having Henry is the assumption that our enemies share our value system and are just like us. Obama, at his inauguration, offered an open hand to our enemies. That policy has been nothing but a sign of weakness and a total failure on the international front. The world is a greedy, dirty, dangerous place run by “human beings” who are deeply flawed. To expect that we’ll all come together for the common good to sing Kumbaya is just a touch optimistic.
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January 18th, 2011 at 4:47 pm
Unfortunately, too much thinking today just follows the steps of what Barbara Tuchman called “the march of folly.”
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January 18th, 2011 at 5:18 pm
Re: to expect that we’ll all come together for the common good to sing Kumbaya is just a touch optimistic.
Is this really what you take away from this discussion? How have you arrived at the assumption that you know what my assumpitons are?
Here’s another assumption: why, if the world is dirty and all human beings deeply flawed, would you expect “us” to be different? What then becomes of your assumption regarding our presumably superior “value system.” I challenge you to distinguish between reality and appearance, and between rhetoric and actuality. I would submit to you that the US is a deeply decadent country and a dangerous country. It could be positive force, given its influence, but it is so only in the minds of its myth-ridden citizenry. As that idiot general in Iraq said, “we’re doing God’s work here.” Lord Blankmind said the same thing about Goldman Sachs and the work of his banksters. That is American thinking at its current most characteristic. Korea, Vietnam, Cambodia, Central America, Iraq, Afghanistan…very good chess playing indeed.
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WARREN MOSLER Reply:
January 19th, 2011 at 6:35 am
And I find it interesting how most humans speak on behalf of the species from time to time.
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Tom Hickey Reply:
January 19th, 2011 at 12:41 pm
Warren, quite a few people are convinced for reasons that seem to have reasonable justification that severe challenges to the continued survival of the species exist at this time, specifically WMD proliferation and climate change. They (we) are also convinced that certain conditions are pushing humanity in this direction and ought to be examined in this light.
Others, not so much.
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WARREN MOSLER Reply:
January 19th, 2011 at 5:11 pm
I’m in the camp that worries about all that, along with a lot of other things. Like fiscal responsibility…
Tom Hickey Reply:
January 19th, 2011 at 5:56 pm
I’m worried about fiscal responsibility, too — that is, what the idiots that believe in it will do because of it.
Austerity In America: 22 Signs That It Is Already Here And That It Is Going To Be Very Painful
Thanks heaven it’s not a species-wide problem affecting mass survival. Oh, wait. These things are interconnected, aren’t they — like climate change has to wait because we can’t “afford” to address it, and we need to spend more on the military so “they” don’t steal “our” resources.
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January 18th, 2011 at 5:52 pm
Neither Austerity nor Keynesianism will cure what ails OECD states and countries as the twin forces of debt-deflation and a loss of cheap energy are simply unstoppable. For example, I have suggested that California drill offshore for oil and gas and use 100% of the proceeds to build rail transport along with new solar and wind power generation. Prescriptions such as these are still unpalatable. Mainly because they reflect an unpleasant reality.
Americans are still not ready to accept that the country is getting poorer, not richer. In real terms. Also, both the political right and the political left share the same delusion: that there is some massive reservoir of wealth to either be released by tax cuts, or redirected through a change in spending priorities. To the tax cutting ideologists, I say the experiment has already been conducted, over the past 20+ years. This only served to amplify our distorted economy. To the hand-waving abundance folks, who for example might like to see the defense budget devoted instead to domestic spending I say; fine. But remember, we’re borrowing a lot of that capital to run defense and other spending.
(From: Gregor.us)
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WARREN MOSLER Reply:
January 19th, 2011 at 6:38 am
I full fica tax suspension hasn’t been tried.
(I’ll ignore the borrowing nonsense for now)
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January 18th, 2011 at 5:54 pm
Henry:
Yes…we’re flawed too. But I’ll take our chances with our values…because they’re ours.
By the way, I get such a kick out of you guys on Warren’s website talking about banksters. Warren is a hedge fund manager who engineered one of the biggest squeezes in the Japanese Government Bond market by buying more of the futures contract than there were bonds to deliver. He did this knowingly and it caused the BOJ to intervene. He also generated one of the biggest squeezes in the history of the agency MBS market, stipulating delivery of more of a certain type of loan than the market could deliver. In so doing, he made a ton of money. He didn’t break the law. Does that make him a bankster too? The whole meltdown in the financial markets was based on the flawed premise that home prices couldn’t fall nationally since they hadn’t since the depression. Loans backed by ever rising collateral values tend to be money good. Had home prices not collapsed, none of these “banksters” would even be known to you. Were these guys criminals? In some cases yes. Were they overly optimistic about housing prices, along with a huge percentage of the investor community? Yes. Now if you can tell me the next market that will collapse, we can start arresting some of these guys now for not knowing its coming.
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beowulf Reply:
January 18th, 2011 at 6:53 pm
“He didn’t break the law. Does that make him a bankster too?”
Yahoo stock forums excepted, the level of public outrage against shortsellers is… nonexistent.
The public outrage (from across the political spectrum) against “banksters” is towards banks, both commercial and investment, who used their political influence to defang federal regulation; and then when their positions went tits up, used their political influence to receive federal bailouts and regulatory forbearance that legally (and ethically) they were not entitled to. That’s what drives people nuts.
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strawberry picker Reply:
January 18th, 2011 at 9:33 pm
The whole meltdown in the financial markets was based on the flawed premise that home prices couldn’t fall nationally since they hadn’t since the depression.
What a crock Ivan, the smart money knew what was coming, engineered it even and what is still yet to come
As a wise founding father once said, by inflation and by deflation, these evil dudes will rob us of our own country.
http://www.getsmartaboutbanks.com/2010/10/the-mers-bombshell-the-commercial-real-estate-securitizations-may-be-even-bigger-than-residential-securitization-fraud/
It is amazing the people I meet who shown fact after fact that the banksters intentionally did stuff like this MERS fraud stuff still believe it was all just unknowable and innocent ignorance. It is making me want to listen to bill black and get my own bank like warren and crew so I can rip off these dumb sheeple too, but then I think, in the grand scheme of things, warren and all the other banksters gonna be just as dead as I am 100 year from now too, so why sweat it dude.
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WARREN MOSLER Reply:
January 19th, 2011 at 6:44 am
We just bought cheap govt bonds from dealers selling them too cheap in a deliberate attempt to force us to sell.
The boj criticized the dealers for shorting their govt’s bonds and driving prices down for the purpose of trying to force us out.
We didn’t squeeze anyone.
And with regard to the MBS trade, I think that was Mike? And it wasn’t all that large?
And yes, the real problem is the institutional structure delivered mainly by Congress that supports all the counterproductive activities in question.
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January 18th, 2011 at 6:08 pm
“He also generated one of the biggest squeezes in the history of the agency MBS market, stipulating delivery of more of a certain type of loan than the market could deliver. In so doing, he made a ton of money.”…
Ivan shouldn’t that be “WE also generated…WE made a lot…”as I recall you ran part of he MBS book? aaaah, the good old days!
As I remember the street knew what you were buying and why…they just bet against you , and then cried Uncle when they lost the bet!
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Ivan Reply:
January 18th, 2011 at 11:32 pm
I knew you’d pop up on this one!!! I don’t remember that being my trade…although I wish it was.
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January 18th, 2011 at 6:22 pm
Ivan, I think you should go and read what Bill Black has to say about fraud and deregulation, rather than basing your view on a so-called flawed premise. The corruption and deregulation made a collapse inevitable.
As for preferring “our values,” whatever these may be in your mind, that of course is certainly your prerogative. I have no quarrel with it. I imagine it is your hope that others will be as loyal to these values as you are.
Regarding Warren’s career as a hedge fund manager, I have no data on that, and one would have to abide by the rule of justice: audiatur et altera pars.
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Ivan Reply:
January 19th, 2011 at 12:10 am
Henry:
I was and still am deeply involved in these markets so I have somewhat of a unique perspective among those on this blog. There is no question (with the benefit of perfect hindsight) that fraud was committed across the spectrum, from borrowers to appraisers to lenders to bankers. As long as there has been mortgages and a mortgage backed securities market, there have been people committing bank fraud by lying on their applications. It is the magnitude of the fraud that caught so many wrong footed in 2007-2008. However, I don’t believe it was lack of regulation that caused the collapse. If anything, it was misguided regulation such as the CRA and the presumed social benefits of homeownership that pushed prices to unsustainable levels. Every time the government acts, as in this case with the CRA and the affordable housing initiative, there are unintended consequences. The evolution of the mortgage market, the rise in home prices, and the subsequent widespread fraud has the fingerprints of the government all over it. Poor regulation can be far worse than no regulation at all.
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WARREN MOSLER Reply:
January 19th, 2011 at 6:56 am
one of the missing pieces of regulation was banning bank staffers/officers from being paid/rewarded simply on volume.
if dodd and frank knew beans about banking that would have made their short list, along with a lot of other things they left out.
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strawberry picker Reply:
January 19th, 2011 at 7:02 am
Why do you continue to try and frame this on dodd and frank as a problem of ignorance instead of one as so many others are framing it as of corruption and greed? You just admitted that regarding the info Ivan posted – that the dealers were trying to FORCE you to sell stuff too cheap so you bitchslappd em good. Why don’t you just say the dealers were ignorant and instead of making them look greedy and corrupt make them look like innocent naive children like you do with all this dodd frank banking stuff? I want to take you seriously Warren Mosler, I wear your t-shirt to tell people about you, but there are a lot of joe 6 packs who rub thier head funnily when you say the dealers you smoked were corrupt and evil, but frank and dodd are just innocent ignorant babies (sigh)
January 18th, 2011 at 8:19 pm
military leaders, and so-called defense intellectuals agreed: the dangers facing the United States were omnipresent and unprecedented. Keeping those dangers at bay demanded vigilance, preparedness, and a willingness to act quickly and even ruthlessly. Urgency had become the order of the day.
In his 1956 book, The Power Elite, C. Wright Mills, a professor of sociology at Columbia, dubbed this perspective “military metaphysics,” which he characterized as “the cast of mind that defines international reality as basically military.” Those embracing this mind-set no longer considered genuine, lasting peace to be plausible. Rather, peace was at best a transitory condition, “a prelude to war or an interlude between wars.”
Perhaps nothing illustrates military metaphysics more vividly than the exponential growth of the U.S. nuclear stockpile that occurred during Eisenhower’s presidency. In 1952, when Ike was elected, that stockpile numbered some 1,000 warheads. By the time he passed the reins to John F. Kennedy in 1961, it consisted of more than 24,000 warheads, and it rapidly ascended later that decade to a peak of 31,000.
As commander in chief, Ike exercised only nominal control over this development, which was driven by an unstated alliance of interested parties: generals, defense officials, military contractors, and members of Congress. True, Eisenhower had established “massive retaliation”—the threat of a large-scale nuclear response to deter Soviet aggression—as the centerpiece of U.S. national-security doctrine. Yet even as this posture was intended to intimidate the Kremlin, the president expected it to offer Americans a sense of security, thereby enabling him to rein in military expenditures. In that regard, he miscalculated badly.
During the Eisenhower years, military outlays served as a seemingly inexhaustible engine of economic well-being. Keeping the Soviets at bay required the design and acquisition of a vast array of guns and missiles, bombers and warships, tanks and fighter planes. Ensuring that U.S. forces stayed in fighting trim entailed the construction of bases, barracks, depots, and training facilities. Research labs received funding. Businesses large and small won contracts. Organized labor got jobs. And politicians who delivered all these goodies to their constituents hauled in endorsements, campaign contributions, and votes. Throughout the 1950s, unemployment stayed tolerably low and inflation minimal, while budget deficits ranged from trivial to non-existent. What was not to like? As a result, Pentagon budgets remained high throughout the Eisenhower era, averaging more than 50 percent of all federal spending and 10 percent of GDP, figures without precedent in the nation’s peacetime history.
For its beneficiaries, girding for war was a gift, and one they expected would never stop giving. The presumption that military capabilities qualifying as adequate today would surely not suffice tomorrow—the Reds, after all, weren’t standing still—generated a ceaseless quest for bigger, better, and more. Every ominous advance in Russian capabilities offered a renewed rationale for opening the military-spending spigot. Whether the edge attributed to the Soviets was real or invented mattered little. The discovery during the 1950s of a “bomber gap” and later a “missile gap,” for example, provided political ammunition to air-power advocates quick to charge that the nation’s very survival was at risk. Alarm bells rang. Congressional committees summoned expert witnesses. Newspapers and magazines nervously assessed the implications of these new vulnerabilities. Ultimately, appropriations poured forth. That both “gaps” were fictitious was beside the point.
The Tyranny of Defense,Inc.
http://www.informationclearinghouse.info/article27287.htm
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Tom Hickey Reply:
January 18th, 2011 at 8:37 pm
Add to this that the military-industrial complex, euphemistically known as the defense industry, doesn’t make weapons only for the US military. It is one of the largest export industries, and it vies with other exporters in selling the weapons that arm the world.
The right traditionally wants military spending rather than social spending, and the left wants social spending rather than military spending. The right says it hates Keynesianism, but The defense industry is the basis for what has aptly been called military Keynesianism.
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strawberry picker Reply:
January 18th, 2011 at 8:47 pm
Hickey, they recently had a SPYCRUISE with lots of the big boyz from the NSA, CIA, and homeland security talking bout how the citizens really don’t appreciate what the spooks are doing for em. My bible taught me the concerns of men are really small and petty when you look at GOD and the universe – its vastness – complexity – awesome expansiveness. All I need to know I learned in star trek, make sure you got a close friend who can do a vulcan neck pinch on all your foes and you will be OK ;) Goodness at the time and effort all you dudes spend on these memes, don’t take yourselves too seriously.
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ESM Reply:
January 19th, 2011 at 12:05 am
Yes, well, when the government gets involved, waste and inefficiency grow. It is inevitable because unlike an inefficient company, the government cannot be outcompeted into bankruptcy.
But having the government run national defense is necessary. A necessary evil perhaps, but necessary nonetheless. It is not necessary to have the government run other areas of our economy, like retirement plans or health care.
Even the most extreme libertarians accept that providing for national defense is an acceptable function of government. This is a concession to the world as it is, rather than the world that Tom or Henry (or I) would like it to be.
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Tom Hickey Reply:
January 19th, 2011 at 1:05 am
ESM, this boils down to whether one thinks that social, political and economic challenges are best solved by competition and control, or cooperation and coordination. There are good reasons for holding each, and there are consequences of each, both opportunities and pitfalls.
This is essentially what the difference between right and left hangs on. Having considered the reasons and consequences, I chose the later after careful consideration.
January 18th, 2011 at 8:52 pm
Strawberry, Envy is ugly and malodorous not matter how cleverly decked-out. Sarcasm and cynicism do not constitute intelligence, nor are they very noble. I’m afraid your outbursts are rather “reptilian,” to use the evolutionary jargon you seem to favor, not to say hysterical. I don’t think the people at this forum are very impressed by your antics, and quite probably are bored by them, much as they would find tedious the antics of Glenn Beck and Co.
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strawberry picker Reply:
January 18th, 2011 at 11:00 pm
Where did you go Jimbo? Dude the only person I am really jealous/envious of is Bernutty. You see every kingdom needs a fool/clown/jester even in the MMT royal court. I want to be the best joker of them all and that damn Ben is always making people laugh much better than I can. Warren’s constant postings of fed doublespeak and highlighting thier contradictions have me ROFL LOL all the time. Warren is a good heckler of ben ;) I am sure Warren and Seinfeld share some genes way back.
If you ever get a chance Jimbo, you should play this game – The Bard’s Tale II – the Destiny Knight, the whole damn game there is this evil anonymous arch-mage destroying the land, but you have a good friend – an old wise sage living away from the cities in the forest (like warren on the USVI) who helps you out through the whole game – but at the end of the game – good LORD – it is the old wise sage that was tricking you the whole time and he tries to kill you as he reveals himself to be the evil arch-mage. R U a Wizard dude?
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January 18th, 2011 at 11:30 pm
Personally, I think it is bad form, not to say a serious unjustice, to make serious accusations against Warren on his own forum. It seems to me that the right way to do that is to marshal your evidence and without condemning the man in advance or impugning his motives, ask him directly. I’m sure he would answer you, if it is done with respect and not just to get a rise out of bystanders and impertinently. No one has the obligation to deal with fools or people of bad faith presenting themselves as valid interlocutors. It should be done in an upright manner, presumably reflecting your own point of view and intention.
If, as you say, people are wasting their time discussing issues here, what is that to you, and why do you spend time here in that case? Life is short. Spend your time in a manner you deem valuable, and don’t waste others’ time.
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Ivan Reply:
January 18th, 2011 at 11:51 pm
My only point with respect to Warren is that too many people are too quick to label. Warren played these games by the letter of the law, made a great deal of money for his investors and himself, and put himself in a position to focus on what’s really important to him. But, because he made a lot of money, I’m assuming some of you would call him a “bankster” as well. Did his trades serve a social purpose? In a very diluted way, his small contribution to the efficient allocation of capital serves a social purpose.
Strawberry…to claim the smart money knew this was coming isn’t entirely true. While some people (Paulson) did in fact bet against the subprime market, very few people bet against the jumbo prime and Alt A markets. Those markets also took enormous hits. If this fiasco was engineered by the “smart money”, why did so much of the smart money need to be bailed out? If not for the bailout of AIG, Goldman would have lost a fortune. Bear Stearns and Lehman were both very savvy mortgage houses and they went poof. Whether it be tulip mania, the tech bubble, or the housing bubble, this is, unfortunately, human nature.
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strawberry picker Reply:
January 19th, 2011 at 5:21 am
Why did they have to be bailed out? Dude that was part of the plan. Reference the mers fraud link I posted for you above, here I will give you some more.
Mish poster talking about mers sillyness:
http://globaleconomicanalysis.blogspot.com/2011/01/comments-regarding-quite-title-and.html
People have to get over the free house thing, and deadbeat borrower. YES, investors and OUR pension funds invested in the notes. However, it was the banks, servicers, and MERS that INTENTIONALLY destroyed the title chain so that they could perpetuate the fraudulent ponzi scheme. ANY mortgage with a MERS clause on it casts doubt on the fact of your mortgage payment getting credited to the correct investor. Whether you are making your payment or not, if you have a MERS clause you probably are not paying the correct party, or “at best” you are paying into a twisted algorithm to satisfy some tranch of MBS temporarily. This is as a DIRECT result of the banks intentional destruction of the title history. WE WILL NEVER KNOW WHO JUSTLY OWNS THE NOTE. Again as a direct result of the banks, not the borrower. Sorry, but I got tired of paying into a criminal enterprise that has destroyed our Country and land records and they had the audacity to come up with a fraudulent doctored note as the original. Should I get a free house, NO. I am proposing to auction it to charity, but BoA certainly shouldn’t get title to it so they can sell it and perpetuate THEIR ponzi scheme and pay bankers bonuses.
So then Ivan you have to think HMM, mers stuff looks crooked, looks like the banks are going to be beholden to the judges, so read the next 2 articles and tell me what you think.
http://www.nakedcapitalism.com/2011/01/pending-legislation-in-va-would-give-end-use-of-mers-give-borrowers-more-foreclosure-defenses.html#comments
http://www.nakedcapitalism.com/2010/08/the-continued-stealth-takeover-of-the-courts.html
Well there you have it Dude, total corruption of the system down to the last judge for the benefit of the banksters. Ivan there is no need to attribute to human stupidity that which can be explained by human greed, you are right though, it is human nature that is the ultimate culprit, mankind in all his glorious animalistic barbarous (repitilian) hate and greed and selfishness.
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ESM Reply:
January 19th, 2011 at 10:32 am
Sorry Straw, but this is pure tin-foil-hattery, on par with 9/11 trutherism and Obama birtherism.
There are some problems with the MERS system and reconciling it with the 50 different archaic state legal regimes for real estate, but the problems certainly weren’t intentional. The system was set up to save transactions costs. And the problems will be worked out, and real estate law will be clarified through a number of court decisions. The only real issue is that some banks have foreclosed on delinquent mortgagors before getting all of the proper paperwork done (e.g. completing all of the mortgage and note assignments and getting them recorded properly). The Massachusetts supreme court recently ruled that the foreclosures are invalid unless the paperwork is in order at the time of the foreclosure sale. It opens up a bit of a can of worms, but it is a minor issue in the grand scheme of things. It delays foreclosures; it doesn’t make them impossible.
strawberry picker Reply:
January 20th, 2011 at 12:56 pm
Mr. Magoo says up above:
“real estate law will be clarified through a number of court decisions.”
Yes I agree, did you care to read the link I posted how they will handle this being ultimately beholden to the judges?
Who cares about the 200 years of property law and legal title transfer that came before, in the echos of “financial innovation” we gonna redo stuff – so read this link again citizen.
http://www.nakedcapitalism.com/2010/08/the-continued-stealth-takeover-of-the-courts.html
So this isn’t merely having judges who will provide the opinions big business wants. We now have a court running roughshod over basic elements of procedure. The last bastion of defense of the individual is being gutted, to the point where even the forms of the law will be ignored if that’s what it takes to produce the outcome the big money interests need.
PS (Mr. Magoo couldn’t see sht) ;)
strawberry picker Reply:
January 20th, 2011 at 12:59 pm
Also from the same link – remember Warren was talking about the congressional investigations that needed to start on judges who were locking up teenagers so they could pad the coffers of the prisons and prison investors – I don’t remember those congressional hearings that warren called for how our judges were being corrupted:
And to remind us why that puts us all at risk, consider this defense of the reason of the law from Roger Bolt’s screenplay about Thomas More, A Man for All Seasons:
More: Yes. What would you do? Cut a great road through the law to get at the Devil?
Roper: I`d cut down every law in England to do that.
More: Oh! (advances on Roper) And when the last law was down, and the Devil turned round on you –where would you hide, Roper, the laws all being flat? (He leaves him) This country’s planted thick with laws –man’s laws, not God’s –and if you cut them down –and you’re just the man to do it –d`you really think you could stand upright in the winds that would blow then? (Quietly) Yes, I`d give the Devil benefit of law, for my own safety`s sake.
ESM Reply:
January 20th, 2011 at 1:15 pm
Straw,
I like your excerpt, but the judges aren’t being asked to rewrite or invalidate laws. They’re being asked to clarify ambiguous areas of the law and to prescribe appropriate remedies for what amounts to clerical errors.
If I do work for a customer and send him a bill, but I misspell his name, do you think that renders my bill invalid. Does the customer’s obligation to pay disappear because of a clerical error? That is for a judge to decide based on the letter of the law, the spirit of the law, and prior court decisions (i.e. the common law).
In 99.999% of cases (and that number is no exaggeration), there is really no dispute that a debt is owed by the homeowner, the homeowner has defaulted on that debt, and the homeowner’s house was mortgaged to that debt. I follow this stuff closely, and I am not aware of any example where a homeowner was sued on the same debt by two separate parties, let alone held responsible for the same debt twice. In all of the millions of foreclosures that have occurred in the last 4 years, I am aware of fewer than 5 cases where somebody was foreclosed on when he was current on his mortgage (or didn’t have one). In all of those cases, the error was quickly rectified.
strawberry picker Reply:
January 20th, 2011 at 1:43 pm
There was nothing ambiguous about the law, 200 years of previous court cases clearly established title transfer before ROBOSIGNER came to town. Mr. Jack Bogle talks about the “soul of capitalism” lost and when banksters talk about financial innovations you better run while holding onto your wallet, but you want me to believe this is all innocent and ignorance, I think you are either being untruthful or the peak of naive. I guess we will just have to agree to disagree.
Are you sure you are at the right blog? Where 90% of the financial sector is total waste and no good for the public?
Warren has said himself banks should do good ole local loans like the old days like he used to do and all this “financial innovation” and securitization was not good for little guys like me right? Let me assure you dude, being crunched up in the already TOO CLOGGED COURTS (and now your Mr. Magoo daddy is coming to add to that fire) aint no fun! It takes me too damn long to get stuff done.
You must not follow this stuff closely enough, read some of denniger’s reporting on mortage messes at his market ticker forums.
strawberry picker Reply:
January 20th, 2011 at 1:48 pm
http://philsgang.com/ Go listen at his wednesday radio show, it is free in his archives, he was a fortune bigshot in his youth and picks on mike norman all the time, but yesterday he talks a lot about paulson and bernanke and how banksters are not speculative people, they like gaurantees, and they got a gaurantee to be bailed out when/if it all went up in smoke with all thier “financial innovation” sillyness. Dude stop being Mr. Magoo and calling me a tin foil guy.
strawberry picker Reply:
January 20th, 2011 at 7:17 pm
Aww crapola Mr. Magoo, here comes some of your clones to florida because of all these tax increases :(
http://globaleconomicanalysis.blogspot.com/2011/01/illinois-first-tax-hike-victim-jimmy.html
The founder of Jimmy John’s said he has applied for Florida residency and may recommend that his corporate headquarters move out-of-state as a result of the Illinois tax increases enacted last week.
strawberry picker Reply:
January 19th, 2011 at 5:21 am
Personally, I think it is bad form, not to say a serious unjustice, to make serious accusations against Warren on his own forum.
will you do me a favor and tell me what macro “public purpose” all those shenanigans did that Ivan laid out on warren’s actions?
(edited comment)
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WARREN MOSLER Reply:
January 19th, 2011 at 7:04 am
This blog is about ‘the financial sector is a lot more trouble than it’s worth’ and asserts that the financial sector in general works against public purpose.
Reply
strawberry picker Reply:
January 19th, 2011 at 7:08 am
Thanks warren for at least not removing the whole remark. Ivan and crew, I have hit a sore spot with some people, and I prayed to my god what should I do, and here was his answer. Warren himself has said that 90% of the financial sector is wasteful, so lets say Bernie Madoff had done those same things that Warren did that Ivan talk about, would you all be coming to bernie madoff’s defense for smoking those dealers that were selling stuff too cheap? It it because it is warren and he is your personal hero you can defend the actions better?
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WARREN MOSLER Reply:
January 19th, 2011 at 7:49 am
you’re mixing metaphors.
the madoff issue was falsifying reports sent to investors.
Ivan Reply:
January 19th, 2011 at 8:04 am
Strawberry: under ERISA laws, investment managers who run plan assets are personally liable if they don’t attempt to maximize value for the plan beneficiaries. They don’t have the luxury of having a social conscience. During the early stages of the loan mod fiasco, the administration, congress, and the media blasted bond holders and hedge funds for not supporting the “public good” through allowing loan modifications that everyone knew would default a second time. What they didn’t point out is that the government had already issued regulations that prevented hedge funds and bondholders from allowing these mods under the Department of Labor.
If I recall correctly, Warren’s firm was running a significant chunk of plan assets. Even if he wanted to have a social conscience, it really was not allowed under ERISA. So…he maximized value for his investors to the best of his ability without apology. Can’t say the same for Madoff.
WARREN MOSLER Reply:
January 19th, 2011 at 8:27 am
nor is it applicable when all you can do is govt and agency secs, swaps, and futures arbitrage.
January 19th, 2011 at 1:24 am
Giant weapons maker becomes Big Brother
By William D Hartung
Have you noticed that Lockheed Martin, the giant weapons corporation, is shadowing you? No? Then you haven’t been paying much attention. Let me put it this way: If you have a life, Lockheed Martin is likely a part of it.
More:
http://www.atimes.com/atimes/Middle_East/MA14Ak02.html
Reply
strawberry picker Reply:
January 19th, 2011 at 4:47 am
http://www.wsws.org/articles/2010/jun2010/infr-j08.shtml
Dude they didn’t watch the terminator movies, here are unmanned drone airplanes being used to disconnect people’s electricity in Detroit. The machine is growing too big and too fast for me, and I am a trek geek, I feel bad for you lower level tech luddites that don’t have a passion for it like I do, how do you cope with toffler’s futureshock?
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January 19th, 2011 at 10:53 am
With so much focus on conspiracy theories regarding MERS and the banks during the mortgage boom, I’m somewhat surprised by the lack of focus on the fraud being committed every day by the banks since the meltdown. Let’s go through the players in the non-agency market.
1) The borrowers. If they lied on their loan app, they committed bank fraud and are criminals. Let’s stop treating them as victims.
2) The lenders…yes they were conflicted. They did pay for production. Warren claims Dodd Frank should have addressed this. However, if you recall, everyone was a mortgage broker in 2005. They didn’t actually fund the loan. They originated the loan and sold the loan simultaneously to people like Wells Fargo and booked a small profit. Dodd Frank would have to eliminate the mortgage broker business entirely…not just the commission salesman at Wells.
What happened next? The loans originated by Wells (or any bank), were sold in bulk into a trust through a purchase and sale agreement. The originator, Wells, made numerous reps and warranties to the trustee about the quality of the loans. Specifically, in virtually every deal, they made a rep that not one loan had an LTV greater than 100%. Absolute nonsense! Who were the trustees? Could have been Bank of New York but also could have been none other than Wells! There were so many carve outs in the trustee agreements, however, that the trustee had virtually no affirmative responsibility to check the reps and warranties made by the originator.
Simultaneously, Wells retains the servicing (collecting of principal and interest payments) on the loans with a promise to pass through the payments into the trust. The servicer has many more affirmative responsibilities than the trustee. For example, they’re required to force the originator to repurchase loans with known fraud, loans with first payment defaults etc etc. So, Wells Fargo, the servicer, is supposed to jam Wells Fargo the bank with the bad loans. Raise your hand if you think this actually happened in a meaningful way!
Next: The trust is wrapped in a securitization vehicle and sold off to investors…Pimco, Blackrock, Fidelity etc. We’re not talking about mom and pop or a bunch of uneducated rubes. Before they sell the securities, they make one more important decision. They decide to hold the residual in the deal. The residual is like the equity piece of the deal with little to no economics but it does have a great deal of control over the voting rights. Importantly, the residual holder knows who owns all the bonds with no requirement to share that information. In fact, they structured the deal so they can’t tell you who the other bondholders are. Then, within the docs, the bondholders need somewhere between 25% and 100% of the holders to bring an action to protect their interests. Who wraps the loans? Wells. Who sells the loans through their broker dealer? Wells. What does the trustee (Wells) have to rep to the dealer securitizing the loans (Wells)? They have to rep that they have good title to all the loans. So what do we have? Wells issues the loans, Wells securitizes the loans, Wells services the loans, Wells acts as the trustee, and Wells owns the residual. Each Wells entity makes reps to other Wells entities and ultimately to the securities holders who may not have standing to bring an action against Wells because they don’t have nor can they locate the other bondholders. What incentive did they have to be honest? They needed to keep the origination pipeline alive and to the extent that their deals perform worse than other deals, it hurt their sale execution. That forces their rates higher to borrowers and prices them out of the market. So, while they’re conflicted in every way possible, they did have an economic interest in seeing their deals perform well. However, once the market went poof and there was no securitization market for non-agency loans, it was every man for himself!
It gets better. An enormous number of these loans were issued with simultaneous or subsequent 2nd liens that are held by Wells. Who services these seconds? Wells? Were they wrapped and sold off in securities form? Generally no. The 4 largest banks hold $400 bln in second liens. Let’s for a moment remember that 2nd lien holders are supposed to have a subordinated interest to first lien holders. Does Wells or any of the major servicing banks recognize the conflict in servicing the first and the second while owning the 2nd? Absolutely. So, what do they do? Now this is all anecdotal but they work with the defaulting borrowers. They encourage them strongly to make their payments on their seconds while they work toward a modification through HAMP or currently their own programs on the first. Suddenly, the second is taking priority over the first. When the second gets in trouble, Wells modifies it to dramatically reduce the payment while adding a large balloon on the back end. This way they can continue to carry the second as current while the first is in default. Keep in mind that they’re servicing the first, originated the first, own the residual on the first, and are acting as trustee on the first. Despite all that, they don’t own the first….so screw the first! And, if they write off the second, $400 bln is just about enough to wipe out the book value of the 4 largest bank holders of seconds.
Now let’s discuss the Treasury and the Obama administration. They came up with HAMP and HAMP 2. HAMP was silent on second liens. The first lien holder was supposed to take the hit. Hamp 2 addressed second liens in a wholly unsatisfying way. Hamp 2 provided that 2nds were supposed to take a proportional writedown to first only after the firsts had gone through a trial modification that was successful. This was outright stealing from the bondholders for the benefit of the banks. The second is supposed to be wiped out before the first takes a penny of loss. Why did the government do this? Perhaps because they had just saved the banks and didn’t want to wipe out their book value? The government has been complicit from the start. Even though the bondholders were largely plan assets, the administration preferred spreading the hit over a far larger number of investors than forcing the banks to take the hit and risk another crisis or “need” for another bailout.
Where does this take us? When many of you talk about banksters, you’re usually addressing their past actions. The problem is that the smart money, along with the SEC and the rating agencies allowed all this to happen. Most presumed the vested interest in superior loan performance would trump the inherent conflicts. It did until the securitization machine stopped working. In my mind, the real problem with the “banksters” is what they’re doing now in concert with the administration. That’s where you should focus your anger!
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WARREN MOSLER Reply:
January 19th, 2011 at 5:09 pm
and if banks weren’t allowed to transact in secondary markets at all as per my proposals, we wouldn’t need to be reading about all this.
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Ivan Reply:
January 19th, 2011 at 8:25 pm
That would only eliminate their market making activities. It wouldn’t stop them from doing every other part of the transaction.
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WARREN MOSLER Reply:
January 19th, 2011 at 9:53 pm
you don’t think it would have been a different macro story if all banks had been required to hold all of what they originated in portfolio?
and didn’t deal in the secondary markets with regard to loans originated by mtg bankers?
ESM Reply:
January 20th, 2011 at 12:33 am
Eliminating secondary market transactions strikes me as too blunt an instrument. After all, there are many non-banks who would like to invest in mortgage-like securities. You would be depriving them of that investment opportunity.
A better approach is to get rid of the nationally recognized statistical ratings organizations (NRSROs). They are worse than useless and really bear the lion’s share of responsibility for the housing bubble (along with the government of course which enables their existence).
How do you get rid of them?
(1) remove the ratings based safe harbors for fiduciaries, particular under ERISA, which is what grants the government imprimatur to NRSROs; and
either
(2a) prohibit use of non-public material information by NRSROs in forming their ratings “opinions”;
or
(2b) prevent NRSROs from using the 1st Amendment to shield themselves from liability for “opinions” gone bad.
WARREN MOSLER Reply:
January 20th, 2011 at 4:33 am
I see no public purpose to banks transacting in the secondary markets.
And I see no public purpose in allowing banks to accept financial assets as collateral.
Nor do I see any public purpose in allowing govt. insured pension funds to invest in most of what they invest in.
Nor do banks allowed only to lend based on credit analysis and hold those loans in portfolio have any use for ratings agencies.
These activities further serve to support the financial sector, also to no public purpose.
If non banks want to invest in mortgages let them originate their own mortgages and fund them outside of the govt’s banking system.
I don’t support a non bank ‘right’ to govt. supported investments that serve no public purpose.
etc.
ESM Reply:
January 20th, 2011 at 10:59 am
Let me take these one at a time:
“I see no public purpose to banks transacting in the secondary markets.”
Suppose a bank has particular expertise in analyzing loans to startup pizzerias, which are very risky. The bank makes a 5yr loan to Tony’s House of Pizza, and the loan works out. Tony’s House of Pizza is clearly a success after its first year of business, and the loan is now considered high-grade. Why shouldn’t the bank be allowed to sell that loan to somebody else whose investment profile it fits better? It would create room in the balance sheet and in the credit risk and interest rate risk budget for more risky loans to startup pizzerias.
“And I see no public purpose in allowing banks to accept financial assets as collateral.”
Allowing investors to leverage their financial investments could improve liquidity and make the market more efficient. Suppose I run a very small hedge fund, but I have identified a particularly cheap investment asset. I am capital constrained, not market capacity constrained. Without leverage, I cannot put on the trade big enough to correct the inefficiency. With leverage, I can. This improves market efficiency so the right price signals are sent to other investors. For example, the poor liquidity in the long-dated oil swaps market, I think sent the wrong price signals to oil companies who then underinvested in future production.
“Nor do I see any public purpose in allowing govt. insured pension funds to invest in most of what they invest in.”
Well, I do not see public purpose in government insurance for pension funds in the first place. In fact, the whole idea of company defined-benefit plans is stupid, and they only exist because the government encourages their creation through the tax code (and through insurance).
“Nor do banks allowed only to lend based on credit analysis and hold those loans in portfolio have any use for ratings agencies.”
I don’t see why anybody has any use for ratings agencies. To me they are no more useful than an investment newsletter.
“If non banks want to invest in mortgages let them originate their own mortgages and fund them outside of the govt’s banking system.”
If I want to invest in a mortgage so as to hedge my own mortgage or take a flyer on interest rates or volatility, either short-term or long-term, I’m supposed to go out and originate my own, with zero liquidity to boot? That’s just not feasible.
“I don’t support a non bank ‘right’ to govt. supported investments that serve no public purpose.”
The word “supported” there is ambiguous. I don’t support a right to government subsidized investments. I do support a right to government guaranteed investments, however. I think that serves a public purpose for particularly risk-averse savers. That’s why I don’t mind the Treasury issuing bonds and notes, for instance.
WARREN MOSLER Reply:
January 20th, 2011 at 10:36 pm
1. what is gained by the bank selling the performing pizza loan? it gets to keep earning the interest and roe if it keeps it.
and if the roe is attractive it can raise more capital to do more of same.
2. Your fund shouldn’t be capital constrained if it makes good returns on equity without leveraged financial assets unless it has other issues. And it’s not so much about ‘liquidity’ in the long dated oil swaps market, which means the bid offered spread, etc., as the size of the bid per se. If there are real buyers of oil via long term contracts they get together with real producers and find common ground.
3. Ratings agencies have been used to save money on credit analysis, in combination with diversity. Results weren’t so good last go round…
4. Sorry if everything you want to do in mortgage land isn’t feasible. That’s not a reason for banks- public private partnerships- to provide it. Better to be able to pre pay your mortgage or use it like a line of credit at the bank.
5. If Congress thinks govt should provide govt annuities on demand it can vote to offer them as desired.
Matt Franko Reply:
January 20th, 2011 at 11:54 pm
ESM,
“Suppose a bank has particular expertise in analyzing loans to startup pizzerias, which are very risky. The bank makes a 5yr loan to Tony’s House of Pizza”
My experience is that banks no longer do such type of loans unless they are secured by other higher quality assets (deposits/real estate etc), and even then they probably go to SBA. maybe 10-15 years ago yes. many people think this is what banks do, my experience has been that they have gotten away from these types of loans, and it is a problem for small business financing. At least until the run-up to the GFC, it seems the banks transitioned to a model that was only directly interested in property and autos/boats at best.
For instance in the late 90s we did a business equipment loan (loan secured by the equipemnt) at our community bank 48 mo, 7% fixed, we put some $ down and the bank had in-house underwiting for the equipment type (like your example) and got a payment coupon book and paid it off over the years. Then this small community bank got consolidated and bought up by Allied Irish Bank into a new entity called Allfirst bank. we went in for something else similar to what we did before and LITERALLY the new bank (now Allfirst) slid a business VISA card application across the table at us 13% (or more). they could care less about local business. Some time later I got up one morning and looked at Bloomberg as I was getting ready and they flashed a report of a $200M fraud at Allfirst Bank (where we also had our business account). They got burned (allegedly, I still wonder who had the other side of the trades) by a Nick Leeson type of thing in TRADING FOREX! Our deposits helping them build a balance sheet to speculate in forex, nice! I knew the bank would be shut down (too small to absorb 200M) and it was an uncomfortable ride in that day as I struggled to think about where to come up with cash to run until the FDIC settled, etc (as it turned out they quickly got M&T to take it over and it fortunately was painless).
That was in retrospect perhaps a small precursor story to what eventually would play out systemically over the next 5 years or so. Banks discarding their community focus/public purpose and turning themselves into giant hedge funds that put real businesses at risk. imo not much has really changed even till this day without true reg reform. So you perhaps can understand if I would support Warrens reg. proposals wrt returning these entities to true public purpose.
Resp,
Tom Hickey Reply:
January 21st, 2011 at 1:01 am
Public purpose is at the foundation of even private business. For example, all corporation have to get a charter from the state to operate. In their application they have to state their business operation and the state has to give approval for it. Even the smallest of businesses generally have to get a business license. The primary purpose of business is providing a service to its customers, not making a profit. Profit is the by-product of a business operation, not the purpose of the business operation. Profit may be the purpose of the owners/investors, but it not the purpose of the business.
If the secretary of state deems the business not to be in the interest of the people of the state, the application will be denied. Similarly in the case of a business license. While this may be unusual, the state does have control over what happens within its jurisdiction. Moreover, states have the right to regulate business as they deem fit iaw the laws of the state, and they don’t do this to voters’ satisfaction, there is often a political backlash.
The federal government has an overall responsibility to oversee interstate commerce. When the public interest is not being served, voters expect the government to take the necessary steps to bring business within the broad compass of serving the public interest, and very often this involves very specific issues, like banking and finance at present.
There is a lot of blather about the free market, but a free market must also a fair market that serves the public interest. That’s a major aspect of commercial law, regulation and oversight at the federal, state, and local levels, and voters’ demand adherence to this, especially when it affects them directly.
Ivan Reply:
January 20th, 2011 at 8:07 am
It would have been a very different story if they had to hold what they originated. However, I don’t believe that undoing 30 years of financial innovation is necessarily the answer. I also don’t feel comfortable with regulating markets based on public purpose. Sounds too Soviet Union to me. However, if you read through my long diatribe, you can see that there are countless conflicts of interest that need to be eliminated in the securitization process. Each party (originator, trustee, servicer, residual holder, rating agency) needs to be independent and liable for their actions.
Reply
WARREN MOSLER Reply:
January 20th, 2011 at 8:30 am
don’t ‘undo’ anything. Just tell the banks they can’t do any of that any more.
laws and public institutions- public infrastructure- are necessarily created to serve public purpose. what other option is there for the public sector?
soviet union owned the means of production, not just public infrastructure.
if you keep banks and pension funds and govt agencies in general away from the products the private sector can mostly figure it out. a few shareholders may lose now and then but there won’t be any systemic risk
Matt Franko Reply:
January 20th, 2011 at 9:07 am
Ivan,
“30 years of financial innovation” …. ???
I call it riding the 30 year interest rate trend.
Now let’s see them “innovate”. (Hint: that’s what we’ve been witnessing for the last 2 years, they’ve got NOTHING)
Heavy Fiscal and reg. reforms are the only way out of this.
Resp,
jorgejrl Reply:
January 20th, 2011 at 9:58 am
You forgot the rating agencies…Moody’s and S&P,without them it would have been impossible to grow the bubble.
They rated trillions of dollars worth of junk AAA so that Banks, pension funds and insurance companies would be able to buy the “securitized” junk.
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January 20th, 2011 at 10:35 am
Matt:
I post a scathing review of the process and you’re going to hang me on “financial innovation”? There is no innovation now because there are no buyers. There are no buyers because there is no confidence. The past was all about greed. Now we’re in the fear cycle. Don’t get too comfortable when things are good and don’t over-regulate when things are this bad. Markets punish bad behavior. Future investors in securitized MBS products will demand more independence among all the parties or they won’t buy. This probably means higher interest rates for all home buyers initially but ultimately a better process will be in place.
Jorge: Good point although you know you can create a AAA from anything…even securitizing your future income stream. Might have trouble placing the first loss piece though :-)
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ESM Reply:
January 20th, 2011 at 11:12 am
Ivan,
I meant to reply to your review earlier. I mostly agree with it although I think you overstated the case. For example, I am not aware of any deals where the trustee is the same as the servicer. I could be wrong, but I always imagined that at least those two roles were kept separate for conflict of interest reasons.
In practice, of course, the trustee is completely worthless, and even acts adversely to the trust beneficiaries’ interests.
I also think it is odd that you chose Wells Fargo as your example, since although they were guilty of malfeasance as well, I think they were by far the least bad of all the major mortgage originators or bundlers. The performance of Wells originated loans has been much better than average, even adjusting for the usual parameters.
Conflict of interest is a problem, but a bigger problem is the collective action clauses embedded in the deal documents which prevent individual investors from taking legal action to enforce their rights. Get rid of the collective action clauses, so that a diligent, individual investor can keep everybody honest, and all of the other problems go away.
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Ivan Reply:
January 20th, 2011 at 12:03 pm
All good points. While I agree in principle about the collective action clause, in practice the cost and time involved in pursuing the action where all would benefit but only one investor pays wouldn’t get the job done. The investor would probably just sell his position if he notices something amiss. As to Wells, you are correct that the Wells shelf with their own origination is one of the better performers. I picked Wells because they are also one of the largest trustees. To the best of my knowledge, there is nothing that precludes them from acting as trustee on their own deals…although it wouldn’t matter anyway. The trustee has virtually no affirmative responsibility to the bondholders. Also, while Wells deals have been better performers on a relative basis, they were still loaded with fraudulent loans. They were just among the best of a very bad lot.
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Ivan Reply:
January 20th, 2011 at 12:04 pm
Also, the second lien conflict of interest is enormous and still hasn’t been dealt with.