Category: Class Warfare

Image by Ookami Dou

The poor will always be with us, or at least as long as Republicans are also with us:

Virginia’s Republican-run House of Delegates rejected a proposed expansion of unemployment benefits Wednesday, along with $125 million in federal stimulus cash to pay for it.

On a mostly party-line 46-53 vote, the House turned down amendments by Democratic Gov. Timothy M. Kaine that were necessary to make Virginia eligible for the federal aid.

Modern Republicanism laid bare: never help anyone who really needs help. But that’s not the worst of it, the abysmal economic illiteracy is:

“It is not stimulus. Paying workers not to work does not promote economic growth,“ Byron said.

Actually, Delegate Kathy Byron, paying workers not to work does promote economic growth. This is economics 101, people who have money (unless they’re useless rich) spend that money. When they spend that money they spend it on products and services made by people who work. The more of those products and services which are bought, the more economic growth there is, since you can’t have economic growth if there’s no demand for products and services.

In times when there is insufficient demand, like in a massive recession or depression, the best thing to do is for the government to spend. And since there are people losing their houses, who are going without food, clothes and medical services, the best way to spend is to give those people money so you kill two birds with one stone: you get demand through spending, and you help people who need it so they don’t wind up starving or on the street.

But let’s extend this even further—when you have a demand problem and you also have very high income inequality (money pooling with the rich, who tend not to spend it) an even better way to increase demand is to increase tax rates on the rich, and then spend that money. You could even give it to the poor and middle class, who haven’t had a raise in 30 years.

And yes, Byron, that would create economic growth, though I’m sure you aren’t capable of understanding that. But it worked for FDR, Truman, Eisenhower and so on, and it would work now, while the Reaganesque policies of the last thirty years haven’t worked and have led to this disaster.

So, if you actually care about economic growth (we won’t pretend you care about unemployed people) you should both accept the UI money and push for highly progressive taxation.

I won’t be holding my breath for you to understand any of this, Byron, but I will hope that eventually enough politicians will decide to stop trying the same failed Reaganite policies over and over again, and do something that works.

Eventually, after most of the current crop of legislators are unemployed themselves.

(h/t Not Larry Sabato)

I’m Sure There’s a Difference Between the Bush/Paulson, Obama/Geithner Approaches to Bailouts

By Ian Welsh

On April 4, 2009

Comments

I’m just not sure what:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

At this point in time, there seems to be no significant functional difference between Paulson/Bush and Geithner/Obama. Both intended to give a ton of money to financial firms, either directly or by buying up crap at prices higher than justified. Both opposed any meaningful restrictions on how they spent the money or who they gave it to.

Actually, I take it back, one difference is that when Paulson wanted 700 billion, he went to Congress. When Geithner made up his plan he just had the FDIC and the FED pony up most of the money, because he knew Congress wouldn’t give him the money.

Some wonder if this is legal:

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay.

Me, I don’t know if it’s legal. What I do know is that they plan on giving money away in a manner which clearly intends to end-run Congress’s clearly legislated mandate for how it be given away. What I know is that they are bypassing Congress when they can, because they know that the elected body which is the only one supposed to be able to pass spending bills wouldn’t give them all the money they want to spend and won’t let them spend what money it does give as freely as they want to.

Of course, that money will still have to be paid back by taxpayers, even if Congress never approved the spending.

But back to the TARP restrictions:

Congress drafted the restrictions amid its highly contentious consideration of the $700 billion rescue legislation last fall. At the time, lawmakers were aiming to reform the lavish pay practices on Wall Street. Congress also wanted the government to gain the right to buy stock in companies so that taxpayers would benefit if the firms recovered.

The requirements were honored in an initial program injecting public money directly into banks. That effort was developed by the Bush administration and continued by Obama’s team. The initiative is on track to account for the bulk of the money spent from the rescue package. All the major banks already submit to executive-compensation provisions and have surrendered ownership stakes as part of this program.

Yet as the Treasury has readied other programs, it has increasingly turned to creating the special entities. Legal experts said the Treasury’s plan to bypass the restrictions may be unlawful.

The problem is that while Geithner’s plan takes money from the FDIC and the Fed, it still uses some TARP money as seed money, and that money carries the restrictions.

I thought it wasn’t the executive’s job to decide that Congress is wrong and then deliberately end-run it. I thought we had an election to stop this sort of thing.

This is one of the things we spent the last 8 years blasting Bush for doing. But in this particular case, the new administration is being less compliant with Congress’s will than the Bush administration was!

Less!

I don’t know whether to spit or cry. I’ve always had my doubts about Obama, but in my worst dreams I didn’t think he’d try and end run Congress even more blatantly than Bush, in order to give even more money away to the richest Americans with even fewer restrictions and less protection from the taxpayer in terms of ownership stakes.

It’s going to be a long 4 years.

Market Rallies On News of Trillion Dollar Giveaway

By Ian Welsh

On March 23, 2009

Comments

Image by TW Collins

Is anyone really surprised the DOW is up almost 500 points, after Geithner promised to give private investors almost $1 trillion to gamble with?

The details of the giveaway are fascinating. I sure wish that I could get financing like this to play the market:

Under one part of the plan focused on bad loans, the Treasury will provide up to 80 percent of initial capital alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.

Now, unless I’m messing up my math, that’s 24/1 leverage. If older details hold, and the 80% is a non-recourse loan, meaning that it’s secured only by the value of securities bought, then it’s even sweeter.

PIMCO has announced it’s interested in participating, which means that the plan has succeeded in one sense—it has the buy-in of some very smart money. That doesn’t mean that it’s necessarily good for taxpayers, or that it will be good in the long term for the economy, necessarily, but at least it isn’t being laughed out of Dodge. On the other hand, would you refuse 24/1 to one financing? Or even matching funds, as contained in part two of the plan?

I sure wouldn’t. And PIMCO have been scavengers before. They bet heavily in Fannie and Freddie bonds after it was clear Fannie and Freddie were insolvent, which was a bet that the government wouldn’t shear bondholders when it bailed out Freddie and Fannie. Smart bet, but not a good return for taxpayers, who would have been better served by letting Freddie and Fannie’s debtholders lose money.

I am becoming increasingly convinced that my original call was the right one: that the various bailouts would lead to Japanification. For 20 years now, since its own bubble burst, Japan has had an economy which slips in and out of recessions like clockwork and which never ever really got good again. In Japan’s case, the lousy economy was in large part because they left a lot of debt debt on the books of private corporations. In America’s case, the debt may be transfered to taxpayers, but the end result is likely to be the same, only compounded by attempts to create secondary bubbles so that the toxic waste regains enough value to claim a win.

Given that Geithner’s trillion dollar giveaway has been greated ecstatically by the financial sector, I expect we’ll see more money used in this fashion. This plan appears to be good for about $2 trillion of lousy debt ($1 trillion from the matching 1/1 program, $1 trillion from the high leveraged portion). Total current toxic waste on the banks books is probably about $4 trillion, which will still have to be dealt with.

That money will have to be paid off, eventually. Doing so will cost the US and the world a great deal of future growth, and individuals a great deal of future income and employment. As things stand right now, I don’t think employment levels as measured by employment/population ratios will recover in the forseeable future—post recession “full” employment will just be lower than pre-recession “full” employment. There are still some ways this could be made to work for everyone, and I’ll discuss those at a later date.

The AIG Bonus Clawback Bill Won’t Work But Here’s What Will

By Ian Welsh

On March 23, 2009

Comments

Last week the House passed a bill designed to claw back bonuses over $250K from recipients of TARP money.

Now I’m a class warfare guy on the side of regular folks (as opposed to the rich, who are winning the current war and won the last one), but this bill is counterproductive and won’t work. It is too easy to work around and it is targeting the wrong people.

The clawback only affects bonuses, leaving a loophole where TARP recipients can just recategorize bonuses as salaries.
If the clawback applied to all income, then employees would be moved to contract status or to companies which haven’t received TARP money (even if artificial companies have to be created for the purpose).
The threshold of $250K of household income is not that high, as Henry Blodgett points out. Don’t get me wrong, no family making that amount is poor, but they are still affluent. (I’ve never made anything close to it, so this isn’t a personal thing.) At the same time, they aren’t filthy rich, either, and they shouldn’t be taxed as if they were.

But concentrating on bonuses for employees at firms which have been bailed out misses the point. It’s not just those firms whose employees need to be taxed more heavily, it’s everyone.

The logic for increasing taxes is simple enough. For the last 20 years, American executives have been able to pay themselves such large bonuses that in 3 to 5 years they could amass enough money that hey would never need to work again. This executive compensation system created the incentive to do whatever was required in order to get those bonuses—leading to flagrant risk taking and outright fraud. It also led to a short-term focus on the business. When executives know that it doesn’t matter to their personal financial well-being if their firm exists in 5 years, they don’t worry about the long term consequences of their decisions. All that matters is booking “profit” now, so you can get money now, and become rich now.

Wall Street and the banks didn’t make any money in the last 10 years, for all that they booked record profits. The combined losses of the financial firms is larger than their entire reported profits. What they did was sell synthetic securities based on dubious assumptions about the future—that the housing bubble would continue forever, there would never be another recession, and defaults wouldn’t cluster; and book the entire calculated future profits of these securities as profit in the year they were created. Of course, those future profits were fictional, but the bonuses based on them were in real money.

In order to make sure this never happens again compensation needs to be restricted in every firm, not just in the US, but in the industrialized world. Executives and salespeople and auditors and loan officers (if banks decide to rehire any) need to know that ten years from now if a loan goes bad that they’re going to be on the carpet for it, that they might lose their job for it, and that they will still need a job in 10 years.

I recommend 7 measures to restrict compensation:

The horizon is not so far as we can see, but as far as we can imagine

Category: Class Warfare

Virginia Republicans Reject Stimulus UI Money

I’m Sure There’s a Difference Between the Bush/Paulson, Obama/Geithner Approaches to Bailouts

Market Rallies On News of Trillion Dollar Giveaway

The AIG Bonus Clawback Bill Won’t Work But Here’s What Will