QotD

… our political class cheers on treasury-draining wars, allows financial elites to rob and pillage, witnesses huge transfers of wealth to the richest, and then when the whole thing explodes, the “real fiscal answer” is for ordinary Americans to have their Medicare benefits “slashed” and Social Security benefits reduced.

Glenn Greenwald

Get Tough On Crime

The reason AIG is in so much trouble is that it sold insurance against a global financial meltdown and then couldn’t pay up.  Felix Salmon says:

The scandal here is not the size of the losses from the global financial meltdown — those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn’t be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It’s time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG’s total losses, but it would feel very right.

And baum at Ethel the Blog says “Confiscate, Imprison, Draw, Quarter, Etc.”,:

Where the hell are the psychotic “tuff on crime” fetishists now that we’re threatened by something slightly more dangerous than a pothead selling bongs?

UPDATE:  From Louise Story and Eric Dash at NYT

One Merrill Lynch trader apparently gambled away more than $120 million in the currency markets. Others seemingly lost hundreds of millions on tricky credit derivatives.

But somehow all this red ink did not spill into plain view until after Merrill earmarked billions for bonuses and staggered into the arms of Bank of America.

Inside Bank of America headquarters here, executives are asking why. The bank is investigating how Merrill accounted for wayward trades in the final, frantic months of 2008 — and why at least one big loss was slow to appear on Merrill’s books.

Of particular concern are the activities of a Merrill currency trader in London, Alexis Stenfors, whose trading has come under scrutiny by British regulators, according to people briefed on the investigation. The loss Mr. Stenfors is believed to have incurred so alarmed Bank of America that this week the bank examined the books of other traders who were on vacation.

Bank of America’s embattled chief executive, Kenneth D. Lewis, is trying to bridle Merrill’s traders, whose rush into risky investments nearly brought down the brokerage firm. But questions over the Merrill losses — in particular, who knew about them, and when — keep swirling. Merrill hemorrhaged $13.8 billion during the final three months of 2008 alone.

Bank of America’s shareholders did not learn of that gaping hole until after they approved the merger of the two companies on Dec. 5. Nor was the extent of the loss fully known when Merrill paid out $3.6 billion in bonuses, which were based on estimates of the firm’s performance as of Dec. 8. When the problems became clear, Bank of America was forced to seek a second, multibillion-dollar rescue from Washington.  [emphasis mine]

The epicenter of the trouble is Merrill’s markets operation, headed by Thomas K. Montag. Mr. Montag, a former Goldman Sachs trader who was brought in by John A. Thain, Merrill’s fallen chief executive, has become a divisive figure inside Bank of America. He is trying to retain his top producers amid the furor over Merrill’s bonuses. He flew to Charlotte this week to strategize with deputies from around the world.

“There is a massive cultural disconnect in the trading area,” said Brad Hintz, an analyst with Sanford C. Bernstein & Company. “You have Bank of America, where it would seem foreign to ride a motorcycle without wearing a helmet, and at Merrill, the legacy is still there, from the C.D.O.’s and the risks they took on.”

For Mr. Stenfors, 38, 2008 looked like a very good year. He recorded a trading profit of about $120 million, and his reward was a handsome bonus …

QotD

Though the path has not been smooth, our economic system has worked extraordinarily well over time.  It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

Warren Buffet

If Buffet means the human potential for greed and self-destruction he may be right.  It’s difficult to find a reason for optimism.  Perhaps it is this:  that the meltdown of the economy might provide an opportunity for change of a more profound kind than Barack Obama has in mind.

Time to Freak Out

I’ve been thinking for months now that the economies of the Western industrialized countries are on a downward path that isn’t about to end and that no amount of fiscal stimulus fiddling of the kind we’ve seen thus far in Canada and the US is going to stop it.  When George Soros and Paul Volcker agree with me, then I really am scared:

Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.

Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker said.

Oops.  Ya think Volcker has told Obama?

What We Save When We Save Capitalism

From the editors at Monthly Review:

… “stagnation theory, in short,”  [Harry] Magdoff and [Paul] Sweezy wrote in closing their introduction to Stagnation and the Financial Explosion,

teaches us that what we need is not the reform of monopoly capitalism but its replacement by a system that organizes economic activity not for the greater glory of capital but to meet the needs of people to lead decent, secure, and, to the extent possible, creative lives. Once this lesson has been well and truly learned, we can give up the absurd fantasy of making a rotten system work for us, and buckle down to the increasingly urgent tasks of directly fighting for what ought to be the birthright of every member of a society that has any claim to consider itself free and democratic—a job, a steady income, a home, health care, and security in old age. If our ruling class and the government it controls cannot meet these elementary human demands, they should be thrown out and make way for another system that can and will. It is of course bound to be a long and difficult struggle, but it is the only one that makes sense.

Read Notes From the Editors here

What’s Politically Possible?

There are those, like me, who do not think it will be politically possible for Barack Obama to take the action necessary to get the economy going again.  Here’s just one reason why:

What appears prudent and rational from the standpoint of the household bodes ill for the economy at large (in much the same way that the banks have rationally taken public money and either hoarded it or used it to buy assets rather than to lend). The prevailing hostility in the United States to “spreading the wealth around” and to administering any sort of relief other than tax cuts to individuals, arises out of hard core neoliberal ideological doctrine (centered in but by no means confined to the Republican Party) that “households know best.” These doctrines have broadly been accepted as gospel by the American public at large after more than thirty years of neoliberal political indoctrination. We are, as I have argued elsewhere, “all neoliberals now” for the most part without even knowing it. There is a tacit acceptance, for example, that “wage repression” – a key component to the present problem – is a “normal” state of affairs in the United States. One of the three legs of a Keynesian solution, greater empowerment of labour, rising wages and redistribution toward the lower classes is politically impossible in the United States at this point in time. The very charge that some such program amounts to “socialism” sends shivers of terror through the political establishment. Labour is not strong enough (after thirty years of being battered by political forces) and no broad social movement is in sight that will force redistributions toward the working classes.

An excellent article by David Harvey, here, via Relentlessly Progressive Economists

Obama Will Have to Be Pushed

John B. Judis at TNREnd the Honeymoon: Why the Left is to Blame for the Lacklustre Stimulus and Bank Bailout:

I think the main reason that Obama is having trouble is that there is not a popular left movement that is agitating for him to go well beyond where he would even ideally like to go. Sure, there are leftwing intellectuals like Paul Krugman who are beating the drums for nationalizing the banks and for a $1 trillion-plus stimulus. But I am not referring to intellectuals, but to movements that stir up trouble among voters and get people really angry. Instead, what exists of a popular left is either incapable of action or in Obama’s pocket.  [more]

Is the US Liberal Left giving Obama a honeymoon?  I think so.  As I’ve said before, American can’t afford it and neither can the rest of the US dependent world.

Glenn Greenwald reflects on the consequences of Obamamania among the left Liberals of the Democratic Party during the election campaign:

During the 2008 election, Obama co-opted huge portions of the Left and its infrastructure so that their allegiance became devoted to him and not to any ideas.  Many online political and “news” outlets — including some liberal political blogs — discovered that the most reliable way to massively increase traffic was to capitalize on the pro-Obama fervor by turning themselves into pro-Obama cheerleading squads.  Grass-roots activist groups watched their dues-paying membership rolls explode the more they tapped into that same sentiment and turned themselves into Obama-supporting appendages.  Even labor unions and long-standing Beltway advocacy groups reaped substantial benefits by identifying themselves as loyal foot soldiers in the Obama movement.

The major problem now is that these entities — the ones that ought to be applying pressure on Obama from the Left and opposing him when he moves too far Right — are now completely boxed in.  They’ve lost — or, more accurately, voluntarily relinquished — their independence.  They know that criticizing — let alone opposing — Obama will mean that all those new readers they won last year will leave; that all those new dues-paying members will go join some other, more Obama-supportive organization; that they will prompt intense backlash and anger among the very people — their members, supporters and readers — on whom they have come to rely as the source of their support, strength, and numbers. 

The Village press corps, including a good deal of the blogosphere, has quickly become a bunch of apologists for Obama.  Nothing could be more dangerous.  Can anything wake them up?  The most important question of this generation.

More of Greenwald here

Paul Krugman’s Stomach Problem

Barack Obama’s attempts to get bipartisan support for a stimulus package failed.  The result of his efforts is a watered down bill that won’t do the job and not one Republican vote, as many predicted.  Paul Krugman offers his view on the Obama administrations efforts:

… while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration’s plans on that front, which also came this week, landed with a dull thud.

The plan sketched out by Tim Geithner, the Treasury secretary, wasn’t bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers’ expense? Or will the required “stress test” act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.

Over all, the effect was to kick the can down the road. And that’s not good enough. So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

And I don’t know about you, but I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

There’s still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can’t.

Read the whole thing here