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Thank Heaven Larry Summers Isn’t Fed Chair

6:19 pm in Uncategorized by masaccio

We need to be very serious about the needs and feelings of the rich, according to Not Fed Chair Larry Summers

Everyone, especially Barack Obama, just thinks Larry Summers is the smartest guy in the room, even if America’s Top Whiner Jamie Dimon is in the room. Maybe so. But his interpersonal skills are worse than Mike Huckabee talking about women. So it’s no surprise shortly after the news cyclists were telling us that 85 people have as much wealth as the poorest 3.5 billion humans on the planet, Larry gets on the boob tube’s silliest channel, CNBC, to explain that we mustn’t do anything about inequality that involves in any way reducing the wealth of the filthy rich.

We shouldn’t be jealous and envious of the obscenely rich, he claims; instead we should find the magic beans that will grow the economy. Larry you ignorant money slut. The economy has been growing for decades, but the stinking rich are taking all the growth for themselves. They aren’t creating jobs, they’re forcing workers to take less. Did you miss the Boeing destruction of a portion of the Seattle middle class? Did you miss Target firing a bunch of people because its IT department can’t handle basic data security? Did you miss the part where the gigantic slaughterhouse corporations want to speed up the lines and privatize meat inspection to increase profits at the expense of workers and meat-eaters? Did you notice the manipulations of Freedom Industries and the efforts of its owner to take the assets and run after poisoning Charleston WV? No, I guess those things don’t show up in your pointless DSGE models, do they?

Try inputting this factoid into your massive intellect, O Great One: The rich take all the money and leave nothing for anyone else. Once you have that fact firmly fixed in your quantum computer brain, then tell us how you plan to get them to stop.

We’d love to hear your plan for sweet-talking the thugs on Wall Street into ending their thievery through financial fraud, pension rip-offs, sleazy interest rate swaps, and all those other innovations you and your buddies at DE Shaw love so much. We’d love to hear about all the new jobs created by the tax avoidance activities of GE, Apple, Google, Starbucks and every other global enterprise. We’d love to hear how you plan to get corporate giants to quit funding ALEC, and quit buying slimy politicians to do their bidding at the expense of the rest of us.

We can’t wait to hear your plan for restoring bargaining power to workers when labor force participation rates have fallen to 35 year lows, and it isn’t retiring baby boomers, either. We’d love to hear how suddenly states will start paying for education as a social good instead of funneling money to test-driven corporate charter schools and sleazy on-line “universities”. We’d love to hear about your plans for waking up the Congress to take any action that might in any way help whatever’s left of the middle class or the hopes of the poor to escape poverty, when their primary goal is obviously to feed the rich with the scraps of the safety net that remain, and pacify their bases with their family values. Instead, I expect we’ll be hearing about your plan to keep corporate profits at ludicrous levels, so as not to hurt the stock prices of your hyper-rich friends.

Get a grip, Summers. You might be the smartest guy in the world, but that doesn’t mean you know anything about human nature. That’s the real reason you aren’t Fed Chair. We think you are an idiot. Maybe an idiot savant, but an idiot.

Here’s another factoid that might help you see reality. As Krugman puts it, leeches and rentiers will not go gently into the euthanasia Keynes promised us. Read the rest of this entry →

Philip Mirowski To Discuss Neoliberalism in Sunday Book Salon

4:02 pm in Uncategorized by masaccio

Our Sunday Book Salon gives us a chance to discuss neoliberalism with Philip Mirowski, author of Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. Most people have a general idea of some of the theories of neoliberalism, especially the general idea that markets should be the dominant force in society. Mirowski traces the roots of this idea to Frederich Hayek and his Mont Pelerin Society. This group expanded and morphed into what Mirowski calls a Russian Doll approach to formulating and implementing a strange notion of humans as consumers and workers and nothing more worth mentioning. It serves the interest of right-wing billionaires, who are glad to fund it.

We can see the influence of those ideas in the Chicago School of Economics, and in economics generally, as the perhaps more humanistic approach of the worldly speculator, John Maynard Keynes, has disappeared. Here’s a sample of one current argument in economics from Simon Wren-Lewis. He says that New Keynesian models describe consumers as perfectly rational actors who have the ability to borrow money as they need it.* If they get a tax cut, they assume it will be followed by a tax hike, so they save the money to pay their taxes later. The minor change in their lifetime income resulting from a tax cut doesn’t affect their spending. They use borrowing to smooth out fluctuations in their incomes. Does that describe anyone you know or have ever known? Why would you make policies out of that trash?

These and many other ideas are at one level just theoretical constructs needed to make it possible to crank out mathematical formulas to describe the economy and guess at the impact of changes in government policy and changes in private sector behavior. Of course, that kind of modeling has been a massive failure.

But, for neoliberals, it’s more than just theory. Their goal is to manipulate human beings into becoming creatures just like these constructs. And they are achieving their goals. We saw it in Jennifer Silva’s book, Coming Up Short, as the young working class people she interviewed see themselves as entrepreneurs of the self, making investments of their time and borrowed money in themselves, hoping to make themselves marketable. If they succeed, as a few have, they think it is because of their efforts alone. If they fail, they think that too is their fault, and that it is fair that they alone should suffer the consequences. In either case, they don’t think it’s fair that some people get help from the government. If the government doesn’t help them, why should it help anyone else?

The fundamental evil of this approach is that it hides a crucial reality of life from the victims. The people who nurture and organize the manipulation and those all-powerful and all-knowing Markets are exempt from the strictures of those markets. They are the elect, the authorities, the Priestly Keepers of Secret Knowledge. They are not like you and me. And neither are their creatures, Corporations. These new Corporate Persons are not to be subjected to laws created through some semi-democratic process, and neither are their human operators, at least at the highest, Jamie Dimon/Lloyd Blankfein level, any more than the people who lie for the National Security Branch of government are subject to the law. These exalted Heroes are beyond the understanding of mere humans, they are God-like Creatures, whose gift it is to comprehend the Oracles of the Market and translate them into punishment and rewards for us little elements of social groupings. And if you don’t believe me, just check out the CEO-worshippers on CNBC and in the business magazines.

Here are some posts taking up Mirowski’s ideas; I hope they will help encourage discussion on Sunday. See you there!

Homo Economicus Replaces the Middle Class
How We Govern Our Selves and Ourselves
Konczal, Douthat and Neoliberalism
The Neoliberal Quantum State Theory of Markets
The Blighted Future of the Middle Class (more by Silva on neoliberalism among working class young people.)
*Here is Wren-Lewis in his own words:

Basic NK models employ the construct of the (possibly infinitely lived) intertemporal consumer. To explain, these consumers look at the present value of their expected lifetime income, and the income of their descendents if they care about them (hence infinitely lived). This has two implications. First, temporary shocks to current income will have very little impact on NK consumption (it is a drop in the ocean of lifetime income). The marginal propensity to consume out of that temporary income (mpc) is near zero, so no multiplier on that account. Second, a tax cut today means tax increases tomorrow, leaving the present value of lifetime post-tax income unchanged, so NK consumers just save a tax cut (Ricardian Equivalence), whereas OK consumers spend most of it. However NK consumers are sensitive to the real interest rate, so if higher output today leads to higher inflation but the nominal interest rate remains unchanged, then you get a multiplier of sorts because NK consumers react to lower real interest rates by spending more.

So far, so different. But the NK consumption model assumes that agents can borrow whatever they need to borrow. There are good theoretical reasons why that is unlikely to be true (e.g. asymmetric information), and even better empirical evidence that it is not. Empirical studies that look for ‘natural experiments’, where agents obtain an unexpected increase in post-tax income which is likely to be temporary, typically find a mpc of around a third (even for non-durables), rather than almost zero as the basic intertemporal model would predict.

Saturday Art: Judith Beheading Holofernes Again

11:33 am in Uncategorized by masaccio

Judith Beheading Holofernes by Artimesia Gentileschi, 1593 – 1656

Judith Beheading Holofernes usually hangs in the Uffizi in Florence, but if you are in Chicago, you can see it at the Art Institute until January 9, 2014. I saw it with Ruth Calvo and Spudtruckowner when they passed through town. I wrote about this painting here, and the discussion holds up pretty well on this seeing. I’d add two points.

First, there are spurts and spots of blood on Judith’s breast and arm that are very visible as it hangs here and less clear at the Uffizi. The droplets are three dimensional and the exact color of blood. The spurts seem a bit thin to me, but they capture the butchery. Judith has rolled up her sleeves, as has the maid, and they are working at this killing.

Second, take close look at the mattress. Look at the trails of blood in the folds as if the blood were seeping flows on the silk sheets. Look at the patch of blood flattened into the sheet under Holofernes’ left shoulder. These details demonstrate the mastery of Gentileschi.

I heard a lecture on the painting from the curator. She said that artists at that time were categorized by the nature of their works: flower and nature painters at the bottom, portraits higher. At the top were history painters, and Gentileschi was one of the very few women thought capable of making history paintings. She discussed at length the fact that Gentileschi was raped by one of her father’s artist colleagues, and the impact this had on her work. I think all art has to stand on its own, without reference to the history and the explanations of the artist. This painting may reflect back to the experience of rape, and may be motivated by revenge fantasies, but it clearly stands on its own. You don’t have to know her life to see the brutality. Perhaps the primary impact of the rape is that Gentileschi chose subjects for her paintings that allowed her to harness and direct her rage into her work.

There are several other versions of this painting in the same room. There is this painting by Lucas Cranach the Elder, with a typical Cranach figure, somehow spider-like, holding a gruesome head. There is a monumental nude version by Jan Sanders van Hemessen and an odd version from Felice Ficherelli which is on this page with a whole group of paintings of this subject.

The Art Institute provided a wonderful addition to this story, a fabulous short sword of the kind Judith is using. It makes everything about this painting more real.

Who Decided There Are No Crimes in MF Global Collapse?

2:33 pm in Uncategorized by masaccio

Jon Corzine didn’t ask where the money came from and didn’t do anything else about it.

The New York Post reports that there will be no criminal charges against Jon Corzine over the billion dollars of customer money used to keep MF Global afloat for a few extra days. The Post quotes “federal investigators” as saying there is no evidence of lawbreaking. Some of the evidence is detailed in the complaint filed by the CFTC recently, which you can read here.

The complaint says what happened to the money. It says that Edith O’Brien took the money out of customer accounts, knowing that this was unlawful. ¶ 62(d) For months, these federal investigators were saying that the big problem was foul-ups and mistakes in a mad rush in the back office. That is now inoperative.

The Complaint explains that Corzine knew that the firm was “undersegregated”, meaning it was using for its own business money belonging to customers that the law requires to be segregated. The Complaint says that on Thursday, October 27, 2011 Corzine and O’Brien received documents showing that the firm was undersegregated. ¶ 63(f)

Actually, the true customer segregated balances were even lower than reflected on the documents sent to Corzine and O’Brien, because $415 million in wire transfers from customer segregated accounts had not been properly recorded on Wednesday, which meant that MF Global’s customer segregated accounts, in fact, were under-segregated by more than $298 million. ¶63(f)

The complaint says that the firm filed false segregated funds reports with the CFTC on Friday, October 28, but it doesn’t say who signed off on the reports. Early in that day, Corzine told O’Brien to pay off $134 million in overdrafts to JPMorgan, MF Global’s lender. O’Brien made the payment by transferring money from customer accounts at JPMorgan to a proprietary account at JPMorgan, and then transferring the money from the proprietary account to pay JPMorgan. The Chief Risk Officer at JPMorgan told Corzine that this had happened, and asked for assurances that it was legal. O’Brien responded to an inquiry by Corzine by showing the second transaction. ¶64(k). Corzine didn’t ask where the money came from and didn’t do anything else about it. The Complaint says that:

Corzine also failed to halt multiple subsequent transfers of funds from customer segregated accounts that were made for proprietary purposes. Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used. ¶64q

And then there’s this:

Corzine knew on Friday morning that MF Global had transferred $175 million to MFGUK even though he thought MF Global had immediate access to only $82 million in proprietary cash. He further learned from JPM shortly before 2:00 p.m. ET on Friday that the funds were used to pay the overdraft referred to in paragraph 64 above and were in fact transferred from a customer segregated account.

I’m sure there is some reasonable explanation as to why responsible officials do not think any crime was committed. Perhaps I have misread the facts, or maybe whatever happened doesn’t constitute a crime, or something else. Somebody who knows should come forward and provide that explanation. It isn’t enough to send a couple of “federal investigators” out to leak this story.

Where is Preet Bharara, the US Attorney for the Southern District of New York?

Where is Eric Holder, the Attorney General?

Where are Gary Gensler and Bart Chilton, two CFTC commissioners?

If this isn’t a crime, then you need to say why and suggest statutory amendments. If you stay silent, people will just assume you are part of Wall Street corruption. Read the rest of this entry →

Surveillance of Banksters Please

11:23 am in Uncategorized by masaccio

The Wall Street Bull statue

Why not spy on Wall Street?

Tim Shorrock explains the general nature of the surveillance state in this post in Salon. The most interesting part is the ability of the government and its private business partners to analyze vast amounts of data in real time.

In April, I wrote about one of those companies, Palantir Technologies Inc., in Salon. It sells a powerful line of data-mining and analysis software that maps out human social networks that would be extremely useful to NSA analysts trying to make sense of all the telephone and Internet data downloaded from Verizon and nine Internet companies that was described in the latest blockbuster stories in the Guardian and the Post.

‘Their bread and butter is mapping disparate networks in real time,’ a former military intelligence officer who has used Palantir software told me. ‘It creates a spatial understanding that can be easily used by analysts.’ (See the detailed profile of Palantir I posted on my website last Friday.)

This software could be used to look at money laundering. It would make it possible to see in real time how money is moving around in the banking system. We could use it to spy on drug money, terrorist financing, and black market arms sales. With a few tweaks, we could use it to watch derivatives traders cheating people, rich people moving their money around in tax havens, Ponzi Schemes, and filthy practices like those alleged in a recent complaint against Zions Bank of Salt Lake City.

Wouldn’t you love to see the Palantir software take a look at Mitt Romney’s money in the Cayman Islands? Wouldn’t you like to know who is getting money from the Koch Brothers? Wouldn’t it be fun to see how the creepy Walton heirs use the money they hoover up from their employees? We could find out who is moving money to Mexican Drug Cartels, and what they do with it, how corrupt dictators hide the money they steal from their countries, and where they buy the guns they use to keep power.

Many of our fellow citizens tell us they have nothing to hide, so why not let the government spy on them. The bedwetters among us don’t really care about privacy matters. As between terrorists and banksters, who causes more damage to them? Banks facilitate everything they are afraid of, and a lot more, like wrecking the economy and the political process. Exposing the money flows will do a lot more to protect us against organized crime and terror and financial crime than anything else I can think of.

It won’t happen. It’s better for oligarchs the way it is. They don’t want you to know how closely their money flows resemble those of the Russian Mafia, the drug cartels and black market arms dealers. They’ll hire their lobbyists to whisper in the ears of their favorite lawmakers about how this will be bad for business and banks, accompanied by some additional campaign cash.

And we’d know about this little exchange immediately if we had financial surveillance that worked like the surveillance of your phone calls and internet usage.

Read the rest of this entry →

Jamie Dimon’s Sleazy Record

9:25 am in Uncategorized by masaccio

Portrait of Jamie Dimon

Don't you feel sorry for poor Jamie Dimon?

On May 21, shareholders of JPMorgan Chase will have the opportunity to express their views of the Chairman/CEO of the mega-bank, and PR people have been filling the inboxes of every possible media outlet. They even got to the New York Post which ran an Op-Ed by Charlie Gasparino on Dimon’s bad feeling about splitting the roles of Chairman of the Board and Chief Operating Office:

Dimon hates the idea of splitting the two roles; he thinks the separation would make it more difficult to manage the world’s biggest bank, with line managers unsure who’s really calling the shots.

He’s right: Anyone thinking that having two people at the top means better corporate governance only has to look at all the corporate scandals at firms with a separate CEO and chairman, with Enron and Worldcom leading the way.

That’s pretty rich coming from a Fox Business News guy, writing for another part of Rupert Murdoch’s empire, but failing to mention the problems with phone hacking, bribery and those ugly arrests, all that under a single Chairman/CEO.

Gasparino has much in common with Andrew Ross Sorkin and Steven Davidoff of the New York Times Dealbook. Just like Gasparino, both Professor Davidoff and Sorkin are focused on how unfair this all is to the Great Man, but none of them mention of the rat’s nest of crooked business at JPMorgan.

For that, you have to look at the blogosphere. Josh Rosner of Graham-Fisher issued a major report listing the many laws JPMorgan broke under Dimon’s control. Here’s a list pulled from Rosner’s report by Dave Dayen at Naked Capitalism, where you can read the report for yourself. Apparently Sorkin, Davidoff and Gasparino just don’t see ther relevance:

Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

And, exhale.

Dayen’s list doesn’t include on-going investigations like LIBOR or the London Whale trades now revealed to be a serious problem, and it doesn’t include the most recent scandals like manipulation of Interest Rate Swap Index fraud, which may or may not involve JPM. But why would that matter to shareholders? After all, the stock is up about 10% in just the last few days, and is back to the glory days pre-Great Crash.

Rosner explains that JPM has paid out $8.5 billion in penalties, interest and so on since 2009, about 12% of income between 2009 and 2012, with much more to come. Those unknown future costs are described in many pages of its 10-K, including footnote 31 starting on page 316, without mentioning an actual amount held in reserve for possible litigation and mortgage put-back losses. Whatever it is, JPMorgan estimates that it might be up to $6 billion on the low side. 10-K at 316.

Shareholders who care about law-abiding management might wonder if Dimon is worth it. They might want to take Dimon up on his promise to leave if the vote goes against him.

Read the rest of this entry →

Oligarchy Exists Inside Our Democracy

10:16 am in Failed government, Uncategorized by masaccio

Suddenly it looks like we are seeing political victories for progressives, on LGBT rights, on issues important to Hispanics, even occasionally on issues important to women. At the same time, we lose every single battle over economic issues. How is it that when polls show that a huge majority oppose cuts to Social Security, Democratic politicians like President Obama and Senate Majority Leader Dick Durbin are all for it, as are the Republicans? How is it that when Obama gets elected on a pledge to hike taxes on incomes above $250K, with a huge majority and control of the Senate, and a legislative situation where all he has to do is nothing and it happens, and then it doesn’t? How is it that the same bill continued a bunch of disgusting loopholes for the richest Americans and the corporations they control, like the NASCAR loophole that essentially only benefits one enormously wealthy family? How is it that within days of hearings showing the incompetence of JPMorgan’s derivatives traders the House Agriculture Committee cleared legislation to inflict derivative losses on the FDIC?

To answer that question, we have to get outside of normal discourse in the US, and take up a new word: oligarchy. Even though our pundit class doesn’t seem to grasp the possibility, it’s easy to see that this single concept explains the apparent discrepancy between wins on social issues and utter defeat on all economic issues.

We think of the US as the Shining City on the Hill of Democracy. Maybe so. But as Jeffrey Winters and Benjamin Page say in their article Oligarchy in the United States?, kindly made available by the author, it is perfectly possible for an oligarchy to function quite nicely inside a democracy. In this paper, and this somewhat more accessible version, Winters and Page answer three questions: a) what is oligarchy? b) how can you have an oligarchy in what is ostensibly a democracy, and c) how can an oligarchy function when there is such a large number of hyper-wealthy people? As to the first, they define oligarchy to mean rule by the richest citizens, a definition that follows Aristotle. This is from Politics, IV, viii:

For polity or constitutional government may be described generally as a fusion of oligarchy and democracy; but the term is usually applied to those forms of government which incline towards democracy, and the term aristocracy to those which incline towards oligarchy, because birth and education are commonly the accompaniments of wealth.

It’s easy enough for an oligarchy to work inside a democracy. Historically, the richest citizens had to fight to protect their wealth and power, with expensive castles and armies and alliances with other oligarchs. As the nation state evolved, the rich struck a deal: the state would take on the burdens of protecting property from foreigners, peasants and other oligarchs, and the rich agreed at least in theory to abide by the same rules as everyone else in the state. Of course, the rich played an important role in determining how those rules would be established. Winters and Page point to a number of provisions in the US Constitution that wet things up for significant control by the rich. Not least is Art. I, Section 10, which prohibits states from passing laws that impair the obligation of contracts, and the Fifth Amendment, which prohibits taking property without due process and just compensation. The Constitution protected wealthy slavers, awarding them extra votes so they could insure control in their home states.

Throughout our history, the richest among us have used their wealth to secure favorable laws. The full extent of that influence is obvious in hindsight, even if at the time other motivations may have seemed important. Laws that restricted voting may have looked like ways to enforce racial prejudice, but they also applied to poor whites as well. Poll taxes, property requirements and other requirements were designed to insure that undesirables couldn’t vote.

Turning to the question of coordination among the oligarchs, how can they work together when there are so many of them. The answer is that all of these hyper-rich people share three important interests:

1. Protecting and preserving wealth
2. Insuring the unrestricted use of wealth
3. Acquiring more wealth.

They don’t have to conspire to protect their interests. They just have to shut up and let a few of them manage the specifics. As an example, consider the Estate Tax. Its function is partly to generate revenue, but its social role is to break up large fortunes. The Walton heirs, a group which has done nothing to deserve great wealth besides belonging to the lucky sperm club, provides leadership for the rest of the oligarchy on this issue. They spend vast sums of money to insure that their children do not suffer the indignity of living on less than billions and billions of dollars of inherited money. You can count the members of the oligarchy who oppose the Walton heirs on this issue, and they do not oppose changes with the kinds of money and influence that the Walton heirs bring, only by cheap talk.

The oligarchs have armies of professionals to influence economic policy; Winters calls them the Wealth Defense Industry. These people see themselves as independent professionals, but they need patronage to maintain their positions, and they get it by providing research and advocacy for the policies and facts that support the views of their controllers. Just watch those supposedly independent lawyers espouse laughable positions in courts, and then watch those indefensible positions win in supposedly independent courts. The same is true of economists and accountants and pretty much any profession you can name.

Winters and Page have some thoughts on the makeup of the oligarchy in the US, but their attempts rely on simple measures like income and wealth alone, and are not completely convincing. Part of the problem is that it is difficult to analyze the patterns of influence with a few raw numbers and simple measures of concentration of wealth and income. There is no obvious way to measure the power of working through corporations, foundations, think tanks, and even universities, which bring a deep range of pressures to bear on government officials. But even the raw numbers show that the power and influence of the rich is enormous, and much greater than any other segment of the population.

It’s only recently that the Oligarchy has lost interest in the bargain about following the rules. Entire industries are off limits for prosecution. Rules are randomly changed to favor the interests of the rich. And worst of all, democracy itself isn’t working. We used to operate under some general form of majority rule. That is not the case in either house. In the House, under the Hastert Rule, the Speaker, John Boehner, will not present a bill that doesn’t have the support of a majority of his party. That means that a minority of the House can prevent any bill from being heard. That minority comes from small states in the most conservative parts of the country.

The Senate operates under rules that allow a single Senator to stop a bill in its tracks. A minority can prevent discussion of any bill. That’s bad enough, but the same rule applies to appointment of judges and the officials in policy positions. These require the advice and consent of the Senate, but again, a minority can prevent consideration of even routine appointments for any reason or for no reason. That means that we do not have judges in many courts, and that the President cannot govern with the people he thinks best.

These matters are largely the fault of the Republicans, who are the party of the rich, the oligarchs. But at least in the Senate, the Democrats could change these rules. They refused to do so in the face of the bad faith of the Republicans. It’s at least as much the fault of Harry Reid as it is the fault of the party of the rich.

The primary impact of this leverage in the hands of the minority is on economic issues. The oligarchy is just as divided as the rest of the population on social issues, like immigration, LGBT rights, women’s issues and similar non-financial matters. It turns out that, for example, some of the oligarchs have family or friends or are themselves LGBT. Their interests in wars and other kinds of issues are also divided. Because of that, democracy could theoretically work on those issues. It’s only those economic issues where the rich are on the same team, and they always win those battles.

And that’s exactly how things are working out. On matters of direct interest to the oligarchy, they win. You can have your silly laws about marriage or abortion as long as they get their way on money. It’s a lousy bargain, and it doesn’t have to be that way.

Cross-posted and slightly revised from Naked Capitalism.

S&P Suit Shows DOJ Knows about Wall Street Corruption

1:43 pm in Uncategorized by masaccio

Lanny Breuer on Frontline defending the Obama Get Out of Jail Free Card for banksters

Despite the best efforts of Lanny Breuer to hide it, the complaint filed against Standard and Poor’s by Los Angeles US Attorney André Birotte, Jr. proves that the Department of Justice is fully aware of the corruption on Wall Street in the run-up to the Great Crash. The alleged facts point directly at the issuers of real estate mortgage-backed securities and collateralized debt obligations as the leading cause of the losses of the victims of S&P’s alleged frauds.

In a nutshell, the issuers, a term which deal underwriters, played a major role in creating the software and techniques used to rate RMBSs and CDOs. They used that role to delay and water down changes to the ratings systems. They played the ratings agencies against each other, and they got much higher ratings than were justified by the mortgage loans that underlay the securities. The issuers had mountains of these bad loans, and were desperate to get them off their baoks to protect their balance sheets. Those issuers include Too Big To Fail Banks, and some others as well.

The complaint explains the role played by issuers in developing the RMBS ratings systems at S&P, beginning at ¶ 123. In April 2004 S&P executives met to discuss changes to the process for creating and implementing changes to its ratings criteria. The new policy

… required consideration of “market insight” and “rating implications” and the polling of both “3 to 5 investors in the product” and “and appropriate number of issuers and investment bankers for a full 360-market perspective.”

¶ 125. That policy was implemented on July 1, 2004. The complaint says that issuer feedback led S&P to limit, adjust and delay updates to ratings criteria in order to preserve profits and market share. I described this in more detail here. The impact was dramatic. One internal S&P document says that “Competition among ratings agencies has helped drive down support levels in deals”, meaning that RMBS securities became more risky. ¶ 131.

S&P also invited input from issuers into its CDO ratings process. The discussion begins at ¶ 158. In response to one group of changes, Bear Stearns allegedly said Bear Stearns would quit using S&P. The changes were not implemented. Issuer input resulted in weakened ratings criteria and delays in implementation in this and other cases^.

Issuers were trying to get that garbage off their books. In 2006, it was becoming clear to S&P that RMBSs and CDOs were not performing as predicted by their ratings. Line-level personnel at S&P wanted to change a policy that permitted analysts to rate CDOs based in part on the initial ratings of RMBS tranches included in the CDO, even when S&P knew downgrades were likely. ¶ 207. S&P executives discussed the actions of issuers:

Issuers were shtting down and liquidating their warehouses i.e., stores of RMBS temporarily held by issuers as they assembled assets for future CDOs), in part to enable the issuers to avoid being required to mark their positions to market — and being stuck with collateral that had suffered losses.

¶ 233(b). What this means is that issuers were taking advantage of the lag time they actively created in adjusting ratings criteria to shovel more of their garbage off their books and onto actively misled investors.

Who were these issuers? The complaint doesn’t name any specific issuers, but it names a large number of securities. Here are some names:

Gemstone CDO VII: $1.1 billion, sold by Deutsche Bank, relationship of managers unclear; litigation pending; March 2007.

Sorin CDO VI: $550 million, Bear Stearns (now owned by JPMorgan), March 2007

Cairn Mezzanine ABS CDO III Limited: $1.78 billion, RBS Greenwich Capital Markets (the securities trading arm of Royal Bank of Scotland), March 2007.

Stack 2007-1: $1.5 billion, Citigroup, April 2007

Octonion I CDO: $1 billion, Citigroup, April 2007

Corona Borealis CDO Ltd.: $1.5 billion, underwritten by Lehman Brothers, other relationships unclear, April 2007.

Vertical Capital LLC, distributed by UBS: Vertical ABS-CDO 2007-1, $1.5 billion April 2007.

And these are just some of the issues rated or for which final ratings were issued. The complaint says S&P rated more than $135 billion in securities from March to June 2007, long after it was obvious that the housing market had collapsed.

The Department of Justice knows this, but it refuses to indict anyone. This complaint makes it clear that it wasn’t just an accident or a matter of greed, as the President and his henchmen claim. With the departure of Tim Geithner and Lanny Breuer, the most offensive proponents of the get out of jail free card, there is an opening for change.

We have this Progressive Caucus in the legislature. Why haven’t some of them taken on the task of learning about this stuff and asking out loud why there are no indictments? Once you know the Obama Administration is making crap up, it’s easy to get past their false explanations. This is one area of bipartisan agreement: every single American hates these cheats.
* The complaint doesn’t say why, so it may or may not have been requested by issuers; but one change S&P made was to change to zero the correlation assumption “…between ‘a CDO of ABS asset” and ‘an RMBS asset in a CDO/ABS transaction.” Correlation in this sense refers to the statistical relation between the failure of two assets: if one fails, what is the probability that the other will. Readers may recall that one of the tools that made RMBSs seem plausible was the Gaussian Copula, which theoretically is a way to measuring the likelihood of correlation of defaults in a large group of mortgage loans. Intuitively, if the portfolio of loans is spread geographically and by other criteria of separation, there should be low likelihood that if a loan in Boston fails, so will a loan in Las Vegas. The model had a number of weaknesses.

There is a close relationship between two tranches of the same RMBS. If one fails, it raises the likelihood that another will fail. Calling it zero removes that relationship, and gives the CDO a higher rating than it should have.
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Obama’s Second Inaugural Address

4:42 pm in Uncategorized by masaccio

Mitch McConnell

I watched the inauguration on CBS, and didn’t turn it off before I was exposed to the sophomoric punditry we get from both old and young on national TV. One of the talking heads informed us that the speech called for working together, which in mediaspeak means doing what Republicans want, and the rest of the comments reinforced that view. They had the text in advance, but they don’t get it; it didn’t fit their idiotic narrative. Now that we have it, let’s take a closer look.

I see three related themes. First, there is a reference to the Declaration of Independence, “life, liberty and the pursuit of happiness”. This theme starts with “Through blood drawn by lash and blood drawn by sword, we learned that no union founded on the principles of liberty and equality could survive half-slave and half-free. “ This is a reference to Lincoln’s Second Inaugural Address:

Fondly do we hope, fervently do we pray, that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue until all the wealth piled by the bondsman’s two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said “the judgments of the Lord are true and righteous altogether.”

Obama makes this stick by talking about the struggles represented by “Seneca Falls, Selma, and Stonewall”. Those struggles are brought forward to today, and he adds to them fair treatment of all of our immigrants. This motif is reinforced by those participating in the ceremony, people from the communities who made up the winning coalition. Obama makes it clear that he knows who elected him and what they want, at least in the social sphere.

Lincoln’s Second Inaugural Address is best known for this:

With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation’s wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.

I think we can assume that Obama knows this, and intended to say that he recognizes that the minority who loathe these changes do not lose their personal dignity, but that they have to change. Peterr made this point last Saturday, and obviously Obama has read and understood Lincoln’s powerful speech.

The second theme is the statement that the election was a defeat for the Republicans who demand that the rich be given a special place in the nation, that they are entitled to run things.

The patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few or the rule of a mob.

He says that the privileged few are the biggest beneficiaries of the collective efforts of the nation.

No single person can train all the math and science teachers we’ll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together, as one nation, and one people.

… For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it.

This is a beautiful restatement of Elizabeth Warren’s forceful statement that “nobody got rich on their own”.

The third theme is that the election was a massive defeat for every last one of the conservative principles espoused by loser Mitt Romney, and Obama knows it. First, he throws the Republican campaign themes back in their faces. First there is the Warren reference, which denies the premise of the Republican Convention. Then there is this:

The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great.

This is a flat denial of the Republican makers and takers meme.

Second, there is no call for bipartisanship. Instead, there is as close to a demand for change in the losing party as we could hope for in a public speech:

Progress does not compel us to settle centuries-long debates about the role of government for all time – but it does require us to act in our time.

For now decisions are upon us, and we cannot afford delay. We cannot mistake absolutism for principle, or substitute spectacle for politics, or treat name-calling as reasoned debate. We must act, we must act knowing that our work will be imperfect.

Obama already has begun to act in this vein, as we saw on taxes. I want more. I hope he makes McConnell get that lemon-sucking look every single day as he realizes he failed in his mission to ruin this President. This speech is a hopeful first step on the road to change. Read the rest of this entry →

Money and #MintTheCoin

11:29 am in Uncategorized by masaccio

Mint the Coin has drawn a whole lot of fevered discussion, but Joe Wiesenthal (@theStalwart) has perhaps the best take: the project opens the door to a real discussion of money, its origins and its purposes. The idea of just minting a coin with a huge designated value does sound strange to those of us whose economics came out of Paul Samuelson’s textbook. Here’s a possible explanation* for the discomfort. And if you think it sounds strange, just think how it sounds to the Ron Pauls of the world.

Australian Model for Trillion Dollar Coin

In my economics class all those years ago, I was taught that money originated in barter societies. This view came from Adam Smith in Wealth of Nations. David Graeber* says that in Smith’s world, which sounds like an American Indian tribe, money arises from barter. One guy makes bows and arrows, another tents. Some use the bows and arrows to hunt down game. In Smith’s world, the bow guy trades for meat and tents, the tent guy trades for meat and bows and arrows, and hunters trade for tents and bows and arrows. Obviously not everyone needs a tent on the same schedule as bows and arrows, so they create money. It’s a great way to solve the complex problems created by barter.

Graeber points out that this bizarre society assumes that women aren’t taking part in any of these transactions, which is absurd, because most likely the clothes and probably the tents are made by the women. Smith might not have known it, but at the time he was writing,

… Lewis Henry Morgan’s descriptions of the Six Nations of the Iroquois, among others, were widely published — and they made clear that the main economic institution among the Iroquois nations were longhouses where most goods were stockpiled and then allocated by women’s councils, and no one ever traded arrowheads for slabs of meat. Economists simply ignored this information. Stanley Jevons, for example, who in 1871 wrote what has come to be considered the classic book on the origins of money, took his examples straight from Smith, with Indians swapping venison for elk and beaver hides, and made no use of actual descriptions of Indian life that made it clear that Smith had simply made this up.

Debt, p. 29, footnote omitted. Smith’s view is that people are driven by a truck and barter mentality.

What, he begins, is the basis of economic life, properly speaking? It is “a certain propensity in human nature . . . the propensity to truck, barter, and exchange one thing for another. ” Animals don’t do this. “Nobody,” Smith observes, “ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. ” But humans, if left to their own devices, will inevitably begin swapping and comparing things. This is just what humans do. Even logic and conversation are really just forms of trading, and as in all things, humans will always try to seek their own best advantage, to seek the greatest profit they can from the exchange.

Debt, p. 25. If you stop to think about it, this is laughably simple-minded view of humans. Graeber points out that people engage in all kinds of transactions outside of simple truck and barter, ranging from acquiring wives to temple contributions. In fact, no one has ever seen or reported on a society based on truck and barter, and no one has ever seen a society in which money arose to simplify barter.

Graeber explains the relevance of these points. He says Adam Smith had an agenda. He wanted to set up economics as a separate area of study, amenable to scientific inquiry and theorizing:

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