Robert Kuttner2009-11-21T17:26:33-05:00Robert Kuttnerhttp://www.huffingtonpost.com/author/index.php?author=robert-kuttnerCopyright 2008, HuffingtonPost.com, Inc.HuffingtonPost Blogger Feed for Robert KuttnerGood old fashioned elbow grease.A Wake Up Call on Jobstag:www.huffingtonpost.com,2009:/theblog//3.3585822009-11-15T22:30:24-05:002009-11-16T18:45:11-05:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
This spells political catastrophe for Democrats in the 2010 mid-term election, as foreshadowed by the recent losses in the New Jersey and Virginia governors' races. But Obama's top economic advisers, such as Larry Summers, don't seem to get it. They continue to resist the idea of a second stimulus package.
"I think we got the Recovery Act right," Summers recently told the Washington Post's Alec MacGillis, adding, "We always recognized that America's problems were not created in a week or a month or a year and that they were not going to be solved quickly. We designed the Recovery Act to ramp up over time, through 2010, and to make sure that the investments we made were important for the country's future."
And other senior Obama officials such as White House Chief of Staff Rahm Emanuel and Office of Management and Budget Chief Peter Orszag are more concerned with cutting the deficit than spending more money to reduce joblessness. According to theWall Street Journal, Orszag is sympathetic to the idea of a commission to cap government spending and Emanuel is floating the idea of spending some of the money that has been repaid from TARP bank bailouts on deficit reduction.
But this is putting the cart before the horse. We need larger deficits now, in order to get a real recovery going, so that a healthy economy will allow us to pay down public debt later. Specifically, we need to focus on three big things:
State and Local Fiscal Relief. You often hear that outlays on public infrastructure are not a good source of stimulus because they take too long to plan. But emergency revenue sharing to states and localities takes effect almost instantly because it prevents cuts in existing programs and layoffs of existing workers. Today, states and localities are not only cutting back outlays because their constitutions require balanced budgets; they are raising taxes, usually regressive taxes. According to the Center on Budget and Policy Priorities, the three year state fiscal gap 2010-2012, will be at least $470 billion. So more than half of the federal stimulus is undermined by state and local belt tightening.
Accelerated Spending on Public Works. The Roosevelt administration, in an era before computers, got a lot of public works spending going in less than a year. There are massive unmet needs in public infrastructure. The Obama administration needs a short term and a long term strategy. Projects such as school repair and expansion, which can get underway in a few months, should get fast-tracked funding commitments right away. Longer term needs, such as smart electrical grids and modernization of water and sewer systems, expanded mass transit, and green energy, should be targeted for funding in 2011, so that plans can get on the drawing boards now.
Wage Subsidies. It is fashionable among American conservatives to make fun of the "rigidity" of European labor markets. But Germany today has a flexible and creative program of wage subsidies. The result is that the German unemployment rate has pealed at around 8 percent while ours has crashed through 10 percent. German companies suffering a downturn because of recession can get wage subsidies for their workers. Workers can also be put on reduced working time (kurzarbeit) and the German unemployment office will make up most of the loss in their take-home pay. According to the German government, a worker cut to 40 percent of his or her normal hours will end up with about 85 percent of usual take-home pay. Today, some 1.4 million German workers have been able to keep their jobs and most of their earnings thanks to the kurzarbeit plan. German firms keep their workers connected to the company, workers hold on to their jobs, and there are also incentives for workers on reduced time to use their spare hours to get additional training.
All told, we need additional federal spending in the range of at least $500 billion. But won't this increase the deficit? Yes it will, and that is the whole point. We are in a classic downward spiral of reduced household income and wealth, and a weakened financial sector. Many businesses face reduced consumer demand, compounded by a reluctance of banks to advance to any but the most blue chip borrowers.
In this climate, GDP growth can turn positive but companies are reluctant to hire. Full recovery will not resume spontaneously based on household or business demand, and the only source of increased demand to break the cycle is the government.
One of the most widespread and mistaken assumptions is that this bleak future is just baked into the cake. Because of the legacy of the financial collapse, and the limits of deficit spending, supposedly, we are just stuck with it. You hear that in testimony from Federal Reserve Chairman Bernanke, and it is repeated mindlessly by the media.
This fatalism is just plain wrong, and history's great counter-example is World War II. In 1939, unemployment was stuck around 16 percent. GDP growth after 1933 was solid -- 6 to 10 percent a year with the exception of 1937 -- but the wounded economy was just not generating net jobs. Many expert commentators of that era concluded that there was something about the maturity of capitalism, or the replacement of human workers by machines, that consigned the economy to a chronic structurally high, rate of unemployment.
Then World War II broke out. The US government borrowed huge sums to recapitalize US industry and re-employ and retrain US worker in war production, to employ 12 million men and women in the armed forces, and to invest massively in science and technology to develop advanced weapons and substitutes for materials in short supply. The unemployment rate dropped to 2 percent by 1943. Deficits were enormous, as high as 29 percent of GDP in 1942 (this year they will be about 10 percent) but the economy grew at 12 percent a year for the four years of the war, and the high unemployment of the 1930s never returned.
The deficit hawks of that era worried that the very large national debt would be a millstone around the economy. At the end of 1945, the debt was 122 percent of GDP, compared to about 55 percent today, but of course the end of 1945 was the beginning of the 25 year postwar boom -- the longest sustained boom in US history. GDP grew at 3.8 percent a year. The average deficit was about 1.1 percent, and with the economy growing much faster than the debt, the debt to GDP ratio declined to about 30 percent by the 1970s. So, we can grow our way out of debt -- but we need to get a real recovery going first.
If past Obama White House Summits are any guide, this one will invite a broad cross section of people: trade unionists and deficit hawks, investment bankers and labor economists, industrialists and Republicans; and everyone will speak of the importance of their pet project for job creation. That's not good enough. This is not a moment for another White House gab fest. It's a time for progressive leadership.
Robert Kuttner is co-editor of The American Prospect, a senior fellow at Demos, and author ofObama's Challenge.]]>The Audacity to Changetag:www.huffingtonpost.com,2009:/theblog//3.3501932009-11-08T19:44:56-05:002009-11-09T11:08:00-05:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
We need a radical break with Wall Street, and we got the politics of prop up and bail out -- with the result that most Americans don't think the program is benefiting them.
We needed President Obama to focus like a laser on economic recovery, and instead we got the distraction of a barely-worth-it health insurance patch. We needed the president to go to the country and win support for fundamental health reform, and instead we got Rahm Emanuel's deal with the drug and insurance industries that won House support by the barest of majorities and managed to frighten senior citizens -- the most satisfied customers of our one public option -- Medicare.
We needed a recovery program that held down unemployment, and instead we got a stimulus that even the Obama team considered too small at the time of its enactment, according to the reporting of The New Yorker's Ryan Lizza.
And now we are on the verge of Barack Obama's very own Vietnam, in an escalating Afghanistan entanglement.
The 2009 off-year elections were a repudiation of incumbents -- only now the incumbent party is the Democrats. Popular cynicism about government representing the interests of insiders and economic elites is even more extreme now than in November 2008, when the desire for drastic change thrust Obama into the White House. If present economic trends continue, the Democrats could lose control of the House in 2010, setting up a repeat of Bill Clinton's period of "triangulation," but with an even more lunatic-fringe obstructionist Republican Party.
So, can Barack Obama recoup, and can he recoup in time?
If you look at what most historians regard as Kennedy's finest hour, his leadership of the Cuban missile crisis of October 1962, you appreciate that Kennedy above all had to face down most of his own advisers. Most wanted a military confrontation with the Soviets. But the brothers Kennedy found an alternative to either war or surrender.
Obama, like Kennedy, needs to overcome the dubious counsel of his own advisers, this time both economic and military. With unemployment still rising to levels the administration did not anticipate, Messrs Summers and company are still opposed to a second stimulus, and the White House is mainly concerned with appeasing the budget hawks.
The president needs to listen to other voices, including his own. He needs to go to the country with a much stronger jobs program, to show people that his administration is on their side. He could take the TARP money that has been repaid by the banks and put it directly into mortgage foreclosure relief, as well as insisting that sub-prime bondholders take the same kind of write-down as auto-company bondholders. He could ask Congress for additional fiscal relief to the states, whose budget collapse is still worsening, undercutting the existing federal stimulus. Deficit reduction can come once the economy is back on track.
On Afghanistan, instead of the seemingly inevitable troop escalation that will please nobody and fail to alter events, he could pursue a policy of pressing the Karzai regime harder for reforms while helping Karzai keep the Taliban from taking control of Kabul and northern provinces -- and using a small troop presence of 20,000 or less to keep al Qaeda off balance. He could firmly reject getting dragged piecemeal into a war that will only be a quagmire. The Republicans would rattle sabers but most Americans would cheer.
Some of what Obama has faced was beyond his control. Nobody said digging out from the financial catastrophe would be easy, or that fashioning a viable policy for Afghanistan would be a cakewalk. Taming a Democratic majority that included Blue Dogs obsessed with fiscal balance and New Dems in bed with Wall Street was not exactly child's play either. But events did not require him to appoint an economic team headed by Larry Summers and Tim Geithner, or to reappoint Ben Bernanke as chairman of the Fed, or Rahm Emanuel as his chief of staff, or to favor the escalation faction in his Afghanistan advisers. Events did not require him to play an inside game with powerful industries instead of taking a case for radical reform directly to the people and offering a Rooseveltian program too popular to oppose.
From the day he declared for the presidency -- indeed, from the day he declared for the Illinois state senate -- Obama has displayed an audacity, a decency, an idealism, and an eloquence that gave us hope that here was a great president. But as chief executive, he has seemed buttoned up and damped down while a great crisis threatens to envelop the country and his presidency. He had the audacity to run and to win. Now, will he have the audacity to learn and to lead?
Robert Kuttner is co-editor ofThe American Prospectand a senior fellow at Demos. He is author of Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency.]]>How to Abort the Recoverytag:www.huffingtonpost.com,2009:/theblog//3.3415402009-11-01T15:21:43-05:002009-11-02T22:18:11-05:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
The latest ploy to promote such a commission is to use the upcoming vote on increasing the national debt, scheduled for late November. Democratic deficit hawks such as Sen. Kent Conrad of North Dakota are working with Republicans such as Judd Gregg of New Hampshire, to condition an increase in the debt on creation of a panel. They have some allies in the White House such as Office of Management and Budget Director Peter Orszag, who has intermittently signaled support for such a plan. The Senate Budget Committee will be holding hearings on this idea in mid-November, according to The New York Times.
The whole approach is bad economics and bad politics on several grounds. First, there is no evidence for the premise that financial markets are anxious about the rising debt. As Dean Baker observes, they keep buying the Treasury's long-term bonds at a low 3.5 percent interest rate. If there were worry that the increased debt would spike inflation, investors would be demanding higher interest rates.
Secondly, it is not "entitlements" that have caused the big increase in the deficit and the debt. The cause is plummeting tax collections as a consequence of the recession. Social Security will be surplus for another generation, and both the House and Senate versions of the health reform bill do not add to the deficit, but help cut costs.
Third, obsessing about debts and deficits when the economy is still losing jobs has it exactly backwards. We probably need bigger deficits for a year or two, to propel a strong recovery. Higher growth will then bring the debt back down to tolerable scale. In World War II, deficits averaged about 25 percent a year (compared to under 10% this year.) But all of that war spending rebuilt the economy and powered three decades of economic boom and the big wartime debt was soon paid off.
Finally, the idea that such a commission could be "above politics" is a deception. The politics--very conservative politics--would be baked into the cake. Republicans on it would resist higher taxes except perhaps for regressive ones such a national sales tax or value added tax. The skids would be greased for deep cuts in Social Security, Medicare, and Medicaid--even before health reform took effect. This would gut all the promises candidate Barack Obama made for a more just America.
Instead of being Mr. Consensus, and trying to please both sides, President Obama needs to weigh in strongly against the idea of a commission before it gains further traction. The House Democratic leadership, mercifully, thinks the commission is exactly the wrong medicine, and has told the White House so.
I spoke with House Speaker Nancy Pelosi on Friday. She favors a plan to increase spending as necessary in the short run to fight the recession, and then significant deficit-reduction once recovery comes--but not via a commission. "Let's have a public conversation in the people's House and in the Senate. This is a very important debate, and is shouldn't be done behind closed doors," she told me, adding: "My responsibility is to protect Social Security and Medicare. If some of the people at the table are opposed to protecting Social Security and Medicare, I'd have big problems. Congress passed these programs in the 1930s, and the 1960s. Why should we give someone else the power to decide their future?"
Amen.
The press for a debt-reduction commission, promoted by scare-mongers such as the Peter G. Peterson Foundation, is really an attack on social insurance masquerading as principled concern for the public fisc. It wasn't entitlements that caused the crash--it was financial high rollers who pushed for deregulation and then exploited it, such as Peterson and his friends.
If you can believe it, the latest gimmick of the Peterson Foundation is an invitation to compose haiku on the alleged fiscal crisis. I kid you not. Here's what the foundation recently sent its supporters:
Hello,
As one of our most active supporters, you've proven your commitment to the Peter G. Peterson Foundation's work time and time again. We're grateful for all you've done -- and we're excited to offer you a sneak peek of our newest initiative, Fiscal Haiku.
The site doesn't officially launch for a few more days, but we're inviting you to take a look before the rest of the country. Below is a copy of the message we'll be sending out for Fiscal Haiku's formal debut -- please visit www.fiscalhaiku.com and start submitting your odes to the economy!
Thanks,
The Peter G. Peterson Foundation
Okay, Pete. Here is my own entry:
Spreading fiscal fear,
ideology parades
as principle. Shame!
]]>The Blair Projecttag:www.huffingtonpost.com,2009:/theblog//3.3253672009-10-18T22:12:00-04:002009-10-19T14:01:25-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
The new constitution for the European Union, unlike its current set of basic laws, provides for a strong president. After much delay, the proposed constitution is now likely to take effect because the Irish recently reversed their "no" vote. (In the current crisis, aid from the EU is helping to keep their economy from going the way of Iceland.) The last holdout, Czech President Vaclav Klaus, who doesn't much like the treaty, said Saturday that he would not stand in its way.
Blair is in need of a high-profile job, and President of the EU suits his ambition. But there seems to be remarkable forgiveness for the fact that Blair helped launch the race to the bottom in financial regulation that helped produce the financial collapse. Under Blair, the British Labour Party decided that the best way to fight Thatcherism was to go it one better and cut a deal with the City of London, Britain's Wall Street. Britain would become the global capital of unregulated hedge funds, private equity, and casino products like credit default swaps. In the U.K., this was known as "light-touch regulation." The bankers, in turn, would give New Labour their financial support.
The unit of AIG that helped take down the world economy was based in London, where it could enjoy even more feeble supervision than in George Bush's United States. Early in the present decade, whenever Americans began warning that finance was becoming dangerously speculative, defenders of business as usual solemnly warned that if we began regulating the affair, the show would move offshore to London, finance's new wild west.
Blair's notion was that it didn't much matter if Britain was losing its manufacturing economy. The City of London, as the center of the world's deregulated money market, would carry Britain. Well, it carried Britain to collapse. The aftermath of Britain's bubble economy today is a bigger disaster even than its American counterpart.
Blair also helped wreck what was once a proud left-of-center party. Progressives have been systematically purged from New Labour. Under Blair's successor, the dour Gordon Brown, Labour's popularity is now at a postwar low, setting the stage for a Conservative comeback despite the fact that the Tories offer nothing more in the way of solutions than do the Republicans in the United States.
Much the same thing happened in Germany a few weeks ago, where a Social Democratic Party (SPD), which had abandoned social democracy a decade ago in favor of neo-liberalism, turned in its worst electoral performance in six decades. If you wonder why left parties are not making any gains from the worst crisis of capitalism since the Great Depression, you need only look to the British Labour Party and the German SPD. They have nothing to offer.
Why, then, is Blair likely to be the first President of Europe? Because he is just what Europe's ruling financial elite wants -- nominally a man of the center-left who can be trusted to continue business as usual.
There are alternatives to Blair, but they are long shots. One is Joschka Fishcher, the well-respected leader of Germany's Greens and Germany's former foreign minister in the late SPD-Green coalition government. Another is Poul Nyrup Rasmussen, the former Danish Social Democratic prime minister who is an actual social democrat as well as Europe's leading advocate of real financial reform.
Politically, however, the failure of nominally center-left parties that emulated the center right has undercut the appeal of genuine progressives. The more likely scenario that could spare us Blair is that leaders of several of Europe's smaller member nations are not quite sure that they want such a high-profile figure, and a compromise candidate could be a functionary or a less visible leader from a small country.
Despite the fact that modern Europe is generally friendlier to a managed form of capitalism than the US, the Blair project reminds us that real reform is not likely to originate in Europe any time soon. That puts even more pressure on Barack Obama to get financial reform right.
]]>It's the Unemployment, Stupidtag:www.huffingtonpost.com,2009:/theblog//3.3092052009-10-04T22:14:34-04:002009-10-05T15:06:22-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
The most recent employment numbers were bad enough on their face -- 263,000 job losses in September, and a measured increase in payroll employment to 9.8 percent. But the real numbers are much worse. The nominal rate conceals the fact that the labor force is 615,000 workers smaller than it was a year ago, even though the working age population continues to grow. People who can't find jobs and quit looking are no longer counted as part of the labor force. If normal labor force growth had continued, the unemployment rate would be close to 12 percent. See the analysis of the numbers by the good people at the >Economic Policy Institute and the estimable Dean Baker. The administration's people know this reality, and they are aware of the political risks. So what are they doing? Precious little.
I had a conversation with a senior administration economic official last week and I asked him to suspend disbelief and consider a large increase in public spending to create more jobs. What would he spend the money on? We discussed the pro's and con's of emergency fiscal aid to the states versus a tax credit for job creation in the private sector, subsidized job-sharing, and direct public works employment. But it was clear that the administration considers a Stimulus II a non-starter. The view is shared by Fed Chairman Ben Bernanke, who testified last week that there was not much we could do about rising unemployment except wait it out.
This is economically deplorable and politically self-defeating. When the administration considered its $787 billion stimulus bill last winter, its projection was that unemployment would peak at 8.9 percent. It's clear that joblessness is going to be a lot worse, and nobody has a convincing story about where the new jobs are going to come from once economic growth turns positive. Time magazine recently ran a cover story suggesting that we might just have to get used to a new reality of persistently high joblessness, and compensate with other policies such as more heroic job training (but for non-existent jobs?)
But that view is malarkey. Economists were making the same argument in 1938 and 1939. The economy, supposedly, had reached a level of maturity and technological sophistication that there just weren't enough jobs. Unemployment was just stuck around 15 percent. Then along came World War II. The federal deficit rose to 29 percent of GDP (this year it will be about 11 percent) and unemployment disappeared.
The president should be making the case for increased deficit spending on job-creation in 2010 and 2011, followed by a program of deficit reduction financed by progressive taxation. Public opinion on these issues is not static, and in fact a recent poll done by Hart Research Associates for EPI shows that the public cares a lot more about joblessness than it does about the deficit. 53 percent of respondents said lack of jobs was the most important issue, but only 27 percent said the deficit was. Fully 83 percent sand that unemployment was a big problem, and just two percent said it was not a problem. Presidential leadership could make a huge difference in translating these attitudes into action.
The Blue Dog Democrats in Congress are opposed to larger deficits, but many of them would support a ten-year program of more public outlay now coupled with deficit reduction after recovery comes. Unfortunately, a lot of Washington's centrist savants are skipping directly to the deficit reduction, overlooking the fact that we are still a long way from recovery. As EPI was holding a conference releasing the results of its research, the more moderate Center for American Progress (CAP) was holding a big event on alarm about the national debt. CAP President John Podesta, former director of the Obama transition team, is an enthusiast of value-added taxes as deficit-reduction medicine.
My own view is that VAT's are highly regressive taxes on consumption. I could go along with them if they were part of a deal that included progressive taxes such as a tax on financial transactions and if some of the money went to expanding public services rather than just reducing deficits. But this is only half of the conversation, and the less urgent half. Unless we get a bigger recovery going, and get unemployment down well before the 2010 mid-term elections, all this center-left policy wonkery will be beside the point because the Republicans will be running the country.
]]>Listening to Paul Volckertag:www.huffingtonpost.com,2009:/theblog//3.3013002009-09-27T22:25:38-04:002009-09-28T12:44:36-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
Paul Volcker was an early backer of Barack Obama. He counseled Obama on one of the best speeches of his campaign, his March 27, 2008 address on financial reform at Cooper Union, and sat in the front row as Obama delivered it. This was the speech where Obama declared that no corner of the financial system should be unregulated. And when Obama clinched the Democratic nomination, Volcker was introduced as a senior advisor.
But when it came time to allocate the jobs, the people with the real power managed to freeze out the grand old man of finance. Volcker, who had been touted as a possible treasury secretary, ended up chairing an advisory panel with little influence, the President's Economic Recovery Advisory Board, and for the most part his phone doesn't ring. The board, appointed last year, did not even have its first meeting until May 20.
Yet Volcker has continued to speak out, and he is worth listening to, even if the White House is ignoring him. In his recent testimony before the House Financial Services Committee, Volcker made it clear that he had serious reservations about the recent administration and Federal Reserve policy of propping up financial institutions deemed "too big to fail." Volcker said that the actions amounted to an unintended and unanticipated extension of the official "safety net," an arrangement designed decades ago to protect the stability of the commercial banking system. The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted. Ultimately, the possibility of further crises -- even greater crises -- will increase.
Volcker explicitly challenged the very centerpiece of the administration's proposed reform program, the idea of focusing on "systemically significant institutions," which presumably would come in for additional supervision, but would be rescued if they got into trouble. Volcker said:
The approach proposed by the Treasury is to designate in advance financial institutions "whose size, leverage, and interconnection could pose a threat to financial stability if it failed." Those institutions, bank or non-bank, connected to a commercial firm or not, would be subject to particularly strict and conservative prudential supervision and regulation. The Federal Reserve would be designated as consolidated supervisor. The precise criteria for designation as "systemically important" have not, so far as I know, been set out. However, the clear implication of such designation, whether officially acknowledged or not, will be that such institutions, in whole or in part, will be sheltered by access to a Federal safety net in time of crisis; they will be broadly understood to be "too big to fail."
Think of the practical difficulties of such designation. Can we really anticipate which institutions will be systemically significant amid the uncertainties in future crises and the complex inter-relationships of markets? Was Long Term Capital Management, a hedge fund, systemically significant in 1998? Was Bear Stearns, but not Lehman? How about General Electric's huge financial affiliate, or the large affiliates of other substantial commercial firms? What about foreign institutions operating in the United States?
And, without using the words, Volcker in effect called for a restoration of the core principles of the Glass-Steagall Act, separating commercial banking from investment banking and proprietary trading. He said:
As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets. Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. So should in my view a heavy volume of proprietary trading with its inherent risks.
Volcker made similar remarks in a speech in Los Angeles earlier this month. The point is that there is an entirely orthodox view of how to reform the financial system well to the left of the administration's. Similar criticisms have been made by progressives like Paul Krugman and Nobel Laureate Joseph Stiglitz, as well as relative conservatives such as former World Bank chief economist Simon Johnson. But it doesn't get much more orthodox than Paul Volcker.
As Congress deliberates the details of financial reform, several of the key elements of the Obama program fall short -- the idea that "systemic risk regulation" should just be bucked to the Federal Reserve; that immense financial conglomerates are perfectly fine as long as the Fed is keeping an eye on them -- the same Fed that totally missed the sub-prime disaster and that is owned by its member banks; the acceptance of the premise that customized derivative securities need not be traded on exchanges; the continuing toleration of the business models of behemoth financial conglomerates such as Goldman Sachs, which mix investment banking, hedge-fund speculation, proprietary trading for their own accounts, and commercial banking -- making them walking conflicts of interest.
Last week, there was a revealing skirmish on the House Financial Services Committee. The administration blueprint for reform, issued last June and currently being debated in several Congressional venues, includes a Consumer Financial Protection Agency (CFPA). In the draft sent to Congress, the proposed Agency had the authority to require that in addition to marketing other, more complex and risky retail products, banks and other institutions would be required to offer "plain vanilla" products. For example, a bank that marketed more lucrative and risky adjustable rate mortgages would also have to offer a traditional 30-year fixed rate mortgage. A similar "plain vanilla" requirement has been part of New York State banking law for three decades.
But when the White House endorsed the idea, the banking lobby went berserk. It targeted members of the Financial Services Committee, offering campaign contributions to friendly legislators and threatening to support the opponents of pro-consumer members. On September 22, Chairman Barney Frank sent his colleagues a letter declaring that he would oppose any "plain vanilla" language, adding that in his draft of the bill: "Financial institutions will not be required to offer plain vanilla products and services and CFPA will not have the authority to approve or change business plans."
Testifying the next day, Treasury Secretary Timothy Geithner, never an enthusiast of the proposed consumer agency, said Frank's changes were fine with him. But of course, the whole point of consumer regulation is to require banks to "change business plans" when those plans are built around insane products such as sub-prime loans or usurious credit cards. The bill is not even out of committee and the bankers' lobby is having its way.
If the American financial system needs anything, it needs a lot more plain vanilla -- fewer products of Byzantine complexity that serve no economic need other than the profit of their sponsors, less excessive risk, and more service by financial institutions to the real Main Street economy. We should be paying a lot more attention to plain vanilla type guys like Paul Volcker.
Robert Kuttner is co-editor ofThe American Prospectand a senior fellow at Demos. His best-selling book isObama's Challenge.
]]>A Virtuous Taxtag:www.huffingtonpost.com,2009:/theblog//3.2851762009-09-13T22:30:07-04:002009-11-13T05:12:01-05:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
There are many ways to damp down financial speculation, but a very effective strategy is to tax it. Given the huge costs of the clean-up (now being borne mainly by taxpayers) it would make a lot more sense to require financial markets to pay for their own bailout.
One very neat way of doing this is through a very small tax on all financial transactions. Ordinary retail sales are taxed, as are wages. But oddly enough, financial transactions are exempt from tax.
This idea was first proposed in modern form by the Nobel Laureate James Tobin in 1972, after the collapse of fixed exchange rates led to massive increase in currency speculation. Tobin proposed a small tax on short term currency trades to make extreme speculation less profitable.
Since them, short term speculation and the invention of exotic securities that lend themselves to speculation has become the dominant activity of Wall Street. So a Tobin-style tax on all financial transactions has three big things going for it.
First, a very small tax in all kinds of financial transactions, say one tenth of one percent, would not be felt by legitimate long-term investors. But in the case of traders who get in and out of exotic derivatives minute by minute, making huge numbers of quickie trades, it would add up to a lot of money and would cut into both their profits and their entire socially destructive business strategy. So a universal financial transaction tax would discourage purely speculative activities and encourage investing for the long term.
Second, such a tax could pull in hundreds of billions of dollars a year, at a time when large deficits are giving the political right (and center) an excuse to cut social spending, and no form of taxation is popular. But this tax would be the least unpopular. It would not just fall primarily on the very, very wealthy. It would fall on the least socially defensible part of Wall Street, the people who make their billions from speculative short term trades. And that raises the third benefit.
What's missing from the entire debate about financial reform is a progressive brand of populism. Regular people know that they got done in by excesses on Wall Street, and they see a Democratic administration shoveling trillions of dollars to the same Wall Street banks that caused the mess. No wonder people are confused about whether government is on their side. What is overdue is a little bit of populist retribution against the people who brought down the system -- and will bring it down again if the hegemony of the traders is not constrained.
Do we have a shot of injecting the case for a Tobin Tax into the debate? In the past few weeks, Adair Turner, the head of Britain's Financial Service Authority, cautiously expressed support for the general idea.
Peer Steinbrueck, Germany's finance minister, explicitly called for such a tax last week, as did the AFL-CIO. In an unguarded moment early in his career, even Larry Summers, President Obama's market-friendly chief economic adviser, embraced the idea, as throwing some salutary sand in the gears when financial markets "worked too well."
The Group of 20 meetings next week in Pittsburgh are not likely to produce very much in the way of real reform, because even after the disgrace of Wall Street, the usual suspects are still making policy in most nations. But a global campaign for a Tobin Tax should begin in earnest now. It could bear early fruit, as speculative excess continues and as government finds itself searching for defensible taxes.
Robert Kuttner is co-editor of The American Prospect, www.prospect.org, and a senior fellow at Demos, www.demos.org. His recent best-selling book isObama's Challenge.
]]>Hard Labortag:www.huffingtonpost.com,2009:/theblog//3.2784892009-09-06T17:35:59-04:002009-10-22T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
In August, the unemployment rate rose to 9.7 percent, and most forecasters think it will be in double digits before year end. In an ordinary recession, employment rebounds last because firms are reluctant to make new hires until they see a substantial pickup in demand -- and this recession is far from ordinary.
The depth of the true unemployment picture has been disguised by large numbers of workers who are on part-time furlough, who have taken pay or benefit cuts, or who are working full-time for part-time pay. The number of workers who had been working for six months or more rose to one unemployed worker in three, the Economic Policy Institute reports. So the economy is stuck in a vicious circle where weak consumer demand is inadequate to power a recovery, and government stimulus spending is not sufficient to make up the difference.
There are three parts to the woes of American workers -- falling wages, rising unemployment, and insecurity about the future. More robust policies could improve all three. For starters, we need a second stimulus bill. It could begin with emergency federal aid to state and local governments that are laying off workers and cutting services in a recession. We also need policies to create more jobs and raise wages for the long term.
Twenty five years ago, I was part of a debate on industrial policy, and I was on the losing side. Neither Democratic presidents nor Republican ones accepted the idea that it mattered whether the United States had world-class industries. After all, we were becoming a service economy, and services were just as good as products. Most economists ridiculed industrial policy on the ground that government was not competent to pick winners and that free markets would make the appropriate investment.
Well, a quarter century later, most of those services turned out to be financial services, and a lot of that sector turned out to be a bubble. The free market made one blunder after another. And ever since the financial collapse that began in the spring of 2007, government has been picking winners with taxpayer money, except that most of them are failing banks. A reading of American history reveals that the U.S. has had industrial policies all along, beginning with Alexander Hamilton's "Report on Manufactures." World War II, the Cold War, and government investment in biotech were one big industrial policy.
Go back and read books from the debate of the 1980s, like Barry Bluestone and Bennett Harrison's The Deindustrialization of America, or Steve Cohen and John Zysman's Manufacturing Matters, and they look prophetic. They lost the political argument, but they were right all along. Now, with the economy facing a prolonged stagnation, a second stimulus should not just be a shot in the arm to restore flagging demand in 2010. It should be a down-payment on serious investment in American manufacturing for a generation.
One piece of good news is that Ron Bloom, the longtime trade unionist and union-friendly investment banker who brought the rescue of GM and Chrysler to a speedy resolution, has been promoted by the Obama Administration to be a kind of manufacturing policy czar. Bloom will have his work cut out for him. For starters, he will be up against an iron consensus favoring "free trade," and an article of faith of the free-trade crowd is that there should be no efforts to promote domestic manufacturing, never mind that every modern industrial power from Brazil to Korea, Japan, and China does precisely that.
Good domestic manufacturing jobs would pay decent wages, but there is a lot more that the government needs to do, since most jobs will still be service sector jobs. As I write in a forthcoming special report of The American Prospect, government has immense unused leverage to hold government contractors to high labor standards. During World War II, the War Labor Board made sure that no employer got a war production contract unless it treated its workers decently. Henry Ford managed to hold out against unions throughout the labor organizing of the 1930s. It was the War Labor board that finally compelled him to settle with the United Auto Workers. Ford was the Wal-Mart of his day.
Later, in the 1960s, before there were the votes in Congress to pass the landmark civil rights acts, Presidents Kennedy and Johnson used the power of federal contracting to demand that any company bidding on a government contract have an affirmative plan to overcome the effects of past racial discrimination in hiring and promotion. This policy was the origin of affirmative action. If government can use its contracting power to promote equal employment for minority workers, then government can surely use that power to insist on decent wages for all workers.
Vice President Biden has made a good start with his Task Force on Middle Class Working Families. President Obama has issued some promising executive orders promoting project labor agreements and making it a bit harder for contractors to bust unions. But the task force is understaffed and does not represent a major administration initiative. To be serious, it needs to be a priority of the President, not just a project of the Vice President.
The Obama administration is on the defensive on health care in part because it is promoting an ambiguous and ultimately feeble health reform bill, but partly because health insurance has become a lightening rod for larger economic fears. Voters are not yet convinced that this president is on their side in the battle for economic security. Major steps to improve job opportunities and wages would be a good place to redeem the popular good wishes that accompanied President Obama as he took office.
Robert Kuttner is co-editor of The American Prospect, www.prospect.org, and a senior fellow at Demos, www.demos.org. His recent book is Obama's Challenge, www.obamaschallenge.com.]]>Killing Yourself with Kindnesstag:www.huffingtonpost.com,2009:/theblog//3.2606702009-08-16T13:10:16-04:002009-09-16T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
Ever since Obama's first efforts to reach out to Republicans, with his cabinet appointment of two Republicans, Gates at Defense and LaHood at Transportation, and his appeasement of Republican tax-cutting demands in the stimulus package, the Republican opposition has made it clear that no goodwill gesture, no effort to meet them halfway signals anything other than weakness. They are out to destroy his presidency, pure and simple. Nothing makes this clearer than the battle over health insurance reform.
Even Chuck Grassley, the rank (I mean ranking) Republican on the Senate Finance Committee and the great white hope of bipartisanship for his Democratic buddy Max Baucus, was giving aid and comfort to the Palin "death panel" nonsense. "In House bill there is counseling for end of life," said Grassley, "And from that standpoint you have every right to fear ... we should not have a government program that determines you're going to pull the plug on grandma." Maybe it's time to pull the plug on Grassley.
The White House Chief of Staff, Rahm Emanuel, is said to be a tough guy. And Obama's top political adviser, David Axelrod, is supposed to be some kind of tactical genius. What do these guys think they are getting by continuing to kiss up to the Republicans?
I don't buy the claim that making nice got them any more Republican votes for Sonia Sotomayor's confirmation. The handful of Republicans who supported her were motivated either by demographics of their state or by the fact that a few GOP senators are still willing to approve a highly qualified centrist nominee and didn't want to alienate women voters. Had Obama been playing hardball on other issues, it would not have fatally damaged Sotomayor. Today's op-ed piece "by" Barack Obama in the New York Times was the same old high-minded pabulum. It read as if it had been pureed several times by the speechwriting staff:
The long and vigorous debate about health care that's been taking place over the past few months is a good thing. It's what America's all about.
But let's make sure that we talk with one another, and not over one another. We are bound to disagree, but let's disagree over issues that are real, and not wild misrepresentations that bear no resemblance to anything that anyone has actually proposed. This is a complicated and critical issue, and it deserves a serious debate.
That's great above-politics stuff if you are modeling high school civics, not so great if the other side is going for the jugular -- and winning.
Clearly, the administration playbook is to stick to the high road and not take the argument to the other side. But the strategy isn't working. The approval ratings for both the president and for his health plan are falling. He isn't even inspiring his own strongest grass roots backers to turn out in numbers at support rallies.
Obama's own gut instincts seem to be a little better than those of his astonishingly risk-averse advisers. At his own town hall meeting in Portsmouth, New Hampshire August 11, Obama was quite eloquent and detailed on the foolishness of the "death panel" lies, and he also said this:
Every time we come close to passing health insurance reform, the special interests fight back with everything they've got. They use their influence. They use their political allies to scare and mislead the American people. They start running ads. This is what they always do.
We can't let them do it again. Not this time. Not now. (Applause.) Because for all the scare tactics out there, what is truly scary -- what is truly risky -- is if we do nothing. If we let this moment pass -- if we keep the system the way it is right now -- we will continue to see 14,000 Americans lose their health insurance every day. Your premiums will continue to skyrocket. They have gone up three times faster than your wages and they will keep on going up.
But, oddly, he didn't name the "special interests" (like the insurance and drug industry) because they are nominally part of his reform coalition. If anyone is killing somebody with kindness, it's the insurance industry backing Obama and slyly killing real reform.
Despite the lies, the real insecurity that people feel, and the shameless Republican opportunism, health reform will be a loser for Obama and the Democrats unless this president can shake off his delusion that bipartisanship works. So far, it works mainly to strengthen the far-right and weaken this president and what should be a reform moment.
]]>Is the Gloss Half Empty?tag:www.huffingtonpost.com,2009:/theblog//3.2550862009-08-09T17:26:44-04:002009-09-09T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
Broad credit was given to the $787 billion stimulus package approved at Obama's urging in February. Commentators generally calculated that without the stimulus, the job numbers would have been a lot worse. Some economists suggested that the unemployment rate might be spared double digits. Even the usually pessimistic Nouriel Roubini, who was an early Cassandra warning of the collapse, declared that the economy had turned a corner. The stock market continued its amazing rebound.
But before we break out the champagne and declare the recession over, let's put this all in perspective. First, the job numbers. The official unemployment rate dropped only because so many people have given up looking for work and dropped out of the measured labor force. But of course, they are just as unemployed -- in fact, more so, since the long-term unemployed have the hardest time finding work. The percentage of long-term unemployment is still the highest in seventy years; and in July, the average duration of unemployment continued its relentless increase.
What about the stimulus? The other day, I came upon a large sign in Lenox, Massachusetts in the Berkshires. It was on Route 183, which is undergoing road work, and the sign proudly declared, FDR style, "Project Funded by the American Recovery and Reinvestment Act." I pulled over to the side, cheered, and took a picture.
What surprised me, though, is that this is the first such sign I've seen after more than six months of stimulus (and it is in a very blue town, in the bluest of states.) I suspect the locals put the sign up. As I'm writing this, it's now Sunday and the town offices are closed, but I will inquire and report back in my next post.
But the paucity of such signs is a metaphor. The stimulus has put out, so far, about $100 billion in a more than 14 trillion dollar economy. Economists generally have credited the stimulus with adding between one and three percentage points to GDP growth, and saving or creating on the order of 500,000 to 700,000 jobs. That is nothing to scoff at; however, it needs to be kept in perspective.
As Floyd Norris recently reported in the New York Times, the economy has added virtually no net private sector jobs in a decade, an unprecedented record. The labor force is several million people larger than it was in 1999, but in that period the entire private sector has increased its employment by only 121,000 jobs out of 109 million.
So, while the stimulus kept things from being even worse, public outlay will need to do even heavier lifting before we get a real recovery. Compared with its pre-recession level, the economy now has a jobs gap of about 9.1 million jobs, according to EPI. Those include 6.7 million jobs lost since 2007, and 2.4 million jobs that would have been created and job-growth had followed its normal trend needed to absorb new workers and to keep the unemployment rate from rising. We are a far cry from even beginning this turnaround.
Also, as I write in a forthcoming column for the American Prospect, state and local governments continue to be in severe budget crisis, causing them to cut jobs and services and raise taxes in a recession, thereby sandbagging the recovery. All states except Vermont are constitutionally prohibited from running current deficits. As a consequence, they behave perversely when revenues fall (as they do in a recession.) All but two states (North Dakota and Montana) now face budget shortfalls, according to the Center on Budget and Policy Priorities. So while one level of government, the feds, is providing a net stimulus, other levels of government are adding to the economic undertow.
What's needed is Stimulus II. In addition to more jobs spending, it should include emergency revenue aid to the states (an idea as radical as Richard Nixon who first proposed general revenue sharing) as well as federalization of long term unemployment benefits.
Suppose Bernanke, Paulson, Geithner and company really got the financial rescue about right? And suppose the Obama team got the stimulus about right, we averted a depression, and things are already reverting to normal?
Don't count those chickens yet. What if Wall Street got too much of the aid and Main Street too little? What if mounting home foreclosures continue to sandbag household net worth? What if we are in for a health reform in name only, a financial reform that leaves the casino model of crony capitalism largely intact, and a jobs recovery that leaves working Americans even more insecure than they were before this financial collapse?
What if Obama had a chance to be Roosevelt, and settled for being Clinton?
]]>Faint Praisetag:www.huffingtonpost.com,2009:/theblog//3.2496352009-08-02T21:09:04-04:002009-09-02T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
Let's review the bidding -- first the substance, then the politics. America spends 15 percent of its GDP covering far less than the entire population, while other wealthy nations cover everyone, more effectively, for about nine percent. We under-insure tens of millions of others by leaving big loopholes in what's covered. More than half of Americans who file medical bankruptcy nominally have insurance.
Why is our system so massively inefficient? Because it is run by and for private insurers, aided and abetted by for-profit drug companies and hospitals. Even if we insure more people, as President Obama hopes to, a fragmented, profit-oriented system dominated by these interests simply cannot yield the most efficient use of health outlays.
By contrast, a comprehensive system with a national health budget naturally looks for the most efficient way to spend health dollars. That means much greater investment in prevention, and in the comprehensive use of proven treatment protocols for the easy stuff that makes a big difference in heading off more expensive treatments later on, such as childhood asthma, high blood pressure, and diabetes. It means a more sensible breakdown of primary care doctors and specialists. It means not saddling med school grads with hundreds of thousands of dollars of debt, which turns them into profit machines rather than healers.
Private health insurers cannot get us to this outcome because they maximize their profits by targeting the young and the healthy, and avoiding the sick, the old, and the risky. They invent preposterous concepts such as exclusion of people with "pre-existing conditions." Hendrik Hertzberg recently observed that we are all born with a pre-existing condition -- mortality. In theory, HMOs were supposed to increase prevention and collaboration. But they rapidly deteriorated into merely a system where large panels of doctors are approved providers if they accept the HMO's fee schedule, and physicians are under pressure to cut costs and see ever more patients in ever shorter appointments if they wish to maintain their incomes.
The "staff model" group practice -- where doctors are salaried and a medical team of generalists and specialists works in close collaboration -- is our closest equivalent of national health insurance, but it is being crowded out by the cherry-picking practices of the insurance industry. The exceptions invariably provide the best and most efficient care, such as the Cleveland Clinic and the Mayo Clinic.
The press commentary on the cause and cure of medical inflation has largely missed the point. The problem is not that "hospitals" and "doctors" in general make or charge too much money. The problem is feast coexisting with famine. The current system gives hospitals incentives to target the services that produce the most reimbursement at the least cost, such as complex cardiac interventions. So cardiology departments are gold-plated, while money-losing emergency rooms are threadbare. To make matters worse, specialty day-surgery hospitals, often owned by doctor-entrepreneurs, divert profitable patients from hard-pressed local general hospitals.
There is also a misallocation of resources according to medical specialty. As reimbursements are cut by insurers and by Medicare, primary care doctors are squeezed; likewise OB/GYNs, psychiatrists, and pediatricians. Meanwhile, some specialists such as oncologists (who are permitted to personally profit from the sale of cancer drugs), surgeons, dermatologists, and others, are still making out just fine. And standard practices and charges wildly vary by region.
The bottom line is that these structural problems cannot be fixed by what is likely to be approved by Congress as the Obama plan. Obama hopes that heavy reliance on new electronic record-keeping can somehow reduce medical inflation. But this is not where the problem (or the solution) lies -- because the plan builds on the existing insurance industry, with all of its inefficiencies. The candid Doug Elmendorf, director of the Congressional Budget Office, recently testified that the design of the Obama approach did nothing that would fundamentally change the pattern of medical cost inflation.
Putting the best possible gloss on Obama's approach, its inclusion of a public option will gradually move more and more people to a Medicare-style system; its much tougher regulation of private insurers will yield at least some of the efficiencies that we could get through true national health insurance, it will ban some of the worst practices such as exclusion for pre-existing conditions, and its "play-or-pay" feature for employers and subsidy of the near-poor will bring insurance to most Americans.
That is the best possible outcome. But it is not the likely one. That brings us to the politics.
President Obama set the terms of this legislative battle by proposing to work with, not against the insurance and drug industries. That added one lead weight to his feet. Then he added a second lead weight by trying to make the affair bipartisan, inviting Republicans to collude to produce an unacceptably weak plan. (Let's seek what kind of bastard child emerges from the collaboration between the unreliable Democrat Max Baucus of the Senate Finance Committee and his Republican counterpart, Chuck Grassley.) Obama also waited until very late in the game to take his case to the country.
The result? The insurance and drug industry lobbies say they support Obama. They just happen to oppose all of the details that would make the reform meaningful. The bill that (barely) cleared the House Energy and Commerce Committee on Friday keeps alive a somewhat stripped down public option. It bans exclusions for pre-existing conditions. And it requires employers to provide at least standard insurance or pay a tax. But the proposed tax is far less than the cost of the insurance, shifting some costs onto government. And it remains to be seen whether the remaining teeth in the House bill can survive what will surely be a weaker Senate bill. The Democratic Blue Dogs remain sunshine patriots on health reform if there is a risk of increasing costs to business; and the Republicans have defined defeat of health reform as a strategy of handing Obama a disabling symbolic defeat.
Given the partial progress by the House, it seems almost churlish to criticize Obama for not having set the bar higher in the first place. The liberal commentariat has bent over backwards to find things in the bill to like.
The estimable Hertzberg writes, "The American health-care system is bloated, wasteful, and cruel. Under the health-insurance-reform package now being bludgeoned into misshapen shape on Capitol Hill, it will still be bloated, wasteful, and cruel -- but markedly less so." Yes, but the consequence will be that medical inflation will likely drive us to further cuts in care, further speed-ups on primary care doctors, and further cost-shifting to patients and taxpayers.
The New York Times, in another classic of faint praise, editorialized, "It seems hard to believe that over the long haul the introduction of electronic medical records will not save substantial money." Actually, it is quite easy to believe. This editorialist must be extremely healthy. If he or she has been to the doctor lately, the medical records are already computerized and "charts" are electronic, not hand written. The problem is not the technology but the insurer-dominated system in which it reposes.
The behavior of Harry & Louise, the Republicans and Blue Dog Democrats is so odious that it's hard not to put in a kind word for Obama. Paul Krugman was never a fan of the Obama approach. His latest column is a general tutorial on why we should thank government for the fact that health insurance functions at all. He declines to say anything nice about the Obama bill, but concludes, very graciously, with more faint praise: "Now Mr. Obama basically proposes using additional regulation and subsidies to make decent insurance available to all of us. That's not radical; it's as American as, well, Medicare."
In my book, Obama's Challenge, I argued that our new president should devote all his effort in his first year to getting the economy back on track. Then, armed with the gratitude of the people and an increased majority in Congress, he should offer a much more robust health reform such as single payer after the first mid-term election. It would be a huge mistake, I contended, to tackle the Mount Everest of domestic reform as a novice.
Well, President Obama didn't take my advice (not the first time.) I can only join my fellow progressive journalists in hoping that something like the House version of the bill survives. But the likelihood is that whatever finally makes it through this session of Congress will reinforce and further bloat the current disaster of a health insurance system rather than fundamentally changing it. And if the decent elements of the plan are blocked, Obama should have the courage to pull the bill and take his case to the people.
As Shakespeare wrote, "Lilies that fester smell far worse than weeds." The satisfaction of a Rose Garden signing ceremony is not worth it, if the plan is more thorn than rose.
]]>Wall Street on Speedtag:www.huffingtonpost.com,2009:/theblog//3.2451212009-07-26T21:19:22-04:002009-08-26T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/New York Times recently reported that the latest scheme--or scam--on Wall Street is something called High Frequency Trading. Very sophisticated financial firms, such as Goldman Sachs, are tipped off by the New York Stock Exchange's own computers to pending buy and sell orders. Armed with ultra sophisticated computer algorithms, the insiders anticipate the direction of the market based on what they learn about supply and demand for a given security. They can make an extra penny here and an extra penny there at the expense of us suckers, adding up to billions.
"Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed," wrote the Times' Charles Duhigg in a front page piece that was the talk of New York and Washington. "High-frequency trading is one answer."
As debates in the blogosphere in the last couple of days have made clear, there are a couple of possibilities of what is at work here. One is that Goldman and others are literally using privileged information to make trades ahead of markets, in which case they are committing a felony. Specifically, the abuse is known as "front-running," or trading ahead of customers, and it is an explicitly illegal form of market manipulation. Front running is epidemic on Wall Street--the whole point of an investment bank trading for its own account is to take advantage of its specialized knowledge of markets--and the SEC or the Justice Department shuts down front-running when it becomes too blatant to ignore.
The other possibility is that the Goldmans of the world have found themselves a nice loophole. Tapping into the Stock Exchange's own computers and other sources of trading activity is something that anyone in theory could do, but only a few privileged insiders have the sophistication to exploit what they find. Often orders are placed, only to be cancelled. Their purpose is to figure out what the market is willing to pay, and then get in ahead of it.
But suppose that High Frequency Trading doesn't violate any law. It still is the essence of what's wrong with the recent metastasis of money markets into private game preserves for insider-traders.
Consider for a moment some first principles. The legitimate and efficient function of financial markets is to connect investors to entrepreneurs, and depositors to borrowers. There is no legitimate reason whatever for this to be done by the millisecond. At bottom, the process is pretty simple. The intermediary--the bank, savings institution, or investment bank makes its fees for making a judgment about risk and reward. How likely is the loan to be paid back? How high an interest rate should it charge? How should a new issue of securities be priced? The investor decides whether to indulge a taste for risk or for prudence.
But the hyperactive trading markets and creations of recent decades such as credit default swaps and high speed trading algorithms add nothing to the efficiency of financial markets. They add only two things--risk to the system, and the opportunity for insiders to reap windfall profits.
Therefore, whether or not Goldman's lawyers have figured out how it can engage in High Frequency Trading and stay within the law, there is a strong case that this entire brand of financial engineering should be prohibited. The whole game should be slowed down. Bona fide investors should get in line under the rule of first come, first served. Anything else should be considered illegal market manipulation. No dummy transactions. There is absolutely no gain to economic efficiency from having prices of securities change in milliseconds, and much gain to the opportunities for manipulation.
The need to restrain traders from exploiting their privileged knowledge is an old fight. During the New Deal, for example, many reformers proposed that floor specialists for investment bankers and brokerage houses simply be prohibited from trading for their own accounts. They should be there simply to execute buy and sell orders for customers. Otherwise, the conflict of interest would be overwhelming--and this was before computers. These reformers were overruled, but insider trading was explicitly prohibited (and good luck catching it.)
Now, as then, it is a mark of Wall Street's stranglehold on politics that the most sensible of remedies seem impossibly radical. One very good way to damp down the dictatorship of the traders, and raise some needed revenue along the way, would be through a punitively high transactions tax on very short term trades. Genuine investors should get favored fax treatment. Pure traders should be taxed, and very short term manipulation taxed into oblivion.
If the financial crisis has proven anything, it is that capital markets have become an insiders' game in which trading profits crowd out the legitimate business of investment. The whole business-models of the most lucrative firms on Wall Street are a menace to the rest of the economy. Until the Obama administration recognizes this most basic abuse and shuts it down, it will be more enabler than reformer.
Robert Kuttner is co-editor of The American Prospect, and a senior fellow at Demos. His recent book is Obama's Challenge. ]]>Smoking the Green Shootstag:www.huffingtonpost.com,2009:/theblog//3.2403952009-07-19T21:30:10-04:002009-08-19T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
We are still at the stage of the recession where economic downdrafts are producing more downdrafts. Reduced purchasing power leads to fewer retail and factory sales and more layoffs, further reducing consumer demand. The Obama stimulus package, about 2.5 percent of GDP for each of two years, doesn't make up enough of the difference. But the federal deficit, caused mainly by falling revenues and not by increased public spending, is alarming the budget hawks. The administration worries, correctly, that deficits will be high for several years to come and wonders who will keep lending Uncle Sam the money. Yet cutting back spending before recovery comes would be suicidal.
In addition, the financial sector has not yet returned to health, despite outsized profits (and bonuses) reported by the likes of Goldman Sachs. This is the kind of purely financial engineering that caused the collapse. The fevered activity at Goldman is a sign of lingering economic illness, not economic health. The rest of the economy, which depends on the financial sector for real investment capital, is still deeply depressed.
Louis Uchitelle's piece in Sunday's New York Times provides some instructive numbers.
Every major sector that reflects the purely private economy has been losing jobs, the only exception being energy extraction plus a tiny increase in computer systems design and management consulting. All of the other expanding sectors that are actually adding jobs reflect government spending - education, health, general government. But the declines in the workhorse parts of the private economy such as manufacturing, construction, and retailing are huge.
With purchasing power still declining and unemployment still rising, where will the recovery come from? White House economic chief Lawrence Summers, in a major speech at the Peterson Institute July 17, emphasized the good news.
"We were at the brink of catastrophe at the beginning of the year but we have walked some substantial distance back from the abyss," he said. And, ever the empiricist, Summers reported that a Google search revealed that "hits for economic depression have returned to baseline levels." That's nice, but what Summers did not forecast was a robust recovery.
And if we stay on the present path, recovery will not come for a long time. Federal deficits will be large enough to raise questions about who will keep lending us the money - but not large enough to power a real recovery that increases real incomes and provides good jobs. The last time we had a massive financial meltdown like this, it took the hyper-stimulus of a war - World War II - to recapitalize industry and re-employ workers.
What, then, is the moral equivalent of war for the 21st century? Let's think way, way outside the box.
We might begin with a serious strategy for rebuilding American manufacturing. American corporations and politicians have been cavalier about just letting manufacturing go. Uniquely among advanced and developing nations, we have no national strategy for nurturing manufacturing at home. There's even an office in the Commerce Department that helps companies outsource.
As a result, even a modest uptick in purchasing power will not produce enough American jobs because there are so many things that America no longer makes.
We could start with clean energy, and move on to mass transit, and reclaim America's capacity to make things. Right now, even if we massively shifted to wind and solar energy, other nations would get most of the production jobs because most solar panels and wind turbines are not made here, while Americans would just get the temporary installation jobs.
We could also get serious about insisting that other trading nations not coerce or bribe our manufactures to locate facilities overseas as a condition of doing business - a flagrant violation of trade law. We could start having a real industrial policy for commercial industry in the way that we have long had a tacit industrial policy for products deemed essential to the military.
The administration is confused about how to reconcile industrial goals with trade law. It had to do a lot of backing and filling so that tens of billions of taxpayer dollars to modernize the auto industry didn't end up subsidizing more outsourcing of jobs to China. If trade law interferes with our ability to revive American manufacturing, then there's something wrong with trade law and let's change it.
For a fine summary on how to revive domestic manufacturing, take a look at the new book, Manufacturing a Better Future for America, edited by Richard McCormack and written by some of America's best experts on reviving manufacturing.
After manufacturing, we need to get serious about investing in a new generation of public infrastructure - everything from smart-grid electrical systems to broadband and modern water and sewer and transportation systems. That will produce lots of good jobs, and make for a more efficient and productive economy.
As far as the deficit is concerned, it will probably need to get bigger before it gets smaller. During World War II, when the nation was a lot poorer and nearly half of our national output went to defeat the Axis powers, my parents and grandparents and tens of millions of Americans like them bought war bonds.
We didn't depend on foreign borrowing, even though the deficits were far larger. Today, the government should create Recovery Bonds and market them to Americans, so that we can finance our own social investment and cease to be financial wards of foreign dictatorships.
The good people at Goldman Sachs can demonstrate their patriotism - not by offering to make money as financial middlemen - but by buying the first issue of these bonds as an investment. The government needs no investment bankers to market these bonds. It can sell them directly to citizens
Gentle reader, we are in a national economic emergency. This is not just about talking up the economy by emphasizing good news. The administration needs to stop smoking its own green shoots and offer strategies equal to the magnitude of the crisis.
Robert Kuttner is co-editor of The American Prospect, and a Senior Fellow at Demos. His latest book is Obama's Challenge.]]>Three Reasons We Need an Economic Wake Up Calltag:www.huffingtonpost.com,2009:/theblog//3.2259622009-07-05T21:11:06-04:002009-08-05T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/
The June Unemployment Numbers. The green-shoots school was expecting that the rising rate of unemployment would continue to slow, as it did in May. But instead the number spiked back up. A total of 467,000 jobs were lost. The unemployment rate rose to 9.5 percent, and OECD economists project that U.S. unemployment will still be in double digits as late as 2011.
The 9.5 percent official figure -- the worst since 1983 -- conceals even worse news. The number of long-term unemployed is at record levels. This is the only recession since the Great Depression in which the job loss wiped out all the job growth of the previous recovery. As our friends at the Economic Policy Institute report.
We now have fewer jobs than in May 2000 when the recovery began, though the economy now has 12.5 million more workers. And there is less than one job opening for every five people seeking jobs. Hidden unemployment is also setting records - people with part time work who want full time work, as well as people whose hours have been involuntarily cut.
Until strong economic growth returns, companies will not resume hiring. And as long as layoffs continue, that means fewer customers and the downward spiral continues.
As EPI observes, President Obama's economic stimulus simply wasn't designed for a recession this deep. And I would add that stimulus funds are getting out too slowly. Compounding the problem is inadequate government policy on three crucial fronts:
State Fiscal Collapse. The states, unlike the Federal government, are not permitted to run current budget deficits. So in a deep recession, when tax receipts fall, their only choice is to cut program spending or raise taxes. Both are of course perverse in a recession, since they only further undercut consumer purchasing power.
As the new fiscal year begins, nearly every state is raising taxes or fees, or laying off workers and reducing programs. At least 48 states face red ink. Some of the state budget crisis is self-inflicted, as in the dance to the death between California Governor Arnold Schwarzenegger and Democrats in the legislature, compounded by a two-thirds supermajority requirement for any kind of tax reform. But most states are just plain hurting.
Massachusetts, with one of the most liberal governors, Deval Patrick, just hiked its sales taxes by 25 percent. A total of 24 other states have enacted tax increases and another 12 all have tax hikes on their agendas. Federal aid under the stimulus covers just 30 to 40 percent of the state shortfall, which is expected to total $350 billion by 2011. And 39 states have cut program outlays on the needy, according to the Center on Budget and Policy Priorities.
The New York Times reports that several states are cutting out summer school. This is just plain nuts.
Some aspects of the recovery program, such as rebuilding a banking system that serves the real economy, are truly challenging. But this part is really simple. Washington is the one part of the government with the capacity to run deficits. So Congress should pass an emergency revenue-sharing law, giving the states another $150 billion immediately. The only condition is what policy wonks call maintenance-of-effort. To receive the money, the states must maintain program outlay levels and taxing systems that were in effect on a date certain, say July 1, 2008.
Most of the stimulus money is still unspent because of various bureaucratic hurdles at all levels of government. This approach would break through all that. Washington would simply cut fifty checks.
The Foreclosure Catastrophe. When the Obama administration took office, they basically continued the Bush administration's program of voluntary loan modifications. They sweetened the deal by paying banks to reduce the principal or interest, spending $75 billion for banks (money that might have gone directly to homeowners.)
But with most distressed mortgages having been converted to securities, and the banks that collect the payments not wishing to get sued, the program is mostly a bust. The Treasury says that something like 50,000 mortgages have been modified, out of several million at risk of foreclosures. Treasury keeps telling Congress to wait a few more months to let the program kick in. But according to the New York Times' indispensable Gretchen Morgenson, the program is actually going backwards. Out of a sample of 3.5 million sub-prime and alt-a (undocumented mortgages better known as "liar loans") handled by five of the nation's biggest lenders, servicers modified 23,749 in February, but only 19,041 in May and 18,179 in June. Meanwhile, foreclosures in progress are over 844,000.
The consequence of this policy failure is a continuing downward spiral of more vacant homes, continuing declines in property values and home equity, depressed home construction, and stresses on homeowners who spend every penny of disposable income to keep their houses. The government needs a Roosevelt-scale mortgage refinancing program with one goal--to keep people from losing their homes. As Morgenson reports, when a bank forecloses, it loses about 63 percent of the loan value. Wouldn't it be better to reduce the monthly payments by 63 percent, and allow people to keep their homes? But only a much more direct government intervention can do that.
Busted Banks. The Administration's policy of pumping up busted banks, such as Citigroup and Bank of America has been a success only in the sense that these zombies are still in business. But surely the right test is whether credit is flowing again to deserving borrowers. Reports from the small business and community reinvestment communities suggest that credit is still very right, despite Federal Reserve policies of cutting short term interest rates almost to zero.
I still have to pinch myself when I realize that the President of the United States is Barack Hussein Obama. Like the rest of the progressive community, my heart swells when Obama, in Egypt, makes a brilliant speech on Middle East, or accelerates the progress of redeeming full civil rights for gays and lesbians. (I could find some quibbles on these fronts as well.) But these are not the issues that will cost him his presidency if he fails to grasp that the economic recovery and the moment of reform are slipping away.
As Republican missteps turn from tragedy to farce and back again, we should not get too cocky. The Republican ticket in 2012 could be Palin-Sanford; if unemployment is 11 percent, it will win.
Robert Kuttner is co-editor of The American Prospect, www.prospect.org and a senior fellow at Demos, www.demos.org. His recent book is "Obama's Challenge," www.obamaschallenge.com.]]>Pecora Whirlingtag:www.huffingtonpost.com,2009:/theblog//3.2220722009-06-28T22:22:59-04:002009-07-29T05:12:01-04:00Robert Kuttnerhttp://www.huffingtonpost.com/robert-kuttner/authoritative story on finalists being considered for the Financial Crisis Inquiry Commission, the investigative body created by Congress to launch a full-scale investigation of the financial crisis in the spirit of the famous early 1930s hearings led by Ferdinand Pecora.
Those famous investigative hearings produced the facts and momentum for the major New Deal financial reforms. If the Reuters story is accurate, progressives have a lot of work to do in a few short days while nominees are being finalized, before the moment is lost.
Under the law creating the commission, which was signed by President Obama in late May, it is to have ten members, six Democrats and four Republicans. They are to be appointed by the House and Senate majority and minority leadership, respectively.
Among the names leaked is just one person with the stature, expertise, and resolve to run a tough investigation (if she were chair)--Brooksley Born. As chair of the Commodity Futures Trading Commission in the late 1990s, Born proposed regulating over-the-counter derivatives, of the sort that helped crash the economy. For this attempt to spoil the party, she was excoriated and isolated by an old-boys' mob that included Alan Greenspan, Robert Rubin, Lawrence Summers and Gary Gensler. Incredibly enough, Gensler, an Obama appointee, now holds Born's old job as chair of the CFTC. More than a decade and several meltdowns later, the Obama administration's 88-page white paper is ambiguous on the subject of whether and how to regulate customized derivatives. Born is just the sort of person the commission needs.
On the Republican side, with one exception, the leaked names could be an alumni society of the people whose policies helped cause the collapse. The absolute howler in the list is former senator Jake Garn of Utah, a tireless proponent of financial deregulation. Among other travesties, Garn sponsored the Garn-St. Germain Act of 1982, the law that allowed savings and loan associations to become speculators' playgrounds, and led directly to the S&L collapse.
Another proposed Republican is Bill Thomas, former chair of the House Ways and Means, a legislator who never met a financial special interest he didn't like; and former Republican Senator and presidential candidate Fred Thompson.
The one commendable Republican on the list--and I hope my support doesn't spoil it for him--is Alex Pollock of the American Enterprise Institute. Pollock has been an honest critic of the financial bailout program and the weak measures undertaken by both the Bush and Obama administrations to stem the epidemic of mortgage foreclosures. In his testimony and speeches, Pollock regularly calls for New Deal-style remedies, such as the Reconstruction Finance Corporation or Roosevelt's Home Owners Loan Corporation, which refinanced one mortgage in five, and spared a million families foreclosure.
The only other Democrat on Reuters' leaked list is former Florida senator and governor Bob Graham, a self-identified New Democrat who served on both the Senate Banking and Finance Committees. Missing, except for Born, are people with deep knowledge and informed criticism of the abuses that led to the crisis.
Some good nominees would be former SEC Commissioner Harvey Goldschmid, now a law professor at Columbia; Elizabeth Warren, Chair of the Congressional Oversight Panel; Damon Silvers, the AFL-CIO's top expert on financial markets and Deputy Chair of the oversight panel; economists Joseph Stiglitz of Columbia or Nouriel Roubini of NYU or James Galbraith of the University of Texas or Dean Baker of the Center for Economic and Policy Research; one-time Wall Streeters and now astute financial critics Nomi Prins, Rob Johnson, Ron Bloom or Richard Bookstaber; former financial regulators Bill Black or Ellen Seidman; or law professors and deregulation critics Frank Partnoy of the University of San Diego or James D. Cox of Duke.
Perhaps it was too much to hope that this commission would be a chance to investigate root causes and mobilize public sentiment behind the sweeping reforms that are needed and not yet forthcoming. Obviously, Republican House Leader John Boehner and his Senate counterpart, Mitch McConnell, are not about to put serious critics of deregulation on this panel. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, however, were astute enough to put Elizabeth Warren and Damon Silvers in charge of the Congressional Oversight Panel (COP) that was created as a condition for giving the Treasury $700 billion in bailout funds last fall. Ever since then, the COP has been the best source of independent thinking and investigation in town.
For the new Pecora Commission, Pelosi and Reid need to do better than finding a predictable list of retired and safe Democratic politicians. This is a rare chance to light a real fire on behalf of deep reform.
