Thursday, December 31, 2009

2009 Fiscal Review

Ive posted the year end DTS withdrawal details for both FY2008 and FY2009 below to compare YoY fiscal details.



I've highlighted 5 line items that show the largest YoY increases in withdrawals from the Treasury account that do not include purchases of financial assets (such as TARP, GSE, FDIC). The YoY increases in the following areas are:

Education: $88B
Medicaid: $49B
Medicare: $42B
Social Security: $57B
Fed. Unemp. Insurance $75B

These YoY increases from '08 to '09 total $311B, or 2.2% of a $14T U.S. economy, this was probably the reason for any GDP growth over the subject period. One key for growth in our economy going forward into 2010 will be the size of any YoY increases in these same areas again this year.

Here is a snip of 1Q (thru Dec. 30th) FY2010 Withdrawals, with highlights of the same sub-lines.

Based on 1st quarter FY2010 (Dec. 30 DTS) totals, and projecting simply 4 times these quarterly Treasury spending rates, would result at year end in a FY09 to FY10 YoY increase of $80B, or 0.57% of a $14T GDP. The projected increases would be:

Education: $FLAT
Medicaid: $12B
Medicare: $17B
Social Security: $16B
Fed. Unemp. Insurance $35B (the largest.... thanks a lot!)

Treasury will have to accelerate spending in these areas for the remaining 3 quarters of FY2010 to have the same effect on growth as the previous year from these 5 large areas of Federal spending. If not, it will be up to the non-government sector to pick up the pace of growth to have a repeat in YoY growth in 2010.

FY2010 Notes: The COLA portion of Social Security payments will have NO increase in CY 2010, there was a 5.8% COLA in CY 2009, any YoY increase in Social Security will mostly be due to increase in enrollment. On the 1Q 2010 snip I've highlighted in blue the 1Q interest paid on Treasury Securities; at $35B per quarter, this rate may result in a full year reduction in interest paid to bond holders in FY 2010 (too bad savers!).

Wednesday, December 30, 2009

Japan unveils growth plan for next decade

"Last week, Japan unveiled a record $1 trillion budget for the next fiscal year, reflecting the prime minister's campaign pledge to boost spending for child support and cut wasteful outlays on public works..."

Japan is boosting domestic spending and investment. China has already been doing this. These countries will see their economies improve dramatically as a result while the U.S. misguidedly seeks deficit reduction in 2010.

Boost your investments in Japan and China. The U.S. is pursuing a course that will keep us weak relative to the growth that will be achieved in these countries. Forex traders should sell the yen!

Congress gives a lesson on money creation

Last Thursday Congress voted to raise the debt ceiling. Prior to that the government was up against its "legal limit" on how much debt it could issue, but with a simple vote the government's spending power increased by $290 billion.

This should show that the only real constraint on how much the government can spend is the constraint it imposes on itself. Any amount--whether $290 billion or $2.9 trillion--is made possible by decree.

Some would argue that the vote simply gave the government the right to "borrow" $290 billion more, so it did not really increase its spending power at all, only the amount it could take from others. This argument would be wrong.

Government spending, by definition, increases the amount of reserves in the banking system and those reserves are the funds used to buy Treasury securities. Therefore, it is correct to say that government spending itself provides the money to buy the debt.

How else can you explain how the national debt went from $900 billion to $12.4 trillion over the past 30 years with interest rates falling to historic lows or even zero? If the issuance of government debt were truly "borrowing" then rates would have climbed to astronomical levels.

The reality is, interest rates are set by the central bank and that goes for long-term rates as well as short term rates. (Long term rates are influenced by what the market perceives the central bank's interest rate policy is going to be over the term of the bond, note or whatever.)

Having a self-imposed constraint it silly because it necessitates this exercise in voting on debt limit increases every couple of years. And since all money emanates from the government's own money (the monetary base) it is normal to assume that the quantity of money will grow with a growing economy (the latter being desirable), so why impose a constraint on the size of the monetary base in the first place? It's dumb...almost like being on a gold standard.

Congress should do away with the debt limit and with the rule that the Treasury is not allowed to run an overdraft in its account at the Fed and focus instead on policies that achieve full output and employment irrespective of the level of public debt securities outstanding.

Friday, December 18, 2009

Treasury at Debt Ceiling

FINAL UPDATE: Senate passes $290B increase on Christmas Eve.

UPDATE 12/23: Politico is reporting that the Senate vote is still scheduled for tomorrow, with a 60 vote majority required to pass. I hope no one is ill tomorrow.

UPDATE 12/22: Reuters is reporting this evening that the Senate will schedule the vote on increasing the debt limit on Thursday 12/24 by an additional $290B. Keep your fingers crossed.

This table from yesterday's Daily Treasury Statement shows that Treasury is virtually sitting right at the debt limit.

At this point it is going to be very hard for Treasury to spend much more than what they take in on a daily basis (the $20B TARP refund from Citigroup has not shown up yet). The House of Representatives has voted to increase the debt ceiling earlier this week, but I am having trouble discerning when the Senate will address this issue. It looks like the Senate cannot take up this issue until after the Health Care Reform is fully debated, and it looks like that will take all next week with Republican threats to extend debate into the Christmas Holiday. So Treasury may be in this spending constrained condition until at least the last week of this month.

Wednesday, December 16, 2009

House passes $154 billion jobs bill with no GOP votes

I've been a lifelong Republican but I have to say that the GOP has become the party of fear-mongering and ignorance, with a leadership that is coarse and cruel. Bravo to House Dems who voted for this one!

The only problem is, the Senate will not take up the measure until next year, leaving millions to dangle in the wind.

As usual, Obama stays out of it.

After getting bailed out by the public, the banks are destroying the dollar

"So the Wall Street elite, just months removed from their near-death experience, are now making a fortune shorting the U.S. dollar. One year ago, faced with the greatest financial panic in generations, the American people swallowed hard and bailed out the banks. Today, the banks have moved on, and are tearing down the currency of the nation that saved them."

Please take the time to read this excellent article by David Paul, President of Fiscal Strategies Group.

Read here.

Tuesday, December 15, 2009

What did the Banks use the TARP funds for anyway?

In the past week there has been no shortage of political theater surrounding the Government's relationship with the banking system. It started with last weeks return of the TARP funds to the Treasury, with Secretary Geithner boasting to Congress that he "picked up a $45B check" from Bank of America. And now continues this week with the Obama administration taking a hardline posture against the banks with a scolding "60 Minutes" appearance on Sunday evening and a Whitehouse "woodshed" meeting first thing Monday with the heads of the largest banks (that some bank executives didn't even attend!). Below, Mike has chronicled some behavior on the part of the President that demeans both he and the Office. His advisors are putting him in a bad place. It's like a giant soap opera, embarrassing.

All of this time and attention is being applied due to what is perceived as a "bailout" of the banks by the Federal Government via the TARP. Many pundits have opined that the banks have had it easy and are making all kinds of money with all the "free money" provided by the Treasury and the Fed. And officials are boasting about the "return" they are getting from TARP "for the taxpayers". Here's a recent one from MSNBC that has all of the required drama and outrage and big numbers.

But what did the banks do with the TARP funds? What did they use them for? What assets did they buy with the funds? I can't find anything.

In FY 2009, the TARP withdrawals from the Treasury's account totaled about $365B, this was an equity investment by the Treasury into the banks. It started in 4Q CY 2008 and was effectively allocated by end of 1Q 2009. $365B is a big number and "can't hide". Since it was equity, it perhaps could even be leveraged. What happened to banks asset base from end of 3Q 2008 to the end of 1Q 2009? Let's look at the big asset classes from the Fed's latest z.1:

US Treasuries (No change)

MBS (Up $100B and subsequently back to unchanged)

Bonds (No change)

Stocks (Down $20B)

Total Bank Credit (DOWN!)

I think we have to conclude the trend was unchanged to down for bank assets all throughout the period that the TARP funds were being dispersed, and this trend has persisted if you follow it through to present. It doesn't look (to me) that the banks acquired any assets with the additional authority the TARP funds may have provided, and if anything were 'deleveraging' or reducing assets the whole time.

And now, the banks are just returning the TARP funds that they had no use for anyway. The only "use" I can think of is that one set of government regulators desired higher bank capital levels for a period of time, so another set of government appropriators provided the funds. This could have been easily avoided by a temporary waiver on capital levels while the banks reduced assets anyway.

This TARP controversy was and is a colossal waste of political time and energy. We could have avoided this soap opera, and instead had an intelligent discussion about how to truly increase output and employment in the economy.

Monday, December 14, 2009

Obama's haranguing of the banks is weak leadership!

In what is becoming an all-too-familiar and nauseating scene, Obama summoned bank executives to the White House again yesterday to beg them to increase lending. The president told the CEO’s that their banks must make “an extraordinary commitment” to rebuild the nation’s economy.

From this statement we can clearly see that in Obama’s mind and in the mind of those who advise him, the vast resources of the Federal Government—the same government that bootstrapped the nation out of the Great Depression and paid for the greatest military buildup the world has ever seen—are now depleted.

Looking past the remarks, which by themselves seem unbecoming for a sitting president—the name-calling and empty threats—we see a weak leader whose ignorance of the monetary system is both mind numbing and downright scary.

Obama's erroneous beliefs have caused him to simply give up. With millions of Americans out of work, businesses and households strapped for cash and a large percentage of the nation’s physical capital sitting idle, he has decided to punt and put the banks in charge of America’s destiny. But as big as they are, they are no match for what the Federal Government can do, which, unfortunately, is a fact that is moot if the president does not understand it himself.

This is the same president who said that Americans should no longer expect to go on buying stuff with a credit card, yet he is begging, pleading, with the banks to load everyone up on debt once again.

It’s also the same president who acknowledges that banks took on hundreds of billions in risky loans, yet apparently wants them to do the same thing all over again on the grossly misinformed idea that more of the same will help the economy.

Someone ought to tell the president that the problem is not a lack of desire to lend. Rather, it is the dearth of credit demand as businesses continue liquidating inventories. And with so many people out of work who can afford to pay back a loan once it is made? In short, lending has become more risky because of an anemic economy.

If the president wants to get credit flowing again he should be focusing his efforts on creating jobs and boosting incomes rather than haranguing the banks, not that they don't deserve it. How about strongly getting behind a second stimulus or pushing for a government jobs program or a payroll tax holiday? All three of these measures would be strong medicine for what ails the economy and if you fix the economy, the credit crisis goes away.

As bankers haul in millions in bonuses the president advocates a deeper-in-debt solution for people and small businesses so that they can live at a subsistence level? What kind of a dumb plan is that? This is like indentured servitude. Something is terribly wrong with this picture.

The president could have taken a more forceful stance against destructive speculation, which is pushing up the price of commodities and leading to higher costs for food and fuel. Instead he takes a laissez-faire approach and lets a lobbyist-driven Congress pass financial reform that is loaded with gigantic loopholes for big speculators.

Yet as weak and misinformed as Obama is, one could almost give him a pass on the argument that he is not expected to know all things economic. That is why he has advisors. But those advisors have failed him and they have screwed the American people. Summers, Geithener, Orzag, Romer et al; the lot of them. It's should be obvious that their interests lie in the selfish safeguard of their positions of power and in doling out special privileges to their former cohorts whom they maintain close ties with.

The rest of us can go to hell and Obama seems okay with that.

Fed MBS Purchases from Household Sector Continues

The Fed released the latest Z.1 report last week for the period ending Third QTR 2009.

The snip below shows how the Fed has been acquiring over $800B of MBS this year while the Household Sector has now reduced it's ownership to just $68B from a level of over $800B a bit over one year ago.

Friday, December 11, 2009

You gotta read this!

By far, the best article I've read on Obama's unbelievable turn--against the people who voted for him and those whom he promised to help. The author is Matt Taibbi of Rolling Stone Magazine. Here's the link.

Obama's Big Sellout
The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway

Posted Dec 09, 2009 2:35 PM

Watch Matt Taibbi discuss "The Big Sellout" in a video on his blog, Taibblog.

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we've been seeing on TV this fall who Obama really is?

Whatever the president's real motives are, the extensive series of loophole-rich financial "reforms" that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street's political power by institutionalizing the taxpayer's role as a welfare provider for the financial-services industry. At one point in the debate, Obama's top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

How did we get here? It started just moments after the election — and almost nobody noticed.

'Just look at the timeline of the Citigroup deal," says one leading Democratic consultant. "Just look at it. It's fucking amazing. Amazing! And nobody said a thing about it."

Barack Obama was still just the president-elect when it happened, but the revolting and inexcusable $306 billion bailout that Citigroup received was the first major act of his presidency. In order to grasp the full horror of what took place, however, one needs to go back a few weeks before the actual bailout — to November 5th, 2008, the day after Obama's election.

That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar — former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett — the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama's chief advisers during the campaign, didn't make the cut. Neither did Karen Kornbluh, who had served as Obama's policy director and was instrumental in crafting the Democratic Party's platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive "a Nobel Prize — for evil."

But come November 5th, both were banished from Obama's inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president's new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama's biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama's economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin's son. At the time, Jamie's dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments.

Now here's where it gets really interesting. It's three weeks after the election. You have a lame-duck president in George W. Bush — still nominally in charge, but in reality already halfway to the golf-and-O'Doul's portion of his career and more than happy to vacate the scene. Left to deal with the still-reeling economy are lame-duck Treasury Secretary Henry Paulson, a former head of Goldman Sachs, and New York Fed chief Timothy Geithner, who served under Bob Rubin in the Clinton White House. Running Obama's economic team are a still-employed Citigroup executive and the son of another Citigroup executive, who himself joined Obama's transition team that same month.

So on November 23rd, 2008, a deal is announced in which the government will bail out Rubin's messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees. It is a terrible deal for the government, almost universally panned by all serious economists, an outrage to anyone who pays taxes. Under the deal, the bank gets $20 billion in cash, on top of the $25 billion it had already received just weeks before as part of the Troubled Asset Relief Program. But that's just the appetizer. The government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets, many of them those toxic CDOs that Rubin had pushed Citi to invest in. No Citi executives are replaced, and few restrictions are placed on their compensation. It's the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin's fuck-up-rich tenure at Citi. "If you had any doubts at all about the primacy of Wall Street over Main Street," former labor secretary Robert Reich declares when the bailout is announced, "your doubts should be laid to rest."

It is bad enough that one of Bob Rubin's former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama's Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government's bailout generosity would not die with George W. Bush and Hank Paulson. "Geithner assures a smooth transition between the Bush administration and that of Obama, because he's already co-managing what's happening now," observed Stephen Leeb, president of Leeb Capital Management.

Left unnoticed, however, was the fact that Geithner had been hired by a sitting Citigroup executive who still had a big bonus coming despite his proximity to Obama. In January 2009, just over a month after the bailout, Citigroup paid Froman a year-end bonus of $2.25 million. But as outrageous as it was, that payoff would prove to be chump change for the banker crowd, who were about to get everything they wanted — and more — from the new president.

The irony of Bob Rubin: He's an unapologetic arch-capitalist demagogue whose very career is proof that a free-market meritocracy is a myth. Much like Alan Greenspan, a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters, Rubin has been held in awe by the American political elite for nearly 20 years despite having fucked up virtually every project he ever got his hands on. He went from running Goldman Sachs (1990-1992) to the Clinton White House (1993-1999) to Citigroup (1999-2009), leaving behind a trail of historic gaffes that somehow boosted his stature every step of the way.

As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year's financial crisis: the repeal of the Glass-Steagall Act (passed specifically to legalize the Citigroup megamerger) and the deregulation of the derivatives market. Having set that time bomb, Rubin left government to join Citi, which promptly expressed its gratitude by giving him $126 million in compensation over the next eight years (they don't call it bribery in this country when they give you the money post factum). After urging management to amp up its risky investments in toxic vehicles, a strategy that very nearly destroyed the company, Rubin blamed Citi's board for his screw-ups and complained that he had been underpaid to boot. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.

Despite being perhaps more responsible for last year's crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around.

There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions — so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!

At Treasury, there is Geithner, who worked under Rubin in the Clinton years. Serving as Geithner's "counselor" — a made-up post not subject to Senate confirmation — is Lewis Alexander, the former chief economist of Citigroup, who advised Citi back in 2007 that the upcoming housing crash was nothing to worry about. Two other top Geithner "counselors" — Gene Sperling and Lael Brainard — worked under Rubin at the National Economic Council, the key group that coordinates all economic policymaking for the White House.

As director of the NEC, meanwhile, Obama installed economic czar Larry Summers, who had served as Rubin's protégé at Treasury. Just below Summers is Jason Furman, who worked for Rubin in the Clinton White House and was one of the first directors of Rubin's Hamilton Project. The appointment of Furman — a persistent advocate of free-trade agreements like NAFTA and the author of droolingly pro-globalization reports with titles like "Walmart: A Progressive Success Story" — provided one of the first clues that Obama had only been posturing when he promised crowds of struggling Midwesterners during the campaign that he would renegotiate NAFTA, which facilitated the flight of blue-collar jobs to other countries. "NAFTA's shortcomings were evident when signed, and we must now amend the agreement to fix them," Obama declared. A few months after hiring Furman to help shape its economic policy, however, the White House quietly quashed any talk of renegotiating the trade deal. "The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement," U.S. Trade Representative Ronald Kirk told reporters in a little-publicized conference call last April.

The announcement was not so surprising, given who Obama hired to serve alongside Furman at the NEC: management consultant Diana Farrell, who worked under Rubin at Goldman Sachs. In 2003, Farrell was the author of an infamous paper in which she argued that sending American jobs overseas might be "as beneficial to the U.S. as to the destination country, probably more so."

Joining Summers, Furman and Farrell at the NEC is Froman, who by then had been formally appointed to a unique position: He is not only Obama's international finance adviser at the National Economic Council, he simultaneously serves as deputy national security adviser at the National Security Council. The twin posts give Froman a direct line to the president, putting him in a position to coordinate Obama's international economic policy during a crisis. He'll have help from David Lipton, another joint appointee to the economics and security councils who worked with Rubin at Treasury and Citigroup, and from Jacob Lew, a former Citi colleague of Rubin's whom Obama named as deputy director at the State Department to focus on international finance.

Over at the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading, Obama appointed Gary Gensler, a former Goldman banker who worked under Rubin in the Clinton White House. Gensler had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented deregulation of derivative instruments like CDOs and credit-default swaps that played such a big role in cratering the economy last year. And as head of the powerful Office of Management and Budget, Obama named Peter Orszag, who served as the first director of Rubin's Hamilton Project. Orszag once succinctly summed up the project's ideology as a sort of liberal spin on trickle-down Reaganomics: "Market competition and globalization generate significant economic benefits."

Taken together, the rash of appointments with ties to Bob Rubin may well represent the most sweeping influence by a single Wall Street insider in the history of government. "Rather than having a team of rivals, they've got a team of Rubins," says Steven Clemons, director of the American Strategy Program at the New America Foundation. "You see that in policy choices that have resuscitated — but not reformed — Wall Street."

While Rubin's allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama's meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America's never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President's Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel "Siberia."

Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had "excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system." That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn't even meet for the first time until last May. The lone progressive in the White House, economist Jared Bernstein, holds the impressive-sounding title of chief economist and national policy adviser — except that the man he is advising is Joe Biden, who seems more interested in foreign policy than financial reform.

The significance of all of these appointments isn't that the Wall Street types are now in a position to provide direct favors to their former employers. It's that, with one or two exceptions, they collectively offer a microcosm of what the Democratic Party has come to stand for in the 21st century. Virtually all of the Rubinites brought in to manage the economy under Obama share the same fundamental political philosophy carefully articulated for years by the Hamilton Project: Expand the safety net to protect the poor, but let Wall Street do whatever it wants. "Bob Rubin, these guys, they're classic limousine liberals," says David Sirota, a former Democratic strategist. "These are basically people who have made shitloads of money in the speculative economy, but they want to call themselves good Democrats because they're willing to give a little more to the poor. That's the model for this Democratic Party: Let the rich do their thing, but give a fraction more to everyone else."

Even the members of Obama's economic team who have spent most of their lives in public office have managed to make small fortunes on Wall Street. The president's economic czar, Larry Summers, was paid more than $5.2 million in 2008 alone as a managing director of the hedge fund D.E. Shaw, and pocketed an additional $2.7 million in speaking fees from a smorgasbord of future bailout recipients, including Goldman Sachs and Citigroup. At Treasury, Geithner's aide Gene Sperling earned a staggering $887,727 from Goldman Sachs last year for performing the punch-line-worthy service of "advice on charitable giving." Sperling's fellow Treasury appointee, Mark Patterson, received $637,492 as a full-time lobbyist for Goldman Sachs, and another top Geithner aide, Lee Sachs, made more than $3 million working for a New York hedge fund called Mariner Investment Group. The list goes on and on. Even Obama's chief of staff, Rahm Emanuel, who has been out of government for only 30 months of his adult life, managed to collect $18 million during his private-sector stint with a Wall Street firm called Wasserstein-Perella.

The point is that an economic team made up exclusively of callous millionaire-assholes has absolutely zero interest in reforming the gamed system that made them rich in the first place. "You can't expect these people to do anything other than protect Wall Street," says Rep. Cliff Stearns, a Republican from Florida. That thinking was clear from Obama's first address to Congress, when he stressed the importance of getting Americans to borrow like crazy again. "Credit is the lifeblood of the economy," he declared, pledging "the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money." A president elected on a platform of change was announcing, in so many words, that he planned to change nothing fundamental when it came to the economy. Rather than doing what FDR had done during the Great Depression and institute stringent new rules to curb financial abuses, Obama planned to institutionalize the policy, firmly established during the Bush years, of keeping a few megafirms rich at the expense of everyone else.

Obama hasn't always toed the Rubin line when it comes to economic policy. Despite being surrounded by a team that is powerfully opposed to deficit spending — balanced budgets and deficit reduction have always been central to the Rubin way of thinking — Obama came out of the gate with a huge stimulus plan designed to kick-start the economy and address the job losses brought on by the 2008 crisis. "You have to give him credit there," says Sen. Bernie Sanders, an advocate of using government resources to address unemployment. "It's a very significant piece of legislation, and $787 billion is a lot of money."

But whatever jobs the stimulus has created or preserved so far — 640,329, according to an absurdly precise and already debunked calculation by the White House — the aid that Obama has provided to real people has been dwarfed in size and scope by the taxpayer money that has been handed over to America's financial giants. "They spent $75 billion on mortgage relief, but come on — look at how much they gave Wall Street," says a leading Democratic strategist. Neil Barofsky, the inspector general charged with overseeing TARP, estimates that the total cost of the Wall Street bailouts could eventually reach $23.7 trillion. And while the government continues to dole out big money to big banks, Obama and his team of Rubinites have done almost nothing to reform the warped financial system responsible for imploding the global economy in the first place.

The push for reform seemed to get off to a promising start. In the House, the charge was led by Rep. Barney Frank, the outspoken chair of the House Financial Services Committee, who emerged during last year's Bush bailouts as a sharp-tongued critic of Wall Street. Back when Obama was still a senator, he and Frank even worked together to introduce a populist bill targeting executive compensation. Last spring, with the economy shattered, Frank began to hold hearings on a host of reforms, crafted with significant input from the White House, that initially contained some very good elements. There were measures to curb abusive credit-card lending, prevent banks from charging excessive fees, force publicly traded firms to conduct meaningful risk assessment and allow shareholders to vote on executive compensation. There were even measures to crack down on risky derivatives and to bar firms like AIG from picking their own regulators.

Then the committee went to work — and the loopholes started to appear.

The most notable of these came in the proposal to regulate derivatives like credit-default swaps. Even Gary Gensler, the former Goldmanite whom Obama put in charge of commodities regulation, was pushing to make these normally obscure investments more transparent, enabling regulators and investors to identify speculative bubbles sooner. But in August, a month after Gensler came out in favor of reform, Geithner slapped him down by issuing a 115-page paper called "Improvements to Regulation of Over-the-Counter Derivatives Markets" that called for a series of exemptions for "end users" — i.e., almost all of the clients who buy derivatives from banks like Goldman Sachs and Morgan Stanley. Even more stunning, Frank's bill included a blanket exception to the rules for currency swaps traded on foreign exchanges — the very instruments that had triggered the Long-Term Capital Management meltdown in the late 1990s.

Given that derivatives were at the heart of the financial meltdown last year, the decision to gut derivatives reform sent some legislators howling with disgust. Sen. Maria Cantwell of Washington, who estimates that as much as 90 percent of all derivatives could remain unregulated under the new rules, went so far as to say the new laws would make things worse. "Current law with its loopholes might actually be better than these loopholes," she said.

An even bigger loophole could do far worse damage to the economy. Under the original bill, the Securities and Exchange Commission and the Commodity Futures Trading Commission were granted the power to ban any credit swaps deemed to be "detrimental to the stability of a financial market or of participants in a financial market." By the time Frank's committee was done with the bill, however, the SEC and the CFTC were left with no authority to do anything about abusive derivatives other than to send a report to Congress. The move, in effect, would leave the kind of credit-default swaps that brought down AIG largely unregulated.

Why would leading congressional Democrats, working closely with the Obama administration, agree to leave one of the riskiest of all financial instruments unregulated, even before the issue could be debated by the House? "There was concern that a broad grant to ban abusive swaps would be unsettling," Frank explained.

Unsettling to whom? Certainly not to you and me — but then again, actual people are not really part of the calculus when it comes to finance reform. According to those close to the markup process, Frank's committee inserted loopholes under pressure from "constituents" — by which they mean anyone "who can afford a lobbyist," says Michael Greenberger, the former head of trading at the CFTC under Clinton.

This pattern would repeat itself over and over again throughout the fall. Take the centerpiece of Obama's reform proposal: the much-ballyhooed creation of a Consumer Finance Protection Agency to protect the little guy from abusive bank practices. Like the derivatives bill, the debate over the CFPA ended up being dominated by horse-trading for loopholes. In the end, Frank not only agreed to exempt some 8,000 of the nation's 8,200 banks from oversight by the castrated-in-advance agency, leaving most consumers unprotected, he allowed the committee to pass the exemption by voice vote, meaning that congressmen could side with the banks without actually attaching their name to their "Aye."

To win the support of conservative Democrats, Frank also backed down on another issue that seemed like a slam-dunk: a requirement that all banks offer so-called "plain vanilla" products, such as no-frills mortgages, to give consumers an alternative to deceptive, "fully loaded" deals like adjustable-rate loans. Frank's last-minute reversal — made in consultation with Geithner — was such a transparent giveaway to the banks that even an economics writer for Reuters, hardly a far-left source, called it "the beginning of the end of meaningful regulatory reform."

But the real kicker came when Frank's committee took up what is known as "resolution authority" — government-speak for "Who the hell is in charge the next time somebody at AIG or Lehman Brothers decides to vaporize the economy?" What the committee initially introduced bore a striking resemblance to a proposal written by Geithner earlier in the summer. A masterpiece of legislative chicanery, the measure would have given the White House permanent and unlimited authority to execute future bailouts of megaconglomerates like Citigroup and Bear Stearns.

Democrats pushed the move as politically uncontroversial, claiming that the bill will force Wall Street to pay for any future bailouts and "doesn't use taxpayer money." In reality, that was complete bullshit. The way the bill was written, the FDIC would basically borrow money from the Treasury — i.e., from ordinary taxpayers — to bail out any of the nation's two dozen or so largest financial companies that the president deems in need of government assistance. After the bailout is executed, the president would then levy a tax on financial firms with assets of more than $10 billion to repay the Treasury within 60 months — unless, that is, the president decides he doesn't want to! "They can wait indefinitely to repay," says Rep. Brad Sherman of California, who dubbed the early version of the bill "TARP on steroids."

The new bailout authority also mandated that future bailouts would not include an exchange of equity "in any form" — meaning that taxpayers would get nothing in return for underwriting Wall Street's mistakes. Even more outrageous, it specifically prohibited Congress from rejecting tax giveaways to Wall Street, as it did last year, by removing all congressional oversight of future bailouts. In fact, the resolution authority proposed by Frank was such a slurpingly obvious blow job of Wall Street that it provoked a revolt among his own committee members, with junior Democrats waging a spirited fight that restored congressional oversight to future bailouts, requires equity for taxpayer money and caps assistance to troubled firms at $150 billion. Another amendment to force companies with more than $50 billion in assets to pay into a rainy-day fund for bailouts passed by a resounding vote of 52 to 17 — with the "Nays" all coming from Frank and other senior Democrats loyal to the administration.

Even as amended, however, resolution authority still has the potential to be truly revolutionary legislation. The Senate version still grants the president unlimited power over equity-free bailouts, and the amended House bill still institutionalizes a system of taxpayer support for the 20 to 25 biggest banks in the country. It would essentially grant economic immortality to those top few megafirms, who will continually gobble up greater and greater slices of market share as money becomes cheaper and cheaper for them to borrow (after all, who wouldn't lend to a company permanently backstopped by the federal government?). It would also formalize the government's role in the global economy and turn the presidential-appointment process into an important part of every big firm's business strategy. "If this passes, the very first thing these companies are going to do in the future is ask themselves, 'How do we make sure that one of our executives becomes assistant Treasury secretary?'" says Sherman.

On the Senate side, finance reform has yet to make it through the markup process, but there's every reason to believe that its final bill will be as watered down as the House version by the time it comes to a vote. The original measure, drafted by chairman Christopher Dodd of the Senate Banking Committee, is surprisingly tough on Wall Street — a fact that almost everyone in town chalks up to Dodd's desperation to shake the bad publicity he incurred by accepting a sweetheart mortgage from the notorious lender Countrywide. "He's got to do the shake-his-fist-at-Wall Street thing because of his, you know, problems," says a Democratic Senate aide. "So that's why the bill is starting out kind of tough."

The aide pauses. "The question is, though, what will it end up looking like?"

He's right — that is the question. Because the way it works is that all of these great-sounding reforms get whittled down bit by bit as they move through the committee markup process, until finally there's nothing left but the exceptions. In one example, a measure that would have forced financial companies to be more accountable to shareholders by holding elections for their entire boards every year has already been watered down to preserve the current system of staggered votes. In other cases, this being the Senate, loopholes were inserted before the debate even began: The Dodd bill included the exemption for foreign-currency swaps — a gift to Wall Street that only appeared in the Frank bill during the course of hearings — from the very outset.

The White House's refusal to push for real reform stands in stark contrast to what it should be doing. It was left to Rep. Pete Kanjorski in the House and Bernie Sanders in the Senate to propose bills to break up the so-called "too big to fail" banks. Both measures would give Congress the power to dismantle those pseudomonopolies controlling almost the entire derivatives market (Goldman, Citi, Chase, Morgan Stanley and Bank of America control 95 percent of the $290 trillion over-the-counter market) and the consumer-lending market (Citi, Chase, Bank of America and Wells Fargo issue one of every two mortgages, and two of every three credit cards). On November 18th, in a move that demonstrates just how nervous Democrats are getting about the growing outrage over taxpayer giveaways, Barney Frank's committee actually passed Kanjorski's measure. "It's a beginning," Kanjorski says hopefully. "We're on our way." But even if the Senate follows suit, big banks could well survive — depending on whom the president appoints to sit on the new regulatory board mandated by the measure. An oversight body filled with executives of the type Obama has favored to date from Citi and Goldman Sachs hardly seems like a strong bet to start taking an ax to concentrated wealth. And given the new bailout provisions that provide these megafirms a market advantage over smaller banks (those Paul Volcker calls "too small to save"), the failure to break them up qualifies as a major policy decision with potentially disastrous consequences.

"They should be doing what Teddy Roosevelt did," says Sanders. "They should be busting the trusts."

That probably won't happen anytime soon. But at a minimum, Obama should start on the road back to sanity by making a long-overdue move: firing Geithner. Not only are the mop-headed weenie of a Treasury secretary's fingerprints on virtually all the gross giveaways in the new reform legislation, he's a living symbol of the Rubinite gangrene crawling up the leg of this administration. Putting Geithner against the wall and replacing him with an actual human being not recently employed by a Wall Street megabank would do a lot to prove that Obama was listening this past Election Day. And while there are some who think Geithner is about to go — "he almost has to," says one Democratic strategist — at the moment, the president is still letting Wall Street do his talking.

Morning, the National Mall, November 5th. A year to the day after Obama named Michael Froman to his transition team, his political "opposition" has descended upon the city. Republican teabaggers from all 50 states have showed up, a vast horde of frowning, pissed-off middle-aged white people with their idiot placards in hand, ready to do cultural battle. They are here to protest Obama's "socialist" health care bill — you know, the one that even a bloodsucking capitalist interest group like Big Pharma spent $150 million to get passed.

These teabaggers don't know that, however. All they know is that a big government program might end up using tax dollars to pay the medical bills of rapidly breeding Dominican immigrants. So they hate it. They're also in a groove, knowing that at the polls a few days earlier, people like themselves had a big hand in ousting several Obama-allied Democrats, including a governor of New Jersey who just happened to be the former CEO of Goldman Sachs. A sign held up by New Jersey protesters bears the warning, "If You Vote For Obamacare, We Will Corzine You."

I approach a woman named Pat Defillipis from Toms River, New Jersey, and ask her why she's here. "To protest health care," she answers. "And then amnesty. You know, immigration amnesty."

I ask her if she's aware that there's a big hearing going on in the House today, where Barney Frank's committee is marking up a bill to reform the financial regulatory system. She recognizes Frank's name, wincing, but the rest of my question leaves her staring at me like I'm an alien.

"Do you care at all about economic regulation?" I ask. "There was sort of a big economic collapse last year. Do you have any ideas about how that whole deal should be fixed?"

"We got to slow down on spending," she says. "We can't afford it."

"But what do we do about the rules governing Wall Street . . ."

She walks away. She doesn't give a fuck. People like Pat aren't aware of it, but they're the best friends Obama has. They hate him, sure, but they don't hate him for any reasons that make sense. When it comes down to it, most of them hate the president for all the usual reasons they hate "liberals" — because he uses big words, doesn't believe in hell and doesn't flip out at the sight of gay people holding hands. Additionally, of course, he's black, and wasn't born in America, and is married to a woman who secretly hates our country.

These are the kinds of voters whom Obama's gang of Wall Street advisers is counting on: idiots. People whose votes depend not on whether the party in power delivers them jobs or protects them from economic villains, but on what cultural markers the candidate flashes on TV. Finance reform has become to Obama what Iraq War coffins were to Bush: something to be tucked safely out of sight.

Around the same time that finance reform was being watered down in Congress at the behest of his Treasury secretary, Obama was making a pit stop to raise money from Wall Street. On October 20th, the president went to the Mandarin Oriental Hotel in New York and addressed some 200 financiers and business moguls, each of whom paid the maximum allowable contribution of $30,400 to the Democratic Party. But an organizer of the event, Daniel Fass, announced in advance that support for the president might be lighter than expected — bailed-out firms like JP Morgan Chase and Goldman Sachs were expected to contribute a meager $91,000 to the event — because bankers were tired of being lectured about their misdeeds.

"The investment community feels very put-upon," Fass explained. "They feel there is no reason why they shouldn't earn $1 million to $200 million a year, and they don't want to be held responsible for the global financial meltdown."

Which makes sense. Shit, who could blame the investment community for the meltdown? What kind of assholes are we to put any of this on them?

This is the kind of person who is working for the Obama administration, which makes it unsurprising that we're getting no real reform of the finance industry. There's no other way to say it: Barack Obama, a once-in-a-generation political talent whose graceful conquest of America's racial dragons en route to the White House inspired the entire world, has for some reason allowed his presidency to be hijacked by sniveling, low-rent shitheads. Instead of reining in Wall Street, Obama has allowed himself to be seduced by it, leaving even his erstwhile campaign adviser, ex-Fed chief Paul Volcker, concerned about a "moral hazard" creeping over his administration.

"The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted," Volcker told Congress in September, expressing concerns about all the regulatory loopholes in Frank's bill. "Ultimately, the possibility of further crises — even greater crises — will increase."

What's most troubling is that we don't know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn't be surprised. Maybe it's our fault, for thinking he was different.

Watch Matt Taibbi discuss "The Big Sellout" in a video on his blog, Taibblog.

[From Issue 1093 — December 10, 2009]

Tuesday, December 8, 2009

Obama urges major new stimulus, jobs spending

A glimmer of hope. Obama talking about boosting spending to jumpstart the economy. Maybe Krugman got to him at the jobs summit. The president says he's "mindful of the deficits, but we've got more to do."

It's encouraging at least; things had been looking bleak.

On a sour note he's still talking about ways "we're going to pay for it." There's that "out of money" belief popping up again. Gold standard/fixed exchange rate stuff: not applicable.

Thursday, December 3, 2009

Obama: No Money for Jobs Program; Money for 30,000 More Troops In Afghanistan Though

This is truly sickening. Obama and his advisers have a complete lack of understanding of our monetary system and have become "enslaved" by a belief system that runs rampant in this country: a belief system that is not based in fact and reality, but rather, on some kind of non-existent gold standard.

So many millions of people are out of work and in a single stroke they could be employed or the funds could be there to employ them, but Obama and his team meekly beg for help from private sector firms who really are constrained in their ability to provide help.

Deficit reduction has become this Administration's main emphasis, overriding the struggles of millions who voted for him and to whom he promised, "change."

And hearing Tim Geithner lamely pledge that the "substantial assets" remaining in Tarp, will be used to pay down the deficit, while so many suffer, is the icing on the cake.

Wednesday, December 2, 2009

Special Liquidity Programs Post "Dubai"

Two special liquidity programs run by the US Fed and the European ECB have shown no increases in activity since last week's press reports of a debt restructuring required by a Dubai based investment company.

The US Fed held a 40-day TAF auction on Monday that went for $16B out of a maximum of $25B offered. The ECB held it's usual weekly USD auction this morning that went for a recent low of just $11B out of the regular unlimited amount they offer.

As the amounts indicated in these auction results are still falling, it looks like any credit market disruptions in Dubai have not driven any institutions to access these short term central bank USD liquidity programs.

Monday, November 30, 2009

Someone should ask Niall Fergusun this question...

Niall Ferguson is a journalist who has been writing for years on why America is doomed because of profligate spending and deficits. He is your classic, out of paradigm Chicken Little type, similar to the likes of Schiff, Rogers, et al.

These guys simply don't understand the monetary system and that's why they keep getting it wrong when it comes to debt and deficits. (Rogers keeps shorting Treasuries, for example. He's been doing it for more than a year and a half as the greatest Treasury bull market of all time plays out, simply because Rogers doesn't understand that the Fed sets rates and wants them low.)

In a recent intereview, Ferguson was asked why he thought that U.S. deficit spending would eventually lead to a collapse of the economy. Essentially, this is what he said:

He started off by questioning the very assumption that there was going to be enough global demand for our debt when all is said and done. This presupposes, of course, that it is the sale of debt that supplies the funds needed for the government to deficit spend, when in fact the opposite is true. (Deficit spending supplies the funds to buy the Treasuries, which are merely interest bearing savings accounts of the U.S. Government.) This is a concept that I've explained many times here in this blog and elsewhere, so I am not going to get into it now.

Getting back to Ferguson, he said that up until now the U.S. was able to spend as much as it wanted because it was in the "lucky position of being able to borrow in its own currency."

This is a comment you often hear from the Debt Doomsday crowd, but one that is truly amazing when you realize that it comes from otherwise educated folks. That's because when you think about it, it really makes no sense at all.

Right off the bat it should make you wonder how, or better yet, why, a nation would have any reason to "borrow" its own currency, a currency that Ferguson and the other know-nothings freely admit can only be issued exclusively by the U.S. government and in any quantity?

Hello??? What am I missing here?

To begin with, why would a nation need to borrow something that it has the monopoly power to issue in any quantity?

Second point: How can our "lenders" (China, Japan, etc) even get their hands on that currency without the U.S. Government providing it to them first place? (Typically through some exchange, like when they give us their output, i.e. "real wealth" and we give them that currency.)

If you understand these two simple points then you're left wondering what exactly it is we are "borrowing" and how does the Chinese having dollars or not having dollars have anything to do with the U.S. Government's continued and unquestioned ability to spend in its own currency?

The answer of course, is, none.

Wednesday, November 25, 2009

Treasury Approaches the "Debt Ceiling"

The Treasury Department is is fast approaching the "debt ceiling" last approved by the Congress at $12.1T earlier this year.

Treasury Direct has a running total of the public debt at the website here. As of this latest accounting, it seems that they are within $100B or so of the last ceiling authorized which has been reported at $12.1T. This is very close as for many individual months in FY 2009, Treasury added more than $100B to the deficit.

Look for Federal discretionary spending to ramp down over the next several weeks or months if the Obama administration determines that a request and authorization to increase the debt ceiling is less politically desirable than the economic benefit additional deficit spending would provide.

The Congress will have to complete the vote to increase this limit soon as OMB is projecting a $1.5T deficit for FY 2010. Expect a lot of political fireworks and demagoguery around this issue while the country continues to suffer.

Monday, November 23, 2009

"There ain't going to be no money for nothing if we pour it all into Afghanistan"

Set aside the atrocious English for a moment as well as the over-arching debate on whether or not our presence in Afghanistan is even worth it, that was House Appropriations Chairman David Obey speaking with ABC News.

His comment highlights--once again--a total lack of understanding of our monetary system by our policy makers. They mistakenly believe the government is either "out of money" (as President Obama said) or very close to being out of money.

Their misunderstanding lies in a belief that taxes fund spending. This is a gold standard concept and is, therefore, inapplicable under the current paradigm where the government credits bank accounts electronically and its "money" floats freely and is non-convertible into any commodity such as gold exchangeable for another currency at a fixed rate of exchange.

Under the current system there is absolutely no constraint to how much crediting of bank accounts the government can do; the only constraint being political. And it is becoming quite clear that our political leaders are about to put limits on how much the government can spend, even though we have 10% of the workforce unemployed and our industrial capacity is being utilized at an anemic, 68% rate.

Existing home sales up the most in 2 1/2 years!

But, as usual, Warren Mosler summed it up best in his comment below:

"Wonderful, we contrive policy to drive up unemployment and foreclose vast numbers of people out of their homes at firesale prices so others can move in with subsidized down payments to buy them."

All because our policymakers don't understand our monetary system.

Wave of Debt Payments Facing U.S. Government

Another incredibly misinformed article, this time from the New York Times. The author displays a complete lack of knowledge of the current monetary system and gets some "help" from the likes of Bill Gross.

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

The Government spends by crediting bank accounts. There is no constraint to its ability to do so. Interest payments are made the same way that any spending is made--by crediting bank accounts. Moreover, ultralow interest rates were a matter of Fed policy. The Fed brought interest rates down by raising the level of bank reserves in the system, from $8 billion in 2007 to over $1.1 trillion, currently. Those reserves are the funds used to buy Treasuries. There is no financing, per se.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

I don't know about the squirrel analogy, but I do know that Bill Gross is a nut! Does a bowling alley have to "stash away points" so that it doesn't run out if too many bowlers score too high? The whole notion is ridiculous and is a "gross" display of Bill Gross's lack of understanding on this issue.

Read the entire, misinformed article here.

Wednesday, November 18, 2009

Obama: Too much debt could fuel double-dip recession

He just doesn't get it. It's exactly the opposite. Deficit spending saved the world's economy from total collapse. Paring back that spending will create the double dip he is talking about.

It's truly amazing how he can say this. We ran up huge debts fighting WWII and the nation prospered like crazy. We cut the debt in 1937 and we went back into a depression.

It's like still saying the world is flat! If you sail too far you'll fall off the edge of the earth.

Tuesday, November 17, 2009

Goldman Sachs Does God's Will While 49 Million Go Hungry

"The Department of Agriculture reports that 49 million Americans don't have enough food. That's up 13 million over the last year and is highest number ever recorded since the survey began 14 years ago."

And Goldman adds to that obscene statistic by being one of the largest commodity speculators in the world, driving up food costs. Yet, the president and Congress continue to allow that to happen.

The government spent 100 times more on Tarp than it did on food stamps in the past year, even though Tarp was unecessary and could have been completely avoided if the Fed had understood its role to sustain the banking system.

In a country where our leaders believe we are out of money (they don't understand the monetary system), the funds spent on Tarp could have gone for food, health care, basic research and education. Instead it went to save Goldman and other financial intermediaries, allowing them them to continue to engage in speculative activity that adds no value to the economy, but which drives up the cost of food and fuel for everyone.

Lending surges!

In my blog post one week ago I mentioned that lending may be on the rebound as we saw the first increase in 17 weeks.

New data out from the Fed indicates that loan growth advanced sharply for a second week in a row. Total loans and leases surged $83.2 billion in the period 10/28 to 11/4 and is up almost $95 billion over the last two week reporting period.

This is good news for the economy especially since it comes at a time when government spending seems to be thottling back. (I have been covering this in my daily report, Fiscal Trend Digest. To get a free, 30-day trial please email me.)

Up $95 billion!

Friday, November 13, 2009

Obama wants domestic spending cuts in next budget

Recovery to be aborted in 2010.

I am currently accepting clients for managed accounts that will fully take advantage of this oncoming fiscal disaster. Please send me an email if you are interested. Managed account inquiry.

After spending binge, White House says it will focus on deficits

-End of recovery now in sight. Start taking profits into this stock market rally.

-Lessons of the past not learned.

-Deficit Terrorists firmly in control.

-Americans of the current and future generations stand to lose their standard of living vis-a-vis the rest of the world because our leaders (and most Americans) don't understand our financial system.

-Protect yourself: get into a good "short" fund.

Budget Freezes, Spending Cuts Possible Says White House

To follow up Mike's posts above, this is bad news for US GDP growth. From the linked AP/CNBC story:
The Obama administration is alerting domestic agencies to expect their budgets will be frozen or even cut by 5 percent, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

This blog has identified that FY 2009 GDP was favorably affected by the year over year increase in Federal spending in this post. Last year's increase in "real" Federal spending was equivalent to 4.4% of the previous year's GDP. If the administration makes across-the-board 5% cuts as the idea floated in this article suggests, this year's "G" contribution to GDP will be impacted.

Review: Y = C + I + E + G where

Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending. The component amounts of GDP need to be sustained or grow year over year or GDP will fall (bad!).

FY 2009 real Federal spending came in at about $4T, a 5% cut would mean a $200B reduction for FY2010 or equivalent to negative 1.43% of our $14T GDP. Ironically, this potential $200B reduction would negate the positive effects of the "stimulus" which have been running at about a $200B annual rate.....hello 12% unemployment?

This could be just political posturing by Obama administration officials, one way to tell is to keep watching the daily/weekly/monthly fiscal information released by the Treasury Dept.

Current Status of Fed MBS Purchases

Through November 11, the FRB NY has just surpassed the $1T level with net purchases of Agency MBS. Over $200B of these purchase transactions have yet to settle so the amount recorded in the H.4.1 Report is only at $775B as a factor affecting bank reserves.

The weekly rate at which the NY Fed is purchasing these securities has slowed over the weeks since the Fed announced that this program would be extended into 1st quarter 2010, from $25B per week to lately around $16B per week. The graph below is as of this week.

This is probably the first time that such a focused Fed program has surpassed the $1T level.

Thursday, November 12, 2009

White House Aims to Cut Deficit With TARP Cash

As millions flounder in the worst job market in six decades, the White House is planning on using unspent Tarp funds to pay down the deficit.

Rather than use the money to spend on new public works projects or pass along as a tax reduction to try to help restore income to households (households other than the 7-figure Wall Street bonus earning kind), the Administration is paralyzed with fear over a deficit that is only slightly above the Reagan shortfall of 1983.

And to make matters worse, more fiscal austerity is likely coming our way. According to sources, White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the "tax and spend" label that has bedeviled Democrats, according to administration and congressional officials.

Avoiding labels. That's what is has all come down to as people suffer in the worst economy since the 1930s...avoiding labels.

With a double dose of fiscal austerity--tax increases and spending cuts--coming our way in this president's first (and probably, only) term, we are guaranteed to repeat the mistakes of the past. If these measures are adopted, the a double dip, recession or even depression, is inevitable.

Enjoy the ride in the stock market for a little while longer, however, it's becoming increasingly evident that the Deficit Terrorists have hijacked this Administration and are firmly in control of policy. That's not good news for the outlook going forward.

Tuesday, November 10, 2009

Will the stock market rally continue?

Here's what I said back on August 14...

Nice prediction if I may say so myself!!


The Deficit Terrorists and our misguided policymakers who listen to them and who don't understand our own monetary system have blood on their hands!!

Read article here.

Loan growth returns after 17 week contraction!


Although the first six statement days of the month of November continue to show a gross surplus (this is the longest stretch of surplus since I started writing my Fiscal Trend Digest report and collecting the data going back to May), the stock market continues to rally.

Surpluses constitute fiscal drag so, ordinarily, it would be bearish at some point for stocks and the economy all else being equal.

However, households spending out of savings or, an uptick in lending (private sector money creation) can also work to sustain consumption and output.

Until now there has been NO evidence of loan growth, in fact, total loans and leases (reported weekly by the Fed) have been contracting for the past 17 weeks.



Monday, November 9, 2009

Wall Street Bonuses Rise as Big 3 May Pay $30 Billion

Goldman Sachs, Morgan Stanley and JP Morgan Chase will pay out up to $30 BILLION in bonuses as the rest of America dangles in the wind, unable to find a job!


Goldman and Morgan Stanley are speculative intermediaries, which would have failed during the financial meltdown had they not received gov't support.

JP Morgan Chase is a commercial bank that resembles an investment bank/hedge fund because of the repeal of Glass Steagall. They closed my overdraft line of credit, even though it was current and I've had it for 10 years. Shame on you, Jamie Dimon!


Friday, November 6, 2009

10.2% unemployment rate highest in 26 years and they still think the Fed can fix this with low rates!!

The nation's unemployment rate rose to the highest level in 26 years and there is not a word being spoken about additional--and aggressive--stimulus (tax cuts and government spending).

Instead, our President and our policymakers are leaving the job up to the Fed, which has ZERO ability to increase aggregate demand. The Fed can only set interest rates and it has set them at zero, which effectively acts like an income cut to so many people who rely on interest income to live.

The Fed's quantitative easing is not only not helping, it is making the situation worse.

Thursday, November 5, 2009

Private-sector led recovery now beginning

In the absence of any private-sector led demand over the past year or so, gauging the economy based on Government money flows was relatively easy because that was the only factor to consider.

But since gov't tends to to "prime the pump" (by restoring non-governmental incomes and savings via spending) over long periods of deficit spending, there comes a time when private sector demand begins to grow on its own.

I think we are reaching that point.

In one sense this makes the job of forecasting the economy a bit more complicated because gov't "involvement" in terms of the percentages of gov't spending, deficits and such, relative to GDP, actually start to shrink. Rather than being the "money pump" that it has been, over time the government becomes more of a siphon as more fiscal drag is applied. (Tax revenues increase in a growing economy faster than the gov't can spend them.)

However, we are nowhere near a level that would concern me at the present time and deficit spending is likely to continue for a while. Moreover, private sector savings are still relatively high and if job growth resumes, private sector wages will rise.

In addition, from a psychological perspective a private-sector led recovery represents a huge potential positive. That's because most people, including our policymakers, are fundamentally opposed to gov't involvement in the economy even if it is there only to sustain output and employment at the most base levels.

On the other hand, demand and employment that is being driven by the private sector would get people excited and they would start to view the recovery as sustainable whereas they saw the government's contribution as unsustainable (even though it could have been sustained for as long as our leaders wanted it to be.)

So if my assessment is correct, we could now get into a "sweet spot" in the market as so many skeptics begin to throw in the towel on their bearish outlooks.

Admittedly, one very important set of supports (the gov't) may begin to ease off, but the private sector's own momentum will take the baton for now, which for most people, will look like a welcome relief.

Enjoy the ride!

More media nonsense about the gov't needing our tax money to fund spending

Here's an article that appeared today online at (where else?) Bloomberg. Bloomberg has, by far, the most economically ignorant journalists in all of journalism and they are the most dangerous because of the fact that Bloomberg is widely considered to be a very serious and respected news outfit.

My comments are in italics.

Taxman Seeking Cash Means U.S. Filers May Move Income to 2009 Share Business
By Margaret Collins

Nov. 5 (Bloomberg) -- The U.S. government is spending $787 billion to stimulate the economy, the deficit is $1.4 trillion and Congress is debating costly changes to health care. The taxpayers’ bill to pay for it isn’t far behind.

Government spending is not constrained by tax revenues. The government only accepts its own money for taxes anyway, so by definition it must spend it into existence in the first place in order for anyone to be able to get it to satisfy their tax liability. Deficit spending means the gov't spends more of its own money than it takes back from the non-government. It couldn't do this if it first had to collect revenue from somewhere. On a gold standard or fixed exchange rate this could be a problem, but not under a floating FX/non-convertible currency system such as the one we are on.

“Something is going to have to be done to raise revenue unless entitlement spending is cut,” said Gerald Prante, senior economist for the Washington-based Tax Foundation.

Again, this guy is clueless. Cutting spending means, once again by definition, that less of the Government's money is available to the non-governmental sector, making the payment of taxes more difficult because it reduces incomes and savings of the non-governmental sector. The only way for the government to "save" is for the private sector to "dissave."

Federal tax rates may rise in 2011 to as high as 39.6 percent, up from 35 percent, for those earning more than $373,650. The House version of the health reform bill sets an additional 5.4 percent surtax on adjusted gross income for high- income individuals. Long-term capital gains rates may reach 28 percent, from 15 percent today, Prante said.

Tax rates will rise because Obama is going to let the Bush tax cuts expire, however, that is not a necessary requirement to "fund" new or existing spending, nor is it wise because it will increase fiscal drag at a time when the economy is, hopefully, recovering. The decision to let tax cuts expire stems from sheer ignorance of our monetary system and nothing more, but Obama displays his ignorance almost every day when he says things like, "the government is out of money." Too bad for us all.

With people like this running things we barely have a chance. God help us all!

Tuesday, November 3, 2009

Another clueless commentator gives her "explanations" for the recovery

Nina Easton is a conservative commentator. Here is an article that she wrote, which appeared online today. My comments are in italics.

Washington's inconvenient economic truths
By Nina Easton, Washington editor
On 10:35 am EST, Monday November 2, 2009

Now that we're officially (if barely) out of the Great Recession, it's time for our nation's elected officials to get down to serious business -- that of taking credit, assigning blame, and calling each other liars.

Barely? We're growing at nearly 4% and could be growing a lot faster if more economic stimulus were applied.

The $787 billion stimulus package signed by President Obama is the picked-over carcass in the middle, with the White House claiming credit for millions of jobs "saved" and the Republicans accusing Team Obama of playing fantasy foosball with hard economic data.

But the stimulus package is mostly beside the point -- at least so far -- which poses an inconvenient political truth for both President Obama and his GOP foes. The real credit for a rebounding economy goes to the Federal Reserve Board -- chaired by a Bush appointee, Ben Bernanke, whose term was just re-upped by Obama.

The Fed only sets interest rates; it cannot add to aggregate demand, which is is what has been so lacking. How does she support her claim that the real credit for the rebounding economy goes to the Fed?

Some credit for stabilizing the financial system can also be given to a wildly unpopular bank bailout launched by President Bush's Treasury Secretary and endorsed and sustained by President Obama's Treasury Secretary.

It could be argued that the bank bailout--in the form it was conducted, i.e. sustaining non-bank intermediaries--was counterproductive. If the Fed had understood its role and lent on an unsecured, unlimited basis to commercial banks, as is their directive, then the "financial system" would have been fine and we would have eliminated a lot of unecessary intermediation.

Try making those points to angry voters in next year's midterm elections.

No elected Democrat really wants to embrace TARP, no matter how much Tim Geithner has tweaked and re-tweaked the bank rescue program, and no matter how many billions banks have since returned, stapled with interest payments to U.S. taxpayers.

Tarp was an extravagant use of taxpayer money. One hundred times what is spent on food stamps, for no good reason.

Likewise, Republicans are painfully aware that last summer's "tea party" rebellions had as much to do with public anger over these Wall Street bailouts as they did with opposition to government-run health care.

Some economists, like Stanford University's John Taylor, think TARP was an unnecessary disaster. Others, like Allen Sinai, president of Decision Economics, say the government missed an opportunity to drive a real turnaround as we stared into a financial abyss.

Yes, there was no change. And Tarp sustained some of the very non-bank, speculative entities that contributed to the crisis.

Instead of injecting capital into banks who were unlikely to lend the money back out in such a dismal credit environment, Sinai argues the government should have supported housing prices -- the root of the crisis -- by directly intervening in the mortgage market.

That's one idea. How about supporting incomes via payroll tax cuts and giving money to cash-strapped states. In other words, you support the real economy and the banking crisis goes away.

Still, most economists credit TARP, followed by Treasury's requirement for the big banks to raise private capital, with stabilizing the financial sector -- a prerequisite to the 3.5% GDP growth for the third quarter that was reported last week. (Even Sinai credits TARP with a small but measurable role in last week's good news.)

The decision to force banks to raise capital was an admisssion by our policymakers that they don't understand our own banking system. Banks are already regulated as to their capital adequeacy. Ostensibly the FDIC and controller of the currency was doing that job.

Says the American Enterprise Institute's Alex Brill, former chief economist to the House Ways and Means Committee: "There is a lot of fair criticism about how TARP operated. But the banking system is the grease in our economy. As a result of TARP, we're in a much better place today." Even though, as Brill acknowledges, "TARP is scary for a lot of politicians and voters."

Banks are functionally agents of the government when it comes to lending and money creation, however, our leaders fail to recognize this. They also fail to recognize that banks make loans based on the ability of those loans to be paid back, which is a function of basic economic conditions. We still have 15 million people unemployed, yet our policymakers are scratching their heads as to why banks are not lending.

There is similar disagreement among economists over the impact of the $787 billion stimulus bill that a Democratic Congress passed and President Obama signed last February.

Sinai calculates that the tax and income supports, along with aid to states and cities, were responsible for about 40% of the 3.5 GDP growth rate reported last week. (Though Sinai and other economists include in their measurements the Cash for Clunkers program, which clearly caused an uptick in auto manufacturing. But that month-long trade-in program has ended, and wasn't even part of the original Obama stimulus bill.)

Yes, income supports via automatic stabilizers, like SS, Medicare and unemployment insurance. NOTHING was done proactively to help incomes rise. In fact, the Fed's zero-interest-rate policy actually has led to a decline in interest income, which is not an insignificant part of national income.

Brill argues that Obama's stimulus had very little impact on GDP because very little money is getting out the government door. "The bureaucracy and red tape in these projects is systemic," he says.

Agreed. Most of the "spending" went for Tarp (about $400 billion). When you remove Tarp from the deficit, the shortfall is about 7% of GDP, which seems wholly inadequate when you are dealing with the worst downturn since the 1930s.

And Stanford's Taylor argues in his blog that the Bureau of Economic Analysis tables released with last week's GDP numbers "make it very clear that the $787 billion stimulus package had virtually nothing to do with the improvement."

It had some, but not a lot. And much of the actual spending was in the second year, so the jury is still out on this.

What's harder to ignore in this improving economic picture is the role of the Fed, which has effectively bypassed an ailing banking system to pump credit into the economy. The Fed's interventions have been manifold: through the commercial-paper market and short-term loans to banks; through supports for loans to small business, auto buyers, credit-card holders and student-loan borrowers; and through a commitment to buy up $1.25 trillion in loans tied to home mortgages.

Despite interest rates being brought down to zero, total bank credit has declined by $400 billion in since last December. This woman has no clue about what she is talking about. Moreover, since hte gov't is a net payer of interest, zero-percent interest rates have resulted in an income cut to many people.

"Where you see that is in home sales and housing starts," says Sinai. "The GDP numbers showed a nice increase in residential construction. Also, home prices have bottomed out. That's a secondary effect of the Fed's actions."

No. It has to do with the fact that housing construction fell to unsustainably low levels.

Of course, Fed monetary policy, which has kept interest rates at effectively zero, has also "had a significant effect on the economy," says Sinai, producing a stock-market rally that caused wealth gains, and boosting investor confidence. And a lower dollar, he notes, has helped exports, which showed a healthy increase in last week's GDP figures.

The stock market's gains are felt more by people at the top--the highest income earners--and do little for folks at the bottom or in the middle. Moreover, achieving export growth in a highly competitive global export economy meant reducing the real terms of trade for Americans. Exports are a cost; imports are a benefit.

As the economy improves, economists will give a pat on the back to Bernanke -- even as they worry about inflation and what will happen when he takes his foot off the money accelerator. But don't look for 435 House members and 36 U.S. Senators seeking reelection next year to take to applause lines for Bernanke -- or his Federal Reserve Board.

The economists are wrong. Bernanke had nothing to do with this recovery if indeed it lasts, becausee the Fed has absolutely zero tools to deal with raising the level of aggregate demand.

The effect of TARP, the most widely publicized piece of last year's government response to the financial crisis, was to stir fierce populist sentiment. The Fed, a historically secretive and mistrusted agency, doesn't escape those passions. Libertarian Ron Paul of Texas, who has called for an end to the Fed, introduced a bill to audit the agency's monetary policy-making -- and 308 House members have since signed on.

Ron Paul is an idiot and his constitutents are idiots for keeping him in office.

This isn't a clean Republican-Democrat divide; it's a grass roots-elite divide. And the Fed's key role in America's economic recovery is one of those truths that just isn't convenient on any campaign trail right now.

The Fed has had zero role in this recovery. She's clueless.

Should the Fed be audited?

Yesterday a reader of my blog sent me an email asking my opinion as to whether or not the Fed should be audited. As many of you know, people like Ron Paul are pushing for a Fed audit. My response to the email is below.

It's a dumb idea being pushed by people who are completely ignorant of our monetary system.

Here are several reasons why it is stupid.

1. One of the Fed's main monetary policy tools is the setting of interest rates. It does this by manipulating the level of reserves in the banking system. Any audit that would constrain the Fed's ability to add to reserves would serverly hamper its ability to conduct monetary policy and that would be bad for the economy.

2. Under a free floating non-convertible currency system such as the one we currently have there is never an issue of "solvency," and solvency, ostensibly, is what the audit woiuld seek to determine. A currency issuing nation and its central bank "spend" by crediting bank accounts and there is no constraint on the ability to do this because there is no "backing" for the currency as would be the case under a gold standard or fixed exchange rate. Conducting an audit for solvency in a monetary regime where there can never be a solvency issue is nonsensical.

3. Last but not least: The Fed is required by law to turn over all its profits to the U.S. Treasury. No business in America and probably no business in the entire world is under such a confiscatory directive. If the Fed were allowed to keep its profits in the form of retained earnings--as nearly all businesses do--then its capital over the past 96 years would have grown into the tens of trillions. The question of solvency would be moot.