America’s Financial Crisis is Not a Clogged Sewer Problem

-


UT Austin/LBJ School of Public Policy economist James K. Galbraith is testifying this morning at 10 am EST for the House Financial Services Committee. He will be joined by economists John Taylor and Alan Blinder. Galbraith, a fervent Obama supporter, is not much impressed by the early moves of President Obama’s economic team.
In the video above, he offers a methodic critique of the financial sector bailout and the stimulus package.
And in National Journal yesterday, Galbraith takes on Obama’s understanding of the financial system arguing that “CREDIT IS NOT A FLOW.”

Obama: “The flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education, how stores stock their shelves, farms buy equipment, and businesses make payroll. But credit has stopped flowing the way it should.”
James K. Galbraith, Professor of Economics, University of Texas: “A remarkable speech, full of good sense and pragmatic determination. But the analysis of the banking crisis relies on a defective metaphor – restoring the “flow of credit.” Credit is not a flow. Banks are not short of funds. (They never are.) They are not blocked up. Adding funds to banks does not make them more willing to lend.
“Credit is a contract. The collapse of values has left the banks short of good borrowers. There are not enough customers with profitable projects. There are not enough customers with stable incomes. There are not enough customers with adequate collateral. Banks will not lend until there is profit in it. And customers will not borrow, until they see more opportunity than risk, and until they have assets they can borrow against.
“Guaranteeing bad assets will not stabilize the price of housing. It will not stabilize incomes and profit opportunities in the economy. Therefore it will not solve the credit problem.
“Meanwhile the guarantees will support incumbent management and shareholders. They will add vast sums to the public debt – directly or contingently – making achievement of the president’s other priorities more difficult. And they will distort the distribution of wealth, by guaranteeing the financial position of an elite group while that of so many others is collapsing.
“Keeping the existing management in place means that we will not arrive at clean and trustworthy audits of the banks. Therefore no one will know to what degree they actually are, or actually are not insolvent. No one will know just how bad the bad assets are, and most will (prudently) suspect the worst. This collapse of trust means that lending to the banks, including by other banks, will continue to be impaired.
“As of tonight, the president and his team are committed to finding an actual solution to the banking crisis. To get to that solution, they need to come to grips with the problem. And for that, they need, first of all, to escape from the prison of a facile metaphor.”

Galbraith’s outline seems sensible to me — and as I see it today, we have a lot of taxpayer money chasing the wrong challenges in the wrong way.
America should begin a major, long-term make-over of all of its core infrastructure. This will help generate jobs, demand, and create an investment that makes sense and that can generate recurring returns to the economy over the very long term.
— Steve Clemons

Comments

39 comments on “America’s Financial Crisis is Not a Clogged Sewer Problem

  1. TheGame says:

    i don’t even know …
    visit this site maybe it will be useful 4 u
    http://rapidok.com/

    Reply

  2. HenryBee says:

    I think, I’ve seen quitу similar post on another resource.
    http://healthnova.org

    Reply

  3. swer says:

    this source very useful for finding links for downloading some video or music files http://rapid4me.com

    Reply

  4. Jack Daniels says:

    the economy makes me horny

    Reply

  5. söve says:

    This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made.

    Reply

  6. guys background search says:

    USA’s FAST ECONOMIC RECOVERY IN 2 STEPS
    Step 1 – STOP THE BAILOUTS and FIX THE BANKS
    – Solve the loan problem.
    – Solve the derivative problem.
    – Reassemble whole loan mortgages
    The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already own $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money for banks to start lending, but banks hoard the money to save themselves.
    Our financial system became untrustworthy, because it mixed $ billions in bad loans in with the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.
    The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.
    So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.
    The USA has fixed this problem before, and it is not hard to fix again. This is how:
    A) Start with the Resolution Trust Corporation (RTC), which the federal government setup to solve a Savings and Loan problem in the 1980s.
    B) RTC buys up securitized mortgages and derivatives to reassemble whole mortgage loans.
    1. “Securitized mortgages” are home loans that have been bundled into large groups and sold to investors. A group of about 4,000 mortgages can be “securitized” and sold just like a stock or bond. Investors like to buy groups of mortgages because they receive all the monthly house payments.
    2. Some groups of securitized mortgages were subdivided into smaller pieces, called “derivatives.” However, both of the fancy names refer to mortgage loans.
    3. The problem is that many bad loans (with no payments) got mixed in with good loans. That turned the all the securitized mortgages into bad investments, which are ruining our banks. It is a huge problem, and the government has to fix it, before our economy will recover.
    4. Total securitized mortgage and derivative market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )
    5. Government should buy up securitized mortgages and derivatives at the lowest market price, which is set via a reverse auction. (Google on “reverse auction”.)
    6. Squatters, who sit on their mortgage derivatives, in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)
    7. Government pays mortgage derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.
    8. Sellers give up all rights. No new law there.
    9. Banks, investors, and insurers now have cash instead of questionable mortgage loans and derivatives. So, the banking system is healthy with cash to lend.
    10. Credit will flow, and the economy will grow.
    C) Government reassembles whole loans from securitized mortgage components and derivatives.
    D) Government sorts the newly reassembled whole loans (mortgages) into groups according to risk/quality.
    1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.
    E) Government (RTC) sells the reassembled whole loans to traditional mortgage banks.
    1. This solves the problem of renegotiating home loans with homeowners. Read on.
    2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.
    3. An important purpose is to reconnect each homeowner with his lender, and vice versa.
    4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.
    5. Government recovers much of the $1.3 Trillion purchase cost, because government auctions off the reassembled mortgages.
    6. The lower quality, more risky mortgages would fetch a lower price at auction.
    7. Mortgage companies, that buy the risky loans, will have more room to negotiate with the homeowners.
    8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)
    9. Other renters would like to buy those empty homes at reduced market prices.
    10. If the government gets stuck with some homes, the government could profit by selling the homes when the housing market recovers.
    F) Insurers like AIG may be reorganized through bankruptcy.
    1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.
    2. Those insurance schemes always were a scam.
    3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work very well. A major flood ruins all the buildings in a large area, all at the same time. So, the insurance company goes broke, and people that bought the insurance are not protected. That is the problem with securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses at the same time. Securitized mortgage insurance was doomed to fail, and the insurance companies went broke in 2009.
    4. Companies that ran the insurance scam may have to go through bankruptcy.
    5. Never ending government bailouts for insurers like AIG are just throwing good money after bad. So, stop the bailouts.
    This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow.*
    Step 2 – STOP THE PORK and START THE RECOVERY
    *The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.
    If President Obama announced Steps 1 and 2, today, the stock market would go up within hours. Investors love a real business plan, instead of a political pork plan. Millions of people will be wealthier, feel wealthier, and have more money to spend. That will jump start the economic recovery within days.

    Reply

  7. Mr.Murder says:

    *Horrid lag here.
    **Place a cap on the rate, to compare that amount, tag it to wage compensation disparities.

    Reply

  8. Mr.Murder says:

    Restore the tax codes to Ike’s levels for determining the amount of taxable income you have.
    Per that amount to wave compensation disparities.

    Reply

  9. WigWag says:

    Erichwkk thanks for your informative comments and kind words.
    I agree with most of James Galbraith’s analysis and I am a big fan of his. Actually I remember seeing his father on television with President Kennedy and being impressed enough to go out and buy “The Affluent Society.” I also really like James’ brother, Ambassador Peter Galbraith who has written some of the smartest analysis of the Iraq War. It’s quite a family. I just wish Obama had found positions in his Administration for James and Peter. I don’t understand why he didn’t.
    I have a few small quibbles with your remarks. You say,
    “but you have to remember that the top marginal tax rate pre-Reagan was 91%.”
    That’s true but the number of deductions available were far greater than the number available now (e.g. deductions for consumer credit) and there were far more tax shelters. Most importantly, pre-Reagan there was no AMT which tends to raise the amount high income tax payers pay today despite the lower marginal rates. I’m not sure, but in light of this it might make more sense to compare effective tax rates than marginal tax rates.
    By the way, I would like to see marginal tax rates on wealthy people raised and I would be delighted if the tax code became even more progressive. I am quite pleased with Obama’s new budget plan including his plans to raise more money from the comparatively wealthy.
    You also say,
    “What we have is a “balance sheet recession” where leveraged monies bid up asset prices (houses, stocks) causing folks to believe they were richer than they actually were. To restore their balance sheet to the optimum relationship between savings (future consumption) and current consumption, they liquidated some savings (often through reduced equity in their home) by financing kid’s education, remodeling kitchen, buying car, remodeling kitchen, etc. Once the bubble burst, revealing that asset prices were NOT representative of anything REAL, folks stop spending to build up cash reserves.”
    I think this is partially true. There’s no question since the mid 1990s we experienced a bubble in asset prices especially in real property and the stock market; but I would argue that to save the American economy its critical for the government to prevent irrational exuberance from turning into irrational pessimism.
    I’ve looked at the trailing PE ratios for the S&P 500 for every quarter between December 31, 1936 and December 31, 2008 (its all on the S&P website). During this period of time. the lowest quarterly PE ratio for the index occurred on June 30, 1949; it was 5.90. The highest trailing PE ratio occurred in the quarter ending December 31, 2000; it was 46.50. During the 286 quarters contained in this time period, the trailing PE ratio was in the single digits in only 64 quarters (mostly in the 1950s and 1980s). The last time the PE ratio was in the single digits was September, 1982. The trailing PE ratio of the S&P exceeded 19.9 during 43 quarters. (the last time was the quarter ending June, 2008) For the other 179 quarters the ratio was between 10.0 and 19.9. The average PE ratio over the entire period was 15.79. As a general rule, higher PE ratios occur in periods of low inflation.
    The consensus view for earnings for the S&P 500 for the remainder of 2009(given the very gloomy outlook) is approximately $51.00 per share. If the PE ratio for the index was to reach its historical average of 15.79, the S&P should be at about 805 (it closed Friday at 735.09). Of course It’s hard to expect the index to trade at its historical average multiple when times are so bad; on the other hand when inflation is low (as it is now) the market multiple tends to be higher.
    If the Obama Administration engages in activities that the market views as unfavorable and even hostile to shareholders (and a bank nationalization plan that wiped out shareholders would surely be viewed this way) we could easily see market multiples approach single digits as they did from 1947 to 1951 and again from 1977 to 1982. This would imply an S&P of approximately 500 for the rest of this year or a 32 percent drop from where we are now.
    A further 32 percent drop in the stock market would wipe out the middle class. Tens of millions would see their retirement savings virtually disappear. Younger middle class people who have been investing since the 1990s would
    experience actual losses similar to what they’ve seen with their homes. College and university endowments would be eviscerated and the granting of scholarships would virtually cease. Municipal and state pension funds would not have sufficient capital or returns to meet their obligations and states and municipalities (which already have under funded pension programs) would have to dramatically increase their capital injections. The money would have to come from cutting other municipal services. Scores of private pension plans would fail, necessitating the need for additional hundreds of billions from the federal Pension Benefit Guaranty Corporation. And given the “wealth effect” that we already see operating in a profoundly negative way, consumer spending would plunge even further.
    The bottom line is that it’s not just the rich guy’s stock market any more. A plunging stock market devastates the American economy and the American working class far more than making the rich taxpayer kick in some additional funds to prevent banks from becoming insolvent; even if they continue to be recalcitrant about lending the money out and even if they keep behaving disgracefully be granting unfathomable bonuses..
    In fact, I think you could make the argument that saving the stock market is more important to American economic vitality right now then increasing the amount of credit banks make available.
    And remember, although no one talks about it, the commercial paper market and the rest of the “shadow banking system” is as important to the provision of credit as banks are. They too are will be less likely to lend if the stock market keeps falling.
    I’m just a dilettante in looking at this. I wish someone who knows what their talking about would tell me I’m wrong.
    I fervently hope that I’m wrong.

    Reply

  10. questions says:

    The cover story from the Jan/Feb Dollars and Sense (dead tree edition) is all about capital flight and its role in the housing bubble’s bursting.
    It’s amazing how many stories can be told about this mess, each of which has a partial truth. It’s also amazing how helpful it would be to have a degree in economics right about now.

    Reply

  11. ... says:

    erichwwk, you mention a criminal element to all of this… would you go so far as to say that the federal reserve has been largely responsible for the financial mess at present? it is my belief that looking for a solution needs to begin with an examination of the role that federal reserve has played in allowing this to happen.. that to me is where the real criminality lies…
    the book by James Galbraith – The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, looks like a good read…i liked this quote from a reader “Galbraith correctly shows us that the “free market” is an ideal construct, not a real thing. There has never been any truly “free market”, unaffected by government policies for good or bad.”

    Reply

  12. questions says:

    Erichwwk,
    I wonder what it will take to restore this “balance” between future and current consumption. We won’t spend a penny beyond sufficient calories (what, 1200-1800 per day or so) if we feel that no future income will replace current spending. We can compromise on housing (move back in with the ‘rents, or double, triple, quadruple up, or even move next door to the local garbage dump), we can walk rather than drive, wear rags rather than haute couture and the like. Given how low we CAN go, I’m not sure that much can stimulate the economy unless there is a massive jobs program coupled with mass unionization to increase wages and redistibute wealth down to workers. I wonder if the stimulus weatherization plan will end up weatherizing homes that will soon be boarded up and slated for demolition. Sobering thought.
    Asset prices caused one version of overconsumption, but much consumption was not driven by inflated asset prices, it was driven by credit card debt and now credit card companies are cutting back. People have bought food and medical care on credit, not just their thousandth pair of shoes. This kind of consumption will be some of the last to be given up, but when you can’t get a credit card anymore, it’ll go. All the bottom feeders who make their money this way will tank and we’ll get another spiral down.
    Health care, community kitchens, community farms in vacant lots might help with some of this. But I suspect there’s a decent chance that we’ll see poverty in ways we’re not at all accustomed to.
    In the end, since the boom was based on fantasy, the recovery is likely to be small and we are going to live with old kitchens and old bathrooms and we’re going to have to make education and health care cheaper. So bring in some tenants for the extra bedroom, pull out the instructions for that canning kit your great-grandmother left you…. And don’t forget the leeches for what ails you!

    Reply

  13. erichwwk says:

    Thanks Wigwag. I love the fact that facts matter for you. If they mattered to everyone like they do to go, we could sort out our differences rather quickly.
    As you’ll note form the graph 2 and 3 comparison, you are of course correct that the EIC and non-payment raises very low incomes disproportionally, but you have to remember that the tax marginal rate pre-Reagan was 91%. So I am not talking whether income tax is progressive overall, but whether the tax is more or less progressive than it was during the high economic growth period 1949-1979 compared to 1980 on. So you are correct in terms of how you frame the issue, and I believe I am correct in terms of how I frame the issue.
    Re to how bailout affects folks by income class, only one of us could be right. Different question.
    A precursor to that is the issue of WHAT the credit problem is. The bank bailout does NOTHING/ZERO/ZILCH to address the credit issue, which Galbraith correctly describes as a long term CONTRACT problem, and not a “flow” problem.
    What we have is a “balance sheet recession” where leveraged monies bid up asset prices (houses, stocks) causing folks to believe they were richer than they actually were. To restore their balance sheet to the optimum relationship between savings (future consumption) and current consumption, they liquidated some savings (often through rduced equity in their home) by financing kid’s education, remodeling kitchen, buying car, remodeling kitchen, etc. Once the bubble burst, revealing that asset prices were NOT representative of anything REAL, folks stop spending to build up cash reserves. So it is the cash reserves of CONSUMERS, not banks, that is at issue. Capitalizing banks merely allows banks to partially fill up THEIR balance sheets, to replace holes caused by withdrawing unearned CEO and other compensation that has disappeared down black hole in Switzerland or Cayman Islands. Joe Stiglitz told Amy Goodman on democracynow.com “we are helping bankers, not banks”. Leijonhufvud, Koos, and I would go further. We are helping bankers, not consumers, to allow these crooks (we ARE talking criminal fraud)to maintain the entitlements they think they somehow earned. A short explanation of the difference between a liquidity recession and a balance sheet recession is here:
    http://www.voxeu.org/index.php?q=node/3065
    Thanks for keeping at this, and caring to sort this out, wigwag.
    Do read Galbraiths testimony before the House Banking Committee Thurs which Steve Clemons links to. It is so much better than the “advice” Obama is getting from Summers and Geithner. It also clears up the SS and Medicaire issues beautifully.
    cheers e

    Reply

  14. erichwwk says:

    Thanks Wigwag. I love the fact that facts matter for you. If they mattered to everyone like they do to go, we could sort out our differences rather quickly.
    As you’ll note form the graph 2 and 3 comparison, you are of course correct that the EIC and non-payment raises very low incomes disproportionally, but you have to remember that the tax marginal rate pre-Reagan was 91%. So I am not talking whether income tax is progressive overall, but whether the tax is more or less progressive than it was during the high economic growth period 1949-1979 compared to 1980 on. So you are correct in terms of how you frame the issue, and I believe I am correct in terms of how I frame the issue.
    Re to how bailout affects folks by income class, only one of us could be right. Different question.
    A precursor to that is the issue of WHAT the credit problem is. The bank bailout does NOTHING/ZERO/ZILCH to address the credit issue, which Galbraith correctly describes as a long term CONTRACT problem, and not a “flow” problem.
    What we have is a “balance sheet recession” where leveraged monies bid up asset prices (houses, stocks) causing folks to believe they were richer than they actually were. To restore their balance sheet to the optimum relationship between savings (future consumption) and current consumption, they liquidated some savings (often through rduced equity in their home) by financing kid’s education, remodeling kitchen, buying car, remodeling kitchen, etc. Once the bubble burst, revealing that asset prices were NOT representative of anything REAL, folks stop spending to build up cash reserves. So it is the cash reserves of CONSUMERS, not banks, that is at issue. Capitalizing banks merely allows banks to partially fill up THEIR balance sheets, to replace holes caused by withdrawing unearned CEO and other compensation that has disappeared down black hole in Switzerland or Cayman Islands. Joe Stiglitz told Amy Goodman on democracynow.com “we are helping bankers, not banks”. Leijonhufvud, Koos, and I would go further. We are helping bankers, not consumers, to allow these crooks (we ARE talking criminal fraud)to maintain the entitlements they think they somehow earned. A short explanation of the difference between a liquidity recession and a balance sheet recession is here:
    http://www.voxeu.org/index.php?q=node/3065
    Thanks for keeping at this, and caring to sort this out, wigwag.
    Do read Galbraiths testimony before the House Banking Committee Thurs which Steve Clemons links to. It is so much better than the “advice” Obama is getting from Summers and Geithner. It also clears up the SS and Medicaire issues beautifully.: http://tinyurl.com/c6art8
    cheers e

    Reply

  15. WigWag says:

    Forgive me, I meant to say the the CBO data is from 2007 not 2008 (but as far as I know, nothing appreciable has changed)

    Reply

  16. WigWag says:

    Hello Erichwwk, I agree entirely that payroll taxes for social secuirty and medicare shouldn’t be counted in this case. If you just look at how the federal tax burden is distributed, this is what you find (the data comes from the CBO and is for 2008)
    1)The top 1 percent of taxpayers (adjusted gross income of $365,000) contribute 39 percent of all federal income tax collected.
    2)The top 5 percent of taxpayers (adjusted gross income of $145,000)contribute 60 percent of all federal income tax collected.
    3)The top 10 percent of taxpayers (adjusted gross income of $104,000) contribute 70 percent of all federal income tax collected.
    4)The bottom 50 percent of taxpayers pay no federal income tax at all. In other words they contribute 0 percent of all federal income tax collected (actually because of the EITC the number is actually negative)
    No matter how you cut the cake, that looks pretty progressive to me. Taxpayers on average are wealthier than the average citizen and the people who contribute the most federal income tax are far wealthier.
    My argument is that it’s better for poor and middle class Americans to have taxpayers (who tend to be wealthier) pay to bail out the banks instead of bank stockholders.
    Certainly the bottom 50 percent of wage earners would be better off; after all, they pay no federal income tax. Many of them do, however, have IRAs or depend on university endowments for scholarships for their kids. A sinking stock market (caused by nationalization) hurts them more than a taxpayer bailout of banks. After all, when it comes to federal income tax, their not taxpayers.
    It seems pretty irrefutable to me but perhaps I’m missing something

    Reply

  17. erichwwk says:

    Hi Wigwag:
    graph 2 shows post Reagan income distribution BEFORE taxes, and Graph 3 after taxes. Taxes clearly move income up the scale not down, as you seem to believe.
    As graph 3, shows taxes transfers wealth (or annual income) from the lower and middle classes, and distributes it to the top. The use of taxes to distribute income from the bottom, and move it up the income/wealth percentiles was so severe, that during that period the lower 40% of Americans LOST almost 80% of their previously held wealth.
    I don’t know where your confusion over tax progressiveness arises. Perhaps you are confusing nominal (announced, tax table rates)with real (actual rates paid, after utilization of loopholes, tax avoidance, etc.)?
    Also, one can not tell much from one side of a balance sheet, from a double entry perspective.
    Looking at how benefits of tax collections are redistributed are as important. SS should not really be considered a tax program, as it is not based on the principle of “ability to pay” but rather on the principle of tax in relation to “benefit”. The government acts more as a fiduciary agent, as a trustee of a separate social contract that “could” just as well be private, as medical insurance is in this country. One would not consider insurance collections and payments as part of the tax system.
    The following graph ( by the Brookings inst, one I use to track nuclear weapons expenditures) makes clear that by far the largest government programs are defense (take out SS and include DOD and the part of DOE that is for nuclear weapons)), and direct transfers (income stabilization or price supports), programs that again take money from the bottom and transfers it to the top. Ditto for debt, if you allocate it in proportion to the other programs, so much of it becomes part of defense expenditures. Defense is essentially a private police force to extract resources from other nations, the benefits of which flow through the largest corporations. Of course lower classes also benefit from the cheap oil, tin, fruits,etc, but as these are all large monopolies, the monopoly rents (consumer surplus) accrue to shareholders only.
    http://tinyurl.com/cxufpa
    BTW, I hope folks read James complete testimony on the financial crisis. He nails what many have been saying, that the financial crisis is a “balance sheet” and NOT a liquidity problem. Recapitalizing banks merely goes towards restoring balance sheets, and has NOTHING/ZERO to do with “starting credit flows”. As such the bailout merely continues transferring wealth from citizens at large to bank shareholders, to allow them to continue the extravagant lifestyles to which they have become accustomed and to which they feel they are entitled.

    Reply

  18. PW says:

    Just to clarify, a question or two: Don’t we want to make sure the banks keep functioning and don’t we recognize that in many cases lousy management is to blame? Couldn’t we drop the shriek-it’s-a-rat attitude here about words like nationalization and perhaps agree that where a good bank is in the hands of bad management we (you+me=gov) should rescue the bank and sell it to new and better management? Note: In my area (100 miles west of JKG) I heard yesterday that the regional banks have retained their high ratings and are lending to eligible (solvent!) borrowers with the result that the top tiers of the real estate market are doing just fine. There are probably many places in the country where you can find pockets of normality and prosperity. Shouldn’t we get going, step over the bodies of the “fiscal conservatives” who created this mess, clean Obama’s vocabulary of facile metaphors, and start bailing fast before we drown even the remaining healthy parts of the economy?

    Reply

  19. WigWag says:

    Unless I’m missing something, erichwwk, the slides you linked to highlight the disasterous turn things have taken in this country in regards to income distribution. They say nothing about the progressivity of the federal tax burden.
    The argument is that given that someone needs to pay for the bank bailout, taxpayers are in a better position to pick up the bill than anyone else. Why? Because the tax code is so progressive.
    Is it progressive enough? No.
    Is it very progressive? Yes.
    Rich people pay far more taxes so let them pick up the bailout costs.
    In the meantime, protect shareholders. Middle class people can’t afford for their pension funds and IRAs to decline even more.

    Reply

  20. erichwwk says:

    Since there has been so much interest in the progressiveness of our tax system in the Post Reagan period, perhaps a comparison of graphs 2 and 3 from this set of 5 will be helpful.
    http://tinyurl.com/bmstr7
    The graphs come form Dr. Robert Frank’s book “Falling Behind:How Rising Inequality Harms the Middle Class”. Dr. Frank has co-authored both a micro and macro economics text with Ben Bernanke.

    Reply

  21. erichwwk says:

    Thank you so much for sharing James Galbraith’s views at TWN. Lets hope the House Financial Services Committee members pays attention and understand what James is saying. Seems not to be the case here, where the credit problem seems poorly understood, and the concern is primarily with how and from whom entitlements are to be withdrawn in order to transfer entitlements to bank shareholders and bank management.
    What is the point of throwing money at a problem, and arguing about who bears the burden, without having any sense of WHAT the problem actually is?

    Reply

  22. WigWag says:

    So now the Obama Administration has decided that instead of nationalizing Citibank they will convert the preferred shares the Treasury owns into common shares. The main advantage to Citi is that they no longer have to pay dividends on the preferred shares (they pay no dividends on common).
    Again the Obama Administration is clueless in how they’re handling this. The conversion of the government shares to common stocks dilutes current shareholders to a 36 percent ownership stake in the company. What’s the result? Citi shares are plunging (expected to open at $1.54 per share)and the stock market is expected to open at its lowest record in 14 years.
    More Americans will cancel plans to send their kids to college and more will be trading in a comfortable retirement to man the check out counters at Walmart, Target and Cosco. There are better solutions but the ideological blinders the Obama Administration wears are as firmly in place as the blinders worn by the Bush people.
    We’ve seen this story before. The idiotic way the Bish Administration handled the rescue of AIG is one of the things that set off the current crisis. Now the Obama Administration is making the same mistakes.
    We had Paulson, now we have Geithner.
    Meet the new boss, same as the old boss.

    Reply

  23. WigWag says:

    “Now, as to pension funds. Let’s not forget that the bond market is worth roughly three times the stock market. Assuming that pension funds have been prudent and invested substantially in bonds, then a further 30% hit on stocks would only amount to an 8% hit to a portfolio proportionately representing stocks and bonds at today’s values (75% bonds, 25% stocks). Of course, once the bond market gets hit, then we’re
    all in real deep doo-doo.”
    Actually JohnH I think you will find that pension funds hold a far higher percentage of equities than you think. CALPERS is the largest employee pension fund in the world ($183.3 billion). And its asset allocation is typical of public and private employee pension funds. If you visit their site, you will discover that this is their asset allocation:
    Inflation Linked Treasuries, $3.6 billion (2.0 percent of portfolio)
    Cash Equivalents, $15.2 billion (8.3% of portfolio)
    Real Estate, $21.1 billion (11.5 percent of portfolio)
    Total Fixed Income, $44.6 billion (24.3% of portfolio)
    Total Equities, $98.8 billion (53.9 % of portfolio)
    The Harvard Endowment totals about $36.4 billion. Income from the Endowment Fund pays over 50 percent of the operating costs at Harvard including virtually all of the scholarships. The Harvard Endowment is considered to be the most successful university endowment in the world and virtually every University seeks to emulate its investment success. Here is the asset allocation of the Harvard Endowment. (From the Harvard Endowment Website)
    Cash Equivalents, 1 percent
    Total Fixed Income, 5 percent
    Real Estate, 34 percent
    Equities and Special Situations, 60 percent
    As you can see, to the extent that Calpers and Harvard are emblematic of pension funds in general and endowments in general (and I think they are), a declining stock market is devastating. California employees (at least those who want to retire) and poor students who rely on scholarships will be severely crippled by continued declines in the stock market.
    You ask,
    “I’m not sure why you just assume that the stock market will be devastated by nationalization.”
    A substantial portion of IRAs and 401Ks of ordinary Americans are invested in S&P 500 Index Funds. In fact the Vanguard S&P fund, the Fidelity S&P fund and the Dreyfus S&P fund are amongst the largest mutual funds in the United States. Collectively they hold tens of billions of retirement assets. The financial sector makes up a substantial portion of the S&P 500. Given the importance of these stocks to the index, when financials fall the index falls, when financials rise the index rises.
    A bank nationalization plan that wipes out shareholders diminishes the retirement assets of millions and perhaps tens of millions of middle class Americans. These Americans would be far better off having the rich pay higher taxes to pay for a bank bailout than they would be with a nationalization plan that causes an even greater decline in their retirement savings than they’ve already seen.
    After all, where do middle class Americans have most of their assets? The answer is in their homes and their retirement accounts. Their homes have already collapsed in value. The government should be doing everything it can to make sure the same thing doesn’t happen to their retirement portfolios.
    That means stock market friendly government strategies are critical. The natural consequence of this is that a nationalization plan that wipes out shareholder equity must be avoided.
    At least if the government cares about poor and middle class people.

    Reply

  24. Don says:

    I could add a whole lot more on federal income taxes, but why? You can’t do much when some men the rob us with their fountain pens.
    As I understand it the Federal Reserve System (through the New Yord Fed Bank) sells bonds on what is called the open market committee. People, like the Chinese government, or even you or me pay money (liquid assets) for the bonds, the bonds are printed up thereby creating new money through the interest on the bond.
    The slight of hand is it’s our tax money that pays the bond’s obligation to the holder and its interest when it comes due. imo, this stimulus bill will create an orgy of bonds sold.
    Will the federal government run out of paper printing all this funny money?

    Reply

  25. JohnH says:

    Good stuff, Wigwag. You freakonomics point about federal progressivity is interesting.
    However, let’s not conflate the fate of the stock market with the fate of financial stocks. I’m not sure why you just assume that the stock market will be devastated by a nationalization. In fact, the stock market might well be relieved to have a solution, which means increased certainty and less risk and therefore higher stock prices.
    Now, as to pension funds. Let’s not forget that the bond market is worth roughly three times the stock market. Assuming that pension funds have been prudent and invested substantially in bonds, then a further 30% hit on stocks would only amount to an 8% hit to a portfolio proportionately representing stocks and bonds at today’s values (75% bonds, 25% stocks). Of course, once the bond market gets hit, then we’re all in real deep doo-doo.

    Reply

  26. Don says:

    Don’t forget all state governments must yearly balance their budgets by their own state laws.
    But the Feds don’t need to, don’t apparently want to, and consequentnly we get deficits up the wazoo.
    Throw in phoney money printed out of thin air, and, voila, you’ve got a major financial mess.
    What country song was it that read, “if you can’t give me love. . .where’s the money?”

    Reply

  27. WigWag says:

    “Wigwag, wigwag–Yes, the INCOME TAX is progressive. But that part of the tax system only represents 45% of tax revenues. The payroll tax, however, represents 35% of federal government revenues. And it is extremely regressive. Net: a flat tax system.”
    Actually even with the payroll tax and estate taxes added to the federal income tax, the total tax burden is still quite progressive. Here are the numbers from the Congressional Budget Office (outlined in a report from the CBO to Max Baucus dated December 23, 2008.) I found these numbers on the NY Times Freakonomics Blog (Steven Dubner).
    Lowest quintile: 4.3 percent
    Second quintile: 9.9 percent
    Middle quintile: 14.2 percent
    Fourth quintile: 17.4 percent
    Percentiles 81-90: 20.3 percent
    Percentiles 91-95: 22.4 percent
    Percentiles 96-99: 25.7 percent
    Percentiles 99.0-99.5: 29.7 percent
    Percentiles 99.5-99.9: 31.2 percent
    Percentiles 99.9-99.99: 32.1 percent
    Top 0.01 Percentile: 31.5 percent
    So even if you include all federal taxes paid by individuals (which I still think is a mistake in this circumstance); the rich pay far and away the highest effective tax rates. And because they pay the most taxes they would shoulder far and away the largest share of the burden of a tax payer bailout of the banks. Middle class and poorer taxpayers will be far better off with a stock market friendly solution to the banking crisis then they would be with the solution proposed by Galbraith, Krugman, and Baker.
    Two other issues should be borne in mind:
    1) A federal takeover which zeroed out shareholders might legally be construed as bankruptcy by state and federal courts. If this happens it could trigger the requirement for massive payments on credit default swaps which could dramatically escalate the crisis.
    2) A perfect case study of what would happen if the large money center banks are nationalized is provided by AIG. AIG was effectively nationalized (Hank Paulson picked one of his former Goldman Sachs cronies as the new CEO). Because Paulson was obsessed with moral hazard, shareholder value was diluted to almost nothing. The effect that this had on the stock market was profound. The equity markets have been plummeting ever since. Was the AIG fix the only reason for the market plunge? Of course not. Was it a major reason? Absolutlely.
    Because of the dramatic fall in equity prices precipitated by the way AIG was nationalized (including the destruction of shareholder value) millions of Americans can no longer afford to send their kids to college and tens of millions have watched their retirement portfolios evaporate. It’s not the rich who can’t afford to send their kids to college or to retire, it’s the middle class and the poor.
    While nationalizing banks might make us feel good, it will make things worse; not better.

    Reply

  28. Linda says:

    I’m not agreeing or disagreeing with any one because I think most of the points made above are valid.
    No sympathy for the wealthy on progressive income tax from me. I though we were fine before Reagan and Gramm-Rudman and don’t think there are enough marginal tax levels and should be much higher all the way up to 91% on anyone earning billions per year.
    Social Security and Medicare are regressive taxes because it’s a one rate flat “tax,” and we’re stuck with calling them “taxes” or “payroll taxes.” But they really shouldn’t be called “taxes” and are more like an annuity or pension fund because each person is promised a specific benefit in return based on how long and how much one paid into the system.
    Both are invitable like death and not optional.

    Reply

  29. Don says:

    One of the biggest pluses the Middle Class and our economy could get would be having congress forgo payroll taxes for the next three years or longer.
    What better way to jump start our economy?

    Reply

  30. ... says:

    get rid of the federal reserve, a major leech on the usa…

    Reply

  31. JohnH says:

    Wigwag, wigwag–Yes, the INCOME TAX is progressive. But that part of the tax system only represents 45% of tax revenues. The payroll tax, however, represents 35% of federal government revenues. And it is is extremely regressive. Net: a flat tax system.
    http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm
    Rich people pay more in taxes only because they gobble up most of the income in this country, not because we have a progressive tax system. From rich people’s point of view, we have a progressive income system and most favorable tax system in their life times.
    Are payroll taxes relevant to bank bailouts? Of course they are. Politicians don’t distinguish among sources of revenue. Which is why the Social Security Trust Fund has been looted to fund the Occupations and the doubling of “defense” spending. And it can help bail the banks out, too.
    So let’s not kid ourselves. Unless Washington starts treating the Social Security Trust Fund as a true trust fund, it won’t be just the wealthy who will foot the bill for the bailouts. It will be all of us.

    Reply

  32. WigWag says:

    “Obama’s proposal to apply the Social Security Tax to high income wage earners is precisely what is needed to restore some measure of progressivity to the federal tax system. Treating hedge fund managers earnings as ordinary income, not capital gains, will help, too.”
    I agree with this comment entirely.
    But the part of the tax system that will pay to bail out banks and shareholders is extremely progressive. What would you call an income tax system where the bottom 50 percent of income earners pay no federal income tax at all?
    Could the system be more progressive? Yes. Should it be more progressive? Yes. Are payroll taxes important and meaninful? Yes. Are they relevant to bailing out banks? No. Will poor and middle class people be better off or worse off if income tax payers instead of shareholder pay the ultimate price of the bailout? They will be far better off.

    Reply

  33. JohnH says:

    No, Wigwag. You said “the tax code is profoundly progressive.” As I pointed out, this is rich people’s propaganda, like the BS about a “liberal” media. It’s true that, while lower income people pay little income tax, they pay a most of the Social Security taxes. So, to the extent that the Social Security “Trust” Fund gets looted, everyone gets stuck with bailing the banks out and funding wars, not just the wealthy.
    Obama’s proposal to apply the Social Security Tax to high income wage earners is precisely what is needed to restore some measure of progressivity to the federal tax system. Treating hedge fund managers earnings as ordinary income, not capital gains, will help, too.

    Reply

  34. Kathleen G says:

    Joseph Stigletz had a few things to say about the bailout and Obama’s speech at Democracy Now
    http://www.democracynow.org/2009/2/25/stieglitz
    “So the question isn’t just whether we hold them accountable; the question is: what do we get in return for the money that we’re giving them?”

    Reply

  35. WigWag says:

    JohnH, you need to go back and read my comment more carefully. I didn’t say the top marginal tax rate is 39 percent, I said the top 1 percent of taxpayers pay 39 percent of all federal income taxes paid into the system. The statistics I mentioned are all on the US Treasury website; go take a look if you like.
    You also say “Now Wigwag will say, but you can’t count Social Security taxes…” In most cases I would not say that; social security and medicare taxes are real and they are meaningful; it’s just that in this case they’re not relevant. The social security surplus (yes there is still a surplus) is used to buy Treasury notes not to pay for things like bank bailouts. In fact all of the money to save the banks (and bank shareholders) will come from federal income taxes not payroll taxes. The only people who don’t think social security taxes are isolated and used for a different purpose than income taxes are supply siders and George Bush (remember his debate with Al Gore about the “lock box”).
    The portion of the tax system that will be used to bail out the banks is profoundly progressive and the budget that Obama is introducing this week will make it even more progressive.
    Rich people pay most of the federal income tax, middle class people pay some; poor people pay almost none. If you think the rich should pay to bail out the banks then you have to want the taxpayer to pay for the clean-up.
    ps: I agree with your comment that the tax rate on interest, dividends and capital gains (assuming anyone has any capital gains left)should be the same as for ordinary income.

    Reply

  36. Don says:

    Geithner didn’t pay his taxes for years, Buddy Boy Bernake and his old senile mentor Greenmoldspan work for internstional bankers, not any organization that has U.S. interests up front.
    Just wait until these international bankers disguised as federal reserve bankers manipulate this country’s currency so much that people will be more than willing go to their new contrived system of “credit card money”.
    Big bro will be tracking every move we make, from every purchase, every travel, every step we take.
    It’s coming regardless of what Obama and his clan say.

    Reply

  37. JohnH says:

    I’ve disagreed with Wigwag in the past, but it’s been about policy. This time it’s about facts. It is simply not true that the federal tax code is “profoundly progressive.”
    If you look at IRS’ 2009 tax rates, the top bracket is 35% (not 39% as Wigwag claims) with no Social Security taxes. A married couple with an AGI of $68,000 pays 25% marginal tax rate plus 7.65% for Social Security and Medicare for a total of 32.65%.
    http://www.bankrate.com/brm/itax/news/taxguide/2009taxrates.asp?caret=3j
    http://www.ssa.gov/pressoffice/colafacts.htm
    Those earning a $million in wages pay at a marginal rate of 2.35% more than the two income family each earning about $40,000. This is barely progressive and certainly not “profoundly progressive!!” In fact, it’s really a flat tax, which is why we probably don’t hear much from Steve Forbes any more. He won!
    Now if you consider that people in higher tax brackets generally own more stocks and earn more from capital gains and qualified dividends, taxed at 15%, then suddenly the “profoundly progressive” tax structure becomes profoundly regressive. This is why Warren Buffet can state that his secretary pays federal taxes at higher rate than he does.
    Now Wigwag will say, “but you can’t count Social Security taxes.” But certainly the average wage earner counts Social Security taxes when he looks at his pay check. And the sad thing is that politicians never made the distinction either. They looked at Social Security revenues as just another revenue source, not as a savings account. All they had to do is issue an IOU and–presto!–they had a source money to loot for more “defense” spending, wars in Iraq and Afghanistan, and Homeland “Security.”
    The bank bailouts now represent a chance for “equal opportunity” looting of Social Security. So its’ your choice–is it being looted for nonsensical wars or for nonsensical bank bailouts. Either way the taxpayer gets screwed.

    Reply

  38. Spunkmeyer says:

    Getting rid of the Gramm-Leach-Bliley Financial Services
    Modernization Act of ’99 would be a great starting point. IMO if
    banks simply went back to the old 3-6-3 rule (deposits at 3%
    interest, lending at 6% interest, on the golf course by 3pm) we’d be
    in a much better place.

    Reply

  39. WigWag says:

    Galbraith, Krugman, Baker and others are all advocating nationalizing failing banks. Their argument is that this will be the fastest and most transparent way to clean up the balance sheets of these institutions and that shareholders instead of taxpayers will end up feeling at least part of the pain. Their refrain is why should taxpayers pay the bill while shareholders reap the benefit? My heart tells me they’re right; my head tells me they’re wrong. Ultimately I think Geithner, Summers and Bernake have the better argument.
    Paradoxically the more progressive thing to do is to stick taxpayers with the bill while rescuing shareholders; the Obama team recognizes this, the progressive economists don’t. The reason to let the taxpayers foot the bill is because the progressive nature of the tax code makes taxpayers disproportionately wealthy. Meanwhile less wealthy people will be hit far harder by the plunge in the stock market that bank nationalization will surely inspire than rich people will.
    In fact, the tax code is profoundly progressive. The top 1 percent of taxpayers (AGI above $365,000) pay 39 percent of all federal income tax. The top 5 percent of taxpayers (AGI above $145,000) pay 60 percent of all federal income tax. The top 10 percent of taxpayers (AGI above $104,000) pay 70 percent of all federal income tax. Meanwhile the bottom 50 percent of income earners pay no federal income tax at all. By sticking the taxpayer with the cost of the bank bailout or by having taxpayers “over pay” to buy bad assets from troubled banks the rich pay almost all the bill, the middle class pays very little and the poor pay nothing.
    Conversely if the government nationalizes the banks the effect on the stock market will be devastating. It could easily fall 20 to 30 percent from the extremely low level it is already at. The results of this will be far worse for middle class and poor people than for the wealthy.
    Yes, the wealthy may own most of the equities but what about pension funds, IRAs, 401ks and endowment funds? Sure the wealthy will be punished, but even after dramatic losses to their stock portfolios they will still have enough to send their kids to college and to contemplate a reasonable retirement.
    But what happens to the poor? If they want to send their kids to college they need for those colleges to have healthy endowments. If the market crashes and the endowments plunge, the poor can kiss any chance of a scholarship goodbye. What about a poor person who wants to go to a museum or a concert; don’t those institutions subsidize inexpensive tickets through their endowments? And when cities have to increase contributions to their employee pension funds to make up for reduced principal in those funds aren’t they going to take this money from programs designed for the poor?
    What happens to middle class people if government intervention in the banking system is done in a way that spooks the equity markets? There are 20 million taxpayers who have AGIs between $62,000 and $104,000. Don’t many or most of these people have large portions of their retirement savings in IRAs and 401ks invested in equities? To make mattes worse, a substantial portion of these retirement assets are invested in index funds tied to the S&P 500. Given the significant portion of the S&P made up of financial stocks a nationalization plan can be expected to negatively affect Index Funds in a disproportionately negative way. Nationalizing the banks and wiping out shareholder equity might inadvertently devastate the retirement plans of tens of millions of middle class Americans.
    And don’t many of those middle class Americans have college savings for their children at risk because those savings are invested in various vehicles with significant exposure to equities? What happens to the college plans for these families if the government takes action that causes equity prices to plunge even further?
    As unpalatable as it is, a taxpayer bailout that preserves the equity stake of shareholders will be far kinder to the poor and middle class than bank nationalization will be.
    Barack Obama and his economic team know it; that’s why they’re so resistant to nationalizing the banks.

    Reply

Add your comment

Your email address will not be published. Required fields are marked *