Showing posts with label Wall Street. Show all posts
Showing posts with label Wall Street. Show all posts
Monday, April 23, 2012
Seven Day Plan to Hold Wall Street Accountable
A Seven Day Plan to Finally Hold Wall Street Accountable
New evidence points to illegal behavior. Prosecution is the only way to keep that behavior from continuing.
Bruce Judson
Monday, 03/19/2012
http://www.newdeal20.org/2012/03/19/a-seven-day-plan-to-finally-hold-wall-street-accountable-74581
It’s now a near certainty that Wall Street executives committed felonies.
The recently released audits of robo-mortgage activities by the Office of the Inspector General of the Department of Housing and Urban Development (HUD) details shocking behavior at the five banks constituting the Federal Housing Administration’s largest mortgage servicers. At Wells Fargo, management quashed a midlevel manager’s study of the foreclosure process as negative results began to emerge, and it gave an individual whose last job had been in a pizza restaurant the title of “vice-president of loan documentation” to facilitate robo-mortgage signing. Bank of America evaluated employees on the volume of foreclosure affidavits produced. JP Morgan Chase gave individuals titles such as “vice-president of Chase Home” where “the titles were given by Chase for the sole purpose of allowing individuals to sign documents and came with no other duties or authority.” Citigroup and Ally similarly engaged in seemingly illegal practices.
Under federal law, the knowing filing of a false affidavit with the court is a felony offense of perjury, punishable by a prison term of up to five years. An individual violates laws against perjury whether he or she personally appears in court and swears to a false statement or provides the court with a false affidavit. Individual states have their own perjury laws, which were undoubtedly violated as well. The HUD report also suggests that individual banks may be guilty of obstruction of justice and the criminal violation of the False Claims Act for filing insurance claims without following HUD requirements.
Since the start of the financial crisis, federal and state officials have been struggling to change Wall Street behavior. To date, every effort has failed miserably, and the weak enforcement provisions of the robo-mortgage settlement are unlikely to meaningfully change this dynamic. Government officials have also relied, with a very few exceptions, entirely on civil enforcement when criminal laws appear to have been egregiously violated.
The greatest moral hazard now confronting the nation is what appears to be increasingly brazen criminal activity by financial industry executives. With each decision not to prosecute, Wall Street executives justifiably conclude that they are immune to the rules. As a result, it appears that Wall Street criminal activity is increasing in frequency and severity, as opposed to the reverse. The activities surrounding the collapse of MF Global are one example.
So what can be done about it? We can change the behavior in the financial service industry for a full generation in just seven days. This plan may seem to be tongue and cheek, but it hearkens back to a similar action in the era of the Great Depression. In the final months of Herbert Hoover’s presidency, the Senate Banking Committee began an investigation into the causes of the Great Crash of 1929, and a young prosecutor named Ferdinand Pecora was appointed as Chief Counsel. Subsequently, the Roosevelt administration conveyed to Pecora that “the prosecution of an outstanding violator of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished, it will be helpful in restoring confidence.” Ultimately, this investigation, which came to be known as the Pecora Commission, led to the indictment of one of America’s most prominent financiers; demonstrated widespread self-dealing in the financial sector; and, as noted by historian Alan Brinkley, generated “broad popular support” for Roosevelt’s reform agenda, including the creation of the SEC and the Glass-Steagall Act.
My seven day plan is based on a simple premise: When criminal laws are egregiously violated, the guilty parties should face appropriate punishment. Here’s the plan:
Day One: Read the HUD Inspector General’s reports and the public records of past mortgage foreclosure cases from across the nation.
Day Two: Meet with the team at the Office of the Inspector General at HUD that prepared the audits. Obtain the names of all the bank officials, lawyers, and notaries whose behavior, as cited in the audit reports or otherwise known to the investigators, represent clear and unquestionable criminal violations. Add to this list other individuals who have similarly demonstrated or testified to behavior unquestionably constituting criminal acts, as indicated by the public records of the mortgage foreclosure cases reviewed in day one.
Day Three: Indict all of the individuals on the list compiled on day two.
Day Four: Indict banks and financial institutions on criminal charges where criminal behavior by employees (as demonstrated by day three indictments) appears to be endemic. The Justice Department guidelines for prosecuting firms include: (1) the pervasiveness of such activity, (2) the compliance procedures in place, (3) attempts by the corporation to end bad behavior, and (4) cooperation with federal investigators. In 2008, the Justice Department adopted a policy of accepting “deferred prosecutions,” involving agreements to change corporate behavior without damaging innocent third parties through prosecution.
Corporations receive the benefits of “legal persons,” as demonstrated by Citizens United. But they must also bear the responsibilities of these privileges. A reading of the HUD reports, and other public records, suggests several banks should clearly be prosecuted.
Day 5: Discuss plea bargains with indicted lower-level officials in return for cooperating in investigations of higher-level officials.
Day 6: Consider plea bargains with indicted banks, which require the removal of all remaining officers and directors who were serving when egregious criminal activity occurred, as well as senior officials who were in a position to exercise appropriate supervisory responsibility but chose to look the other way.
Day 7: Indict any senior Wall Street officials implicated by new cooperative testimony resulting from activities on day five. Adopt and announce a policy that future criminal violations will be prosecuted in a similar fashion.
What is particularly disturbing is that a look at the evidence already in the public domain (much less what investigators already know) shows that none of the actions discussed above are entirely absurd. The purpose of prosecution not simply punishment. It acts to deter further illegal activity and to restore public confidence in our system of governance. The nation desperately needs both of these benefits today.
Moreover, these ongoing, almost certainly criminal activities are ultimately dangerous threats to our economy, the success of capitalism, and our democracy. In his column on MF Global, Joe Nocera noted that “customers need to be able to trust” the laws protecting their money. “Otherwise, the markets can’t function.”
Today, as in the era of FDR, we must send a message to the financial community that illegal behavior will not be tolerated. By prosecuting blatant felonies now, we will deter future misbehavior and begin the process of recreating a fair society where equal justice prevails.
Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.
Wednesday, March 21, 2012
Wall Street’s Broken Windows
William K. Black
March 4, 2012
http://neweconomicperspectives.org/2012/03/wall-streets-broken-windows.html
James Q. Wilson was a political scientist who often studied the government response to blue collar crime. The public knows him best for his theory called “broken windows.” The metaphor was what happens to a vacant building when broken windows are not promptly repaired. Soon, most of the windows in the abandoned building are broken. The criminals feel little compunction against petty destruction because the building’s owners evince no concern for the integrity of their building. Wilson took social norms, community, and ethics seriously. He argued that as community broke down fewer honest citizens were active in monitoring and policing behavior. The breakdown in community was criminogenic – it led to widespread serious blue collar crime. He urged us to take even minor blue collar crimes and breaches of civility seriously and to demand that they be contained through social pressure and policing.
New York City’s police strategy embraced “broken windows.” The police increased the priority with which they responded to even minor offenses that upset the community – “squeegee men,” graffiti, and street prostitution. Reported blue collar crime fell in New York City. It also fell sharply in most other cities, which did not implement “broken windows” programs, but Wilson and the NYPD got the credit and popular fame for the sharp fall in reported blue collar crime in New York City. Wilson became one of the most famous blue collar criminologists in the world.
Wilson’s broken window theory remains controversial among many blue collar criminologists. As a celebration of his life and research I offer this discussion of applying “broken windows” theory and policies to elite white-collar crime.
Wilson was strongly conservative. His research focus in criminology was almost exclusively blue collar crime. That was a shame because “broken windows” theory is most compelling in the context of elite white-collar crime and because the application would reveal interesting twists in the theory’s potential. Such an application, however, would have been outside Wilson’s comfort zone. Wilson tended to use the word “crime” to refer exclusively to blue collar crime and his emphasis was on very low status criminals. In a book entitled, Thinking About Crime, Wilson argued that criminology should focus overwhelmingly on low-status blue collar criminals.
This book [does not deal] with “white collar crimes”…. Partly this reflects the limits of my own knowledge, but it also reflects my conviction, which I believe is the conviction of most citizens, that predatory street crime is a far more serious matter than consumer fraud [or] antitrust violations … because predatory crime … makes difficult or impossible maintenance of meaningful human communities (1975: xx).
I am rather tolerant of some forms of civic corruption (if a good mayor can stay in office and govern effectively only by making a few deals with highway contractors and insurance agents, I do not get overly alarmed)…. (1975: xix).
Notice that Wilson’s explanation is antithetical to his “broken windows” reasoning. There are, of course, relatively minor white-collar crimes. Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes. He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints. The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point. Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.” Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.
“Broken windows” theory, in the white collar crime context, would lead us to make the prevention and deterrence of consumer frauds and anti-trust violations through prosecutions a high priority because of their tendency to produce a “Gresham’s” dynamic in which businesses or CEOs that cheat gain a competitive advantage and bad ethics drives good ethics out of the markets. These offenses degrade ethics and erode peer restraints on misconduct.
The ongoing crisis demonstrates that anti-consumer frauds are a direct assault on community. Mortgage fraud – and it was overwhelmingly the lenders and their agents who put the lies in millions of liar’s loans – physically and socially destroy community by producing mass defaults, homelessness, and vacant homes.
Taking Wilson’s “broken windows” reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct. Indeed, we have implicitly tested the applicability of “broken windows” reasoning in that context by adopting policies that acted directly contrary to Wilson’s reasoning. We have adopted executive and professional compensation systems that are exceptionally criminogenic. We have excused and ignored the endemic “earnings management” that is the inherent result of these compensation policies and the inherent degradation of professionalism that results from allowing CEOs to create a Gresham’s dynamic among appraisers, auditors, credit rating agencies, and stock analysts. The intellectual father of modern executive compensation, Michael Jensen, now warns about his Frankenstein creation. He argues that one of our problems is dishonesty about the results. Surveys indicate that the great bulk of CFOs claim that it is essential to manipulate earnings. Jensen explains that the manipulation inherently reduces shareholder value and insists that it be called “lying.” I have seen Mary Jo White, the former U.S. Attorney for the Southern District of New York, who now defends senior managers, lecture that there is “good” “earnings management.”
Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties. For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve. Court decisions have increasingly weakened the fiduciary duties of loyalty and care. The Chamber of Commerce’s most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act. We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud. The Private Securities Litigation Reform Act of 1995 (PSLRA) has achieved its true intended purpose – making it exceptionally difficult for shareholders who are the victims of securities fraud to bring even the most meritorious securities fraud action.
The Supreme Court has held that banks and other entities that aid and abet securities fraud are immune from suit by the victims of securities fraud. Only the federal government may sue those that aid and abet fraud. The federal government has cut the number of financial fraud prosecutions by over one-half over the last twenty years even as financial fraud has grown massively. No elite CEO leading a control fraud that helped drive the current crisis has even been indicted. Elite CEOs can defraud with near impunity and become wealthy. Elite white collar fraud is a “sure thing” – the only strategy likely to make a mediocre CEO wealthy and famous.
Because Wilson did not research elite white collar crimes he did not direct his formidable intellectual energies and expertise to the study of who could prevent the breaking of corporate windows and repair those that were broken. This was a great loss because his studies of varieties of police behavior in response to blue collar crime are justly famous among criminologists. The central truth he would have quickly recognized had he thought of seeking to reduce elite white collar crimes is that only the financial regulators can serve as the “regulatory cops on the beat.” The police do not deal with elite white collar crimes. A small cadre of FBI special agents works on elite white collar crimes. There are roughly three special agents assigned to white collar crime investigations per industry in the U.S., so they never “patrol a beat.” They investigate only when someone brings a possible white collar crime to their attention. That means whistleblowers, but it overwhelmingly means criminal referrals from the federal financial regulators. Financial institutions may make criminal referrals against their customers, but they will virtually never make them against their CEOs. Only the regulators can make the thousands of criminal referrals against elite white collar criminals essential to a successful prosecutorial effort against the epidemics of accounting control fraud that drive our worst financial crises. In the lead up to the ongoing crisis we gutted the federal regulators, preempted the state regulators, and appointed anti-regulators to head the agencies. A majority of the U.S. House of Representatives is trying to further gut the Commodities Futures Trading Commission (CFTC). If we want to stop the criminals who are destroying our economy and our communities by breaking windows on an epic scale the first step is to rebuild a regulatory force committed to serving as the essential “cops on the beat.”
I listened in stunned amazement to the presentations of law professors who specialize in white collar crime and securities law at the two annual meetings that followed the ongoing financial crisis. Virtually every speaker in these sections presented arguments calling for reducing white collar criminal liability and liability for securities fraud. At the time they were speaking, the Justice Department had already ceased prosecuting major firms and the SEC brought a pathetically high percentage of its small number of enforcement actions against tiny firms with fewer than 10 employees.
We have systematically reduced effective peer restraints in our most important controls against financial fraud. Law firms, audit firms, and investment banks used to be professional partnerships. Each partner was potentially liable for any firm misconduct, which maximized the incentive to insist on higher levels of integrity. These firms are now virtually all corporations or limited liability partnerships. The incentive of partners to monitor other partners’ actions to ensure their integrity has largely been lost.
In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory. We have been breaking windows. We have excused those who break the windows. Indeed, we have praised them and their misconduct. The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context. The squeegee guys make tiny amounts of money and are hated and politically powerless. The mediocre financial CEO who engages in accounting control fraud because it is a “sure thing” causes the bank to report record (albeit fictional) profits and becomes wealthy and politically powerful. He uses his wealth to make charitable and political contributions that make him far harder to sanction. He claims that any crackdown on him is “class warfare” by “neo-Bolsheviks.” Incredibly, the Wall Street Journal continues to serve as the cheerleader and apologist for those who become wealthy by breaking windows, communities, and economies.
Wilson warned of blue collar “super predators.” He called them “feral” – wild animals. These criminals are in fact dangerous, but they are odd candidates for the title of “super predators.” Wilson noted that they were disproportionately black and that they were confined almost entirely to the poorest neighborhoods in America where their pickings are poor. Accounting control frauds occupy Wall Street and other financial centers – the richest neighborhoods in the world. Their “take” from fraud is extraordinary. The blue collar criminals that occupied Wilson’s attention late in his career were politically and socially powerless. The fraudulent CEOs that drive our recurrent, intensifying financial crises are wealthy and socially and politically dominant.
Wilson had a fabulous career and added greatly to the policy debate about how to respond to blue collar crime. Our most fitting tribute to him and contribution to his legacy would be to apply his “broken window” theory to the elite white collar crimes and criminals that drive our financial crises. The troubling paradox is that the strongest proponents of “broken windows” theory and policies in the blue collar crime context are the strongest opponents of applying analogous policies in the elite white collar crime context. The Wall Street Journal is the most prominent example of this class-based incoherence.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @WilliamKBlack
March 4, 2012
http://neweconomicperspectives.org/2012/03/wall-streets-broken-windows.html
James Q. Wilson was a political scientist who often studied the government response to blue collar crime. The public knows him best for his theory called “broken windows.” The metaphor was what happens to a vacant building when broken windows are not promptly repaired. Soon, most of the windows in the abandoned building are broken. The criminals feel little compunction against petty destruction because the building’s owners evince no concern for the integrity of their building. Wilson took social norms, community, and ethics seriously. He argued that as community broke down fewer honest citizens were active in monitoring and policing behavior. The breakdown in community was criminogenic – it led to widespread serious blue collar crime. He urged us to take even minor blue collar crimes and breaches of civility seriously and to demand that they be contained through social pressure and policing.
New York City’s police strategy embraced “broken windows.” The police increased the priority with which they responded to even minor offenses that upset the community – “squeegee men,” graffiti, and street prostitution. Reported blue collar crime fell in New York City. It also fell sharply in most other cities, which did not implement “broken windows” programs, but Wilson and the NYPD got the credit and popular fame for the sharp fall in reported blue collar crime in New York City. Wilson became one of the most famous blue collar criminologists in the world.
Wilson’s broken window theory remains controversial among many blue collar criminologists. As a celebration of his life and research I offer this discussion of applying “broken windows” theory and policies to elite white-collar crime.
Wilson was strongly conservative. His research focus in criminology was almost exclusively blue collar crime. That was a shame because “broken windows” theory is most compelling in the context of elite white-collar crime and because the application would reveal interesting twists in the theory’s potential. Such an application, however, would have been outside Wilson’s comfort zone. Wilson tended to use the word “crime” to refer exclusively to blue collar crime and his emphasis was on very low status criminals. In a book entitled, Thinking About Crime, Wilson argued that criminology should focus overwhelmingly on low-status blue collar criminals.
This book [does not deal] with “white collar crimes”…. Partly this reflects the limits of my own knowledge, but it also reflects my conviction, which I believe is the conviction of most citizens, that predatory street crime is a far more serious matter than consumer fraud [or] antitrust violations … because predatory crime … makes difficult or impossible maintenance of meaningful human communities (1975: xx).
I am rather tolerant of some forms of civic corruption (if a good mayor can stay in office and govern effectively only by making a few deals with highway contractors and insurance agents, I do not get overly alarmed)…. (1975: xix).
Notice that Wilson’s explanation is antithetical to his “broken windows” reasoning. There are, of course, relatively minor white-collar crimes. Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes. He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints. The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point. Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.” Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.
“Broken windows” theory, in the white collar crime context, would lead us to make the prevention and deterrence of consumer frauds and anti-trust violations through prosecutions a high priority because of their tendency to produce a “Gresham’s” dynamic in which businesses or CEOs that cheat gain a competitive advantage and bad ethics drives good ethics out of the markets. These offenses degrade ethics and erode peer restraints on misconduct.
The ongoing crisis demonstrates that anti-consumer frauds are a direct assault on community. Mortgage fraud – and it was overwhelmingly the lenders and their agents who put the lies in millions of liar’s loans – physically and socially destroy community by producing mass defaults, homelessness, and vacant homes.
Taking Wilson’s “broken windows” reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct. Indeed, we have implicitly tested the applicability of “broken windows” reasoning in that context by adopting policies that acted directly contrary to Wilson’s reasoning. We have adopted executive and professional compensation systems that are exceptionally criminogenic. We have excused and ignored the endemic “earnings management” that is the inherent result of these compensation policies and the inherent degradation of professionalism that results from allowing CEOs to create a Gresham’s dynamic among appraisers, auditors, credit rating agencies, and stock analysts. The intellectual father of modern executive compensation, Michael Jensen, now warns about his Frankenstein creation. He argues that one of our problems is dishonesty about the results. Surveys indicate that the great bulk of CFOs claim that it is essential to manipulate earnings. Jensen explains that the manipulation inherently reduces shareholder value and insists that it be called “lying.” I have seen Mary Jo White, the former U.S. Attorney for the Southern District of New York, who now defends senior managers, lecture that there is “good” “earnings management.”
Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties. For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve. Court decisions have increasingly weakened the fiduciary duties of loyalty and care. The Chamber of Commerce’s most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act. We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud. The Private Securities Litigation Reform Act of 1995 (PSLRA) has achieved its true intended purpose – making it exceptionally difficult for shareholders who are the victims of securities fraud to bring even the most meritorious securities fraud action.
The Supreme Court has held that banks and other entities that aid and abet securities fraud are immune from suit by the victims of securities fraud. Only the federal government may sue those that aid and abet fraud. The federal government has cut the number of financial fraud prosecutions by over one-half over the last twenty years even as financial fraud has grown massively. No elite CEO leading a control fraud that helped drive the current crisis has even been indicted. Elite CEOs can defraud with near impunity and become wealthy. Elite white collar fraud is a “sure thing” – the only strategy likely to make a mediocre CEO wealthy and famous.
Because Wilson did not research elite white collar crimes he did not direct his formidable intellectual energies and expertise to the study of who could prevent the breaking of corporate windows and repair those that were broken. This was a great loss because his studies of varieties of police behavior in response to blue collar crime are justly famous among criminologists. The central truth he would have quickly recognized had he thought of seeking to reduce elite white collar crimes is that only the financial regulators can serve as the “regulatory cops on the beat.” The police do not deal with elite white collar crimes. A small cadre of FBI special agents works on elite white collar crimes. There are roughly three special agents assigned to white collar crime investigations per industry in the U.S., so they never “patrol a beat.” They investigate only when someone brings a possible white collar crime to their attention. That means whistleblowers, but it overwhelmingly means criminal referrals from the federal financial regulators. Financial institutions may make criminal referrals against their customers, but they will virtually never make them against their CEOs. Only the regulators can make the thousands of criminal referrals against elite white collar criminals essential to a successful prosecutorial effort against the epidemics of accounting control fraud that drive our worst financial crises. In the lead up to the ongoing crisis we gutted the federal regulators, preempted the state regulators, and appointed anti-regulators to head the agencies. A majority of the U.S. House of Representatives is trying to further gut the Commodities Futures Trading Commission (CFTC). If we want to stop the criminals who are destroying our economy and our communities by breaking windows on an epic scale the first step is to rebuild a regulatory force committed to serving as the essential “cops on the beat.”
I listened in stunned amazement to the presentations of law professors who specialize in white collar crime and securities law at the two annual meetings that followed the ongoing financial crisis. Virtually every speaker in these sections presented arguments calling for reducing white collar criminal liability and liability for securities fraud. At the time they were speaking, the Justice Department had already ceased prosecuting major firms and the SEC brought a pathetically high percentage of its small number of enforcement actions against tiny firms with fewer than 10 employees.
We have systematically reduced effective peer restraints in our most important controls against financial fraud. Law firms, audit firms, and investment banks used to be professional partnerships. Each partner was potentially liable for any firm misconduct, which maximized the incentive to insist on higher levels of integrity. These firms are now virtually all corporations or limited liability partnerships. The incentive of partners to monitor other partners’ actions to ensure their integrity has largely been lost.
In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory. We have been breaking windows. We have excused those who break the windows. Indeed, we have praised them and their misconduct. The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context. The squeegee guys make tiny amounts of money and are hated and politically powerless. The mediocre financial CEO who engages in accounting control fraud because it is a “sure thing” causes the bank to report record (albeit fictional) profits and becomes wealthy and politically powerful. He uses his wealth to make charitable and political contributions that make him far harder to sanction. He claims that any crackdown on him is “class warfare” by “neo-Bolsheviks.” Incredibly, the Wall Street Journal continues to serve as the cheerleader and apologist for those who become wealthy by breaking windows, communities, and economies.
Wilson warned of blue collar “super predators.” He called them “feral” – wild animals. These criminals are in fact dangerous, but they are odd candidates for the title of “super predators.” Wilson noted that they were disproportionately black and that they were confined almost entirely to the poorest neighborhoods in America where their pickings are poor. Accounting control frauds occupy Wall Street and other financial centers – the richest neighborhoods in the world. Their “take” from fraud is extraordinary. The blue collar criminals that occupied Wilson’s attention late in his career were politically and socially powerless. The fraudulent CEOs that drive our recurrent, intensifying financial crises are wealthy and socially and politically dominant.
Wilson had a fabulous career and added greatly to the policy debate about how to respond to blue collar crime. Our most fitting tribute to him and contribution to his legacy would be to apply his “broken window” theory to the elite white collar crimes and criminals that drive our financial crises. The troubling paradox is that the strongest proponents of “broken windows” theory and policies in the blue collar crime context are the strongest opponents of applying analogous policies in the elite white collar crime context. The Wall Street Journal is the most prominent example of this class-based incoherence.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @WilliamKBlack
Are Bankers Capitalists?
Thursday, 03/1/2012Bruce Judson
http://www.newdeal20.org/2012/03/01/are-bankers-capitalists-73236
Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?
The phrase “Wall Street” is evocative in American culture. For generations, it has referred to the showcase of American capitalism: our financial services system that ensured the efficient use of funds by channeling capital to its most productive use. Indeed, the governing ethos in America is that Wall Street is the heart and soul of our capitalist economy.
As I have written before, capitalism involves four basic principles: absolute responsibility for anything and everything that happens to your company (i.e. total accountability), equal justice under the law, compensation based on the real value created for society, and competition, which involves failure and what is often called creative destruction.
The CEO of JPMorgan Chase, Jamie Dimon, has repeatedly touted the success of his efforts and disparaged critics. Earlier this week he compared compensation in the banking industry to the struggling media world, suggesting that the banking industry was far more successful. In speaking to journalists, according to Bloomberg, he noted, “Worse than that, you don’t even make any money… [while] we make a lot of money.”
Mr. Dimon is right. He and his colleagues are successful. But the real question is this: What are they successful at? By almost any criteria, the banks operate under rules that are so far from capitalism as to be unrecognizable. Let’s take Mr. Dimon’s comparison of the media industry and the banking industry further.
Both industries have been affected by unforeseen events. The Internet has undermined the viability of innumerable media businesses, leading to bankruptcies, changing business models, and intense competition for advertiser and subscriber dollars. In the face of these changes, industry participants have been forced to adapt or die. The forces of creative destruction, which are central to capitalism, have operated with an unforgiving ferocity. Formerly dominant entities have been forced to declare bankruptcy, while new media competitors and business models emerge on a seemingly daily basis.
In contrast, the banks argued that TARP was warranted because the economic tsunami of 2008 was unforeseeable. One of the essential functions of a financial institution is to manage risk. The majority of our large institutions failed entirely in this central responsibility as the economic crisis struck. In effect, many of our leading financial services firms were (and often continue to be) led by such poor businesspeople that if the principles of capitalism were enforced they would be out of business. My friends who are media entrepreneurs in Silicon Valley actually laugh when they hear the “we should not be responsible because this was not foreseeable” claims from the bankers. Every entrepreneur knows that they must make payroll each week or they are bankrupt.
At the same time, no one in Washington seriously believes the too big to fail legislation in Dodd-Frank will ever work. Inevitably, as in the case of AIG, counter-parties will declare that they will suffer irreparable harm if one of our leading banks is allowed to fail. I have come to call this “the Washington wink.” You ask a federal official if too big to fail legislation will work, they dutifully say of course it will. However, the “of course” is inevitably accompanied by a knowing wink.
In another divergence, the government has not subsidized media businesses. The banks may be showing profits, but they are on government life support. These so-called zombie banks can borrow from the Federal Reserve at almost no cost, and a long list of government initiatives have served as additional “stealth” bailouts of the banks. In the absence of this government support, would the banking industry still be successful? If media companies could borrow funds at almost no costs, I suspect their balance sheets and profits would be dramatically enhanced.
Capitalism is built on the idea that compensation and profits reflect the relative contribution an individual or firm makes to the total wealth of a society. Real societal wealth is anything that can be consumed or experienced. Profits are an accounting proxy meant to measure wealth. As I have written before, this proxy has failed miserably with regard to the banking industry. Given the loss of real societal wealth that accompanied the economic crisis as a result of poor bank management, the employment crisis, and the ongoing support the industry needs from the government, there is only one possible conclusion: at this moment the financial services industry is far more of a destroyer of real wealth than a wealth creator.
Meanwhile, media companies don’t profit by repeatedly breaking the law. The lack of enforcement against Wall Street undermines our democracy and capitalism, and is effectively another form of stealth government support for the industry. As noted here, JP Morgan Chase (like several of the large banks) is in the middle of a host of potential scandals. In a true capitalist economy, the government would enforce the law to prevent repetitive malfeasance. The executives leading a firm that repeatedly violated the law would be held accountable by the firm’s board for failure to exercise this basic responsibility to society.
Since the start of the economic crisis, the financial services industry has grown even more concentrated. It’s hard not to regard our largest financial services institutions as effective monopolies. Yet, to my knowledge, no investigation of antitrust issues related to the industry is underway. This is yet another stealth government subsidy. By contrast, in an earlier article I wrote about the misguided Justice Department investigation of e-book pricing, another area that is already suffering badly.
Yes, Mr. Dimon, you are a success. However, I would suggest that the success you so proudly proclaim reflects the loss of two of our nation’s most important values. The first is the failure of individuals and leaders to simply take responsibility for their actions and the actions of their companies. The second is that Wall Street, which should be the heart of American capitalism, has instead become the heart of a dysfunctional system that is destroying the nation’s wealth.
No, bankers are not capitalists. At every turn, they demonstrate that the last thing they want is the return of real capitalism to America.
Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.
http://www.newdeal20.org/2012/03/01/are-bankers-capitalists-73236
Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?
The phrase “Wall Street” is evocative in American culture. For generations, it has referred to the showcase of American capitalism: our financial services system that ensured the efficient use of funds by channeling capital to its most productive use. Indeed, the governing ethos in America is that Wall Street is the heart and soul of our capitalist economy.
As I have written before, capitalism involves four basic principles: absolute responsibility for anything and everything that happens to your company (i.e. total accountability), equal justice under the law, compensation based on the real value created for society, and competition, which involves failure and what is often called creative destruction.
The CEO of JPMorgan Chase, Jamie Dimon, has repeatedly touted the success of his efforts and disparaged critics. Earlier this week he compared compensation in the banking industry to the struggling media world, suggesting that the banking industry was far more successful. In speaking to journalists, according to Bloomberg, he noted, “Worse than that, you don’t even make any money… [while] we make a lot of money.”
Mr. Dimon is right. He and his colleagues are successful. But the real question is this: What are they successful at? By almost any criteria, the banks operate under rules that are so far from capitalism as to be unrecognizable. Let’s take Mr. Dimon’s comparison of the media industry and the banking industry further.
Both industries have been affected by unforeseen events. The Internet has undermined the viability of innumerable media businesses, leading to bankruptcies, changing business models, and intense competition for advertiser and subscriber dollars. In the face of these changes, industry participants have been forced to adapt or die. The forces of creative destruction, which are central to capitalism, have operated with an unforgiving ferocity. Formerly dominant entities have been forced to declare bankruptcy, while new media competitors and business models emerge on a seemingly daily basis.
In contrast, the banks argued that TARP was warranted because the economic tsunami of 2008 was unforeseeable. One of the essential functions of a financial institution is to manage risk. The majority of our large institutions failed entirely in this central responsibility as the economic crisis struck. In effect, many of our leading financial services firms were (and often continue to be) led by such poor businesspeople that if the principles of capitalism were enforced they would be out of business. My friends who are media entrepreneurs in Silicon Valley actually laugh when they hear the “we should not be responsible because this was not foreseeable” claims from the bankers. Every entrepreneur knows that they must make payroll each week or they are bankrupt.
At the same time, no one in Washington seriously believes the too big to fail legislation in Dodd-Frank will ever work. Inevitably, as in the case of AIG, counter-parties will declare that they will suffer irreparable harm if one of our leading banks is allowed to fail. I have come to call this “the Washington wink.” You ask a federal official if too big to fail legislation will work, they dutifully say of course it will. However, the “of course” is inevitably accompanied by a knowing wink.
In another divergence, the government has not subsidized media businesses. The banks may be showing profits, but they are on government life support. These so-called zombie banks can borrow from the Federal Reserve at almost no cost, and a long list of government initiatives have served as additional “stealth” bailouts of the banks. In the absence of this government support, would the banking industry still be successful? If media companies could borrow funds at almost no costs, I suspect their balance sheets and profits would be dramatically enhanced.
Capitalism is built on the idea that compensation and profits reflect the relative contribution an individual or firm makes to the total wealth of a society. Real societal wealth is anything that can be consumed or experienced. Profits are an accounting proxy meant to measure wealth. As I have written before, this proxy has failed miserably with regard to the banking industry. Given the loss of real societal wealth that accompanied the economic crisis as a result of poor bank management, the employment crisis, and the ongoing support the industry needs from the government, there is only one possible conclusion: at this moment the financial services industry is far more of a destroyer of real wealth than a wealth creator.
Meanwhile, media companies don’t profit by repeatedly breaking the law. The lack of enforcement against Wall Street undermines our democracy and capitalism, and is effectively another form of stealth government support for the industry. As noted here, JP Morgan Chase (like several of the large banks) is in the middle of a host of potential scandals. In a true capitalist economy, the government would enforce the law to prevent repetitive malfeasance. The executives leading a firm that repeatedly violated the law would be held accountable by the firm’s board for failure to exercise this basic responsibility to society.
Since the start of the economic crisis, the financial services industry has grown even more concentrated. It’s hard not to regard our largest financial services institutions as effective monopolies. Yet, to my knowledge, no investigation of antitrust issues related to the industry is underway. This is yet another stealth government subsidy. By contrast, in an earlier article I wrote about the misguided Justice Department investigation of e-book pricing, another area that is already suffering badly.
Yes, Mr. Dimon, you are a success. However, I would suggest that the success you so proudly proclaim reflects the loss of two of our nation’s most important values. The first is the failure of individuals and leaders to simply take responsibility for their actions and the actions of their companies. The second is that Wall Street, which should be the heart of American capitalism, has instead become the heart of a dysfunctional system that is destroying the nation’s wealth.
No, bankers are not capitalists. At every turn, they demonstrate that the last thing they want is the return of real capitalism to America.
Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.
Tuesday, March 20, 2012
Romney's Auto Bail-out Billionaires
Top funders made billions from US Treasury Greg Palast for Nation of Change
Thursday, February 23, 2012
Republican Presidential candidate Mitt Romney called the federal government's 2009 bail-out of the auto industry, "nothing more than crony capitalism, Obama style... a reward for his big donors to his campaign." In fact, the biggest rewards - a windfall of more than two billion dollars care of US taxpayers -- went to Romney's two top contributors.
John Paulson of Paulson & Co and Paul Singer of Elliott International, known on Wall Street as "vulture" investors, have each written checks for one million dollars to Restore Our Future, the Super PAC supporting Romney's candidacy.
Gov. Romney last week asserted that the Obama Administration's support for General Motors was a, "payoff for the auto workers union." However, union workers in GM's former auto parts division, Delphi, the unit taken over by Romney's funders, did not fare so well. The speculators eliminated every single union job from the parts factories once manned by 25,200 UAW members.
The two hedge fund operators turned a breathtaking three-thousand percent profit on a relatively negligible investment by using hardball tactics against the US Treasury and their own employees.
Under the control of the speculators, Delphi, which had 45 plants in the US and Canada, is now reduced to just four factories with only 1,500 hourly workers, none of them UAW members, despite the union agreeing to cut contract wages by two thirds.
It wasn't supposed to be quite so bad. The Obama Administration and GM had arranged for a private equity investor to provide half a billion dollars in new capital for Delphi, but that would have cut the pay-out to Singer and Paulson. The speculators blocked the Obama-GM plan, taking the entire government bail-out hostage. Even the Wall Street Journal's Dealmaker column was outraged, accusing Paul Singer of treating the auto company, "like a third world country."
But it worked. Singer and Paulson got what they demanded. Using US Treasury funds:
GM agreed to pay off $1.1 billion of Delphi's debts, forgave $2.15 billion owed GM by Delphi (which had been spun off as an independent company) pumped $1.75 billion into Delphi operations, and took over four money-losing plants that the speculators didn't want.
If those plants had been closed, GM factories would have shut down cold for lack of parts.
Then there was the big one: The US government agreed to take over $6.2 billion in pension benefits due Delphi workers under US labor law.
Governor Romney, while opposing the bail-out of GM, accused Obama of eliminating the pensions of 21,000 non-union employees at Delphi. In fact, it was Romney's funders who wiped out 100% of the pensions and health care accounts of Delphi salaried retirees.
Paulson and Singer paid an average of about 67 cents a share for Delphi. In November, 2011, Paulson sold a chunk of his holdings for $22 a share. Paulson's gain totals a billion and a half dollars ($1,499,499,000), and Singer gained nearly a billion ($899,751,000) -- thirty-two times their investment.
One-hundred percent of this gain for the Paulson and Singer hedge funds is accounted for by taxpayer bail-out support.
But, unlike the government loans and worker concessions given to GM, the US Treasury and workers get nothing in return from Delphi.
From GM, the US Treasury got warrants for common stock (similar to options) that have already produced billions in profit.
And Delphi? It's doing well for Paulson and Singer. GM and Chrysler, still in business by the grace of the US Treasury, remain Delphi's main customers, buying parts now made almost entirely in China and other cheap-labor nations.
And exactly who are Paulson and Singer?
Billionaire John Paulson became the first man in history to earn over $3 billion in a single year -- not for his hedge fund, but for himself, personally. At the core of this huge payday was a 2007 scheme by which, via Goldman Sachs, he sold "insurance" on subprime mortgage loans. According to a lawsuit filed by the Securities Exchange Commission, Goldman defrauded European banks by pretending that Paulson was investing in the insurance. In fact, Paulson was, secretly, the beneficiary of the insurance, reaping billions when the mortgage market collapsed.
Goldman paid half a billion dollars in civil fines for the fraud. While the SEC states that Paulson knowingly participated in the scheme, he was not fined and denies he defrauded the banks.
Multi-billionaire Singer is known as Wall Street's toughest "vulture" speculator. Vulture fund financial attacks on the world's poorest nations have been effectively outlawed in much of Europe and excoriated by human rights groups, conduct Britain's former Prime Minister Gordon Brown described as, "morally outrageous."
This is one report from our new investigative series: Billionaires & Ballots. We need your support to dig into the sources of the big money bending the campaign using our team's internationally heralded investigative skills. You've seen our reports on BBC Television Newsnight, on Democracy Now, in The Nation, in Rolling Stone, on Truthout and elsewhere. Our stories require digging deep into hidden files and for witnesses spread over five continents. Without your tax-deductible donation this would be impossible. [We just returned from the Congo tracing the twisted path of Romney's top funders. We go where the evidence takes us, without partisan favor. Please donate now and receive a gift signed by Greg Palast: his brand new, highly acclaimed book Vultures' Picnic, films and more.
Greg Palast is the author of Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates and High-Finance Carnivores, released in the US and Canada by Penguin.
Support the Palast Investigative Fund and keep our work alive.
Greg Palast is available for media - contact Julia at Jwouk@boothmedia.com
GregPalast.com
Thursday, February 23, 2012
Republican Presidential candidate Mitt Romney called the federal government's 2009 bail-out of the auto industry, "nothing more than crony capitalism, Obama style... a reward for his big donors to his campaign." In fact, the biggest rewards - a windfall of more than two billion dollars care of US taxpayers -- went to Romney's two top contributors.
John Paulson of Paulson & Co and Paul Singer of Elliott International, known on Wall Street as "vulture" investors, have each written checks for one million dollars to Restore Our Future, the Super PAC supporting Romney's candidacy.
Gov. Romney last week asserted that the Obama Administration's support for General Motors was a, "payoff for the auto workers union." However, union workers in GM's former auto parts division, Delphi, the unit taken over by Romney's funders, did not fare so well. The speculators eliminated every single union job from the parts factories once manned by 25,200 UAW members.
The two hedge fund operators turned a breathtaking three-thousand percent profit on a relatively negligible investment by using hardball tactics against the US Treasury and their own employees.
Under the control of the speculators, Delphi, which had 45 plants in the US and Canada, is now reduced to just four factories with only 1,500 hourly workers, none of them UAW members, despite the union agreeing to cut contract wages by two thirds.
It wasn't supposed to be quite so bad. The Obama Administration and GM had arranged for a private equity investor to provide half a billion dollars in new capital for Delphi, but that would have cut the pay-out to Singer and Paulson. The speculators blocked the Obama-GM plan, taking the entire government bail-out hostage. Even the Wall Street Journal's Dealmaker column was outraged, accusing Paul Singer of treating the auto company, "like a third world country."
But it worked. Singer and Paulson got what they demanded. Using US Treasury funds:
GM agreed to pay off $1.1 billion of Delphi's debts, forgave $2.15 billion owed GM by Delphi (which had been spun off as an independent company) pumped $1.75 billion into Delphi operations, and took over four money-losing plants that the speculators didn't want.
If those plants had been closed, GM factories would have shut down cold for lack of parts.
Then there was the big one: The US government agreed to take over $6.2 billion in pension benefits due Delphi workers under US labor law.
Governor Romney, while opposing the bail-out of GM, accused Obama of eliminating the pensions of 21,000 non-union employees at Delphi. In fact, it was Romney's funders who wiped out 100% of the pensions and health care accounts of Delphi salaried retirees.
Paulson and Singer paid an average of about 67 cents a share for Delphi. In November, 2011, Paulson sold a chunk of his holdings for $22 a share. Paulson's gain totals a billion and a half dollars ($1,499,499,000), and Singer gained nearly a billion ($899,751,000) -- thirty-two times their investment.
One-hundred percent of this gain for the Paulson and Singer hedge funds is accounted for by taxpayer bail-out support.
But, unlike the government loans and worker concessions given to GM, the US Treasury and workers get nothing in return from Delphi.
From GM, the US Treasury got warrants for common stock (similar to options) that have already produced billions in profit.
And Delphi? It's doing well for Paulson and Singer. GM and Chrysler, still in business by the grace of the US Treasury, remain Delphi's main customers, buying parts now made almost entirely in China and other cheap-labor nations.
And exactly who are Paulson and Singer?
Billionaire John Paulson became the first man in history to earn over $3 billion in a single year -- not for his hedge fund, but for himself, personally. At the core of this huge payday was a 2007 scheme by which, via Goldman Sachs, he sold "insurance" on subprime mortgage loans. According to a lawsuit filed by the Securities Exchange Commission, Goldman defrauded European banks by pretending that Paulson was investing in the insurance. In fact, Paulson was, secretly, the beneficiary of the insurance, reaping billions when the mortgage market collapsed.
Goldman paid half a billion dollars in civil fines for the fraud. While the SEC states that Paulson knowingly participated in the scheme, he was not fined and denies he defrauded the banks.
Multi-billionaire Singer is known as Wall Street's toughest "vulture" speculator. Vulture fund financial attacks on the world's poorest nations have been effectively outlawed in much of Europe and excoriated by human rights groups, conduct Britain's former Prime Minister Gordon Brown described as, "morally outrageous."
This is one report from our new investigative series: Billionaires & Ballots. We need your support to dig into the sources of the big money bending the campaign using our team's internationally heralded investigative skills. You've seen our reports on BBC Television Newsnight, on Democracy Now, in The Nation, in Rolling Stone, on Truthout and elsewhere. Our stories require digging deep into hidden files and for witnesses spread over five continents. Without your tax-deductible donation this would be impossible. [We just returned from the Congo tracing the twisted path of Romney's top funders. We go where the evidence takes us, without partisan favor. Please donate now and receive a gift signed by Greg Palast: his brand new, highly acclaimed book Vultures' Picnic, films and more.
Greg Palast is the author of Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates and High-Finance Carnivores, released in the US and Canada by Penguin.
Support the Palast Investigative Fund and keep our work alive.
Greg Palast is available for media - contact Julia at Jwouk@boothmedia.com
GregPalast.com
3 doomsaying experts who foresee economic devastation ahead
Adam Shell, USA TODAY2-26-12
http://www.usatoday.com/money/perfi/stocks/story/2012-02-26/stock-market-bears-doomsayers/53259742/1
NEW YORK – Behind the mainstream Wall Street happy talk about more stable financial markets and an improving economy are grim warnings of tough times ahead from a small cadre of doomsayers who warn that the worst of the financial crisis is still to come.
Harry Dent, author of the new book The Great Crash Ahead, says another stock market crash is coming due to a bad ending to the global debt bubble. He has pulled back on his earlier prediction of a crash in 2012, as central banks around the world have been flooding markets with money, giving stocks an artificial short-term boost. But a crash is coming in 2013 or 2014, he warns. "This will be a repeat of 2008-09, only bigger, when it finally hits," Dent told USA TODAY.
Gerald Celente, a trend forecaster at the Trends Research Institute, says Americans should brace themselves for an "economic 9/11" due to policymakers' inability to solve the world's financial and economic woes. The coming meltdown, he predicts, will lead to growing social unrest and anti-government sentiment, a U.S. dollar with far less purchasing power and more people out of work.
Celente won't rule out another financial panic that could spark enough fear to cause a run on the nation's banks by depositors. That risk could cause the government to invoke "economic martial law" and call a "bank holiday" and close banks as it did during the Great Depression.
"We see some kind of threat of that magnitude," Celente, publisher of The Trends Journal newsletter, warned in an interview.
Robert Prechter, author of Conquer the Crash, first published in 2002 and updated in 2009, is still bearish. He says today's economy has similarities to the Great Depression and warns that 1930s-style deflation is still poised to cause financial havoc. Prechter predicts that the major U.S. stock indexes, such as the Dow Jones industrials and Standard & Poor's 500, will plunge below their bear market lows hit in March 2009 during the last financial crisis. The brief recovery will fail as it did in the 1930s, he says.
2 very different viewpoints
If he's right, stocks would lose more than half of their value. "The economic recovery has been weak, so the next downturn should generate bad news in a big way," Prechter said in an e-mail interview. "For the third time in a dozen years, the stock market is in a very bearish position."
These dire forecasts differ sharply with the brighter outlooks being espoused by the bulls, or optimists, on Wall Street. Recent stock performance and fresh readings on the economy also suggest a future that is less gloomy than the doomsayers predict.
The Dow, for instance, is in rebound mode and has climbed back to levels not seen since the early days of the financial crisis in May 2008. Tech stocks in the Nasdaq composite are trading at levels last seen in 2000. Data on auto sales, manufacturing and consumer confidence have been firming. Job creation is also on the rise. The unemployment rate dipped to 8.3% in January, its lowest level in three years.
As a result, stock market strategists such as Rod Smyth of RiverFront Investment have been raising their outlooks for 2012. Smyth raised his target range for the S&P 500 to 1250-1500. If the market hits the top of the range, stocks would have risen 10%. Similarly, Brian Belski, strategist at Oppenheimer, recently said he remains comfortable with his year-end 2012 target of 1400. That's up 2.5% from here. Bespoke Investment Group published research that shows the market, which is closing in on a new bull market high, has done well in the past once it breaks through old highs.
Bulls are betting that Europe's banking system will be stabilized, minimizing the risk of a severe credit crisis. Bulls are also encouraged by recent data from around the world that show modest growth and a pickup in economic momentum.
The causes of economic calamity
So what has the super-bears so worried?
Dent says the combination of aging Baby Boomers exiting their big spending years and a shift toward debt reduction and austerity around the world will cause the economy to suffer another severe leg down, making it more difficult for the government and Federal Reserve to avert a new meltdown. He has not always been bearish. In 1993 he wrote The Great Boom Ahead.
Celente, who as far back as 2008 has been warning of economic calamity, argues that the ballooning debt and the growing divide between the haves and have-nots has put the U.S. in a weakened state.
As a result, he says, the nation is more vulnerable to potential shocks. He worries about potential chaos caused by people all trying to yank their money out of financial markets at the same time. He also sees risk in the event there is a loss of confidence in elected leaders.
Societal unrest in the form of street protests and increased crime are possible, too, he adds. Markets could also be spooked by an oil price shock due to a military conflict between Israel and Iran, or a bad outcome to Europe's debt crisis.
"2012 is when many of the long-simmering socioeconomic and political trends that we have been forecasting and tracking will climax," Celente noted in his Top 12 Trends 2012 newsletter. In an interview he added: "When money stops flowing to the man on the street, blood starts flowing in the street."
While bulls are urging investors to get back into stocks, the doomsayers are advising a far different strategy. Dent's investment advice is simple: "Get out of the way." He recommends buying short-term U.S. Treasury bills and the U.S. dollar, which will benefit from safe-haven cash flows. He says stocks will fall sharply in value.
Celente's advice centers on survival. He says buy gold so you don't lose purchasing power when the value of the dollar plummets. He says buy a gun to protect your family against desperate people in search of food and money. He says plan a getaway to places with more stable finances and governments.
Prechter says to keep your powder dry and buy when things get really bad: "When things get really scary, as in early 2009, I get bullish."
http://www.usatoday.com/money/perfi/stocks/story/2012-02-26/stock-market-bears-doomsayers/53259742/1
NEW YORK – Behind the mainstream Wall Street happy talk about more stable financial markets and an improving economy are grim warnings of tough times ahead from a small cadre of doomsayers who warn that the worst of the financial crisis is still to come.
Harry Dent, author of the new book The Great Crash Ahead, says another stock market crash is coming due to a bad ending to the global debt bubble. He has pulled back on his earlier prediction of a crash in 2012, as central banks around the world have been flooding markets with money, giving stocks an artificial short-term boost. But a crash is coming in 2013 or 2014, he warns. "This will be a repeat of 2008-09, only bigger, when it finally hits," Dent told USA TODAY.
Gerald Celente, a trend forecaster at the Trends Research Institute, says Americans should brace themselves for an "economic 9/11" due to policymakers' inability to solve the world's financial and economic woes. The coming meltdown, he predicts, will lead to growing social unrest and anti-government sentiment, a U.S. dollar with far less purchasing power and more people out of work.
Celente won't rule out another financial panic that could spark enough fear to cause a run on the nation's banks by depositors. That risk could cause the government to invoke "economic martial law" and call a "bank holiday" and close banks as it did during the Great Depression.
"We see some kind of threat of that magnitude," Celente, publisher of The Trends Journal newsletter, warned in an interview.
Robert Prechter, author of Conquer the Crash, first published in 2002 and updated in 2009, is still bearish. He says today's economy has similarities to the Great Depression and warns that 1930s-style deflation is still poised to cause financial havoc. Prechter predicts that the major U.S. stock indexes, such as the Dow Jones industrials and Standard & Poor's 500, will plunge below their bear market lows hit in March 2009 during the last financial crisis. The brief recovery will fail as it did in the 1930s, he says.
2 very different viewpoints
If he's right, stocks would lose more than half of their value. "The economic recovery has been weak, so the next downturn should generate bad news in a big way," Prechter said in an e-mail interview. "For the third time in a dozen years, the stock market is in a very bearish position."
These dire forecasts differ sharply with the brighter outlooks being espoused by the bulls, or optimists, on Wall Street. Recent stock performance and fresh readings on the economy also suggest a future that is less gloomy than the doomsayers predict.
The Dow, for instance, is in rebound mode and has climbed back to levels not seen since the early days of the financial crisis in May 2008. Tech stocks in the Nasdaq composite are trading at levels last seen in 2000. Data on auto sales, manufacturing and consumer confidence have been firming. Job creation is also on the rise. The unemployment rate dipped to 8.3% in January, its lowest level in three years.
As a result, stock market strategists such as Rod Smyth of RiverFront Investment have been raising their outlooks for 2012. Smyth raised his target range for the S&P 500 to 1250-1500. If the market hits the top of the range, stocks would have risen 10%. Similarly, Brian Belski, strategist at Oppenheimer, recently said he remains comfortable with his year-end 2012 target of 1400. That's up 2.5% from here. Bespoke Investment Group published research that shows the market, which is closing in on a new bull market high, has done well in the past once it breaks through old highs.
Bulls are betting that Europe's banking system will be stabilized, minimizing the risk of a severe credit crisis. Bulls are also encouraged by recent data from around the world that show modest growth and a pickup in economic momentum.
The causes of economic calamity
So what has the super-bears so worried?
Dent says the combination of aging Baby Boomers exiting their big spending years and a shift toward debt reduction and austerity around the world will cause the economy to suffer another severe leg down, making it more difficult for the government and Federal Reserve to avert a new meltdown. He has not always been bearish. In 1993 he wrote The Great Boom Ahead.
Celente, who as far back as 2008 has been warning of economic calamity, argues that the ballooning debt and the growing divide between the haves and have-nots has put the U.S. in a weakened state.
As a result, he says, the nation is more vulnerable to potential shocks. He worries about potential chaos caused by people all trying to yank their money out of financial markets at the same time. He also sees risk in the event there is a loss of confidence in elected leaders.
Societal unrest in the form of street protests and increased crime are possible, too, he adds. Markets could also be spooked by an oil price shock due to a military conflict between Israel and Iran, or a bad outcome to Europe's debt crisis.
"2012 is when many of the long-simmering socioeconomic and political trends that we have been forecasting and tracking will climax," Celente noted in his Top 12 Trends 2012 newsletter. In an interview he added: "When money stops flowing to the man on the street, blood starts flowing in the street."
While bulls are urging investors to get back into stocks, the doomsayers are advising a far different strategy. Dent's investment advice is simple: "Get out of the way." He recommends buying short-term U.S. Treasury bills and the U.S. dollar, which will benefit from safe-haven cash flows. He says stocks will fall sharply in value.
Celente's advice centers on survival. He says buy gold so you don't lose purchasing power when the value of the dollar plummets. He says buy a gun to protect your family against desperate people in search of food and money. He says plan a getaway to places with more stable finances and governments.
Prechter says to keep your powder dry and buy when things get really bad: "When things get really scary, as in early 2009, I get bullish."
One Out Of Every Ten Wall Street Employees Is A Psychopath
One Out Of Every Ten Wall Street Employees Is A Psychopath, Say Researchers Alexander Eichler
02/28/12
http://www.huffingtonpost.com/2012/02/28/wall-street-psychopaths_n_1307168.html
Maybe Patrick Bateman wasn't such an outlier.
One out of every 10 Wall Street employees is likely a clinical psychopath, writes journalist Sherree DeCovny in an upcoming issue of the trade publication CFA Magazine (subscription required). In the general population the rate is closer to one percent.
"A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible," writes DeCovny, who pulls together research from several psychologists for her story, which helpfully suggests that financial firms carefully screen out extreme psychopaths in hiring.
To be sure, typical psychopathic behavior runs the gamut. At the extreme end is Bateman, portrayed by Christian Bale, in the 2000 movie "American Psycho," as an investment banker who actually kills people and exhibits no remorse. When health professionals talk about "psychopaths," they have a broader range of behavior in mind.
A clinical psychopath is bright, gregarious and charming, writes DeCovny. He lies easily and often, and may have trouble feeling empathy for other people. He's probably also more willing to take dangerous risks -- either because he doesn't understand the consequences, or because he simply doesn't care.
An appetite for risk can seem like a positive business trait on Wall Street, where big gambles sometimes lead to big rewards. But for the people DeCovny is talking about, the outcomes matter less than the gambles themselves -- and the chemical rush of serotonin and endorphins that accompanies them.
This is hardly the first time that mental illness has been equated with a certain capacity for professional success -- especially in the financial sector, where some stock traders have actually scored higher than diagnosed psychopaths on tests that measure competitiveness and attraction to risk.
Some psychologists have long claimed that the qualities that make for a high-achieving politician or stockbroker are also the same traits that psychopaths have in abundance.
Other researchers generalize it to bosses as a species, saying that about 4 percent of all executives are psychopaths -- and that their relative lack of scruples is what helps them excel in business.
At the same time, the fast-moving, high-pressure environment of Wall Street probably compromises the mental health of some of its employees. A recent study found that many young bankers develop alcoholism, insomnia, eating disorders and other stress-related ailments within just a few years on the job.
Stockbrokers have also been shown to experience clinical depression at a rate more than three times as high as the general population.
DeCovny writes that for someone with a "latent" compulsive gambling problem, a job trading stocks can trigger pathological responses that send the person into an escalating pattern of lies, debts and even embezzlement and fraud.
A person with this problem would feel gratified by an enormous loss, because of the way their brain's reward system works -- which DeCovny says may explain the activities of such notorious rogue traders as Kweku Adoboli, Jerome Kerviel and Nick Leeson, three men who gambled and lost the combined equivalent of $10.3 billion for their respective institutions over the past 17 years.
02/28/12
http://www.huffingtonpost.com/2012/02/28/wall-street-psychopaths_n_1307168.html
Maybe Patrick Bateman wasn't such an outlier.
One out of every 10 Wall Street employees is likely a clinical psychopath, writes journalist Sherree DeCovny in an upcoming issue of the trade publication CFA Magazine (subscription required). In the general population the rate is closer to one percent.
"A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible," writes DeCovny, who pulls together research from several psychologists for her story, which helpfully suggests that financial firms carefully screen out extreme psychopaths in hiring.
To be sure, typical psychopathic behavior runs the gamut. At the extreme end is Bateman, portrayed by Christian Bale, in the 2000 movie "American Psycho," as an investment banker who actually kills people and exhibits no remorse. When health professionals talk about "psychopaths," they have a broader range of behavior in mind.
A clinical psychopath is bright, gregarious and charming, writes DeCovny. He lies easily and often, and may have trouble feeling empathy for other people. He's probably also more willing to take dangerous risks -- either because he doesn't understand the consequences, or because he simply doesn't care.
An appetite for risk can seem like a positive business trait on Wall Street, where big gambles sometimes lead to big rewards. But for the people DeCovny is talking about, the outcomes matter less than the gambles themselves -- and the chemical rush of serotonin and endorphins that accompanies them.
This is hardly the first time that mental illness has been equated with a certain capacity for professional success -- especially in the financial sector, where some stock traders have actually scored higher than diagnosed psychopaths on tests that measure competitiveness and attraction to risk.
Some psychologists have long claimed that the qualities that make for a high-achieving politician or stockbroker are also the same traits that psychopaths have in abundance.
Other researchers generalize it to bosses as a species, saying that about 4 percent of all executives are psychopaths -- and that their relative lack of scruples is what helps them excel in business.
At the same time, the fast-moving, high-pressure environment of Wall Street probably compromises the mental health of some of its employees. A recent study found that many young bankers develop alcoholism, insomnia, eating disorders and other stress-related ailments within just a few years on the job.
Stockbrokers have also been shown to experience clinical depression at a rate more than three times as high as the general population.
DeCovny writes that for someone with a "latent" compulsive gambling problem, a job trading stocks can trigger pathological responses that send the person into an escalating pattern of lies, debts and even embezzlement and fraud.
A person with this problem would feel gratified by an enormous loss, because of the way their brain's reward system works -- which DeCovny says may explain the activities of such notorious rogue traders as Kweku Adoboli, Jerome Kerviel and Nick Leeson, three men who gambled and lost the combined equivalent of $10.3 billion for their respective institutions over the past 17 years.
Wednesday, February 29, 2012
The Top Twelve Reasons Why You Should Hate the Mortgage Settlement
Yves SmithThursday, February 9, 2012
http://www.nakedcapitalism.com/2012/02/the-top-twelve-reasons-why-you-should-hate-the-mortgage-settlement.html
As readers may know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.
The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they’ll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.
The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.
The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.
The mortgage settlement terms have not been released, but more of the details have been leaked:
1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.
Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:
“It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.
The Times is also subdued:
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.
2. Schneiderman’s MERS suit survives, and he can add more banks as defendants. It isn’t clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.
3. Nevada’s and Arizona’s suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been “folded into” the settlement.
4. The five big players in the settlement have already set aside reserves sufficient for this deal.
Here are the top twelve reasons why this deal stinks:
1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.
2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.
3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.
4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.
5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.
6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.
7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.
8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.
9. There is plenty of evidence of widespread abuses that appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.
10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.
11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.
12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.
As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.
http://www.nakedcapitalism.com/2012/02/the-top-twelve-reasons-why-you-should-hate-the-mortgage-settlement.html
As readers may know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.
The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they’ll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.
The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.
The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.
The mortgage settlement terms have not been released, but more of the details have been leaked:
1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.
Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:
“It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.
The Times is also subdued:
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.
2. Schneiderman’s MERS suit survives, and he can add more banks as defendants. It isn’t clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.
3. Nevada’s and Arizona’s suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been “folded into” the settlement.
4. The five big players in the settlement have already set aside reserves sufficient for this deal.
Here are the top twelve reasons why this deal stinks:
1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.
2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.
3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.
4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.
5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.
6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.
7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.
8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.
9. There is plenty of evidence of widespread abuses that appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.
10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.
11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.
12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.
As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.
Monday, January 30, 2012
Occupy Las Vegas protesters target foreclosed homes in valley
Kristi Jourdan
Jan. 7, 2012
http://www.lvrj.com/news/occupy-las-vegas-protesters-target-foreclosed-homes-in-valley-136885893.html
They are the faces of the foreclosure crisis, and Occupy Las Vegas wants to set up camp in their yards.
About 20 protesters spread out across the valley and spent Saturday knocking on the doors of homes facing foreclosure in hopes of contacting homeowners and their neighbors. The majority of the properties are single-family homes in Las Vegas, Henderson and North Las Vegas going to auction in the next week or so.
Some of the dozens of properties were caked in cobwebs and decorated with dirty lawn chairs, evidence the owners were long gone. An old welcome mat sat on the porch of one property, but a look through the blinds showed the home was empty.
Others were cleaner, a sign that real estate agents and banks were caring for them or, as some neighbors reported, the owners don't live there anymore but occasionally return to the property to keep it neat.
Some properties were in gated communities where protesters were unable to make contact with homeowners or neighbors. The occupiers left cards and fliers in screen doors and windows whenever they could.
The group of protesters set up a small camp in front of an empty three-bedroom home in the Autumn Chase neighborhood, which has made headlines for internal squabbling among neighbors and homeowners association leadership.
The 1,200-square-foot home in the 5000 block of Golden Fields Street is scheduled to go to auction Tuesday.
Protesters said they want to collectively bargain with banks through public protests and letter-writing campaigns. They said they want to call attention to predatory lending practices.
They are promoting principal reduction rather than simple modifications as a way to break the cycle that created the foreclosure crisis in the Las Vegas Valley, which is commonly called "ground zero" of the foreclosure crisis.
"We're going to put (banks) in a position where they don't gain anything by negotiating with the homeowner, but they'll lose something if they don't," said Sebring Frehner, event organizer.
Occupy Las Vegas is the local chapter of the Occupy Wall Street movement against corporate greed and influence in politics. Local protesters have a permit through late February to camp on county-owned property on Paradise Road near Swenson Street and Tropicana Avenue.
With a crew of five in tow, protester Angie Sullivan scoured a North Las Vegas neighborhood, contacting nearby neighbors of an abandoned property in hopes of tracking down its owner.
Sullivan said she was concerned that the area was too transient, because neighbors didn't know each other and houses appeared to be empty.
"I don't know about organizing a neighborhood where there is no one left," Sullivan said.
Neighbors Jamie and Gina Basham live across from the property in the 2100 block of Mountain Sunset Avenue which is scheduled to be auctioned off Monday. The couple has lived in the neighborhood for almost three years and said they didn't mind occupiers camping on the property across the street to draw attention to the foreclosure issue.
"I don't have a problem with it if it helps everybody else," Jamie Basham said.
Banks "have taken advantage of people, and there are strength in numbers."
Contact reporter Kristi Jourdan at kjourdan@reviewjournal.com or 702-455-4519.
Jan. 7, 2012
http://www.lvrj.com/news/occupy-las-vegas-protesters-target-foreclosed-homes-in-valley-136885893.html
They are the faces of the foreclosure crisis, and Occupy Las Vegas wants to set up camp in their yards.
About 20 protesters spread out across the valley and spent Saturday knocking on the doors of homes facing foreclosure in hopes of contacting homeowners and their neighbors. The majority of the properties are single-family homes in Las Vegas, Henderson and North Las Vegas going to auction in the next week or so.
Some of the dozens of properties were caked in cobwebs and decorated with dirty lawn chairs, evidence the owners were long gone. An old welcome mat sat on the porch of one property, but a look through the blinds showed the home was empty.
Others were cleaner, a sign that real estate agents and banks were caring for them or, as some neighbors reported, the owners don't live there anymore but occasionally return to the property to keep it neat.
Some properties were in gated communities where protesters were unable to make contact with homeowners or neighbors. The occupiers left cards and fliers in screen doors and windows whenever they could.
The group of protesters set up a small camp in front of an empty three-bedroom home in the Autumn Chase neighborhood, which has made headlines for internal squabbling among neighbors and homeowners association leadership.
The 1,200-square-foot home in the 5000 block of Golden Fields Street is scheduled to go to auction Tuesday.
Protesters said they want to collectively bargain with banks through public protests and letter-writing campaigns. They said they want to call attention to predatory lending practices.
They are promoting principal reduction rather than simple modifications as a way to break the cycle that created the foreclosure crisis in the Las Vegas Valley, which is commonly called "ground zero" of the foreclosure crisis.
"We're going to put (banks) in a position where they don't gain anything by negotiating with the homeowner, but they'll lose something if they don't," said Sebring Frehner, event organizer.
Occupy Las Vegas is the local chapter of the Occupy Wall Street movement against corporate greed and influence in politics. Local protesters have a permit through late February to camp on county-owned property on Paradise Road near Swenson Street and Tropicana Avenue.
With a crew of five in tow, protester Angie Sullivan scoured a North Las Vegas neighborhood, contacting nearby neighbors of an abandoned property in hopes of tracking down its owner.
Sullivan said she was concerned that the area was too transient, because neighbors didn't know each other and houses appeared to be empty.
"I don't know about organizing a neighborhood where there is no one left," Sullivan said.
Neighbors Jamie and Gina Basham live across from the property in the 2100 block of Mountain Sunset Avenue which is scheduled to be auctioned off Monday. The couple has lived in the neighborhood for almost three years and said they didn't mind occupiers camping on the property across the street to draw attention to the foreclosure issue.
"I don't have a problem with it if it helps everybody else," Jamie Basham said.
Banks "have taken advantage of people, and there are strength in numbers."
Contact reporter Kristi Jourdan at kjourdan@reviewjournal.com or 702-455-4519.
Friday, January 6, 2012
Occupy the P.U.-litzers!
12/27/11
http://www.fair.org/index.php?page=4451
This year has given us simply too many worthy contenders for FAIR's annual P.U.-litzers--recognizing the stinkiest journalism of the year. A big part of the problem was that so many outlets were striving to distinguish themselves with especially awful coverage of the Occupy Wall Street movement. So to note those lowlights, we bring you a special installment of P.U.-litzers: The OWS edition.
--Early Warning System Award: CNN's Wolf Blitzer
On September 19: "Protests here in New York on Wall Street entering a third day. Should New Yorkers be worried at all about what's going on?"
--We Could Do It Better Award: New York Times' Ginia Bellafante
Under the headline "Gunning for Wall Street, With Faulty Aim" (9/23/11), Bellafante turned in the quintessential corporate media dismissal of progressive protests. The reporter discovered "a default ambassador in a half-naked woman...with a marked likeness to Joni Mitchell and a seemingly even stronger wish to burrow through the space-time continuum and hunker down in 1968."
The movement's cause "was virtually impossible to decipher," Bellafante complained, slamming [it] for "lack of cohesion and its apparent wish to pantomime progressivism rather than practice it knowledgeably." And who has more knowledge about grassroots progressive activism than the New York Times.
--What's News Award: NPR's Dick Meyer; Washington Post
Asked to explain NPR's non-coverage of OWS, executive editor Meyer said (NPR.org, 9/26/11): "The recent protests on Wall Street did not involve large numbers of people, prominent people, a great disruption or an especially clear objective."
And the massive demonstrations around the world October 15th made it onto the front page of the next day's Washington Post--in the form of a lower right-hand corner blurb approximately one column inch long, directing people to page A20 to find news about protests in "more than 900 cities in Europe, Africa and Asia."
--Channeling Glenn Beck Award: Reuters
Under the headline (10/13/11) "Who's Behind the Wall Street Protests," the news agency provided an answer straight from one of Glenn Beck's conspiratorial chalk boards:
One name that keeps coming up is investor George Soros, who in September debuted in the top 10 list of wealthiest Americans. Conservative critics contend the movement is a Trojan horse for a secret Soros agenda.
Who exactly is bringing up Soros' name? Reuters names one slightly less than credible source: right-wing talker Rush Limbaugh. But Reuters did its own digging, going on to suggest "indirect financial links" between Soros and the group Adbusters, which issued the original call for the Occupy protest. The links were mostly figments of the right-wing imagination, as even some Reuters reporters pointed out. Reuters eventually changed the headline to "Soros: Not a Funder of Wall Street Protests."
--The Suites to the Streets Award: New York Times' Andrew Ross Sorkin
The Times star business writer (10/4/11) did little to dispel critics who say he's too close to his Wall Street sources by admitting that he checked out the protests--after a banker told him to:
I had gone down to Zuccotti Park to see the activist movement firsthand after getting a call from the chief executive of a major bank last week, before nearly 700 people were arrested over the weekend during a demonstration on the Brooklyn Bridge.
"Is this Occupy Wall Street thing a big deal?" the CEO asked me. I didn't have an answer. "We're trying to figure out how much we should be worried about all of this," he continued, clearly concerned. "Is this going to turn into a personal safety problem?"
As I wandered around the park, it was clear to me that most bankers probably don't have to worry about being in imminent personal danger. This didn’t seem like a brutal group--at least not yet.
--Those Facts Are Biased Award: WNYC's Takeaway
Web producer Caitlin Curran was photographed at an OWS protest holding a sign that said this:
It's wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn't aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon.
Curran was promptly fired by the New York public radio station for her flagrant violation of journalistic objectivity. Who could trust a journalist who took a far-out radical position like that?
--Timeless Cliches Award: Washington Post's Charles Krauthammer
"Starbucks-sipping, Levi's-clad, iPhone-clutching protesters denounce corporate America even as they weep for Steve Jobs," wrote Post columnist Krauthammer (10/14/11), maligning the protesters as "indigant indolents saddled with their $50,000 student loans and English degrees" whose policy proposal boils down to "eat the rich."
--We Smell a Rat Award: Washington Post
November 16: "Is this an occupation or an infestation?"
--Fact Check Failure Award: CNN's Erin Burnett
New CNN host Burnett decided on her debut program (10/3/11) to fact check the Occupy Wall Street protests. Declaring that that the protesters "did not know" why they were there, adding that "it seems like people want a messiah leader, just like they did when they anointed Barack Obama." Burnett quizzed one protester: "So do you know that taxpayers actually made money on the Wall Street bailout?" Burnett assured viewers this was true--"right now to the tune of $10 billion.... This was the big issue, so we solved it."
A few problems: The TARP bailout is not "the big issue" for OWS, and it's odd to think that people should feel good that big banks were about to turn low-interest government loans into profits. And the total cost of the various bank rescue policies run into the trillions of dollars (Bloomberg News, 8/22/11). But, yes, those protesters sure don't know what they're talking about.
--Tabloid-Style Dignity Award: New York Post
The front page of Rupert Murdoch's New York Post (11/4/11), urging a crackdown on Occupy Wall Street, proclaimed: "Enough! Mr. Mayor, It Is Time to Reclaim Zuccotti Park--and New York's Dignity." This on the same front page that recently declared (8/10/11), "Crazy Stox Like a Hooker’s Drawers--Up, Down, Up." Another cover (10/27/09) photoshopped a skirt onto a Phillies baseball player with a line about the "Frillies" coming to town. And who could forget the Iraq War classic (2/14/03), "UN Meets: Weasels to Hear New Iraq Evidence," with animal heads superimposed onto the representatives from France and Germany? That's the New York Post for you: Always dignified.
--Clueless and Repugnant Award: Washington Post's Richard Cohen
After the Post columnist visited the New York protests, he wrote a column (10/24/11) defending the group against bogus charges of anti-Semitism. But he had plenty of other things to say about OWS. To Cohen, "their slogans suggest a tired socialism that is as repugnant to me as the felonious capitalism that produced the mortgage bubble and the impoverishment of millions of Americans." Cohen was just getting warmed up. The protests are "a destination for the aimless...a tourist attraction with the usual vendors, the usual zaftig young women doing the usual arrhythmic dance, somehow missing the beat of many drums."
Occupy Wall Street is "an incoherent articulation of anger...above all, a conspiracy to have left-leaning writers make jackasses of themselves by imparting grave and grand meaning to what is little more than a vast sleepover." But no anti-Semitism.
http://www.fair.org/index.php?page=4451
This year has given us simply too many worthy contenders for FAIR's annual P.U.-litzers--recognizing the stinkiest journalism of the year. A big part of the problem was that so many outlets were striving to distinguish themselves with especially awful coverage of the Occupy Wall Street movement. So to note those lowlights, we bring you a special installment of P.U.-litzers: The OWS edition.
--Early Warning System Award: CNN's Wolf Blitzer
On September 19: "Protests here in New York on Wall Street entering a third day. Should New Yorkers be worried at all about what's going on?"
--We Could Do It Better Award: New York Times' Ginia Bellafante
Under the headline "Gunning for Wall Street, With Faulty Aim" (9/23/11), Bellafante turned in the quintessential corporate media dismissal of progressive protests. The reporter discovered "a default ambassador in a half-naked woman...with a marked likeness to Joni Mitchell and a seemingly even stronger wish to burrow through the space-time continuum and hunker down in 1968."
The movement's cause "was virtually impossible to decipher," Bellafante complained, slamming [it] for "lack of cohesion and its apparent wish to pantomime progressivism rather than practice it knowledgeably." And who has more knowledge about grassroots progressive activism than the New York Times.
--What's News Award: NPR's Dick Meyer; Washington Post
Asked to explain NPR's non-coverage of OWS, executive editor Meyer said (NPR.org, 9/26/11): "The recent protests on Wall Street did not involve large numbers of people, prominent people, a great disruption or an especially clear objective."
And the massive demonstrations around the world October 15th made it onto the front page of the next day's Washington Post--in the form of a lower right-hand corner blurb approximately one column inch long, directing people to page A20 to find news about protests in "more than 900 cities in Europe, Africa and Asia."
--Channeling Glenn Beck Award: Reuters
Under the headline (10/13/11) "Who's Behind the Wall Street Protests," the news agency provided an answer straight from one of Glenn Beck's conspiratorial chalk boards:
One name that keeps coming up is investor George Soros, who in September debuted in the top 10 list of wealthiest Americans. Conservative critics contend the movement is a Trojan horse for a secret Soros agenda.
Who exactly is bringing up Soros' name? Reuters names one slightly less than credible source: right-wing talker Rush Limbaugh. But Reuters did its own digging, going on to suggest "indirect financial links" between Soros and the group Adbusters, which issued the original call for the Occupy protest. The links were mostly figments of the right-wing imagination, as even some Reuters reporters pointed out. Reuters eventually changed the headline to "Soros: Not a Funder of Wall Street Protests."
--The Suites to the Streets Award: New York Times' Andrew Ross Sorkin
The Times star business writer (10/4/11) did little to dispel critics who say he's too close to his Wall Street sources by admitting that he checked out the protests--after a banker told him to:
I had gone down to Zuccotti Park to see the activist movement firsthand after getting a call from the chief executive of a major bank last week, before nearly 700 people were arrested over the weekend during a demonstration on the Brooklyn Bridge.
"Is this Occupy Wall Street thing a big deal?" the CEO asked me. I didn't have an answer. "We're trying to figure out how much we should be worried about all of this," he continued, clearly concerned. "Is this going to turn into a personal safety problem?"
As I wandered around the park, it was clear to me that most bankers probably don't have to worry about being in imminent personal danger. This didn’t seem like a brutal group--at least not yet.
--Those Facts Are Biased Award: WNYC's Takeaway
Web producer Caitlin Curran was photographed at an OWS protest holding a sign that said this:
It's wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn't aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon.
Curran was promptly fired by the New York public radio station for her flagrant violation of journalistic objectivity. Who could trust a journalist who took a far-out radical position like that?
--Timeless Cliches Award: Washington Post's Charles Krauthammer
"Starbucks-sipping, Levi's-clad, iPhone-clutching protesters denounce corporate America even as they weep for Steve Jobs," wrote Post columnist Krauthammer (10/14/11), maligning the protesters as "indigant indolents saddled with their $50,000 student loans and English degrees" whose policy proposal boils down to "eat the rich."
--We Smell a Rat Award: Washington Post
November 16: "Is this an occupation or an infestation?"
--Fact Check Failure Award: CNN's Erin Burnett
New CNN host Burnett decided on her debut program (10/3/11) to fact check the Occupy Wall Street protests. Declaring that that the protesters "did not know" why they were there, adding that "it seems like people want a messiah leader, just like they did when they anointed Barack Obama." Burnett quizzed one protester: "So do you know that taxpayers actually made money on the Wall Street bailout?" Burnett assured viewers this was true--"right now to the tune of $10 billion.... This was the big issue, so we solved it."
A few problems: The TARP bailout is not "the big issue" for OWS, and it's odd to think that people should feel good that big banks were about to turn low-interest government loans into profits. And the total cost of the various bank rescue policies run into the trillions of dollars (Bloomberg News, 8/22/11). But, yes, those protesters sure don't know what they're talking about.
--Tabloid-Style Dignity Award: New York Post
The front page of Rupert Murdoch's New York Post (11/4/11), urging a crackdown on Occupy Wall Street, proclaimed: "Enough! Mr. Mayor, It Is Time to Reclaim Zuccotti Park--and New York's Dignity." This on the same front page that recently declared (8/10/11), "Crazy Stox Like a Hooker’s Drawers--Up, Down, Up." Another cover (10/27/09) photoshopped a skirt onto a Phillies baseball player with a line about the "Frillies" coming to town. And who could forget the Iraq War classic (2/14/03), "UN Meets: Weasels to Hear New Iraq Evidence," with animal heads superimposed onto the representatives from France and Germany? That's the New York Post for you: Always dignified.
--Clueless and Repugnant Award: Washington Post's Richard Cohen
After the Post columnist visited the New York protests, he wrote a column (10/24/11) defending the group against bogus charges of anti-Semitism. But he had plenty of other things to say about OWS. To Cohen, "their slogans suggest a tired socialism that is as repugnant to me as the felonious capitalism that produced the mortgage bubble and the impoverishment of millions of Americans." Cohen was just getting warmed up. The protests are "a destination for the aimless...a tourist attraction with the usual vendors, the usual zaftig young women doing the usual arrhythmic dance, somehow missing the beat of many drums."
Occupy Wall Street is "an incoherent articulation of anger...above all, a conspiracy to have left-leaning writers make jackasses of themselves by imparting grave and grand meaning to what is little more than a vast sleepover." But no anti-Semitism.
75 Years Ago Today, the First Occupy
Michael Moore December 30th, 2011
http://www.michaelmoore.com/words/mike-friends-blog/75-years-ago-today-first-occupy
On this day, December 30th, in 1936 -- 75 years ago today -- hundreds of workers at the General Motors factories in Flint, Michigan, took over the facilities and occupied them for 44 days. My uncle was one of them.
The workers couldn't take the abuse from the corporation any longer. Their working conditions, the slave wages, no vacation, no health care, no overtime -- it was do as you're told or get tossed onto the curb.
So on the day before New Year's Eve, emboldened by the recent re-election of Franklin Roosevelt, they sat down on the job and refused to leave.
They began their Occupation in the dead of winter. GM cut off the heat and water to the buildings. The police tried to raid the factories several times, to no avail. Even the National Guard was called in.
But the workers held their ground, and after 44 days, the corporation gave in and recognized the UAW as the representative of the workers. It was a monumental historical moment as no other major company had ever been brought to its knees by their employees. Workers were given a raise to a dollar an hour -- and successful strikes and occupations spread like wildfire across the country. Finally, the working class would be able to do things like own their own homes, send their children to college, have time off and see a doctor without having to worry about paying. In Flint, Michigan, on this day in 1936, the middle class was born.
But 75 years later, the owners and elites have regained all power and control. I can think of no better way for us to honor the original Occupiers than by all of us participating in the Occupy Wall Street movement in whatever form that takes in each of our towns. We need direct action all winter long if we are to prevail. You can start your own Occupy group in your neighborhood or school or with just your friends. Speak out against economic injustice at every chance you get. Stop the bank from evicting the family down the block. Move your checking and credit card to a community bank or credit union. Place a sign in your yard -- and get your neighbors to do it also -- that says, "WE ARE THE 99%." (You can download signs here and here.)
Do something, anything, but don't remain silent. Not now. This is the moment. It won't come again.
75 years ago today, in Flint, Michigan, the people said they'd had enough and occupied the factories until they won. What is stopping us now? The rich have one plan: bleed everyone dry. Can anyone, in good conscience, be a bystander to this?
My uncle wasn't, and because of what he and others did, I got to grow up without having to worry about a roof over my head or medical bills or a decent life. And all that was provided by my dad who built spark plugs on a GM assembly line.
Let's each of us double our efforts to raise a ruckus, Occupy Everywhere, and get creative as we throw a major nonviolent wrench into this system of Greed. Let's make the politicians running for office in 2012 quake in their boots if they refuse to tax the rich, regulate Wall Street and do whatever we the people tell them to do.
Happy 75th!
http://www.michaelmoore.com/words/mike-friends-blog/75-years-ago-today-first-occupy
On this day, December 30th, in 1936 -- 75 years ago today -- hundreds of workers at the General Motors factories in Flint, Michigan, took over the facilities and occupied them for 44 days. My uncle was one of them.
The workers couldn't take the abuse from the corporation any longer. Their working conditions, the slave wages, no vacation, no health care, no overtime -- it was do as you're told or get tossed onto the curb.
So on the day before New Year's Eve, emboldened by the recent re-election of Franklin Roosevelt, they sat down on the job and refused to leave.
They began their Occupation in the dead of winter. GM cut off the heat and water to the buildings. The police tried to raid the factories several times, to no avail. Even the National Guard was called in.
But the workers held their ground, and after 44 days, the corporation gave in and recognized the UAW as the representative of the workers. It was a monumental historical moment as no other major company had ever been brought to its knees by their employees. Workers were given a raise to a dollar an hour -- and successful strikes and occupations spread like wildfire across the country. Finally, the working class would be able to do things like own their own homes, send their children to college, have time off and see a doctor without having to worry about paying. In Flint, Michigan, on this day in 1936, the middle class was born.
But 75 years later, the owners and elites have regained all power and control. I can think of no better way for us to honor the original Occupiers than by all of us participating in the Occupy Wall Street movement in whatever form that takes in each of our towns. We need direct action all winter long if we are to prevail. You can start your own Occupy group in your neighborhood or school or with just your friends. Speak out against economic injustice at every chance you get. Stop the bank from evicting the family down the block. Move your checking and credit card to a community bank or credit union. Place a sign in your yard -- and get your neighbors to do it also -- that says, "WE ARE THE 99%." (You can download signs here and here.)
Do something, anything, but don't remain silent. Not now. This is the moment. It won't come again.
75 years ago today, in Flint, Michigan, the people said they'd had enough and occupied the factories until they won. What is stopping us now? The rich have one plan: bleed everyone dry. Can anyone, in good conscience, be a bystander to this?
My uncle wasn't, and because of what he and others did, I got to grow up without having to worry about a roof over my head or medical bills or a decent life. And all that was provided by my dad who built spark plugs on a GM assembly line.
Let's each of us double our efforts to raise a ruckus, Occupy Everywhere, and get creative as we throw a major nonviolent wrench into this system of Greed. Let's make the politicians running for office in 2012 quake in their boots if they refuse to tax the rich, regulate Wall Street and do whatever we the people tell them to do.
Happy 75th!
Thursday, January 5, 2012
The Book of Jobs
Forget monetary policy. Re-examining the cause of the Great Depression — the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago. Joseph E. Stiglitz
The Economic Crisis
January 2012
Domino Theory: The financial meltdown is the Depression parallel everyone notices. The more frightening parallel is everything else.
http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.
We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.
The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.
Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.
The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.
Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.
Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.
Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.
For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.
At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.
The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.
The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.
Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.
The Agriculture Adjustment Act, F.D.R.’s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.
Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like “industrial policy,” but that’s what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.
The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.
The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.
Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.
Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.
Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.
Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.
What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.
The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.
The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.
That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.
The Economic Crisis
January 2012
Domino Theory: The financial meltdown is the Depression parallel everyone notices. The more frightening parallel is everything else.
http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.
We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.
The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.
Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.
The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.
Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.
Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.
Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.
For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.
At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.
The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.
The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.
Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.
The Agriculture Adjustment Act, F.D.R.’s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.
Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like “industrial policy,” but that’s what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.
The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.
The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.
Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.
Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.
Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.
Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.
What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.
The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.
The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.
That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.
Friday, December 23, 2011
Occupy Our Homes
J.A. Myerson, Truthout
Wednesday 7 December 2011
http://truth-out.org/occupy-our-homes/1323268606
Yesterday, no one had lived in 702 Vermont Street for three years. Vermont Street sits in East New York, the Brooklyn neighborhood where foreclosures are five times more frequent than in the rest of the state. Today, Alfredo and Tasha and their son and daughter moved in, with the help of a number of friends whom they'd never met. Some were from the advocacy groups Picture the Homeless and Vocal New York, others were clergy or members of the city council. They had been organized and brought together by Occupy Wall Street for a national day of action to promote foreclosure resistance, an event kicking off a project they call Occupy Our Homes.
Alfredo, Tasha and the kids, way back yesterday, were homeless, having been foreclosed upon by a bank and hundreds upon hundreds of people who had never heard of them came to East New York today to get them a home. Occupy Wall Street is itself somewhat homeless these days, having been evicted from Zuccotti Park on the orders of the 12th-richest man in the United States. A few weeks ago, the media tycoon in question deployed what he openly calls his "army" to dispossess the occupation, including, naturally, everyone who called it their home. Much wondering has been going on in the press about what Occupy Wall Street would do now that it was homeless. Today's answer seems to have been: get other people homes.
The few hundred activists marched through the streets of East New York and took a tour of the foreclosed properties in the area, which is very easy to do, since they are everywhere. "On every block, we have one or two homes either for sale or in foreclosure," Lorraine, who lives in the neighborhood, told me. "I think we have three houses for sale on my block alone."
On the Upper West Side, there are always street fairs. There are museums and libraries and there are parks and concert venues. And on the Upper West Side, there are places for kids to go after school and there are places for people who want to get healthier to exercise. On the Upper West Side, there are churches made of stone. In East New York, there is a church called Hope Christian Center, which looks like an abandoned office building, the paint on the façade stripping away to reveal the brick beneath.
"There's nothing to do here," said longtime East New Yorker Corinne Gonzales, who attributes the many people who watched the march from their windows to this. Revealingly, it was at their windows where people found themselves on a chance Tuesday afternoon in this neighborhood and not, perhaps, at work. Many of them joined the march, which, at its peak, swelled to what was widely estimated to include 1,000 participants - on a Tuesday afternoon in the rain.
Corrine had never seen anything like it. News cameras and satellite vans don't come here, except, occasionally, in the case of a shooting. Now, they'd come here to document the difficulty of a life of poverty and the attempt to change that dynamic. If Occupy Wall Street had chosen to do something else today, another day would have gone by in which no one in the media or politics paid any attention to East New York.
"It's not fair to us low income families," Corrine told me. "Everybody's talking about middle class. Middle class? What about us? We got children. It's not fair to us. And I thank God that you guys came out today to represent us low income families. And I appreciate it very much."
Some activists brought housewarming gifts for the new residents of 702 Vermont Street. Yates McKee, 32, marched carrying a large houseplant. "A plant is important because it's something that helps make it a nice environment," he told me. "It's also a metaphor for sustaining life."
Lorraine had brought brownies. She started a "part-time cooking thing" to make extra money before she lost her job. "They're free," she said, offering me one. "It might energize you, with a little sugar. I have a sweet tooth." These brownies were to welcome the activists who had come to help, though the baker herself faces foreclosure. "Any person at this point is one step away from being jobless and homeless," she remarked. "It's a reality. This is the life that we're living right now. It's like this is what we worked for, all those other years. This is the point that we've come to."
If anybody wanted demands, they were clear today. As Brian Gibbs of Picture the Homeless said by way of the people's microphone, "What we need is real, affordable housing now. It has to change." Gibbs was once homeless on the street and spoke of the police harassment routinely visited upon him and others in his situation. "The problem with homelessness is that people get so desperate, they are willing to risk arrest in order to get off the streets," he told the crowd.
At one stop along the tour, a young man named Quincy, who works as a part time plumber, took the people's mike. "I was tricked into signing over my deed," he confessed. "Now I'm getting evicted. I have a loan of $475,000."
Standing beside him, his city council member, one-time Black Panther Charles Barron, announced, "We will not let this young man lose his home. We've stopped other foreclosures and we're going to stop this one." Thereupon, Quincy began to weep, the friends and comrades he never knew he had gathering around him to place their calming hands upon his shoulders and his arms and his head. He didn't know they were out there, but 1,000 people ready to protect his home happened to be around the corner the day upon which he was getting foreclosed.
As Quincy wrapped up his remarks, a cry from the crowd drew everyone's attention to another longtime resident of the neighborhood, who told the story of having bought her house in 1997, putting $80,000 down. She'd been working two jobs all of her life and had paid her mortgage responsibly, putting down months in advance when she went on vacation. Her son did four years in Kuwait and four years in Iraq and now he's dead. The Pentagon, the woman said, doesn't know whether he died by enemy bullets or friendly fire. Since then, she's become sick and the bills for her medical treatment have ruined her hopes for paying off the rest of her mortgage. Crying to the sky, she asked again and again, "How am I going to do it?"
At the march's destination, balloons announced the block party to be thrown for the incoming neighbors. A tent appeared on the roof, on which was scrawled, "You cannot evict an idea whose time has come." Remarks were shared by, among others, Alfredo, a 27-year-old community organizer around stop and frisk, and Tasha, whose shyness in the face of the people's microphone moved her to nervous giggles and a swift conclusion to her brief thanks.
I went into 702 Vermont Street with the Occupy Wall Street Sanitation Working Group, who entered before anyone else to get the house ready to be, so to speak, occupied. This was a formidable charge. It very much seemed to one as though the people who left 702 Vermont Street did so in a big hurry. Crumbled dry wall, copious mold, piles of refuse - the house might as easily have been Sarajevo in 1996 than in the same city as Wall Street in 2011.
The sun set over Vermont Street behind the clouds, steadily drizzling on the block party. Eventually, Bloomberg's army, consisting of quite a smaller number of people when there wasn't rich people's property to protect, asked the block party to stick to the sidewalk, and the event drew to a close, teams of occupiers agreeing to stay with Alfredo and Tasha and with Quincy for the night, vowing to put their bodies between the residents and anyone attempting to turn them into something else.
The police's boss has $19.5 billion. He's got places to stay all over the world, luxury townhouses in the swankiest neighborhoods in the finest cities in the world and sprawling mansions in lush paradises in the tropics. And no one ever threatens to kick him out of any of them. For the time being, anyway.
This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.
J.A. Myerson is an independent journalist who is involved in the Media and Labor Outreach committees at Occupy Wall Street.
Wednesday 7 December 2011
http://truth-out.org/occupy-our-homes/1323268606
Yesterday, no one had lived in 702 Vermont Street for three years. Vermont Street sits in East New York, the Brooklyn neighborhood where foreclosures are five times more frequent than in the rest of the state. Today, Alfredo and Tasha and their son and daughter moved in, with the help of a number of friends whom they'd never met. Some were from the advocacy groups Picture the Homeless and Vocal New York, others were clergy or members of the city council. They had been organized and brought together by Occupy Wall Street for a national day of action to promote foreclosure resistance, an event kicking off a project they call Occupy Our Homes.
Alfredo, Tasha and the kids, way back yesterday, were homeless, having been foreclosed upon by a bank and hundreds upon hundreds of people who had never heard of them came to East New York today to get them a home. Occupy Wall Street is itself somewhat homeless these days, having been evicted from Zuccotti Park on the orders of the 12th-richest man in the United States. A few weeks ago, the media tycoon in question deployed what he openly calls his "army" to dispossess the occupation, including, naturally, everyone who called it their home. Much wondering has been going on in the press about what Occupy Wall Street would do now that it was homeless. Today's answer seems to have been: get other people homes.
The few hundred activists marched through the streets of East New York and took a tour of the foreclosed properties in the area, which is very easy to do, since they are everywhere. "On every block, we have one or two homes either for sale or in foreclosure," Lorraine, who lives in the neighborhood, told me. "I think we have three houses for sale on my block alone."
On the Upper West Side, there are always street fairs. There are museums and libraries and there are parks and concert venues. And on the Upper West Side, there are places for kids to go after school and there are places for people who want to get healthier to exercise. On the Upper West Side, there are churches made of stone. In East New York, there is a church called Hope Christian Center, which looks like an abandoned office building, the paint on the façade stripping away to reveal the brick beneath.
"There's nothing to do here," said longtime East New Yorker Corinne Gonzales, who attributes the many people who watched the march from their windows to this. Revealingly, it was at their windows where people found themselves on a chance Tuesday afternoon in this neighborhood and not, perhaps, at work. Many of them joined the march, which, at its peak, swelled to what was widely estimated to include 1,000 participants - on a Tuesday afternoon in the rain.
Corrine had never seen anything like it. News cameras and satellite vans don't come here, except, occasionally, in the case of a shooting. Now, they'd come here to document the difficulty of a life of poverty and the attempt to change that dynamic. If Occupy Wall Street had chosen to do something else today, another day would have gone by in which no one in the media or politics paid any attention to East New York.
"It's not fair to us low income families," Corrine told me. "Everybody's talking about middle class. Middle class? What about us? We got children. It's not fair to us. And I thank God that you guys came out today to represent us low income families. And I appreciate it very much."
Some activists brought housewarming gifts for the new residents of 702 Vermont Street. Yates McKee, 32, marched carrying a large houseplant. "A plant is important because it's something that helps make it a nice environment," he told me. "It's also a metaphor for sustaining life."
Lorraine had brought brownies. She started a "part-time cooking thing" to make extra money before she lost her job. "They're free," she said, offering me one. "It might energize you, with a little sugar. I have a sweet tooth." These brownies were to welcome the activists who had come to help, though the baker herself faces foreclosure. "Any person at this point is one step away from being jobless and homeless," she remarked. "It's a reality. This is the life that we're living right now. It's like this is what we worked for, all those other years. This is the point that we've come to."
If anybody wanted demands, they were clear today. As Brian Gibbs of Picture the Homeless said by way of the people's microphone, "What we need is real, affordable housing now. It has to change." Gibbs was once homeless on the street and spoke of the police harassment routinely visited upon him and others in his situation. "The problem with homelessness is that people get so desperate, they are willing to risk arrest in order to get off the streets," he told the crowd.
At one stop along the tour, a young man named Quincy, who works as a part time plumber, took the people's mike. "I was tricked into signing over my deed," he confessed. "Now I'm getting evicted. I have a loan of $475,000."
Standing beside him, his city council member, one-time Black Panther Charles Barron, announced, "We will not let this young man lose his home. We've stopped other foreclosures and we're going to stop this one." Thereupon, Quincy began to weep, the friends and comrades he never knew he had gathering around him to place their calming hands upon his shoulders and his arms and his head. He didn't know they were out there, but 1,000 people ready to protect his home happened to be around the corner the day upon which he was getting foreclosed.
As Quincy wrapped up his remarks, a cry from the crowd drew everyone's attention to another longtime resident of the neighborhood, who told the story of having bought her house in 1997, putting $80,000 down. She'd been working two jobs all of her life and had paid her mortgage responsibly, putting down months in advance when she went on vacation. Her son did four years in Kuwait and four years in Iraq and now he's dead. The Pentagon, the woman said, doesn't know whether he died by enemy bullets or friendly fire. Since then, she's become sick and the bills for her medical treatment have ruined her hopes for paying off the rest of her mortgage. Crying to the sky, she asked again and again, "How am I going to do it?"
At the march's destination, balloons announced the block party to be thrown for the incoming neighbors. A tent appeared on the roof, on which was scrawled, "You cannot evict an idea whose time has come." Remarks were shared by, among others, Alfredo, a 27-year-old community organizer around stop and frisk, and Tasha, whose shyness in the face of the people's microphone moved her to nervous giggles and a swift conclusion to her brief thanks.
I went into 702 Vermont Street with the Occupy Wall Street Sanitation Working Group, who entered before anyone else to get the house ready to be, so to speak, occupied. This was a formidable charge. It very much seemed to one as though the people who left 702 Vermont Street did so in a big hurry. Crumbled dry wall, copious mold, piles of refuse - the house might as easily have been Sarajevo in 1996 than in the same city as Wall Street in 2011.
The sun set over Vermont Street behind the clouds, steadily drizzling on the block party. Eventually, Bloomberg's army, consisting of quite a smaller number of people when there wasn't rich people's property to protect, asked the block party to stick to the sidewalk, and the event drew to a close, teams of occupiers agreeing to stay with Alfredo and Tasha and with Quincy for the night, vowing to put their bodies between the residents and anyone attempting to turn them into something else.
The police's boss has $19.5 billion. He's got places to stay all over the world, luxury townhouses in the swankiest neighborhoods in the finest cities in the world and sprawling mansions in lush paradises in the tropics. And no one ever threatens to kick him out of any of them. For the time being, anyway.
This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.
J.A. Myerson is an independent journalist who is involved in the Media and Labor Outreach committees at Occupy Wall Street.
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