Derivatives and bonds and crashes, oh my (European edition)

Bob Kuttner writes about the huge piece of the world economic crisis on the other side of the Atlantic in Europe on the Brink Huffington Post 10/23/2011:

Beginning in 2008, the collapse of Bear Stearns revealed the extent of pyramid schemes and interlocking risks that had come to characterize the global banking system. But Western leaders have stuck to the same pro-Wall-Street strategy: throw money at the problem, disguise the true extent of the vulnerability, provide flimsy reassurances to money markets, and don't require any fundamental changes in the business models of the world's banks to bring greater simplicity, transparency or insulation from contagion.

As a consequence, we face a repeat of 2008. Precisely the same kinds of off-balance sheet pyramids of debts and interlocking risks that caused Bear Stearns, then AIG, Lehman Brothers and Merrill Lynch to blow up are still in place.

And he explains the gerbel-wheel on which the EU's leaders decided to place themselves:

The Greek situation reveals the deeper potential for contagion, and the Ponzi scheme that now characterizes the banking system. Europe's banks hold some in $121 billion Greek government bonds that are trading at about 40 cents on the dollar. Europe's leaders, meeting in a summit conference over the weekend, admitted that Greece needs a reduction in its debt load of 50 to 60 percent, and not the 21 percent that was agreed to by the banks back in July.

So Europe's banks will need to take much a bigger hit, and it's not clear that they have the capital to sustain it. But Europe's governments and the European Central Bank are balking at providing this money directly. Instead, they hope to double down with a bailout fund, the $606 billion European Financial Stability Facility that, in effect, borrows against the credit of Europe's soundest economies.

Kuttner comes up with a nice turn of phrase here:

The banks' own shaky condition makes them risk-averse about holding not just Greek sovereign debt, but also the bonds of Portugal, Ireland, Italy and Spain.

The financial industry has coined the acronym PIGS to denote these nations, implying that the crisis is their own fault for living beyond their means. But the true pigs of the story are the banks.

It gets dizzying, but these bank policies are putting the world's economy at risk. As Kuttner explains, banks holding Greek and other now-dubious sovereign debt have used derivatives (interest-rate swaps, in this case) to insure themselves against losses. When they have to take those losses, the insurance provided by the derivatives will kick in and create new problems for the banks that provided the derivatives. Something very similar to that is what happened with AIG's collapse.

Kuttner is also good on this point:

Euro-skeptics are saying, "We told you so" -- the Euro was always a doomed idea. It's true that creating a monetary unit to be used by 17 separate nations with diverse economic strengths and budgetary conditions was a risky proposition. The Euro was a vessel designed for calm seas, not for once-in-a-century storms.

But to solely blame Europe and its institutions is to excuse the source of the storms. That is the political power of the banks to block fundamental reform.

Democratic government should be providing the offset to the power of the financial institutions. And in that sense, in the US and most of Europe, our governments are failing badly on their responsibilities to the people.

Tags: robert kuttner, world economic crisis

Scratching for signs for Democrats to have electoral hope in 2012

This report from Binyamin Appelbaum and Helen Cooper in the New York Times received understandable attention from the progressive blogosphere the last few days: White House Debates Fight on Economy 08/13/2011. The bottom line is that any serious stimulus or any real concern about jobs is not part of the Administration's perspective on what needs to be done over the next year.

Mark Thoma in White House Debates Giving Up on Helping the Economy Economist's View 08/14/2011 calls attention to this paragraph of the Times story ...

The issue is being framed by the 2012 election. Administration officials, frustrated by the intransigence of House Republicans, have increasingly concluded that the best thing Mr. Obama can do for the economy may be winning a second term, with a mandate to advance his ideas on deficit reduction, entitlement changes, housing policy and other issues.

... and asks:

The best thing the administration can do is abandon support for struggling households now so Obama can get reelected and reduce social insurance programs that help struggling households?

Because that seems to be the approach they are determined to follow.

Robert Kuttner, Looking for Some Good News Huffington Post 08/14/2011, describes the reasons for cautious optimism for the Democrats in 2012.

The Republicans have been captured by the far right. Ordinarily, that would be good news for Democrats. The Republicans may well nominate someone too crazy for most Americans to vote for. There is also the beginning of a serious backlash against the Tea Party among the general electorate (though not among the Republican base).

Through the smog of rhetoric and demagoguery, more and more Americans are coming to correctly blame Republicans for the obstructionism on the budget agreement that helped trigger panic in financial markets. With so many far-right Republicans having picked up House seats in the 2010 midterm, the election of 2012 could be a good year for a Democratic comeback.

But, we have a little problemita on the Democratic side:

The only problem is that we have our own albatross in the White House. Barack Obama is not likely to have coattails. And his own strategy for dealing with prolonged stagnation neither motivates voters nor fixes what ails the economy. Oh, and it divides his own party. ...

Obama may yet be saved by the sheer extremism of the likely Republican nominee. But we should not bet the farm on that either. I vividly remember being reassured that Ronald Reagan was too far-right, and George W. Bush too dumb, to be elected. So much for that theory. ...

I have to say Obama is doing just about everything he can to depress people who were so excited about him in 2008.

He emphasizes the importance of mounting progressive primary challenges in Democratic primaries. And I was particularly intrigued by this comment: "Talk to elected Democrats on the subject of Obama off the record, and you get unprintable rage."

But I don't see a lot of that spilling over into publicly articulated rage on the part of Democratic members of Congress. It makes perfect sense they would be upset by what Obama's anti-Social Security and anti-Medicare positions are doing to the Party. Right now it looks like a lemming strategy.

But that's probably unfair to lemmings. Because they don't occasionally run off cliffs because they make mass suicide pacts with each other. It's because in their migrations, when they come to an obstacle, they are determined to get past it. Even if the obstacle turns out to be an ocean.

Does that describe a Democratic Party that will express "unprintable rage" to a friendly partisan off the record but are reluctant to stand up unequivocally in defense of Social Security and Medicare benefits?

Kuttner points to this piece by Andrew Hacker, The Next Election: The Surprising Reality New York Review of Books 07/21/2011, that offers hope for Obama re-election, though not for Social Security and Medicare. Hacker digs into the weeds of turnout trends and points out that the 2012 electorate is likely to be much more favorable for Obama and the Democrats than in 2010, i.e., younger, less affluent, more urban. Or, as he puts it:

The 2012 electorate will differ from 2010's in a crucial respect: it will contain nearly 50 million additional voters. Some will be new, but most of them will be people who supported Obama in 2008. Compared with the 2010 House electorate, they will be younger, more ethnically diverse, with fewer identifying themselves as conservatives, and a higher proportion will be women. Most of them would not have voted for the Republicans who now make up John Boehner's House.

The problem for the Democrats is that Hacker's case for capitalizing on a more favorable electorate in 2012 turns on Obama drawing sharp lines between himself and the Republicans, particularly on the Ryan Plan's proposed abolition of Medicare. He suggests Harry Truman's "give 'em hell" campaign of 1948 as a model. (Truman himself said, I just told the truth and they thought it was hell.)

Which brings us back to the Democrat's problemita. As Hacker observes, "In the end, turning out voters in a presidential election rests far more on enthusiasm than money." And Kuttner reminds us that "the 18-year-olds who voted for Obama with such enthusiasm in 2008 will be 22-year-olds looking for jobs in 2012." And Obama's proposals for a Grand Bargain that basically really only means the beginning of phasing out Social Security and Medicare has already made it difficult for Obama to pose as the champion of those programs. "We won't cut Social Security and Medicare as much as the other guys" doesn't sound promising as a campaign slogan. Obama's calling Social Security cuts "modest adjustments," as he did today on his bus tour along with scolding Democrats for objecting to them.

Particularly when the Republican Party is already using talking points like this, "During The Debt Ceiling Negotiations, Obama Offered $650 Billion In Cuts To Entitlement Programs Like Medicare, Medicaid, And Social Security." (Reach Out And Touch Medicare GOP.com 08/04/2011)

And when the Republicans will be running endless ads like this:



As Kuttner grimly observes, "There is a whole, depressing genre of commentary that goes, 'Here's what Obama needs to do.' Well, gentle reader, he isn't reading these columns and he isn't going to do it." Unless the Democratic base can bring enough pressure to, among other things, get those silently enraged elected Democrats to start standing up seriously for Social Security and Medicare.

Tags: 2012 election, barack obama, mark thoma, robert kuttner

Debt-ceiling fight shows that reality matters

Robert Kuttner, The Joys of Fanaticism The American Prospect Online 07/29/2011:

The events of this month suggest that we are living through a momentous and needless catastrophe in the making. With the economy already very fragile, the Republicans are willing to push it off a cliff, and a weak Democratic president seems unable or unwilling to stop them.

As I've suggested in an earlier piece, what comes to mind is World War I, with the mutual miscalculations and bluffing games that led to a calamitous war that nobody wanted.

It is also truly chilling to watch one of America's two parties increasingly dwell in a parallel universe, where facts don't matter, and a kind of carnival atmosphere of let-it-burn prevails.

Joan McCarter has this to say on the impasse of Friday morning (Reid: 'It's really time that they legislate' in the House Daily Kos 07/29/2011):

To use the analogy of the "grown up in the room," somebody needs to take control of the pre-school that's taken over the House.

The grown-up in the room right now should say "enough," and put the 14th amendment on the table, take everything else off.

Sounds right to me.

The recklessness of the Republican Wrecker Party is the main problem. But Barack Obama is President of the United States and he is doing a very poor job in exerting his leadership as the leader of a democracy facing a authoritarian wrecker Party like today's Republicans. Robert Reich states it well in The Empty Bully Pulpit 07/27/2011:

How did we get into this mess?

I thought I’d seen Washington at its worst. I was there just after Watergate. I was there when Jimmy Carter imploded. I was there during the government shut-down of 1995.

But I hadn't seen the worst. This is the worst.

How can it be that with over 9 percent unemployment, essentially no job growth, widening inequality, falling real wages, and an economy that’s almost dead in the water — we’re locked in a battle over how to cut the budget deficit?

Part of the answer is a Republican Party that’s the most irresponsible and rigidly ideological I’ve ever witnessed.

Part of the answer is the continuing gravitational pull of the Great Recession.

But another part of the answer lies with the President — and his inability or unwillingness to use the bully pulpit to tell Americans the truth, and mobilize them for what must be done. [my emphasis]

If the Democratic Party hadn't crippled itself in various ways, senior leaders of the Party would be meeting with Obama about now and tell him that he either needs to take a clear stand that he will use his 14th Amendment powers to protect the 14th Amendment obligation to meet the financial commitments of the US government, or to announce that he isn't running for a second term while he pursues this train wreck of an approach on his own. But that would only be effective if there were a credible threat within the Democratic Party of a strong primary challenge to him. And there's not: another way the Democratic Party has inflicted severe damage on itself.

Tags: barack obama, debt ceiling, democratic party, robert kuttner, robert reich

Dominique Strauss-Kahn's arrest and the IMF's political direction

Robert Kuttner gives a quick run-down on arrrested International Monetary Fund (IMF) chief Dominique dubious personal and professional history as it relates to the pending charges against him in Strauss-Kahn and the European Left Huffington Post 05/15/2011:

Strauss-Kahn, who until yesterday headed the International Monetary Fund, was the Socialist front-runner to challenge French President Nicolas Sarkozy next year. Polls showed that Strauss-Kahn well ahead of both Sarkozy and far right populist Marine Le Pen.

But even before this latest scandal broke, Strauss-Kahn didn't seem like much of a socialist. Last week, the press caught DSK, as the local press calls him, and his wife tooling around in a borrowed $150,000 Porsche, which reinforced his image as wealthy playboy. In 2008, Strauss-Kahn barely survived a widely publicized affair with one of his IMF employees, and in the wake of the New York incident, another woman has stepped forward claiming a rape in 2002.

Cynics here have argued that the wily Sarkozy promoted his likely rival for the IMF post to increase the chances that the imperious Strauss-Kahn would commit some highly visible and politically fatal act. For demolishing the Socialists' claim to speak for the common Frenchman and woman, it's hard to beat an accusation of the entitled Socialist standard bearer orally raping a chambermaid in a $3,000 luxury hotel room and then trying to skip town.

Politics is politics, so it's certainly not unthinkable that Sarkozy may have had such a possibility in mind.

While Strauss-Kahn may not have been "much of a socialist," as Kuttner says - the IMF during his term in office had moved a bit away from the neoliberal Washington Consensus that had so badly discredited the IMF in much of the world. Joe Stiglitz discusses that shift in The IMF’s Switch in Time Project Syndicate 05/05/2011 (before Strauss-Kahn's arrest). Stiglitz describes how "Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact." And that subsequent capital flows to growing developing nations has made the need for such capital controls even more widely appreciated. The IMF has now "blessed such interventions," i.e., capital controls, though Stiglitz notes that the IMF stayed witht he neoliberal notion that they should be only a "last resort." And he argues:

On the contrary, we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous. Such regulations should be a key part of any system to ensure financial stability; resorting to them only as a last resort is a recipe for continued instability.

Stiglitz considers it an even more signficant shift in IMF policy has been "the link that the IMF has finally drawn between inequality and instability." This is an issue of particular concern in the United States, though we are a long way from being subjected to the dubious tutelage of the IMF that threaten Greece and other EU countries under attack by the capital markets. Stiglitz notes, "As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a 'land of opportunity' than even 'old' Europe." And he concludes

For progressives, these abysmal facts are part of the standard litany of frustration and justified outrage. What is new is that the IMF has joined the chorus. As Strauss-Kahn concluded in his speech to the Brookings Institution shortly before the Fund's recent meeting: "Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda."

Strauss-Kahn is proving himself a sagacious leader of the IMF. We can only hope that governments and financial markets heed his words.

Obviously, Stiglitz was commenting on Strauss-Kahn's public role as IMF chief, not on his alleged sexual assaults. Kuttner concurs with Stiglitz' judgment on the recent direction of IMF policy:

For all his personal flaws, Strauss-Kahn, in his current job as head of the International Monetary Fund, has been less of an austerity-monger than most of his predecessors. That's a pretty low bar, but under Strauss-Kahn and his chief economist, Olivier Blanchard, the IMF has uncharacteristically weighed in on the side of not punishing nations with large deficits, but helping them to grow their way out of recession.

With Strauss-Kahn sidelined and probably finished, the IMF has appointed an American, John Lipsky, a career official, as acting managing director. Strauss-Kahn, as a French Socialist, had been leaning against the IMF austerity culture, and Lipsky is considered more orthodox.

Steve Clemons also discusses recent IMF policy and Staruss-Kahn's public leadership style in The Meaning of Strauss-Kahn Washington Note 05/16/2011.

Tags: imf, international monetary fund, joseph stiglitz, neoliberalism, robert kuttner, strauss-kahn