Our Economy

Trash company's experiment turning restaurant leftovers into a saleable product

2012-01-22T05:15:00.000-08:00

RANCHO CUCAMONGA - Those rib bones you left on your plate at Lucille's Barbecue may be a treat for your dog but they're also good for your garden. The Southern-style restaurant at Victoria Gardens, along with seven other eateries in the city, are part of a Burrtec Waste pilot program that takes restaurant food waste and turns it into rich, compost soil. "When they asked me if I was ready for the program, I told them I was ready yesterday," said Martin Rodriguez, general manager of Lucille's.

The pilot program is what government officials like to call a "win-win." Restaurants get their food waste hauled away for free, thereby reducing their total trash volume. Burrtec gets to expand its services and sell a new product - nutrient-rich dirt. When the program started, waste from Lucille's filled up three large trash bins and one recycle bin. Today, two months later, Lucille's uses two food waste bins, one recycle bin and one trash bin. The change has saved the restaurant nearly $500.

On a daily basis, Burrtec receives food waste from Lucille's, BC Cafe, Red Hill Coffee Shop, Panther Cafe at Chaffey College, Chili's, On the Border, Souplantation and Hometown Buffet. The kitchen scraps get mixed with green waste, which sit in large, covered piles. The batches get aerated and hydrated for three months.

"We just try to make a nice cohesive environment for bugs," said Richard Crockett, a Burrtec Waste general manager referring to organisms which break down the materials into compost. "As long as you create a nice environment for bugs, they'll do all the work."

At the tour of Burrtec's facilities, Councilwoman Diane Williams and Environmental Programs General Manager Richard Crockett gives a tour of the composting Thursday at Burrtec Waste Industries' West Valley Material Recovery Facility in Fontana. Manager Linda Ceballos stuck their hands in a pile of compost as others stayed back and made jokes about never shaking their hands. "It's just dirt," Ceballos said.

It's true, it's just dirt - high-demand dirt. Many residents are inquiring about buying this plant-friendly compost. For now, Burrtec is selling it in bulk to landscapers and other companies. But in the future, Burrtec plans to refine the product to sell to more customers.
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Excellent video on deregulation

2011-10-25T11:53:00.000-07:00

Excellent video describing how deregulation caused the financial crisis we are experiencing.

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10 Reasons for Progressives to Feel Reassured About the Debt Package

2011-08-04T09:23:00.000-07:00

The debt ceiling is being raised. We will not have another debt ceiling battle in 6 months.

Medicare, Medicaid and Social Security remain untouched — which would not even have been the case in President Obama’s first proposal.

$2.5 trillion in cuts, as opposed to Obama’s initial proposal of $4 trillion (to say nothing of Paul Ryan’s 6 trillion). Many of the cuts are in defense.

The super committee will have triggers to prevent deadlock.
The cuts are for over a decade and do not begin to take effect until 2013.
The Bush tax cuts expire in 2013.

Polls showed a majority of Americans wanted Obama to compromise more. He did. In the election, no one can say he is the unreasonable one. It is very easy to say the right is more than unreasonable. The Tea Party is reckless and dangerous and now everyone knows for sure.

Now we see why the 2012 elections are so important. America got what it voted for in 2010. If we want to reverse the disastrous policies George W. Bush instated and the Tea Party have kept in place, we have to turn this country around in the next election.
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It’ll Be an All-Cuts Budget “Deal” (Just Like California)

2011-07-28T09:10:00.000-07:00

For many years now in California we’ve witnessed an extremist Republican minority in the legislature hold the state budget hostage through manipulating the “two-thirds rule” that allows a legislative minority to dictate to the majority whether any new revenues can be raised.

The debt ceiling gambit that Republicans in the House of Representatives have used to tie the U.S. government in knots in recent months is simply the California GOP’s tactic writ large.

Like Governor Jerry Brown and the Democratic leadership in Sacramento, President Barack Obama and the Democratic leadership in Washington will capitulate (after many paralyzing months of hopes for “compromise”) and enact an all-cuts budget with no “shared sacrifice” in the form of higher taxes imposed on the rich and corporations.

The debt ceiling “deal” might postpone the next budget confrontation past the 2012 elections, but it will shred social programs that serve working people and are vital to key Democratic constituencies, while tearing apart the broader social contract between the government and its citizens. (At a time when the otherwise gridlocked Congress and administration can pull together and pass with celerity $649 billion for one-year’s defense budget the debt ceiling fight is all about priorities in any case.)
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The Biggest Driver in the Deficit Battle: Standard & Poor’s

2011-07-28T09:08:00.000-07:00

Standard & Poor’s didn’t exactly distinguish itself prior to Wall Street’s financial meltdown in 2007. Until the eve of the collapse it gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations.

Standard & Poor’s (along with Moody’s and Fitch) bear much of the responsibility for what happened next. Had they done their job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn’t have become so large – and their bursts wouldn’t have brought down much of the economy.

Had Standard & Poor’s done its job, you and I and other taxpayers wouldn’t have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now.

In other words, had Standard & Poor’s done its job, today’s budget deficit would be far smaller.

And where was Standard & Poor’s (and the two others) during the George W. Bush administration – when W. turned a $5 trillion budget surplus bequeathed to him by Bill Clinton into a gaping deficit? Standard & Poor didn’t object to Bush’s giant tax cuts for the wealthy. Nor did it raise a warning about his huge Medicare drug benefit (i.e., corporate welfare for Big Pharma), or his decision to fight two expensive wars without paying for them.

Add Bush’s spending splurge and his tax cuts to the expenses brought on by Wall Street’s near collapse – and today’s budget deficit would be tiny.
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Seniors' worries center on Social Security, Medicare

2011-07-28T05:45:00.001-07:00

Ann Filippini relies on a $700 Social Security payment and a $100 pension each month to pay her bills.

With a potential U.S. government default looming, the 80-year-old Plains Township resident is worried she won't get her Social Security check next month.

President Obama said Monday night he could not guarantee that Social Security checks will go out as planned next month if Democrats and Republicans fail to reach a deal to raise the debt ceiling by Aug. 2. Social Security checks are set to be sent Aug. 3.

"I'm a nervous wreck because I don't have a penny saved. I just used that for everything. I don't get much," Filippini said Wednesday. "What are we supposed to do? How are we supposed to pay our bills?"

Filippini was one of several senior citizens at the Kingston Senior Center who expressed fears about threats from government officials to withhold Social Security checks.

"That's our livelihood," said Doris Thompson, 85, of Kingston, who said she relies solely on government entitlements - Social Security for income and Medicare for health coverage.

"It would really hurt financially," said Marcia Young, 64, of Plymouth. "You have to worry about paying your bills and buying medications."

Rachael Pollard, 70, of Plymouth, suggested that legislators cut their own "perks, retirement and lucrative salaries" as a way to cut spending.

"If they want us to sacrifice, let them sacrifice first," Pollard said. "The gas company, the electric company, the water company and everyone else keeps raising their prices. So what are the people who only get $700 or $800 a month going to do? Do they want to starve the old people to death or just kill them off because they can't afford their medicine? That way, they'll balance Social Security."

The Question Conservatives Can't Answer

2011-07-27T18:09:00.000-07:00

The following fact was sent to numerous conservative pundits, politicians, and profitseekers:

Based on Tax Foundation figures, the richest 1% has TRIPLED its share of America's income over the past 30 years. Much of the gain came from tax cuts and minimally taxed financial instruments. If their income had increased only at the pace of American productivity (80%), they would be taking about a TRILLION DOLLARS LESS out of our economy.

And a question was posed:

In what way do the richest 1% deserve these extraordinary gains?

This question was not posed in sarcasm. A factual answer is genuinely sought. It seems unlikely that 1% of the population worked three times harder than the rest of us, or contributed three times as much to American productivity. Money earned from tax cuts and minimally taxed financial instruments is not productive income. And while some big earners have developed innovative ideas and leading-edge businesses, it seems fair to say that taxpayer-funded research at the Defense Advanced Research Projects Agency (the Internet), the National Institute of Health (pharmaceuticals), and the National Science Foundation (the Digital Library Initiative) has laid a half-century foundation for their idea-building.

So I asked anyone out there to explain, defend, or justify the fact that over 20% of our country's income (it was 7% in 1980) now goes to the richest 1% of Americans.

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Devastating class warfare not good enough for House GOP

2011-07-27T17:48:00.000-07:00

Conservatives complain that the Speaker's debt ceiling plan is too namby-pamby

Robert Greenstein at the Center on Budget and Policy Priorities has been doing some invaluable budget number-crunching throughout the ongoing debt ceiling crisis. On Monday he released a "statement" on the new Boehner plan that includes by far the strongest rhetoric I've seen from him to date.

House Speaker John Boehner's new budget proposal would require deep cuts in the years immediately ahead in Social Security and Medicare benefits for current retirees, the repeal of health reform's coverage expansions, or wholesale evisceration of basic assistance programs for vulnerable Americans.
The plan is, thus, tantamount to a form of "class warfare." If enacted, it could well produce the greatest increase in poverty and hardship produced by any law in modern U.S. history.

I will take a closer look at how both the Reid and Boehner plans will impact ordinary Americans tomorrow morning. But for now, with Greenstein's denunciation ringing in your ears, consider this: A significant number of House Republicans oppose the Boehner plan because it does not go far enough.

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Wall Street's War

2010-06-06T07:50:00.000-07:00

It's early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-
indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.

The real shocker is a thing known among Senate insiders as "716." This section of an amendment would force America's banking giants to either forgo their access to the public teat they receive through the Federal Reserve's discount window, or give up the insanely risky, casino-style bets they've been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street's most lucrative profit centers: Five of America's biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more than half of JP Morgan's trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.
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Corrupt Banking System - video

2010-03-29T17:06:00.000-07:00

This is an interesting and instructive video of how our banking system originated and how it operates.
watch video

on Financial Services Deregulation

2010-03-25T19:33:00.000-07:00

There continues to be discussion on who is to blame for financial deregulation near the end of the Clinton administration. So I have gathered together a few articles and commentary on the events and political pressures at that time.

Although many blame Clinton for signing the bill, the vote in Congress was such that a veto by Clinton would likely have been over-ridden and the bill passed anyway.

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The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November. On November 4th, the final bill resolving the differences was passed by the Senate 90-8, and by the House 362-57. This legislation (whose voting margins, if repeated, would easily have overcome any Presidential veto) was signed into law by Democratic President Bill Clinton on November 12, 1999.
Wikipedia

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In the United States, Congress can override a presidential veto by having a two-thirds majority vote in both the House of Representatives and Senate, thus enacting the bill into law despite the president's veto. However, a veto may not be overridden if it is a pocket veto, a veto in which the president simply ignores a bill between congressional sessions. The veto override is an example of checks and balances, the process in which various branches of the U.S. government can limit each others' power.
Many states of the U.S. have similar regulations, i.e. a state governor can veto (refuse to sign on) a bill passed by the legislature, and the legislature can override the veto. Most states require a two-thirds majority vote to override.

wikipedia
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The Gramm-Leach bill was passed in a republican held congress, but the vote in the senate was 90-8. That means most of the democrats voted for it too. Clinton's treasury guy, Robert Rubin pushed the bill through and then took a cushy job at Citibank, who had the most to gain since they had already started a merger with Travelers Group insurance. Clinton gave the pen he used to sign the bill to Sandy Weill, the CEO of Citibank, it is now displayed in their headquarters.

You talk about the republicans having control for the first six years of "W"s presidency. Remember that it took several years for the subprime loans started after deregulation to begin failing. The people that took out ARMs that had 2, 3, or 5 years before their rates went up and hoped their income would go up during that time are the ones to blame!

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Edit: "The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, one of the central pillars of Roosevelt's New Deal. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others' industries, and investment banking and commercial banking were separated."

1999 Republican Congress
Source(s):
thomas.gov

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De-regulation has been a Republican mantra since Reagan's administration. Clinton did not have a Democratic congress, Republicans the majority in both the House and Senate.

The facts that can be easily checked on the Congress web page.

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Clinton, Republicans agree to deregulation of US financial system

An agreement between the Clinton administration and congressional Republicans, reached during all-night negotiations which concluded in the early hours of October 22, sets the stage for passage of the most sweeping banking deregulation bill in American history, lifting virtually all restraints on the operation of the giant monopolies which dominate the financial system.

The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, one of the central pillars of Roosevelt's New Deal. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others' industries, and investment banking and commercial banking were separated.

Campaign of influence-buying

They had good reason, to be sure. The banking, insurance and brokerage industry lobbyists have combined their forces over the last five years to mount the best-financed campaign of influence-buying ever seen in Washington. In 1997 and 1998 alone, the three industries spent over $300 million on the effort: $58 million in campaign contributions to Democratic and Republican candidates, $87 million in "soft money" contributions to the Democratic and Republican parties, and $163 million on lobbying of elected officials.

The chairman of the Senate Banking Committee, Texas Republican Phil Gramm, himself collected more than $1.5 million in cash from the three industries during the last five years: $496,610 from the insurance industry, $760,404 from the securities industry and $407,956 from banks.

Threat to financial stability

The proposed deregulation will increase the degree of monopolization in finance and worsen the position of consumers in relation to creditors. Even more significant is its impact on the overall stability of US and world capitalism. The bill ties the banking system and the insurance industry even more directly to the volatile US stock market, virtually guaranteeing that any significant plunge on Wall Street will have an immediate and catastrophic impact throughout the US financial system.

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Gramm–Leach–Bliley Act -- Wikipedia

The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance, and banking, if not for a temporary waiver process.[1] The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the "financial services industry".
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McCain, Obama camps point fingers in banking deregulation, mortgage messes

The 1999 Gramm-Leach-Bliley Act broke down barriers between banks, securities firms, mortgage lenders and insurance companies. That deregulation repealed Great Depression-era bank regulations with the approval of former president Bill Clinton.

The Gramm bill encouraged lending during the strong housing market but has put banks, investment houses and insurance companies in peril since the housing bust which started two years ago. The measure allowed those lending money to sell off those loan portfolios to other companies, thus disconnecting the lending risk.

The Obama camp points out that former U.S. Sen. Phil Gramm was a key architect of the banking and lending deregulation. Gramm is a McCain economic adviser eho could be in the Arizona Republican's cabinet. Since his Senate days ended he has also worked for investment bank UBS.

The Democratic National Committee says that 19 McCain fundraisers and campaign advisers lobbied for mortgage giants Fannie Mae and Freddie Mac. The federal government took over the mortgage groups earlier this month as part of a number of finance and mortgage-related bailouts. A number of other McCain fundraisers and campaign officials have lobbied for American International Group and other finance firms. The Federal Reserve Bank is bailing AIG out with an $85 billion package

McCain links to Fannie, Freddie, AIG and other troubled financial firms include senior campaign advisor Charlie Black, campaign manager Rick Davis and national fundraising cochairman Wayne Berman. Merrill Lynch chief executive John Thain is also a McCain backer and has raised money for the Arizona senator. Bank of America said earlier this week it was acquiring Merrill Lynch.

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UBS Money Laundering: What Did Phil Gramm Know?

2009-08-20T08:14:00.000-07:00

In recent days yet another wealthy private customer of the Swiss-based banking conglomerate UBS admitted to criminal fraud in a growing parade of perp walks that could extend into the thousands. It is a case that threatens to ensnare former Sen. Phil Gramm, the Texas Republican who is vice chairman of UBS' investment banking business. Given the widespread involvement of UBS in what the Justice Department alleges were systematic efforts to violate US tax laws, it must be asked: Did Gramm as a top executive have no inkling about what was going on?

Perhaps, but for Gramm this has to be a moment that at the very least tests his ideological commitment to the radical deregulation of banking that he championed during his twenty-four years in Congress. He joined UBS soon after the bank acquired Enron, a company that had gone bankrupt after jumping through the "Enron loophole" in the Commodity Futures Modernization Act, which Gramm had pushed though Congress. Gramm's wife, Wendy, had been an Enron board member and head of its audit committee but failed to sound the alarm before the Houston-based company collapsed. Then UBS itself ran into big trouble because of $37 billion in bad mortgage debt made possible by derivatives market deregulation engineered by then-Sen. Gramm. US taxpayers have had to pony up money to heal UBS' self-inflicted wound. But the bank's involvement with tens of thousands of secret accounts tied to allegations of tax evasion raises starker issues--of possible criminal fraud through practices that Gramm as a senator helped keep opaque.
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PAUL KRUGMAN: The Joy of Sachs

2009-07-17T01:20:00.000-07:00

The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America. Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away. Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee. Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
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U.S. Economy: Consumer Costs Fall Most in Six Decades

2009-06-17T16:25:00.000-07:00

The cost of living in the U.S. fell over the last 12 months by the most in six decades, easing concern that government efforts to revive the economy will lead to an immediate outbreak of inflation. The consumer price index dropped 1.3 percent in the year ended in May, the most since 1950, the Labor Department said today in Washington. Prices increased just 0.1 percent last month, less than anticipated, after no change in April.

The lack of sustained gains in sales is one reason companies are finding it difficult to pass increases in fuel costs on to customers. Higher gasoline prices will probably restrain Americans’ discretionary spending at a time when the economy is showing signs of stabilizing. “Inflation is not an issue,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. “There are huge amounts of slack in the economy and demand is quite soft, so it’s difficult to see how inflation can pick up for the balance of the year.”
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The Dirty Dozen

2009-03-30T02:27:00.001-07:00

Meet the bankers and brokers responsible for the financial crisis - and the officials who let them get away with it. (More details in Wikipedia)
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China 'worried' about US Treasury holdings

2009-03-13T05:54:00.000-07:00

China's premier expressed concern Friday about its holdings of Treasuries and other U.S. debt, appealing to Washington to safeguard their value, and said Beijing is ready to expand its stimulus if economic conditions worsen. Premier Wen Jiabao noted that Beijing is the biggest foreign creditor to the United States and called on Washington to see that its response to the global slowdown does not damage the value of Chinese holdings.

"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference following the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets." Analysts estimate that nearly half of China's $2 trillion in currency reserves are in U.S. Treasuries and notes issued by other government-affiliated agencies.

Wen's comments foreshadowed possible appeals to President Barack Obama, who will meet with Chinese President Hu Jintao at a London summit of leaders of the G-20 group of major economies on April 2 to discuss the global financial crisis. Washington is counting on China to continue buying Treasuries to fund its massive stimulus package. Last month, visiting Secretary of State Hillary Rodham Clinton sought to reassure Beijing that government debt would remain a reliable investment.
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The Great Solvent North

2009-03-11T13:37:00.000-07:00

HAS the world turned upside down? America, the capital of capitalism, is pondering nationalizing a handful of banks. Meanwhile, Canada, whose banking system had long been notorious for its stodgy practices and government coddling, is now being celebrated for those very qualities. The Canadian banking system, which proved resilient in the global economic crisis, is finally getting its day in the sun. A recent World Economic Forum report ranked it the soundest in the world, mostly as the result of its conservative practices. (The United States ranked 40th).

Most people don’t know that the vision behind Canada’s banking system, made up of a few large, national banks with branches from coast to coast, actually had its beginnings in the United States. Canada’s system is the product of a banking framework inspired by Alexander Hamilton, the first American secretary of the Treasury. Hamilton envisioned the First Bank of the United States, chartered in 1791, as a central bank modeled on the Bank of England.

Canadians found inspiration in Hamilton’s model, but not all Americans did. In the 1830s, President Andrew Jackson opposed extending the charter of the Second Bank of the United States, perceiving it as monopolistic. Money-lending functions were then assumed by local and state-chartered banks, eventually giving rise to the free-market, decentralized system that America has today.

Today, Canada’s system remains truer to Hamilton’s ideal. The five major chartered banks, the few regional banks and handful of large insurance companies are all regulated by the federal government. Canadian banks are relatively constrained in the amounts they can lend. Canadian banks are required to have a bigger cushion to absorb losses than American banks. In addition, Canadian government regulations protect the domestic banks by limiting foreign competition. They also keep banks broadly owned by public shareholders.
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THOMAS L. FRIEDMAN: Obama’s Ball and Chain

2009-03-06T08:29:00.000-08:00

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money — consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game.

When this huge bubble exploded, it created a crater so deep that we can’t see the bottom — because that hole is the product of two inter-related excesses. Some banks are in trouble because of the subprime mortgage securities they have on their books that are now worth only 20 cents on the dollar because of widespread defaults.
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Obama: 'There Is No Easy Out' for Wall Street

2009-02-11T07:20:00.000-08:00

On the same day his Treasury secretary detailed a $2 trillion plan to stabilize the U.S. banking systems and the Senate narrowly passed an $838 billion economic stimulus bill, President Barack Obama said, "we are in a perfect storm of financial problems." The Dow Jones industrial average dropped 382 points following today's news, and Obama said it's important to recognize that "there is no easy out" when it comes to the current economic crisis.

"Wall Street, I think, is hoping for an easy out on this thing, and there is no easy out," Obama told "Nightline" co-anchor Terry Moran in an exclusive interview in Fort Meyers, Fla. "I think that you have two choices in this situation: you can prolong the agony and shareholders will be happy until they're not happy, and that could be a year from now or two years from now or in the case of Japan, eight years later. Or you can just go ahead and acknowledge that yeah, there's, there's a lot of work that has to be done to put these banks back on a firmer footing."
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Nightline

The Great Crash, 2008: A Geopolitical Setback for the West

2009-02-11T06:45:00.000-08:00

The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world's center of gravity away from the United States.

A brutal recession is unfolding in the United States, Europe, and probably Japan -- a recession likely to be more harmful than the slump of 1981-82. The current financial crisis has deeply frightened consumers and businesses, and in response they have sharply retrenched. In addition, the usual recovery tools used by governments -- monetary and fiscal stimuli -- will be relatively ineffective under the circumstances.

This damage has put the American model of free-market capitalism under a cloud. The financial system is seen as having collapsed; and the regulatory framework, as having spectacularly failed to curb widespread abuses and corruption. Now, searching for stability, the U.S. government and some European governments have nationalized their financial sectors to a degree that contradicts the tenets of modern capitalism. Much of the world is turning a historic corner and heading into a period in which the role of the state will be larger and that of the private sector will be smaller. As it does, the United States' global power, as well as the appeal of U.S.-style democracy, is eroding. Although the United States is fortunate that this crisis coincides with the promise inherent in the election of Barack Obama as president, historical forces -- and the crash of 2008 -- will carry the world away from a unipolar system regardless.
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Paul Krugman: The Destructive Center

2009-02-09T03:54:00.000-08:00

What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses? A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even if the original Obama plan — around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts — had been enacted, it wouldn’t have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years. Yet the centrists did their best to make the plan weaker and worse.

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate, waiting until late last week before finally saying what needed to be said — that increasing spending is the whole point of the plan. And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan, which was, by the way, better focused than the original administration proposal.
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Charlie Rose's Financial Interviews

2009-01-31T08:24:00.000-08:00

Mr. Rose interviews the major figures of the day. Here are interviews on our economy that I am sure you will find informative.

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Paul Krugman; Don’t Cry for Me, America

2009-01-31T07:54:00.000-08:00

Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again. And now, the United States. The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they’re getting, search for alternatives. They think they’ve found what they’re looking for in some country or other, and money rushes in. But eventually it becomes clear that the investment opportunity wasn’t all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That’s the story of multiple financial crises in Latin America and Asia. And it’s also the story of the U.S. combined housing and credit bubble. These days, we’re playing the role usually assigned to third-world economies.

For reasons I’ll explain later, it’s unlikely that America will experience a recession as severe as that in, say, Argentina. But the origins of our problem are pretty much the same. And understanding those origins also helps us understand where U.S. economic policy went wrong. The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve.

Mr. Bernanke asked a good question: “Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?” His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.

The result, said Mr. Bernanke, was a “global saving glut”: lots of money, all dressed up with nowhere to go. In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the “depth and sophistication of the country’s financial markets.” All of this was right, except for one thing: U.S. financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as “a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.” E.g., “Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad.”

In other words, the United States was not, in fact, uniquely well-suited to make use of the world’s surplus funds. It was, instead, a place where large sums could be and were invested very badly. Directly or indirectly, capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst, with painful consequences.

Paul Robin Krugman is an American economist, columnist, author and intellectual. He is a professor of economics and international affairs at Princeton University, and a columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences "for his analysis of trade patterns and location of economic activity". Krugman is well-known in academia for his work in international economics, including trade theory, economic geography, and international finance. Wikipedia A link to Mr. Krugman's essays is in the Featured Observer panel of Our Economy.

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Rich got richer as their tax rates fell in Bush years, data show

2009-01-31T07:36:00.000-08:00

The average tax rate paid by the richest 400 Americans fell by a third to 17.2% through the first six years of the Bush administration, and their average income doubled to $263.3 million, new data show. The 17.2% in 2006 was the lowest since the Internal Revenue Service began tracking the 400 largest taxpayers in 1992, although they paid more tax on an inflation-adjusted basis than for any year since 2000.

The drop from 2001's tax rate of 22.9% was largely because of President Bush's push to cut tax rates on most capital gains to 15% in 2003. Capital gains made up 63% of the richest 400 Americans' adjusted gross income in 2006, or a combined $66.1 billion, according to the data. In all, those taxpayers reported a combined $105.3 billion in adjusted gross income in 2006, the most recent year for which the IRS has data.
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David Frum: Wall Street's new welfare queens, too greedy to be smart

2009-01-27T03:35:00.000-08:00

There is an urgent warning for Republicans in the weekend’s two big financial stories. On Sunday, the New York Times reported that the Obama administration is considering much tighter regulation of hedge funds and rating agencies. Such a story jangles Republican nerves – and calls us out to fight.

But then there’s this: This morning, the Financial Times reported that Merrill Lynch’s new owner, Bank of America, signed off on $4 billion worth of executive compensation in a quarter in which Merrill suffered a $15 billion loss. Worse: BA seems to have tilted the bonus formula so that more was paid in cash, less in stock.

BA has been of course a huge recipient of federal bailout funds. And so these decisions open the door for President Obama and the Democrats to accuse the banks of wasting taxpayer dollars. It does not help that former Merrill CEO John Thain happened to redecorate his office at this time for $1.2 million, a sum that reportedly included $87,000 for a single rug. Rush Limbaugh defended Thain in a weekend interview with National Review’s Byron York.
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Republicans Approach Obama With Clenched Fists

2009-01-27T03:13:00.000-08:00

During his inaugural address, President Barack Obama told the Muslim world: “we will extend a hand if you are willing to unclench your fist.” He could just as easily have been speaking about Congressional Republicans. Obama has courted Republican support, and emphasized his openness to hearing their ideas (in sharp contrast to Bush’s ignoring Dems). But the GOP has ignored his overtures and kept their fists clenched. From delaying the inevitable confirmations of Hillary Clinton and Eric Holder, to trying (unsuccessfully) to kill the Lilly Ledbetter Fair Pay Act (S. 181), to the demand by GOP House Whip Eric Cantor that the stimulus package do more for the wealthy while eliminating funds for weatherizing low-income housing, Republican Congress members have already demonstrated a preference for opposition and obstructionism. As Rush Limbaugh exhorts his followers to ensure that Obama “fails,” Republicans are rejecting the electorate’s demand for change. Those fearing that the President would follow Bill Clinton’s “triangulation” strategy in his dealings with Congress should stop worrying; such concerns already appear misplaced.
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U.K. Economy Shrinks Most Since 1980, in Recession

2009-01-23T06:55:00.000-08:00

The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession. Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

“This is undeniably grim,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues.”
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Foreign Affairs: The Great Crash, 2008

2009-01-19T06:57:00.000-08:00

U.S. economy may sputter for years

2009-01-19T06:23:00.000-08:00

Transfixed by the daily spectacle of dismal economic news and wild Wall Street swings, few Americans have looked up to see what a wide array of economists say lies beyond the immediate crisis. The sleek racing machine that was the U.S. economy is unlikely to return any time soon despite the huge repair efforts now underway. Instead, it probably will continue to sputter and threaten to stall for years to come. The prospects are so gloomy, according to a recent study, that unemployment may be slightly higher by the time President-elect Barack Obama's first term ends.

The damage done by plunging house and stock prices, the failure of other major economies to be independent sources of growth and hidden weaknesses in America's past performance have crippled nearly every actor in the nation's economic drama. None -- save perhaps the government -- retains the power to push the economy back to speeds it regularly achieved during much of the last generation, economists say.

"That is going to feel like stagnation" to most people, said John Lonski, chief economist at Moody's Investors Service. "We're in a post-bubble global recession, and post-bubble recessions are lethal for growth," Stephen S. Roach, chairman of Morgan Stanley Asia, said from Beijing. "It will be a long time before the world experiences anything more than anemic recovery."
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The Madoff scandal: Follow the feeders

2009-01-11T03:39:00.000-08:00

The crucial roles played by credulous middlemen and clueless regulators. A week after Bernard Madoff’s vast alleged Ponzi scheme came to light in mid-December, a thief made off with a $10,000 copper statue from his Florida estate. Since then, dozens of Madoff-related items have appeared for sale on eBay, a website, including a disaster-recovery kit for employees of his securities firm and opera glasses emblazoned with its logo. An embarrassingly large number of the victims were supposed to have been highly sophisticated.

Explaining its failures is a task that will fall to the SEC’s incoming chairwoman, Mary Schapiro. But the commission can partially redeem itself by quickly getting to the bottom of some unanswered questions. Who, apart from Mr Madoff, was party to the scam? When did it start? And how much money is left? Much of the $50 billion that he has confessed to losing was phantom profit that only existed on customers’ account statements.
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U.S. Living Standards Still Tops

2008-12-30T02:02:00.000-08:00

In good times and in bad, Americans are better off than most of the world. About 1.4 billion people of Earth's inhabitants live in abject poverty. A more meaningful comparison is with those who live in Europe, Japan, Australia and a handful of other members of the Organization for Economic Cooperation and Development (OECD). The U.S. fares well, even when compared with its industrial peers.

The U.S.' per capita gross domestic product (GDP) ranks only 16th in the world, behind Ireland, Sweden, Australia, France and others. But this understates U.S. living standards. Adjusted for cost of living, U.S. is tops among large, industrialized nations. In the whole world, it trails only Qatar, Luxembourg, Norway, Singapore and Brunei.

In housing, the average U.S. family enjoys nearly twice as much living space as the Germans, French or Brits. Even the 20% of Americans with the lowest incomes tend to have larger residences than is typical for households in Western Europe. In food affordability, the U.S. shines: Just 5.7% of household spending is dedicated to food. Most European and Canadian households devote between 9% and 14% to feeding their families. For Japanese consumers, food takes nearly 15% of household spending.

Health care is another story, however. There's no doubt that the U.S. is by far the leader in quality of health care -- for those who can get it. But access and affordability are a problem. U.S. health care expenditures in 2006 accounted for over 15% of GDP. The share is probably greater now. In France and Germany, health consumes about 11% of GDP. In Canada, it's about 10%, and in Japan and the U.K., it's around 8%.

The U.S. is low on key indexes of public health among major industrialized nations: infant mortality, life expectancy, deaths preventable with proper care and the high portion of people without health coverage. And there are more measures by which the U.S. doesn't compare very well: The personal savings rate is dismally low but finally beginning to rise. College education is less affordable than in many other countries, where governments provide much more assistance to qualified students.

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Dollar is ravaged as Fed goes to zero interest rates

2008-12-17T19:14:00.000-08:00

The dollar has been thrown to the wolves by the Federal Reserve’s decision Tuesday to slash its benchmark short-term interest rate to as low as zero. The dollar was ravaged in currency trading today, particularly against its major rival, the euro. The European common currency soared to a 12-week high of $1.442, up from $1.398 on Tuesday and $1.271 two weeks ago. The dollar also plunged to a new 13-year low of 87.24 yen, from 89.35 on Tuesday and 93.30 two weeks ago.

Currency values often are a function of countries’ interest rates, and with the U.S. now at zero on short-term rates, global investors can find better returns on their cash almost anywhere else. That’s a potential drain on the dollar as money shifts elsewhere. But for the moment, the Fed’s move offers traders a great excuse to take profits in the dollar after its sharp rally of the last five months. The euro had plunged as low as $1.24 in mid-November, from nearly $1.60 in July, as global investors rushed into the dollar as a safety play.
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Why home values may take decades to recover

2008-12-12T22:54:00.000-08:00

Rick Wallick at home in Banks, Ore. Wallick, a former software engineer, bought a $200,000 house in Arizona at the peak of the real estate bubble. That house is worth only $80,000 now. "We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.

His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink. As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
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Global Stocks, Dollar Tumble as Auto Bailout Fails; GM Slumps

2008-12-12T05:42:00.000-08:00

Stocks tumbled around the world and the dollar slumped after the Senate rejected a bailout for American automakers, threatening to deepen the global recession. Treasuries rallied and yields fell to record lows. The dollar fell to a 13-year low against the yen, while the cost of protecting corporate bonds against default soared. Metals and crude oil slumped.

“The markets are still guided by fear,” said Robert Drijkoningen, The Hague-based head of the multi-asset group at ING Investment Management, which has $488 billion under management. “The markets are in a very dire situation and are in a very risk- averse situation. The short-term is bleak,” he said on Bloomberg Television. “It’s over with,” Senate Majority Leader Harry Reid said on the Senate floor in Washington last night. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”
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Bank of America to cut up to 35,000 jobs

2008-12-12T05:41:00.000-08:00

Bank of America said late Thursday that it plans to cut up to 35,000 jobs over the next three years as the financial giant adjusts to a recession and completes the pending acquisition of brokerage firm Merrill Lynch & Co. This comes as the latest wave of mass layoffs in the troubled financial sector, which has been crippled by the credit crunch and the failure of large institutions such as Lehman Brothers More than 220,000 jobs already have been lost across the sector this year, according to labor-tracking firm Challenger Gray & Christmas. At Bank of America the cuts will come from both companies and affect all lines of business and staff units, the firm announced.
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U.S. Healthcare Outlook Negative Due to Economic Pressure

2008-12-10T07:45:00.000-08:00

Fitch's 2009 Outlook for the U.S. Healthcare sector is Negative. Fitch believes that, in general, the Healthcare sector will face a very difficult operating environment in 2009 resulting from weaker demand associated with the global economic recession and a U.S. governmental focus on reducing the consumer burden of health care spending.

Even though U.S. healthcare demand remains strong due to an aging demographic, Fitch expects that growing economic weakness will cause some consumers to delay or forego spending on prescriptions and procedures due to rising unemployment levels and declining wealth. As a result, volume weakness will likely increase, in part putting pressure on top line growth. It is also likely that a growing uninsured or underinsured population will result in an increase in bad debt and uncompensated care for the industry.
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US Recession May Be Worst Since World War II

2008-12-06T20:12:00.000-08:00

The U.S. economy may be headed for its deepest and longest recession since World War II as mounting job losses take their toll on consumer confidence and spending. Employers cut payrolls last month at the fastest pace in 34 years as the unemployment rate rose to 6.7 percent, the highest level since 1993. The 533,000 drop brought cumulative job losses this year to 1.91 million, the Labor Department said yesterday in Washington. At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982. The recession is the 11th since a downturn that occurred in 1945, the year that World War II ended.
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China to Shun West’s Finance Sector

2008-12-03T07:05:00.000-08:00

The comments by Lou Jiwei, the chairman and chief executive of the China Investment Corporation are the clearest signal yet that after sustaining heavy losses on initial investments in the Blackstone Group, Morgan Stanley and Barclays, state-run Chinese institutions have no appetite for further purchases in this sector. “Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have,” Mr. Lou said as part of a panel discussion on the second and final day of the Clinton Global Initiative conference here.
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Iceland: The country that became a hedge fund

2008-12-02T08:42:00.000-08:00

Okay, not really. But its main banks and business tycoons took huge risks and its citizens borrowed to the hilt. Now this island nation is paying the price.

On a gloomy morning in early August, more than a month before Wall Street and the world's financial system seized up, a senior aide to Iceland's Prime Minister paid a visit to the Russian embassy in Reykjavík to make a controversial request: Bail us out.

Iceland had one of the richest economies in Europe, but it had a problem. Its three main private sector banks had become so large that their assets amounted to more than ten times the gross domestic product of the country - and there were signs that they might run into trouble. Iceland had asked its traditional allies for help, but to its consternation, its pleas to the U.S. Federal Reserve, the Bank of England, and the European Central Bank went unheeded. Instead, the answer was always, "Ask the International Monetary Fund" - a drastic step Iceland didn't want to take.
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The black hole in financial markets

2008-11-22T12:37:00.000-08:00

Subprime mortgages were the beginning, not the end, of a global financial crisis, and in recognition of this fact equity markets have crashed. The proximate cause of this week's retreat in equity markets to the lowest levels since the 1990s was the collapse of loans to American commercial real estate, which in turn implies the collapse of insurance companies and pension funds. Americans who relied on private pension funds, whether through their employer or insurance companies, will lose part or all of their pensions.

The problem now becomes self-feeding. The collapse of equity and credit values destroys the value of corporate pensions, requiring corporations with defined benefit plans that still cover 20 million workers to divert profits to their pension funds. The impairment of the credit of insurance companies, in return, eliminates a major source of long-term credit provision.
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Downey Savings, PFF Bank seized by federal regulators

2008-11-22T11:32:00.000-08:00

Federal regulators seized Downey Savings & Loan and PFF Bank & Trust late Friday, saying hundreds of millions of dollars in bad loans from the housing bubble had rendered the Southern California banking fixtures unsound. The banks' branches will continue operating as usual under the ownership of Minneapolis-based U.S. Bank, one of the country's largest banks, and no depositors will lose any money because of the failures, regulators said.

After seizing the banks, the agency handed them over to the Federal Deposit Insurance Corp., which immediately agreed to have U.S. Bank, a unit of US Bancorp, acquire virtually all their assets and assume all of their deposits. US Bancorp agreed to shoulder the first $1.6 billion in losses on the two thrifts' loans. The FDIC will be on the hook for losses after that, which it estimates will be $2.1 billion. Of the $3.7 billion in total estimated losses, $2.9 billion is on Downey's loans and $800 million is on PFF's.
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GM shares hit 70-year low as bailout hopes dim

2008-11-20T11:36:00.000-08:00

Shares of General Motors Corp tumbled more than 35 percent to hit a 70-year low on Thursday as prospects dimmed that lawmakers would reach a compromise on a proposed $25 billion bailout for U.S. automakers before Congress adjourns this week. Shares of Ford Motor Co also fell, dropping nearly 17 percent to their lowest level in 27 years, and auto parts suppliers declined across the board amid concerns a failure by one of the U.S. automakers would touch off a cascade of failures in the struggling industry.

Without a deal this week, any bailout is likely to have to wait until the new Obama administration takes over in January, by the time GM has warned it would run desperately short of its minimum cash needs. Failure to craft a deal carries the risk that one or more of the U.S. automakers -- GM, Ford or Chrysler LLC -- could be forced into bankruptcy, analysts have warned.
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At economic summit, China carries the big stick

2008-11-16T11:49:00.000-08:00

As global leaders gather today for an economic summit in Washington, no one may feel the spotlight's glare as much as Chinese President Hu Jintao. In the weeks leading up to this meeting of leaders of the Group of 20 developed and emerging countries, there have been repeated calls from different corners of the world for China to step up and take a bigger role in addressing the global financial crisis.

Beijing responded Sunday with a $586-billion economic stimulus package that includes infrastructure spending and other measures to bolster domestic demand. And on Friday, Chinese officials confirmed they had offered $500 million in aid to financially teetering Pakistan, calling it "an urgent agreement based on the two countries' long-term friendly relations."

But there will probably be expectations for China to do more, given that it holds the biggest stockpile of foreign exchange reserves in the world, nearly $2 trillion worth, and that it looks to be one of the few major economies to show significant growth in the near term. In particular, British Prime Minister Gordon Brown has urged China as well as oil-rich Saudi Arabia to boost the resources of the International Monetary Fund.

Japan, which holds the second-largest cache of foreign reserves, around $1 trillion, is expected during the summit to pledge $100 billion in loans to the IMF, according to Japanese media. Though his nation's own economy is ailing, reports suggest Prime Minister Taro Aso is trying to assert leadership in dealing with the worst global downturn in decades.
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Wikipedia finance references

2008-11-11T11:54:00.000-08:00

Freddie Mac
Fannie Mae
Credit default swap
Collateralized debt obligation

Steve Forbes interviews T. Boone Pickens

2008-10-27T12:20:00.000-07:00

There are also other interviews on the economy.

click for video interview

Think the Bailout Is Radical? Just Wait

2008-10-20T12:00:00.000-07:00

In the past month, the unprecedented has become routine. The Treasury Department and the Federal Reserve, headed by Republicans, have intervened in the U.S. economy to an extent that would have shocked liberals a year ago. The Treasury is now a major shareholder of U.S. banks, the Fed is a principal lender to private business, and the American taxpayer stands behind huge swaths of the financial system, from home mortgages to business bank accounts.

Breathtaking though these past weeks have been, they're nothing compared to what both the United States and other Western countries have experimented with in the past. You have to go back to the Great Depression and World War II to find examples of widespread U.S. government investment in private enterprise. But in other Western capitalist countries, nationalization was routine during the postwar period. Starting in 1946, Britain's Labor government nationalized transport, energy and communications companies, and by 1971, a Conservative government had taken over the failing automobile manufacturer Rolls Royce.

At the peak, 10 percent of British economic output came from nationalized companies. If the current crisis deepens, Treasury's $250 billion passive investment -- which is less than a quarter of total bank capital in the United States -- could grow. And having said yes to banks, the government might find it hard to say no to buying stakes in other industries that also show up, cap in hand, or to other types of debt.

In total dollars, the expansion of Federal Reserve lending is actually larger than the price tag of the Treasury Department's actions. That might grow even further. By law and tradition, the Fed is the lender of last resort, a role it fulfills by making short-term, secured loans to banks. But many of the firms whose failure threatens the entire economy nowadays aren't banks. A clause in the Federal Reserve Act lets the Fed lend to other types of firms -- under "unusual and exigent circumstances."
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Gramm-Leach-Bliley Act

2008-10-18T12:08:00.000-07:00

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, enacted November 12, 1999, is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act since the 1980s, if not earlier. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act. The bills were introduced in the U.S. Senate by Phil Gramm (R-Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa).
wikipedia

Blame it on Gramm

2008-10-18T12:07:00.000-07:00

The possibility that Phil Gramm (R-TX), McCain's economic advisor, could become Secretary of the Treasury is absolutely frightening. Gramm, as a senator, pushed through legislation that increased his personal wealth and caused our current financial problems. Enacted in 1999, the Gramm-Leach-Bliley Act crippled existing legislation that protecting us from predatory, immoral and unregulated financial institutions. Because the Republicans made it veto proof, Clinton was forced to sign the legislation.

The Gramm Act allowed financial organizations to combine banking, brokerage and insurance services under a single roof. For the first time since the Great Depression, the banks, acting as brokers, could and did use depositors' money in high risk investments. In addition they could now sell off mortgages given to high risk individuals. For those in the know, this was a money machine.

There was no incentive to restrict mortgages to qualified individuals: the banks packaged these mortgages and sold them. Without the risk of mortgage defaults, the banks targeted an easy market: individuals with poor or no credit. Credit worthiness was no longer a qualification to obtain a mortgage. The more mortgages issued, the greater the commission.

Acting as brokerages, the banks assembled mortgages into packages called Mortgage Backed Securities. These were sold to mutual funds, retirement funds and individuals; they were traded as regular securities and placed on the balance sheet as just another asset. But an enormous problem hid just out of sight: the value of these Mortgage Backed Securities could not be determined. Their price was set at the face value of the included mortgages without considering possible defaults.

The financial industry solved this problem by creating another financial instrument called an Obligation Default Swap. This is an insurance policy but under that name it is regulated. Calling it a swap meant they could go ahead without regulation. Holders of Mortgage Backed Securities could purchase Obligation Default Swaps insuring them against mortgage defaults. These Obligation Default Swaps could be traded as any other security to anyone believing it was a good investment. Any relationship between lender and borrower was obliterated by the complexity of these unnecessary financial products and their many trades.

As home values decline and the economy recesses, many mortgages will go into default and the financial industry must assume the losses. As defaults mount, the worth of these financial assets declines and the reduction goes against earnings; some institutions are forced into bancruptcy or accepting government or become bankrupt.
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McCain, Gramm part of problem

Financial boom, financial bust: What happened?

2008-10-18T12:05:00.000-07:00

The founders knew, and Greenspan forgot, about human nature. Critics say it was the growth of largely unregulated investments known as derivatives -- which Greenspan encouraged and defended -- that helped produce the present crisis. Greenspan's defense of these investments was based in part on an optimistic view of human nature. Excesses, he believed, would be prevented because individuals would restrain the worst of their greed and self-interest to protect their own reputations.

What the framers had learned over the 11 years that separated independence from the Constitutional Convention was that people could not be counted on to suppress their greed and self-interest, but would pursue them relentlessly. In Philadelphia in 1787, the challenge at the Constitutional Convention became how to create the coercive power Washington had referred to without abandoning the dream of democracy -- how to frame a government that would guarantee individual liberty while protecting people from excesses caused by unbridled pursuit of that liberty. They needed, James Madison said, "a republican remedy for the diseases most incident to republican government."

The answer they came up with was to make a virtue of the vice of self-interest. A reliance on public virtue was to be replaced by a "policy of supplying by opposite and rival interests, the defect of a better motive," Madison explained. From this flowed the original American idea of separation of powers and checks and balances. The result was the most enduring democratic government in history.

The framers left us their document, the Constitution, and a fundamental lesson in self-government that we could all benefit from recalling: Systems that count on individuals to restrain their self-interest have historically failed, but systems that anticipate and encourage the pursuit of self-interest while creating checks on it can succeed magnificently.
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More Tarnish on the Greenspan Legacy

2008-10-18T12:03:00.000-07:00

The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles. Obviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week. The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage.
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Greenspan not Gekko cooked up this stew

Budget deficit hits record $438 billion, CBO says

2008-10-18T12:02:00.000-07:00

The record $438 billion shortfall for the budget year that ended last week is up from $162 billion posted last year. The previous record of $413 billion was posted in 2004. CBO said Tuesday that with the economy in a slump, revenues dropped by almost 2 percent. Corporate income receipts dropped by $65 billion, or nearly 18 percent. At the same time, individual income tax revenues declined by 1.6 percent. The deficit is virtually certain to balloon even higher next year as the government sorts out the financial crisis and taps a $700 billion Treasury fund to buy toxic mortgage-related securities. The next president is likely to have to scale back campaign pledges as he inherits a likely deficit for 2009 exceeding $500 billion.

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What is a Warrant (finance)

2008-10-15T12:23:00.000-07:00

In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. For instance, it was a common practice during the height of the dot-com bubble for a landlord of sought-after commercial real-estate to demand warrants from high-tech startups as part of the lease agreement. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.

Wikipedia

Explaining Uncle Sam’s Bet on U.S. Banks

2008-10-15T12:22:00.000-07:00

The U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corp. quietly nationalized much of the U.S. banking system Tuesday. A capital injection of $250 billion into banks in the form of super senior preferred shares. All the shares will count for Tier 1 equity, which helps banks meet their government-mandated requirements for capital levels.

Details are still coming out, but several banks will get $25 billion each: J.P. Morgan Chase, Bank of America, Wells Fargo and Citigroup. Goldman Sachs Group and Morgan Stanley will get $10 billion each. Here is how they stack up, according to Whitney’s research: the infusion will constitute 28% of Morgan Stanley’s shareholder equity; 24.8% at Wells Fargo; 18.3% at Citigroup; 21.9% at Goldman; J.P. Morgan, 18.8%; Bank of America and Merrill, roughly 12.6% each.

The banks will pay Treasury quarterly dividends of 5% for the next five years on the cash-infusion shares. After that, the dividend jumps to 9%. The banks have to pay Treasury the dividends before they pay dividends to any other preferred or common stockholders. The dividends won’t be cheap; Whitney estimates that will cost $500 million a year for any bank taking $10 billion, and $1.2 billion for any bank accepting $25 billion from Treasury.

Treasury will take warrants in each bank. The warrants will equal about 15% of the amount of preferred shares the agency is injecting into each bank. If the bank raises more money than the Treasury’s capital injection amount, the number of warrants will fall by half.

But there are strings attached, right? Yes indeed. There’s a pay cap for executives, of course. But shareholders could feel a bit of pain as well, as Treasury starts pressing the banks on how to use their capital. And no matter how good times are, the banks can’t increase their dividends to stockholders for three years–unless the banks redeem all of Treasury’s shares. The banks also can’t buy back any shares without Treasury’s permission.

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IMF warns U.S. headed for deep recession

2008-10-02T12:28:00.000-07:00

The U.S. is likely headed for a deep recession, the International Monetary Fund warned Thursday in a report in which it notes that the current banking crisis is the type that's most likely to lead to such a downturn, and suggesting the government's proposed bailout of the banking system is the right course of action.

"Episodes of financial turmoil characterized by banking sector distress are more likely to be associated with severe and protracted downturns," the world's lender of last resort said in a chapter in its world economic outlook, released in the wake of Wednesday evening's vote by the U.S. Senate supporting the revised $700-billion US bailout but in advance of Friday's second vote on the rescue package by the U.S. House of Representatives.

"Financial stress is more likely to be followed by an economic downturn when it is preceded by a rapid expansion of credit, a run-up in house prices and heavy borrowing by households and non-financial firms," it said. "The current situation of the United States bears some resemblance to previous episodes of banking-related financial stress episodes that were followed by recessions."
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What is Inflation? -- Wikipedia

2008-09-23T12:10:00.000-07:00

The current financial crisis will likely cause inflation due to huge increases of money supply. So it seems appropriate to get a good understanding of inflation. Click the Wikipedia link at the bottom for more information. -- Bill

Inflation causes certain adverse effects in the economy. For example, uncertainty about future inflation may discourage investment and saving. Inflation also shifts income from those on fixed incomes to those with variable incomes. High inflation may cause hoarding by households as they buy consumer durables as stores of wealth. Inflation also erodes the real values of fixed accounting values. Prices (including rents and wages) are eroded if they are not inflation-adjusted. Therefore, in many economies, salaries, wages and other regular payments are adjusted for inflation, in an attempt to keep their real values constant.

Economists generally agree that high rates of inflation and hyperinflation are caused by high growth rates of the money supply. Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity) and sometimes to changes in the money supply (i.e. the amount of units of currency). However, there is general consensus that in the long run, inflation is caused by money supply increasing faster than the growth rate of the economy.

Inflation originally referred to the debasement of the currency, where gold coins were collected by the government (e.g. the king or the ruler of the region), melted down, mixed with other metals (e.g. silver, copper or lead) and reissued at the same nominal value. By mixing gold with other metals, the government could increase the total number of coins issued using the same amount of gold, and thus gained a profit known as seigniorage.

However, this action increased the money supply, and lowered the relative value of money. As the real value of each coin had decreased, the consumer had to pay more coins in exchange for goods and services of the same value (i.e. prices had increased). In the 19th century, the word inflation started to appear as a direct reference to the action of increasing the amount of currency units by the central bank.

In the United States in the 19th century (when the term first began to be used frequently), inflation originally was used to refer to increases of the money supply (monetary inflation), while deflation meant decreasing it. However, classical political economists from Hume to Ricardo did distinguish between and debate the cause and effect: the Bullionists, for example, argued that the Bank of England had over-issued banknotes (over-increased the money supply) and caused 'the depreciation of banknotes' (price inflation).

Wikipedia

On Phil Grahm, financial advisor to McCain

2008-09-20T12:13:00.000-07:00

MSNBC's Keith Olbermann reported on Tuesday on former Senator Phil Graham's role in the deregulation of commercial banking which had been strictly regulated since shortly after the Great Depression, as well as Mr Graham's role as an advisor on national finance issues to the McCain campaign.

Notwithstanding the conflict of interest in having a current lobbyist for UBS Bank as an advisor to the campaign, what is more interesting to your guides is that Senator Graham's efforts towards deregulating the commercial finance system could be a key factor in today's mortgage crisis. Senator Graham's efforts at deregulation introduced the entire system of mortgage backed securities whereby banks could bundle mortgage instruments with other similar mortgages, and sell them as securities.

Phil Graham, a dedicated soldier in Milton Friedmans' "Dark Chicago Ghost "economics idealism, rears its ugly head once again. Its Graham's legislation, that leads right into our current banking/credit situation.
article & videos
McCain advisor spurred $62 trillion derivatives market that will swamp global markets
McCain's advisor Phil Graham being blamed for the mess on Wall Street, higher gas prices
McCain's history with the savings and loan disaster in the 1990s.

Greenspan: This Is The Worst Economy I've Ever Seen

2008-09-15T12:15:00.000-07:00

Former Federal Reserve Chairman Alan Greenspan offered a woeful outlook of America's economic situation on Sunday, saying the crisis with the country's financial institutions was as dire as he had ever seen in his long career, and predicting that one or more of those institutions would likely collapse in the near future.

"Oh, by far," Greenspan said, when asked if the situation was the worst he had seen in his career. "There's no question that this is in the process of outstripping anything I've seen and it still is not resolved and still has a way to go and, indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system."
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