Roosevelt's Brain Trust vs Obama's Brainiacs
By Steve Fraser
On a December day in 1932, with the country prostrate under the weight of the Great Depression, ex-president Calvin Coolidge -- who had presided over the reckless stock market boom of the Jazz Age Twenties (and famously declaimed that "the business of America is business") -- confided to a friend: "We are in a new era to which I do not belong." He punctuated those words, a few weeks later, by dying.
A similar premonition grips the popular imagination today. A new era beckons. No person has been more responsible for arousing that expectation than President-elect Barack Obama. From beginning to end, his presidential campaign was born aloft by invocations of the "fierce urgency of now," by "change we can believe in," by "yes, we can!" and by the obvious significance of his race and generation. Not surprisingly then, as the gravity of the national economic calamity has become terrifyingly clearer, yearnings for salvation have attached themselves ever more firmly to the incoming administration.
This is as it should be -- and as it once was. When in March 1933, a few months after Coolidge gave up the ghost, Franklin Delano Roosevelt was inaugurated president, people looked forward to audacious changes, even if they had little or no idea just what, in concrete terms, that might mean. If Coolidge, an iconic representative of the old order, knew that the ancien régime was dead, millions of ordinary Americans had drawn the same conclusion years earlier. Full of fear, depressed and disillusioned, they nonetheless had an appetite for the untried. Like Obama, FDR had, during his campaign, encouraged feverish hopes with no less vaporous references to a "new deal" for Americans.
Brain Trust vs Brainiacs
Yet today, something is amiss. Even if everyone is now using the Great Depression and the New Deal as benchmarks for what we're living through, Act I of the new script has already veered away from the original.
A suffocating political and intellectual provincialism has captured the new administration in embryo. Instead of embracing a sense of adventurousness, a readiness to break with the past so enthusiastically promoted during the campaign, Obama seems overcome with inhibitions and fears.
Practically without exception he has chosen to staff his government at its highest levels with refugees from the Clinton years. This is emphatically true in the realms of foreign and economic policy. It would, in fact, be hard to find an original idea among the new appointees being called to power in those realms -- some way of looking at the American empire abroad or the structure of power and wealth at home that departs radically from views in circulation a decade or more ago. A team photo of Obama's key cabinet and other appointments at Treasury, Health and Human Services, Commerce, the President's Economic Recovery Advisory Board, the State Department, the Pentagon, the National Security Council, and in the U.S. Intelligence Community, not to speak of senior advisory posts around the President himself, could practically have been teleported from perhaps the year 1995.
Recycled Clintonism is recycled neo-liberalism. This is change only the brainiacs from Hyde Park and Harvard Square could believe in. Only the experts could get hot under the collar about the slight differences between "behavioral economics" (the latest academic fad that fascinates some high level Obama-ites) and straight-up neo-liberal deference to the market. And here's the sobering thing: despite the grotesque extremism of the Bush years, neo-liberalism also served as its ideological magnetic north.
Is this parochialism, this timorousness and lack of imagination, inevitable in a period like our own, when the unknown looms menacingly and one natural reaction is certainly to draw back, to find refuge in the familiar? Here, the New Deal years can be instructive.
Roosevelt was no radical; indeed, he shared many of the conservative convictions of his class and times. He believed deeply in both balanced budgets and the demoralizing effects of relief on the poor. He tried mightily to rally the business community to his side. For him, the labor movement was terra incognita and -- though it may be hard to believe today -- played no role in his initial policy and political calculations. Nonetheless, right from the beginning, Roosevelt cobbled together a cabinet and circle of advisers strikingly heterogeneous in its views, one that, by comparison, makes Obama's inner sanctum, as it is developing today, look like a sectarian cult.
Heterogeneous does not mean radical. Some of FDR's early appointments -- as at the Treasury Department -- were die-hard conservatives. Jesse Jones, who ran the Reconstruction Finance Corporation, a Hoover administration creation, retained by FDR, that had been designed to rescue tottering banks, railroads, and other enterprises too big to fail, was a practitioner of business-friendly bailout capitalism before present Treasury Secretary Henry Paulson was even born.
But there was also Henry Wallace as Secretary of Agriculture, a Midwestern progressive who would become the standard bearer for the most left-leaning segments of the New Deal coalition. He was joined at the Agriculture Department -- far more important then than now -- by men like Mordecai Ezekiel, who was prepared to challenge the power of the country's landed oligarchs.
Then there were corporatists like Raymond Moley, Donald Richberg, and General Hugh Johnson. Moley was an original member of FDR's legendary "brain trust" (a small group of the President's most influential advisers who often held no official government position). Richberg and Johnson helped design and run the National Recovery Administration (the New Deal's first and failed attempt at industrial recovery). All three men were partial to the interests of the country's peak corporations. All three wanted them released from the strictures of the Sherman Anti-Trust Act so that they could collaborate in setting prices and wages to arrest the killing deflation that gripped the economy. But they also wanted these corporate behemoths and the codes of competition they promulgated subjected to government oversight and restraints.
Meanwhile, Felix Frankfurter (another confidant of FDR's and a future Supreme Court justice), aided by the behind-the-scenes efforts of Supreme Court Justice Louis Brandeis, fiercely contested the influence of the corporatists within the new administration, favoring anti-trust and then-new Keynesian approaches to economic recovery. Secretary of Labor Frances Perkins used her extensive ties to the social work community and the labor movement to keep an otherwise tone-deaf president apprised of portentous rumblings from that quarter. In this fashion, she eased the way for the passage of the Wagner Act that legislated the right to organize and bargain collectively, and that ended the reign of industrial autocracy in the workplace.
Roosevelt's "brain trust" also included Rexford Tugwell. He was an avid proponent of government economic planning. Another founding member of the "brain trust" was Adolph Berle, who had published a bestselling, scathing indictment of the financial and social irresponsibility of the corporate elite just before FDR assumed office.
People like Tugwell and others, including future Federal Reserve Board chairman Marriner Eccles, were believers in Keynesian deficit spending as the road to recovery and argued fiercely for this position within the inner councils of the administration, even while Roosevelt himself remained, until later in his presidency, an orthodox budget balancer.
All of these people -- the corporatists and the Keynesians, the planners and the anti-trusters -- were there at the creation. They often came to blows. A genuine administration of "rivals" didn't faze FDR. He was deft at borrowing all of, or pieces of, their ideas, then jettisoning some when they didn't work, and playing one faction against another in a remarkable display of political agility. Roosevelt's tolerance of real differences stands in stark contrast to the new administration's cloning of the Clinton-era brainiacs.
It was this openness to a variety of often untested solutions -- including at that point Keynesianism -- that helped give the New Deal the flexibility to adjust to shifts in the country's political chemistry in the worst of times. If the New Deal came to represent a watershed in American history, it was in part due to the capaciousness of its imagination, its experimental elasticity, and its willingness to venture beyond the orthodox. Many failures were born of this, but so, too, many enduring triumphs.
Beyond the Bailout State
Why, at least so far, is the Obama approach so different? Some of it no doubt has to do with the same native caution that caused FDR to navigate carefully in treacherous waters. But some of it may result from the fallout of history. Because the Great Depression and the New Deal happened, nothing can ever really be the same again.
We are accustomed to thinking of the Bush years -- maybe even the whole era from the presidency of Ronald Reagan on -- as a throwback to the 1920s or even the laissez-faire golden years of the Gilded Age of the late nineteenth century. In some respects, that's probably accurate, but in at least one critical way it's not. Back in those days, faced with a potentially terminal financial crisis, the government did nothing, simply letting the economy plunge into depression. This happened repeatedly until 1929, when it happened again.
Since the New Deal, however, inaction has ceased to be a viable option for Washington. State intervention to prevent catastrophe has become an unspoken axiom of political life in perilous times. Of course, thanks to regulatory mechanisms installed during the New Deal years, there was no need to engage in heroic rescues -- not, at least, until the triumph of deregulation in our own time.
Then crises began to erupt with ever greater frequency -- the stock market crash of 1987, the savings and loan collapse at the end of that decade, the massive Latin American debt defaults of the early 1990s, the collapse of the economies of the Asian "tigers" in the mid-1990s, the near bankruptcy of the then-huge hedge fund, Long Term Capital Management, later in that decade, the dot-com implosion at the turn the century, climaxing with the general global collapse of the present moment. Beginning perhaps with the bailout of the Chrysler Corporation in the late 1970s, these recurring crises have been met with increasingly strenuous efforts to stop the bleeding by what some have called "the bailout state."
The Resolution Trust Corporation, created to rescue the savings and loan industry, first institutionalized what Kevin Phillips has since described as a new political economy of "financial mercantilism." Under this new order the state stands ready to backstop the private sector -- or at least the financial sub-sector which, for the past quarter century, has been the driving engine of economic growth -- whenever it undergoes severe stress.
Today, the starting point for all mainstream policymakers, even those who otherwise preach the virtues of the free market and the evils of big government, is the active intervention of the state to prevent the failure of private-sector institutions considered "too big to fail" (as with most recently Citigroup and the insurance company AIG). So, too, the tolerance level for deficit spending, not only for military purposes but, in extremis, to help stop ordinary people from going under, is infinitely higher than in 1932. Ronald Reagan was prepared to live with such spending, if necessary, even as he removed portraits of Thomas Jefferson and Harry S. Truman from the Cabinet Room and replaced them with a canvas of Calvin Coolidge.
The question for our "new era" -- not one our New Deal ancestors would have thought to ask -- has become: How do we get beyond the bailout state? This is one crucial realm where genuinely new thinking and new ideas are badly needed.
At the moment, as best we can make out, the bailout state is being managed in secret and apparently in the interests, above all, of those who run the financial institutions being "rescued." Often, we don't actually know who is getting what from the Federal Reserve and the Treasury, or on what terms, or even which institutions are being helped and which aren't, or often what our public monies are actually being used for.
What we do know, however, is anything but encouraging. It includes tax exemptions for merging banks, prices for public-equity stakes in failing outfits that far exceed what is being paid by governments (or even private investors) abroad for similar holdings. Add to this a stark lack of accountability, aggravated by the fact that the U.S. government has neither voting rights (nor even a voice) on boards of directors whose firms would be in bankruptcy court without Washington's aid.
Living in an Empire of Depression
Are we, then, witnessing the birth of some warped, exceedingly partial version of state capitalism -- partial, that is, to the resuscitation of the old order? If so, lurking within this string of bum deals might there not be a great opportunity? Putting the economy and country back together will require massive resources directed toward common purposes. There is no more suitable means of mobilizing and steering those resources than the institutions of democratic government.
Under the present dispensation, the bailout state makes the government the handmaiden of the financial sector. Under a new one, the tables might be turned. But who will speak for that option within the limited councils of the Obama team?
A real democratic nationalization of the banks -- good value for our money rather than good money to add to their value -- should be part of the policy agenda up for discussion in the Obama era. As things now stand, the public supplies the loans and the investment capital, but the key decisions about how they are to be deployed remain in private hands. A democratic version of nationalizing the financial system would transfer these critical decisions to new institutions created by the Congress and designed to pursue public, not private, objectives. How to subject the flow of credit and investment capital to public control ought to be on the drawing boards if we are to look beyond the old New Deal to a new one.
Or, for instance, if we are to bail out the auto industry, which we should -- millions of jobs, businesses, communities, and what's left of once powerful and proud unions are at stake -- then why not talk about its nationalization, too? Why not create a representative body of workers, consumers, environmentalists, suppliers, and other interested parties to supervise the industry's reorganization and retooling to produce, just as the president-elect says he wants, new green means of transportation -- and not just cars?
Why not apply the same model to the rehabilitation of the nation's infrastructure; indeed, why not to the reindustrialization of the country as a whole? If, as so many commentators are now claiming, what lies ahead is the kind of massive, crippling deflation characteristic of such crises, then why not consider creating democratic mechanisms to impose an incomes policy on wages and prices that works against that deflation?
Overseas, if everything isn't up for discussion -- and it most certainly isn't -- it ought to be. What happens there bears directly on our future here at home. After all, we live in the empire of depression. America's favorite export for more than a decade has been a toxic line-up of securitized debt. Having ingested it in lethal amounts, every economy in the world from Iceland's and Germany's to Russia's and Indonesia's is either folding up or threatening to fold up like an accordion under the pressure of economic disaster.
Until now, the American way of life, including its economy of mass consumption, has depended on maintaining the country's global preeminence by any means possible: economic, political, and, in the end, military. The news of the Bush years was that, in this mix, Washington reached for its six-guns so much more quickly.
A global depression will challenge that fundamental hierarchy in every conceivable way. The United States can try to recapture its imperiled hegemony by methods familiar to the Obama-Clinton-Bush (the father) foreign policy establishment, that is by using the country's waning but still intimidating economic and military muscle. But that's a devil's game played at exorbitant cost which will further imperil the domestic economy.
It might, of course, be possible, as in domestic affairs, to try something new, something that embraces the public redevelopment of America in concert with the global South. This would entail at a minimum a radical break with the "Washington Consensus" of the Clinton years in which the United States insisted that the rest of the world conform to its free market model of economic behavior. It would establish multilateral mechanisms for regulating the flow of investment capital and severe penalties and restrictions on speculation in international markets. Most of all, it would mean lifting the strangulating grip of American military might that now girdles the globe.
All of this would require a capacity for re-imagining foreign affairs as something other than a zero-sum game. So far, nothing in Obama's line-up of foreign policy and national security mandarins suggests this kind of potential policy deviance. Again, no Rooseveltian "brain trust" is in sight, even though unorthodoxies are called for, not just because of the hopes Obama's victory have aroused, but because of the urgency of our present circumstances.
If original thinking doesn't find a home somewhere within this forming administration soon, it will be an omen of an even more troubled future to come, when options not even being considered today may be unavailable tomorrow. Certainly, Americans ought to expect something better than a trip down (the grimmest of) memory lanes into the failed neo-liberalism of yesteryear.
Steve Fraser is a visiting professor at New York University and the author of Wall Street: America's Dream Palace. He is a regular contributor to TomDispatch.com and co-founder of the American Empire Project (Metropolitan Books).
Copyright 2008 Steve Fraser
http://www.tomdispatch.com/post/175008
Monday, December 1, 2008
BUSH Administration Diluted Loan Rules before Crash
AP IMPACT: US diluted loan rules before crash
By MATT APUZZO, Associated Press Writer Matt Apuzzo, Associated Press Writer
Mon Dec 1, 6:11 am ET
WASHINGTON – The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.
Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
_Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
_Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
_Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.
_Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
_Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.
"In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.
Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.
"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.
One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers.
"It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.
California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.
Last week, Downey Savings joined the growing list of failed banks. The problem: About 52 percent of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe — maybe even safer than traditional 30-year mortgages.
"To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer.
At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.
It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller.
Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.
"You're looking at a decline in real estate values that was never contemplated," she said.
Some saw problems coming. Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.
"We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products," Kevin Stein, associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.
The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision — agencies that sometimes don't agree.
The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending. Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.
Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal "attempted to send an alarm bell that these products are bad." After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk. She disputes the notion that the rules were weakened.
In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.
Congress is considering further tightening, including some of the same proposals abandoned years ago.
Copyright © 2008 The Associated Press
http://news.yahoo.com/s/ap/20081201/ap_on_bi_ge/meltdown_ignored_warnings
By MATT APUZZO, Associated Press Writer Matt Apuzzo, Associated Press Writer
Mon Dec 1, 6:11 am ET
WASHINGTON – The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.
Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
_Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
_Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
_Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.
_Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
_Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.
"In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.
Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.
"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.
One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers.
"It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.
California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.
Last week, Downey Savings joined the growing list of failed banks. The problem: About 52 percent of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe — maybe even safer than traditional 30-year mortgages.
"To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer.
At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.
It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller.
Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.
"You're looking at a decline in real estate values that was never contemplated," she said.
Some saw problems coming. Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.
"We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products," Kevin Stein, associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.
The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision — agencies that sometimes don't agree.
The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending. Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.
Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal "attempted to send an alarm bell that these products are bad." After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk. She disputes the notion that the rules were weakened.
In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.
Congress is considering further tightening, including some of the same proposals abandoned years ago.
Copyright © 2008 The Associated Press
http://news.yahoo.com/s/ap/20081201/ap_on_bi_ge/meltdown_ignored_warnings
Tuesday, November 11, 2008
The Mini-Depression and the Maximum-Strength Remedy
by: Robert Reich, TPM Cafe
This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.
When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.)
First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent.
This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.
The real problem is on the demand side of the economy.
Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners - as well as Americans - put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)
That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?
The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy - people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled - government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.
The answer to the second question is mostly "infrastructure" - repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)
Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.
Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.
They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.
Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.
»
by: Robert Reich, TPM Cafe
In 1929 the Industrial market crashed signaling the beginning of the Great Depression. (Photo: BusinessWeek)
This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.
When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.)
First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent.
This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.
The real problem is on the demand side of the economy.
Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners - as well as Americans - put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)
That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?
The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy - people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled - government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.
The answer to the second question is mostly "infrastructure" - repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)
Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.
Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.
They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.
Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.
http://tpmcafe.talkingpointsmemo.com/2008/11/09/the_mini_depression_and_the_ma/
This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.
When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.)
First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent.
This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.
The real problem is on the demand side of the economy.
Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners - as well as Americans - put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)
That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?
The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy - people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled - government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.
The answer to the second question is mostly "infrastructure" - repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)
Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.
Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.
They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.
Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.
»
by: Robert Reich, TPM Cafe
In 1929 the Industrial market crashed signaling the beginning of the Great Depression. (Photo: BusinessWeek)
This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.
When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.)
First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent.
This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.
The real problem is on the demand side of the economy.
Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners - as well as Americans - put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)
That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?
The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy - people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled - government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.
The answer to the second question is mostly "infrastructure" - repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)
Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.
Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.
They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.
Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.
http://tpmcafe.talkingpointsmemo.com/2008/11/09/the_mini_depression_and_the_ma/
Monday, November 10, 2008
Franklin Delano Obama?/ The Obama Agenda
Franklin Delano Obama?
By Paul Krugman
Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world?
The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
About the New Deal’s long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation’s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.
Can Mr. Obama achieve something comparable? Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.
But the new administration should try not to emulate a less successful aspect of the New Deal: its inadequate response to the Great Depression itself.
Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.
That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”
This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn’t all these public works amount to a major fiscal stimulus?
Well, it wasn’t as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.
And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
This history offers important lessons for the incoming administration.
The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery.
The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.
http://www.nytimes.com/2008/11/10/opinion/10krugman.html?_r=1&oref=slogin&pagewanted=print
Copyright 2008 The New York Times Company
----------------------------------------------------------
The Obama Agenda
By PAUL KRUGMAN
Tuesday, Nov. 4, 2008, is a date that will live in fame (the opposite of infamy) forever. If the election of our first African-American president didn’t stir you, if it didn’t leave you teary-eyed and proud of your country, there’s something wrong with you.
But will the election also mark a turning point in the actual substance of policy? Can Barack Obama really usher in a new era of progressive policies? Yes, he can.
Right now, many commentators are urging Mr. Obama to think small. Some make the case on political grounds: America, they say, is still a conservative country, and voters will punish Democrats if they move to the left. Others say that the financial and economic crisis leaves no room for action on, say, health care reform.
Let’s hope that Mr. Obama has the good sense to ignore this advice.
About the political argument: Anyone who doubts that we’ve had a major political realignment should look at what’s happened to Congress. After the 2004 election, there were many declarations that we’d entered a long-term, perhaps permanent era of Republican dominance. Since then, Democrats have won back-to-back victories, picking up at least 12 Senate seats and more than 50 House seats. They now have bigger majorities in both houses than the G.O.P. ever achieved in its 12-year reign.
Bear in mind, also, that this year’s presidential election was a clear referendum on political philosophies — and the progressive philosophy won.
Maybe the best way to highlight the importance of that fact is to contrast this year’s campaign with what happened four years ago. In 2004, President Bush concealed his real agenda. He basically ran as the nation’s defender against gay married terrorists, leaving even his supporters nonplussed when he announced, soon after the election was over, that his first priority was Social Security privatization. That wasn’t what people thought they had been voting for, and the privatization campaign quickly devolved from juggernaut to farce.
This year, however, Mr. Obama ran on a platform of guaranteed health care and tax breaks for the middle class, paid for with higher taxes on the affluent. John McCain denounced his opponent as a socialist and a “redistributor,” but America voted for him anyway. That’s a real mandate.
What about the argument that the economic crisis will make a progressive agenda unaffordable?
Well, there’s no question that fighting the crisis will cost a lot of money. Rescuing the financial system will probably require large outlays beyond the funds already disbursed. And on top of that, we badly need a program of increased government spending to support output and employment. Could next year’s federal budget deficit reach $1 trillion? Yes.
But standard textbook economics says that it’s O.K., in fact appropriate, to run temporary deficits in the face of a depressed economy. Meanwhile, one or two years of red ink, while it would add modestly to future federal interest expenses, shouldn’t stand in the way of a health care plan that, even if quickly enacted into law, probably wouldn’t take effect until 2011.
Beyond that, the response to the economic crisis is, in itself, a chance to advance the progressive agenda.
Now, the Obama administration shouldn’t emulate the Bush administration’s habit of turning anything and everything into an argument for its preferred policies. (Recession? The economy needs help — let’s cut taxes on rich people! Recovery? Tax cuts for rich people work — let’s do some more!)
But it would be fair for the new administration to point out how conservative ideology, the belief that greed is always good, helped create this crisis. What F.D.R. said in his second inaugural address — “We have always known that heedless self-interest was bad morals; we know now that it is bad economics” — has never rung truer.
And right now happens to be one of those times when the converse is also true, and good morals are good economics. Helping the neediest in a time of crisis, through expanded health and unemployment benefits, is the morally right thing to do; it’s also a far more effective form of economic stimulus than cutting the capital gains tax. Providing aid to beleaguered state and local governments, so that they can sustain essential public services, is important for those who depend on those services; it’s also a way to avoid job losses and limit the depth of the economy’s slump.
So a serious progressive agenda — call it a new New Deal — isn’t just economically possible, it’s exactly what the economy needs.
The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president. He has the political mandate; he has good economics on his side. You might say that the only thing he has to fear is fear itself.
http://www.nytimes.com/2008/11/07/opinion/07krugman.html?pagewanted=print
Copyright 2008 The New York Times Companyda
By Paul Krugman
Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world?
The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
About the New Deal’s long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation’s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.
Can Mr. Obama achieve something comparable? Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.
But the new administration should try not to emulate a less successful aspect of the New Deal: its inadequate response to the Great Depression itself.
Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.
That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”
This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn’t all these public works amount to a major fiscal stimulus?
Well, it wasn’t as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.
And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
This history offers important lessons for the incoming administration.
The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery.
The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.
http://www.nytimes.com/2008/11/10/opinion/10krugman.html?_r=1&oref=slogin&pagewanted=print
Copyright 2008 The New York Times Company
----------------------------------------------------------
The Obama Agenda
By PAUL KRUGMAN
Tuesday, Nov. 4, 2008, is a date that will live in fame (the opposite of infamy) forever. If the election of our first African-American president didn’t stir you, if it didn’t leave you teary-eyed and proud of your country, there’s something wrong with you.
But will the election also mark a turning point in the actual substance of policy? Can Barack Obama really usher in a new era of progressive policies? Yes, he can.
Right now, many commentators are urging Mr. Obama to think small. Some make the case on political grounds: America, they say, is still a conservative country, and voters will punish Democrats if they move to the left. Others say that the financial and economic crisis leaves no room for action on, say, health care reform.
Let’s hope that Mr. Obama has the good sense to ignore this advice.
About the political argument: Anyone who doubts that we’ve had a major political realignment should look at what’s happened to Congress. After the 2004 election, there were many declarations that we’d entered a long-term, perhaps permanent era of Republican dominance. Since then, Democrats have won back-to-back victories, picking up at least 12 Senate seats and more than 50 House seats. They now have bigger majorities in both houses than the G.O.P. ever achieved in its 12-year reign.
Bear in mind, also, that this year’s presidential election was a clear referendum on political philosophies — and the progressive philosophy won.
Maybe the best way to highlight the importance of that fact is to contrast this year’s campaign with what happened four years ago. In 2004, President Bush concealed his real agenda. He basically ran as the nation’s defender against gay married terrorists, leaving even his supporters nonplussed when he announced, soon after the election was over, that his first priority was Social Security privatization. That wasn’t what people thought they had been voting for, and the privatization campaign quickly devolved from juggernaut to farce.
This year, however, Mr. Obama ran on a platform of guaranteed health care and tax breaks for the middle class, paid for with higher taxes on the affluent. John McCain denounced his opponent as a socialist and a “redistributor,” but America voted for him anyway. That’s a real mandate.
What about the argument that the economic crisis will make a progressive agenda unaffordable?
Well, there’s no question that fighting the crisis will cost a lot of money. Rescuing the financial system will probably require large outlays beyond the funds already disbursed. And on top of that, we badly need a program of increased government spending to support output and employment. Could next year’s federal budget deficit reach $1 trillion? Yes.
But standard textbook economics says that it’s O.K., in fact appropriate, to run temporary deficits in the face of a depressed economy. Meanwhile, one or two years of red ink, while it would add modestly to future federal interest expenses, shouldn’t stand in the way of a health care plan that, even if quickly enacted into law, probably wouldn’t take effect until 2011.
Beyond that, the response to the economic crisis is, in itself, a chance to advance the progressive agenda.
Now, the Obama administration shouldn’t emulate the Bush administration’s habit of turning anything and everything into an argument for its preferred policies. (Recession? The economy needs help — let’s cut taxes on rich people! Recovery? Tax cuts for rich people work — let’s do some more!)
But it would be fair for the new administration to point out how conservative ideology, the belief that greed is always good, helped create this crisis. What F.D.R. said in his second inaugural address — “We have always known that heedless self-interest was bad morals; we know now that it is bad economics” — has never rung truer.
And right now happens to be one of those times when the converse is also true, and good morals are good economics. Helping the neediest in a time of crisis, through expanded health and unemployment benefits, is the morally right thing to do; it’s also a far more effective form of economic stimulus than cutting the capital gains tax. Providing aid to beleaguered state and local governments, so that they can sustain essential public services, is important for those who depend on those services; it’s also a way to avoid job losses and limit the depth of the economy’s slump.
So a serious progressive agenda — call it a new New Deal — isn’t just economically possible, it’s exactly what the economy needs.
The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president. He has the political mandate; he has good economics on his side. You might say that the only thing he has to fear is fear itself.
http://www.nytimes.com/2008/11/07/opinion/07krugman.html?pagewanted=print
Copyright 2008 The New York Times Companyda
Thursday, November 6, 2008
Thank You to Everyone who helped the Campaign
We got 111, 649 votes and the highest Democratic Candidate Congressional vote total in North Texas (only Eddie B Johnson & Chet Edwards got higher percentages and we spent 5.58 cents per vote). We had a dedicated team of volunteers. Thank you.
Japanese researchers make brain tissues from stem cells
Thu Nov 6, 3:36 am ET
TOKYO (AFP) – Japanese researchers said Thursday they had created functioning human brain tissues from stem cells, a world first that has raised new hopes for the treatment of disease.
Stem cells taken from human embryos have been used to form tissues of the cerebral cortex, the supreme control tower of the brain, according to researchers at the government-backed research institute Riken.
The tissues self-organised into four distinct zones very similar to the structure seen in human foetuses, and conducted neuro-activity such as transmitting electrical signals, the institute said.
Research on stem cells is seen as having the potential to save lives by helping to find cures for diseases such as cancer and diabetes or to replace damaged cells, tissues and organs.
The team's previous studies showed stem cells differentiated into distinct cells but until now they had never organised into functioning tissues.
"In regenerative therapy, only a limited number of diseases can be cured with simple cell transplants. Transplanting tissues could raise hopes for greater functional recovery," the institute said in a statement.
"Cultivated tissues are still insufficient and too small to be used to treat stroke patients. But study of in-vitro cultivation of more mature cortex tissues, such as those with six zones like in the adult human brain, will be stepped up," it said.
The tissues could also serve as "a mini organ" for use in studying the cause of the Alzheimer's disease and developing vaccines, it said.
Embryonic stem cells are harvested by destroying a viable embryo, a process that some people find unacceptable.
Riken said cortex tissues were also obtained from "induced pluripotent stem cells," which are similar to embryonic stem cells but artificially induced, typically from adult cells such as skin cells.
The research was led by Yoshiki Sasai at Riken Centre for Development Biology in western Japan's Kobe.
The cultivated tissues look like minature mushrooms two millimetres (0.08 inches) in diametre.
The team also succeeded in making cortex tissues from the embryonic stem cells of mice.
Using mouse tissues, scientists confirmed they had formed a network of neurons that properly respond to stimulus.
The tissues can also be selectively induced to different cortex types controlling memories, visual sensation and other tasks.
The findings of the study were published in the November 6 online journal Cell Stem Cell in the United States.
Copyright © 2008 Agence France Presse. All rights reserved
TOKYO (AFP) – Japanese researchers said Thursday they had created functioning human brain tissues from stem cells, a world first that has raised new hopes for the treatment of disease.
Stem cells taken from human embryos have been used to form tissues of the cerebral cortex, the supreme control tower of the brain, according to researchers at the government-backed research institute Riken.
The tissues self-organised into four distinct zones very similar to the structure seen in human foetuses, and conducted neuro-activity such as transmitting electrical signals, the institute said.
Research on stem cells is seen as having the potential to save lives by helping to find cures for diseases such as cancer and diabetes or to replace damaged cells, tissues and organs.
The team's previous studies showed stem cells differentiated into distinct cells but until now they had never organised into functioning tissues.
"In regenerative therapy, only a limited number of diseases can be cured with simple cell transplants. Transplanting tissues could raise hopes for greater functional recovery," the institute said in a statement.
"Cultivated tissues are still insufficient and too small to be used to treat stroke patients. But study of in-vitro cultivation of more mature cortex tissues, such as those with six zones like in the adult human brain, will be stepped up," it said.
The tissues could also serve as "a mini organ" for use in studying the cause of the Alzheimer's disease and developing vaccines, it said.
Embryonic stem cells are harvested by destroying a viable embryo, a process that some people find unacceptable.
Riken said cortex tissues were also obtained from "induced pluripotent stem cells," which are similar to embryonic stem cells but artificially induced, typically from adult cells such as skin cells.
The research was led by Yoshiki Sasai at Riken Centre for Development Biology in western Japan's Kobe.
The cultivated tissues look like minature mushrooms two millimetres (0.08 inches) in diametre.
The team also succeeded in making cortex tissues from the embryonic stem cells of mice.
Using mouse tissues, scientists confirmed they had formed a network of neurons that properly respond to stimulus.
The tissues can also be selectively induced to different cortex types controlling memories, visual sensation and other tasks.
The findings of the study were published in the November 6 online journal Cell Stem Cell in the United States.
Copyright © 2008 Agence France Presse. All rights reserved
Saturday, November 1, 2008
TARP; the Troubled Asset Recovery Program
From Wikipedia, the free encyclopedia
(Redirected from Troubled Asset Relief Program)
This article is about the Treasury fund. For the legislative bill and subsequent law, see Public Law 110-343. For the legislative history and the events leading to the law, see Emergency Economic Stabilization Act of 2008.
The authority of the United States Department of the Treasury to establish and manage a Troubled Assets Relief Program (TARP) managed by a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.[1][2] The law which created the fund authorized the Treasury to draw up to $250 billion for immediate use, then requires the President to certify that an additional $100 billion in funds are needed; a final $350 billion are subject to Congressional approval.[3]
Contents [hide]
1 TARP administrative structure
2 TARP participation restrictions
3 Reorientation of TARP to bank equity investments
3.1 Similar historical federal banking investments
4 References
5 External links
6 See also
[edit] TARP administrative structure
The program is run by the Treasury's new Office of Financial Stability. According to a speech made by Neel Kashkari[4], the fund will be split into the following administrative units:
"1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.
2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives.
3) Insurance program: We are establishing a program to insure troubled assets. We have several innovative ideas on how to structure this program, including how to insure mortgage-backed securities as well as whole loans. At the same time, we recognize that there are likely other good ideas out there that we could benefit from. Accordingly, on Friday we submitted to the Federal Register a public Request for Comment to solicit the best ideas on structuring options. We are requiring responses within fourteen days so we can consider them quickly, and begin designing the program.
4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.
5) Homeownership preservation: When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners. This goal is consistent with other programs - such as HOPE NOW - aimed at working with borrowers, counselors and servicers to keep people in their homes. In this case, we are working with the Department of Housing and Urban Development to maximize these opportunities to help as many homeowners as possible, while also protecting taxpayers.
6) Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP. This team is working hard to define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.
7) Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements. We welcome this oversight and have a team focused on making sure we get it right."
[edit] TARP participation restrictions
Companies that sell their bad assets to the government must provide warrants so that taxpayers will benefit from future growth of the companies.[3] The President is to submit a law to cover taxpayer losses on the fund, using "a small, broad-based fee on all financial institutions."[3] In order to participate in the bailout program, "companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits 'golden parachutes' and requires that unearned bonuses be returned."[3] The fund has an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There is also an inspector general to protect against waste, fraud and abuse.[3]
Reorientation of TARP to bank equity investments
On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury will buy equity stakes in nine American Banks, and potentially thousands of smaller banks, using the first $250 billion dollars allotted to the program.[5]
The banks agreeing to receive equity investments from the Treasury include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.[6][7][8] The Bank of New York Mellon is to serve as master custodian overseeing the fund.[9]
Similar historical federal banking investments
The nearest parallel action the federal government has taken in the was in investments made by the Reconstruction Finance Corporation (RFC) in the 1930s. The RFC, agency, chartered during the Herbert Hoover adminisistration in 1932, made loans to distressed banks and bought stock in 6,000 banks, totalling $1.3 billion. In 2008 dollars, that would amount to $200 billion. When the economy had stabilized, the government sold its bank stock to private investors or the banks, and is estimated to have received approximately the same amount previously invested.[10]
In 1984, the government took an 80 percent stake in nation’s then seventh-largest bank Continental Illinois Bank and Trust. Continental Illinois made loans to oil drillers and service companies in Oklahoma and Texas. The government was estimated to have lost $1 billion because of bad loans purchased as part of the bank Continental Illinois, which ultimately became part of Bank of America.[10]
References
^ "Economic rescue swiftly signed into law". AFP (2008-10-03).
^ Gross, Daniel (2008-10-01). "How the Bailout Is Like a Hedge Fund. It's massively leveraged. It's buying distressed assets. It's taking equity stakes…". Slate.
^ a b c d e Summary of the Emergency Economic Stabilization Act of 2008 United States Senate Committee on Banking, Housing and Urban Affairs. (Retrieved October 2, 2008)
^ http://www.accountability-central.com/single-view-default/article/treasury-update-on-implementation-of-troubled-asset-relief-program-tarp-before-institute-of-intern/?tx_ttnews[backPid]=1&cHash=8702938e7e
^ Landler, Mark; Eric Dash (2008-10-14). "Paulson Says Banks Must Deploy New Capital: Drama Behind a $250 Billion Banking Deal", New York Times. Retrieved on 2008-10-14.
^ Solomon, Deborah; Damian Paletta, Jon Hilsenrath and Aaron Lucchetti (2008-10-14). "U.S. to Buy Stakes in Nation's Largest Banks: Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort". Wall Street Journal. Retrieved on 2008-10-14.
^ "Bailout: The Rescue Plan & The Largest Recipients", New York times (2008-10-14). Retrieved on 2008-10-14. (Graphic of proposed bank equity investments)
^ "Beneficiary Banks", New York Times (2008-10-14). Retrieved on 2008-10-14.
^ Dash, Eric (2008-10-14). "Bank of New York Will Oversee Bailout Fund", New York Times. Retrieved on 2008-10-14.
^ a b Lohr, Steve (2008-10-13). "Intervention Is Bold, but Has a Basis in History". Retrieved on 2008-10-15. The article relies on the work of New York University Historian and Economist Richard Sylla for historical estimates.
External links
Zumbrun, Josh et al. (October 14, 2008). "The Ownership Society", Forbes. Analysis of the injection of Government equity capital into banks.
See also
H.R. 1424
Emergency Economic Stabilization Act of 2008
Liquidity crisis of September 2008
This United States government-related article is a stub. You can help Wikipedia by expanding it.
This economics or finance-related article is a stub. You can help Wikipedia by expanding it.
eFinancial crisis of 2007–2008
Main issues Economic crisis of 2008 · Financial crisis of 2007–2008
http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
(Redirected from Troubled Asset Relief Program)
This article is about the Treasury fund. For the legislative bill and subsequent law, see Public Law 110-343. For the legislative history and the events leading to the law, see Emergency Economic Stabilization Act of 2008.
The authority of the United States Department of the Treasury to establish and manage a Troubled Assets Relief Program (TARP) managed by a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.[1][2] The law which created the fund authorized the Treasury to draw up to $250 billion for immediate use, then requires the President to certify that an additional $100 billion in funds are needed; a final $350 billion are subject to Congressional approval.[3]
Contents [hide]
1 TARP administrative structure
2 TARP participation restrictions
3 Reorientation of TARP to bank equity investments
3.1 Similar historical federal banking investments
4 References
5 External links
6 See also
[edit] TARP administrative structure
The program is run by the Treasury's new Office of Financial Stability. According to a speech made by Neel Kashkari[4], the fund will be split into the following administrative units:
"1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.
2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives.
3) Insurance program: We are establishing a program to insure troubled assets. We have several innovative ideas on how to structure this program, including how to insure mortgage-backed securities as well as whole loans. At the same time, we recognize that there are likely other good ideas out there that we could benefit from. Accordingly, on Friday we submitted to the Federal Register a public Request for Comment to solicit the best ideas on structuring options. We are requiring responses within fourteen days so we can consider them quickly, and begin designing the program.
4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.
5) Homeownership preservation: When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners. This goal is consistent with other programs - such as HOPE NOW - aimed at working with borrowers, counselors and servicers to keep people in their homes. In this case, we are working with the Department of Housing and Urban Development to maximize these opportunities to help as many homeowners as possible, while also protecting taxpayers.
6) Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP. This team is working hard to define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.
7) Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements. We welcome this oversight and have a team focused on making sure we get it right."
[edit] TARP participation restrictions
Companies that sell their bad assets to the government must provide warrants so that taxpayers will benefit from future growth of the companies.[3] The President is to submit a law to cover taxpayer losses on the fund, using "a small, broad-based fee on all financial institutions."[3] In order to participate in the bailout program, "companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits 'golden parachutes' and requires that unearned bonuses be returned."[3] The fund has an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There is also an inspector general to protect against waste, fraud and abuse.[3]
Reorientation of TARP to bank equity investments
On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury will buy equity stakes in nine American Banks, and potentially thousands of smaller banks, using the first $250 billion dollars allotted to the program.[5]
The banks agreeing to receive equity investments from the Treasury include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.[6][7][8] The Bank of New York Mellon is to serve as master custodian overseeing the fund.[9]
Similar historical federal banking investments
The nearest parallel action the federal government has taken in the was in investments made by the Reconstruction Finance Corporation (RFC) in the 1930s. The RFC, agency, chartered during the Herbert Hoover adminisistration in 1932, made loans to distressed banks and bought stock in 6,000 banks, totalling $1.3 billion. In 2008 dollars, that would amount to $200 billion. When the economy had stabilized, the government sold its bank stock to private investors or the banks, and is estimated to have received approximately the same amount previously invested.[10]
In 1984, the government took an 80 percent stake in nation’s then seventh-largest bank Continental Illinois Bank and Trust. Continental Illinois made loans to oil drillers and service companies in Oklahoma and Texas. The government was estimated to have lost $1 billion because of bad loans purchased as part of the bank Continental Illinois, which ultimately became part of Bank of America.[10]
References
^ "Economic rescue swiftly signed into law". AFP (2008-10-03).
^ Gross, Daniel (2008-10-01). "How the Bailout Is Like a Hedge Fund. It's massively leveraged. It's buying distressed assets. It's taking equity stakes…". Slate.
^ a b c d e Summary of the Emergency Economic Stabilization Act of 2008 United States Senate Committee on Banking, Housing and Urban Affairs. (Retrieved October 2, 2008)
^ http://www.accountability-central.com/single-view-default/article/treasury-update-on-implementation-of-troubled-asset-relief-program-tarp-before-institute-of-intern/?tx_ttnews[backPid]=1&cHash=8702938e7e
^ Landler, Mark; Eric Dash (2008-10-14). "Paulson Says Banks Must Deploy New Capital: Drama Behind a $250 Billion Banking Deal", New York Times. Retrieved on 2008-10-14.
^ Solomon, Deborah; Damian Paletta, Jon Hilsenrath and Aaron Lucchetti (2008-10-14). "U.S. to Buy Stakes in Nation's Largest Banks: Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort". Wall Street Journal. Retrieved on 2008-10-14.
^ "Bailout: The Rescue Plan & The Largest Recipients", New York times (2008-10-14). Retrieved on 2008-10-14. (Graphic of proposed bank equity investments)
^ "Beneficiary Banks", New York Times (2008-10-14). Retrieved on 2008-10-14.
^ Dash, Eric (2008-10-14). "Bank of New York Will Oversee Bailout Fund", New York Times. Retrieved on 2008-10-14.
^ a b Lohr, Steve (2008-10-13). "Intervention Is Bold, but Has a Basis in History". Retrieved on 2008-10-15. The article relies on the work of New York University Historian and Economist Richard Sylla for historical estimates.
External links
Zumbrun, Josh et al. (October 14, 2008). "The Ownership Society", Forbes. Analysis of the injection of Government equity capital into banks.
See also
H.R. 1424
Emergency Economic Stabilization Act of 2008
Liquidity crisis of September 2008
This United States government-related article is a stub. You can help Wikipedia by expanding it.
This economics or finance-related article is a stub. You can help Wikipedia by expanding it.
eFinancial crisis of 2007–2008
Main issues Economic crisis of 2008 · Financial crisis of 2007–2008
http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
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