The Banking Fiasco

I see Congress added a provision to the stimulus bill limiting CEO bonuses and the compensation of “all highly paid individuals at the 359 banks that are receiving government aid.”  According to the NY Times, industry insiders are worried:

“This is a big deal. This is a problem,” said Scott Talbott, chief lobbyist for the nation’s largest financial services firms. “It undermines the current incentive structure.”

Talbott said banking executives expected certain restrictions would be applied to them but are concerned that some of the most highly paid employees, such as top traders, who bring in hefty sums for the company, would flee to hedge funds or foreign banks that have not accepted U.S. government funds

I can see how this provision might cause some weird incentives.  I wish Congress didn’t have to do it, but the public outrage Congress must be hearing about CEO bonuses has to be deafening.

What’s interesting is that the CEOs and finance company executives apparently don’t hear it at all.  This tells you just how disconnected these people must be from life as we know it.  Consider a few facts:

• People are looking into the abyss of economic doom caused in large part by a dysfunctional banking sector.
• Wall Street stars paid themselves massive amounts of money over the last few years based on what we now know were phony profits.  They made no attempt to pay this back.
• Unless they can fix their own industry, there is a very strong case to be made that the banking sector should be nationalized and reorganized—this means current executives would lose their jobs and shareholders wiped out.

Given these facts it seems like the banking executives would be launching a massive PR campaign to explain how they aren’t making much money anymore and everyone’s working together to fix the system.  Instead they are apparently working as hard as possible to extract maximum dollars from the system EVEN NOW.

My prediction:  all of the major banks–Citigroup, JPMorgan Chase, B of A–will be taken over by the government and reorganized.  The guys running these institutions now just don’t get it.  They are practically begging Congress to take them out.

Fish Barriers

Republicans are demonizing Obama’s stimulus bill because it’s wasteful.  Yes, they say, we need the government to stimulate the economy, but this bill is just pork, not stimulus. To take one random example of this commentary, here’s  the Buffalo News:

How many new economy-stimulating jobs will be created immediately, if at all, by the tacked-on $650 million for new digital TV conversion coupons? Or the $1 billion to get ready for the 2010 Census, which would have to be done anyway? Or the $726 million for after-school snack programs, the $1 billion or so for climate research, $20 million to remove fish barriers at dams or $20 million to rehabilitate off-road ATV trails?

Now, to be fair, the writer of this piece is questioning how many jobs will be created by the spending bill immediately.  And the speed of the spending is a legitimate issue, but the real complaint here isn’t  that the spending isn’t quick enough, it’s that the spending is frivolous.  Fish barrier removal?  ATV trail rehab?   The implication is that we might as well be paying people to dig holes and fill them back up.

So, is it?  Let’s turn to the google.  It turns out that here in the Northwest there are lots of barriers to fish migration, mainly resulting from highway construction decades ago when people weren’t thinking much about the impact on fish.  With dwindling wild fish runs, it makes sense to rectify this situation.  Maybe that shouldn’t be a priority.  I don’t know enough about it to have an opinion.  But my point is GOPers who are criticizing it as frivolous don’t know enough about it to have an opinion either.  In fact they seem to know even less than I do, since at least I googled it for five minutes.

The reality is that virtually every economist on the planet says the economy is in a serious downward spiral that can only be broken by government spending.  So, if the GOP wants to propose OTHER SPENDING, I say let’s have a discussion. They want to spend more on Star Wars or the Great Mexican Fence?  Let’s discuss.  Just demogoguing the proposed spending isn’t very helpful.

Zombie Republicans 3

Ron Paul joins the chorus of free market Republicans who don’t get it.  According to CNN Paul posted a video on Youtube in which he “agrees that the economy needs to be stimulated but doesn’t think the federal government should be doing it.”

“Sure, we want more spending,” Paul said. “We need a lot more spending in the economy, but it has to be done by market forces, by individuals, by businesses making proper decisions.”

Help me.  The problem is that businesses and individuals ARE making proper decisions.  It makes a ton of sense for individuals to stop spending money in very uncertain times like this.  It makes a ton of sense for businesses to stop investment and lay off workers when they don’t have enough customers.  These are “proper decisions” by individuals and businesses.  But the consequence of their proper decisions is a devastating feedback loop that leads to recession or depression.   That’s why the government has to step in and spend.  No one else will.

Economists call this a market failure.  Zombie Republicans deny the existence of market failure.  It’s Devil Worship.  Devil Worship, I tell you!!

Update:

My commenter links to an excellent GOP zombie photo:

Zombie Republicans 2

Here’s Mitch McConnell on why we can’t spend our way out of a recession:

“…we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15%. And, it’s widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”

A Senate Republican strays from the Capitalist Way

I heard Rush Limbaugh make exactly the same point last week, not to mention Joe the Plumber in the post below. The self-contradiction is pretty obvious, isn’t it?  WWII was a big spending project, much bigger than anything FDR undertook under the New Deal.  Conclusion:  yes we can spend our way out of a recession.  FDR’s New Deal spending just wasn’t big enough.

Another conclusion is pretty obvious too.  Republicans would be delighted to get us out of our economic problems right now if they could find an Adolph Hitler to fight.  But, lacking one, they would prefer to wait years, decades if necessary, for the economy to completely deflate, then recover on it’s own.  They would prefer that hundreds of thousands of workers sit idle, perhaps for years, witness the permanent loss of trillions of  dollars of economic output, the further deterioration of roads, bridges, docks; the consignment of millions more to poverty, many of them children.   All of this they would endure because the spectacle of government solving a problem, other than fighting a war, interferes with their cult-like devotion to the free market.

Beck Republicans

The economy is racing headlong for a cliff (another 600,000 jobs gone in January) and the GOP is working overtime to prevent the one thing that might help:  deficit spending by the federal government.  Unrestricted tax cuts would be the least likely way to promote spending, yet 36 of the 41 GOP senators voted for such a measure yesterday.

Even conservative economists don’t propose such crazy stuff.  My theory is that they get it from folks like Glenn Beck and Rush Limbaugh.  Did anyone see Beck’s latest rant on Fox?  Yikes, these guys used to be restricted to weird monologues on public access television didn’t they?  This is about 10 minutes long, but you can experience it’s essence by watching the first few minutes:

more about “Road To Socialism 2/5/09“, posted with vodpod

When Mitch McConnell and other conservative Republicans hear from their constituents, they are listening to people like Beck.  That’s why they act and vote like wackos.

No compromise

In his blog Paul Krugman makes the point that the stimulus bill before Congress isn’t going to end up with bipartisan support.  The GOP wants tax cuts and the Democrats want spending.  The difference of opinion isn’t so much a debate over the proper course of action, it’s a “collision of fundamentally incompatible world views”.  Says Krugman:

If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Republicans certainly like tax cuts, but I think it’s important to be clear why. It’s not because they think tax cuts will pay for themselves (even though they say so); it’s not because they don’t like the government to spend money (see Iraq War, et al); it’s not because they are particularly greedy (well, maybe it is, but let’s just stipulate that one).  It’s because the massive borrowing required by tax cuts will eventually accomplish what they can’t accomplish through more straightforward means:  destroy broad based social insurance programs like Social Security and Medicare.  This is the “fundamentally incompatible world view”.  For the modern conservative Social Security and Medicare are “European-style socialism”.  And if Obama tries to pass anything approaching national healthcare, he’s going to have a major collision with that world view.

Zombie Republicans

According to Republicans  the stimulus bill that just passed the House is nothing more than a monstrous pork fest for Democratic pet causes.  It has nothing to do with addressing our economic crisis.    Among the spending projects that Republicans object to:

• Amtrak– $1 billion
• Child care centers — $2 billion
• National Endowment for the Arts — $50 million
• global warming research — $400 million
• new cars for the government — $600 million
• fixing up the Smithsonian — $150 million
• $81 billion for Medicaid
• $20 billion for food stamps
• $20 billion for fish barriers
• $87 million for an ice-breaker ship

This is of course business as usual.  The GOP objects to spending on social programs, mass-transit, the arts.  This isn’t news.  What IS NEWS (and maybe the GOP leaders missed this), the economy is heading into the tank.  According to the CBO if nothing is done unemployment will reach 9 percent this year, and economic output will fall below it’s potential by $1 trillion.  This is a serious problem but it could be at least partially alleviated by government spending.  That’s what this about, not pork.

Since the basic problem seems to be getting ignored here, let’s try to bring it back in focus.  The economy is falling off a cliff, but the problem isn’t lack of a willing and skilled workforce, or lack of  investment in factories, building, roads, and docks.  We have the people and the wealth and the know-how to create far more goods and services than we are likely to create over the next few years.   But somehow the supply and demand don’t meet.   How does that happen?  It happens because people suddenly stopped spending money and suddenly started hording cash.

This is all understandable—given the loss of wealth from the  bursting the housing and stock market bubbles; not to mention the general uncertainty.  The problem is that the desire to hold cash can translate into a deadly feedback loop for the economy.  What was a simple desire for security ends up forcing banks to call in loans to generate the cash people want to hold.  That puts businesses out of business.  Banks also have to sell assets to raise cash; that depresses asset prices; further worsening the banks situation. Since people are not spending, other businesses see demand for their goods drop; they lay off workers; demand drops even more; they lay off more workers.  Pretty soon we are in deep do-do.

One way to break this cycle is to flood the market with cash.  The Fed effectively says, “hey, if people want cash, lets just print money and give it to them”.  That way banks don’t have to start calling loans and putting businesses out of business.  Once the panic passes and people stop holding so much cash, the Fed effectively takes the cash back out of the economy.

Another way to break the cycle is for government to spend money “counter-cyclically”.  Some government programs do this automatically:  unemployment insurance, food stamps.  Government can also enact specific legislation to spend money to break the cycle.  The is what the current stimulus debate is about.

This is why calling the list above “nothing but pork spending” is ludicrous.  It’s spending; therefore it’s stimulus.  No doubt it’s not what Republicans would spend money on, but the concept here is SPENDING.  If the GOP wants to propose other spending, fine.  But the GOP is acting as if it 1985 and they are making huge political points by fighting against big goverment Democrats.  Wake up guys.  It’s 2009 and the economy is going off a cliff.

Obama vs. Limbaugh

Obama has made a point of taking on far right talkers like Hannity and Limbaugh to a certain extent.  During the campaign he said that  “hardcore Sean Hannity fans probably wouldn’t want to have a beer with me“.  And the other day he told GOP leaders that “you can’t just listen to Rush Limbaugh and get things done”. Hannity and Limbaugh love this stuff, of course, because going eyeball to eyeball with Obama boosts their ratings. 

So, from that perspective, I’m not sure it makes sense for Obama to mention them by name and risk increasing their visibility.  On the other hand,  Limbaugh wingnuttism has been around now for years, so Obama isn’t exactly giving a national stage to a start-up movement; they say Limbaugh has 20 million listeners.  By now that’s probably his max and it’s a lot, but it’s not enough people to win a national election.  And I would argue that Limbaugh wingnuttism drives off a lot of folks too.  He’s one reason there are zero GOP congressmen in the northeast.  So to the extent Obama can identify the GOP with Limbaugh/Hannity he can solidify the Democrats as the more centrist party and keep winning elections as the GOP becomes an ever more regional party.

I think Obama knows what he’s doing.

By the way, a liberal group is tagging along on this idea. They are running radio ads in three states asking, effectively “whose side is our Senator on in the vote for a stimulus package:  Rush Limbaugh or President Obama?”  The states are Nevada, Pennsylvania, and Ohio and they all have a GOP senator.  They are all states Obama won.

Stimulus

Dean Baker asks “Do the Republicans Have Any Clue What “Stimulus” Means?  Why isn’t the NY Times Asking?”

The NYT told readers that the Republicans objected to spending that they “ridiculed as having nothing to do with economic stimulus.” It then listed the expansion of federal Medicaid coverage of family planning services as one example.

Actually, this program involves spending money, therefore it is stimulus. This money will employ people in the provision of family planning services, just as highway spending employs people in the constructing or repairing highways.

It’s sort of like baseball being a type of sport. Some people may not like baseball, but that doesn’t change the fact that it is a sport.

If the Republicans were to insist that baseball is not a sport then it would be reasonable to assume that they do not know what the word “sport” means.

I’m with Dean Baker on this.  I can’t count the number of times I’ve seen GOP leaders John Boehner and Eric Cantor on TV claiming that expanding Head Start doesn’t have anything to do with stimulus, or aid to state and local governments doesn’t have anything to do with stimulus, or repairing the national mall doesn’t have anything to do with stimulus.  The statements don’t even make sense.  Reporters should at least follow up to ask what they mean. Maybe it was just a gaffe.

Meanwhile Boehner and Cantor keep offering as an alternative to the Democrat’s plan, massive tax cuts for people the least likely to spend it–the wealthy.  Now THAT doesn’t have anything to do with stimulus

Waste, Fraud, and Abuse

I knew this was coming.  Here’s Minority Whip Eric Cantor (R-VA) on the Obama stimulus package:

If you look at the bill that passed the ways and means committee yesterday, for every dollar spent to help small businesses, four dollars is being spent to help upkeep the grass on the lawns of Washington. Again, what does that have to do with a stimulus bill?

Of course.  Any time a spending bill goes through Congress, the “government is the problem” crowd sends it’s staffers forth to find “fraud, waste, and abuse”.  This time they’ve found massive wasteful spending on “the lawns of Washington”.

It turns out that this particular claim is bogus.  The lawns of Washington actually need a lot of work, and of course the money isn’t being spent just on lawns.  But my point would be—what if it was a total waste? What if the $200 million Cantor is talking about actually was flushed down the toilet?

That would be bad, but in the scheme of things—we are talking about an item in a $700 billion spending bill—it’s nothing.  Further, let’s take a look at the options.  Every time anti-government types find wasteful government spending the implication is that private spending would never—-I repeat NEVER–engage in waste!  It’s simply a given that private enterprise is frugal and efficient.

So how exactly did it come to pass that the  financial sector—private businesses whose job it is to allocate and supervise the allocation of capital—recently allocated hundred of billions of dollars into a grossly  inflated housing market?

We’re not talking about an over-watered lawn here.  We are talking about a massive mis-allocation of resources that would have embarassed a Soviet central planner.  Yet the game-of-the-day continues to be poring over government spending projects in search of “waste”, no matter how immaterial.  Help me.