What U.S. Economic Recovery? Five Destructive Myths

[rhody]

That's the Washington Post, not the Wall Street Journal.

Yes, you are correct, I hope Ezra Klein and Sarah Kliff of the Washington Post can forgive me. Rhody face palms... knocks head against wall.

Rhody...

 

[MarcoD]

WSJ Article: European debt crisis in eight graphs

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

Personally, I agree with the analysis but not the conclusions. We have a fiscal union with fiscal ramifications for those who spend too much, that's exactly what the markets are doing now. There isn't even much need to change that, the markets were just late in understanding how the Eurozone system works. Second, we have stimulus funds for weaker economies.

Exposure and stuff is nice, but that's like studying the exposure of New York/Wall Street with respect to Michigan. It doesn't say a lot. (Okay, the exposures are real, the system might collapse that way, but that's about it.)

The only, but real, risk is that the whole system explodes; i.e., the Euro becomes worthless because no government bonds are trusted anymore. That's about it.

 

[SixNein]

WSJ Article: European debt crisis in eight graphs

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

I would wager it has already contributed greatly to our weak recovery.

 

[MarcoD]

I would wager it has already contributed greatly to our weak recovery.

And I would say that if anybody is to blame it is Wall Street and the (resulting) cheap borrowing costs in Europe. Seriously, the collapse of the housing bubble in the US left a debt hole partly owned by Europe, and that debt hole exploded because people got scared and withdrew funding. Let's guesstimate that on about 1-2 trillion. The whole problem in Europe now is the result of some debt-ridden governments -that's their own fault- and banks -same idiots here- trying to fix a debt hole without sufficient funds. The money is gone, and some people in Wall Street now must be exorbitantly rich.

No offense meant. It's not a blame game, it's just a US investment which went wrong.

(The Greeks rigged the books, so that's a different story, but I do feel a bit sorry for Italy. If money would have remained cheap, they could have gotten through with structural reforms (granted, not under Berlusconi). But the increase in costs of money, and a probable capital flight from that nation, means that they're stuck in a hole, maybe for decades.
And I wonder what percentage of pension funds evaporated in my own country because of the debt hole.)

 

[MarcoD]

And on a more serious note. The US is on a spending spree. To fund that, they borrow internationally, also from Europe, and spend it on oil and Chinese goods and assets.

Personally, I would prohibit any US funding from European side, since it now has become apparent that it is just a fine manner of giving money away. So I am not against decoupling the US and European economy, and I wasn't that in favor of the latest move of the national banks to stimulate international dollar transfer.

 

[turbo]

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

The second (and perhaps more damaging) problem is the Fed. When the cry-babies on Wall Street threaten to hold their breath, the Fed lowers interest rates again and again. This free money means that the investment banks can afford to pay almost zero interest, even on very large, stable accounts. Greenspan and Bernanke have a huge responsibility for the current debt crisis because they created it by driving wealth to the wealthy. Cheap borrowing came at the expense of the US taxpayers, for the benefit of the big banks and investment firms. And it is continuing. Is the Fed ever going to start charging reasonable interest rates for the borrowing of our money? Probably not, unless the taxpayers demand it.

 

[MarcoD]

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

God, yeah. I have nothing against the US, or the US public, but I think by now you can safely state that Wall Street managed to 'steal' money from literally everyone. There is a note that you can't blame them for the US trade deficit, so it was bound to happen, but the credit crunch was rather extravagant.

(And, contrary to what you think, I guess that the Fed keeps interest low to sponsor the trade deficit. I mean, cheap money means you got more to spend, right?)

(I mean, no offense. But if you really abstract from most details, then the US spends money in, say, China, and for every ten dollars maybe borrows eight dollars from China and two dollars from Europe. It can't pay back, so where will it default on? You can engineer it, or let it happen, but it will always default, also on Europe. It's just a law of nature that Europe can't invest in the US.)

(Ah well, editing again since I guess I should say I have no idea anyway since one would need to check the real numbers. Europe may be bankrupt, a part of Europe may be bankrupt, the US may be bankrupt, and nothing may have happened. Or maybe we're all filthy rich. No idea.)

 

[mheslep]

The major problem in the US is Wall Street.

... is the federal government

They are practically unregulated,

http://www.realclearpolitics.com/video/2011/09/20/ceo_tells_congress_he_was_fined_for_hiring_too_many_people.html.

In my own business, securities regulations have prohibited me from hiring brokers for more than three years. I was even fined fifteen thousand dollar expressly for hiring too many brokers in 2008. In the process I incurred more than $500,000 in legal bills to mitigate a more severe regulatory outcome as a result of hiring too many workers. I have also been prohibited from opening up additional offices. I had a major expansion plan that would have resulted in my creating hundreds of additional jobs. Regulations have forced me to put those jobs on hold.

and were allowed to bundle crap into derivatives,

Fannie and Freddie, created by the federal government, invented mortgage bundling. They still owe taxpayers $130B (unlike the WS banks who paid off), and after being seized by the government still pay themselves huge bonuses as effective government employees.

sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

So you don't like them, whoever they may be. But before you throw people in jail, exactly what law are you saying was broken? I bought some stock the other day. It went down. I'd like to use the Turbo law to throw the CEO in jail.

 

[MarcoD]

On a side note. I decided that economics is essentially the same as women's studies. It is incredibly interesting and academically pleasing, you can study it for the rest of your life, the topic behaves whimsical and erratic, and at the end of your life, you end up concluding that your understanding was less than you started. But pleasing still.

 

[rhody]

exactly [/I] what law are you saying was broken? I bought some stock the other day. It went down.

Sixty Minutes had a segment on this featuring two whistleblowers, who reported that the way mortgages were being doctored, and reported were of dubious quality and a high percentage of their loans fell into this category, if I remember correctly this was somewhere above 50%. The problem was systemic and across the company's. The Sarbanes–Oxley Act of 2002 was supposed to address this.

In a nutshell, the CEO/CFO's of major financial institutions with over 500 million in assets were to sign a document at physcal year end that said all financial statements under their scrutiny were valid and accurate. If fraud could be proven, and they were tried and convicted they could be subject to:

(a) Certification of Periodic Financial Reports.— Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o (d)) shall be accompanied bySection 802(a) of the SOX a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.

(b) Content.— The statement required under subsection (a) shall certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of [1] 1934 (15 U.S.C. 78m or 78o (d)) and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

(c) Criminal Penalties.— Whoever— (1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or

(2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

You have to watch the Sixty Minutes program to get the full picture, but to date the Securities and Exchange Commission (SEC) the oversight branch and the US Justice Department, the judicial branch have not prosecuted or convicted any of the major banks involved in the Securities debacle, with exception of two people, one of which, Richard Scrushy is described below.

The laws are in place, and there appears to be substantial evidence to investigate, but as you can see from the fines and the periods for confinement have not been dealt to anyone accused and convicted of cooking the books at the expense of the shareholders. The financial penalty and incarceration time in proportion to the the amount of harm done to our economy and million's of people's lives seems out of whack to me.

One of the guy's who was prosecuted and convicted under Sarbanes–Oxley, Richard Marin Scrushy
recieved this penalty for his crimes. His criminal trial was in Montgomery, Alabama.

On June 28, 2007, Scrushy was sentenced to six years and ten months in a federal prison, ordered to pay $267,000 in restitution to United Way of Alabama, three years probation, and a fine of $150,000.[43] Scrushy is also expected to personally pay for his time in prison and perform 500 hours of community service

His civil trial was in Birmingham, Alabama.

Scrushy continued to assign blame to his subordinates and maintain that he did nothing wrong.[55] Closing arguments were heard in the trial on May 27, 2009.[56] On June 18, 2009, Judge Horn ordered Scrushy to pay $2.87 billion in damages.[57] Judge Horn stated, "Scrushy knew of and actively participated in the fraud" and referred to Scrushy as the "CEO of the fraud".[11] Scrushy is expected to appeal the judgment

After review of what Scrushy was ordered to serve and pay for his crimes (plea bargained down substantially from the maximum penalty) it hardly seems fair does it ? Do you think his punishments will deter others from continuing the practice of misreporting financial statements as a CFO ? Personally, I doubt it, the reward is too high and the risk and punishment too low. I might add as a final tribute the the Sixty Minute Investigators, they report that the Justice Department has for unknown reasons been unwilling to aggressively pursue other CEO's and CFO's of major US financial institutions.

Rhody...

 

[mheslep]

... The Sarbanes–Oxley Act of 2002 was supposed to address this.

No, the new accounting procedures of SO have little or nothing to do with junk securities sales. SO is about eliminating book cooking, inflating the apparent value of a company and the like.

 

[rhody]

No, the new accounting procedures of SO have little or nothing to do with junk securities sales. SO is about eliminating book cooking, inflating the apparent value of a company and the like.

So you are saying, until the book cooking stops, we should not hold a CFO/CEO accountable ? They have a legal obligation to do so under SO. BTW, the second whistler blower on the Sixty Minutes segment told the CFO of his company eight days before that they were serious fraud going on, and yet eight days later the CFO signed the financial statements as accurate and true, with full knowledge that he was doing it with the penalties of SO looming. So far he has not been investigated or indicted by the Justice Department, who is NOW well aware of the problem.

What do you want, more regulation at the boots level, where the buying and selling of mortgages and repackaging and reselling them takes place ? It never fails to amaze me when greed is involved what lengths SOME people will go to obtain wealth at ANY cost.

Rhody...

 

[mheslep]

So you are saying, until the book cooking stops, we should not hold a CFO/CEO accountable ? ...

Eh? I only said the book cooking CEO example you referred to has nothing to do with mortgage security bundling and bubbles.

What do you want

I want the Federal government out the actual business of financing home mortgages, either directly or through guarantees. This means a nearly immediate dissolution of Fannie, Freddie, and the FHA. The FHA is another disaster in process, right now, with the same platitudes from leadership saying everything they're doing is risk free and for the good of the country, the same cozy deals with congress (just raised the limit on FHA guaranteed mortgages). How do the likes of FHA get away with this? I suggest in part because of people creating misdirection by pointing to Wall Street.

 

[JonDE]

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

The second (and perhaps more damaging) problem is the Fed. When the cry-babies on Wall Street threaten to hold their breath, the Fed lowers interest rates again and again. This free money means that the investment banks can afford to pay almost zero interest, even on very large, stable accounts. Greenspan and Bernanke have a huge responsibility for the current debt crisis because they created it by driving wealth to the wealthy. Cheap borrowing came at the expense of the US taxpayers, for the benefit of the big banks and investment firms. And it is continuing. Is the Fed ever going to start charging reasonable interest rates for the borrowing of our money? Probably not, unless the taxpayers demand it.

I'm not sure how to phrase this without it sounding like a smart remark, but I truly am just asking.
But in the current economic situation how do you see the feds cheap rates as coming at the expense of the tax payer? Cheap rates are good for anyone that takes a loan, not just banks. Whether it is a business loan or buying a house, it is a great time to take a loan. It is bad for people with lots of savings (cheap rates), but then again, the people that save the most, are the people that have the most and make the most.
Further the main point of cheap rates is to offer incentive to take loans, particularly areas where loans are needed for purchases, such as housing. The housing market is still very weak. One thing a lot of people don't realize is that a strong housing market is almost essential to having any kind of recovery. Historically new housing building accounts for around 5% of GDP, and coming out of most "normal" recessions, the growth in the housing market accounts for around 8% of GDP growth.

 

[turbo]

I'm not sure how to phrase this without it sounding like a smart remark, but I truly am just asking.
But in the current economic situation how do you see the feds cheap rates as coming at the expense of the tax payer? Cheap rates are good for anyone that takes a loan, not just banks. Whether it is a business loan or buying a house, it is a great time to take a loan. It is bad for people with lots of savings (cheap rates), but then again, the people that save the most, are the people that have the most and make the most.
Further the main point of cheap rates is to offer incentive to take loans, particularly areas where loans are needed for purchases, such as housing. The housing market is still very weak. One thing a lot of people don't realize is that a strong housing market is almost essential to having any kind of recovery. Historically new housing building accounts for around 5% of GDP, and coming out of most "normal" recessions, the growth in the housing market accounts for around 8% of GDP growth.

Well, here is one way to look at it. What incentive do people have to save money? Not invest, but save for a stable interest income? People have practically NO incentive to save because the Fed shovels free money at the banks, so the banks pay no interest to anybody else. With interest rates on savings not even keeping up with inflation, and with bogus "fees", people who save are sliding backward all the time. I could park my money in other places, but I like to stay at least somewhat liquid so that if a nice tract of land (for example) comes on the market at a fair price, I can jump on it.

Our government should not be in the business of encouraging more loans and more debt, IMO. We already have far too much of that. The last time I owed any money at all to anybody was a bank-loan on a house that was paid off decades ago. My parents grew up in the Depression and I learned from them. If you can't afford it, you don't buy it. If you can't reasonably expect to save enough money to buy something, set your sights lower.

The free money that the Fed shovels at the banks comes at the expense of taxpayers. The Fed should set an interest rate that guarantees us taxpayers a modest return on our investment, and let individual savers back into the market, so we can earn some interest, too. As long as people concentrate on loans, borrowing, and debt, we lose and the banks win.

Watch the news on Thursday. The Senate is scheduled to consider the confirmation of the head of the Consumer Financial Protection Bureau. Without a director and fully-functioning staff, the agency cannot possibly regulate the non-bank "financial services" that often take advantage of less-affluent. Even the "moderate" Maine senators are toeing the party line on this one, refusing to agree to support the nominee. It's hard to see how usury serves Mainers well, but apparently our senators know what's best.

 

[turbo]

For some perspective:
http://www.huffingtonpost.com/rep-alan-grayson/the-fed-bailouts-money-fo_b_1129988.html

 

[mheslep]

More perspective from the former Congressman and author who lost his 2010 Fla election in a landslide.
http://motherjones.com/politics/2010/01/best-quotes-alan-grayson