As Naked Capitalism Publisher Yves Smith explained, yesterday, in "
Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs," the faux Democratic wing of the Democratic Party is now teeing-up what I can only refer to as "the ultimate Wall Street clusterf**k." It is beyond brilliant in its deviousness.
What's being very seriously proposed--and, IMHO, I think it maintains more than ample "spinnability" to make it through to actual legislation that our president will support--is, for all intents and purposes, relinquishing Fannie Mae's and Freddie Mac's roles (i.e.: the GSE's, or government-sponsored entities' roles) in the housing industry to Wall Street, while permanently backstopping the too-big-to-fail banks in much the same manner that our government has funded and supported the GSE's up until now. IMHO, if it becomes the law of the land, it would be the ultimate privatization of profits and socialization of losses for our nation's status quo, and virtually insure the ongoing domination of our society by Wall Street, perhaps, for many generations to come.
Putting it even more succinctly, what's being proposed (again, see farther down, below)
is the wholesale, virtually permanent, institutionalized sell-out of Main Street to Wall Street.
IMHO, once you do a deeper dive with Yves on this latest, and perhaps most egregious, exercise in premeditated corporate kleptocracy, one cannot help but think of Matt Taibbi's rough and tumble prose about vampire squids; and how his widely-publicized analogy barely scratches the veneer of the greater truths surrounding this now-simmering economic travesty that is playing out in real life.
PROLOGUE
I will get to the details of Yves' post in a few moments; but, first, providing stark and simple context via his observations concerning the current state of our economy, let's walk through the prologue, as former Clinton administration Labor Secretary Robert Reich explains some basic qualitative--and quite inconvenient to some, IMHO--facts of life on Main Street, right now.
The powers that be--in the MSM, the blogosphere, and even via some of our supposedly "respected" economic bloggers in the Democratic Party-- are pumping up the volume on our nation's "recovery" propaganda. And, quite frankly, much of what we're being told, up to and including the numbers and manufactured "facts" upon which we've misdirected our focus, via the MSM and our own government (and even here in the "upscale Democratic blogosphere"), belie the over-arching truth--for most of us--as the former cabinet secretary explained the current state of our economy in one headline on Wednesday, "Stocks Up, Houses Down, And What This Means for Most Americans:" "The American economy isn't back."
LEADING ECONOMIC INDICATORS/INDICES/INDEX
We see, and we are told: the Leading Economic Indicators/Index/Indices ("LEI") are going through the roof. The most widely-quoted LEI is that which is published by the Conference Board. But, if you look more closely at what the Conference Board's saying you'll note what their chief economist just wrote about our economy. From a widely-circulated email posted by Bart Van Ark, the Conference Board's first non-American, chief economist, via the WaPo, a week ago:
Continued woes in the housing market and weakness in the labor market will prevail throughout 2011. We anticipate a post-holiday pullback in consumer spending, a rise in the personal savings rate, further cuts in spending by state and local municipalities, and a deceleration in business investment in inventories in the current and next quarters. Consequently, economic growth will register only a sluggish 2 percent in the first half of 2011.
Back in the middle of 2009, when some in the Democratic blogosphere were touting our "recovery"--and still, even to this day, gratuitously hype their armchair pundit prognostication skills--they pointed to this article in the NY Times, by Floyd Norris: "Leading Indicators Are Signaling the Recession's End." However, if one bothered to read all of Mr. Norris' article, they would have come across this reference to the LEI...
...An end to recession is not, of course, the same thing as the beginning of a boom. The indicator "has an unblemished record on calling the turning point," said another economist, Robert J. Barbera of ITG, "but it is not a particularly good guide to the power of the upturn."
Indeed, one of the strongest moves in the leading indicators came at the end of the brief 1980 recession, as credit controls were removed. But the economy soon fell into another, longer recession...
...
...During the most recent three months, the strongest indicators have been the financial ones...
Bold type is diarist's emphasis (throughout this diary).
Speaking of financial indicators...
STOCK MARKET PERFORMANCE
We see, and we are told the stock market's kicking ass, with the Dow back over 12,000 on Tuesday, which is the first time it's been past that mark since June 2008. But, if you look more closely, from Robert Reich on Wednesday...
...Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday's rally). The Fed's continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.
It's simply wonderful, especially if you're among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you're among the next richest 9 percent, who own 40 percent.
But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans...
In fact, as I noted in a recent diary, the top 10% of our society owns approximately 98.5% of all marketable investment vehicles, and the bottom 90% owns 1.5%.
THE INSTITUTE FOR SUPPLY MANAGEMENT'S (ISM) MANUFACTURING INDEX
We see, and we are told, "ISM Manufacturing Index increases in January." But, if you look more closely at the impact this actually has on our nation's horrendous unemployment situation (see next section, below), the truthful answer is: "Not so much."
ISM Manufacturing Index increases in January
by CalculatedRisk on 2/01/2011 10:00:00 AM
...From the Institute for Supply Management: "January 2011 Manufacturing ISM Report On Business®"
The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply ManagementTM Manufacturing Business Survey Committee. "The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004 when the index registered 61.4 percent. The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals."
...
This was a strong report and above expectations. The new orders and employment indexes were especially strong...
We're also told the ISM's New Orders Index jumped 5.8%, surging to 67.8% from the seasonally-adjused mark of "...62 percent reported in December. This is the 19th consecutive month of growth in the New Orders Index."
Calculated Risk notes that ISM's Employment Index registered "...61.7 percent in January, which is 2.8 percentage points higher than the seasonally adjusted 58.9 percent reported in December. This is the 16th consecutive month of growth in manufacturing employment. "
And, even Paul Krugman said the PMI number was very good! "How Good Is That PMI Number?"
But, what does all of this "growth" really mean when it's overlayed upon our nation's employment/unemployment situation? Well, later this morning, the Bureau of Labor Statistics' January 2011 Employment Situation Report will be published, and when one looks closely at the numbers, shouts of glee over the creation of 100,000, 200,000, or even 300,000 net new jobs are not as "awesome" as some might have us believe, per the normally optimistic-but-evenhanded Calculated Risk: "Employment Situation: A Lighter Shade of Gray."
UNEMPLOYMENT
We see, and we are told, jobs are coming back. But, if you look more closely, it's at a pathetic snail's pace--one which is, even in a "good" month--barely keeping up with our nation's population growth.
Federal Reserve Board Chair Ben Bernanke had this to say last night, as reported in this morning's NY Times:
...On the eve of new unemployment figures for January that the Labor Department will report Friday, Mr. Bernanke predicted that "we'll start seeing some stronger payroll reports and some lower unemployment rates pretty soon," but cautioned that it would take years for the job market to return to normal.
He said that uncertainty about the recovery's durability was hampering firms from hiring. "Firms have been using a lot of temporary workers, because they can bring temporary workers on and if the economy weakens again, they can let them go," he said. "It'll be a really good sign when we see those temporary jobs being converted into permanent jobs."
And, here's Calculated Risk's take in anticipation of Friday's job numbers...
Employment Situation: A Lighter Shade of Gray
by CalculatedRisk on 2/03/2011 02:36:00 PM
The numbers are grim: almost 15 million Americans are unemployed, another 9 million are working part time for economic reasons, and about 4 million more have left the labor force since the start of the recession (we can see this in the dramatic drop in the labor force participation rate). Of those unemployed, 6.4 million have been unemployed for six months or more.
And the situation is also bleak for many of those who have jobs. A recent report showed most of the employment growth has been in low-to-mid wage industries (more skewed than in previous recoveries). And real earnings for most Americans have been under pressure for some time.
Against that backdrop, the recent spate of good employment news might seem almost insignificant, but it is a start.
Tomorrow the BLS will release the January Employment Situation Summary at 8:30 AM ET. The consensus is for an increase of 150,000 payroll jobs in January, and for the unemployment rate to increase slightly to 9.5% (from 9.4% in December).
That would be an improvement - the U.S. economy only added about 95,000 jobs per month in 2010 - however 150,000 additional payroll jobs is still pretty small compared to the number of unemployed. And that is barely enough to keep up with the growth of the working age population...
Jobs? Wait a moment. What kind of jobs? (Hint: see immediately above.)
As I've noted in recent diaries, our country's labor unions are being eviscerated at record-breaking levels with every passing day.
What's actually occurring before us (a/k/a our "jobless recovery") is what many economists are now referring to as: "The Great Decoupling."
"The Great Decoupling"
Mark Thoma
Economist's View Blog
Tuesday, February 01, 2011
Lane Kenworthy notes the decoupling of economic growth from median income growth in the early 1970s:
The great decoupling, Consider the Evidence: Tyler Cowen's e-book The Great Stagnation offers a novel explanation of the slowdown in U.S. median income growth since the 1970s. ... Innovation has slowed. ... But I'm skeptical on two counts.
First, I'm not convinced that innovation has in fact slowed significantly. ... Computers are the engine of the postindustrial economy; they are the modern counterpart to steel, railroads, and the assembly line. Advances in computer hardware and software, their widespread dissemination, and their application to myriad tasks -- automation and coordination of supply chains in manufacturing, record keeping and scheduling in services, and much much more -- surely represent a massive improvement.
Second,... A key difference between the WW2-1973 period and the decades since then is that median income growth has become decoupled from economic growth...
INCOME INEQUALITY
We see, and we are told that there is some jobs growth. But, if you look more closely, the truth is that it would take an ongoing lift in our nation's GDP of between 4% and 5% per annum, for the next, consecutive six years, for unemployment levels in this country to clawback to where they were just three years ago, prior to our country's great recession. And, stock market share ownership inequalities aside (see above), as I covered it in my diary on January 29th, in "Washington's Inequality Facts Strike A Blow To Dem Mindset," the truth is that we're currently witnessing the greatest income inequality between our nation's haves and have-nots since reliable metrics were first established to accurately survey these truths, which was many years prior to our nation's Great Depression.
STATE AND MUNICIPAL BUDGET CRISES
We see, and we are told that our federal government is doing what it can to support social services, education and jobs growth throughout the country. But, if you look more closely, such as that which I noted in my diary on January 21st, "The United Bankrupt States of Twisted Economic Priorities," draconian budget cuts at the state level are undermining--and then some--all efforts at the federal level to the contrary.
And, this brings us back to Robert Reich, and some harsh facts about our current nation's housing slump, which is now still on a downward trajectory, having recently eclipsed depths reached during our Great Depression...
...What do most Americans own? To the extent they have any significant assets at all, it's their homes.
As noted, up above, it is not corporate equity via the stock market.
...the really big story right now - in terms of the lives of most Americans, and the effects on the US economy -- isn't Wall Street's bull market. It's Main Street's bear housing market.
Reich continues on to point out that...
According to the Wall Street Journal's latest quarterly survey of housing-market conditions, home prices continue to drop. They've dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter's in all but three of the markets surveyed.
...
...millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away. This means even more foreclosure sales, pushing housing prices down even further.
So don't be fooled. The American economy isn't back. While Wall Street's bull market is making America's rich even richer, most Americans continue to be mired in a worsening housing crisis that the Administration is incapable of stemming, and of which Wall Street has now seemingly washed its hands.
And, now having fully "buried the lead," Yves Smith points out how Wall Street--to paraphrase former Wall Streeter Rahm Emanuel's oft-quoted comment concerning "never letting a good emergency go to waste"--has been carefully positioning itself to pull off the coup of the century with the help of none other than our corporatist "New Democrats."
IMHO, with everything now very much in place, this could EASILY make September 2008 look like just a warm-up...to this endgame: "Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs."
(Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to republish her blog's posts in their entirety for the benefit of the DKos community.)
Wall Street Co-Opting Nominally Liberal Think Tanks;
Banks Lobbying to Become New GSEs
Yves Smith
Naked Capitalism
Thursday, February 3, 2011
One of my cynical buddies often remarks, "Things always look the darkest before they go completely black."
His gallows humor comes to mind as a result of the hushed conversations inside the Beltway around GSE reform. While the shiny bright object these days in DC is health care repeal, or perhaps Egypt, in quiet corners in think tanks and trade associations the bankers and their allies are getting ready to appropriate themselves a permanent US credit card worth trillions of dollars. The dynamic that became all too familiar during the bailouts is about to repeat itself.
Barney Frank's great moral passion is low-income housing, and that's not an accident. The traditional alliance in financial politics since the 1950s was between liberal low-income housing advocates and Wall Street financiers. Since the 1970s, Democrats tried to balance the two sets of interests by creating consumer protections but allowing the capital markets to manage themselves. This dynamic has created a serious political problem in the last four years, because complete capitulation to the banks in the capital markets has pillaged the low-income and middle-income communities the Democrats thought they were standing up for.
It's not that the people who made this Faustian bargain are bad so much as they are fundamentally irresponsible and childish. The breakdown of law and order in the capital markets arena has created predatory lending, and ultimately has subverted any attempt to implement new laws. Dodd-Frank not just a weak response to the crisis, but actually downright pathetic thanks to the lack of prosecution for anyone who breaks the rules set forth in the bill.
And so, we return to the reform of the GSEs. The Republican mainstream wants to simply hand over government money to banks in the form of a government guarantee. No surprise there. Republicans see the world the way the banks do. Very conservative Republicans, however, aren't on board. On the Democratic side, the dynamic works through the low-income housing advocates.
A think tank that calls itself liberal, the Center for American Progress, just presented a plan to reform Fannie/Freddie and the housing finance system. It would create an FDIC-like insurance fund for the securitization market, and create entirely private Fannie/Freddie like entities that can offer insurance wrappers on mortgage-backed securities, only these entities will carry explicit government guarantees. These entities can also be controlled by banks. There is a mechanism to funnel money to low-income housing, and ostensibly strict regulation of capital. These people believe that without the government guaranteeing mortgages, the American housing finance system will return to a pre-1930s model of a highly unstable predatory market.
Sadly, as well-intentioned as these people may be, this is just one more bank-friendly proposal designed to suppress debate on the Democratic side. CAP is THE mainstream Democratic think tank for Congress and the administration. Its CEO, John Podesta, ran the transition for Obama and was Clinton's chief of staff from 1999 to 2001, so he is the embodiment of Rubinite/mainstream (meaning corporatist) Democratic party thinking. His brother is an enormously powerful corporate lobbyist, and I've heard his brother also apparently collects and ostentatiously displays pornographically-themed art (a tactic to impress/intimidate clients; ironically, anyone who has done time on Wall Street has seen worse and at closer range too).
That this kind of low-income-advocate/bank-friendly throwback would come from CAP isn't entirely surprising, since the Administration has made the pet wishes of the financial services industry one of its top priorities, and the CAP generally provides cover for Team Obama initiatives.
You can read the Fannie/Freddie "reform" plan for yourself. Effectively all this proposal does is move Fannie's and Freddie's activities to new private entities that will have bigger loss cushions and and an explicit government guarantee. It thus preserves the incentives that led to their being placed in conservatorship in the first place, namely, socialized losses and privatized gains.
It is takes a wee bit of unpacking to depict accurately the multiple levels of hypocrisy involved in this initiative. First, the banking industry has long attacked Fannie and Freddie for distorting the mortgage market. Now they come hat in had to the government hat in hand wanting to be the GSEs.
Actually, that characterization is too kind. They are pushing for a better deal than the GSE had. They want the new entities, which they call to be fully privatized (they are called "Chartered Mortgage Institutions", while the GSEs had an ambiguous public/private role that became more private over time, and they want an explicit government guarantee, while the old GSE had an implicit guarantee (actually, their documents declared loudly that they were not government guaranteed, but the reassurance of government officials to important foreign investors led them to demand that the US stand behind the guarantees).
The government would guarantee that in the event of the failure of the CMI investors would continue to receive timely payment of principal and interest on CMI guaranteed mortgage-backed securities that meet product structure, underwriting, and securities structure standards. The government guarantee would be explicit and appropriately priced, and the proceeds would be held in a Catastrophic Risk Insurance Fund.
Now the way the banks profit from all this is covered by a fig leaf. The CMIs would not be owned by originators, save through a "broad based cooperative structure". Um, given how concentrated the banking industry is now, with 10 banks controlling 70 percent of the deposits in the US, who are we kidding? "Broad based" is likely to mean "little banks take token interests".
But the bigger source of profit to banks will be no doubt be indirect. Take note of the huge lie at the heart of this: the idea that the new CMIs will charge a sufficiently high premium. If the insurance were "appropriately priced", it would lead to the mortgages having pretty much the same terms as if there were no guarantee. "Appropriately priced" insurance has to cover the risk of expected loss. In fact, third-party insurance is typically more costly than self insuring because people are loss averse and are willing to pay more than the actual expected value of loss to forestall the consequences of Bad Stuff Happening to Them.
But the canard is in plain view; the document explicitly says that the insurance will NOT cover the risk of "catastrophic loss"; that is to be borne by the taxpayer. As we know, the odds of extreme events is higher than finance theory would have you believe. As the quants say, "tails are fat". And we are vastly more likely to have bad outcomes where we explicitly allow private sector actors to dump the consequences of stupid or greedy behavior on the public at large.
Note also that these new CMIs get other right out of the current Fannie and Freddie charter privileges, such as the ability to own loans in their own portfolios.
The second bit of hypocrisy is the pretense that this program is anything other than a massive handout to the banking industry and is somehow necessary for the health of the housing market. If you want to see who is the real moving force behind this idea, compare the CAP proposal to a fall 2009 proposal by the Mortgage Bankers Association. You'll notice the main provisions are the same, but the MBA proposal at least free of the sanctimonious posturing of the CAP plan.
As an aside, it's important how the banks are maintaining message discipline on this issue. The only proposals receiving any sort of push are virtually the same, whether it be the CAP plan, the older MBA proposal, or those from the New York Fed and Financial Services Roundtable. The one partial exception is the Federal Reserve's plan, which has the dubious distinction of being an even bigger handout to the industry by advocating that pretty much the entire asset backed securities market, including auto loans and credit card receivables, be government backstopped. Well, we did it in the crisis, why not make it policy? After all, we've conditioned the banks to expect it, right? Ain't Mussolini-style corporatism wonderful.
People who are on the Fannie/Freddie beat, such as financial services industry expert and self-styled "recovering GSE analyst" Josh Rosner, recoiled when they learned of the CAP plan. From the Huffington Post:
"This whole cooperative idea, handing the banks the keys to the kingdom to become the new GSEs, that's just a terrible plan," says Joshua Rosner..."Why create a new class of too-big-to-fail GSEs? The banks have wanted to be the GSEs forever, and now they think they've finally got their chance."
The report contains other serious distortions. It implies that this sort of scheme is necessary to preserve thirty-year mortgages. But we had a robust thirty year mortgage market ex Fannie and Freddie before the crisis, namely, so-called "jumbo" or non-conforming mortgages. And the premium over Fannie and Freddie mortgages was not high, typically 25 to 40 basis points, which ironically is less than the 50 basis point premium over current Fannie and Freddie pricing set forth in the CAP document.
Skeptics will argue that the private mortgage market, ex Fannie and Freddie, is pretty much dead. That's correct, but the logic in having more heavily backstopped GSEs as the remedy is all wrong. The reason we have virtually no private securitization market right now is investors are on strike. And the reason they are still on the sidelines is the securitization industry has fought sensible pro-investor reforms tooth and nail. As we pointed out, the FDIC put forward a very well thought out plan a full year ago and presented it at the American Securitization Forum. The ASF, which represents the sell side (it pretends to represent the entire industry, including investors, but anyone close to the action knows better) has thrown its full weight against it as well as a weaker plan from the SEC. So the banks are engaged in a full bore effort to continue to suck as much blood as possible from the general public rather than clean up their act and suffer reduced profits and top brass bonuses.
Another major misrepresentation is that the alternative to this plan is to do nothing; the straw man is always to compare these proposals to shuttering the GSEs overnight. But there are other ways to get Fannie and Freddie out of the housing finance business, and some are remarkably straightforward.
For instance, we featured a vastly simpler plan here, one from John Hempton, which was later endorsed by Floyd Norris at the New York Times, and it's actually pro-market as well. Just raise Fannie and Freddie fees gradually over time. That will eventually result in mortgages being priced so that it makes sense for private parties to offer them. Hempton also pointed out (boldface ours):
Every proposal for the government to get out of Fannie and Freddie is in reality a proposal for the government to get out of only a bit of Fannie and Freddie.
For example: if you are a business that likes managing interest rate risk you want Fannie and Freddie out of the interest rate risk management business but you want them to stay in the credit risk management business. You would prefer the government take the risks that you don't want. And moreover you would prefer they took it at the lowest possible price.
The worst proposal out there (much worse than doing nothing) comes from Phil Swagel and Don Marron. They propose that the government exit the interest rate risk management business (the only business at Frannie that never lost money) and allow ten or so new competitive companies with government guarantees to compete with each other to sell government guarantee of credit risk. That means that credit risk (the risk that blew up the system) will be priced as close as possible to zero with the government wearing the downside. I can't see that Swagel and Marron learnt anything from the crisis.
Note that the plan the Center for American Progress recommends looks virtually identical to the plan Hempton deemed to be worst. Now that stance may look unprincipled, but it's a tad more complicated.
The banking industry has managed over time to get the affordable housing do-gooders into their camp. The problem, of course, is that providing housing subsidies that help the middle class actually doesn't directly help lower income people much and in fact arguably hurts them, since artificially cheap loans actually increase housing prices. In addition, they conveniently obscures the true cost, since the subsidy appears cheap (it's a mere guarantee) when in fact the bills come due in arrears, via the expenses of bailouts (first of the savings and loans, now of the GSEs).
And to the extent there are net plusses, it's inefficient to achieve housing goals by laundering money through the banking industry. It's tantamount to being in favor of having the mob run numbers rackets because it brings more funds into the neighborhood. And the banksters must be amused that they've gotten this crowd on their side on the cheap. They've no doubt respect them more if they insisted on being paid properly.
If we want to subsidize housing to advance social goals, the only sensible way to do that is through formal government programs with explicit goals, oversight, and accountability. And despite the bad name that overly aggressive and poorly thought out initiatives have garnered, we have had affordable housing programs that produced good outcomes at low cost. For instance, traditional FHA loans had low default rates because they had tough borrower screening and documentation requirements.
But we've learned what a bad idea it is to conduct housing policy by distorting the mortgage market, and separately saw what a bad idea it is to give the banking sector to place "heads I win, tails you lose" bets on the taxpayer dime. Yet a group that wraps itself in the mantle of representing public would have you believe that bankster-enriching failed ideas are just what the doctor ordered.
# # #
Yes...what we see and what we're told about our economy and our "recovery" is one thing. But, when you look more closely, more often than not these days, it morphs into something entirely different.
Everyone will be tuned into the Super Bowl this weekend...meanwhile, without any fanfare and nary a whimper--now that we're in a "recovery"--the stage for the Main Street-Wall Street endgame has just been set.