Fund Your Utopia Without Me.™

11 June 2011

There's Dumb And Then There's Krugman - II

ON UNEMPLOYMENT INSURANCE:

From "Macroeconomics" by Paul Krugman and Robin Wells is a/k/a Mrs. Paul Krugman

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect... In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker's incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of "Eurosclerosis," the persistent high unemployment that affects a number of European countries.

ON DEFICITS:





"Well, basically we have a world-class budget deficit not just as in absolute terms of course – it’s the biggest budget deficit in the history of the world – but it’s a budget deficit that as a share of GDP is right up there. It’s comparable to the worst we’ve ever seen in this country. It’s biggest than Argentina in 2001. Which is not cyclical, there’s only a little bit that’s because the economy is depressed. Mostly it’s because, fundamentally, the Government isn’t taking in enough money to pay for the programs and we have no strategy of dealing with it. So, if you take a look, the only thing that sustains the US right now is the fact that people say, ‘Well America’s a mature, advanced country and mature, advanced countries always, you know, get their financial house in order,’ but there’s not a hint that that’s on the political horizon, so I think we’re looking for a collapse of confidence some time in the not-too-distant future."

Got that? The federal budget deficit, at the time about 3.5% of GDP, represented a potential catastrophe. In 2010, the deficit was more than 9% of GDP.  Here he is June, 2010:
 
"Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Br├╝ning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic. But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity."

ON ENTITLEMENT REFORM:

From 1996:
"Generous benefits for the elderly are feasible as long as there are relatively few retirees compared with the number of taxpaying workers — which is the current situation, because the baby boomers swell the workforce. In 2010, however, the boomers will begin to retire. Every year thereafter, for the next quarter-century, several million 65-year-olds will leave the rolls of taxpayers and begin claiming their benefits.
The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension. Mr. Peterson, the chairman of the Blackstone Group, a private investment bank, informs us that ”the combined Federal cost of Social Security and Medicare, expressed as a share of workers’ taxable payroll, is officially projected to rise from the already burdensome 17 percent in 1995 to between 35 and 55 percent in 2040. And this figure does not include the many other costs — from nursing homes to civil service and military pensions — that are destined to grow along with the age wave.”

But aren’t Social Security and Medicare basically pension funds, in which workers’ contributions are invested to provide for their retirement? Hardly. A private pension fund that planned to pay the benefits these programs promise would be accumulating huge reserves. In fact, the so-called ”trust funds” are making barely any provisions for the future. In another spectacular statistic, Mr. Peterson notes that if Medicare and Social Security had to obey the same rules that apply to private pensions, the reported Federal deficit this year would be not its official $150 billion, but roughly $1.5 trillion.
In short, the Federal Government, however solid its finances may currently appear, is in fact living utterly beyond its means. While the present generation of retirees is doing very nicely, the promises that are being made to those now working cannot be honored.
What did the old Paul Krugman think of Peterson’s proposals to rein in costs and raise the age of eligibility for federal entitlements? He called them “sensible:”
Both Mr. Morris and Mr. Peterson offer plans to avert the crisis ahead. The details differ, and Mr. Peterson’s proposal is more completely fleshed out, but the general thrust is clear: slow the growth in benefit levels, gradually raise the retirement age, impose limits on expensive terminal medical care that prolongs life for only weeks or days and — last but not least — raise taxes moderately now, rather than massively later. We need not dwell on their sensible proposals, however, because there is not the slightest prospect that they will be put into effect — or indeed that we will do anything serious about the looming crisis until it is almost upon us.

07 June 2011

Fanniegate: Gamechanger For The GOP?

By: Walter Russell Mead 

Democrats, watch out.

The Republican Party and especially its Tea Party wing have just acquired a new weapon of mass destruction — and it has nothing to do with any of Congressman Wiener’s rogue body parts.  If they deploy this weapon effectively in the next election cycle — a big if — then they have the biggest opportunity to move the country rightward since Ronald Reagan took the oath of office back in 1981.

The Tea Party WMD stockpile is currently stored in book form:  Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. By Gretchen Morgenson, one of America’s best business journalists who is currently at The New York Times, and noted financial analyst Joshua Rosner, Reckless Endangerment gives the best available account of how the growing chaos in the mortgage and personal finance markets and the rampant bundling of dubious loans into exotically toxic securities plunged the world, and millions of American families, into the gravest financial crisis since World War Two. It is gripping reading as well, and its explanations are clear enough that readers without any background in finance will have no trouble following the plot.  The villains?  An unholy alliance between Wall Street, the Democratic establishment, community organizing groups like ACORN and La Raza, and politicians like Barney Frank, Nancy Pelosi and Henry Cisneros.  (Frank got a cushy job for a lover, Pelosi got a job and layoff protection for a son, Cisneros apparently got a license to mint money bilking Mexican-Americans of their life savings in cheesy housing developments.)

Massachusetts Congressman Barney Frank (Source: Wikimedia Commons)
If the GOP can make this narrative mainstream, and put this picture into the heads of voters nationwide, the Democrats are toast.  The party will have to reinvent itself (or as often happens in American politics, be rescued by equally stupid Republican missteps) before it can flourish.

If Morgenstern and Rosner are to be believed, the American dream didn’t die of old age; it was murdered and most of the fingerprints on the corpse come from Democratic insiders.  Democratic power brokers stoked the housing bubble and turned a blind eye to the increasingly rampant corruption and incompetence at Fannie Mae and the associated predatory lenders who sheltered under its umbrella; core Democratic ideas may well be at fault.

This is catnip to Republicans, arsenic to Dems.  If Morgenson and Rosner are right, there is someone the American people can blame for our current economic woes and it is exactly the cast of characters that a lot of Americans love to hate.  Big government, affirmative action and influence peddling among Democratic insiders came within inches of smashing the US economy.

The Morgenson/Rosner story is a simple and easily grasped one. It is made for campaign ads.  The Great Villain, the man who almost ruined America according to the book, is James Johnson, long one of the most important members of the Democratic establishment.  He ran Walter Mondale’s campaign.  He chaired John Kerry’s search for a vice-president — the brilliantly executed search that chose the revered anti-poverty warrior John Edwards.

Barack Obama, impressed by this track record of discernment, reportedly asked him to lead Obama’s search in 2008 — though Johnson withdrew when word got out that he benefited from the disgraced and disgusting Angelo Mozilo’s corrupt program of ‘special’ mortgages for political friends.  (Mozilo was the head of Countrywide, a massively fraudulent and predatory lender which benefited hugely from its business connections with Fannie Mae.)  He is a director of the much hated Goldman Sachs, a former director of Lehman Brothers, has chaired the board of the Brookings Institution, is a major Democratic Party fundraiser who bundled several hundred thousand dollars for President Obama, helped bring old Clinton friends into the Obama organization, and has been at the center of Democratic finance and politics for a generation.

Named CEO of Fannie Mae (a government backed mortgage corporation) Johnson decided to make untold wealth by making and securitizing junk housing loans and by massaging the financial reports to ensure that he qualified for the obscenely generous maximum bonus no matter what was actually happening to the company under his care.

Fannie Mae, a historically staid and predictable government linked company, needed to turn into a cutting edge speculative growth engine to make the hundreds of millions Johnson wanted.  Since taxpayers stand behind Fannie Mae’s debts, Johnson needed to get the politicians to back his desire to turn this milkwagon into a Porsche.  Fortunately for him — and unfortunately for the country and the world — he found a way.

Fannie Mae would adopt the goal of increasing the percentage of Americans who owned their own homes, targeting the inner city poor who, allegedly, were blocked from home ownership by racial discrimination.  (A bogus study to this effect was widely circulated; devastating criticisms and rebuttals quietly ignored.) This is where such luminaries of the American political scene as ACORN and La Raza get into the act.  They served as cheerleaders for Johnson’s self-enrichment plan, camouflaging a Wall Street rip-off by hymning its benefits for the poor.

The purpose of no doc, no money down loans wasn’t, Heaven forbid, to generate rich fees and high interest rates for mortgage brokers and Wall Street.  No, the smarmy defenders of the Great American Rip-off told us, those features were necessary to make sure that poor people (so cruelly, unfairly locked out of mortgages because they didn’t qualify for the stuffy old-fashioned kind) could participate in the American Dream.  Anybody who opposed Jim Johnson’s get rich scheme was a racist who hated the poor.  Political correctness married Wall Street chicanery as Maxine Waters, Chris Dodd and Barney Frank led the band; crooked accountants and clueless rating agencies performed the ceremony; big government dowered the couple with a debt guarantee and bankers dressed as flower girls showered the happy pair in a confetti of junk mortgages and junk bonds.

Fannie Mae and the housing market were off to the races — and where Fannie Mae led the way, the financial markets followed.  Regulators were captured by the interests they were supposed to regulate; favors were dispensed with a lavish hand; taxpayer-provided money was used to assemble a vast lobby focused on extracting more money from hapless taxpayers to make James Johnson even richer. In the process, millions of financially unsophisticated low income people were stuck with obscenely unfair mortgages, honest whistle blowers were subjected to savage personal attacks, home prices lost all touch with reality, taxpayers were stuck with losses that may approach one trillion dollars, and financial markets were poisoned almost beyond repair.

House in Foreclosure, 2008 (Source: Wikimedia Commons)
But there’s a bright side.  Mondale-Kerry-Obama confidant Johnson made a boatload of money, and Fannie Mae was able to pay many of his personal bills — at least until it went broke.

That at least is the story of Reckless Endangerment.  No doubt Johnson’s memoirs will tell the story in a different way.  The housing bubble and the financial market meltdown were very complex phenomena, many cooks were required to spoil this broth and the arguments over what caused the crash may never end.

Truth is one thing; politics is another.  Politically, this story is a killer app for the GOP.  It demonizes Dems, lends itself to attack ads, divides Democrats between their Wall Street and union bases, and combines GOP hate figures in ways calculated to unify the GOP and heighten the intensity of the faithful.

The story illustrates everything the Tea Party thinks about the corrupt Washington establishment and the evils of big government.  It demonstrates the limits on the ability of government programs to help the poor.  It converts a complicated economic story into a simple morality play — with Dems as the villain.  It allows Republicans to capitalize on public fury at the country’s economic problems.  It links the Democrats to Wall Street — the one part of the private sector that the Republican base loathes.  It exposes that mix of incompetence and arrogance that is the hallmark of the modern American liberal establishment and links this condescending cluelessness to the real problems of real American families.  It links President Obama (through appointments, associations and friendships) with the worst elements of the Clinton legacy and it blunts some key Democratic talking points.

The story can also be a devastating wedge issue.  The Democratic Party today is a fragile coalition of elite liberals, traditionally Democratic ethnic blue collar whites, African Americans and Hispanics.  The Fannie Mae story is essentially a story of how liberal Wall Streeters raped every one else — and how the organized leadership of the other groups colluded in the attack. 

Hammering this picture home will demoralize and divide the Democratic Party, reducing enthusiasm among minorities and pulling swing white ethnic votes toward the GOP.

The story builds GOP unity even as it divides the Democrats, allowing GOP populists and establishment figures to find some common ground.  For one thing, it builds the idea that Wall Street is a liberal Democratic institution rather than a conservative Republican one.  In fact, Wall Street is in love with power and cuts deals with whoever can make them, but for years Democrats have prospered by making running on Franklin D. Roosevelt’s platform against ‘the malefactors of great wealth’.  There are many powerful Wall Street figures who are closely linked to the Democrats, however, and the James Johnson story puts a face on that alliance.  Socially and culturally, most of Wall Street stands closer to the Democratic establishment than to the Republican Party these days; linking the Democrats to Wall Street, teacher unions and race hustlers is an easy and compelling way to push the Democrats closer to the cliff even as it allows GOP candidates to lace their speeches with populist anti-Wall Street rhetoric without embracing anti-business policy.

The story doesn’t just attack a failure of Democratic policy execution; it exposes a key flaw in New Democratic thinking.  The Third Way as dreamed up by Bill Clinton and Tony Blair sought to harness the power of financial markets to a public service agenda.  Old style command and control liberalism believed in directly mandating business to do what politicians thought should be done.  AT&T had to serve rural communities, but in exchange it had a phone monopoly and regulators made sure that it made a good profit.  The airlines and bus companies had to service unprofitable routes, but regulators made sure that their route networks as a whole were profitable.

As competition became more global and the inflexible regulations of the old liberalism proved less workable, a new and updated liberalism appeared.  Instead of old fashioned mandates, liberals would use new approaches that capitalized on the power of the market.  Use cap and trade schemes rather than command and control to control carbon through the market — and by creating an international market that will make money for financial firms.  Tweak the mortgage regulations to spread home ownership to the poor.  Both Britain and the US are looking at fun new ideas like ‘infrastructure banks’ that can fund projects that liberals like without putting large new debts on the public accounts.  Private profits can grow even as the public interest is served: this was the Clinton-Blair dream that was billed as liberalism’s response to the Thatcher revolution.  Additionally, liberal politicians like Al Gore and James Johnson were well placed to capitalize on the new arrangements.  Bill Clinton and Tony Blair have both become much wealthier after leaving office than old style liberals like Harry Truman ever could.

The story also undercuts what little is left of the credibility and the moral authority of the American establishment.  What is especially shocking in this story is that the higher up and more powerful people are usually the most venal and corrupt.  Low level researchers and bureaucrats are constantly raising questions and preparing devastating reports that expose the flawed premises behind Fannie Mae’s policies.  They are being constantly slapped down by the well connected and the well paid.  The American establishment does not have the necessary moral strength and intellectual acuity to run the affairs of this country; Tea Party believers will find much in this book that confirms their worst fears.

Republicans of course have a few financial scandals of their own that Democrats can take out and rattle.  But because Fanniegate offers a clear storyline, identifiable villains linked to specific disasters that have hit tens of millions of Americans in the pocketbook, and is overwhelming a story of Democratic abuses of Democratic ideas, it is potentially a game changing event.  It is also an issue that a GOP candidate for the nomination can use to break away from the field; it is an issue a contender could ride all the way to the White House.

Paul Krugman once told me that he thought that Enron would have a greater impact on American politics than 9/11.  He was wrong about that scandal, but if the GOP plays its cards right, Fanniegate could push this country into a new political era.


- WALTER RUSSELL MEAD, Editor-at-Large of The American Interest magasine, Progressive, Yale University Professor, recognised as one of the leading authorities on American foreign policy, writes for several journals, magazines and newspapers such as Foreign Affairs, The New Yorker, The Washington Post, and The Wall Street Journal, registered Democrat, and Barack Obama voter and supporter, 7 June 2011