Obama's Budget Banter Omission: The Banks Broke the Bank

Since the White House announced its 2012 budget, the requisite punditry stream has been breaking down its specific pluses and minuses. I could grab illustrative quotes from various places and people, or add to the analytical details, but for the most part, it boils down to something like this:

GOP and GOP supporters: Obama didn't make enough spending cuts, he's not taking this whole budget thing seriously. Oh, and about the cuts he did suggest with regard to corporate tax benefits, high-end mortgage-holder deductions and (his-own) extension of wealthy individual Bushian tax breaks - well, that's just plain anti-American and - will kill jobs. (The fact that corporations were contributing just 6.6% and 7.2% in 2009 and 2010, of the total federal tax receipts, a 50% drop relative to the rate before the financial crisis, or about $150 billion per year, isn't relevant in the scheme of things.) Now, where can we cut another $100 billion? 

DEMs and DEM supporters: Obama inherited a bum economy, bum budget and bum deficit from Bush. And, he's turning around the crap hand he was dealt, slowly.  That means he has to cut back on some important programs, but he's gonna champion a high-speed railway, electric cars (to drive along side the high-speed railway?), and clean energy initiatives, and those will most certainly put millions of people back to work. Yes, he appointed Tim Geithner, one of the lead bank bailout builders, whose Treasury department colluded with the Fed, under Ben Bernanke, the other guy Obama kept on deck to help the economy, to increase the amount of US Treasury debt to $9.4 trillion from $5.4 trillion since the financial system began inhaling subsidies in the fall of 2008, and went on to post record bonuses and profits. But, he had no choice.

The intent of the actual discourse kind of makes me imagine a burning building across the street, raging flames, engulfing smoke, crumbling over its foundation, and there are two people watching, one's a Democrat and one's a Republican. While the fire intensifies, they are arguing over whether it's better to use a thimble or a teaspoon of water as an extinguisher aid. Somewhere, off in the distance, is an engineer trying to figure out how to rebuild the building over its ashes.

The sad truth is that the budget deficit is a direct outcome of the economic policies that were adopted by both parties over the years. National debt nearly doubled under Bush, and continued to grow under Obama, while the financial system pillaged the country for trillions of dollars twice - first, during the leveraged build-up to the economic collapse, and then, via a stockpile of creative subsidization awards afterwards, the underlying debt build-up for which, lingers like a bad hangover.

Unless the real economy becomes healthier, more people are employed and we institute a far more progressive tax and distribution structure, there is simply no mathematical way, to balance this budget.

So, there is no silver bullet amount of spending cuts that is sufficient to balance it either, particularly as long as we are only looking at, and debating about, the spending side of the US balance sheet, and only a portion of the non-discretionary component, at that. Quibbling over whether Obama is cutting enough or not enough, is quibbling over the wrong question. Obama showcasing just the cuts as these 'hard choices' that will get us more towards balance, is meaningless. It is equally misleading for the GOP  to focus on a separate subset of potential spending cuts, and conclude that this extra $100 billion will do the trick. Making $1.1 trillion of cuts over ten years, all things equal, with a projected deficit per year that's higher than that, won't balance any budget, for any political party.

You know what would have been really cool?

If Obama had just said - you know what - the budget can't be balanced, deal with it. And you know why? Because over the past two years, the economy, that was trashed by the banking sector, still sucks. And, during the entirety of the Bush administration, while prepping the economy to suck, debt to pay for wars and tax cuts kept growing. And, when the banking system was facing the abyss, we opened our checkbooks, we stimulated the hell out of it, but we did it mostly through issuing Treasury debt and the magical Fed printing machines - so it doesn't show up in the budget that we're all debating, except for a couple hundred billion to Fannie and Freddie and what remains of the stellar TARP project. And you know what? I admit that was a stupid thing to do. It was stupid when it started under Bush, and it was stupid when it continued under me and the economic team I appointed to keep it going. The bailout binge increased our public debt by 50% under my reckless economic advisors, Treasury Secretary, the Federal Reserve. And, hell if other countries decide to dump Treasuries in bulk, and their interest rates rise, and Bernanke can't QE them down fast enough, our budget deficit will gap like the Grand Canyon. 

Meanwhile folks, we need revenue. Just like banks need profits to pay bonuses. And, that's something that can only be remedied through a healthier economy - not just for corporations, stock market investors and banks - that are sitting on $2 trillion in cash, with $1 trillion parked at the Fed  - but for the general population that still counts 26 million people under or unemployed, not to mention a historically high 48.9% unemployment rate for youth, rising food and basic needs costs, continued foreclosures on entire families, and health insurance rates that will double within the next three years. You know what, when this country needed revenue in the past, Republican presidents and congresses did the math. Now, it's my turn. Let the GOP explain exactly how a lower corporate tax contribution created more jobs in the past two years, and while they're trying to figure that out, I'm gonna show some real leadership, and do everything I can - not to balance the budget - but to balance our economy.

Oh well.

Break up the Megabanks: My take in the New York Times debate

Across the globe, we continue to feel the repercussions of negligent, reckless, and dangerous banking practices rewarded for screwing up so broadly and decisively. And it's far from over. Here in the US, the biggest banks are bigger, riskier, bloated with federal subsidies, and more of a threat to us than ever before. Thank you, Ben Bernanke, the Fed, Tim Geithner, Hank Paulson, the Treasury Department, Barack Obama, Larry Summers, George Bush, Jamie Dimon, Lloyd Blankfein, John Thain and all the other pillagers who took part in this national and international travesty. 

We aren't done with this crisis. It's just in remission given the epic stimulus the big banks received. We shouldn't have to wait for the other shoe to drop to pull a Glass-Steagall. 

Read the rest of my comment, along with those of Simon Johnson, William Black and others, in the New York Times Debate Forum.

Aren't Geithner and Bernanke eerily quiet about the Foreclosure Crisis?

Maybe I'm missing something, but it strikes me there's been a deafening silence emanating from Treasury Secretary, Tim Geithner, and Federal Reserve Chairman, Ben Bernanke, on the foreclosure front. It’s as if they a) don’t read the news or b) are afraid someone will notice their incompetence. While Senator Harry Reid, Nancy Pelosi and other Congress people are dispensing irate pre-election sound-bites, Attorney Generals across the country are gearing up for investigations and lawsuits, and banks are announcing foreclosure moratoriums because it’s quarterly earnings season and uncertainty is bad for stock prices, (plus they are afraid their REO customers (private equity funds, asset managers, etc) will fear future legal repercussions, so they’ll have nowhere to dump all the properties they can’t sell), Geithner spent last week defending TARP (again) and talking up the merits of global economic coordination and the dollar.  Meanwhile, the Fed is gearing up to buy more Treasuries (in addition to its $300 billion program) because no one else wants them, like some kind of alien that spawns offspring so it can eat its  own progeny.

Foreclosure fraud is not new, many sane people and organizations have been talking about it for years, plus you don’t manufacture $14 trillion worth of mortgage backed securities in all their permuted and over-leveraged glory out of $1.4 trillion worth of subprime loans in 5 years without cutting a lot of corners.  But the reason this situation is hairy for Geithner and Bernanke is that the government owns or is backing trillions of dollars worth of assets predicated on the same suspicious loans that were defaulting into the 2008 crisis period they did nothing to stop, while lavishing the banks that promulgated them with the biggest bailout and subsidization in US history.

The Fed owns nearly $1.5 trillion toxic assets that already have no bid (actual buyer), and will have less of a bid the more uncertainty there is about the loans that fill them. The Treasury is directly backing $400 billion of GSE securities, and is behind another $6.8 trillion of indirect backup to the GSE's. Both entities are desperately hoping the financial market doesn't seize up (yes the market, they don’t seem to be bothered about individuals and their homes), so they don't become the only bid again (well, actually still) behind any securitized asset. That would ruin their story – that the bailout worked even though it did absolutely nothing to help borrowers at the loan level, or by extension the general economy.