Beyond the AIG Bonuses
Thursday, March 19, 2009
SARAH ANDERSON, saraha@igc.org
Anderson is director of the Global Economy Project at the Institute for Policy Studies, which just released the report “Beyond the AIG Bonuses: The Taxpayer Subsidies for Executive Excess That Haven’t Yet Hit the Headlines”
http://www.ips-dc.org/reports/#1168 .
Her past pieces include “Executive Pay and the Stimulus Bill,” “The CEO Pay Debate: Myths v Facts” and “Pay-Cap Populism;” see:
http://www.ips-dc.org/staff/sarah .
From: Institute for Public Accuracy
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The Fed Did It, and Greenspan Should Admit It
Mises Daily by Frank Shostak 3/19/2009
In his Wall Street Journal article from March 11, 2009, former Fed chairman Alan Greenspan rejects the idea that the Fed’s low-interest-rate policy between December 2000 and June 2004 fueled the housing bubble, which in turn laid the foundation for the current economic crisis.
(The federal funds rate was lowered from 6.5% in December 2000 to 1% by June 2003. It was kept at 1% until June 2004 when the rate was raised by 0.25%.)
Greenspan holds that what matters for the housing market is long-term and not short-term interest rates. The Fed, however, doesn’t control long-term rates, argues the former Fed chairman.
According to Greenspan, the decline in long-term rates and mortgage rates took place while the Fed had been tightening its interest-rate stance. The federal-funds-rate target was raised from 1% in June 2004 to 4.25% in December 2005.
Yet in June 2005 the yield on the 10-year Treasury note fell to 3.92% from 4.58% in June 2004. The 30-year fixed-mortgage rate closed at 5.58% in June 2005 against 6.29% in June 2004.
How in the world, asks Greenspan, can the Fed be blamed for the housing bubble and the current economic crisis?
Who, then, is to blame for this fall in long-term interest rates and for the present economic crisis?
According to Greenspan, the culprit is the savings glut from emerging economies, such as China. This glut of savings was channeled to long-term US Treasuries and other US financial assets thereby depressing their yields, argues the former Fed chairman.
Ben Bernanke concurs. In his speech at the Council on Foreign Relations on March 10, 2009 he said,
Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows…
What Greenspan and Bernanke call “savings” is nothing more than the amount of US dollars that emerging economies accumulated.
The accumulation of these dollars by emerging economies cannot increase the pool of dollars. The accumulated dollars are part of the existing pool of US money.
When a Chinese exporter sells goods to an American importer, he is paid with dollars. This means that the ownership of dollars is changed here, not their quantity.
With all other things being equal, a sustained decline in long-term yields requires an increase in the pool of dollars. The increase in the pool of dollars means that more American dollars will be employed as the medium of exchange. As a result, the prices of goods and assets move higher, while yields on assets are pushed lower.
However, if the accumulated dollars of emerging economies are only invested in US Treasuries, then it is tempting to suggest that a sustained fall in long-term rates without an expansion in the pool of dollars is possible.
We suggest that this is highly unlikely. If the pool of dollars remains unchanged while the quantity of goods and assets continues to expand, then this will lead to the fall in the average price. (Remember, a price is the number of dollars per unit of a good or asset.)
This means that explicit and implicit yields will come under upward pressure. (As a result, investors from emerging markets are likely to shift their funds from less-yielding Treasuries to a higher-yielding asset if the pool of dollars remains fixed, thus pushing yields on Treasuries higher.)
It is only the monetary policy of the Fed — and not the accumulation of dollars by emerging economies — that can set in motion changes in the pool of dollars. Hence, the fall in long-term interest rates and mortgage rates has to be the result of the Fed’s loose monetary stance.
If what we are saying is valid, then how are we to reconcile the fact that in 2005 long-term rates had been falling while the Fed was tightening its stance?
Historically, the 30-year fixed-mortgage rate and the federal funds rate have had a tendency to display a very good visual correlation. This doesn’t mean that the correlation is perfect — a discrepancy in the movements between the federal funds rate and long-term rates can occur.
The emergence of a discrepancy doesn’t imply that suddenly the Fed’s policies have nothing to do with the housing bubble or boom-bust cycles.
(Recall that, because of a discrepancy during June 2004 and June 2005 between the federal funds rate and long-term rates, Greenspan has concluded that his loose monetary policy between December 2000 and June 2004 had nothing to do with the housing bubble.)
Various discrepancies between the movement in the federal funds rate and the mortgage rate are the result of a variable time-lag effect from changes in monetary policy on various markets.
Because of the variable time lag, a situation can emerge where long-term rates may ease despite the central bank’s tighter interest-rate stance.
Despite a tighter-interest-rate stance, the previous loose-interest-rate stance may still dominate economic activity. Consequently, in order to maintain a given interest-rate target in the midst of still strong economic activity, the Fed may be forced to push more money into the economy to prevent the federal funds rate from overshooting the target. (For instance, an increase in the federal funds rate from 1% to 2% is a tighter stance, yet the 2% rate can still be too low — strong economic activity pushes the federal funds rate above the target.)
As a result, more money becomes available for financial markets, which puts downward pressure on long-term rates, all other things being equal.
In November 2004, the yearly rate of growth of the Fed’s balance sheet jumped to 6.9% from 4.3% in June 2004. Note that this increase in the pace of monetary pumping took place while the federal-funds-rate target was lifted from 1% in June to 2% in November.
Also note that between December 2004 and June 2005 the average yearly rate of growth of Fed assets stood at a still-elevated 6%.
Contrary to Greenspan and other commentators, we suggest that what sets in motion a boom-bust cycle is not a boom in a particular market such as the housing market but the increase in money supply out of “thin air.”
Now let us say that the dollars accumulated by emerging economies were to be invested solely in Treasuries. while this might push long-term interest rates temporarily lower, all other things being equal, it is not going to set in motion a boom-bust cycle as long as the pool of US dollars remains unchanged.
If, as a result of lower interest rates, too many dollars are invested in the housing market, it means that fewer dollars are invested in other goods. As a result, the housing market will become overvalued while other goods will become undervalued. This will set in motion an outflow of money from the housing market to other markets.
In our writings we have shown that the main source of boom-bust cycles is the Fed itself. Thus, by aggressively lowering interest rates between December 2000 and June 2004 — and accompanying this with monetary pumping — the Fed set in motion an economic boom.
The boom gave rise to various nonproductive (bubble) activities that emerged on the back of the loose monetary stance of the Fed. The increase in money supply led to the diversion of real funding from wealth-generating activities toward various nonproductive activities.
(Note that these activities cannot stand on their own — they cannot fund themselves. They are funded by diverting — by means of new money created “out of thin air” — real savings from wealth-generating activities.)
From June 2004 through September 2007, the Fed adopted a tighter stance, which slowed the diversion of real funding to nonproductive activities.
As a result of this, various nonproductive activities came under pressure. (Without real funding, these activities are forced to go under.)
Now, when money is injected, it doesn’t instantly affect all the activities in an economy. The money starts with the first recipients and then moves to other recipients. It moves from one market to another market — there is a time lag.
This means that various nonproductive (bubble) activities are spread across all the markets — the boom is everywhere. Once the Fed tightens its stance it starts a bust, and this weakens various nonproductive activities across all the markets. The severity of the bust is dictated by the size of the boom.
(The percentage of nonproductive activities — the product of the boom — determines the severity of an economic bust in a particular sector of the economy.)
It follows, then, that a bubble in a particular market cannot emerge without the preceding increases in money supply. This in turn means that a bubble cannot emerge without a preceding loosening of monetary policy, which means it cannot occur without money pumping by the Fed. Hence, what matters for the economic boom, i.e., the emergence of bubbles, is the creation of money “out of thin air” and not the level of long-term interest rates.
Contrary to Greenspan, we can conclude that it is not long-term rates as such that fueled the bubble but the loose monetary policy of the Fed.
We can also conclude that the so-called savings glut in emerging economies had nothing to do with the last economic boom or the current economic crisis.
The only institution that can set in motion the expansion of money and a false boom is the Fed.
Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global
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TRAC Challenges Government Privacy Claim
Monday, March 16, 2009
As part of its ongoing efforts to obtain information on the workings of the U.S. Federal Government, TRAC has asked the Office of Personnel Management (OPM) to reverse its decision withholding government organizational information on the grounds that the release would violate the privacy of individual employees.
TRAC’s appeal to OPM concerned a February 23 ruling by Gary A. Lukowski, the manager of OPM’s Workforce Information and Planning Group, that contended the release of the requested information about how an agency is organized into units and subunits “would constitute a clearly unwarranted invasion of personal privacy.”
In its appeal, TRAC said it was impossible for the requested structural information to invade personal privacy because “these records contain no information about any individual.” TRAC also noted that the OPM action directly contradicted President Obama’s January 21 Transparency and Open Government memorandum pledging his administration to “an unprecedented level of openness.”
For further details on this and other TRAC FOIA activities, go to:
David Burnham and Susan B. Long, co-directors
Transactional Records Access Clearinghouse
Syracuse University
Suite 360, Newhouse II
Syracuse, NY 13244-2100
315-443-3563
trac@syr.edu
http://trac.syr.edu
Transactional Records Access Clearinghouse
Embargoed for Monday, March 23, 2009 (6:30 PM EDT, Sunday, March 22, 2009)
Greetings. The IRS audit rate for millionaires plummeted in the just-ended fiscal year, according to agency data obtained and analyzed by the Transactional Records Access Clearinghouse (TRAC). The very sharp decline from FY 2007 to FY 2008 contrasts directly with a 2008 press release in which the IRS claimed it was making “strong progress in a number of key enforcement areas,” especially for “individuals with incomes of $1 million or more.”
In addition to the collapse in the audit rate of America’s millionaires, TRAC’s investigation found the agency’s earlier boast about its increased focus on the wealthy was, as the IRS now admits, untrue since it was based upon faulty agency records.
Today’s report is the first of several that TRAC intends to post about various IRS subjects in the next few months.
The report is available at
under embargo for Monday, March 23. Reporters desiring immediate access will require a user ID and password. For those needing more information send an email to trac@syr.edu or call 315-443-3563.
This report was developed with the support of Syracuse University, the Knight Foundation, the New York Times Company Foundation and others. It builds on TRAC’s investigation of the IRS that goes back more than two decades.
David Burnham and Susan B. Long, co-directors
Transactional Records Access Clearinghouse
Syracuse University
Suite 360, Newhouse II
Syracuse, NY 13244-2100
315-443-3563
trac@syr.edu
http://trac.syr.edu
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Marketplace Op-Ed: Wall Street rescue plan needs rescuing
NPR
http://tinyurl.com/c489m3 (marketplace.publicradio.org)
Robert Reich
Former Labor Secretary ROBERT REICH TEACHES PUBLIC POLICY AT THE UNIVERSITY OF CALIFORNIA AT BERKELEY.
March 18, 2009
…The real scandal of AIG, recipient of $170 billion taxpayer dollars so far, isn’t just that the firm plans to give giant bonuses to its executives. It’s that even though the public now owns 80 percent of AIG, Tim Geithner, the Treasury Secretary, didn’t even know of this bonus plan until last week, and seems helpless to stop it. Despite the fact that the plan runs directly counter to administration promises that taxpayer money will no longer be used for Wall Street bonuses.
We’ve also learned that much of the $170 billion has been used by AIG to pay off counter-parties such as Goldman Sachs, that up until now has claimed it did not receive any bailout money. In fact, the original plan to bail out AIG was concocted at a meeting last fall, run by former Treasury Secretary Hank Paulson, who had been a former CEO of Goldman Sachs — along with the current CEO of Goldman Sachs, and the then head of the New York Fed, our current Treasury Secretary, Tim Geithner….
The Wall Street bailout is starting to look like the most expensive tax-supported fiasco in history, and yet it’s close to the center of the president’s economic recovery program. The public was willing to go along with a large stimulus package, but it won’t go along with a second stimulus, and certainly not another bank bailout….
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Firms Still See Contraction in Manufacturing – Philadelphia Fed
Thursday, March 19, 2009
The following information is now available on the Philadelphia Fed’s website:
Firms Still See Contraction in Manufacturing
March 19, 2009 — The region’s manufacturing sector continued to contract this month, according to firms polled for the March Business Outlook Survey. The survey’s general activity index edged up to -35.0 from -41.3 in February. In the special questions, firms were asked to give their production estimates for the second quarter of this year.
http://tinyurl.com/c8bfcw (www.philadelphiafed.org
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#9 of 10 Reasons Why Conservatives’ Fiscal Ideas Are Dangerous
By Sara Robinson, Campaign for America’s Future. Posted February 27, 2009.
It would almost be funny if their ideas about spending didn’t lead us into the deepest financial catastrophe in nearly a century.
Yes, it’s true. The conservatives — that’s right, the very same folks who just dragged us along on an eight-year drunken binge during which they borrowed-and-spent us into the deepest financial catastrophe in nearly a century — are now standing there, faces full of moral rectitude, fingers pointing and shaking in our faces, righteously lecturing the rest of us on the topic of “fiscal responsibility.”
I didn’t think it was possible. I mean, they were mean enough drunk — but hung over, in the clear light of morning, it turns out they’re even worse.
I know. The choice is hard. Laugh? Cry? Scream? All three at once? It would almost be funny, if it weren’t such clear evidence of a complete break with objective reality — and their ideas of what that “fiscal responsibility” means weren’t so dangerous to the future of the country.
The next episode in this surreal moral drama is set to take place next Monday, when President Obama will convene a “fiscal responsibility summit” at the White House to discuss the right’s bright new idea for getting us out of this hole: let’s just dismantle Social Security and Medicare.
As usual, this proposal is encrusted with a thick layer of diversions, misconceptions, factual errors and out-and-out lies. Here are some of the most pungent ones, along with the facts you need to fire back.
9. But this Peterson guy’s a billionaire Wall Streeter. Obviously, he knows something about finance…
Let’s punt this one to William Greider:
Peterson, who made his fortune on Wall Street, never raised a word about the dangers of hyper leveraged finance houses gambling other people’s money. He never expressed qualms about the leveraged buyout artists who were using debt finance to rip apart companies. He didn’t fund an all out effort to stop Bush from raiding the Social Security surplus to pay for tax cuts for the rich.
But now he wants folks headed into retirement who have already prepaid a surplus of $2.5 trillion to cover their Social Security retirements to take a cut and to work a few years longer to cover the money squandered on bailing out banks, wars of choice abroad, and tax cuts for the few.
Basically, we’re only having this conversation in the first place because a conservative ideologue was willing to pony up $1 billion of his own money to fund a “foundation” devoted to killing Social Security. Given that most politicians — both Democrat and Republican — are extremely unwilling to touch the notorious “third rail of politics,” it’s pretty clear that next Monday’s “fiscal responsibility summit” wouldn’t even be happening if Peterson wasn’t bankrolling the Beltway buzz on this terrible idea.
…
Complete article at:
http://www.alternet.org/workplace/128900/
Sara Robinson is a Fellow at the Campaign for America’s Future, and a consulting partner with the Cognitive Policy Works in Seattle. One of the few trained social futurists in North America, she has blogged on authoritarian and extremist movements at Orcinus since 2006, and is a founding member of Group News Blog.
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Limbaugh defends AIG from “lynch mob”
In recent days, Rush Limbaugh has defended AIG from a “lynch mob … demanding heads” over the company’s controversial employee retention bonuses.
Read More
http://mediamatters.org/items/200903180001?lid=946602&rid=23307231
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Jefferson’s Moose:
Post’s book is about Jefferson and about cyberspace. He’s been toiling to understand both for almost 15 years. The central story of the book was Jefferson’s bringing a stuffed moose to Paris, to show the Old World why their theories about nature in the New World were wrong. Words had failed to do the trick. But when one saw the seven foot tall moose in Jefferson’s entry way, one could not but recognize that theories about nature being “degenerate” in America were false.)
http://tinyurl.com/aj7mg8 (www.lessig.org)
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Borowitz Report – Bush Memoir Shocker
March 19, 2009
Cheney to Pen Bush’s Memoir
First Vice-President in History to Write President’s Book
One day after publisher Random House signed former President George W. Bush to write a presidential memoir entitled Decision Points, Mr. Bush announced that he had tapped former Vice President Dick Cheney to write the memoir for him.
“This book will detail the twelve greatest decisions I’ve made in my life,” Mr. Bush told reporters in Crawford, Texas today. “The thirteenth greatest decision was hiring Dick Cheney to write about the other twelve.”
By getting the nod, Mr. Cheney will become the first vice-president in history to write a president’s memoir for him.
Mr. Bush said he decided to seek a ghostwriter after realizing that he faced several obstacles to writing the book himself, such as learning to spell.
But according to sources close to the former president, Mr. Cheney was his second choice to write the memoir after Mr. Bush was turned down by his first choice, author James Frey.
Mr. Bush, who reportedly “likes the way he makes things up,” had asked Mr. Frey to pen the memoir under the title A Million Little Decision Points.
A spokesman for Dick Cheney said that he would finish writing the memoir in 2009 and would finish redacting it in 2010.
Upcoming Events
April 16, 2009 at 8:00PM
Andy at Hamilton College
For one night only, Andy performs in upstate NY, free and open to the public! At the Fillius Events Barn, Hamilton College, 198 College Hill RoadLocation:
Hamilton College, Clinton, NY 13323
For tickets go to Hamilton CollegeApril 30, 2009 at 8:00PM
Andy’s Only NY Show!
Andy reviews Obama’s first 100 days with special guests Hendrik Hertzberg (The New Yorker), Jonathan Alter (Newsweek, MSNBC) and comedian Judy GoldLocation:
The 92nd Street Y, Lexington and 92nd Street
For tickets go to 92y.org
http://www.borowitzreport.com/
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three thousand words
|
Phil Hands
Wisconsin State Journal Mar 19, 2009 |
Steve Benson: keep your eye out for space junk …
http://tinyurl.com/dn4oqx (www.azcentral.com)
Cameron Cardow: … but we laid off the delivery guy.
