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Revisiting a Fed Waltz With A.I.G.

Gretchen Morgenson, New York Times
A ray of sunlight broke through the Washington fog last week when Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, published his office’s report on the government bailout last year of the American International Group.

It’s must reading for any taxpayer hoping to understand why the $182 billion “rescue” of what was once the world’s largest insurer still ranks as the most troubling episode of the financial disaster. And it couldn’t have come at a more pivotal moment.

Many in Washington want to give more regulatory power to the Federal Reserve Board, the banking regulator that orchestrated the A.I.G. bailout. Through this prism, the actions taken in the deal by Treasury Secretary Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time, grow curiouser and curiouser.

Of special note in the report: the Fed failed to develop a workable rescue plan when A.I.G., swamped by demands that it pay off huge insurance contracts that it couldn’t make good on as the economy tanked, began to sink. The report takes the Fed to task as refusing to use its power and prestige to wrestle concessions from A.I.G.’s big, sophisticated and well-heeled trading partners when the government itself had to pay off the contracts…
(21 Nov 2009)

Elizabeth Warren Warns: Taxpayers Are “Involuntary Investors” in “Shaky” Banks, Risk-Taking Firms

Art Levine, truthout
As financial reforms face new delays in Congress, the chair of the Congressional oversight panel on the TARP program, Elizabeth Warren, told Truthout Tuesday that the nation’s financial institutions still pose major risks for taxpayers – and the economy.

She declared, “The rules that got us into this financial crisis have not yet been changed.” Meanwhile, she said, “The too-big-to-fail institutions are bigger, the banking industry is more concentrated and the toxic assets remain on the books of the banks. Worse yet, the implicit government guarantee that let big companies take on high risks, then keep all the rewards if they succeed and get taxpayer bailouts when they failed, are even stronger than they were a year ago.”

She added, “In other words, we are now operating under a set of rules that have proven to be disastrous, but we have not changed them.”

She also noted the risks to taxpayers who have bailed out banks that are still holding on to so-called toxic subprime mortgages and are using government funds to help offset those losses. “Basically, the American taxpayer becomes an involuntary investor in shaky banks because they hold onto taxpayer dollars rather than make loans,” she noted…
(25 Nov 2009)

New Study Shows Ten States Face Fiscal Crisis

Stephen Lendman, uruknet
The Pew Center on the States (PCS) “works to advance state policies that serve the public interest,” through “credible research (to) advance nonpartisan, pragmatic solutions for pressing problems affecting Americans.” Its new report titled, “Beyond California: States in Fiscal Peril,” says the following:

“Many economists are optimistic that America’s Great Recession may be turning the corner. States, however, are not celebrating. Plagued by record-setting revenue losses, the housing bust and credit crisis, high unemployment and a host of other challenges, (they’ve) struggled through nearly two years of budgetary pain – and are bracing for more.”

California is worst off, but hardly alone. Others include Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. Pew’s Managing Director on the States, Susan Urahn, says:

“America’s economic recovery and prosperity hinge in key ways on how quickly and to what degree states emerge from the Great Recession.” For many, their “fiscal health hangs in the balance.”

Economic, money-management, and political factors “pushed California to the brink of insolvency,” but other states face the same pressures. As a result, their residents can expect higher taxes, more layoffs, reduced social services, longer waits for them, over-crowded classrooms, fewer teachers, higher tuitions, and less help for the unemployed and most needy…
(25 Nov 2009)

Chinese Banks In The Tank

Gordon G. Chang,
On Nov. 23, the China Banking Regulatory Commission, Beijing’s bank regulator, ordered Chinese lenders to formulate long-term fundraising plans. Those banks with “relatively low” capital adequacy ratios and without “practical” plans would face restrictions on further growth relating to market entry, outbound investment, new branches and “business expansion.”

Chinese investors were rattled. On the following day, the Shanghai Composite Index plunged 3.45% on record turnover. Shares of the four largest Mainland banks listed in Hong Kong were down as well. Bank of China fell about 4%.

Bank of China, one of the so-called Big Four banks, increased its loan book 44% in the 12 months ending September. That’s astounding, but that bank, in fact, was a laggard. In the first nine months of this year, the country’s banks extended $1.27 trillion in loans, more than double the lending during the same period last year.

Chinese banks have gone on an unprecedented spree on orders from Beijing. Last November, the State Council, the central government’s cabinet, announced its $586 billion stimulus program. At the time, the government said it would loosen credit. Beijing kept that promise…
(27 Nov 2009)

A world awash in debt

Kevin Carmichael, Globe and Mail
For 220 years, through civil upheaval, global conflict and a depression, the United States largely kept its public debt under control.

But the world’s largest economy may finally have met its match. In its bid to prevent the Great Recession from spiralling into a global depression, the U.S. government spent tens of billions rescuing financial institutions and automotive companies. In the process, the federal budget deficitswelled 220 per cent from 2008 to a record $1.6-trillion (U.S.).

The world’s biggest economy has plenty of company: Seven of the members of the Group of 20 nations are on a trajectory that will leave them with debts bigger than 75 per cent of their economies by 2014, according to the International Monetary Fund.

It’s hard to understate the fiscal cost of the financial crisis, which continues to send shock waves around the world. This week’s move by Dubai World, a state-owned conglomerate that fuelled the United Arab Emirates’ rapid growth, to withhold debt payments shows the financial crisis continues to put government finances at risk.

Even in Canada, a relative paragon of fiscal prudence, the combined gross debt of the federal and provincial governments is on pace to reach 79 per cent of gross domestic product next year, compared with 64 per cent in 2007.

The numbers are staggering. But as the dust settles from the financial meltdown, policy makers are slowly coming to grips with the fact that a long battle with deficits and debt is only beginning…
(2 Dec 2009)

How Free-Market Delusions Destroyed the Economy

Raj Patel, alternet
The following is an excerpt from Raj Patel’s new book, The Value of Nothing (Picador, 2010).

If war is God’s way of teaching Americans geography, recession is His way of teaching everyone a little economics. The great unwinding of the financial sector showed that the smartest mathematical minds on the planet, backed by some of the deepest pockets, had not built a sleek engine of permanent prosperity but a clown car of trades, swaps and double dares that, inevitably, fell to bits. The recession has not come from a deficit of economic knowledge, but from too much of a particular kind, a surfeit of the spirit of capitalism. The dazzle of free markets has blinded us to other ways of seeing the world. As Oscar Wilde wrote over a century ago: “Nowadays people know the price of everything and the value of nothing.” Prices have revealed themselves as fickle guides: The 2008 financial collapse came in the same year as crises in food and oil, and yet we seem unable to see or value our world except through the faulty prism of markets.

One thing is clear: The thinking that got us into this mess is unlikely to rescue us. It might come as some consolation to know that even some of the most respected minds have been forced to puzzle over their faulty assumptions. Perhaps the most pained admission of ignorance happened in a crowded room in front of the House Committee on Oversight and Government Reform when, on October 23, 2008, Alan Greenspan described the failure of his worldview.

Greenspan was one of the acknowledged legislators of the world’s economy over the past nineteen years in his role as chairman of the Federal Reserve. A card-carrying member of the free market brigade, he used to sit at the feet of Ayn Rand who, although largely unknown outside the United States, remains influential long after her death in 1982. Her 1957 book Atlas Shrugged, in which heroic business moguls fight the scourge of government officials and union organizers, has once again scaled the bestseller lists. Regarding altruism as “moral cannibalism,” Rand was the cheerleader for an extreme free market libertarian school of thought, which she called “Objectivism.”

Drawn into her circle by this heady philosophy, Greenspan earned himself the nickname “the Undertaker” for his jolly demeanor and dress sense. When Greenspan chose a career in government, it was rather like a hippie joining the marines, a lapse that his former friends could never forgive. Despite this, Greenspan remained largely faithful to Rand’s philosophy, continuing to believe that egoism would lead to the best of all possible worlds, and that any form of restraint would result in disaster…
(30 Nov 2009)