While the entire eastern seaboard was obsessed with Irene, Gretchen Morgenson wrote in the New York Times this weekend about the Federal Reserve efforts to save the financial sector during the Great Recession, at enormous cost to the taxpayers and little benefit to Main Street. Talk about burying the lede!
Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.
The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again. (emphasis added)
This is NOT the TARP money bailout that was publicly debated and ultimately Congressionally approved, but additional amounts of money that were lent by the Federal Reserve to large banks (including foreign banks) largely in secret and at minimal interest rates in order to make sure that these banks could meet their minimum liquidity requirements so as to avoid bankruptcy.
S&P is only one of the three big credit ratings agencies. The other two, Moody's and Fitch, did not downgrade US debt (though they did change their outlooks to "negative"). However, remember that the ratings agencies played a significant role in their overly optimistic ratings of structured debt securities which were instrumental in the 2008 crash. It's arguable that having been caught with their pants down, S&P is reacting rashly in the opposite direction, seeing danger where there is none. But ratings are as much a dart game as they are a science and have been called, among other things, "substandard and porous."
However, because of the interconnectedness of the US financial sector, the downgrade of US debt will have (and has had) direct follow-on effects: specifically, the downgrade today of the debt of Fannie and Freddie Mac, and of DTCC, the central depository for United States securities, all of which rely significantly on the US government.
Downgrades are significant because many "safe" investment vehicles (such as money market funds and low risk pension funds) have mandated investment rules, which may include, for example, a rule that such funds invest only in AAA rated securities. The downgrade of US debt (and subsequent downgrade of other US backed securities as well as the as-yet-unseen ancillary effects of the downgrade) may lead to massive sell-offs by these funds, fueled by nothing but their mandates.
Despite all of the above, IF investors are genuinely worried about default by the US government (which is what a downgrade signals), then the interest rate on 10-year Treasury bonds should be soaring (because the likelihood that the US government will continue to honor its debt in 10 years should have just deteriorated significantly). Instead, that interest rate has actually edged down today.
What happened today is generally being seen as a flight from securities to "safe havens" (which includes US Treasuries and gold, which broke all-time highs again today).
The fear is most likely driven by a renewed sense that the global economic outlook is bleak. Most are speculating that the continued deterioration of Eurozone sovereign debt is the main driver of this fear, but the botched debt deal (see below) and the S&P downgrade are likely contributing to an overall sense that a double dip is imminent.
There is definitely an element of psychological fear in today's market gyrations. Volatility, measured via the VIX (or fear index) was off the chart today.
Even if the main driver for the market gyrations these past few days lies squarely in Europe, the US government is far from blameless. There are real, grown-up ways to deal with the continued economic instability, and real steps that could have been taken to fortify our domestic economic situation while we brace for the inevitable from Europe. And yet, Congress has consistently shied away from taking such steps over the past 3+ years. One view, from the Economist:
[The US government's] prescription for a weak economy [through the debt deal] is a large slug of austerity. Thanks to the expiry of a payroll-tax credit and extended jobless benefits in December, the United States is on course for a fiscal contraction of some 2% of GDP next year, the biggest of any large economy—and enough to drag a weak economy into recession.
The debt deal, which implies only modest new spending cuts in the short term, is not directly responsible for this. But Congress could, and should, have stopped this potentially ruinous trajectory. There was a deal to be had: keep up spending in the short term, with a stress on much-needed infrastructure investment, as well as extending the temporary tax cuts, in exchange for a big medium-term reduction in the deficit, centred on entitlements and tax reform. Congress did precisely the opposite, failing to support the economy now and failing to find enough cuts over the next decade to stabilise America’s debt.
Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty. Now that the tea-partiers have used default successfully as a political weapon, it will surely be used again. The refusal to compromise, rapidly becoming a point of honour for both parties, is wreaking damage ... At best, the politicians will have slowed a sputtering expansion; at worst they will have killed off the recovery and inflicted lasting harm on the world’s most impressive prosperity machine. (emphasis added)
Kady is back from a self-imposed sabbatical and may be persuaded to occasionally pop back on her other blog.
Three months ago the Republicans opened debate on the FY2012 budget when Rep. Paul Ryan released The Path to Prosperity: Restoring America’s Promise. In that plan, he proposed a remaking of Medicaid that would eviscerate the program’s core purpose: provide health care to the most vulnerable.
Many labor under the misconception that Medicaid is health benefit open to any low-income American. In reality, states are only required to cover impoverished children (including those in foster care), pregnant women, some disabled persons, some adults with dependent children, and the elderly. In fact, more than 2/3 of Medicaid spending pays for services for the disabled and elderly; children consume about 1/5 of the total funds with the rest going to adults.
Childless adults, even those with incomes far below the poverty line are not automatically eligible for Medicaid. Nor are the parents of Medicaid-eligible children automatically eligible for coverage. For example, in Alabama, parents’ incomes cannot exceed 24% of the federal poverty line – less than $5000 a year for a family of three. Eleven other states all have income eligibility well below the FPL.
I'm not buying. If Karl Rove and his American Crossroads stealth-on-behalf-of-wealth PAC were a corporation, I'd boycott him. That's partly what I'm trying to do with my vote this November.
Foreign donations to sway American elections are illegal, and the Federal Election Commission has the jurisdiction to penalize groups that violate the law. I wish they'd do something about it now, while it can have an effect.
10-22-10, UPDATED TO ADD: From the NYT, plenty of U.S.-based companies donate to dismantle government regulations they don't like. This NYT investigative report says 45 of the most rapacious American corporations account for most of the Chambers' lobbying.
Clearly, what's at stake for corporations overseas is a piece of the American manufacturing pie that has been steadily offshored since the 1980s. Foreign nationals benefit when U.S. corporations move their operations to subcontractors in other countries, and those nations and corporations are willing to buy and pay for GOP candidates who will make policy that is good for business. Their business. Not the business of America and Americans.
If we're to have an economic recovery, I urge President Obama to highlight those corporations that put America first. I have 6 suggestions to this end:
Unabashed Elizabeth Warren fan here. Though I attended Netroots, I was busy when she spoke. Through the magic of Ustream, I watched and so can you. Her part is from 7:50 in, to 29:00. (The whole video is good, but who has an hour and 15 minutes to watch all of it?)
We desperately need her as the head of the newly-created Consumer Financial Protection Bureau. The sooner President Obama appoints her the head, the sooner you can understand all the terms of the mortgage, credit card, and bank loans you agreed to.
MamaBee wondered: Wearing my manager hat, I bristle at the
idea of government involvement in how I manage my employees. How can
government possibly understand the unique needs of my business and
workers? I’m all for legislating anti-discrimination and family policy —
equal pay; affordable, high-quality childcare; and paid family and sick leave,
for example. But I’m having a hard time getting my mind around how the
government can practically be involved with flexible work.
I wonder how we can continue without government intervention. I’ve no doubt that MamaBee is a terrific manager but that’s my point: she is one manager. For most U.S. employees, your work life balance, your ability to telecommute, to have
flextime or comp time, to have paid time off, or to job share, is only as good (or
bad) as your manager, your department head, your unit, and/or your company. Most of
us are one job reclassification, downsize, merger, acquisition, or reorganization
away from instantaneous disappearance of our work life policies.
Please accept my apologies for the rhetorical question.
As someone who worked at the Securities and Exchange Commission for several years, I already know the answer to that question is, "yes." Unfortunately, that mission has gone missing and seems to have been replaced by keeping Wall Street bankers afloat at the expense of those of us who were just trying to save for retirement and our kids' college educations.
When I worked there, first as an attorney in the Enforcement Division and then as Deputy Director of Public Affairs, I was excited about the work of the agency. There was a lot of personal satisfaction in knowing that we were trying to catch the "bad guys" who did their best to get rich on insider trading schemes, "cooking the books" or just outright lying to clients.
"All of the competing and often compelling arguments brought to bear on
these intractable social issues are steeped not in health care,
medicine, epidemiology, economics, practicality, or common sense.
Rather, they are broadcast to us across treacherous philosophical,
emotional and spiritual terrain that will never be amenable to
political compromise. And so, in short, the ideologues on both sides
of each issue pounced; the issue was squeezed altogether from The Plan
or flash-frozen in its current state of impasse (abortion being the
perfect example); and what we’ve ended up with is a health care
“reform” bill that re-paints all the old lines in the political
pavement and promises to reform almost nothing structural or profound
about health care in America."
For those of us who have worked on health care reform for a long time, the "incredible shrinking health care reform bill" is a disappointment. As I tell others, this bill (be it HR 3962 or HR 3590, and it will probably more closely resemble the latter) is the beginning. There will need to be tweaks and rewrites; just as other legislation needs to be reauthorized periodically to reflect new realities -- and outlays -- so too will health care reform.
The White House Press releases have stacked up to a guilt-inducing and slightly concerning level in my inbox, so I decided to take the most recent (and to me, highest priority) and do a quick list-like rundown in one post to (a) clear my email and conscience, and (b) get us all up-to-date on a few current events and additional resources for more information.
Here we go, in chronological order from oldest to most recent:
7. Jason Furman responds to Twitter and Facebook comments about tax changes
"Yesterday, even before we posted here on the blog about the President's proposals to curb offshore tax havens and end tax incentives for companies shifting jobs overseas, we asked for your reactions on our various social networking outposts. As we expected, there were a lot of interesting comments and questions, largely supporting the President but some raising concerns and objections. We asked Jason Furman, Deputy Director of the National Economic Council, to address some of them."
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