Dean Baker: Bailing out America's toxic banks won't solve this economic crisis |

Dean Baker: Bailing out America's toxic banks won't solve this economic crisis

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While the bankers' greed fed the housing bubble, the incompetence and corruption of the economics profession allowed the world's largest financial bubble to grow unchecked, until its inevitable collapse wrecked the economy. Remarkably, the economists who got everything wrong as the bubble was expanding, are still being given the opportunity to get everything wrong as we try to dig out from the wreckage.

Even though most of the "best" economists in the world did not see it, the story of the bubble and its collapse was in fact extremely simple. The recovery from the stock market crash in 2001 was driven by the growth of the housing bubble.

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Households spend in part based on their housing wealth. The predictable result of the creation of $8tn in housing bubble wealth ($110,000 per homeowner) was a massive consumption boom on the order of $400bn to $600bn a year. The problem was not people's spendthrift ways; the problem was that economic policymakers allowed a huge bubble to develop. People treated this bubble wealth as real wealth, and responded exactly as economic theory would predict: they spent like crazy.

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So, if we snap our fingers and the banks are now fixed, these smaller firms will suddenly be in a position to invest more. Equipment and software investment accounts for 7% of GDP. If we generously assume that the capital-starved small firms account for half of this investment, and that the bank fix will boost their investment by 50%, then throwing money at the banks will increase investment by an amount equal to 1.75% of GDP an amount that is approximately equal to half the falloff in housing construction, and less than a quarter the total drop in demand due to the collapse of the housing bubble.

In other words, the arithmetic shows that a bank fix, while desirable, cannot possibly be sufficient to offset the collapse of the housing bubble. If our priority is to save the bankers from suffering the consequences of their own mistakes, then it makes sense to throw all our money at them. But if the point is to fix the economy, then we have to look elsewhere. ...

Federal Tax Burdens for Most Near Their Lowest Levels in Decades

Two Final Words on Taxes: Low and Fair | OurFuture.org

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Here’s a headline from the Center on Budget and Policy Priorities: Federal Tax Burdens for Most Near Their Lowest Levels in Decades. The report explains that the median-income family of four paid only 5.9 percent of its income in federal individual income taxes in 2007 (the last year for which data is available), a level that is low compared to the past 50 years. This CBPP chart says it all:

Hmmm, are the “teabaggers” crazy? Yes! Because not only are Americans paying lower taxes, they are happier with the tax system.

According to a recent Gallup Poll, “48 percent of Americans say that the amount of federal income tax they pay is ‘about right,’ with 46 percent saying ‘too high’—one of the most positive assessments Gallup has measured since 1956.” Over the past half-century, about 60 percent have usually said that taxes are “too high.”

More important than that finding, nearly two-thirds of Americans currently believe that the income tax they have to pay this year is fair.

Gallup concludes:

Gallup finds Americans' views of their federal income taxes about as positive as at any point in the last 60 years. This may reflect the income-tax cut that was part of the $787 billion economic stimulus plan, as well as a continuing sense of patriotism with the country fighting two wars.

That’s not to say that Americans like to pay taxes. They don’t. But perhaps lawmakers and the media should get a grip. There are certainly some revolting taxpayers, but politically, there is no tax revolt. ...

Chadwick: The Looming Credit Card Crisis - CNBC Guest Blog - CNBC.com

Chadwick: The Looming Credit Card Crisis - CNBC Guest Blog - CNBC.com

On the surface, JPMorgan Chase’s first quarter 2009 earnings look auspicious, reversing the red ink of the last few quarters and exceeding what was expected by investors.

... Today the disastrously managed credit card business threatens to be a major impediment in the economic recovery because the only way the banks can extricate themselves from the mess they have created is literally to shut down the industry. They may not view it that way, but their customers do. When you punish your best customers, the ones who pay on time and pay far over the monthly minimum, by (1) forcing them to pay higher interest rates, despite the lowest interest rates in the country in over fifty years, (2) increasing their monthly payments (3) shortening the payment terms and (4) reducing or even cancelling their credit lines, you are saying you don’t want to be in the business.

The excuse the banks are using is that the economy is difficult and everyone has to share in the pain. But who was sharing in the profits for all those years when the business was the most profitable one for the banks? Nobody but the banks reaped those rewards. They should now suffer the losses on their own.

Government involvement in industry is not good for industry or for Government. But the impact of what the banks are doing to their GOOD customers is so harmful to the economy, that it behooves the Government to open its eyes to it. It has a responsibility to its constituents. ...

Hiring H-1B Visa Workers Trims U.S. Tech Workers' Wages - by 6% ... offshoring decreases wages 2-3%

Hiring H-1B Visa Workers Trims U.S. Tech Workers' Wages - PC World

The use of H-1B workers by U.S. companies is decreasing wages for computer programmers, system analysts and software engineers by as much as 6%, according to a study released last week by researchers at New York University's Stern School of Business and the Wharton School of the University of Pennsylvania.

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"In this paper, we simply sought to dispel the myth that globalization generates no losers," wrote Prasanna Tambe, an assistant professor of information, operations and management sciences at the Stern School and Lorin Hitt, a professor of operations and information management at Wharton. The authors said that it's important that policy makers understand the wage impact of the H-1B visa program..

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What they found is that H-1B admissions at current levels are associated with a 5% to 6% drop in wages for computer programmers, systems analysts and software engineer categories. Offshore outsourcing also decreases wages for a broader category, including IT managers, by 2% to 3%, the study found.

The IT workers most likely to be affected by the downward pressure on wages are recent college graduates and people changing jobs, the researchers said. ...

Microsoft Layoff Sparks H-1B Debate - PC World

Microsoft Layoff Sparks H-1B Debate - PC World

Patrick Thibodeau, Computerworld

Feb 2, 2009 5:05 pm

Layoff announcements by IT vendors came fast and furious over the past two weeks. But it was Microsoft Corp.'s that drew the attention of a U.S. senator, who said it was "imperative" that the company give job priority to U.S. citizens over foreigners with H-1B visas.

"Microsoft has a moral obligation to protect ... American workers by putting them first during these difficult economic times," Sen. Charles Grassley (R-Iowa) wrote in a letter to Microsoft CEO Steve Ballmer on Jan. 22.

Grassley, a vocal critic of the H-1B program, could have sent the letter to any of the vendors laying off employees -- or to corporations with H-1B workers on their IT staffs. He likely singled out Microsoft because its chairman, Bill Gates, has called for an increase in the annual cap on visas during congressional hearings.

Microsoft, which plans to cut up to 5,000 employees over the next 18 months, said last week that a "significant number" of the first 1,400 people being let go are foreign workers who are in the U.S. on visas.

... But the software vendor is considered to be one of the leading H-1B employers. For instance, according to USCIS data, Microsoft received approval for a total of nearly 2,300 visas for the federal government's 2006 and 2007 fiscal years.

Most Bailed Out Banks Reduced Lending Since Getting Funds

Most Bailed Out Banks Reduced Lending Since Getting Funds

Wall Street Journal:

Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

Okay, now job losses are a LOT worse than 1981-1982 :: The Curious Capitalist - TIME.com

Okay, now job losses are a LOT worse than 1981-1982 :: The Curious Capitalist - TIME.com

Here, updated with this morning's non-farm payroll data from the Bureau of Labor Statistics, is the latest edition of my comparing-the-recessions chart:

Update: Now I've got a piece up on TIME.com about the employment data.

Update 2: Here's a new version of my Great Recession vs. Great Depression job loss chart.

Making Banking Boring -

Op-Ed Columnist - Making Banking Boring - NYTimes.com
|By PAUL KRUGMAN | Published: April 9, 2009

Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.
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Recently, the economists Thomas Philippon and Ariell Reshef circulated a paper that could have been titled “The Rise and Fall of Boring Banking” (it’s actually titled “Wages and Human Capital in the U.S. Financial Industry, 1909-2006”). They show that banking in America has gone through three eras over the past century.

Before 1930, banking was an exciting industry featuring a number of larger-than-life figures, who built giant financial empires (some of which later turned out to have been based on fraud). This highflying finance sector presided over a rapid increase in debt: Household debt as a percentage of G.D.P. almost doubled between World War I and 1929.

During this first era of high finance, bankers were, on average, paid much more than their counterparts in other industries. But finance lost its glamour when the banking system collapsed during the Great Depression.

The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.

Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.

After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits. ...
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Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress. ...

Mike Whitney: "Liquidate the Banks; Fire the Executives!"

Mike Whitney: "Liquidate the Banks; Fire the Executives!"

On Tuesday, a congressional panel headed by ex-Harvard law professor Elizabeth Warren released a report on Treasury Secretary Timothy Geithner's handling of the Troubled Assets Relief Program (TARP). Warren was appointed to lead the five-member Congressional Oversight Panel (COP) in November by Senate majority leader Harry Reid. From the opening paragraph on, the Warren report makes clear that Congress is frustrated with Geithner's so-called "Financial Rescue Plan" and doesn't have the foggiest idea of what he is trying to do. Here are the first few lines of "Assessing Treasury's Strategy: Six Months of TARP":

"With this report, the Congressional Oversight Panel examines Treasury’s current strategy and evaluates the progress it has achieved thus far. This report returns the Panel’s inquiry to a central question raised in its first report: What is Treasury’s strategy?"

Six months and $1 trillion later, and Congress still cannot figure out what Geithner is up to. It's a wonder the Treasury Secretary hasn't been fired already.

From the report:

"In addition to drawing on the $700 billion allocated to Treasury under the Emergency Economic Stabilization Act (EESA), economic stabilization efforts have depended heavily on the use of the Federal Reserve Board’s balance sheet. This approach has permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress. Thus, while Treasury has spent or committed $590.4 billion of TARP funds, according to Panel estimates, the Federal Reserve Board has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities. The total value of all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion."

So, while Congress approved a mere $700 billion in emergency funding for the TARP, Geithner and Bernanke deftly sidestepped the public opposition to more bailouts and shoveled another $3.3 trillion through the back door via loans and leverage for crappy mortgage paper that will never regain its value. Additionally, the Fed has made a deal with Treasury that when the financial crisis finally subsides, Treasury will assume the Fed's obligations vis a vis the "lending facilities", which means the taxpayer will then be responsible for unknown trillions in withering investments. ...

TARP banks rescue: designers plans are “either in the pocket of the banks or they’re incompetent.”

Stiglitz Says White House Ties to Wall Street Doom Bank Rescue - Bloomberg.com | By Michael McKee and Matthew Benjamin

April 16 (Bloomberg) -- The Obama administration’s plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.” ...

The Credit Card Trap - NYTimes.com

Editorial - The Credit Card Trap - NYTimes.com
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As the credit card business boomed in recent years, too many lenders added tricks and traps that have ensnared and infuriated millions of their customers. Interest rates spike even when a consumer meticulously pays on time. Fees appear out of nowhere; banks can change their complicated rules at any time or for any reason.

Responding to thousands of complaints, the Federal Reserve Board issued new rules last December to help curb unfair and deceptive practices. But those protections will not take effect until July of next year. [July 2010!..ed.] Congress now has an opportunity to move far more swiftly.

Senator Christopher Dodd, a Democrat from Connecticut and chairman of the Senate banking committee, has offered a credit card bill that deserves the support of his colleagues. It is stronger than the Fed’s regulations and would provide consumers relief more quickly than the credit card bill now moving through the House.

The Dodd bill would help end “bait and switch” tactics like promising a very low interest rate then adding hidden fees and other charges. It would make credit card contracts, which tend to favor the banks, less one-sided. It would help protect younger customers who are more easily tricked into burdensome debt.

And it would provide stronger protection against abusive practices — charging very high fees, for instance, for minor mistakes like being hours late paying the bill. ...

Geithner's Five Big Misconceptions

Geithner's Five Big Misconceptions | Henry Blodget|Mar. 23, 2009, 9:02 AM
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In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms. He views the crisis the same way Wall Street does--as a temporary liquidity problem--and his plans to fix it are designed with the best interests of Wall Street in mind.

If Geithner's plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:

The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. ...

The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. ...

Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone ...

Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. ...

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years. ...
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... The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total Debt To GDP.

In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

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