The Silent Drums

Rest in Peace, Regg the drummer. Our hearts break as the silence of your presence fills the room. Peace be with you in your final resting place. God knows that we miss you and we love you. Thank you for your love, acceptance and humorous spirit. You were deeply loved my many and will missed by all who knew you. My brother, I love you. Good bye.


Let Them Eat Swaps

Wall Street Crooks

The corporate executives laid the foundation for the government's 80% ownership in AIG as well as the banking sector. The AIG corporate executives along with the other financial titans came to the government groveling on their knees begging for a government handout.

The corporate enterprises set their executive compensation, which included generous bonuses for bankrupting the industry. They ran the companies and the financial sector into the ground. Damn, Wall Street should have been able to run their capitalistic empire without training wheels and adult supervision. But, I guess that was a wrong assumption. Since, the Wall Street investment bankers, and other assorted financial institutions are 100% to blame for their jacked-up business models and their over leveraged toxic derivatives/swaps. Of course, the Bush Administration should have regulated their industry, but that doesn't absolve the blame of the companies like Bears, AIG, Merill Lynch, Goldman Sachs, Citibank, Bank of America, Enron, Worldcom and other assorted nefarious players for their dirty deeds done in the dark off the balance sheets.

This pinstriped crew is just as corrupt as Bernie Madoff. And they should go to jail too.

During my childhood, I (like most kids) played the game Monopoly. As a child, it seemed strange that the first major stop on the corner of the game-board was a "jail."

Along with a more punitive space the police man pointing backwards in the “go to jail” space. As if that weren't enough the Community Chest and Chance cards both had cards, drawn at random, with not only a "get out of jail free” card, but also a "go to jail, go directly to jail, do not pass go, do not collect $200" card. As a child those cards and the presence of jail on the game board that bought and sold property, utilities, and railroads didn't make sense. Now, in light of the Wall Street meltdown I understand. These crooks just need to go to jail.

--by Ron Edwards


The 1994 Orange County Bankruptcy

Remember the bankruptcy of Orange County, California? What caused Orange County's downfall, you guessed it those demonic derivatives! Who would have thunk that derivatives/swaps would tank the world financial system. Good gravy, we the people just need to grow-up and learn a thing or two from history.

Eliot Spitzer Weighs in on AIG

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:
  • What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
  • Was it already known who the counterparties were and what the exposure was for each of the counterparties?
    What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?
  • What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.
  • Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.
--by Eliot Spitzer the former governor of the state of New York. (source: Slate)


Rage at AIG Swells As Bonuses Go Out

A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all.

"It's a mob effect," one senior executive said. "It's putting people's lives in danger."

Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy.

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

President Obama yesterday vowed to "pursue every legal avenue to block these bonuses." But that pledge might have came too late. About $165 million in retention payments started to go out Friday to employees at Financial Products, after numerous discussions with the Treasury Department and the Federal Reserve.

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment. (continue this Washington Post article here)


Muzzling GOP Chairman Michael Steele

According to the Washington Post: "After two weeks of public drubbing over comments that included criticism of radio host Rush Limbaugh and a reference to abortion as a matter of "individual choice," Steele is taking steps to address some of the concerns about his early gaffes. He has called a halt to his television appearances and curtailed national media interviews."

(source: Washington Post "Steele's Focus Turns to Nuts and Bolts" by Perry Bacon Jr.)

The Real Scandal of AIG

Robert Reich, Former Secretary of Labor and Professor at Berkeley writes in the Huffington Post: The real scandal of AIG isn't just that American taxpayers have so far committed $170 billion to the giant insurer because it is thought to be too big to fail -- the most money ever funneled to a single company by a government since the dawn of capitalism -- nor even that AIG's notoriously failing executives, at the very unit responsible for the catastrophic credit-default swaps at the very center of the debacle -- are planning to give themselves $100 million in bonuses. It's that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money.

The administration is said to have been outraged when it heard of the bonus plan last week. Apparently Secretary of the Treasury Tim Geithner told AIG's chairman, Edward Liddy (who was installed at the insistence of the Treasury, in the first place) that the bonuses should not be paid. But most will be paid anyway, because, according to AIG, the firm is legally obligated to do so. The bonuses are part of employee contracts negotiated before the bailouts. And, in any event, Liddy explained, AIG needed to be able to retain talent.

AIG's arguments are absurd on their face. Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid; indeed, AIG's executives would have long ago been on the street. And any mention of the word "talent" in the same sentence as "AIG" or "credit default swaps" would be laughable if it laughing weren't already so expensive.

Apart from AIG's sophistry is a much larger point. This sordid story of government helplessness in the face of massive taxpayer commitments illustrates better than anything to date why the government should take over any institution that's "too big to fail" and which has cost taxpayers dearly. Such institutions are no longer within the capitalist system because they are no longer accountable to the market. So to whom should they be accountable? When taxpayers have put up, and essentially own, a large portion of their assets, AIG and other behemoths should be accountable to taxpayers. When our very own Secretary of the Treasury cannot make stick his decision that AIG's bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken. (source: Huffington Post)


Lecturing Jim Cramer

According to the Chicago Tribune: Delivering to Jim Cramer a show-long lecture about the responsibilities of a financial news network, Jon Stewart positioned himself as the thinking man's Rick Santelli, as a guy who's also mad as hell, but at the people who deserve the ire.

In the much anticipated Cramer vs. Stewart showdown on "The Daily Show" Thursday night after a week of public back-and-forth, Stewart wore the populist hat CNBC reporter Santelli tried to don a couple of weeks ago in delivering an on-air "rant," as Santelli called it, against irresponsible mortgage takers.

"They burned the [bleeping] house down with our money," Stewart said, seething, of Wall Street insiders who turned piles of dubious loans into instruments of short-term profit, "and walked away rich as hell, and you guys knew that that was going on."

The crowd at Comedy Central's studio cheered because it was good populism, well aimed and well delivered. And Cramer, the usually peripatetic host of CNBC's "Mad Money," sat and took it, mostly, like a schoolboy willing to let the teacher go on in hopes of still being allowed to graduate.

Stewart creamed him, if anything almost to a fault. He urged Cramer and his newschannel brethren to report rather than blindly trust what CEOs say (Cramer's primary defense of CNBC's lack of vigilance). But, really, Stewart didn't report himself; he delivered a 22-minute opinion column, occasionally interrupted by Cramer shoulder shrugs, "okays," and mea culpas plus, bringing in financial TV in general, wea culpas.

Not that Cramer had much defense to offer. This was his response to the burning down the house comment, Stewart's most passionate: "Okay. Alright. I have a wall of shame [on the show]. Why do I have banana cream pies? 'Cause I throw them at CEOs. Do you know how many times I have 'pantsed' CEOs on my show?"

That's not a defense. It's another count in the indictment, an admission to not taking this stuff as seriously as, we now see, it ought to have been taken.

"It feels like we are capitalizing your adventure," Stewart said to Cramer, a former trader who, Thursday morning, appeared on a show with -- no joke -- convicted criminal Martha Stewart, pounding dough, little gifts that Stewart's writers did not fail to unwrap.

But this really wasn't about getting laughs. Right before the burning house remark, the man Cramer had derisively called a "comedian" showed a video clip of Cramer talking about how to manipulate stock and said, "I understand you want to make finance entertaining, but it's not a [bleeping] game… I can't tell you how angry that makes me, because what it says to me is you all know.... [There's] a game you know is going on but that you go on television as a financial network and pretend it isn’t happening."

He called it "this weird Wall Street side bet" happening on top of, and dwarfing, the public game of whether stock A or B is headed up or down. He kept the focus, almost unrelentingly, on the Wall Street gamesmen and women who turned bad mortgages into epic disaster and, to his credit, tried to indict Cramer and his colleagues en masse, and for failing a broader civic duty.

"I hope that was as uncomfortable to watch as it was to do," Stewart said when it was over.

That, Mr. Santelli, is how you do populist. See the difference between that and standing in a roomful of traders, going after a guy whose house maybe had two more bathrooms than he should have been able to afford?

Funny side note: Late in the show, as things were winding down, ads came on successively for Bank of America, which has seen its stuck tumble in the crisis as it bought more troubled financial firms, and for Apple, the stock of which Cramer seemingly talked about being able to influence in one of "Daily Show's" clips.

Vintage Jon Stewart on Crossfire

Why did Jim Cramer pick a fight with this guy?

Colbert Bets On Cramer

The Pregame Show: Martha Stewart and Cramer

Rick Santelli's Misplaced Populism

What were the loudmouths over at CNBC thinking? Perhaps they've been living in the Wall Street hermetically sealed bubble too long. First, Rick Santelli decided to crap on distressed homeowners facing an epic rate of foreclosures that was fueled by Wall Street's insatiable greed. In light of the trillion dollar bailout of Countrywide, Bears Stern, Merill Lynch, Fannie Mae, Freddie Mac and other assorted Retail Bankers and Investment Bankers, CNBC's Rick Santelli ranted on the trading floor in front of the cameras about President Obama's proposal to relieve millions of overburdened homeowners. CNBC's Rick Santelli called these homeowners that were duped by predatory lenders and victims of the housing bubble that was engineered by the Bush Administration, Wall Street and the financial sector-- “losers.”

SANTELLI: "The government is promoting bad behavior! How this, president and new administration, why didn't you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers' mortgages or would we like to at least buy cars and buy houses in foreclosure and give 'em to people that might have a chance to actually prosper down the road and reward people that could carry the water instead of drink the water."

SANTELLI:"This is America! How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills? Raise their hand. President Obama, are you listening?"

Rick Santelli's Clip from 2/19/2009

Chris Matthews asks the Question: “Who'd ya vote for Rick”

MATTHEWS: OK, let‘s go around it a couple ways. First of all, do you believe the problem here of these over two million people out there facing foreclosure, who are at the bottom of this toxic asset problem, which is at the bottom of our financial crisis, which is the bottom of our economic crisis today and the reason we‘re going into something close to a Depression—so let‘s get at it.

We got a bunch of people out there can‘t afford their houses they‘re living in. Is it their fault because they‘re deadbeats, they shouldn‘t have bought the houses, or is the guy who sold them the house, the woman who sold them the house—was that person a huckster who got them to buy the house with phony-baloney low interest rates, with no down payment, and guess what, allowed them to lie on their application and claim an income they didn‘t have? Who‘s responsible, the huckster or the deadbeat?

SANTELLI: Everybody. You know what?

MATTHEWS: No, no, no. No, no, no. No. You‘re an analyst. Who‘s largely responsible for the problem of these two million cases of toxic assets which are weighing down our financial system and may bring us all to financial hell? Who‘s responsible?

SANTELLI: Well, Chris, think about it. Were these mortgage brokers -

were they licensed? Was there any supervision there? No, OK? Did the people that signed these have their lawyers look at them? If not, shame on them, OK? Chris Matthews, do you sign something without reading the fine print or having a lawyer look over a housing contract? Have you had a lawyer for all your contracts closing on all your properties? Have you?

MATTHEWS: Am I supposed to answer that question? Yes. Occasionally, I find myself not reading the fine print. But let me ask you a question. Did you vote for Obama or McCain?

SANTELLI: I voted for Mr. McCain. It should be between me and my...

MATTHEWS: OK, I‘m just trying to...

SANTELLI: But I did. And you know what? This isn‘t a left or right issue, though.

MATTHEWS: No, I want to know where you‘re coming from politically because you‘re coming down hard on Barack. That‘s all I‘m asking for.

Then, Jim Cramer jumps onto Rick Santelli's bandwagon on MSNBC's Hardball:

BARNICLE: How did it get to this point? How did so many people miss so many signs just over the last year-and-a-half, never mind six or seven years ago, in terms of the housing boom and the mortgages to people who couldn‘t afford them, just the last year-and-a-half? How did so many smart people miss so many stop signs?

CRAMER: There was so much money made, Mike, it wasn‘t worth seeing the stop signs. You could make so much money on one of these trading desks or mortgage desk that, frankly, you stopped caring about your client. Now, I mean, look, I—look, I said that Bank of America (INAUDIBLE) do better than the government, but Bank of America, CitiBank, they all—if you were on the trading desk—I used to be on a trading desk—you could make $5 million, $6 million, $7 million, and it wouldn‘t—you‘d do it in three years. You‘d gaffe (ph) every one of your clients, and then you go home. And we had a level of greed that was only equaled by the amount of money you made. So there was just too much money to be made, Mike. It was just too bountiful.

SANTELLI: “I don‘t think it‘s right in America to reward people that made the wrong decisions. Send them to classes on how to read the small print, but I think that the greater bulk of this country should be getting something and being taken care of and not ignored.”

Okay Messrs. Cramer and Santelli, the losers that couldn't read the “small print” seems to be your Wall Street cronies and their partners in crime the banking sector. Obviously the Wall Street investment houses couldn't read or balance their books, hence trillions of dollars in losses. Clearly the bankers couldn't read the small print as they wrote and approved trillions of dollars in subprime and predatory mortgages. Most certainly, the goof balls on Wall Street couldn't read the small print when the retail bankers and other assorted nefarious lenders dumped DDD-junk and called it AAA-paper. What a bunch of losers on Wall Street. They come to the government with their pants around their ankles begging the government for a handout so the taxpayers of America can subsidize their bogus banking practices.

The one thing that they really, really do teach in business school is how to read a balance sheet. Reading and understanding various spread sheets and ratios is the basis for ALL of the business classes. It's like being a doctor and not knowing how to read a thermometer and blood pressure machine or what those numbers mean. So who is really the “loser” the highly trained professionals in the finance sector or an unsuspecting prospective homebuyer. Either you are a professional or you're not. Can you even read a balance sheet. If so, then why the full scale financial meltdown? Who was really asleep at the switch the passengers or the pilot.

No, Rick Santelli and Jim Cramer, America really doesn't want to bailout “losers.” The problem is that America sees Wall Street, Investment Houses, Bankers and their enablers like CNBC as the perverted losers in this equation.


Jon Stewart vs. Cramer

Cramer responds to Jon Stewart on Morning Joe:



From the conservative website, New Majority, Danielle Crittenden writes: Perhaps the obvious answer is that women don't gravitate towards talk radio, period. It's the sports talk of political junkies. Successful women's programming tends to be based on the Oprah model: the sharing of personal stories, ideally inspirational, and a more "inclusive" approach to dialogue.

That being said, I’m a woman who used to enjoy talk radio and has always been bored senseless by Oprah. For a long time I listened to Rush: I enjoyed his intelligent criticism of liberal policies; his bracing energy; his sense of humor. If I was in the car long enough, Rush would bleed into Hannity and others, and I’d listen to them too. However, over the past few years, I found myself joining the female majority and changing stations when these shows came on. At first I thought I was doing so because, as a mother of three, I didn't need another person in the car yelling at me. Then, when I'd force myself to listen, I felt like I was trapped in an elevator with someone whose ego squished me up against the doors: when they weren’t boasting about their moral courage or superior worldviews, they seemed to take everything that was happening politically as a personal slight--or achievement, depending on what it was (Electoral victory? All thanks to my listeners! Electoral defeat? The people were denied my message by the liberal media!). That is, when they weren’t trying to sell me a Sleep Number Bed. I'm sure many male listeners have tuned out for the same reasons.
But maybe this type of personality is just innately more off-putting to women. As women, we know this type of man. We may have dated this type of man. Lord knows, we may have married and divorced this type of man. But however we may have come across him we know this much: We want to get to our floor and leave the elevator as quickly as possible.


James Otis = Judas Iscariot

"Then one of the 12, called Judas Iscariot, went unto the chief priests, and said unto them, 'What will ye give me, and I will deliver him unto you?' And they covenanted with him for 30 pieces of silver." -- Matthew 26:14-15
Then there’s James Otis, the capitalistic foreigner in question, who scrambled to recover the moral high ground after being tut-tutted at by persons in government for “commercialising” Gandhi’s heritage (an accusation puzzlingly not thrown at Vidhu Vinod Chopra or the rest of the Munnabhai team). In an extraordinary expression of self-assertion, Otis demanded that the elected government of the world’s largest democracy alter its spending priorities if it wanted the used eyeglasses in question.
And how did all this end? In properly Indian manner, with competitive chaos: Tushar Gandhi using Dilip Doshi to bid against Vijay Mallya, who may or may not have been the state’s representative. If anyone thinks that the spectacle of a liquor baron bidding for the used crockery of a man who was not the world’s biggest alcohol fan was blasphemous, they’re clearly moralistic killjoys that don’t understand Gandhism. What more agreeable spectacle than Vijay Mallya, the buyer of Tipu’s sword, now buying slightly less violent relics? (And wasn’t he complaining the other day Kingfisher had no money?) Or than the government, which first disdained then took credit for Slumdog, now trying to take credit for another Indian Victory Abroad? (source: Indian Express)

The Drama of Gandhi Auction!

Gandhi On the Auction Block

According to the Financial Times of the UK: "Gandhi memorabilia sell for $1.8million" Reporter Alan Rappeport states:

Memorabilia of Mahatma Gandhi were sold at auction for $1.8m to an Indian businessman on Thursday despite the owner of the collection’s last-minute effort to retrieve the items, which included a bowl, a pocket watch, a pair of leather sandals and spectacles.

Less than an hour before the items were auctioned at Antiquorum auctioneers on Madison Avenue, James Otis, a Los Angeles-based filmmaker and peace activist said he decided that because of the international controversy over Gandhi’s possessions, he wanted to call off the auction and take them back.
“I pray that the outcome is positive and one that Gandhi would approve of,” said Mr Otis, who plans to begin a 23-day fast to contemplate his actions.

Antiquorum insisted that the sale would go on, and after furious bidding a representative of Vijay Mallya, the billionaire chairman of United Breweries Group and Kingfisher Airlines, outlasted the other collectors.

Tony Bedi, who did the bidding for Mr Mallya, said that the items would be turned over to the Indian government and put on display. He said that he thought they were worth at least $6m.

“Look at the history,” Mr Bedi said. “Gandhi is not about money but about peace.”
The sale of the items had become the subject of an international dispute and earlier this week Mr Otis offered to sell the rare collection to India to advance the cause of non-violence. But the negotiations broke down when the Indian government offered to pay only the reserve price of up to $30,000.

On Wednesday a publishing house set up by Gandhi claimed to be the rightful owner of the Indian independence leader’s possessions and said it had launched a legal challenge to the sale through the Indian courts. The Delhi High Court also issued an injunction disputing the right of Mr Otis, who amassed the collection over the past 10 years, to own the items.
Prior to the bidding Antiquorum officials said there would be a two week delay before Gandhi’s goods would be delivered to the winner to allow time for the dispute over its owners to be resolved. Afterwards Robert Maron, chairman of Antiquorum, said he was happy that the memorabilia was out of the private sector and would be returned to India.But hours after the auction Mr Otis apparently had another change of heart. Ravi Batra, a lawyer who said he was representing Mr Otis, said that his client was pleased that the items were won by a reputable person who intended to return them to India and that they would ratify the auction. He would not comment on how much of the $1.8m Mr Otis would collect or what he would do with the money.

“No harm, no foul,” Mr Batra said.

Larry Graham

Reg and Spenser these next few youtube clips are for you two. Enjoy. I sure do miss the sound of funk&soul....

Spenser, check out this old school master of the funky bass strut his stuff. Mr. Graham is an amazing talent. Dust off your pedals and your guitar and follow along, don't forget to grab Reg the drummer. I'm sure you can add this sound into your mix.





Bush's former speech writer, David Frum, weighs in on the Limbaugh quesion. Frum asserts: President Obama and Rush Limbaugh do not agree on much, but they share at least one thing: Both wish to see Rush anointed as the leader of the Republican party. Here’s Rahm Emanuel on Face the Nation yesterday: “the voice and the intellectual force and energy behind the Republican party.”

What a great endorsement for Rush! (And we know Rush is fond of compliments – listen to his loving account in his CPAC speech of the birthday lunch given him by President Bush just before Inauguration Day.)

But what about the rest of the party? Here’s the duel that Obama and Limbaugh are jointly arranging:

On the one side, the president of the United States: soft-spoken and conciliatory, never angry, always invoking the recession and its victims. This president invokes the language of “responsibility,” and in his own life seems to epitomize that ideal: He is physically honed and disciplined, his worst vice an occasional cigarette. He is at the same time an apparently devoted husband and father. Unsurprisingly, women voters trust and admire him.

And for the leader of the Republicans? A man who is aggressive and bombastic, cutting and sarcastic, who dismisses the concerned citizens in network news focus groups as “losers.” With his private plane and his cigars, his history of drug dependency and his personal bulk, not to mention his tangled marital history, Rush is a walking stereotype of self-indulgence – exactly the image that Barack Obama most wants to affix to our philosophy and our party. And we’re cooperating! Those images of crowds of CPACers cheering Rush’s every rancorous word – we’ll be seeing them rebroadcast for a long time.

Rush knows what he is doing. The worse conservatives do, the more important Rush becomes as leader of the ardent remnant. The better conservatives succeed, the more we become a broad national governing coalition, the more Rush will be sidelined.

But do the rest of us understand what we are doing to ourselves by accepting this leadership? Rush is to the Republicanism of the 2000s what Jesse Jackson was to the Democratic party in the 1980s. He plays an important role in our coalition, and of course he and his supporters have to be treated with respect. But he cannot be allowed to be the public face of the enterprise – and we have to find ways of assuring the public that he is just one Republican voice among many, and very far from the most important.


Bernanke Blasts AIG For 'Irresponsible Bets' That Led to Bailouts

According to the Washington Post, Federal Reserve Chairman Ben S. Bernanke delivered an unusually harsh rebuke to American International Group yesterday, expressing rare public exasperation over having to repeatedly bail it out.

"I think if there's a single episode in this entire 18 months that has made me more angry, I can't think of one, than AIG," said the characteristically reserved central banker.

Bernanke had arrived on Capitol Hill for what was billed as a Senate hearing on the federal budget. Instead, he ran headfirst into a fresh wave of frustration about the latest federal rescue of the wounded insurance giant.

"Mr. Chairman," Sen. Ron Wyden (D-Ore.) asked as the hearing began, "at what point will the taxpayer no longer be on the hook for the massive AIG failure? What is the endgame for American taxpayers?"

Bernanke acknowledged that the "AIG situation is obviously a very uncomfortable one." But he maintained that because the company has ties to major financial firms across the globe, its collapse "would be devastating to the stability of the world financial system."

The Fed chairman did his best to counter the lawmakers' frustrations with his own. "I share your concern. I share your anger. It's a terrible situation," he said. "But we're not doing this to bail out AIG or their shareholders, certainly. We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."
Bernanke said much of his anger stems from the way AIG strayed from its core insurance business and took unmonitored and unnecessary risks through its Financial Products unit, which wrote billions of dollars in exotic derivative contracts that faltered and nearly destroyed the parent company.

"AIG exploited a huge gap in the regulatory system," Bernanke said. "There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets -- took huge losses. There was no regulatory oversight because there was a gap in the system."

When Financial Products imploded, it left the government with a dilemma.

"We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system," Bernanke said. "We know that failure of major financial firms in a financial crisis can be disastrous for the economy."

On Monday, AIG announced a loss of $61.7 billion for the fourth quarter of 2008, the biggest quarterly corporate loss in U.S. history. The federal government simultaneously announced that it would once again restructure the terms of the AIG bailout, which began in September and had grown to a $152 billion total package.

The new deal gives AIG access to another $30 billion in taxpayer funds, eliminates some costly dividend payments and grants the government direct stakes in two of the company's largest insurance subsidiaries.
Continue reading the Washington Post article here.

Let Our Start-Ups Bail Us Out

Reid Hoffman asserts on Tuesday, March 3, 2009, in the Washington Post:

President Obama noted last week that "we have lived through an era where, too often, short-term gains were prized over long-term prosperity." As the $787 billion stimulus is sorted out, we should consider not only what's there but also what's missing. Unless lawmakers move to jump-start key elements of sustainable economic growth, we may find ourselves worse off in a few years.

The stimulus finances important development of infrastructure, renewable energy and scientific research, which is great for jobs in the short term but doesn't guarantee the vibrant economic ecosystem required for sustainability. The credit meltdown, the mortgage crisis and the collapse of automakers have created a climate of fear around investment at precisely the time that new ventures -- not merely new technologies -- need to be championed as the course to stability. Products and services drive a healthy economy. To translate the stimulus into sustainable growth, we need incentives for business innovators.

Entrepreneurs are the fertile soil for job growth and recovery. Small companies represent 99.7 percent of all employer firms, Commerce Department data show. They pay nearly 45 percent of U.S. private payroll and have generated 60 to 80 percent of net new jobs annually over the past decade.

Consider a few start-ups from the past century: Microsoft, MTV, CNN, FedEx, Intel, Hewlett-Packard, Burger King. Each opened during a period of economic downturn. Today, these brands employ hundreds of thousands of people worldwide. We need to prepare for the next Burger King. By empowering individuals and small businesses, an innovation stimulus can help germinate stable industry players for the long term.
Continue reading the entire article here.

Square Deal, not the New Deal

The Right Roosevelt? by David Ignatius from the Washington Post on Thursday, March 5, 2009:

There has been a lot of speculation about whether Barack Obama can be another Roosevelt, but I wonder if we're talking about the right Roosevelt. In fixing the financial crisis, Obama could use a little less of FDR's affection for economic giantism and a little more of TR's zeal for trust-busting.

This week's $30 billion supplementary bailout for insurance behemoth AIG is a case in point. Keeping this insolvent monster on life support doesn't make sense. The company should have been dismantled when the crisis first hit last year, when the healthy parts could have been sold for a decent price. Treasury says that after this latest bailout, AIG should shrink and remake itself in smaller pieces. Better late than never, I guess.

Even AIG knows it's too big. "AIG's conglomerate structure is too complicated, unwieldy and opaque," said Edward Liddy, the company's new chief executive, who came in last fall to try to clean up the wreckage. The tragedy is that this was clear a few years ago, and nobody did anything about it. A former regulator remembers that AIG's transactions were so tangled and incomprehensible that it couldn't close its books on time -- yet nobody thought to call a halt.

Treasury and Federal Reserve officials have continued to operate on the assumption that in finance, bigger is better -- and safer. The argument for these huge, diversified financial institutions has been that in pooling different kinds of risks, they would increase the portfolios' overall stability. That rationale helped create the monstrosity called Citigroup. It was like the argument for securitization of subprime mortgages -- put enough of them together and the danger of default would be less. That didn't work out too well.

And yet the authorities have continued to act as if greater size will provide greater stability. That was the rationale for pushing a healthy Bank of America to acquire a sick Merrill Lynch last fall. A better response to Merrill's sickness would have been to leach out the toxic assets and then encourage an orderly breakup of the brokerage firm; it was too big already.

A case study for today's regulators is President Theodore Roosevelt's response to the financial shenanigans of 1902, when the railroad barons tried to combine the Great Northern and Northern Pacific lines into a huge holding company called Northern Securities Co. Roosevelt wanted to file an antitrust suit to stop the deal. The financiers threatened that the lawsuit would cause a panic on Wall Street, to which TR's attorney general, Philander G. Knox, memorably replied: "There is no stock ticker at the Department of Justice."

When Roosevelt ignored the threats and moved to file the trustbusting suit, he received a hasty visit from J. Pierpont Morgan, the reigning financial titan. "If we have done anything wrong, send your man to my man and they can fix it up," offered Morgan. TR responded unflinchingly, "That can't be done."

Sad to say, but since this crisis began last year, Treasury and Fed officials have been rushing to "send your man to my man" to fix things up in hastily concocted weekend deals. The big financial trusts of our day have been threatening the regulators with ruin, and the regulators have been caving. They don't want another Lehman Brothers. But the authorities should have explored whether, as an alternative to failure, they could dismantle the giants into smaller, more manageable parts that could work their way to solvency.

Historian Walter Lord, in his 1960 book "The Good Years," wrote of Morgan and the other plutocrats: "These men were not naturally callous. They had no evil intent. But they had lost touch. The vastness of the operations, the complexity of their corporate structures kept them from their employees and the people they served." That's a perfect description of the executives at Citigroup, AIG and the other behemoths that brought the financial crisis down on our heads.

The Obama team has been lauded for emulating Franklin Roosevelt's bold response to the Great Depression of the 1930s. And as calls grow for nationalization of Citi and other giant banks, they may be tempted to go where even FDR feared to tread. But financial giantism -- private or public -- isn't the answer. The challenge is how to reconstruct our broken financial system. Let's give Franklin a rest for a while and ponder Teddy's progressive philosophy: When it comes to finance, smaller really is beautiful.


Obama’s Ball and Chain

New York Times Op-ed writer Thomas Friedman states: Two signs of the times: First, a banker friend remarked to me that you know your bank is in trouble when its share price is less than the cost of taking money out of one of its A.T.M.’s.

Second, go to Google and type in these four letters: m-e-r-e. Before you go any further, Google will list the possible things or people you’re searching for, and at the top of that list will be the name “Meredith Whitney.” She comes up before “merengue” and “Meredith Viera.” Who is Meredith Whitney? She is a banking analyst who became famous for declaring last year, long before others, that Citigroup was up to its neck in bad mortgages and would not likely survive in its present form.

Do you know how many people have to be searching for you if all you have to do is put in four letters and your name pops up first? A lot! But I am not surprised. Our banking system is in so much trouble that everyone is searching for the silver-bullet solution — and the person who can describe it. Alas, there is no silver bullet.

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money — consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game.

When this huge bubble exploded, it created a crater so deep that we can’t see the bottom — because that hole is the product of two inter-related excesses. Some banks are in trouble because of the subprime mortgage securities they have on their books that are now worth only 20 cents on the dollar because of widespread defaults.

And many other banks — the ones that took on the most leverage like Citigroup and Bank of America — are in trouble because of all the loans on their books that can’t now be repaid, such as auto loans, commercial real estate loans, credit card loans, corporate loans. Most of the big banks have not marked down these loans yet because if they did, they would be insolvent. The subprime toxic securities will take billions to bail out; the loans could take trillions.

Climbing out of such a deep crater is going to be tricky. Any big step we try to take could trigger other problems — the full dimensions of which we don’t understand. We need to create a “bad bank” to buy and hold the toxic mortgage assets or have the government buy the first batch and create a market, but that would likely involve bailing out banks that have behaved very recklessly. It is a price I’d pay to save the system, but even doing that is very complicated. Buying securitized toxic mortgages is not like buying a yacht off the books of a bankrupt savings-and-loan.

Nationalizing Citigroup may sound good on paper, but putting Citigroup into receivership could trigger all kinds of defaults on derivative contracts that it has written. It may be inevitable, but we’d better understand all of Citigroup’s counterparty risks so we don’t inadvertently set off more falling dominos, à la Lehman Brothers.

At the moment, the Obama team seems to prefer a gradual attempt to nurse these sick banks back to health with repeated blood transfusions — $30 billion more to A.I.G. today, another $40 billion to Citigroup tomorrow. And Lord only knows how much Bank of America will need after its weekend fling with Merrill Lynch has left it with Toxic Asset Disease. The Federal Reserve and the Treasury seem to be trying to give these banks enough capital to survive the next two years, as they de-leverage and de-risk their portfolios — and then hope for the best.

If they are right, the president (and the rest of us) will just have a wrenching first year and then be able to gradually put the banking crisis behind him.

For now, though, the banks still threaten to consume the Obama presidency. Indeed, I’m sorry to report that if you just type two letters into Google — “b-a” — the first thing that comes up is not Barack Obama. It’s “Bank of America.” Barack Obama is third.

SubPrime Mortgage Mess Explained

CNBC "House of Cards"


Wall Street Meltdown

Enron Was The Pit Canary, But Its Death Went Unheeded

History is repeating itself as companies hide debt, blame the market for their failings and expect the taxpayer to pony up asserts Bethany McLean of The Guardian, on Saturday 4 October 2008:

Bad experiences are supposed to be good, in a twisted sort of way. That's because we're supposed to learn things that help us avoid the same mistakes the next time around. But it's hard to argue now that anything good came out of the bad experience called Enron. In fact, one thing that is crystal clear amid all the chaos of these days is that the lessons from Enron went unlearned - or were just forgotten.

Start with the Houston-based energy trader's notorious lack of transparency. After Enron's implosion, everyone talked about how important it was to be able to understand how a company makes money. Now raise your hand if you understand how a modern financial services firm makes money. No hands? The truth is, there is no way to understand. These companies are as opaque as Enron. Just as Enron had off balance-sheet vehicles - SIVs - that allowed it to book earnings and hide debt, Citigroup and other financial institutions had structured investment vehicles that did the same. Indeed, Citigroup had to take almost $50bn of SIVs back on to its balance sheet after they ran into trouble. It would be nice if the accounting rule-makers would grasp this basic tenet: if they want to hide it, we want to know about it.

Of course, SIVs are only a small manifestation of the deeper problem, which is the evolution of financial engineering into a dark art. Enron now seems like the canary in the coal mine. After its bankruptcy, Steve Cooper, who was in charge of restructuring it, told the Wall Street Journal his task might leave him "in a wheelchair and drooling" due to the complexity of its financial structures and the "unbelievable amount of debt accumulated around the company". Doesn't that sound like our entire financial system?

Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn't afford the payments into sleek new instruments called RMBS and CDOs. But Enron's machinations couldn't make the losses go away, and Wall Street's shiny acronyms can't turn a defaulted mortgage into good money.

As for the lessons we've forgotten, how about this one: financial statements aren't supposed to be fairytales. Enron was castigated for its abuse of mark-to-market, or fair value, accounting. This is supposed to allow investors to see what the market says a security is worth, instead of just what the company paid for it. Employed correctly, it makes a company's finances more transparent. But we all joked that Enron didn't mark to market - it marked to myth, to whatever it wanted them to be. In this, the US regulatory agency, the SEC, was complicit, because it signed off on Enron's use of this accounting and never ensured it wasn't abusing the rules.

Today's mark-to-market saga has a new twist. The SEC is facing political pressure to abolish mark-to-market accounting requirements for financial institutions, and some in Congress would like to dig mark-to-market's grave. Said in another way, now financial services firms may be allowed to deceive investors about their status, with the regulators blessing that deceit. (An aside here. Those who say mark-to-market should be abolished argue that because there is no market, firms are being forced to value these securities at artificially low levels. But there is no market precisely because firms aren't willing to sell at a price at which a reasonable investor would buy.)

While for a short period in the aftermath of Enron, we did understand that short-sellers serve a good purpose, we have also forgotten that. Short-sellers were the first to warn there were problems at Enron. But today, nobody is thanking short-sellers like David Einhorn, a hedge fund manager who began to warn investors about Lehman's problems in March, when the stock was worth about $50. Instead, companies say the short-sellers are to blame for their problems. And the SEC has gone along with this and banned short-selling in a number of stocks. Poor Washington Mutual and Wachovia, which plummeted after the ban on short-selling. How will they explain what happened to them now they can't blame short-sellers?

Which leads to the most sobering repeat lesson of all. Most of the believers in the free market only believe in it when it is going their way. When it doesn't, it's someone else's fault. Enron's former leaders often cited their free-market beliefs. Its demise, they said, was due to a short-sellers' conspiracy.
Indeed, when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn't work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it's that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down. Then again, maybe it really isn't a good sign for the future that there don't seem to be any smart guys anywhere in the room.
Bethany McLean is a contributing editor at Vanity Fair and co-author of The Smartest Guys in the Room.

The Economic Consequences of Mr. Bush

President Obama has to deal with yet another crippling legacy of George W. Bush: The Economy.

Nobel laureate, Joseph E. Stiglitz, sees a generation-long struggle to recoup. Read his assessment of Bush's economy by Joseph E. Stiglitz from the December 2007 edition of Vanity Fair:
The American economy can take a lot of abuse, but no economy is invincible. When we look back someday at the catastrophe that was the Bush administration, we will think of many things: the tragedy of the Iraq war, the shame of Guantánamo and Abu Ghraib, the erosion of civil liberties. The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page.
I can hear an irritated counterthrust already. The president has not driven the United States into a recession during his almost seven years in office. Unemployment stands at a respectable 4.6 percent. Well, fine. But the other side of the ledger groans with distress: a tax code that has become hideously biased in favor of the rich; a national debt that will probably have grown 70 percent by the time this president leaves Washington; a swelling cascade of mortgage defaults; a record near-$850 billion trade deficit; oil prices that are higher than they have ever been; and a dollar so weak that for an American to buy a cup of coffee in London or Paris—or even the Yukon—becomes a venture in high finance.

And it gets worse. After almost seven years of this president, the United States is less prepared than ever to face the future. We have not been educating enough engineers and scientists, people with the skills we will need to compete with China and India. We have not been investing in the kinds of basic research that made us the technological powerhouse of the late 20th century. And although the president now understands—or so he says—that we must begin to wean ourselves from oil and coal, we have on his watch become more deeply dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.

Remember the Surplus?

The world was a very different place, economically speaking, when George W. Bush took office, in January 2001. During the Roaring 90s, many had believed that the Internet would transform everything. Productivity gains, which had averaged about 1.5 percent a year from the early 1970s through the early 90s, now approached 3 percent. During Bill Clinton’s second term, gains in manufacturing productivity sometimes even surpassed 6 percent. The Federal Reserve chairman, Alan Greenspan, spoke of a New Economy marked by continued productivity gains as the Internet buried the old ways of doing business. Others went so far as to predict an end to the business cycle. Greenspan worried aloud about how he’d ever be able to manage monetary policy once the nation’s debt was fully paid off.

This tremendous confidence took the Dow Jones index higher and higher. The rich did well, but so did the not-so-rich and even the downright poor. The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities. The global-trade agreements we pushed through were often unfair to developing countries. We should have invested more in infrastructure, tightened regulation of the securities markets, and taken additional steps to promote energy conservation. We fell short because of politics and lack of money—and also, frankly, because special interests sometimes shaped the agenda more than they should have. But these boom years were the first time since Jimmy Carter that the deficit was under control. And they were the first time since the 1970s that incomes at the bottom grew faster than those at the top—a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had begun to dim. The tech boom was over. The nasdaq fell 15 percent in the single month of April 2000, and no one knew for sure what effect the collapse of the Internet bubble would have on the real economy. It was a moment ripe for Keynesian economics, a time to prime the pump by spending more money on education, technology, and infrastructure—all of which America desperately needed, and still does, but which the Clinton administration had postponed in its relentless drive to eliminate the deficit. Bill Clinton had left President Bush in an ideal position to pursue such policies. Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus? The country could well have afforded to ramp up domestic investment in key areas. In fact, doing so would have staved off recession in the short run while spurring growth in the long run.

But the Bush administration had its own ideas. The first major economic initiative pursued by the president was a massive tax cut for the rich, enacted in June of 2001. Those with incomes over a million got a tax cut of $18,000—more than 30 times larger than the cut received by the average American. The inequities were compounded by a second tax cut, in 2003, this one skewed even more heavily toward the rich. Together these tax cuts, when fully implemented and if made permanent, mean that in 2012 the average reduction for an American in the bottom 20 percent will be a scant $45, while those with incomes of more than $1 million will see their tax bills reduced by an average of $162,000.

The administration crows that the economy grew—by some 16 percent—during its first six years, but the growth helped mainly people who had no need of any help, and failed to help those who need plenty. A rising tide lifted all yachts. Inequality is now widening in America, and at a rate not seen in three-quarters of a century. A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago. Some 5.3 million more Americans are living in poverty now than were living in poverty when Bush became president. America’s class structure may not have arrived there yet, but it’s heading in the direction of Brazil’s and Mexico’s.

The Bankruptcy Boom

In breathtaking disregard for the most basic rules of fiscal propriety, the administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous “war of choice” in Iraq. A budget surplus of 2.4 percent of gross domestic product (G.D.P.), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II.

Agricultural subsidies were doubled between 2002 and 2005. Tax expenditures—the vast system of subsidies and preferences hidden in the tax code—increased more than a quarter. Tax breaks for the president’s friends in the oil-and-gas industry increased by billions and billions of dollars. Yes, in the five years after 9/11, defense expenditures did increase (by some 70 percent), though much of the growth wasn’t helping to fight the War on Terror at all, but was being lost or outsourced in failed missions in Iraq. Meanwhile, other funds continued to be spent on the usual high-tech gimcrackery—weapons that don’t work, for enemies we don’t have. In a nutshell, money was being spent everyplace except where it was needed. During these past seven years the percentage of G.D.P. spent on research and development outside defense and health has fallen. Little has been done about our decaying infrastructure—be it levees in New Orleans or bridges in Minneapolis. Coping with most of the damage will fall to the next occupant of the White House.

Although it railed against entitlement programs for the needy, the administration enacted the largest increase in entitlements in four decades—the poorly designed Medicare prescription-drug benefit, intended as both an election-season bribe and a sop to the pharmaceutical industry. As internal documents later revealed, the true cost of the measure was hidden from Congress. Meanwhile, the pharmaceutical companies received special favors. To access the new benefits, elderly patients couldn’t opt to buy cheaper medications from Canada or other countries. The law also prohibited the U.S. government, the largest single buyer of prescription drugs, from negotiating with drug manufacturers to keep costs down. As a result, American consumers pay far more for medications than people elsewhere in the developed world.

You’ll still hear some—and, loudly, the president himself—argue that the administration’s tax cuts were meant to stimulate the economy, but this was never true. The bang for the buck—the amount of stimulus per dollar of deficit—was astonishingly low. Therefore, the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. “Qualified at birth” became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with “teaser” initial rates, and went to town on the proceeds.

All of this spending made the economy look better for a while; the president could (and did) boast about the economic statistics. But the consequences for many families would become apparent within a few years, when interest rates rose and mortgages proved impossible to repay. The president undoubtedly hoped the reckoning would come sometime after 2008. It arrived 18 months early. As many as 1.7 million Americans are expected to lose their homes in the months ahead. For many, this will mean the beginning of a downward spiral into poverty.

Between March 2006 and March 2007 personal-bankruptcy rates soared more than 60 percent. As families went into bankruptcy, more and more of them came to understand who had won and who had lost as a result of the president’s 2005 bankruptcy bill, which made it harder for individuals to discharge their debts in a reasonable way. The lenders that had pressed for “reform” had been the clear winners, gaining added leverage and protections for themselves; people facing financial distress got the shaft.
And Then There’s Iraq

The war in Iraq (along with, to a lesser extent, the war in Afghanistan) has cost the country dearly in blood and treasure. The loss in lives can never be quantified. As for the treasure, it’s worth calling to mind that the administration, in the run-up to the invasion of Iraq, was reluctant to venture an estimate of what the war would cost (and publicly humiliated a White House aide who suggested that it might run as much as $200 billion). When pressed to give a number, the administration suggested $50 billion—what the United States is actually spending every few months. Today, government figures officially acknowledge that more than half a trillion dollars total has been spent by the U.S. “in theater.” But in fact the overall cost of the conflict could be quadruple that amount—as a study I did with Linda Bilmes of Harvard has pointed out—even as the Congressional Budget Office now concedes that total expenditures are likely to be more than double the spending on operations. The official numbers do not include, for instance, other relevant expenditures hidden in the defense budget, such as the soaring costs of recruitment, with re-enlistment bonuses of as much as $100,000. They do not include the lifetime of disability and health-care benefits that will be required by tens of thousands of wounded veterans, as many as 20 percent of whom have suffered devastating brain and spinal injuries. Astonishingly, they do not include much of the cost of the equipment that has been used in the war, and that will have to be replaced. If you also take into account the costs to the economy from higher oil prices and the knock-on effects of the war—for instance, the depressing domino effect that war-fueled uncertainty has on investment, and the difficulties U.S. firms face overseas because America is the most disliked country in the world—the total costs of the Iraq war mount, even by a conservative estimate, to at least $2 trillion. To which one needs to add these words: so far.

It is natural to wonder, What would this money have bought if we had spent it on other things? U.S. aid to all of Africa has been hovering around $5 billion a year, the equivalent of less than two weeks of direct Iraq-war expenditures. The president made a big deal out of the financial problems facing Social Security, but the system could have been repaired for a century with what we have bled into the sands of Iraq. Had even a fraction of that $2 trillion been spent on investments in education and technology, or improving our infrastructure, the country would be in a far better position economically to meet the challenges it faces in the future, including threats from abroad. For a sliver of that $2 trillion we could have provided guaranteed access to higher education for all qualified Americans.

The soaring price of oil is clearly related to the Iraq war. The issue is not whether to blame the war for this but simply how much to blame it. It seems unbelievable now to recall that Bush-administration officials before the invasion suggested not only that Iraq’s oil revenues would pay for the war in its entirety—hadn’t we actually turned a tidy profit from the 1991 Gulf War?—but also that war was the best way to ensure low oil prices. In retrospect, the only big winners from the war have been the oil companies, the defense contractors, and al-Qaeda. Before the war, the oil markets anticipated that the then price range of $20 to $25 a barrel would continue for the next three years or so. Market players expected to see more demand from China and India, sure, but they also anticipated that this greater demand would be met mostly by increased production in the Middle East. The war upset that calculation, not so much by curtailing oil production in Iraq, which it did, but rather by heightening the sense of insecurity everywhere in the region, suppressing future investment.

The continuing reliance on oil, regardless of price, points to one more administration legacy: the failure to diversify America’s energy resources. Leave aside the environmental reasons for weaning the world from hydrocarbons—the president has never convincingly embraced them, anyway. The economic and national-security arguments ought to have been powerful enough. Instead, the administration has pursued a policy of “drain America first”—that is, take as much oil out of America as possible, and as quickly as possible, with as little regard for the environment as one can get away with, leaving the country even more dependent on foreign oil in the future, and hope against hope that nuclear fusion or some other miracle will come to the rescue. So many gifts to the oil industry were included in the president’s 2003 energy bill that John McCain referred to it as the “No Lobbyist Left Behind” bill.

Contempt for the World

America’s budget and trade deficits have grown to record highs under President Bush. To be sure, deficits don’t have to be crippling in and of themselves. If a business borrows to buy a machine, it’s a good thing, not a bad thing. During the past six years, America—its government, its families, the country as a whole—has been borrowing to sustain its consumption. Meanwhile, investment in fixed assets—the plants and equipment that help increase our wealth—has been declining.

What’s the impact of all this down the road? The growth rate in America’s standard of living will almost certainly slow, and there could even be a decline. The American economy can take a lot of abuse, but no economy is invincible, and our vulnerabilities are plain for all to see. As confidence in the American economy has plummeted, so has the value of the dollar—by 40 percent against the euro since 2001.

The disarray in our economic policies at home has parallels in our economic policies abroad. President Bush blamed the Chinese for our huge trade deficit, but an increase in the value of the yuan, which he has pushed, would simply make us buy more textiles and apparel from Bangladesh and Cambodia instead of China; our deficit would remain unchanged. The president claimed to believe in free trade but instituted measures aimed at protecting the American steel industry. The United States pushed hard for a series of bilateral trade agreements and bullied smaller countries into accepting all sorts of bitter conditions, such as extending patent protection on drugs that were desperately needed to fight aids. We pressed for open markets around the world but prevented China from buying Unocal, a small American oil company, most of whose assets lie outside the United States.

Not surprisingly, protests over U.S. trade practices erupted in places such as Thailand and Morocco. But America has refused to compromise—refused, for instance, to take any decisive action to do away with our huge agricultural subsidies, which distort international markets and hurt poor farmers in developing countries. This intransigence led to the collapse of talks designed to open up international markets. As in so many other areas, President Bush worked to undermine multilateralism—the notion that countries around the world need to cooperate—and to replace it with an America-dominated system. In the end, he failed to impose American dominance—but did succeed in weakening cooperation.

The administration’s basic contempt for global institutions was underscored in 2005 when it named Paul Wolfowitz, the former deputy secretary of defense and a chief architect of the Iraq war, as president of the World Bank. Widely distrusted from the outset, and soon caught up in personal controversy, Wolfowitz became an international embarrassment and was forced to resign his position after less than two years on the job.
Globalization means that America’s economy and the rest of the world have become increasingly interwoven. Consider those bad American mortgages. As families default, the owners of the mortgages find themselves holding worthless pieces of paper. The originators of these problem mortgages had already sold them to others, who packaged them, in a non-transparent way, with other assets, and passed them on once again to unidentified others. When the problems became apparent, global financial markets faced real tremors: it was discovered that billions in bad mortgages were hidden in portfolios in Europe, China, and Australia, and even in star American investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other developing countries—innocent bystanders, really—suffered as global risk premiums soared, and investors pulled money out of these emerging markets, looking for safer havens. It will take years to sort out this mess. Meanwhile, we have become dependent on other nations for the financing of our own debt. Today, China alone holds more than $1 trillion in public and private American I.O.U.’s. Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion. Most likely these creditors will not call in their loans—if they ever did, there would be a global financial crisis. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means. Just as Guantánamo and Abu Ghraib have eroded America’s moral authority, so the Bush administration’s fiscal housekeeping has eroded our economic authority.The Way Forward
Whoever moves into the White House in January 2009 will face an unenviable set of economic circumstances. Extricating the country from Iraq will be the bloodier task, but putting America’s economic house in order will be wrenching and take years.

The most immediate challenge will be simply to get the economy’s metabolism back into the normal range. That will mean moving from a savings rate of zero (or less) to a more typical savings rate of, say, 4 percent. While such an increase would be good for the long-term health of America’s economy, the short-term consequences would be painful. Money saved is money not spent. If people don’t spend money, the economic engine stalls. If households curtail their spending quickly—as they may be forced to do as a result of the meltdown in the mortgage market—this could mean a recession; if done in a more measured way, it would still mean a protracted slowdown. The problems of foreclosure and bankruptcy posed by excessive household debt are likely to get worse before they get better. And the federal government is in a bind: any quick restoration of fiscal sanity will only aggravate both problems.

And in any case there’s more to be done. What is required is in some ways simple to describe: it amounts to ceasing our current behavior and doing exactly the opposite. It means not spending money that we don’t have, increasing taxes on the rich, reducing corporate welfare, strengthening the safety net for the less well off, and making greater investment in education, technology, and infrastructure.

When it comes to taxes, we should be trying to shift the burden away from things we view as good, such as labor and savings, to things we view as bad, such as pollution. With respect to the safety net, we need to remember that the more the government does to help workers improve their skills and get affordable health care the more we free up American businesses to compete in the global economy. Finally, we’ll be a lot better off if we work with other countries to create fair and efficient global trade and financial systems. We’ll have a better chance of getting others to open up their markets if we ourselves act less hypocritically—that is, if we open our own markets to their goods and stop subsidizing American agriculture.

Some portion of the damage done by the Bush administration could be rectified quickly. A large portion will take decades to fix—and that’s assuming the political will to do so exists both in the White House and in Congress. Think of the interest we are paying, year after year, on the almost $4 trillion of increased debt burden—even at 5 percent, that’s an annual payment of $200 billion, two Iraq wars a year forever. Think of the taxes that future governments will have to levy to repay even a fraction of the debt we have accumulated. And think of the widening divide between rich and poor in America, a phenomenon that goes beyond economics and speaks to the very future of the American Dream.

In short, there’s a momentum here that will require a generation to reverse. Decades hence we should take stock, and revisit the conventional wisdom. Will Herbert Hoover still deserve his dubious mantle? I’m guessing that George W. Bush will have earned one more grim superlative.

Anya Schiffrin and Izzet Yildiz assisted with research for this article.
Joseph Stiglitz, a leading economic educator, is a professor at Columbia.