History Provides Guide for Ending Recession

Paul Krugman, winner of the Nobel Prize in Economics in 2008, has written a cogent and timely op-ed in the New York Times illuminating what is currently going on at the nexus of economics and politics. For Krugman's biography click here. What is especially fascinating is his analysis of how reminiscent the present situation is of the dynamics existing in 1938 during the New Deal. Then as now, the United States stood at the crossroads of deciding whether to continue or contract government stimulus of the economy.

Krugman's piece, "1938 in 2010," begins with a setting up of the parallel scenario: "Here's the situation: The U.S. economy has been crippled by a financial crisis. The President's policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections." Sound familiar? It ought to. The situations facing Franklin Roosevelt in 1938 and Barack Obama in 2010 are eerily alike.

Krugman goes into how FDR listened to the deficit hawks in 1937 and pulled back New Deal expenditures, only to see the economy begin to soften alarmingly. He was able to rush some emergency funding through, which stabilized the situation, but public opinion had begun to set against any more deficit spending-just like today. The Gallup poll in March 1938 found that 63% favored cutting taxes on business and only 15% favored additional spending to improve the economy. In the midterms the Democrats "lost 70 seats in the House and 7 in the Senate."

Fortunately for the economy, the situation was retrieved by the need to rearm as the clouds of war began to gather over Europe in 1939. You ought to take a look at Krugman's piece to see how massive this government stimulus on an epic scale really was. For in economic terms, that is what the war footing essentially was from 1939 to 1945, an immense government spending and jobs program that achieved full employment and actually reduced the debt as a percentage of GDP as the national economy exploded.

Today we are again faced with the same dynamics, though there appears to be little chance of an overwhelming set of circumstances arising (such as the need to prepare for and fight WWII) to fortuitously restore the consensus for government spending to prime demand and end the Recession. In that sense, Krugman is right to make the case that we seem too often not to learn from history, that too many politicians and economists have been "unlearning the lessons of the 1930s" and appear ready to commit "all the same mistakes."

Krugman is right on the mark in closing with, "But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here's hoping we find those virtues in the not too distant future."

Is Obama Caving to Banks?

Right wing pundits like Sean Hannity and the Republican congressional leadership characterize President Barack Obama more and more openly as a socialist bent on having the federal government take over the national economy. Their liberal counterparts such as Bill Moyers and the Huffington Post accuse the same man of showing himself to be captive to if not a toady of the very financial insiders who have taken the world economy to the precipice. So what is he, radical leftist or closet reactionary?

The answer, of course, is neither. When I hear both the far left and the far right going bananas my BS indicator lights up. It usually indicates someone is charting a moderate or a pragmatic course. Based on his books, his campaign and his statements on the issues so far, I think Obama gets the gist of what is happening very well. Obama is a pragmatist with a heart; that is what gives him a liberal bent. He wants to solve problems and get people the help they need. He is not a doctrinaire ideologue.

Look at his stance on health care, for instance. He wants people to have health coverage. If the private market were working he would have no problem with doing it that way. But it doesn't. Nearly 50 million people are without coverage and millions more with coverage are denied the care they need by companies whose interest lies in profit rather than providing care. Consequently we will see an effort to modify the system to make them compete against a government entity that exists to provide care. It's not the single payer the left wants. It's not the unfettered free market the right wants. It jumps out of the ruts of the ideological divide; it's a hybrid.

Word comes today from Bloomberg that the Congressional Oversight Panel led by Harvard Law School Professor Elizabeth Warren is suggesting stronger action, including, "getting rid of top executives and liquidating problem banks." The majority of the group, appointed by Democrats, said it was offering "potential policy alternatives" to the way Treasury Secretary Timothy Geithner has restructured the TARP setup and "not endorsing any shift at this time." Still, Warren said in an interview that bank liquidation could work faster and be, "least likely to sap the patience of taxpayers" and "provide clarity relatively quickly" to the markets.

Geithner's plan for using government leverage to incentivize investors to bid on loan portfolios containing unknown amounts of "toxic" subprime mortgages is similarly running into a lot of criticism from the left. Sam Stein in Huffington Post, for instance, quotes Columbia University economist Jeffrey Sachs as saying, "The amount of potential rip-off in the Geithner-Summers plan is unconscionably large." Bill Moyers and Michael Winship in Truthout write of a number of fears based on the reduction of FBI agents overseeing banking since 9/11, reasoning by analogy based on the S & L Crisis of the late 80s and the financial industry connections of Geithner and Larry Summers to conclude without any real evidence that criminality and favoritism are at the root of their approach to the crisis. It may be, but circumstantial evidence and suspicion are not proof.

An insight into what is likely happening comes from a scoop reported on Politico on April 3 and since picked up by others. The article by Eamon Javers, "Inside Obama's Bank CEOs Meeting" offers a fascinating glimpse of the president at work. Five White House figures were there: Chief of Staff Rahm Emanuel, Geithner, Council of Economic Affairs Chair Christina Romer, Senior Adviser Valerie Jarrett and National Economic Council Director Summers. Summers was so quiet the source speculated he had been told not to say anything.

There were no trappings of ceremony. Obama came in, went around the table and shook hands. He took his seat and said, "So let's get to it." His demeanor to "the titans of finance - men used to being the most powerful man in almost any room - was 'I'm the president, and you're not.'" He ran down the economic situation "for several minutes without notes," finally touching on Wall Street compensation. "The anger, gentlemen, is real." He said rewards must be "proportional, balanced, and tied to the health and success of the company."

"These are complicated companies," one CEO began. Another said, "We're competing for talent on an international market," trying to justify enormous salaries and bonuses. But President Obama was in no mood to hear them out. "Be careful how you make those statements, gentlemen. The public isn't buying that. My administration is the only thing between you and the pitchforks." Some wanted to start paying back the money early. He told them no, they would pay back the money on the schedules Treasury had devised. There would be also be regulatory reform coming and they would swallow it and like it. He said, "This is like a patient who's on antibiotics. Maybe the patient starts feeling better after a couple of days, but you don't stop taking the medicine until you've finished the bottle."

This doesn't sound like a man who is beholden to these men, in awe of them or uncomprehending of the issues relating to finance. It sounds like a man who knows exactly what he wants to do and is in the process of doing it - just as he is in practically every other matter on his very full plate. It's possible that Obama is wrong here, that heads should be rolling and half the country's major financial institutions ought to be in Chapter 11. Some say the president is showing a lack of intestinal fortitude, that when it comes down to it he is a wimp.

Or maybe not. At the very moment he was addressing these executives, GM CEO Rick Wagoner was in a private meeting he had been summoned to with Obama's Auto Task Force Senior Advisor Steve Rattner, who summarily informed him that his resignation would be required immediately. I'd say it looks like Obama thinks things can be righted the way he is going about it. The situation with Wagoner shows he will be ruthless when necessary. If the banks need it too I suspect he will pull the trigger when he judges the time has come. He doesn't think it has, yet. The guy is very smart, very sequential and deadly serious behind that infectious smile. He's been on the job ten weeks. I say give him time to unfold his strategy. It may just be that he knows precisely what he's about, and that some are underestimating him. It wouldn't be the first time.

Enough of "Too Big to Fail"

One result of the financial industry crisis is a startling awareness of just how vulnerable the American economy and citizenry are to the policies and performances of megacorporations. Cases such as AIG and Citigroup make plain that the private decisions of such large and crucially positioned companies can have very public ramifications. They are are deemed "too big to fail." With this realization has come the dawning comprehension that their profits may be private but their liabilities, when they become serious enough, fall to the public charge. That is because of the fear that their failure would drag the rest of the national economy down into Depression with them, a fear that may well be true.

What do you do when the public of a democracy is at the mercy of people who are not accountable to the public? For starters, companies that have received federal "bailouts" should be under some rather strict federal requirements as a condition for getting the funds. It seems the Bush Administration utterly failed in this regard. Thus far as the case of AIG seems to indicate, the Obama Administration is not off to a very good start either. Perhaps the "stress tests" financial institutions are undergoing may yield some benefits, but up to now the government has acted as though it is afraid of the big banks.

That has to stop. Those who seek money are the ones with hat in hand. Contrast the harsh terms imposed on the automakers, with blue-collar workers having to grant concessions in exchange for their bosses getting money, with the lack of requirements made of banks as they continue with lavish bonuses and a reluctance to evidence transparency. Obama's rhetoric on this has been excellent. But up to now the oversight of his minions appears to be sorely disappointing.

A second point is that once the government (the taxpayers, the people) has contributed enough to have a majority stake in an entity, they should own it with all the rights that implies. AIG, for instance, has gotten enough help to be 80% government-owned. Companies like that should be in receivership like bankrupted citizens or failed banks taken over by the FDIC. There could be terms for them to repay the assistance or buy back their shares and return to private status, but only after they have met their obligations to the people who have acquired them first. And that is us.

Third, we need to consider not allowing anyone to get "too big to fail" any more. There was a time when antitrust was enforced, but that seemingly was a long time ago. America's Community Banks see the inequity and are complaining about it. C. R. Clouthier, President of Midsouth Bank in Louisiana, told the House antitrust subcommittee Tuesday, "Excessive concentration has led to systemic risk and the banking crisis we now face." Speaking for the Independent Community Bankers of America, Clouthier said his fellow small bankers felt it is patently unfair that big banks get bailed out while community banks are summarily shut down. "Community banks are angry," he said. See an article on this here.

The solution, he offered, was for Congress to "identify banks or other financial institutions that have become so large that their failure poses a systemic risk and put them under federal supervision." These might be placed under the Federal Reserve. The idea calls to mind the old Public Utilities Commission, which used to regulate "Ma Bell," the one national phone company, for decades.

The idea no doubt has merit if the alternative is to simply leave the economy once again at the mercy of the greedy and shortsighted grubbers on Wall Street. Of course, another approach might also be to prevent anyone from getting that big, as antitrust was wont to do in the days of someone like Teddy Roosevelt vis a vis Standard Oil. But perhaps that is hoping for too much of a good thing.

CNBC Follies

Some on Wall Street don't seem too supportive of President Obama's recovery plan. The market is continuing to trend lower, and some are attributing it to their reaction to moves from D.C. They especially don't like the idea of bailing out some people in troubled mortgages. Bailouts for themselves, of course, are just fine.

"The Daily Show" with John Stewart ran a terrific opening segment on Wednesday night. Stewart invited CNBC commentator Rick Santelli onto his program. Santelli accepted. Santelli is the former derivatives trader who went on a tirade against Obama's homeowner bailout idea on CNBC recently. Then Santelli backed out on Stewart.

Stewart let him have it with both barrels. Or rather, he let CNBC have it. In a brilliant eight minutes "The Daily Show" absolutely skewered the business "experts" at CNBC and their pathetically inaccurate prognostications over the past year. Among some of the gems:

"Bear Stearns is fine. Bear Stearns is not in trouble."
"Lehman Brothers is not Bear Stearns."
"The Bank of America is going to $60 in a heartbeat." (It now sells for under $3.)
"AIG's obviously not going bankrupt."
"The worst of this subprime business is over."
"You should be buying things and accept that they're overvalued."
"The upside potential (of GM) is good."
"Will Merrill (Lynch) need to raise capital? No."

You can watch "The Daily Show" fun for yourself by clicking here. When bozos like these express lack of confidence in Obama's plans it makes it ever more likely they will be a smashing success.

Canada Gets It Right

The American financial system, economy, housing and equity markets continue to plummet. With President Obama's signature on the stimulus today, immense efforts are now underway to unfreeze credit and jolt demand back into place. Meanwhile, north of the border, our unpretentious Canadian neighbors furnish an example of responsible, comprehensive thinking we would do well to emulate.

We have brought most of our current woe on ourselves by following foolish ideology and by our unwillingness to address critical issues. Newsweek's insightful foreign affairs columnist Fareed Zakaria profiles how Canada gets it right in "Worthwhile Canadian Initiative" in the magazine's February 16 issue. You can go to the original here.

For starters, Canada refused to go along with the deregulate at all costs banking ethic. As Zakaria reports, "Canadian banks are typically leveraged at 18 to 1--compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1." As a result, Canada is the only country, "in the industrialized world," that, despite crisis all around it in the past year, "has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors." Canada's banking system is currently rated "the healthiest in the world" by the World Economic Forum. Ours comes in at number 40. Its largest bank, Toronto Dominion has gone from the 15th largest bank in North America a year ago to number 5 now. Why? "It hasn't grown in size; the others have all shrunk."

Canada has also confronted serious fiscal issues our politicians have been afraid to tackle honestly. For one, it's "had 12 years of budget surpluses and can now spend money to fuel a recovery from a strong position." Its counterpart to our Social Security has been put on a sound actuarial footing. Its integrated health system costs just 9.7% of GDP, compared to our 15.2%, and delivers far better results in terms of longevity and healthy years of life. An ominous result is that, "American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America's largest car-producing region."

Canada also has a far more intelligent immigration system. "Visas are awarded on educational level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25points, for instance), he or she can become a full-time, legal resident of Canada." Microsoft recently opened a research center in Vancouver to, the company announcement said, take advantage of "highly skilled people affected by immigration issues in the U.S." As Zakaria puts it, "So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada--where most of them will work and pay taxes for the rest of their lives."

There are a lot of good examples to be found in our quiet neighbor to the north. We would do well to carefully study their model for application to some our own difficulties with finance, housing, competitiveness, health care and immigration. Feelings of superiority and a refusal to learn from others are dubious luxuries we can ill afford in these times.

What Would Lincoln Do?

Today, February 12, is Abraham Lincoln's birthday. The future Sixteenth President was born in a hovel in backwoods Kentucky on this day 200 years ago. To mark the occasion there is a tremendous article by David Von Drehle in the new edition of Time Magazine entitled "What Would Lincoln Do?" It's the kind of treatment thoughtful people ought to read. You can find it here.

Naturally, most of the analysis of Barack Obama's historical significance has concentrated on his status as the first black president. That status cannot help but associate him with Lincoln. "And," as Von Drehle writes, "this already keen interest has been further stoked by what Lincoln Bicentennial Commission executive director Eilenn Mackevich calls an 'Obama wind.' The new President, another slender fellow from Illinois, has been busy reading about Lincoln, quoting Lincoln, evoking Lincoln. The Lincoln Memorial was among Barack Obama's first stops in Washington, and when Obama was sworn in last month it was, for many, the culmination of a long march that began with Lincoln's Emancipation Proclamation."

But the Time article asks us to take a look at a different facet of how the two are similar, and that is in economics. "Long before he gave his first speeches about Union or slavery, Lincoln was a crusader on questions of economic development and banking. He cut his political teeth on conditions painfully topical for us today: an economic crash that left the young legislator struggling to shore up a failing bank while arguing for government spending on public works."

He was familiar with the cycles of boom and bust, having seen "major economic crashes" in 1837 and 1857. "He believed that government had a leading role to play in building the infrastructure of a growing economy. But the guiding principle for all of it, the whole reason for the nation's being, was that "equal chance," the humble citizen's right to get ahead." And it was public action that would help make that possible. He saw what had happened in New York with the completion of the Erie Canal connecting the Atlantic with the Great Lakes. "Attacked and derided as government waste, the Erie Canal was carrying more freight within a few years than the entire Mississippi River." It made New York the megalopolis of the continent and brought opportunity to formerly isolated farmers and craftsmen through the ability to use it to "move their produce to distant markets."

In the 1837 crash, "Financial markets froze, government debt soared, public opinion soured on the maneuverings of bankers and the schemes of politicians." Yet, "at the risk of his budding political career, Lincoln struggled to save the canals and the railroads." He maintained, "The way to save the system was to pump more money into it." Like a stalled steam engine, he likened the economy to being at a "dead point." From there, he said, even a single turn is "extremely difficult," but jolt it back to life and it quickly regains momentum.

His activist economic legacy as president was practically unprecedented. Von Drehle points out that Lincoln, "worked an unprecedented economic transformation on the country," marked by "creative finance, large ambition and the spirit of economic advancement." He introduced an income tax, large-scale bond sales, paper currency and new controls on banks to fund the Civil War. In the midst of it he sponsored the Homestead Act, the Morrill Land-Grant College Act and the Transcontinental Railroad. These brilliant initiatives are paying dividends still today. He even continued construction on the Capitol Dome. It is easy to draw the similarities between Abraham Lincoln's public infrastructure and finance activism and that which Barack Obama seeks to do in the difficult straits of 2009.

No doubt Old Abe would be fascinated if he could come back today and see the first president of African descent ensconced in his former digs. He would surely be proud to learn the fellow is from Illinois. But he might be just as gratified to see his twenty-first century successor turning to the same kinds of opportunity and stimulus-creating ideas he pioneered back then, and against opposition just as dead-set against the very principles. It is easy to imagine the Rail Splitter nodding that big, shaggy head of his in approval.

What the Stimulus Cuts Mean

Now that we have some numbers on the Senate compromise for the Stimulus Package I feel I can make some comments. Moderate Republican Senators Susan Collins and Olympia Snowe from Maine and Arlen Specter from Pennsylvania emerged from negotiations with twelve to fifteen moderate Democrats led by Ben Nelson of Nebraska and announced agreement had been reached to cut some $110 billion from the Stimulus Bill passed by the House. Because the Republican leadership has said it will filibuster if the Democrats cannot get 60 votes the Democrats needed at least two Republicans to cross party lines.

The Senate version, to be voted on Tuesday, comes to $827 billion. That's actually more than the House's $819 billion. That's because the Senate version includes the annual extension of relief from the Alternative Minimum Tax for inflation. The House version did not include this, and in order to reconcile the two bills either the House will have to cut over $90 billion from what they have already approved or the Senate will have to restore some cuts. Of course, that is all up to the three Republican crossovers. Any two of them could scuttle the whole deal.

The caucusers pruned the easy, low-hanging fruit, of which there was precious little in this bill compared to the usual Washington budget offering. Nobel economist Paul Krugman mentioned tonight it was less than 2%. At any rate, 83% of the $110 billion in cuts come from seven items. They are: Aid to State Education Budgets $20 b, Aid to States $40 b, School Construction $16 b, State Incentive Grants $ 7.5 b, Higher Education Construction $3.5 b, Federal Building Greening $3.5 b, and aid to implement No Child Left Behind $600 million.

These are not cuts of "pork barrel spending." Except for the Federal Building Greening, which of itself is a wise investment that will pay for itself in a few years while helping clean the air, they all represent programs directly related to saving or creating jobs by getting fiscal aid to states hard-pressed by the recession. Forty-six states face deficits due to the recession. On Meet the Press this morning Rep. Barney Frank (D-MA) said, "That's the wasteful spending that my colleagues are talking about. Money to go to the states to stop them from laying off cops and firefighters, money to help keep teachers going. Those are jobs."

His counterpart on the program, Sen. John Ensign (R-NV) pooh-poohed Frank's contention. "You know, that's just fear mongering. We're not going to be doing that in any of the states. (The states') budgets are bloated, the federal government's budget is bloated. What we should be doing is cutting back." You can read a synopsis and see the comment here

As so often seems to be the case, the Republican is wrong not only on the economics but also on the facts. The Center on Budget and Policy Priorities reports that already

Florida has cut aid to local school districts for the current year by $140 per pupil. South Carolina has cut per-pupil funding by $95 in the current year. Maine has cut K-12 funding about $140 per pupil; this comes on top of education cuts earlier this year that were targeted to reduce specific programs. Georgia’s governor has proposed cutting aid to local school districts for the current year by $115 per pupil, and for the coming fiscal year by $189 per pupil.

The report mentions an additional twenty-three states in the process of initiating drastic education cuts of their own. It then concludes,

State deficits over the next two and a half years are likely to total more than $350 billion. With education accounting for such a large share of state general fund budgets, it is difficult for states to avoid these types of damaging cuts — which will only get deeper as the recession continues. The federal government, which can and should run deficits during a recession, could provide assistance to states to help them avoid these actions.

And this is only the effect on education. With deficits like these in prospect there are likely to be similar pressures on law enforcement, sewers, water, parks, libraries, public health and all the other things state governments do. Sen. Ensign and his ideological soul mates may think cutting these appropriations will save money, but in the long run they will cost a great deal of it when states, counties, cities and school districts have to lay off hundreds of thousands of workers to balance their budgets.

If the Stimulus package passes in its present form expect a hue and cry from desperate governors (including big-state Republican heavyweights Arnold Schwarzenegger of California and Charlie Crist of Florida who have already spoken about the critical need for these funds) demanding reinstatement. Economist Krugman also said the package may already be too small as it is. He reported consumer spending is expected to be off $2.8 trillion in the coming two and a half years and the Stimulus is now at barely $800 billion. For these reasons I do not believe all these cuts will ultimately stand.

Recession Economics 101

I am waiting for more definitive information to come out on the Stimulus compromise before offering a more detailed analysis of it. Word tonight is that moderate Republican Senators Susan Collins, Olympia Snowe and Arlen Specter, meeting with about a dozen Democratic moderates have cut about $110 billion off the Administration proposal, to about $780 billion. I will want to see what has been cut and what retained before commenting.

The debate so far clearly demonstrates that the lion's share of remaining Republicans have learned nothing from their disastrous mismanagement of the economy over the past eight years and indeed the impetus of the past twenty-eight.

Let me see if I can make this simple. An economy goes into a recession because people are not buying enough. In other words, demand is low. When sales go down companies cut back production (or orders if they are retailers, or services if they are a service provider, and so on) and labor costs, because there are not enough sales to justify full production or service and therefore not enough work to justify a full payroll.

The people who are laid off lose their income and cut back drastically on their spending. If this happens to a lot of people it means still less demand, requiring further cuts in production and employment across the economy. It becomes a "downward spiral." That is what we are in now. The Labor Department reported today that job losses accelerated to 598,000 in January, the fourth worst month ever recorded in U.S. history. We have lost 3.6 million jobs since the beginning of the recession, more than half of these in the past four months.

On top of that, once people sense the economy is in recession even those with jobs spend less. They fear they may be next to be laid off, so they save any extra money to get them through hard times should they lose their jobs. This depresses demand even more.

In our present particular case we also have the added burden of the housing bubble and related financial crash. Banks lost so much money making foolish loans they are cash-poor and gun shy about making new loans. People have little or no equity in their homes to secure new loans anyway. And companies see little reason to borrow to expand in an economic climate with no demand for their goods or services, even if the banks would make it available at reasonable rates, which they are not.

What did President Bush try to do about this? He passed a $170 billion stimulus plan based on tax rebates a year ago, in February, 2008. The recession has only deepened since. That is because people, with recessionary expectations, did not spend the money. They saved it or used it to pay down things like credit card debt. Next he led a $700 billion effort to subsidize and partially nationalize, at least temporarily, the financial industry. Half of that has been committed, and it has accomplished little as well, since there were no sensible requirements that the banks use the money to lend to people or to avoid wasting it on bonuses to the super rich, junkets and such.

So, what did Senators McCain, Kyl, McConnell, Graham and most other Republicans do? Thirty-six of them voted in favor of McCain's amendment to get rid of almost all the spending in Obama's recovery bill and just have tax cuts. That is thirty-six of the forty-one, or almost 90% of them, voted to reinforce failure by continuing to do what did not work last time, or the time before that, or the time before that. They do not learn because they have their beliefs, which are impervious to results.

What Obama and most Democrats want to do is to get spending going in the economy by having the government do it. If business can't, the banks won't, and consumers either cannot or dare not, who else is there to restore demand? That's right, only the government in such a climate can spend the kinds of sums necessary to increase sales for goods and services which will result both in the direct creation and restoration of jobs and the breaking of the recessionary cycle. The theory behind this has been established for over seventy years and has been successful in overcoming many recessions over the decades. Look up a selection of biographies of economist John Maynard Keynes here.

Wall Street Whistle Blower Vindicated

Harry Markopolos is not a household name, but he soon could be. For nearly ten years the investor and former securities industry executive and fraud investigator carried on a fruitless campaign to get federal regulators to thoroughly examine the dealings of now-disgraced pyramid scammer Bernie Madoff. Now that Madoff's $50 billion Ponzi scheme has been revealed, Markoplos is seen as something of a prophet. He testified before the House Financial Services subcommittee this week. You can read the Los Angeles Times story about it here.

"The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion," Markopolos told the subcommittee. "It took me about five minutes to figure out he was a fraud." Markopolos came to that conclusion in 2000, based on comparing the strategy Madoff touted with the results he claimed he was getting. It just didn't add up.

Markopolos and his team of four investigators found 29 separate "red flags" about the Madoff operation. Over the years he delivered his findings and evidence to the Securities and Exchange Commission, former New York Attorney General Eliot Spitzer and the Wall Street Journal. Markopolos was not reticent about the reasons he feels no investigations were launched. He cited the incestuous pattern of former Wall Street figures regulating their own industry before cycling back into the business.

Markopolos testified, "The SEC is captive to the industry it regulates and is afraid." As a one-time chairman of the NASDAQ stock market and a member of the SEC Advisory Committee, Madoff was, "one of the most powerful men on Wall Street and in a position to easily end our careers or worse." For this reason, he said, "the agency is busy protecting the big financial predators from investors," and, "roars like a lion and bites like a flea."

SEC Division leaders Linda Thomsen and Lori Richards and industry self-regulator Stephen Luparello were heard by the committee last week, in performances that left the congressmen, "scarcely satisfied," according to the Times, and legislators of both parties are calling for a major shakeup. Markopolis pointed to the Financial Industry Regulatory Authority as, "very corrupt." It was headed by Mary Schapiro until December. She is now the Head of the SEC.

What Obama Should Do Next

Thus far it appears the Republicans are getting the better of the stimulus bill debate. The Congressional GOPers are both nit-picking it on details and attacking its basic premises, contending as always that spending is bad and tax cuts are good. Even though a tax cut never built a highway or a bridge, if President Obama is not able to recapture the initiative in this debate the Republicans just may succeed in gumming up the works and stymieing Obama on his biggest initiative right out of the gate. They would like nothing better than to do this, for they would seem powerful and he crippled and ineffective for a long time to come.

For his part, Obama, due to his continuing efforts to woo Republicans and foster bipartisanship, cannot use his strongest argument, the one that was so effective in the campaign. If he wanted to skewer the naysayers all he would need do would be to remind Americans that these same people and their discredited philosophies were what got us into this mess in the first place. We have followed their prescription of cutting taxes and domestic programs while deregulating business and fighting unnecessary wars and have achieved the customary results. Anyone who would turn the economy back over to them after the last eight years must have a short memory indeed.

But he can't really talk like that if he wants to preserve any chance of bipartisanship going forward. They know this, and thus their cooperation will come with a higher price than it would otherwise bring. So they find fault with the specifics they can. Obama said today in an interview with NBC anchor Brian Williams that the total of all the spending components that anyone has objected to so far accounts for less than one percent of the package. But it is the continuing dynamic of them finding fault that is the primary story.

Obama needs to turn that around with an attention-getting part of the bill that will get people excited. Computerizing medical records, as smart and needed as that is, does not cross the excitement threshold. Neither does weatherstripping and insulating federal buildings. People want to see tangible evidence of activity, and that usually means construction, a lot of it. Obama will make a good splash tomorrow by announcing a cap on salaries for companies that have taken federal bailout money. That will play well because people are extremely angry at fat cats who've fed at the public trough and kept on with business as usual. But he should also find a visionary part of the stimulus to stand as his poster child for the public relations war now underway. Franklin Roosevelt did that with the Grand Coulee Dam and Jack Kennedy with the space program in their days, for instance. Obama would be wise to target from among the projects in his bill a 21st century equivalent.

One can hardly fault the Republicans for pushing for what they believe in, nor Obama for trying to change the partisan climate. But at some point something will have to give. Either the Republicans will need to offer meaningful cooperation or Obama will have to order the Democratic majorities in Congress to start steamrolling them and let bipartisanship be damned. If their price for partnership is a continuance of Bushism that should be a price Obama refuses to pay. That is not what a majority of nine million Americans voted for three months ago. If the president crosses the aisle too far that gurgling sound you hear will be the sound of change you can believe in sinking into the swamp of disillusionment. He should never forget one thing; he and his party won the election, and they won it big.

A Sickening Sense of Entitlement

The former CEO of Merrill Lynch spends $1.22 million of the corporation's money on decorating his office, then on his way out dishes out $3 to $4 billion of federal bailout money in bonuses to upper management--despite the fact they had led the firm to a $15 billion dollar loss and absorption by Bank of America. AIG gets $85 billion in bailout money and sends the bigwigs to a swanky California seaside resort a week later at a cost of $440,000 for the weekend. The crash of Citigroup would probably implode the stock market. It gets $45 billion of federal rescue money. The next thing you know, they are signing up for a $50 million corporate jet.

What is wrong with these people? It would never even occur to me to ask my employer to shell out money to decorate my office, particularly in dire times for the bottom line. In ten years I have asked for one paint job and to replace a ceiling tile discolored by a leak in the roof. I hesitate to use too many of the district's pens and markers. How about you? Don't you try to watch the company's pennies too? Why are these clowns so different? Simple. It's because they are not like you and me. Their lives may as well have been lived in a parallel universe compared to ours.

Most of the top management at firms like Lehman Brothers, Goldman Sachs, Citicorp, Morgan Stanley Chase and so forth come from a tiny sliver of society whose lives are as far out of the norm as the Tsar's was to his serfs. These are the children of millionaires and billionaires. They went to private boarding schools and got into Ivy League business schools as legacies. I know plenty of scholarship students who saw their type at prestigious schools. They had $1,000 a week clothing allowances, scarcely went to class and somehow muddled through with a minimum of effort. They stepped into mid-upper management right out of school based on the extensive social and business network of their fellow aristocrats. They were immediately admitted to the most exclusive clubs and associations in the Big Apple and other major financial centers.

These people have no clue what it is like to actually have to work hard, save money, land a job or keep one based on their merits. John Thain left Goldman Sachs with $300 million in stock. Merrill hired him at $83 million a year. He couldn't afford to spruce up his own office? It likely never crossed his mind. Everything is an entitlement to people like him. In one of life's supreme ironies, the wealthiest are the class most apt to get practically everything in life gratis. Connections, many decades of gaming the system to cater to their whims and address their every interest, and a casually sickening sense of entitlement make it all so common and all so easy. Warren Buffett, a self-made billionaire, is one who recognizes the incongruity for what it is, complaining of the injustice of his paying a lower tax rate than his secretary.

The current administration appears to be getting a little fed up with this state of affairs. Vice President Biden said he wanted to throw such people "in the brig." President Obama called such a lack of responsibility "shameful." It might just be that some much tighter regulations will be attached to the second half of the TARP bailout money, the half under Obama's control. There is talk of salary limits, requirements for using the money and paying it back, and so forth. The word is that much of it will go this time to help mortgage payers rather than profligate and ungrateful financial houses, anyway.

It all just goes to show that these scions of the domestic noble class cannot be trusted to take care of the national or even their own corporate interest without the most stringent regulation. This is the real "good ole boy" network writ large. They have led lives of incredible privilege, having everything handed to them. In their experience, the rest of the human race exists to provide for their every whim. They are, in short, spoiled brats. Giving them free reign has wrecked property values, retirement prospects, and the housing, stock and job markets for untold millions. Enough. Either we take control of them or they will have control of us. If it is handled right, the economic crisis caused by their overreach may prove a blessing if it shocks the public out of compliant accession to their steady accretion of power and gives Obama the political wherewithal to act.

Obama's Aid to States

One of the most important items in President Obama's stimulus package is his contemplated aid to states. This is an important component of heading off the "downward spiral" a strong recessionary economy sets in motion.

The spiral works like this. States have to balance their budgets. They cannot deficit spend like the federal government can. When the economy falters many individuals lose their jobs or earn less. Many companies make less profit or go out of business altogether. The tax contributions of these people and companies go down. With less money coming in, state governments suspend projects and lay people off. The laid off workers join the unemployed, spending less in the economy and paying less taxes. The companies who have lost their state contracts lay off more workers too. The more people without jobs, the weaker demand in the economy gets and the worse the recession gets. It's a classic catch-22.

In my city of Visalia, California a major street project on Mooney Boulevard, Visalia's main thoroughfare, has been suspended by the state budget crisis. The road remains torn up in many places, impeding access into local businesses; the contractors are without work. The phenomenon is nationwide. In Alabama, for example, the budget crunch has resulted in a 7.7% reduction in state jobs.

There is only one entity capable of reversing this contraction, the federal government in Washington. After meeting with the nation's governors in December, Obama appears ready to act. See the Wall Street Journal article on that here. California, with over 11% of the country's population, could be getting a bit more than $21 billion. That could erase about half the state's projected deficit and prevent the loss of many more jobs than would otherwise occur.

Will this recovery plan, designed to create or save now 4 million jobs, be expensive? Absolutely. But what is the cost of doing nothing? More than 2.6 million jobs have disappeared in the past year. What is the cost of that? If the dynamic goes on purchasing power will continue to decline and suck the entire economy down the maelstrom. The key is to make sure the funds, perhaps $850 billion in all, are actually spent on things that will help produce purchasing power that will circulate through the system. As Obama said in his Inaugural, the issue is not big or small government, but effective government.

In the bargain, as in the New Deal, we should also be getting some useful assets, such as modernized electrical and communications grids, restored roads and bridges, a jump on green energy production and current energy conservation, among many other long overdue infrastructure items.

As a friend of mine who is a leader in rural development in Oregon says, localities cannot act if they are offered loans. They are strapped and cannot take on more debt when they cannot even afford to meet current obligations. This is the kind of approach it is going to take to get the country moving again. We will see over the next three to four weeks whether congressional Democrats will have the discipline to stick to the essential priorities and whether congressional Republicans will decide to share credit for the recovery program as Obama is offering them or opt to reject it on the grounds they will be able to make hay if it fails. It should be interesting. In the meantime, however, the nation needs action, bold and swift.