Government Paralysis and the Social Security Trust Fund

by Allen W. Smith / June 30th, 2012

Social Security is, today, facing its greatest challenges ever, and it is not at all certain what the future holds for the program. If the surplus revenue, generated by the 1983 payroll tax increase, had been saved and invested in marketable U.S. Treasury bonds, as was the intent of the legislation, the Social Security trust fund would today hold 2.7 trillion in “good-as-gold” marketable U.S. Treasury bonds. These bonds could have been sold in the open market, as needed, and full benefits could have been paid until 2033. But the intent of the Social Security Amendments of 1983 was not followed. Instead of saving and investing the surplus money, as it was supposed to do, the government spent every dime of it on wars and other government programs.

As a result, the trust fund today holds no real assets that can be converted to cash. The $2.7 trillion of Social Security money has been misused. The money was spent for non-Social Security purposes, and it no longer exists. The government “borrowed” the money and replaced it with IOUs, called “special issues of the Treasury.” These IOUs represent an accounting record of how much Social Security money was misspent, but they cannot be converted into cash, or used to pay benefits.

Unless the government repays that $2.7 trillion, Social Security will face some hard times in the years ahead, and there is no certainty that the government will repay the money. No provisions have been made for repaying the money, and, given the political environment that currently exists, it may not be politically feasible to repay the money.

Many people have a very naïve notion of how the United States government operates.  They picture Uncle Sam as a benevolent dictator, with unlimited power, who always does whatever is right and fair. They blindly trust the government to honor all of its commitments and to look out for the best interests of the public. But that characterization of the United States government is not even remotely accurate. The government is made up of professional politicians, most of whom look out primarily for themselves and their constituents.

America is, today, travelling through uncharted political waters. Our political system has broken down, and we are going through the greatest tax rebellion since the Boston Tea Party. The organization, Americans for Tax Reform, led by Grover Norquist, has managed to get hundreds of members of Congress to sign a pledge that they will not vote for any tax increase of any kind or amount. This anti-tax movement has become very powerful, and it is a major roadblock to any tax increase, including one that might be exclusively earmarked for repaying the Social Security money.

In the summer of 2011, irresponsible politicians took the nation to the brink of national bankruptcy over what should have been a routine vote to raise the debt ceiling, and there are indications that the same thing might happen again. It is very questionable that today’s, or tomorrow’s, politicians will risk their political careers by voting for a tax increase to pay back the Social Security money that was “borrowed” and spent by yesterday’s politicians.

Finally, the government is not legally obligated to repay the Social Security money. Section 1104 of the 1935 Social Security Act, specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress,” and, in a 1960 U.S. Supreme Court ruling (Fleming v. Nestor), the Court ruled that nobody has a “contractual earned right” to Social Security benefits. Thus, Congress could legally do whatever it wanted to do with regard to changing, or even eliminating, Social Security.

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. Read other articles by Allen, or visit Allen's website.

This article was posted on Saturday, June 30th, 2012 at 7:49am and is filed under Social Security.

Corporate Profits at All-Time High; Wages at All-Time Low: Can We Call it Class War Yet?

AlterNet.org

   

AlterNet / By Sarah Jaffe

Corporate Profits at All-Time High; Wages at All-Time Low: Can We Call it Class War Yet?

The middle class is being hollowed out; increasingly, there are the super-super-rich, and there are the rest of us.

June 29, 2012  |  

 

Photo Credit: Sarah Jaffe

This week, David Segal at the New York Times broke the news to America that not only was Apple -- the computer and gadget manufacturer formerly seen as a symbol of good old American ingenuity -- making its profits on the backs of abused factory workers in China, but also on poorly paid store employees here in the US.

Apple store workers, he wrote, make up a large majority of Apple's US workforce—30,000 out of 43,000 employees in this country—and they make about $25,000 a year, or about $12 an hour.

Lawrence Mishel at the Economic Policy Institute notes that that's just a dollar above the federal poverty level. This for a company that paid nine of its top executives a total of $441 million in 2011.

“The discrepancy between Apple’s profits/executive pay and its compensation to its workers is a particularly glaring example of what is occurring in the wider economy,” Mishel writes.

And he's right. Also this week, Henry Blodget at Business Insider posted three charts that show just how out of whack our economic system really is. Corporate profits are now at an all-time high, while wages as a percent of the economy are at an all-time low, and fewer Americans are employed than at any time in the previous three decades.

Companies like Apple are squeezing their workers, leaving them to live on less, while lavishing pay and benefits on their executives. The death of lionized Apple chief Steve Jobs seems to have opened a floodgate of reporting and criticism of the company's labor practices, but all this really proves is that Jobs and his empire are no better than, and no different from the rest of the US business elite. Just like everyone else, they're taking their profits directly out of workers' pockets.

“One reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those 'wages' are other companies' revenue,” Blodget points out. And high unemployment makes workers willing to accept those poverty wages. When you're desperate for a job, any job is better than nothing.
Right-wingers from Michele Bachmann to Ron Paul have used high unemployment as an opportunity to call for eliminating the minimum wage entirely, letting companies decide just how little they think their workers are worth. Companies love to claim that if they're forced to pay more, they'll have to eliminate jobs, but these numbers show that actually, they're able to keep wages low and refuse to hire; available cheap labor supposedly leads to more job creation, but it's the hollow, gnawing fear created by ongoing high unemployment that keeps wages low and workers passive. And the rich are getting ever richer.

The “recession” is over—officially it ended in 2009, but for most people the pain was just beginning. Real incomes have continued to fall, governments continue to slash budgets while corporate profits just keep going up. This is the new normal.

And it's only going to get worse.

The rhetoric of austerity, sounded loudest from Republicans but often echoed by far too many Democrats, is a language of belt-tightening, of shared sacrifice, of somber speeches by pompous politicians who proclaim that they feel your pain while announcing budget cuts that freeze salaries, lay off workers and force more work onto those who remain. And CEOs use that same language when sorrowfully explaining why they simply can't create jobs. Morgan Stanley's CEO, James Gorman, beset by New Yorkers at his bank's shareholder meeting, blamed the lousy economy when asked why he hadn't created the jobs his company had promised the city in exchange for massive tax breaks.

Because that's what rich corporations are able to buy with their record profits; politicians who turn around and hand them even more money, often in the form of tax breaks that hollow out city and state budgets and force even more austerity, even more social service cuts that fall on the backs of the same underpaid workers. (Remember FreshDirect, handed $129 million in tax subsidies to create $8-an-hour jobs?)

Corporate taxes, too—at least the ones corporations actually pay—are at a 40-year low, with an effective tax rate paid of 12.1 percent. They've fallen from about 6 percent of GDP to less than 2 percent, according to ThinkProgress's Pat Garofalo. Once again, that's what you can buy when you'd rather pay politicians than your workers.

Chris Hayes, in his new book Twilight of the Elites, notes that the ultra-wealthy have spawned a whole “income defense” industry dedicated to preserving their wealth and power, an industry that works tirelessly to push policies that favor the rich. He writes:

Over the last decade, the political arm of the income defense industry has been wildly successful. The tax cuts passed by Bush and extended by Obama represent a total of $81.5 billion transferred from the state into the hands of the richest 1 percent. Meanwhile, hedge fund managers and their surrogates have deployed millions of dollars to lobbyists to maintain the so-called carried interest loophole, a provision of tax law that allows fund managers to classify much of their income drawn from investing gains as “carried interest” so that it is taxed at the low capital gains rate of 15 percent, rather than the marginal income rate, which would in most cases be more than twice that. It was this wrinkle in the law that helped Mitt Romney, a man worth an estimated quarter of a billion dollars, pay an effective tax rate of just under 14 percent in 2010. In 2008, 2009, and 2010, the House of Representatives passed a bill closing the loophole, only to see it beaten back by an intense wave of lobbying in the Senate.

With Citizens United, the Supreme Court gave the ultra-rich yet another weapon in the class war, another tool by which to control our politics. MIT economist Daren Acemoglu told ThinkProgress, “We already had a very serious problem. Instead of trying to stem that tide [of money in politics], we’ve done the opposite and we’ve now opened the sluice gate and said you can use that money with no restrictions whatsoever.”
It's bad enough when the rich use their money to buy themselves tax breaks that help them get even richer. But millionaires and billionaires from Bill Gates to Betsy DeVos to Mark Zuckerberg are also putting money into pet political ideas; on education, for example, where their money buys them outsized influence over policy. Politics has become a playground for the ultra-rich, where they get to test their pet theories on the rest of us and we're expected to smile and thank them for their charity.
It's not just tax breaks and subsidies that have created massive inequality—it's also full-on war on the only means of organized power that working people ever had: unions. Private-sector union density hovers around 7 percent right now, after years of concerted attacks, and for the last couple of years public sector unions have been in the 1 percent's crosshairs.

From the Supreme Court, where Samuel Alito wrote a majority decision attacking unions' ability to collect money from workers they represent for political activity, to the reelection of Scott Walker in Wisconsin, public-sector unions are under pressure. Politicians keep slashing public-sector jobs, keeping unemployment high and tax revenues low, and stalling the recovery, but they're also part of the attack on the one part of the economy that still has a strong union culture.

As unions declined, so have wages for most people. The Center for American Progress found in a study that as union membership decreases, so does the so-called middle class's share of national income. The middle class long served as a buffer between those at the top and those at the bottom. As long as the majority of Americans were comfortable, had decent jobs and pensions, and could send their kids to school, the wealthy could stay wealthy and the poor were pretty much just ignored. And that middle class was built through decades of union agitation, not just for higher wages and healthcare benefits, but for the eight-hour day, for the weekend, for safety in the workplace and some job security.

But now the middle class has been hollowed out. Increasingly, there are the super-super-rich, and there are the rest of us.

As Hayes writes, we're ruled by an ever-smaller group of elites who not only control all the resources, but all the power. The same people who are pushing wages downward are the ones paying for politicians' campaigns, and they're the same people on the boards of directors and trustees of our universities, our institutions—like JP Morgan Chase's Jamie Dimon, who serves on the Board of Directors of the Federal Reserve Bank of New York, the National Center on Addiction and Substance Abuse, the Harvard Business School, Catalyst, as well as on the Board of Trustees of New York University School of Medicine.
Meanwhile, for the vast majority of us, the recession that supposedly ended in 2009 looks more like a depression each day, and as long as low wages and high unemployment remain the order of the day, there's no recovery in sight.

Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @sarahljaffe.

Supremes’ Obamacare ruling: What me worry? Why we worry

Scott Rosenberg

Editor's blog

Supremes’ Obamacare ruling: What me worry? Why we worry

By Scott Rosenberg

Photo by Envios.

Political America waits on tenterhooks for the next 24 hours to learn how the Supreme Court will rule on the Obama healthcare reforms.

Why should we care? It’s summer!

But really: There are plenty of pragmatic, historical, and political reasons to care. What happens tomorrow will likely affect whether you and your relatives can get, or afford, health insurance. It may well determine the outcome of the election in November. It will shape the next round of the debate over how Americans pay for the kind of society they want. And it will tell us how far the Supreme Court is willing to go down the road of what James Fallows — not a rash man — has called a “long-term coup.”

But the biggest reason we should care about tomorrow’s ruling is a psychological one. The Obama health plan — for all its compromises and limitations — represents an increasingly endangered species. It’s a large-scale effort to solve a major social problem with (mostly) smart, (mostly) efficient policies — a law that leverages the power of the American people, working through the government they elect, to make their world better. This is now such a rarity in American politics that if you’re under 40, you’ve basically never witnessed it.

In other words, the survival of the Obama health reforms isn’t only about the particulars of the health insurance debate. It’s about whether we have any hope of working together to tackle all the other vast problems that we know we aren’t going to solve through individual action alone. That includes pretty much everything we write about here at Grist, from bringing down climate-change-driving carbon emissions; to rethinking our industrial food system; to expanding our transportation options and revamping our energy grid; and on and on.

These things demand not just personal choices but collective will. Collective will waxes when it achieves its ends and wanes when it’s stymied.

If the conservative machine manages to derail the health reforms, the message is clear. Activists? Give up — you’re wasting your time. Idealists? Dream on! Capitalist individualism is the only game in our town. If it proves ineffectual in solving our national problems, well, we’ll all go down together, clutching the Constitution in our air-conditioned SUVs — except for the increasing percentage of the population that can’t afford the AC, the vehicle, or the fuel.
Is the U.S. still able to apply big common solutions to our big common problems? The court’s ruling may well answer that question — and there’s a strong possibility it’s going to answer “no.”

So what will happen tomorrow? Plenty of pundits think the court will throw out much or all of Obamacare; many obviously view that as a big defeat for the president and his allies, but some argue it will invigorate them, help them in November, and give them a chance to push for a purer government-run “single-payer” health plan. (Not going to happen with the current Congress, though.) You can also find pundits who think the court will uphold all or much of Obama’s law, though again they’re divided over whether this helps or hurts the president and the cause of health-insurance reform.

My bet, which is worth almost nothing, is that the Supremes will hand down a sweeping ruling against Obamacare. The conservative ideologues who now control the court do not shrink from the big battles, and to them, this is Gettysburg, Waterloo, and Stalingrad rolled into one. Why should they content themselves with half-measures? It’s not every day that you get an opportunity to win a decisive match in the long struggle between public responsibility and private power that has shaped American history.

But isn’t the court about, like, the law? Why assume that the conservative justices are approaching this as partisan players aiming for a maximal win? Well, here’s why: That’s the way every phase of this conflict has played out over the last quarter century.

At the heart of the legal conflict the court will resolve lies the “individual mandate” — Obamacare’s requirement that everyone in the U.S. get some kind of health coverage. The individual mandate is a deeply conservative approach to the healthcare issue, one that emerged from right-wing think tanks in the 1980s as a business-friendly alternative to the much-feared “single-payer” approach, where the government just extends Medicare-like coverage to the entire population. Republicans and conservatives embraced it en masse, and Democrats largely opposed it.

Then came the Clinton impeachment fight, the Florida election debacle of 2000, the politicization of 9/11, the Bush imperial presidency and its wars — a decade and a half of conservative aggression and progressive retreat. The right woke up after Obama’s election to realize that it had succeeded in moving the goalposts. Obama, aiming to seize the middle ground and come up with a plan that some Republicans might back, said, “Okay, let’s go with the individual mandate; it’s not perfect but it’s a lot better than nothing.” A Democratic president whose top priority was passing a healthcare law was now embracing the conservative policy prescription, much to many of his own supporters’ chagrin.

So if you’re a conservative Republican, what do you do? If your aim was to solve the problem of getting health care to all Americans, you’d just notch the win and line up behind the Obama plan, which used to be your plan. What we learned since 2008 is that the right is playing an entirely different game. Obama and his supporters were playing to pass a healthcare law; the Republicans were playing to beat Obama. (Side note: This argument is partially inspired by an excellent recent post over at Talking Points Memo. Couldn’t find the link to add here. If you’re reading this and you remember it, send it on!)

And so the red-state world set out to transform the individual mandate from a market-based alternative to “socialist” collectivized medicine into what it is today — a conservative-bogeyman nightmare of, um, “socialist” collectivized medicine. Along the way, conservatives determined that this concept that their own wonks had devised was in fact an unconstitutional overreach, then re-engineered the political landscape to prepare for its legal destruction.
This is a gambit that’s all too familiar to those of us who have followed the climate fight over the last two decades. Long before the shapeshifters of the intellectual right worked this transubstantiation on their own healthcare prescription, they’d had a perfect dress rehearsal: They’d done exactly the same thing with the concept of “cap-and-trade,” a market-based alternative to more aggressive state-enforced carbon emission rules that morphed over the course of a few years into a conservative-bogeyman nightmare of aggressive state intervention.

And it worked — beautifully. Utter the phrase “cap-and-trade” in any politically heterogeneous crowd today, and the right side of the house will grimace. The people who actually care about dealing with carbon emissions to stop the climate from going haywire were left wringing their hands; their opponents marched along to the next fight.

Today, that fight is over health care. But even if you don’t care about health insurance or haven’t followed the details of this policy argument or can’t see how any of it affects you, don’t be fooled: If the anti-Obamacare gang wins this one, they’ll move right on to the next issue. They’ll roll back common-sense environmental protections, cripple government efforts to smarten cities, and block food reforms. They won’t rest until they’ve scoured all prospect of collective action from our future.

All of which is a good reason to pay attention to how the Supreme Court rules tomorrow, and to how your senators and congresspeople clean up any resulting mess — or don’t.

Read more: Politics

The Supreme Court Scenarios on Health Care; The Odds Are Bad for a Good Result for People

AlterNet.org

NEWS & POLITICS  

AlterNet / By Steven Rosenfeld

The Supreme Court Scenarios on Health Care; The Odds Are Bad for a Good Result

There are a number of ways the justices can go, but it doesn't look good.

June 26, 2012  |  

 

Photo Credit: ShutterStock.com

 

Nobody can predict how the unpredictable Supreme Court will rule on the constitutional challenges to the Affordable Care Act in a decision expected Thursday.

 

Recently, Bloomberg polled 21 respected constitutional scholars about the law's controversial mandate that all Americans have health insurance. Nineteen said they believed it to be constitutional according to an impartial interpretation of the law, but only eight thought the justices would uphold the provision. Such is the unpredictability of the court's activist conservative majority.

 

Broadly speaking, there are several scenarios health policy experts and constitutional experts agree are plausible. We briefly go through those scenarios below.

 

No matter what the Court decides, its decision will become one of the top issues in 2012’s presidential and congressional elections. Should the GOP win big this fall, it is likely there would be legislative and/or executive branch efforts to derail the reform.

 

Scenario I: The Entire Law Is Thrown Out

 

The Supreme Court heard three days of argument on the law, starting with the question of whether it was premature to challenge the ACA because its most contested provisions had not yet taken effect, and progressing to questions whether it is an unconstitutional breach of individual and/or state’s rights.

 

The ACA is intended to transform private health insurance and public care options for the working poor and elderly. On the private insurance side, it does that by requiring almost all individuals to have a health plan by January 2014, but also requires that insurers offer many more coverage plans than is now the case. It also bars insurers from not covering people with prior medical problems, and imposes cost controls on the premiums they charge. It requires companies with 50 or more employees to cover workers, and offers tax breaks and subsidies to individuals and businesses to pay for it.

 

On the public side, the ACA primarily expands Medicaid—the state-run program for poor people—by raising the income ceiling to enroll, and institutes many prevention-oriented programs such as creating clinics in underserved areas. It also adjusts payments under the federal Medicare program for the elderly.

 

The first scenario is that the Court will decide the entire law should be overturned on constitutional grounds—which would mean accepting the views of 26 red-state attorneys generals and ideological right-wing think tanks. There are two constitutional arguments these Republicans make: the first that Congress overreached its authority to regulate interstate commerce by requiring that all citizens (with few exceptions) have a health plan; and the second that is also overreached by requiring the states significantly expand Medicaid programs.

 

Legal scholars initially thought both of these constitutional claims were more ideological than realistic, as Congress has been regulating interstate commerce for generations—and healthcare spending accounts for one-sixth of the nation’s economy—and that Congress has similarly imposed requirements when funding innumerable programs to be run by the states. 

 

The last time the U.S. Supreme Court threw out a federal reform on par with the ACA was at the height of the 1930s Depression, when then-President Franklin D. Roosevelt was battling the Court over the New Deal. Though nobody can guess what today’s Supreme Court will do, most scholars don’t believe it will completely overturn the ACA. 

 

Should the Court do that, however, it would provoke an intense political response on par with the Court’s decision in 2000 to stop the presidential recount in Florida and install George W. Bush as president. Moreover, the Court is aware that states and the private sector have spent billions to implement the law. Suspending those efforts would cause economic turmoil.

 

Scenario II: The Entire Law Is Upheld

 

The second scenario is the entire law is upheld. That could be because the coverage mandate has not yet taken effect, meaning the law’s opponents have no current basis to sue—because no one has yet been "harmed." The red states’ objections about paying for a fraction of future Medicaid expansion costs are similarly far off, because the feds are paying for the law’s early costs. 

 

The ACA could also be upheld because the Court will find no basis to either of the opponent’s constitutional claims that Congress overreached in regulating health insurance markets. This is not seen as likely because during oral arguments, the conservative justices were openly hostile to the government’s defense of the law. 

 

However, if this is their decision, then blue states (which mostly support the reform) will continue to prepare for it, such as creating state health exchanges where individuals can buy plans. Red states (that sued) will have to act quickly to catch up.

 

Needless to say, if the law is upheld, the GOP will double down on campaign promises to overturn it legislatively—if elected to Congress or the presidency—after November.

 

Scenario III: Start Slicing Up the Law, Starting with the Mandate

 

This is where the guessing and complexities begin. Most of the arguments during the hearings concerned the individual coverage mandate that is slated to take effect in January 2014.

 

The Court asked both sides to argue three questions: whether they should hear a mandate challenge now; whether the coverage requirement was constitutional, and if the mandate were struck down what should happen to the rest of the law; specifically, should other related sections of the law also be struck down.

 

The government’s top lawyer told the Court that if they struck down the mandate, they should also get rid of two other key provisions: one requiring insurers to sell policies to people with pre-existing medical conditions, and a related measure that prevented the insurers from charging certain groups a higher price for the same plan (because of pre-existing conditions).

 

Politically, the law’s opponents took the most draconian view, saying that everything about the ACA violated individuals’ and states’ constitutional rights, and the entire law should be overturned. Because the law did not have a so-called severability clause, which would mean the entire law would stand unless specifically overturned, the opponents did not want to entertain the notion that other aspects of the law could stay in effect.

 

The question of whether the mandate and related parts of the law are "severable" is one that the Court will have to address. If the Court decides that the law is indeed severable then it will have to specify what provisions it wants to delete—which can be messy. 

 

Health analysts say that if the coverage mandate goes but the other pre-existing conditions parts remain, the health insurance industry will lead a lobbying stampede back to the Congress to strike that aspect of the law or come up with an alternative approach to getting younger, healthier people into the insurance pool. The outcome there is anybody’s guess.

 

More likely, the Court will follow the government’s request and strike the mandate and the pre-existing condition provisions. If those all go, then millions of people who now lack insurance will be in a quandary, as almost everyone above age 50 has a pre-existing condition and currently is denied coverage.

 

Health policy experts say that insurers will likely develop other plans to capture some of that business. It’s hard to predict how fast that will unfold and how many of America’s 50 million uninsured individuals will take advantage of whatever options are offered, as the decisive factor will be price. The insurance industry wanted the mandate because it spread the cost of paying for care among people who were healthy and sick.

 

In any event, the sky will not fall if either the mandate—or the mandate and the related pre-existing condition provisions—fall. In short, there will be tremendous pressure on the industry and Democrats to find ways to entice the uninsured to get coverage. The GOP, of course, would seek to dismantle the remaining reforms, as none of their 2012 candidates have voiced any other agenda.    

 

But the ACA has two halves, so to speak—the market driven-side and the government-driven side. The coverage mandate does not have much to do with the ACA’s expansion of government-run health programs for the poor, working poor and elderly, other than lowering some of the most expensive care because more Americans would be prodded into seeking preventative services and treatment earlier and more often.

 

Indeed, the other big question before the Court is whether the rest of the law concerning the expansion of public sector healthcare will stand.

 

Scenario IV: Curtail More Government Care for the Poor and Elderly?

 

On the final day of arguments, the Court looked at whether Congress could force states to expand Medicaid or face the federal government withholding all federal Medicaid subsidies. Several conservative justices seemed intrigued that the mandate could stay but the state expansion of public sector care could be curtailed—because the feds were offering the states too many dollars, making it a form of “coercion.” (The federal government pays for almost all of the cost of Medicaid expansion for the law’s first half-dozen years.)

 

Few analysts followed that thread, but those who did—including one journalist who has covered the Court longer than anyone else—suggested that this part of the law might also be on the chopping block. Republican-led states facing budget shortfalls argued for that outcome, saying that Congress did not have the authority to order them to spend money, even though Congress was picking up the tab. Ironically, these GOP-led states have vast numbers of low-income residents who would benefit from expanding Medicaid.

 

It is hard to imagine that the Supreme Court would find that Congress does not have the constitutional power to order the states to expand Medicaid and other long-established nationwide programs, although that is exactly what the red-state attorneys general argued.

 

But just as the prospect that a fallen mandate would undermine the ability to pay for coverage for all, it is possible that the Court’s conservatives could somehow side with these red states—and target specific funding provisions, such as the state-federal matching funds formula, or decree that states could opt out of following the law.

 

Any shrinking of the ACA’s public sector health initiatives could be very troubling, as these target the most financially vulnerable Americans and those who do not get health care until they face medical emergencies.

 

Assessing Outcomes and What’s Not On The Table

 

Regardless of what the Court decides, the medical profession, insurance industry and many state governments have been planning for the law to take effect—and reshaping how healthcare services are to be delivered. That work will not disappear, and it seems very unlikely that the insurance industry will completely revert to its pre-ACA days. It might still offer new plans to individuals, mandate or not. And many of the ACA’s best public features, such as creating dozens of clinics in underserved areas, will likely endure.

 

But the best-informed court watchers say the ACA decision will be momentous because the legal issues that are raised go to the heart of the Constitution’s design—how power and authority are parsed between Congress and the states. Moreover, the political fights involve very emotional stakes, as the ACA’s proponents see the law as a technocratic economic management solution whereas its opponents see a loss of personal liberty. Undoubtedly, these schisms will become a major part of the 2012 elections.

 

Progressives were never very enamored of the ACA’s market-driven approach. They wanted to see government-delivered health services offered to individuals—the so-called Medicare-for-all approach. Should the coverage mandate fall, the likely impact will be that the cost of private insurance will stay as high as it now is, and it will remain to be seen if individuals can buy insurance policies that are now denied to them.

 

But the worst outcome for progressives would be to see the Supreme Court curtail key government healthcare programs, because the slow but steady expansion of Medicaid and Medicare preserves the possibility that in the future a public option could be offered.

 

The Supreme Court is expected to release its ACA ruling on Thursday, with each of the nine justices reading statements from the bench.        

 

Steven Rosenfeld covers democracy issues for AlterNet and is the author of "Count My Vote: A Citizen's Guide to Voting" (AlterNet Books, 2008).

How the Wall Street Mafia Holds America -- and the World -- Hostage

AlterNet.org

ECONOMY  

BillMoyers.com / By Bill Moyers and Matt Taibbi and Yves Smith

Matt Taibbi and Yves Smith: How the Wall Street Mafia Holds America -- and the World -- Hostage

Yves Smith and Matt Taibbi join Bill Moyers to discuss our criminal global financial system.

June 25, 2012  |  

 

Rolling Stone editor Matt Taibbi and Yves Smith, creator of the finance and economics blog Naked Capitalism, join Bill to discuss the folly and corruption of both banks and government, and how that tag-team leaves deep wounds in our democracy. Taibbi's latest piece is "The Scam Wall Street Learned from the Mafia." Smith is the author of "ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism."

Bill Moyers: Welcome. This past week, Jamie Dimon, CEO of JP Morgan Chase, was back on Capitol Hill, testifying before the House Financial Services Committee, as he had earlier done before the Senate Banking Committee. He was being questioned on how his bank had lost two billion dollars -- or more -- on risky trading. His reception in the House was less fawning than what he got from the senators. Although many of them also are beneficiaries of JP Morgan largesse, House members were more combative.

Barney Frank: You said you have a fortress balance sheet. That assumes there's something special about the way you are that made us have to worry less. But we can't assume that's going to be the case for every financial institution.
Jamie Dimon: But I also said that we'd be solidly profitable this quarter. So relative to earnings–
Barney Frank: That's not the question. Mr. Dimon, please don't filibuster.
Sean Duffy: You didn't know about these trades. You didn't know about these losses. How do you come forward today and say the regulators should have known that -- what one of the best CEOs in the industry didn't know and couldn't have known?
Michael Capuano: With the regulatory regime that we have today -- we both agree that it's not what we want, but it's what we have. Do you really think it's a smart idea to be cutting the legs out of one of those major regulators? Do you think that's good for America?
Jamie Dimon: I have enough problems. I'm going to leave that to you.
Michael Capuano: Well, Mr. Dimon, the only reason I ask is because you have had no hesitancy whatsoever in expressing opinions on other matters. I thought you might want to take an opportunity to express one today.

Bill Moyers: Coincidentally, just before Dimon's House testimony, Bloomberg News published data indicating that JP Morgan Chase receives a government subsidy worth about 14 billion dollars a year in taxpayer money.

Money, said Bloomberg editors, that "helps the bank pay big salaries and bonuses, and more important, distorts markets, fueling crises such as the recent subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the euro and sink the global economy."

With me are two guests who can guide us through the thicket of testimony and beyond. Matt Taibbi, contributing editor at "Rolling Stone" magazine, has investigated the folly and corruption of banks and government with scathing, often profane wit and perception. His book, Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America, described the events leading up to the financial meltdown in 2008. His newest piece for Rolling Stone is a chilling expose called "The Scam Wall Street Learned From the Mafia."

Yves Smith created and runs Naked Capitalism, the popular blog on finance and economics. She once worked for Goldman Sachs, McKinsey & Company, and Sumitomo Bank, and now heads a management consulting firm. You'll want to read her book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Welcome to both of you.

Yves Smith: Thanks so much.

Matt Taibbi: Thank you.

Bill Moyers: So in this particular case, what is JPMorgan's sin? That's the question Representative David Schweikert raised on the day of the hearing. He asked, "What sin has JPMorgan committed other than being big enough to lose billions of their own money in a quarter and still turn a $4 billion profit?" Want to take a stab at answering?

Matt Taibbi: Yeah, sure. Their sin wasn't the loss. The sin was in being a too-big-to-fail company where we can't afford to have them go under. Why are we there in the first place? If this was a company that, if it went out of business, it wouldn't affect our lives personally and wouldn't have major ramification for the economy, we wouldn't be holding hearings in the Senate and the Congress.
We would say, fine, they lost so much, a bunch of money. Too bad for them. But that's not the case. As we saw in 2008, when these companies go down, we all end up paying for it. You know, we ended up financing of, what, five, six, seven trillion dollar bailout in 2008. And if a company like JPMorgan Chase goes under, there will certainly be some sort of federal action, which is why we have to know about it. We have to know what goes on when they have unexpected two, three billion dollar losses that affects all of us.

Yves Smith: They were guilty of gaming the system. And the way that they've done it is this unit was using depositor money and yet taking very large bets.
And in this unit, all the other banks similarly have similar units in their treasury department, and the purpose of these portfolios is supposed to be to have liquid assets in case there's a run on the bank.

And Bloomberg News had a story where they actually reported that all the other banks take less risk in these portfolios. And that's before we get to the credit default-- that's before we get to the blow-up part, just in the, even the simpler part of the portfolios. They have, they keep more in treasuries. And they have less in corporate bonds. So Dimon is already taking more risk in this unit than he should have.

And this is something which is frustrating about the testimony. There's a sort of, you know, one of the, again, stories that Dimon was promoting was, oh, well, we didn't find out about it. And then when we found out about it, we jumped on it and now it's all fine. And, therefore, the regulators shouldn't have been able, you know, how could the regulators have found about it?
And, therefore, since the regulators couldn't found out, you know, more regulation is futile. And, in fact, you could have found this information from the outside. You could have seen that prices were moving in this instrument in a really weird way.

Bill Moyers: Was everybody looking the other way? Have we forgotten so quickly?

Matt Taibbi: Well, the entire derivatives market is essentially a gigantic black box. It's not like the regulators have access to all this information.

Yves Smith: I think they're not used to looking for the information.

Matt Taibbi: Right.

Yves Smith: I think it's been acculturated that they're used to having tea and cookies with the banks and reviewing their internal reports and not doing any type of external validation and this kind of basic external checking they could do that they're not habituated to doing.

Bill Moyers: A very curious thing happened when the House hearings opened. Some members of that committee felt that Dimon should be sworn in. But the chairman of the committee, a Republican from Alabama, Spencer Bachus, said, no, that wasn't necessary. Am I making too much out of that?

Matt Taibbi: I thought that was an incredible moment for a couple of reasons. Obviously, the reason there was a hullabaloo over that was because of what happened when Lloyd Blankfein, the CEO of Goldman Sachs, came and testified before the Senate a couple of years ago. There later was a controversy over whether or not he had perjured himself in those hearings.

So the question was if, you know, Jamie Dimon is going to be sworn in, whether he would have to tell the truth, would be obligated, or whether it would just be a friendly conversation. But what was amazing about that, was that it Spencer Bachus who came to Jamie Dimon's defense. Spencer Bachus is the congressman for the Birmingham, Alabama, region which has been decimated by the Jefferson County swap disaster, which was caused by Chase, which was fined $700 million by the SEC.

So here's a guy who represents the county that has been most affected by Chase's bad behavior, and he comes to Chase's defense in the hearing, which I thought was-- it set the tone for the whole thing.

Yves Smith: Matt mentioned the toxic swaps. Jefferson County isn't the only example.

There have been a whole series of, you know, since Jefferson County and other municipalities blew up by deals they did before the crisis, there have been a series of swaps done after the crisis with transit authorities, where they are losing a tremendous amount of money. You can look at the way JPMorgan has serviced mortgage loans.

You know, they had to get up and admit that they had been basically breaking the law, and there were criminal penalties associated with this law, by foreclosing on servicemen in Iraq and not giving them rate breaks that they were entitled to. And there are some egregious cases.

Matt Taibbi: There's $228 million fine that they paid last year for municipal bond bid rigging. There was another $153 million fine that they paid for failure to, for fraud in CDO trades. I mean, there are case after case after case that involve these criminal charges. And what I thought was amazing about these hearings is that nobody brought any of those things up.

Bill Moyers: Both of you have mentioned the Jefferson County story. Give me a quick summary of what JPMorgan did in Jefferson County, Alabama.
Matt Taibbi: Well, Jefferson County had to build a new sewer system. And they had to borrow a bunch of money to do that. And it was originally a $300 million project. But they got into a series of swap deals with JPMorgan Chase to basically push their financing into the future. But the deals were heavily mispriced in Chase's favor. And Chase actually bribed another bank to stay away from Chase because they wanted that business. They wanted to give the--

Bill Moyers: Bribed them?

Matt Taibbi: They bribed them.

Bill Moyers: That's against the law, isn't it?

Matt Taibbi: Yes, yes.

Yves Smith: Yeah.

Matt Taibbi: And they were caught for it. A couple of their executives were caught for it, and they were heavily fined by the SEC for doing it. And this resulted in this disaster where Jefferson County's going to be bankrupt for a generation. It ended up costing them $3 billion out of what was originally, what, $300 million?

Yves Smith: Million dollar, yeah, yeah, yeah. What got to be $2.9 billion deal in the end. And on top of that, my mother happens to live in Jefferson County.
Bill Moyers: Oh, I didn't know that.

Yves Smith: You have the average person in-- basically you cannot have access to the sewage system and not pay more than-- and not pay less than 50 bucks a month. So there are people in the poor areas who are deciding what they're going to have: electricity, water, or sewer. I mean, you can't-- they can't afford all three.

Bill Moyers: Why is that JPMorgan's fault that they have to make that choice?

Matt Taibbi: They basically got them into these onerous toxic swap deals that were poorly understood by the local politicians. And they bribed the local politicians to accept the swap deals. They did it through middleman companies that bribed the--

Yves Smith: The consultant on the deal is in jail. The former mayor was involved in other improprieties, too. But the former mayor's in prison. You know, this is--
Matt Taibbi: For signing off on these deals.

Bill Moyers: Is there a question you would have asked Dimon if you had been on either of those committees that was not asked?

Matt Taibbi: The question I wanted to ask is, was, really more about the criminality. I mean, none of the members in either the House or the Senate really got into the issue of all the different offenses that these banks have committed in the last few years. You know, or, an ordinary person, if he commits welfare fraud, never gets a food stamp again in his life.

So given that these banks have systematically and repeatedly committed fraud, repeatedly been caught, you know, in situations like Jefferson County, municipal bid rigging, why should we still give them billions and billions of dollars in emergency lending from the Fed, bailouts, all of this aid from the government? How come there's no consequences for them and there are consequences for ordinary people?

Yves Smith: I would have asked questions more having to do with what's the justification for complex banking at all? That why do we need, why shouldn't banks be run on the utility basis? Why should we have people like Dimon and his, the members of the CIO unit, most of which he's fired, what the justification for literally that hundreds of millions of bonuses were paid collectively to those people.

And now he says they didn't know what they were doing. There's no justification for this, the sort of level of compensation that we generally have on Wall Street. And I would like to see that myth starting to be punctured in more public places.
Bill Moyers: What do you mean when you say banks should be more like a utility?

Yves Smith: Banks, more than any other business, more than military contractors, live off the government. They depend on government backstopping. They exist only by way of government issued licenses, which if you had open entry you'd see much lower fees. And they get some confidence from the public from the fact that they are regulated. Oh, and the most important thing is they have access to--

Matt Taibbi: The Federal Reserve.

Yves Smith: --the Federal Reserve.

Matt Taibbi: They're getting huge amounts of free money.

Yves Smith: Well, not just the free money. The Federal Reserve basically guarantees the payment system. You know, that's the really critical architecture that banks control is that, you know, we write checks to each other. We have credit cards. They clear through banks.

But the fact that banks can exchange money with each other confidently is because the Fed stands behind that. So there's a much-- there's another layer of Fed backstopping beyond what we think of the way they step in in a crisis or the way they're now intervening to help the banks. So the fact that these institution really depend in a very fundamental way on government support means they don't have any right to the upside.

I mean, they should really be paid like public servants. I mean, I'm not kidding. I mean, and if they had been, if the pay had been ratcheted down after the crisis, I would have had a lot more sympathy for them, even if they just behaved for a couple of years. You know, they were bailed out. And then in 2009 the industry went and paid itself record bonuses, higher than 2007 instead of rebuilding their balance sheets. I mean, this was just a slap in the face for the public.

Bill Moyers: And there's no shame.

Yves Smith: No.

Bill Moyers: You're describing a corrupt financial and political system. And both of you in recent writings, your current article in "Rolling Stone," which is devastating on the scam that the "Wall Street learned from the Mafia," and a recent column you wrote about the mafia state, you're both using that metaphor to apply to our financial and political system. When I read your pieces, you're not playing with words there. You mean it.

Yves Smith: Yeah.

Bill Moyers: Why do you mean it?

Yves Smith: Well, the mafia, when it gets to be big enough, first thing it has services that people feel they need if they're in a difficult situation. So, for example, loan sharking. If you really need money, they do have the money. And people enter into these loan shark deals even though they know it's going to be very difficult to pay 20 percent or more interest and they'll have their legs broken if they don't pay back.

And the banks actually behave very much in that manner when they find people who really need money. So you see this with credit cards, you know, that, or, and with mortgages. That if you hit-- it's not this if you hit any tripwire, that, you know, become in arrears, the banks basically act in this very extortionate manner and don't cut any breaks.

Matt Taibbi: And I think that there's also this, they are the mafia because of their vast criminality in Wall Street now is that it's bribery, theft, fraud, bid rigging, price fixing, gambling, loan sharking. All of these things, it's all organized.
I mean, the story I just wrote about, which was about the systematic rigging of municipal bond auctions, which affected every community in every state in the country and all of the major banks were involved, including Chase.

They were rigging the auctions that were designed to create a fair rate of return on the investments that towns were getting on their-- the money they borrowed for municipal bonds. And this is not like something that the mafia does. This is what the mafia does. The mafia has historically, it's one of their staple businesses, is bid rigging for construction or garbage or, you know, street cleaning services, whatever it is.

They're doing exactly the same thing. The only thing that's different is there's no violence involved. But what their method of control is that they're ubiquitous. They have this incredible political power that the mafia never had.
Yves Smith: And they also have what amounts to an oligopoly. I mean, for many of these services, you have a great deal of difficulty going beyond the five biggest banks, you know? This is-- it's the consequence of too big to fail is that when, you know, some of the smaller players, again, you know, like-- JPMorgan buying Bear Stearns.

In the crisis, when the smaller players got sick, they were merged into the bigger players. So now if you want-- for a lot of these services, there aren't that many players for you to go to. You really have no choice in-- other than to deal with the big banks.

Bill Moyers: Congress is paid to be informed and to hold these guys accountable. Why don't they ask the kind of questions you're dealing with here?
Matt Taibbi: People refuse to look at these banks and think of them as organized crime organizations.

They in their eyes, organized crime is always either the Italian mafia or the Irish mafia. This isn't what it looks like. But that is who they are. And I think that they're treated with a kind of deference and respect, because traditionally that's not who they were. They were these icons of finance who helped build this country.

But that's not who they are anymore. And I think, it's hard for people to wrap their heads around that and treat them the way they should be treated.
Yves Smith: Well, I think people don't want to think that there's something wrong with leaders. And CEOs are leaders of the business community. If you really believe that CEOs of businesses that are really fundamental to the economy are corrupt, you have to think of a very serious restructuring of the business and financial system.

And even if people kind of intellectually might be willing to contemplate that, they don't really want to go to what the implications are. So it's much easier for them to block out that thought.

Bill Moyers: Both of you have been writing a great deal lately about the crisis in Europe. So explain to us simply what hand Wall Street has in what's going on in Italy, Greece, and Spain today and why we should care.
Yves Smith: Well, I almost want to go one step of abstraction higher because people tend to focus on the immediate ways Wall Street was involved like Goldman Sachs helped Greece cover up how serious its deficits were.
Matt Taibbi: Which in the situation, it was very similar to Jefferson County, by the way.
Yves Smith: Right. But the more important story is much higher, which is that the reason the big reason that all, you have basically a sovereign debt crisis, that the governments in Europe, many of them had to borrow a tremendous amount of money in the wake of the crisis. And the euro zone is not well set up to adapt to that. I could go into technical reasons why, but it's not unlike a state.

You know, when a state has a budget problem that suddenly they have to think about, you know, cutting costs and doing all kinds of draconian measures. And while maybe a state or a city can do that, you can't have the biggest economy in the world. I mean, Europe is the biggest economy in the world doing that and not have it basically turn into a down spiral, that you cut spending and then that leads to less income.

And your deficits get worse rather than better. So, but the reason they had that problem is, in fact, very directly the result of the financial crisis. That you had countries that weren't running deficits, government deficits like Ireland and Spain, that were held up as poster children before the crisis of doing things right.

And that when the crisis hit, you both had a big drop in tax revenues. You had bank bailouts. And these countries had decent social safety nets so that, you know, things like, you know, unemployment insurance went up. And so the budget crisis they're having is the direct result of the financial crisis. And yet it's somehow being treated as if they're separate events. Like somehow these
governments were profligate and that borrowers were irresponsible –

Matt Taibbi: Social safety net.

Yves Smith: Safety net.

Matt Taibbi: Exactly. Right. That's clearly going to be the place that is going to take the brunt of the damage. I mean, I think the most direct example here in America was a lot of unions and state pension funds were primary victims of the sort of broad fraud scheme to sell fraudulent mortgage backed securities.
So they, a lot of these institutional investors were buying these bad mortgages, huge pools of mortgages from all these, the usual suspects, the big banks. And then when they decreased in value and suddenly there they don't have, it's harder for them to meet their obligation and suddenly the finger is pointed at them and everyone saying, "Oh, look at those pens, the state pensioners or look at those union employees, they're they cost too much money. We have to cut their services. We have to cut pensions. We have to do all these things."
Whereas, in fact, they were buying a fraudulent product from Wall Street and that's why they're in such bad shape now. And I think, but politically, the direction is always going to be let's blame-

Bill Moyers: The poor.

Matt Taibbi: That person. The poor.

Bill Moyers: The guy on the pension. The woman on the pension –

Matt Taibbi: Right. And we'll never point the finger in the other direction.

Yves Smith: Well, in fact, the implications, that's true. But the implications are actually quite grim, and they're not being discussed honestly. We're talking about old people dying faster. We're talking about children being homeless and not getting education, and we're talking about grim outcomes like that.

And they're not even part of the discourse. I mean, you look, Greece is the extreme example. But in Greece, the hospitals are breaking down. Garbage is not being picked up. And if you look at the results of the last election, what you saw is even with the efforts to scare people into staying in the euro, you see this polarization where the Nazi Party got seven percent of the vote even after there was an incident in a TV station where there was literally an on-air fight where a Nazi Party member beat up on somebody basically I think it was on camera, you know?

So you've got a real social polarization with radicalization going on. And I've seen a number of reports out of Greece saying that it's basically on knife edge of breakdown.

Bill Moyers: Could it happen here?

Yves Smith: If things, if we have another crisis and things aren't addressed, I could see this definitely happening maybe not nationally but in significant regional pockets. I mean, you know, this is a country full of guns. And people don't like to think about what happens when people are pushed, you know, I mean, the kind of random violence, the sort of, you know, going postal phenomena?

Matt Taibbi: When I was in a foreclosure court last year. I spent a week in a foreclosure court in Jacksonville.

Bill Moyers: Reporting on it.

Matt Taibbi: Reporting on it. And the amount of raw anger that you see in these proceedings from people who have lost their homes, they have no illusions about who's to blame for the situation. They know exactly, you know, where the problem is. And I--

Bill Moyers: And it's where?

Matt Taibbi: It's with these banks that sold them these mortgages. And I think there's a growing awareness out there in the public, more and more people have had a personal problem on some front with Wall Street, whether it's credit card debt or a mortgage debt or they've lost their jobs. And I think there's anger and it's starting to become more organized.

Bill Moyers: Both of you trace this back to what you call fraudulent debt. Is that right?

Matt Taibbi: In the case of the mortgage markets, absolutely. I think what a lot of these, this was a fraud scheme. It's the same scam that you see here in the streets of New York when somebody's selling a phony Prada bag or a phony Rolex watch in the street. These banks were selling phony mortgages that were, they were selling them as triple A rated instruments when, in fact, they were essentially worthless.

They were highly risky, toxic instruments. And they knew it. They were buying, they were in cahoots with companies like Countrywide and Long Beach, these sort of fly-by-night mortgage operations who went out and they gave mortgages to everybody and everybody who had a pulse. They took these mortgages. They bundled them. They waved a whole bunch of phony hocus-pocus math over them and reconfigured them into triple A rated investments.

Then they went out into the world and they sold them to every customer all over the world, pensions, unions, foreign trade unions, foreign governments. And they--

Yves Smith: Trade councils in Australia. I mean, real know nothings.

Matt Taibbi: Everybody. Everybody bought this stuff. It all blew up like, everybody who was in on it knew it eventually would because they were betting against the stuff as they were selling it. And, and the, and that's why we have this, this situation that we're in now.

Yves Smith: Yeah, but even the most even if I'm giving Wall Street more credit than it deserves. But even if you take out the bad creation and selling of the product, you also have the fact that Wall Street basically demands an asymmetrical deal with contracts, that if you have a credit card deal or if you have a mortgage, if you make the tiniest, little violation, you know, we get to take our pound of flesh.

And yet if you're a union member, it's perfectly fine to break your contract. You know, our contracts count, but we can break all the other contracts in society to get our obligations honored. I mean, this is just crazy.

Matt Taibbi: But they genuinely think that they earn their money. And I think that was one of the illuminating things not only about the Dimon hearings but also the Lloyd Blankfein, slash, Goldman Sachs hearings a couple of years ago. These guys really think that they're, they have a unique and special genius that entitles them to earn the vast sums of money that they pay themselves, that somehow that they're creating all this wealth for themselves.

And they really genuinely don't think that they're getting their money-- from all of us. And to them it's irrelevant that they're getting all their money for free from the Fed and that they're lending it all out to us at five percent, 10 percent, 20 percent, you know, 25 percent. They think they deserve the money. And I think that's the scariest part.

Bill Moyers: There's a definition of a sociopath as being radically deprived of empathy. Do you see characteristics of sociopathic behavior on Wall Street?

Matt Taibbi: Absolutely.

Yves Smith: Yes.

Matt Taibbi: I'm sorry, just what Yves was talking about with, you know, the old people who were dying earlier now, people who don't have kids, who aren't going to school, garbage that's being left in the streets. That's all because some guy was sitting up in a skyscraper in Wall Street and knowingly selling some communities, some municipality a fraudulent, toxic mortgage backed security.
I mean, he knows that that instrument is going to blow up in, you know, six months, a year. But he's selling it to them anyway. But he doesn't care, you know, because he can't see it, you know? I think in the eyes of a lot of these guys if they can't see the effect, it doesn't really exist. And to me, that's classic sociopathic behavior when you're blind, you're willingly blind to the consequences.

Yves Smith: I mean, it's really the growth of the trading culture. You know, in the old days, I worked on Wall Street when Wall Street really was only criminal around the margins. I mean, you really, Goldman Sachs in those days had the expression long-term greedy which meant you didn't kill the--

Bill Moyers: Long-term what?

Yves Smith: Long-term greedy. That they were long-term greedy. And that meant you didn't kill the goose that laid the golden egg. You know, you wouldn't put your customer into egregiously bad deal. If you took a little extra, you only took it when the customer was making money, too, so if they ever figured it out they wouldn't be really upset.

That attitude has changed completely. And I attribute it significantly to the growth of derivatives. Over-the-counter derivatives where you can't see the price on an exchange. You can't see the history.

And they're much more complicated. And those started growing really in the early '90s and became, and it becomes very interwoven in the practice of finance. Because the derivatives are so complicated, you can't price compare. The risks are often bundled in within formulas that the buyers can't understand. And so they can load all kinds of basically what's equivalent to hidden fees in these things by the way they structure the risks in the terms.

So they're the perfect vehicle for stealing because you're selling, no, you're selling somebody something they can't evaluate.

Bill Moyers: When you come back, I want you to take the whole hour and explain to me what a derivative is and how it works. Okay? Is that a promise?

Matt Taibbi: Absolutely.

Bill Moyers: Alright, Yves and Matt, thank you very much for joining us.

Matt Taibbi: Thank you.

Yves Smith: Thank you.

Veteran journalist Bill Moyers is the host of “Moyers & Company,” airing weekly on public television. Check your local listings. More at www.billmoyers.com. 

 

Matt Taibbi is a writer for Rolling Stone. Yves Smith is the creator of the finance and economics blog Naked Capitalism.

 

Yves Smith is the founder of Naked Capitalism and the author of 'ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.'

Bill Clinton’s Legacy of Denial

Published on Wednesday, June 22, 2011 by TruthDig.com

Bill Clinton’s Legacy of Denial

by Robert Scheer

 

Does Bill Clinton still not grasp that the current economic crisis is in large measure his legacy? Obviously that’s the case, or he wouldn’t have had the temerity to write a 14-point memo for Newsweek on how to fix the economy that never once refers to the home mortgage collapse and other manifestations of Wall Street greed that he enabled as president.

Endorsing the Republican agenda of financial industry deregulation, reversing New Deal safeguards, President Clinton pursued policies that in the long run created more damage to the American economy than any other president since Herbert Hoover, whose tenure is linked to the Great Depression. Now, in his Newsweek piece, Clinton has the effrontery to once again revive his 1992 campaign mantra, “It’s the economy, stupid,” as the article’s title without any sense of irony, let alone accountability. But that has always been the man’s special gift—to rise above, and indeed benefit from, the messes he created.

His list of safe nostrums—painting tar-surface roofs white and seeking more efficient solar and battery production—to be featured at his lavishly funded Clinton Global Initiative conference in Chicago next week is vintage Clinton hype. All of those solutions are of the win/win sort that he loved to ballyhoo as president; who in his or her right mind would be against green job creation? But that hardly speaks to a crisis in which, as was reported Tuesday, the housing meltdown continues unabated as the toxic mortgages sold and packaged by the leading banks and investment houses clog the real estate market, destroying consumer confidence and hobbling job creation.

Conceding that the bailed-out banks are sitting on $2 trillion that they won’t lend, Clinton offers not a word about mortgage relief for swindled homeowners. With an all-time high of 44 million Americans living below the poverty line, Clinton once again brags of his success in ending the federal welfare program.

There is only a one-sentence reference in the Clinton article to the era of financial greed: “The real thing that has killed us in the last 10 years is that too much of our dealmaking creativity has been devoted to expanding the financial sector in ways that don’t create new businesses and more jobs and to persuading people to take on excessive debt loads to make up for the fact that their incomes are stagnant.” Now that’s a clear description of the consequence of President Clinton’s policy of radical deregulation of the financial industry, but he writes as if that outcome has nothing to do with him.

Clinton signed off on the reversal of the Glass-Steagall Act, the legislative jewel of the Franklin Roosevelt administration designed to prevent financial institutions from getting too big to fail. In signing the Financial Services Modernization Act, which broke down the barrier between high-rolling Wall Street investment firms and consumer banks carrying the deposits of ordinary folk, Clinton gushed in 1999, “Over the [past] seven years we have tried to modernize the economy. … And today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority.”

The first beneficiary of that legislation was Citigroup, a corporation that resulted from a merger that would have been banned by Glass-Steagall. Upon signing the law, Clinton handed one of the pens he used to a beaming Sandy Weill, Citigroup CEO and a close friend and financial supporter of the president. Clinton’s treasury secretary, Robert Rubin, then went off to be a $15-million-a-year exec at Citigroup and was in a key position there when the bank made those toxic derivative packages that would have forced it into bankruptcy had U.S. taxpayers not bailed the bank out.

So much for the “modernizing” that Clinton had bragged about.

A year later a variation of that same word appeared in the title of the Commodity Futures Modernization Act, which Clinton signed and which exempted from government regulation all of the collateralized debt obligations and credit default swaps that would later prove so toxic. That legislation led to the explosion of the market in unregulated mortgage-based securities, the key source of the financial-sector “dealmaking” that Clinton now bemoans.

In his memoir Clinton pays tribute to Rubin as “the best and most important treasury secretary since Alexander Hamilton.” He wrote that line in 2004, when Rubin, who had come to Clinton from a top job at Goldman Sachs and later left for Citigroup, was already clearly defined as someone who profited mightily from the very bills that he had pushed through while working for Clinton.

As with so much in the Clinton record, the former president remains in deep denial over having any culpability for his misdeeds. In his thousand-page memoir there is no reference to the above-mentioned radical deregulation of the economy that he presided over. As evidenced by his Newsweek article, the man has long been convinced that there is no problem or contradiction of his that cannot be simply plastered over with blather. Sadly, he may be right.

Copyright © 2011 Truthdig, L.L.C.

The JPM Derivatives Propping Up U.S. Debt

Why the Senate Won't Touch Jamie Dimon

by Ellen Hodgson Brown / June 20th, 2012

When Jamie Dimon, CEO of JPMorgan Chase Bank, appeared before the Senate Banking Committee on June 13, he was wearing cufflinks bearing the presidential seal.  “Was Dimon trying to send any particular message by wearing the presidential cufflinks?” asked CNBC editor John Carney.  “Was he . . . subtly hinting that he’s really the guy in charge?”

The groveling of the Senators was so obvious that Jon Stewart did a spoof news clip on it, featured in a Huffington Post piece titled “Jon Stewart Blasts Senate’s Coddling Of JP Morgan Chase CEO Jamie Dimon,” and Matt Taibbi wrote an op-ed called “Senators Grovel, Embarrass Themselves at Dimon Hearing.”  He said the whole thing was painful to watch.

“What is going on with this panel of senators?” asked Stewart.  “They’re sucking up to Jamie Dimon like they’re on JPMorgan’s payroll.”  The explanation in a news clip that followed was that JPMorgan Chase is the biggest campaign donor to many of the members of the Banking Committee.

That is one obvious answer, but financial analysts Jim Willie and Rob Kirby think it may be something far larger, deeper, and more ominous.  They contend that the $3 billion-plus losses in London hedging transactions that were the subject of the hearing can be traced, not to European sovereign debt (as alleged), but to the record-low interest rates maintained on U.S. government bonds.

The national debt is growing at $1.5 trillion per year.  Ultra-low interest rates MUST be maintained to prevent the debt from overwhelming the government budget.  Near-zero rates also need to be maintained because even a moderate rise would cause multi-trillion dollar derivative losses for the banks, and would remove the banks’ chief income stream, the arbitrage afforded by borrowing at 0% and investing at higher rates.

The low rates are maintained by interest rate swaps, called by Willie a “derivative tool which controls the bond market in a devious artificial manner.”  How they control it is complicated, and is explored in detail in the Willie piece here and Kirby piece here.

Kirby contends that the only organization large enough to act as counterparty to some of these trades is the U.S. Treasury itself.  He suspects the Treasury’s Exchange Stabilization Fund, a covert entity without oversight and accountable to no one. Kirby also notes that if publicly-traded companies (including JPMorgan, Goldman Sachs, and Morgan Stanley) are deemed to be integral to U.S. national security (meaning protecting the integrity of the dollar), they can legally be excused from reporting their true financial condition.  They are allowed to keep two sets of books.

Interest rate swaps are now over 80 percent of the massive derivatives market, and JPMorgan holds about $57.5 trillion of them.  Without the protective JPMorgan swaps, interest rates on U.S. debt could follow those of Greece and climb to 30%.  CEO Dimon could, then, indeed be “the guy in charge”: he could be controlling the lever propping up the whole U.S. financial system.

Hero or Felon?

So should Dimon be regarded as a national hero?  Not if past conduct is any gauge.  Besides the recent $3 billion in JPMorgan losses, which look more like illegal speculation than legal hedging, there is JPM’s use of its conflicting positions as clearing house and creditor of MF Global to siphon off funds that should have gone into customer accounts, and its responsibility in dooming Lehman Brothers by withholding $7 billion in cash and collateral.  There is also the fact that Dimon sat on the board of the New York Federal Reserve when it lent $55 billion to JPMorgan in 2008 to buy Bear Stearns for pennies on the dollar.  Dimon then owned nearly three million shares of JPM stock and options, in clear violation of 18 U.S.C. Section 208, which makes that sort of conflict of interest a felony.

Financial analyst John Olagues, a former stock options market maker, points out that the loan was guaranteed by $55 billion of Bear Stearns assets.  If Bear had that much in assets, the Fed could have given it the loan directly, saving it from being swallowed up by JPMorgan.  But Bear did not have a director on the board of the NY Fed.

Olagues also notes that JPMorgan received an additional $25 billion in TARP payments from the Treasury, which were evidently paid off by borrowing from the NY Fed at a very low 0.5%; and that JPM executives received some very large and highly suspicious bonuses called Stock Appreciation Rights and Restricted Stock Units (complicated variants of employee stock options and restricted stock).  In 2009, these bonuses were granted on the day JPMorgan stock reached its lowest value in five years.  The stock quickly rebounded thereafter, substantially increasing the value of the bonuses.  This pattern recurred in 2008 and 2012.

Olagues has evidence of systematic computer-generated selling of JPMorgan stock immediately prior to and on the dates of the granted equity compensation.  Collusion to manipulate the stock to accommodate the grant of options is called “spring-loading” and is a violation of SEC Rule 10 b-5 and tax laws, with criminal and civil penalties.

All of which suggests we could actually have a felon at the helm of our ship of state.

There is a movement afoot to get Dimon replaced on the Board, on the ground that his directorship represents a clear conflict of interest.  In May, Massachusetts Senate candidate Elizabeth Warren called for Dimon’s resignation from the NY Fed board, and Vermont Senator Bernie Sanders has used the uproar over the speculative JPM losses to promote an overhaul of the Federal Reserve.  In a release to reporters, Warren said:

Four years after the financial crisis, Wall Street has still not been held accountable, and that lack of accountability has history repeating itself—huge, risky financial bets leading to billions in losses. It is time for some accountability. . . . Dimon stepping down from the NY Fed would be at least one small sign that Wall Street will be held accountable for their failures.

But what chance does even this small step have against the gun-to-the-head persuasion of a nightmare collapse of the entire U.S. debt scheme?

Propping Up a Pyramid Scheme

Is there no alternative but to succumb to the Mafia-like Wall Street protection racket of a covert derivatives trade in interest rate swaps?  As Willie and Kirby observe, that scheme itself must ultimately fail, and may have failed already.  They point to evidence that the JPM losses are not just $3 billion but $30 billion or more, and that JPM is actually bankrupt.

The derivatives casino itself is just a last-ditch attempt to prop up a private pyramid scheme in fractional-reserve money creation, one that has progressed over several centuries through a series of “reserves”—from gold, to Fed-created “base money,” to mortgage-backed securities, to sovereign debt ostensibly protected with derivatives.  We’ve seen that the only real guarantor in all this is the government itself, first with FDIC insurance and then with government bailouts of too-big-to-fail banks.  If we the people are funding the banks, we should own them; and our national currency should be issued, not through banks at interest, but through our own sovereign government.

Unlike Greece, which is dependent on an uncooperative European Central Bank for funding, the U.S. still has the legal power to issue its own dollars or borrow them interest-free from its own central bank.  The government could buy back its bonds and refinance them at 0% interest through the Federal Reserve—which now buys them on the open market at interest like everyone else—or it could simply rip them up.

The chief obstacle to that alternative is the bugaboo of inflation, but many countries have proven that this approach need not be inflationary.  Canada borrowed from its own central bank effectively interest free from 1939 to 1974, stimulating productivity without creating inflation; Australia did it from 1912 to 1923; and China has done it for decades.

The private creation of money at interest is the granddaddy of all pyramid schemes; and like all such schemes, it must eventually collapse, despite a quadrillion dollar derivatives edifice propping it up.  Willie and Kirby think that time is upon us.  We need to have alternative, public and cooperative systems ready to replace the old system when it comes crashing down.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

This article was posted on Wednesday, June 20th, 2012 at 10:21am and is filed under Banks/Banking, Debt.