Stiglitz: Wall Street Hypocrisy, Business as Usual

In a note available at Project Syndicate, Joseph Stiglitz reminds us of the ineptness, sometimes tragic ineptness, of Wall Street and the IMF. This account bears strikingly synchronous tones to our recent "The Economic Fallacy of Free Trade" in the PolicyIndex.

Ten years after the Asian Currency Crisis ...

.... Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.) Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency. ....

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.

Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture were needed. But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.

...

There's more. Read it and weep.

Inflation: Cost push, demand pull, Fed pratfall

Yesterday we looked at what is in the inflation basket, both in core inflation and headline inflation. We saw that the depression of wages over the past 30 years has been the chief inflation-fighting strategy by the Fed.

Today we follow that up with a look at the two dynamics of inflation, cost-push and demand-pull. We’ll give you our conclusion and forecast up front. The Fed will apply the interest rate brakes in error because it does not distinguish between the two dynamics, or if it does, it finds no problem in continuing to call on the middle class to shoulder the inflation-fighting burden for everyone.

First let’s listen to some of the conceptual context. Here’s Fed Chair Ben Bernanke responding to a question from Joint Economic Committee vice-chair Carolyn Maloney on November 8.

“... In all but the shortest of terms the Federal Reserve’s policy determines how much inflation there is, and we’re going to make sure that the inflationary impact that may come from the weakening dollar is not passed into broader prices and become part of the underlying inflation rate.”

Chairman Bernanke is adamant that the Fed not only can control, but can determine inflation in all but the shortest of terms.

Bernanke is not encumbered by concern for the real world. A practicing economist who spoke to the point was Carl Weinberg, chief economist at High Frequency Economics (November 20, Bloomberg’s “On the Economy with Tom Keene).

“... The Fed is out to control the things it can control. When it comes to goods and services, things that are controlled by labor costs, the Fed is in there keeping an eye on it. It doesn’t mean headline inflation isn’t important, but it means that in terms of the Fed monitoring things in terms of what it can do, I think core inflation is probably the place to look.

“Something else to think about is when you see food prices go up, or you see energy prices go up, that’s not inflation. That’s a relative price change. And in fact, the analysis is very different when you see the price of food go up relative to the price of everything else, because it squeezes out consumption of other things and is actually a depressing impact on the economy as long as we don’t have wage increases to offset those food price increases. So generally speaking a rise in food prices brakes the economy by itself. A rise in energy prices brakes the economy as long as other prices are under control.”

To round it off, here is Marvin Goodfriend, former Fed staffer, now a professor at Carnegie Mellon University and a Bernanke disciple (November 15, Bloomberg):

“...Insofar as inflation forecasts go, as you lengthen the horizon the Fed ought to be able to manage inflation. That is, you can target inflation over the long run. That’s the nature of what Monetary Economics teaches us, that Central Banks determine the rate of inflation over the longer run. So the longer the horizons are, the more these forecasts turn into targets for the Federal Reserve to aim at.

“On the other hand, the longer the forecast horizons are, the more difficult it is to forecast the real GDP numbers and the unemployment, over which the Federal Reserve has less control over the longer run.”

So the clear message is that the Fed under Bernanke feels it has an iron lock on inflation in all but the shortest of terms, and the only part it can really affect is wage growth by sponsoring ongoing slack in the labor economy. (Parenthetically, this is a big reason for the support of free trade in many financial quartes – it ships out wage growth).

But back to cost push vs. demand pull.

There are two reasons prices might go up. One is the price of inputs goes up – commodities like oil, metal, grain, etc. The second is that the supply of the product is insufficient for the demand, and the price is bid up. This second is the market’s very effective means of rationing scarce products.

The last event of demand-pull inflation in the US economy was in the 1960s under Lyndon Johnson, with the Great Society competing with the Vietnam War for labor and capital. It was called “Guns and Butter” inflation. American consumers, flush with cash, pulled prices up. Johnson responded with an income tax surcharge of 10 percent to cool off demand. He was the last president to make a tax increase the central point of economic policy. Since that time taxes have been equated with the vilest of sins, the US has run immense budget deficits, and the economy has generally performed at one-third the Johnson era level.

Also since that time – even in the “New Economy” Dot.Com boom of the 1990s, we have not had demand pull inflation (noting that inflation is a generalized rise in prices).

But we have had cost-push inflation. Beginning under Nixon with the first OPEC oil crisis: Oil supplies were reduced by the OPEC oil cartel for the precise purpose of pushing up the price. The market began to ration the supplies by way of the price mechanism. “Stagflation” began, and plagued the 1970s.

Yes, I said “ration.” Here, too, the supplies are insufficient for the demand, but because the supply is constrained. One is too many dollars chasing goods. The other is too few goods being chased. It’s all the same, you say? Upon reflection, you will see there is the possibility of balance without inflation that lies between the two extremes. But more importantly the events on the ground look different.

In demand-pull inflation, there is a boom. Producers are motivated to generate product in the earlier, lower cost years, further stimulating demand. In cost-push inflation, there is not a boom, because the costs of the commodities are already, as Weinberg says, braking the economy.

In terms of economic policy, stagflation was an important turning point. It was here that the country, under Richard Nixon and Ronald Reagan, took a hard right away from the Keynesian Demand Side policies that had accompanied the great growth of America after the Second World War. The proposition that supposedly refuted the Keynesian conceptual framework was the supposed contention by Keynesians that unemployment and inflation could not co-exist. This connection between inflation and employment began with the so-called Phillips curve, an invention outside Keynesian theory. But that made little difference to ideologues looking for a return to Supply Side dominance.

The inflation-employment connection continues today at the Fed (hardly a Keynesian institution) in the form of NAIRU – the non-accelerating inflation rate of unemployment. NAIRU as a proposition was blown up by Nobelist Robert Eisner, but adhered to anyway by the Fed, who may have realized that tighter employment markets might not accelerate inflation, but slack markets certainly dampened it.

And since the 1960s, in spite of the confusion of pundits, all recessions have been accompanied by inflation.

The Why of this is not difficult to see. Weinberg put his finger on it. If the product of an economy is composed of labor and commodity inputs, and the price of commodities goes up, in order to keep the overall price level constant, the price of labor must go down.

Now as we approach an inflation fueled by higher oil prices, higher commodity prices of all kinds – including food, metals and energy, and higher input prices from a falling dollar, we basically have two options. We can allow inflation; that is allow these pressures to be reflected in the overall price level. Or we can attempt to reduce demand further, put a lid on prices, by raising the interest rate. No matter that demand, as Weinberg says, is already dampened.

The risk is that the Fed will choose the low volatility in the short run, by increasing the downward pressure on the middle class, rather than allow the short-term price volatility that will release the pressure. Complicating the problem is that the asset investor bubble that moved from the Dot.Com boom to Housing has now migrated into commodities. This source of inflation pressure ought to be addressed by an increase in margin requirements.

The Fed has already released its inflation targets, although it refers to them as “forecasts.” And as you heard, the Fed considers itself duty bound to address only inflation, never mind regulating the Wild West of mortgage originators or the Wild West of unregulated securities and investment trusts. Never mind the collapsing dollar or incipient recession. The Fed will raise rates when prices begin to rise. Why raise rates instead of, say, increasing reserve requirements or some other demand-dampening tactic? Because as we’ve seen the Fed knows only one tool – the easy button of interest rates.

Two additional points.

One: Attempts to keep oil prices out of even core inflation are hopeless. Oil leads all energy prices – including coal, electricity and natural gas – as a component or as a substitute. These energy prices must contribute to transportation, power and heating components of other goods and services. A simple example, air travel.

Two: Raising interest rates to fight cost push inflation is similar to the medical practice of bleeding the patient practiced in the pre-scientific era. Higher interest rates contribute to higher costs, not what you want to do with cost-push inflation.

In the end, I suppose, the patient either recovers in spite of the treatment or dies. In either case, the disease is resolved and the Fed can point with pride at its interest rate remedy.

Stagcession and Inflation, Bernanke's not on board, but he's on the tarmac with his suitcase

Now I'm worried. Ben Bernanke seems to agree with me. Inflation AND recession. (Blog or better, check out the two podcasts on the subject via the link to the right). Not that he would speak so clearly, particularly when he has lots of covering of his backside to attend to, but the tone changed in testimony before the Joint Economic Committee and Chuck Schumer today.

Particularly note that further rate cuts are not indicated by either his long-term imagination that economic fundamentals will eventually come around, nor by his concerns for short- and long-term inflation. In spite of this, you don't need to be a Fed watcher to know that further interest rate cuts are coming to benefit the financial sector and credit markets.

Bernanke's testimony, in part:

"[The FOMC does} not see the recent growth performance as likely to be sustained in the near term .... the contraction in housing-related activity seem[s] likely to intensify. Indicators of overall consumer sentiment suggested that household spending [will] grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit, and continuing weakness in housing.

....

" [H]eightened uncertainty about economic prospects could lead business spending to
decelerate as well. Overall, the Committee expect[s] that the growth of economic activity [will] slow noticeably in the fourth quarter from its third-quarter rate.

"Growth [is] seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane.

....

"The Committee also [sees] downside risks to this projection: One such risk was that
financial market conditions would fail to improve or even worsen, causing credit conditions to become even more restrictive than expected. Another risk [is] that, in light of the problems in mortgage markets and the large inventories of unsold homes, house prices might weaken more than expected, which could further reduce consumers’ willingness to spend and increase investors’ concerns about mortgage credit.

....

"[The] inflation outlook was also seen as subject to important upside risks. In particular, prices of crude oil and other commodities had increased sharply in recent weeks, and the foreign exchange value of the dollar had weakened. These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."

His recommendations for policy changes and his belated oversight efforts come long after the horse is out of the barn. His analysis of the problems comes fully two years after they would have been useful.

The economy? No. Fed action is to benefit the financial sector

If Fed action is supposed to forestall a downturn in the economy, there is a small problem. Interest rate cuts work into economic results only after a lag of about 18 months.

The Fed action is really about bailing out the financial sector. Banks are in big trouble, with their off-balance sheet vehicles threatening to come onto the balance sheet when more CDOs turn bad. The so-called Super Conduit, or whatever its current name is, will only push the problem out six months. When the borrow short, lend long SIVs come back home to live, the sheet will hit the fan.

At least $400 billion is likely tied up in this mess.

And to be fair, the Fed didn't pretend that this was an attempt to improve things on Main Street. Their statement began:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

(emphasis added)

There is panic in the big banks.

The problem is too big for the only tool the Fed ever uses, the interest rate, to solve. Rate cuts are no doubt the wish of everybody on the FOMC's cocktail circuit and these banks and bankers will call the tune for the Fed, but this is not a moral hazard we're driving a golf ball into. This moral hazard is a sinkhole swallowing the dollar.

AWOL - Where is the political angst when you need it?

Listening to the first part of the House Financial Services Committee hearing on predatory lending and financial sector packaging is tedious. The consensus is, "Let's get the money flowing like it was before, but protect the borrowers from getting fleeced."

The money will not flow in a healthy mortgage sector in the same amounts, because those amounts were based on too low interest rates and packaging of mortgages to sell in shady CDOs upstream. Lots of cheap money leads directly to this kind of bubble and bust, it is the leverage that makes that kind of volatility possible.

Inflating home prices made people feel good, and lets them think that they are financial geniuses and promotes spending and so on, but in the end saddles people with debt they don't want and undermines the security of their financial assets and breaks their nest eggs.

The current hearings notwithstanding, and recognizing Chairman Franks went so far as to clear his calendar, nobody I am aware of is pressing the culpable in the recent financial sector screw-up or reforming the troops around legitimate policies.

• Bombs are dropping on middle class America with housing prices crumbling. It is not only those losing their homes, but those who are losing equity who are hurt.


• The bombers are the ludicrous mortgage peddling schemes, but they were sent into the skies by the too low for too long interest rates set by the Fed.


• Traditional defense have been sabotaged by the same bogus financial actors who force-fed the mortgage peddlers. Bad loans were packaged and gilded with spray paint and sold upstream as gold bricks.


• Yes, home buyers should have known it was too good to be true. Buyers of packaged debts should have wondered why they were so light. But even if all the naive or purposefully apathetic are punished, many millions of others are innocent victims.


• Homeowners who were led out into the open by the Fed's low interest rates are being blamed for coming under fire. It's like blaming those in the twin towers for being at work in what they knew was a terrorist target.

The problem is that the generals are chicken hawks. The Fed knows nothing other than the big red interest rate button. The "Easy" button. The Supply Side strategy of the Bush administration never worked and never can work. The SEC has political hacks rather than marshals of the market.

Were the shoe on the other foot, and a Democrat in the White House, the traveling Republican bellows would be touring the talk shows fanning the flames of crisis into full-blown panic. Look what they did with 9-11.

On the other hand, the Democrats are revealing too much about themselves when they are not on top of this. This is not a passing problem. The housing sector has saved the economy during the past six years. Debt for households, debt for government, cheap money, falling dollar.

Interest rates can be low and stable if the credit worthy are the only people able to borrow and if margin requirements on every kind of financial exchange are raised. High.

Have the Democrats bought into market rhetoric? Do they believe the architects of this falling house of cards who seem to say the Market is still prescient, but that it needs to be calmed like an hysterical matron (Jim Cramer?).

To revisit stocks: Be sure, stocks are not up because of strength in their fundamentals or faith in the economy, but because the villas of SIVs and hedge funds got washed away and all that liquidity at the top has only stocks, commodities and currency hedges to run to.

There is no strength.

The dollar has been heading south for years, fleeing Supply Side II and Greenspan Cheap. Now, with Bernanke cutting rates, it's on the run. With it goes the Chinese yuan, being pegged by its government. Look for the rest of the world to try to quarantine the US and China.

Let's put it simply:

• The Fed under Greenspan held short-term rates under water so long, they expired as a tool of economic policy. (See inverted yield curve. The back end of the yield curve is not responding.)


• The Bush tax cuts and Fed bailouts and so-called financial innovation have liquidity sloshing around at the top. This is the excess in the financial system that is the source of instability.


• Bush economic chicken hawks have spared the financial sector from even the most minimal standards. The bad apples have gotten into the barrel. Even Wall Street's less intoxicated voices can be heard calling for hedge fund disclosure and conflict of interest protections. The Bush team is in the bunker and out of earshot.
  

Dear Democrats: It's the economy, stupid.

Mortgage and predatory lending bill introduced in the House

Policy response is finally on the floor:

A House Financial Services Committee proposal goes part way to closing the barn door after the horses have been rustled.

“The Mortgage Reform and Anti-Predatory Lending Act of 2007” introduced today in the House Financial Services Committee steps up to some of the needed protections for homeowners. Still, those who were force-fed shady loans downstream from Bear Stearns will not fare so well as the befuddled buyers of them upstream. That is, the Fed is not going to bail anybody out with less than a six-figure income.

At least some action is being taken:

The bill will reform mortgage practices and improve consumer protection. The proposed legislation

• Calls for licensing and registration of mortgage originators, including brokers and bank loan officers. It prohibits steering, and establishes "a federal duty of care."
• Sets a minimum standard for all mortgages, including the condition that "borrowers must have a reasonable ability to repay."
• Attaches limited liability to secondary market securitizers who package and sell interest in home mortgage loans outside of these standards. (Individual investors in these securities would not be liable.)
• Expands consumer protections for “high-cost loans” under the Home Ownership and Equity Protection Act.
• Protects renters of foreclosed homes from being evicted. Lease terms must be honored. Absent a lease, renters have 90 days.
  

Sponsors are: Reps. Brad Miller (D-NC), Mel Watt (D-NC) and Barney Frank (D-MA). "This bill represents a significant step forward to clean up and prevent a number of the questionable practices that, unfortunately, took hold in the mortgage lending industry in the last several years. I hope the industry will embrace the changes and allow the bill to move forward quickly” said Watt.

This is on the table, but it will be buried under hundreds of thousands of mortgages already signed.

At a minimum, the Feds need to mandate SEC regulation of hedge funds, at least with regard to disclosure. The corrupt repackaging of securities is just part of what is a bigger mess. They have apparently infected money market funds, supposedly safe havens. The reason hundreds of billions in bad paper can be floated so easily is that practices are not open to the public.

Sure, the ratings agencies broke down, but with transparency, objective eyes -- those belonging to non-clients -- would have exposed this stuff.

See our proposals for an effective response at Demand Side Economics Policy Index.

5 Lessons and 7 Remedies for the Mortgage Meltdown and Credit Crunch

The meltdown in mortgages, overbuilding of housing stock and infestation of the world's financial markets by bogus instruments is a failure of the entire financial system: Banks, hedge funds, investment institutions of all types, rating agencies, the Federal Reserve Board and its chairman, local mortgage brokers and loan originators, state regulatory agencies, and individual home buyers. Ultimate responsibility for the order of the market lies with the Federal Reserve.

What are the lessons from the housing debacle that is now unwinding? That is, What are the lessons that should inform policy?

Too much congratulation and not enough corporal punishment is being dealt the Fed.


The need for financial markets to be regulated has been exposed by one crisis after another. The S&L bailout, the Long Term Capital Management fiasco, Enron and World Com and many more in between. Rather than set standards and hold to them, under Greenspan and Bernanke, there has been cheap money at the end. This in spite of a direct mandate from Congress.

• The Fed is not going to regulate, or indeed, set any standard at all, nor use any tool other than short-term interest rates, no matter what problem confronts it.


• The Fed is going to bail out the financial sector whenever things go bad for them. This insurance makes a mockery of the "risk" for which they compensate themselves so well. So mortgage holders should stop looking.


• No other sector will be bailed out, because the Fed is in thrall to the financial sector. When banks moved to broad services over the past four decades, they took their control of the Fed with them.


• Neither inflation nor recession is as important to the Fed as padding the financial sector. The need for "confidence" in the financial markets, which turns out to be a "confidence game," trumps both inflation and recession in the mind of the Fed. Prediction: As soon as financial firms and hedge funds signal their solvency, the Fed's practice will be to support the value of the dollar for as long as possible. This will be done for the benefit of its financial sector constituents. The announced reason will be to stem inflation pressure, but the inflation will be cost-push from higher commodities and imports, rather than demand-pull, and so higher interest will not touch it.


• The financial sector controls monetary policy and monetary policy is out of control (see inverted yield curve).

The absence of action by the Fed is the big problem. The policy response MUST do what the Fed has not done and -- of equal importance -- institute a clear civilian control of the financial sector, both in fact and in the minds of the public.

Seven Policy Remedies

1. Financial transaction tax, a .0025 tax on the value of each financial transaction. This one-quarter of one percent. This will be incidental to most transactions. 25 cents on every one hundred dollars, or 25 dollars on every ten thousand dollars. For transactions with high leverage, this tax is relatively more for the hedge fund, since they will incur the tax on the total no matter that their total is small. That is, if using a million dollars, they leverage another nine million for the transaction, the effective tax on them is 2.5 percent. If money is being moved higgley piggley to take advantage of short-term arbitrage, over a year's time it will be subject to the tax several times. The yield of such a tax would be immense. The cost to the real economy would be negligible. (This is similar to the Tobin Tax, proposed to slow down the mad rush of currency speculation around the globe.)


2. New top marginal rates on personal income tax, no income source excluded, of 50% on $1 million or more and 90% on $10 million or more. Take the reward out of high risk. Return sobriety to corporate governance. The companies of Europe are winning with executive salaries one-third of those in the U.S. Top hedge fund managers make $1 billion per year.


3. Reestablish the SEC. William Donaldson, former head of the SEC, whose appointment actually brought confidence in Wall Street back from the grave after the Enron and World Com fiascos, abandoned the post after three years. Partisan hacks returned to the posts. Donaldson has called for "getting tough" on conflict of interests, increasing oversight and closing the loophole that lets hedge funds play in the market without disclosure of their practices.


4. Windfall profits tax. There are obscene rewards to those who take a company private, do financial slicing and dicing, and sell it back to the public. These and other financial gymnastics are today's replacement for productive work. They do not have to be encouraged in the tax code.


5. No free lunch on bailouts. Companies and funds who are bailed out with cheap money from the Fed need to be identified individually and dealt with individually. Rather than this upper class welfare, there needs to be a price for liquidity, a share of the firm or specific repayment conditions, that benefit the government and the people who are footing the bill. Stiglitz seconds this suggestion in his piece:

Those in financial markets who believe in free markets have temporarily abandoned their faith. For the greater good of all (of course, it is never for their own selfish interests), they argued a bailout was necessary. While the US Treasury and the IMF warned East Asian countries facing financial crises ten years ago against the risks of bail-outs and told them not to raise their interest rates, the US ignored its own lectures about moral hazard effects, bought up billions in mortgages, and lowered interest rates.

....

It may make sense for central banks (or Fannie Mae, America's major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity. But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions. Equity owners in banks should not get a free ride.


6. Mortgage loan disclosure. Surveys, investigations and anecdotal evidence by the boxcar load have shown that many home loan purchasers do not understand the terms of their loans. This is not confined to unsophisticated subprime borrowers. A simple one-page disclosure summary is available that sets things down in black and white. It needs to be mandated for every mortgage.


7. Strict limits on the type of mortgage instruments. The ARMs promoted by Alan Greenspan are not appropriate. They are speculative instruments. Prepayment penalties are loan shark stuff. Congress must set a strict limit on the types of loan that are eligible for income tax interest deduction.

These are what could be done. The collapse in pother nations' economies undergoing similar stress in the housing sector did not happen. These countries have at least minimal standards for financial institutions and instruments. The rest of the world does not let financial markets regulate themselves.

A sad catastrophe is brewing

Thursday, December 29, 2005

The current federal debt is $8.1 trillion. Yes, $8.1 trillion. $8,100,000,000,000. Eight trillion one hundred billion dollars. This is the principle on which we are paying interest every year. See it to the penny at Bureau of the Public Debt.

The on-budget deficit, that is, the amount we are adding to the debt by borrowing from all sources including Social Security trust funds, was $567 billion in 2004. It will be at least $500 billion this year, next year, and every year until a change is made. Half a trillion dollars a year we are borrowing. At 5% interest, four years from now, that half a trillion will only pay debt service. At 10% interest? (Ten percent is conceivable, because who will lend us money with these kinds of books?)

Net interest is currently about one-tenth of federal spending. This is largely a legacy of the policies of Ronald Reagan and the first George Bush. Dubya is making them look like pikers. Inevitably the debt service will be crippling.

The Iraq War, the culture of corruption, the torture and habitual lying, the burning of the Bill of Rights, these are examples of a betrayal of America by the Radical Right under Bush and Cheney. Baffling in their audacity. Magnets for outrage. But the crime that is being committed on our economy.... Unless we all die before we want to, the burden will not fall solely on our children.

Bush and the Republican Congress are poisoning the future. They are playing war with other people's lives and gambling with other people's money. The Right Wing is ensuring the demise of popular (as in "of the people") social programs by these deficits, but the damage will not be confined to the structures we expected to carry us in dignity, but to the whole fabric of the economy.

It's worse than you think. See the Congressional Budget Office projections.

Payback for Arctic Refuge filibuster?

Ted Stevens, I'm coming to your state on this one. The minute they could no longer use it as a bargaining chip, Republicans in Congress cut badly needed help for low-income households to heat their homes this winter. The director of CBPP Robert Greenstein called it:

"Even though there is bipartisan support in Congress for providing LIHEAP [Low-Income Home Energy Assistance Program] funds, congressional leaders stripped those funds out of the defense bill the minute they could no longer use them to help get ANWR enacted."

While a small piece of the LIHEAP money was attached to Arctic drilling, $2 billion was not. Both were stripped.

The Republican leadership may be delivering payback. They sure lined up to blow smoke over cutting vital assistance just before Christmas. Senator Rick Santorum's office said, "Democrats stripped out the $2 billion in LIHEAP money because it would have been funded by revenues from oil drilling in ANWR." Does this guy have any credibility left?

Senator Charles Grassley (R-Iowa)was quoted as saying ANWR drilling was the source of funds for the entire utility assistance. Senator Judd Gregg (R-N.H.), chairman of the Senate Budget Committee, said the only way Congress could have found extra money was through a new revenue source. What is it called when people who know better make statements that are not true?

A spokesman for Dennis Hastert attacked Senate Democrats for delaying passage of a separate piece of legislation — the budget reconciliation bill that would cut Medicaid, student loans, child support enforcement, and other programs — by procedural means which forces another vote in the House. The Hastert spokesman, Ron Bonjean, said this action would delay the provision of money to help low-income families pay their heating bills. Bogus. The only money for heating assistance contained in the budget reconciliation bill is funding for 2007.

The Republicans blocked LIHEAP from other bills, preferring to use it as a sweetener, first for the budget reconciliation bill then, when that passed the House floor, moving the money to the defense appropriation bill with ANWR. Two weeks ago Bush & Co. rejected attempts to update food stamp benefits to reflect higher heating bills and hence less money for food, claiming the adjustment was unnecessary because more LIHEAP funds were on the way. Sure, George.

Now Congress has left town with no action. Worse, because of the 1% across-the-board cut in discretionary funding, there will actually be LESS MONEY IN THE LIHEAP FUND, PRECISELY WHEN HEATING BILLS ARE SPIKING.

These people are running the country!

See the whole sick thing at the Center on Budget and Policy Priorities.

More wartime tax cuts from Bush

If Tim Eyman is the poster boy for deadbeat dads, George Bush surely must be their king. The latest arrogance of another tax cut for the rich in a time of war while cutting social programs is nothing less than George playing poker with the mortgage payment, the kids college fund, and the grocery money.

See the breakout of the new tax cuts, at EPI's snapshot. More than $16 billion in new business tax cuts, $20 billion in capital gains tax cuts, and over $30 billion in tax cuts on dividends.

It doesn't bother him. I wonder where he'll be when the bills come due? For Medicare, for education, and for our social security. The social safety net may still be there, but it's now only a few inches off the ground. If you hit it, it's not going to save you any broken bones.

Up until George, I objected when people dismissed our social security system. It was phenomenally successful in its time. It raised millions of seniors from poverty and humiliation almost immediately when it was enacted. Later revisions lifted even more. Its financing is impeccable in terms of internal sufficiency. But social security is now the house, and the mortgage payment is going to the rich in the form of tax breaks.

I can think of two possibilities: (1) Bush doesn't know what he's doing and imagines like the Queen of Hearts that reality is determined by decree, or (2) He knows exactly what he is doing, and he is purposely dismantling the social programs that make us a civilized society. Maybe it's a combination, Bush is #1 and the people who maintain him in power are #2.

But there is a third. The enabler. The compliant, supine press, who faithfully report his lies as matters of opinion and the facts as contrary opinions. To the press he is not the deadbeat dad, but a man of strong principles, and if not principles, at least appetites. They are his poker buddies, his "friends on the force."

In the end, all will suffer. Even the deadbeat dad. If things aren't righted, it will be a tragedy. If things are righted, it will leave a scar. Better we should have done the right thing to begin with.

The economy is doing great. Right. Look out the window.

Dubya trotted out into the Rose Garden the other day so he could get one number on the nightly newscasts: 4.6% GDP growth in the previous six month period (annual rate). He bubbled a little bit, muttered something about keeping taxes down, and retired (don’t we wish) to the spin room.

Look out the window. It's still raining. And Dubya’s poll numbers on the economy show America isn’t listening anymore.

Before I show you my secret chart on GDP, let it be known that it’s jobs that matter. Check out the Economic Policy Institute’s work on this. Jobs Picture shows a pathetic 2.6% more jobs four years into the current “recovery,” jobs which cost us $860 billion in tax cuts. The next lowest performance over a similar period is 7.6% in the 1990s, after taxes were raised. EPI’s The Boom that Wasn’t will depress you even further.

[At this point I begin a long digression on why jobs matter more than GDP and how we used to do better. For the sake of flow, I’ve saved it for a sunny day.]

GDP can be spun in a lot of ways. It can be bought by trucking Chinese goods halfway across the country, past closed factories and abandoned storefronts into the WalMart at the edge of town. Jobs can’t.

GDP can be generated by borrowing against our future, shifting spending to us today from us tomorrow. You can do the same thing with a credit card. Borrowing is not earning. Are you feeling good when you borrow five percent of your income so you can buy three percent more stuff?

So, now, the following chart needs some explanation.

First, it should be titled “Average Annual Real GDP Growth,” instead of just “Average Real GDP Growth.” It shows average growth per year.

Second, the concept is to produce GDP net of borrowing, that is, taking our spending (GDP) and deducting federal deficits, what we put on the credit card. Surely if we’re priming the pump we can’t count the water we put in as part of the product.

Lastly, the deficits used as the minus are not the deficits of the unified budget that you most often see. I have used the deficits of the operating budget. This leaves social security out of the financing of general government.

Explanation of this last point: Social Security is a retirement benefits program that is operated very well and is financed by payroll taxes. Tax revenue goes into a trust fund for future use. The trust fund buys only special federal bonds. If social security were a private or independent program obeying the same rules, the government could not count the receipts from the bonds it against its operating shortfalls. For some reason, in the “unified” budget, this is allowed. The reason, of course, is so the numbers won't look as bad as they are. I don’t allow the theft in the chart below. This is simply growth minus federal debt.

These data go through 2004. They would be roughly the same today, however, since the pace of borrowing has only picked up.