The Economic Collapse
July 29, 2010

Even just a decade ago, major pieces of legislation in the U.S. Congress would be just a few dozen pages long. But today, it seems like every time Congress passes an important bill it ends up being over a thousand pages long. In fact, the final version of the new financial reform law was over 2,300 pages. Overall, as we wrote about extensively in a previous article, this much-ballyhooed new law does a whole lot of nothing, but it turns out that lobbyists and special interests were able to insert a few nasty surprises that we are just now finding out about. But it was the same thing with the health care reform law. It was only after it was passed that most of us learned that it contained a provision that will force U.S. small businesses to collectively produce millions more 1099 tax forms each year. Now small businesses from coast to coast are screaming bloody murder about that provision but it is too late – the law has already passed. Unfortunately, there are some surprises in the recently passed financial reform law that are nearly just as bad.

So just what are those surprises?

Well, first let’s talk about what the financial reform law does not do. The financial reform bill was supposed to “fix” Wall Street and the financial system, but it did not do much of anything….

-It does nothing to address the problems with Fannie Mae and Freddie Mac.

-It does not eliminate “too big to fail”.

-It does absolutely nothing to eliminate the horrific bubble in the derivatives market.

-It does nothing to reform the organization most responsible for the recent financial crisis – the Federal Reserve. In fact, this new law actually gives the Federal Reserve even more power.

But it does create a ton of new paperwork and a bunch of new government organizations.

Oh goody!

But was there any major law that Congress has passed over the last several years that did not increase the size and scope of government?

That is a good question.

In any event, let’s get to some of the nasty surprises contained in the new financial reform law….

*Barack Obama has been running around touting how this new law will “increase transparency” in the financial world, but it turns out that a little-noticed provision of the new law exempts the Securities and Exchange Commission from virtually all requests for information by the public, including those filed under the Freedom of Information Act.

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Richard Benson
SF Group
July 27, 2010

Inflation is defined as the rate at which the general level of prices for goods and services is rising, and, subsequently, the purchasing power is falling. I’ve always thought of inflation in terms of what we get and what we pay, but quality and service are as important as quantity, for the price.

I felt inspired to write this article when I went shopping for razor blades recently and had a painfully difficult time finding the razor blades I needed. Much to my dismay, I discovered that most of the stores want to sell five-blade razors at a much higher price than the Trac II razor blades I’ve grown accustomed to. So I rebelled by buying and hording away every last Trac II blade I could find and now have enough blades to last for years. But it’s not only razor blades that are disappearing or increasing in price. It’s noticeable every time I make a purchase at the supermarket, restaurant or department store. Following are some examples of what I am talking about:

Cereal boxes are only half full; yogurt has shrunk to six ounces from eight; tuna cans are now five ounces from six; candy bars are half their size, and newspapers are shrinking and may totally disappear. (Reporters are expensive, so picking up and printing government and corporate news releases is now considered serious reporting.) A meal at a local restaurant tasted like yesterday’s leftovers and the portion size dwindled, but the price was higher.

Also, if you can afford to go on vacation, you’ll become an unpaid travel agent working for the airlines, car-rental companies, and hotel. That’s right. I recently had to spend my valuable time on the internet doing the research then booking and paying for a trip. Then, to top it off, I had to use my computer, printer, and paper at my own expense. When I got to the airport, I was strip-searched and forced to pay extra for an exit row, to check a bag, get a pillow, blanket, and a meal. Then, I had to waste an hour of my life in a long line while being forced to take off my shoes in honor of the shoe bomber and pay my respects to the TSA, who added a fee to my airline ticket. When I picked up the rental car, airport fees and taxes pushed the cost up by a third for an older car that wasn’t well-maintained. (The major rental companies are hanging on to their cars until they are close to breaking down.) When I finally arrived at the hotel, I was hit with a resort fee, internet fee, and daily telephone charge each time I looked at the receiver. I was careful, too, when approaching the mini-bar in the room because the motion detectors inside would bill me for food and beverage items that were examined and put back but not consumed (a bottle of coke was $5). The taxes were horrendous and I wonder if the maid service and extra towels or pillows were bundled in the final bill.

Every time I turn around, it seems like we’re getting less but paying more. Believe me, none of this “less for more” is appearing in the Consumer Price Index. I even heard the other day that postage was going up another two cents for a First Class letter, and Saturday delivery may be eliminated altogether. If you’re dealing with the government, there is no such thing as First Class. State and local governments have closed parks, cut back on trash collection, road repairs, library hours, and laid off teachers. Meanwhile, taxes are going up and property values are going down. In New York City, they announced a major cut in bus and subway service along with a fair increase. When it comes to public services, the collapse in services – especially in cities – will be monumental and nowhere is it reflected as a major price increase for services actually rendered.

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Washington’s Blog
July 19, 2010

Preface: If you’ve been too busy to pay attention to the details, and if you’re hoping that the financial reform bill which has just been passed will fix the economy, this essay will bring you up to date.

Congress, Federal Reserve chairman Ben Bernanke, Treasury Secretary Timothy Geithner and the rest of the folks who run the economy are patting themselves on the back for passing the financial “reform” legislation.

Obama says it was “my policies that got us out of this mess.”

The new bill is widely described as the biggest change in how the economy is regulated since the Great Depression.

Is it true?

Unfortunately, as discussed below, none of our real economics problems have been addressed.

Consumer confidence is plunging again, and yet little in the legislation really restores trust in the system.

The poker game started breaking down because the wealthiest took all of the chips, and most people have no money to play with … but the bill does nothing to address the ever-widening gap in wealth.

The bill does little to restore the rule of law, which – as PhD economist James Galbraith notes – is a necessary ingredient in economic recovery.

Unemployment continues to plague the economy, because – even with the new bill- the government is feeding the parasite and killing the patient.
Main street continues to bleed because – instead of breaking up the too big to fails so that their dead weight stops suffocating the real economy (virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won’t be able to recover, and see this) – the government has allowed them to get even bigger (and see this and this).

Indeed, just as BIS warned years ago, bailing out the banks has simply spread their problems into sovereign crises … and now the banks and governments are broke, and the global strategy of printing obscene quantities of money (“quantitative easing”) is debasing currencies worldwide.

“Deficit hawks” like top economic historian Niall Ferguson says that America’s debt will drive it into a debt crisis, and that any more quantitative easing will lead our creditors to pull the plug. See this, this and this. Indeed, PhD economist Michael Hudson says (starting around 4:00 into video):

If the problem that is grinding the economy to a halt is oo much debt, and if no one in the government – in either party – is looking at solving the debt problem, then … we’re going to go into a depression as far as the eye can see.

Yet the U.S. hasn’t reined in its profligate spending. While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter.

As PhD economist Dean Baker points out, the IMF is cracking down on the once-proud America like a naughty third world developing country. (As I’ve repeatedly noted, the IMF performed a complete audit of the whole US financial system during Bush’s last term in office – something which they have only previously done to broke third world nations.)On the other hand, “deficit doves” – i.e. Keynesians like Paul Krugman – say that unless we spend much more on stimulus, we’ll slide into a depression. And yet the government isn’t spending money on the types of stimulus that will have the most bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps – let alone rebuilding America’s manufacturing base. See this, this and this.

Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers. (Not only has the government rewarded the gamblers, bailed them out and let them engage in a new round of risky betting, but it hasn’t even meaningfully reined in credit default swaps.)Paul Volcker is warning that the watered-down Volcker rule (which won’t even kick in for some time) won’t prevent the next crisis. Similarly, one of the primary authors of the legislation – Chris Dodd – long ago said the bill wouldn’t prevent future crises.

Shady accounting is part of what got us into this mess … but as Citigroup Inc. analyst Keith Horowitz notes, banks are making huge amounts of money from an accounting rule that allows banks to book profits when the value of their own bonds falls.

High frequency trading is wrecking the markets … but isn’t addressed in the new legislation.

Neither is reforming money pits like Fannie and FreddieThe Fed is now warning that it could be 5 to 6 years before the economy recovers, and that there is a “significant downside risks” and a possible slide into deflation. That’s not a big surprise … Ben Bernanke doesn’t understand that liquidity was never the problem, and he has continued the same behavior which got us into this mess in the first place. Bernanke and the Fed have caused widespread destruction to the economy (see this, this, this and this). And yet the financial reform bill gives the Fed has more – instead of less – power.

Timothy Geithner was largely responsible for the crash and prolonging the crisis (see this, this, this, this, this, this, this, this, this and this) … and yet Geithner is being given more – instead of less – power by the new legislation.

Instead of becoming more democratic and more of a free market capitalist economy, the U.S. has become a a kleptocracy, an oligarchy, a banana republic, a socialist or fascist state … which acts without the consent of the governed.
No wonder the American and world economies are falling back into the double dip of a very nasty downturn.

And see this.

John Stepek
Money Week
July 12, 2010

Let’s assume for the moment that all the talk of a double-dip recession will translate into the real thing.

What’s likely to happen? Well, another dose of quantitative easing – or money printing as we like to call it – seems the most likely reaction. The anti-austerity crowd will bray “we told you so”. Governments will panic in response, anxious not to be accused of driving the economy into a depression.

And so the printing press will be warmed up again. And that will probably result in a rebound in asset prices.

But can it work in the longer run? Evidence from the past says no. And I’m not just talking about Japan. Quantitative easing has been tried before in the US too…

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James D. Hamilton
Wall Street Pit
July 12, 2010

I’ve been taking a look at what happened to the demand for U.S. Treasury bills and bonds as a result of the financial crisis. Here’s a summary of some of the data that I found interesting.

The Federal Reserve publishes flow of funds accounts that include estimates of who has been holding the debt issued by the U.S. Treasury at different points in time. Here’s a pie chart showing the breakdown as of the end of 2007. At that time, almost half of the U.S. Treasury debt was owed to people or institutions outside the United States. The Federal Reserve and state and local governments held another quarter. Pension funds (combined private and federal, state and local government), mutual funds, and money market funds held another 15%. U.S. households played a very minor role in lending to the U.S. government, with holdings of only about 5% of the total debt.

In the two years since then, U.S. Treasury debt has increased more than 50%. The chart below summarizes who bought all that new debt. Foreigners bought more than half of the net new debt issuance. But the Federal Reserve and state and local governments have barely increased their holdings of Treasury debt at all, meaning that other sectors significantly increased their share. In particular, money market and mutual funds increased their holdings of Treasury debt by 85% over the last two years. Banks increased their holdings by 146%, and households by 143%.

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