Mediocre Poison Eaters And The Imperfection of Evolution National Geographic

Washington gets explicit: its ‘war on terror’ is permanent Glenn Greenwald, Guardian

“Astoundingly Disturbing”: Obama Administration Claims Power to Wage Endless War Across the Globe Democracy Now

U.S. authorities seize accounts of major Bitcoin operator Reuters

Senator calls for U.S. to join oil price probe USA Today

Wells, Citi Halt Most Foreclosure Sales as OCC Ratchets Up Scrutiny American Banker (SW) “Question No. 1, for example, is ‘Is the loan’s default status accurate?’” [boggles].

Sen. Warren demands to know why criminal bankers aren’t being locked up Raw Story (SW)

DOJ to press: “If you preempt my ability to spin out a story the way I want to, I’m going to ruin your source base” – Marcy Wheeler on Scott Horton Show Wheeler on AP (with more on biometrics).

Bulls vs. Bears

“Give the Market the Benefit of the Doubt” and Invest in Stocks: Barry Ritholtz Daily Ticker. Ritholtz: “WISH @YahooFinance STAYED AWAY FROM MAD HEADLINES”

In which Downtown Josh Brown destroys the 1999 comparison The Reformed Broker

Too Much Talk About Liquidity Paul Krugman, Times

Retiring Wall Street Strategist Gives Amazing Investment Advice Just Before He Quits Henry Blodget, Business Insider

Is This Another Bubble? We Can’t Know Without Better Data Editors, Bloomberg

Hans Rosling: the man who’s making data cool Guardian

Spotting Black Swans with Data Science Online WSJ

A Simple Graph That Should Silence Austerians and Gold Bugs Forever Atlantic. As if.

Global economy lacks strong source of demand growth FT

May consumer sentiment highest in nearly six years Reuters

Maersk Warns of Subdued Demand OnlineWSJ

As Greece Struggles with Debt Crisis, Its Shipping Tycoons Still Cut a Profit Time

China exporters at risk as buyers delay paying South China Morning Post

No, It Looks Like the House Has Not Unintentionally Eliminated the Debt Ceiling After All Dan Kervick, New Economic Perspectives

What Principles? Eschaton. Because #MintTheCoin. Also too.

Covering facts versus the ‘narrative’ CJR

Michelle Rhee and the Washington Post Taking Note

Sponsored Content Pretty Fucking Awesome America’s Finest News Source

Rob Ford in ‘crack cocaine’ video scandal Toronto Star. Ford is Mayor of Toronto.

Report: Canada could see indigenous uprising  Al Jazeera

The Baby in the Well New Yorker. “The case against empathy.”

Book Talk: Of apes and atheists – is empathy evolution? Reuters

Pope blames tyranny of capitalism for making people miserable The Age

What Do You Desire? n+1 (see also). NSFW (the acronym, not the media empire).

What about Marx? Understanding Society

Antidote du jour (furzy mouse)”

Bill Moyers is joined by the heads of two independent watchdog groups keeping an eye on government as well as on powerful interests seeking to influence it. Sheila Krumholz, executive director of the Center for Responsive Politics and OpenSecrets.org, and Danielle Brian, who runs the Project on Government Oversight, talk to Bill about the importance of transparency to our democracy, and their efforts to scrutinize who’s giving money, who’s receiving it, and most importantly, what’s expected in return.

Worth the 20 minutes with your morning coffee. These passages caught my eye:

BILL MOYERS: Hasn’t the buying of influence in Washington become so routine it’s now the norm?

DANIELLE BRIAN: Oh, there’s no question that it’s become the norm. And part of the problem with that is that people are less and less outraged. They get sort of used to it, journalists as well. And so I do think that what Sheila’s pointing to in addition to the campaign contributions and lobbying, which people think of when they think of money affecting government, it is also that revolving door that goes on where jobs, where people are leaving the federal government either from the Congress or the agencies and going to the industries that they had been overseeing or vice versa where they are leaving those industries and coming into the federal government.

These are the kinds of things that are really affecting policies. And then you have those same lobbyists who are dealing with legislation who are in the agency level who are also affecting how rulemakings, which is really some of the details that matter most. ….

DANIELLE BRIAN: It’s really I think the revolving door is maybe the most important corrupting element of in Washington because of– you have what we call, in this case that’s a reverse revolving door, right. But either way what you’ve got is people who are coming to the government or to be in public service with an incentive coming from their prior employer in this case.

You know, you’re not forgetting your friends who just gave you a multibillion or a multimillion dollar deal. Or you have people who are in the public service who are anticipating their next step, you know, their public service is essentially a stepping stone in their résumé to make more money. I don’t want that kind of person in my government. I would rather see that we have policies that really slow down the assumption that the reason you’re in government is to help go make money for yourself and for your next business afterwards.

OpenSecrets and POGO are doing great work. Good data is good! But two brief critiques:

First, I’m really not sure how useful the “revolving door” metaphor really is. Suppose the door were locked, and everybody working for the State did that for the rest of their lives, and everybody working in Civil Society did that. Would policy outcomes change that much, either for worse or for better? I’m not sure. I think it might be more useful to think of a single, fluid “political class.” Then, if we freeze the political class with a snapshot at any point in time, some members of that class will be seen to wield the violence that is the (putative?) monopoly of the State, and others to be engaged in the contractual or (putatively?) voluntary associations that make up the network of Civil Society. (I know; potted Gramsci. State does the coercion; civil society does the hegemony. Do feel free to propose superior tools!) Take a snapshot, and different players will be found in different roles, maybe even different uniforms, but the playbook, the plays, and the game will all remain the same.

Second, in some ways, I’m not even sure that it’s the corruption of policy that matters the most. As in so many places (Cooper Union) we have a governance issue, and part of what keeps current governance systems in place (this would be the hegemony part) is TINA — There Is No Alternative, apparently coined in honor of Margaret Thatcher, bless her heart. Here’s an example (hat tip DCBlogger) of how TINA works:

An essential and successful element of the Peterson strategy is to create an environment where it is widely if not universally believed that there is no alternative to his vision. … A review of the proceedings of the Fiscal Summits of the last three years makes agonizingly clear that most of the journalists who conducted interviews or moderated panel discussions both reflected and amplified the Peterson worldview — entirely unselfconsciously, it would seem.

So, for example, Lesley Stahl, the CBS “60 Minutes” reporter, was fully a part of the Erskine Bowles and Alan Simpson deficit-cutting team during her interview with both men: “You are going to have to raise taxes and cut things, big things, put restrictions on Social Security. Everybody knows that.”

Virtually none of the reporters thought to ask about or suggest an alternative path, such as preserving Social Security benefits and bolstering the system’s reserve by raising the cap of wages subject to Social Security taxes (currently annual wages above approximately $110,000 are not subject to any Social Security tax).

Journalists working at Peterson Fiscal Summits, 2010-2012

Maria Bartiromo, 2011 (host, CNBC’s “Closing Bell with Maria Bartiromo”)

Tom Brokaw, 2012 (former anchor and managing editor, NBC Nightly News)

Erin Burnett, 2012 (host of CNN’s “Erin Burnett OutFront”)

John F. Harris, 2012 (editor-in-chief of Politico)

Gwen Ifill, 2011, 2010 (senior correspondent of “PBS NewsHour”)

Ezra Klein, 2011 (columnist, Washington Post)

Jon Meacham, 2010 (former editor-in-chief, Newsweek)

Bob Schieffer, 2010 (host, CBS “Face the Nation”)

Lesley Stahl, 2010 (reporter, CBS “60 Minutes”)

George Stephanopoulos, 2012 (host, ABC’s “This Week”)

David Wessel, 2012, 2011 (economics editor, Wall Street Journal)

George Will, 2011 (columnist, Washington Post)

Judy Woodruff, 2012, 2011 (host, “PBS NewsHour”)

And most questioning proceeded either on the false assumption that deficits were derived from excessive spending on entitlements or as though they had mysteriously, but inevitably, come to pass.

Many journalists fairly shouted their personal desire to see greater cooperation and “compromise,” with groups realizing the importance of submerging their interests to the greater good. Who should do the submerging? In 2012, Tom Brokaw had a suggestion in the form of a question to former President Bill Clinton: after Wisconsin Governor Scott Walker pushed through a bill undermining the right of union members to collectively bargain, shouldn’t those workers have just sat down and negotiated with Walker as, Brokaw said, “has been traditionally done in this country” instead of “gather[ing] outside the capitol”?

There were a couple of exceptions to the rule. In a session moderated by Ezra Klein of the Washington Post in 2011, Klein posed a number of questions that reflected an unwillingness to operate from within the Peterson framework. For example, Klein asked New York Times columnist David Brooks whether, instead of blaming Americans for simply wanting benefits without paying for them, the causes of the debt should be located in the Bush tax cuts, two unfunded wars (Iraq and Afghanistan), and the federal government’s emergency response to the financial crisis.

Judy Woodruff, of the PBS NewsHour, generally asked questions from within the Peterson frame, but, at one point in 2012, posed a question that perhaps all the journalists should have been thinking about as well. She asked Rep. Christopher Van Hollen, Jr. (D-Md.) if “Democrats like you, by participating in forums like this one that is all focused on austerity, on cutting the deficit and the debt…really become also window dressing for a conservative agenda that is anti-jobs and anti-recovery and wrongheaded economics?”

Over the course of the three years of fiscal summits that Remapping Debate examined, the other journalist interviewers and moderators hewed strictly to the conventional Peterson wisdom. What follows are annotated illustrations of this recurring problem.

“Remapping Debate” indeed! I’m not even sure whether Peterson’s work comes under the heading of corruption at all (even if many of the journalist were also on Peterson’s payroll as moderators). Is a sincere belief, shared with all one’s colleagues, family, friends, and the usual suspects on the Acela — that is, in the political class — really corruption? And if all the players believe in TINA, no matter which side of the revolving door they are on, does the revolving door really matter that much? Readers?

Cross-posted from Testosterone Pit. Contributed by Chriss Street: Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

Lambert here: Of course. Tim Geithner [slaps forehead].

Acting IRS Commissioner Steven T. Miller was forced by to resign, predominantly due to the July 7, 2011 memorandum that I published last weekend in my report, IRS HAD ENEMIES LIST IN 2010 & 2012. The document, written on U.S. Treasury Department stationary, demanded that senior IRS management terminate attempts to have donations to selected tax-exempt groups be fully taxed as gifts.

The IRS admitted the groups examined were conservative, such as Tea Parties. The Miller memo appeared to confirm that he knowingly lied to Congress while under oath at least twice last year about predatory audits of conservative organizations. But Mr. Miller has told the press he is only resigning when his “acting assignment ends in early June.”

I was suspicious Mr. Miller’s resignation was an effort to prevent him from being required to testify again under oath on Friday to three Congressional Committees. But if Mr. Miller is staying until June, he must testify on Friday. With the President throwing the IRS Commissioner “under the bus,” Mr. Miller may be ready to throw former Treasury Secretary Timothy Geithner and President Obama under the bus.
 
Steven T. Miller is a career civil servant at the IRS. He holds a Juris Doctorate law degree from George Washington University and a Master of Laws in taxation from Georgetown University. He has held several senior positions at the IRS and worked for a number of years as an attorney in the IRS Chief Counsel’s office. He also served as a Congressional staff member for the Joint Committee on Taxation. Holding prestigious law degrees and having given harsh warnings to senior IRS staff in 2011 to ban predatory examinations, it is doubtful Mr. Miller would have authorized continued examinations unless ordered to by his direct boss, former IRA Commissioner Douglas H Shulman.

Douglas H. Shulman was nominated by Republican President George W. Bush  and confirmed by the Senate as IRS Commissioner on Friday March 14, 2008 at the youthful age of 41. Mr. Shulman formerly served as the Vice Chairman of the Financial Industry Regulatory Authority (FINRA), at an even more youthful age, where he made a name for himself working closely with New York Federal Reserve Bank President Timothy Geithner, pioneering over-the-counter trading of derivatives by banks. As IRS Commissioner, he reported directly to Timothy Geithner as U.S. Treasury Secretary.

Over the next four days after his confirmation, the legendary Bear Stearns Brokerage firm collapsed, heralding the beginning the worst recession since the Great Depression. The U.S. Federal Reserve was required to take responsibility for $29 billion in toxic sub-prime assets from Bear Stearns’ portfolio. As the FINRA whiz-kid he was the regulatory architect that championed banks and brokerage firms’ taking on sub-prime asset leverage. Douglas Shulman again showed incredible timing for avoiding horrific personal blame for scandal by resigning on November 9, 2012, a day after the reelection of President Barack Obama. 

By the time Barack Obama came into office in January of 2009, real estate was collapsing, the stock market was down by 40% and unemployment was about to vault to over 10%. President Obama summed up his opinions of leveraged banks on CBS’s “60 Minutes” stated: “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” Mr. Obama went on to say: “They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it’s gone through in—in decades, and you guys caused the problem. And we’ve got 10% unemployment.”

It was always baffling to me that IRS Commissioner Douglas Shulman had managed to convince the President to not demand his resignation as punishment for his dubious leadership at FINRA that contributed to the financial crisis. As IRS Commissioner, Mr. Shulman must have received a copy of Deputy Commissioner for Services and Enforcement Steven T. Miller’s memo of July 7, 2011 that screamed the audits and examinations had: “significant legal, administrative and policy implications with respect to which we have little enforcement history.” It is documented President Franklin Roosevelt used the IRS to investigate and intimidate his political enemies, so IRS Commissioner Shulman must have known that Mr. Miller was concerned the retaliation against conservative groups exceeded FDR’s using the IRS against political enemies.

The IRS continues to mislead the public, as Fox News reported that at least 471 tax-exempt organizations, not the 300 admitted to by the IRS, were examined with “extra scrutiny.” Then Treasury Secretary Timothy Geithner must have received a copy of the 2011 Miller memo, because it was written on Department of Treasury stationary and Shulman and Miller reported to him. Therefore, to find out if the IRS has been running a massive enemies list for the White House, Congress must demand that Timothy Geithner testify under oath.

Harry Truman said that he took personal responsibility for the actions of his Administration’s by saying: “Buck stops here.” Barack Obama said at his Benghazi press conference “there is no there, there.” The question the American people want to know about any illegal use of the IRS for political purposes, “Is there any here, here?” By Chriss Street.

During their second term, Presidents not only get tangled up in scandals but also become obsessed with “legacy.” This includes their performance as measured by the stock market. Many people can relate to it. Retirement depends on it. Outside of a few shorts, everyone wants it to go up. But President Obama must be biting his fingernails down to the quick. Read…. Every President His Bubble – And Its Aftermath.

* * *

Lambert here: This, to me, is the key paragraph:

Then Treasury Secretary Timothy Geithner must have received a copy of the 2011 Miller memo, because it was written on Department of Treasury stationary and Shulman and Miller reported to him. Therefore, to find out if the IRS has been running a massive enemies list for the White House, Congress must demand that Timothy Geithner testify under oath.

Grant “must have received” (though these people are one and all twisty as corkscrews, and I don’t see why Timmy’s dog couldn’t have eaten that memo). Therefore, if the Republicans do not demand that Geithner testify, wouldn’t that show this scandal is all kayfabe? In that regard, note this paragraph from Pravda’s WaPo’s Editorial Board:

The origins of the IRS’s practice of targeting tea party-type groups applying for 501(c)(4) tax-exempt status are still murky. In testimony on Friday, Steven T. Miller, the outgoing acting IRS commissioner, couldn’t identify whose idea this was — though so far there is no evidence that it came from Washington.

But surely the “origin” of the practice is less interesting than who signed off on it? And here WaPo’s coverage, like most other coverage, seems to think that the chain of command in the executive branch goes Miller -> Shulman -> White House, when in fact the chain, as Street points out, goes Miller -> Shulman -> Geithner -> White House. Why move Geithner out of the line of fire?

From accounts of Miller’s four hours of “mistakes were made” testimony Friday (yesterday), he denied White House involvement, but if Miller threw Geithner “under the bus,” it didn’t make the news. (The last hit for “Geithner” at the FedNews transcript service is Thursday 5/16.) The Reuters account summarizes who knew what when at Treasury:

Deputy Treasury Secretary Neal Wolin, an Obama political appointee, learned nearly a year ago that a government watchdog was looking into inappropriate targeting by the IRS.

Wolin, the No. 2 official at Treasury, is due to testify next week before the House Oversight and Government Reform Committee. …

Treasury Secretary Jack Lew was told [by whom?] about the investigation when he took office in March, the department said, but neither he nor Wolin was told about its findings even as a preliminary version circulated elsewhere within the department.

Of course, being told about an investigation isn’t the same as being told about the Miller Memo. Odd, though, how Geithner’s name just keeps not coming up. “He wasn’t there again today / O how I wish he’d go away…”

Miller and Shulman testify before the Senate Finance Committee Tuesday. Will the Democrats make the demand that the Republicans didn’t? Or will some Republican staffer clever up, read Street’s post, and induce their boss to take a bite at the Miller Memo apple?

By Sell on News, a macro equities analyst. Originally posted at MacroBusiness.

One of the puzzles of the global financial crisis has been that there has been no push for debt to equity swaps. In previous crises, most notably the Latin American debt crisis of the 1980s, arguably the beginning of the modern era of hyper usury and financial debauch from globalising Western banks, the situation was solved by at least the appearance of debt for equity swaps. The obvious difference being that with equity the risk lies with the creator of the funds and with debt the risk lies with the recipient of the funds. When there is a risk to the whole system, this is a way to reduce the overall peril.

I wonder as we look to Cypriot savers taking a “haircut”, if we are seeing the shape of what will happen in the next crisis. The essence of a debt for equity swap is that the obligation that goes with debt is taken away. Calling the confiscation of bank deposits equity instead of theft would be a way to prettify the actions of the hyper-usurers. Michel Chossudovsky thinks that Cypress is a dress rehearsal  for things to come. A “savings heist” in European and American banks deemed too big to fail.

“According to the Institute of International Finance (IIF), “hitting depositors” could become the “new normal” of this diabolical project, serving the interests of the global financial conglomerates.

This new normal is endorsed by the IMF and the European Central Bank. According to the IIF which constitutes the banking elites mouthpiece, “Investors would be well advised to see the outcome of Cyprus… as a reflection of how future stresses will be handled.” (quoted in Economic Times, March 27, 2013)

“Financial Cleansing”. Bail-ins in the US and Britain

What is at stake is a process of “financial cleansing” whereby the “too big to fail banks” in Europe and North America (e.g. Citi, JPMorgan Chase, Goldman Sachs, et al ) displace and destroy lesser financial institutions, with a view to eventually taking over the entire “banking landscape”.

The underlying tendency at the national and global levels is towards the centralization and concentration of bank power, while leading to the dramatic slump of the real economy.

Bail ins have been envisaged in numerous countries. In New Zealand a “haircut plan”was envisaged as early as 1997 coinciding with Asian financial crisis.

There are provisions in both the UK and the US pertaining to the confiscation of bank deposits. In a joint document of the Federal Deposit Insurance Corporation (FDIC) and the Bank of England, entitled Resolving Globally Active, Systemically Important, Financial Institutions, explicit procedures were put forth whereby “the original creditors of the failed company “, meaning the depositors of a failed bank, would be converted into “equity”. (See Ellen Brown, It Can Happen Here: The Bank Confiscation Scheme for US and UK Depositors,Global Research, March 2013).

What this means is that the money confiscated from bank accounts would be used to meet the failed bank’s financial obligations. In return, the holders of the confiscated bank deposits would become stockholders in a failed financial institution on the verge of bankruptcy.

Bank savings would be transformed overnight into an illusive concept of capital ownership. The confiscation of savings would be adopted under the disguise of a bogus “compensation” in terms of equity.”

There is little doubt that the problems of the crisis have not been addressed. The central issue is that governments no longer govern the financial system, they have instead allowed private actors, traders and banks mostly, to make up their own rules – all under the guise of “financial de-regulation” which is a logical nonsense because money IS rules.

Until that absurdity is addressed the problems will linger. A second crisis is highly likely and this time governments will have little left to fight its effects. Extreme measures like debt for equity swaps seem likely.

But there are differences. The Latin American debt crisis was a conventional banking crisis. It was basically American and European banks shoveling petro dollars into the pockets of corrupt Latin American politicians and officials, who promptly invested the money back in European and American banks. It was a fairly common form of greed that could be partially solved by reconfiguring debt into equity.

This crisis is a lot more deadly. The debt, or leverage, is mostly created at the meta-level – on derivatives, which are transactions derived from more conventional forms of capital (such as debt, equity) That type of debt is used to amplify the returns from relatively small changes in pricing. The stock of derivatives is over $700 trillion, more than twice the value of the conventional forms of capital from which it is derived.

That leverage is a form of debt, and as the crisis demonstrated when that debt goes wrong it can potentially destroy the whole system. It was something seen as far back as 1998 when LTCM almost brought down the world financial system after it made a highly leveraged play on the rouble that went horribly wrong.

After this bail out I rather monotonously wrote about the looming crisis for a decade in BRW, Australia’s national business magazine (to precisely no effect). It was obvious the problem had not been addressed. It is still obvious that it has not been addressed, although there is at least an understanding that something is seriously wrong.

The trouble is, that kind of leverage is in the realm of meta money: the layer of financial activity that goes on above the level of  conventional banking and government finances and GDP.

Meta debt can bring down banks and governments, as we have seen. But it can’t be swapped in any obvious way into equity in order to reduce the risk. The only solution is to stop it, by setting rules that take it away. But that would require governments to govern, and that seems to be something they refuse to do – perhaps because they have been bought off, or perhaps because they cannot think clearly enough about their role in global capital markets.

* * *

Lambert here: Or perhaps there as been a change in the Constitutional order such that “governments” do not and perhaps cannot govern as they once did.

Do you like my mane? Cat owners transform their pets into lions in latest internet craze Daily Mail (SW)

Cells as living calculators MIT News

Tony Hayward becomes Glencore Xstrata interim chairman FT

White House scandals

Why Washington scandal-mania may save Medicare and Social Security Greg Sargent, WaPo. Just like Monica.

For All the Deluded and/or Stupid People (which is most people), and a Second Iron Law Power of Narrative

Bulls vs. Bears

Markets Insight: Phony QE peace masks rising risk of instability Gillian Tett, FT

Does Sentiment Still Matter Capital Observer

Remember This Moment The Reformed Broker

David Tepper Is Killing It In This Market Because He’s A Democrat Joe Weisenthal, Business Insider

308 S Bristol Ave, Los Angeles, CA 90049. $5,900,000. “No Showings of The Inside of The Property, Exterior Only”

Wal-Mart Second-Quarter Forecast Trails Estimates Bloomberg

Why U.S. Manufacturing Can’t Get Off the Mat Businessweek

The CBO Is Likely Still Overestimating Future Deficits Modeled Behavior

Central banks saved world economy, now beware the fallout: IMF Reuters

The Cat in the Tree and Further Observations: Rethinking Macroeconomic Policy George Akerlof, iMFdirect (via). Akerlof: “There is only one major criticism of the policies put in place. We should have led the public to understand that we should measure success not by the level of the current unemployment rate, but by a benchmark that takes into account the financial vulnerability that had been set in the previous boom.”

Paul Krugman’s Misguided Moral Crusade Against Austerity Michael Kinsley, New Republic (wowsers).

Libor in a barrel Economist. “Oil markets fall under the suspicion of price-fixing on a global scale.”

Wife of ‘Rain Man’ Trader Starts to Talk Online WSJ

Obama Student Loan Policy Reaping $51 Billion Profit HuffPo

As a Reminder, the Fed Is NOT Printing Money Jesse’s Café Américain

Rethinking the middle-class Macrobusiness

Formula One Car Parts 3D-Printed by Just Thirty Workers Corriere Della Sera

The New Yorker StrongBox Cryptome (rsj)

The three types of specialist Kottke.org

Cooper Occupation Exceeds One-Week Mark Art in America

Drone Pilots Expose Politicians’ Lies David Swanson, FDL

Chaos in Turkey as police use tear gas and water cannons to put down rioters protesting over Syria Daily Mail

Israel to approve four West Bank settlements Al Jazeera

What We Mean When We Say ‘Race Is a Social Construct’ Atlantic

Italy’s Kabobo Beppe Grillo’s Blog

Nigel Farage barricaded in Scottish pub and rescued by police riot van Telegraph

Comparative Xenophobia, Part I Political Violence @ a Glance

Why isn’t New Orleans Mother’s Day parade shooting a ‘national tragedy’? Guardian (JL)

Dzhokhar’s Sharpie Manifesto emptywheel

Antidote du jour (furzy mouse):

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

A few months ago, I wrote a story for The American Prospect about the credit rating agencies, and their thus-far successful effort to ward off any change to their business model, despite their wretched performance during the crisis. This is true even though Dodd-Frank contained a measure, written by Al Franken, to alter the issuer-pays model that incentivizes higher ratings in the pursuit of future profits. The Franken-Wicker rule (the “Wicker” is Republican Senator Roger Wicker) would create a self-regulating organization to randomly assign securities to accredited rating agencies, with more securities over time going to the agencies that rated the most accurately.

When we last left this rule, the SEC was doing their best to avoid implementing in. The usual watering down in Dodd-Frank made this contingent on a study. Although the language of the law stated plainly that the SEC “shall” change the issuer-pays model to the Franken-Wicker vision or some alternative solution it deemed more feasible, this gave the SEC plenty of wiggle room – they could simply decide that the status quo was the most feasible of all.

The study finally came out, six months late, and it read basically like a book report from a distracted high schooler, merely regurgitating public comments given to the agency on a variety of different models. At the end, the SEC recommended only that “the commission, as a next step, convene a roundtable at which proponents and critics of the… courses of action are invited to discuss the study and its findings.”

Franken and Wicker went ballistic, demanding that they get the roundtable within the next three months, and that the SEC moves with all deliberate speed thereafter to implement a new payment model, complete with a written timeline for next steps. The SEC complied in the most under-the-wire way possible, agreeing to set a date for the roundtable – EXACTLY three months to the day after their letter.

That roundtable was held this week. First off, here were the participants at the roundtable. If you strain your eyes you may be able to find a couple reform advocates (Better Markets managed to sneak somebody on), but they’re surrounded by people like the American Securitization Forum’s Tom Deutsch, SIFMA’s Christopher Killian, representatives from all the rating agencies (including one from Mexico), someone from uber-lobby firm Patton Boggs, etc. At this point it was hard for me to even bother to look into what happened at this thing, but I soldiered on.

Predictably, the main thrust of the roundtable, from the market-based participants, was to not rock the boat. Changing the inherent conflict of interest that comes with the issuer-pays model would “create new conflicts,” be “costly and slow to implement,” and “cause uncertainty in the marketplace.” I swear they have these objections on a wheel somewhere, and they just spin it to determine the order in which they say them.

Market participants also touted rule 17g-5, which theoretically gives any rating agency access to the same data that the issuer gives to the agency they paid for the rating. This was going to spur competition, everyone said, as a firm could show themselves to be more accurate than the Big 3 (S&P, Fitch, Moody’s). But two years into the program, not one rating has been produced by an unhired firm.

As Better Markets’ Dennis Kelleher described it, the roundtable consisted of “eight hours with 25 or so panelists and speakers almost guaranteed not to point in any particular direction.”
But there was one interesting moment. Not in Franken’s speech, which just restated his priors, or in Mary Jo White’s wooden address. The real fireworks came from Jules Kroll, of Kroll Bond Rating Agency, and I’m really surprised this didn’t get more attention:

Jules Kroll, a former private investigator who started a bond-rating company after the financial crisis, said the largest credit-rating firms are again putting profits ahead of accuracy amid record demand for corporate debt.

“They’re selling themselves out just as they did before,” the chief executive officer of Kroll Bond Rating Agency Inc. said today at a U.S. Securities and Exchange Commission roundtable in Washington. “If you want to see the next tsunami, wait for the outcome in high yield and watch what washes up on shore.”

The article swings wildly away from Kroll’s comments almost as soon as it finishes the lede, so we don’t get much more information. However, a separate Bloomberg story makes pretty clear that we are all the way back to the golden age of ratings shopping.

Almost six years after the start of the worst financial crisis since the Great Depression, bond issuers are again exploiting credit ratings by seeking firms that will provide high grades on debt backed by assets from auto loans to office buildings considered inappropriate by rivals.

Fitch Ratings isn’t grading a deal linked to a Manhattan skyscraper after saying investors needed more protection. The securities won top grades from Moody’s Investors Service and Kroll Bond Rating Agency Inc. Blackstone Group LP’s Exeter Finance Corp. got top-tier ratings from Standard & Poor’s and DBRS Ltd. in the past 15 months on $629 million of bonds backed by car loans to people with bad credit histories, even as Moody’s and Fitch said they wouldn’t grant such rankings.

Borrowers are finding more options than ever to get the top ratings that many investors require after U.S. regulators doubled the number of companies sanctioned to assess securities to 10 since 2006.

In other words, the additional upstarts in the rating agency biz have just made it easier for issuers to play them off of one another. And this has just driven more garbage securities into the market, tied to commercial mortgages, subprime auto loans (which accounted for an amazing 43% of all car financing in the last quarter of 2012), or whatever else is laying around. Meanwhile, junk bonds are at record sales highs, and of course those are the bonds that have that rating profile; surely, with this running rampant there are plenty of other “junk bonds without portfolio” out there.

No real agenda for next steps came out of the meeting. In fact, I’m sure the SEC would love to drag their feet just long enough for Congress to slow them to molasses. Today, the House votes on HR 1062, which would force an additional layer of “cost-benefit analysis” to any SEC rulemaking. This is designed simply to clog up any SEC rulemaking implementation whatsoever, including but not limited to Dodd-Frank. And it provides an avenue for Wall Street to sue the SEC for not following cost-benefit guidelines on any rule they implement. Incidentally, the Independent Community Bankers of America, who are supposed to be every reformer’s best friend these days, sent a letter to the House supporting the bill.

In the case of the rating agencies, I’m sure the SEC would welcome the opportunity to apply more analysis and talk it out until everybody forgets what it is they were supposed to be doing. Meanwhile, the essential corruption of their business model continues unabated.

I don’t know exactly how critical this would be, but for what it’s worth, the SEC Office of Credit Ratings is accepting comment letters on the roundtable and the proposed alternatives until June 3, if you’re so inclined.

Dave here. This comes from the same group of people, generally speaking, that brought us the trillion-dollar coin, so buckle in with the full expectation of the same boldness of thought.

By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives

My fellow NEP blogger Joe Firestone wrote recently about House Resolution 807, the Full Faith and Credit Act, which was passed on May 9th by the US House of Representatives. The supposed purpose of the act is to prevent default on the public debt as a result of the debt ceiling. Many have described the act as a measure that prioritizes the financial obligations of the US government, and authorizes the Secretary of the Treasury to meet only the highest priority obligations when at the debt ceiling. Indeed, that is how the act is described by its own authors, since the head of the resolution contains the description, “A bill to require that the Government prioritize all obligations on the debt held by the public in the event that the debt limit is reached.”

Now that the bill has been passed, the words “a bill” in that description have been replaced by “an act.” The act seems to have been designed to provide the Secretary of the Treasury with an alternative mechanism for paying off public debt and meeting Social Security obligations once the government has reached the statutory debt limit. But the new mechanism cannot be applied directly to other government spending commitments, and so Congress would still apparently have the ability use the debt ceiling as a tool for shutting down other government payments and forcing the executive branch to accept further spending cuts.

Such might have been the authors’ intentions. But if I am not mistaken, this act would provide the Secretary of the Treasury with the power to meet all US spending obligations, and effectively eliminate the debt ceiling as a serious political and operational consideration going forward.

To see how the Full Faith and Credit Act might have the unintentional effect of eliminating the efficacy of the statutory debt ceiling altogether, we need to look at the text of the act. It is quite short. Here is the key provision:

SEC. 2. PAYMENT OF PRINCIPAL AND INTEREST ON PUBLIC

DEBT AND SOCIAL SECURITY TRUST FUNDS.

(a) IN GENERAL.—In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.

The act thus authorizes the Treasurer to issue a new kind of obligation in order to pay off other obligations. So what are these latter obligations, the “obligations described in subsection (b)”? Here they are:

(b) OBLIGATIONS DESCRIBED. For purposes of this subsection, obligations described in this subsection are obligations which are—

(1) held by the public, or

(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

Note that Section 2 of the H.R. 807 is significantly different from the original version of the bill that was put forward back in 2011. That original version was a bit more complicated. It directed the Treasurer to prioritize government payments once at the debt ceiling and to “pay with legal tender” the interest and principle on public debt obligations to the extent that the Treasury’s funds were sufficient for doing so, and then to extend the maturities of debts that could not be so paid. If all public debt obligations could be paid from available funds, the Treasurer would then be required to prioritize all other spending obligations and pay them off “in that order the Secretary considers advisable and in the public interest.”

But the version of the act that was actually passed on May 9th authorizes the Treasurer to issue “obligations … to pay with legal tender”, the principal and interest on the obligations described in subsection 2(b). Now, an obligation is just another debt instrument. So the act basically permits the Treasurer to issue IOUs to pay the principal and interest on public debt. It permits the Treasurer to redeem conventional government debt obligations – all of the usual bills, notes and bonds the government issues, and that count against the debt subject to the debt limit – with a new kind of debt obligation.

Call these new types of obligations “807-obligations”. The Full Faith and Credit Act then says the Secretary of the Treasury can issue an 807-obligation whenever it has reached the debt ceiling, and use it to pay off public debt. If you have a T-bill with a $10,000 face value that matures on June 1st, and the government is at the debt limit, then on June 1st the Treasurer is authorized to give you an IOU for $10,000.

Now here are a couple of important facts about 807-obligations:

1. 807-obligations do not count against the debt ceiling, once the debt ceiling has been reached.

This is made plain by section 2(d) of the act itself:

(d) OBLIGATIONS EXEMPT FROM PUBLIC DEBT LIMIT.—Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation would otherwise cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

2. 807-obligations, once issued, would themselves be obligations held by the public.

This is obvious from the plain language of the act, as well as from the fact that section 2(a) of the act specifies that these new obligations are to be issued under chapter 31 of title 31 of the US Code, which is all about public debt.

It thus follows, according to subsection 2(b) of the Full Faith and Credit Act, that 807-obligations can always be issued to pay off other 807-obligations once the debt ceiling has been reached. In effect, then, the bill gives the Secretary of the Treasury unlimited authority to pay off conventional debt with a new kind of debt which does not count against the debt limit, and to roll that total debt over perpetually. Usually, when people speak of “rolling over the public debt”, they mean that the government can sell new debt and use the funds raised to pay off old debt. But the Full Faith and Credit Act provides a way for the Treasurer to roll the debt over at the debt limit by issuing a kind of money-substitute, and by using this substitute to pay the creditor.

But, one might counter, this new mechanism only applies to public debt obligations and Social Security, and still doesn’t give the Treasurer the ability to issue IOUs to pay other kinds of bills. So Congress can still force a default or suspension of payments on all of those other government spending commitments and plans.

While this claim is technically true, it seems to me that if this act takes effect there will no longer be any obstacle to the Treasurer meeting all government spending commitments, even if it has reached the formal debt limit. Suppose the Treasury needs $10 million dollars to pay some building contractors, but the debt held by the public is at the statutory debt limit and so Treasury can’t sell any more bills, notes or bonds. Building contractors are not one of the types of obligation covered under subsection 2(b) so the Secretary can’t pay the contractors with 807-obligations. However, the Treasurer can issue a bunch of 807-obligations to pay off some conventional short-term debt obligations, which then gives the Secretary more space to issue conventional debt. Since these new 807-obligations don’t themselves count against the debt limit, then once they have been issued and used to redeem T-bills, that brings the public debt down $10 million below the debt ceiling. Treasury can then sell $10 million worth of new securities to raise the cash, and pay the contractor with the cash.

The law thus allows the Treasurer to continually extend US borrowing beyond the debt limit by swapping in, whenever necessary, debt that is not subject to the limit for debt that is subject to the limit.

But what if the public doesn’t really want to hold these 807-obligations? After all, if the government is no longer guaranteeing that it will always make the principle and interest payments on its securities with dollars, and if the buyers of public debt know they might end up getting IOUs instead of money when the obligations come due, won’t those buyers decide Treasury securities are now more risky than they were before? Won’t they as a result bid up the yields on these securities and raise the government’s borrowing costs?

I don’t think this is really a serious concern. For one thing, the Fed can always guarantee a market for whatever kind of debt obligation the government wants to sell, at whatever price, by standing ready to repurchase the debt at a price that is profitable to the purchaser. But even if we imagine that some future debt-hawking Fed chair adopts an uncooperative stance toward the extension of public debt, here are a few other salient factors to consider:

First, the Full Faith and Credit Act contains no directions pertaining to the maturities of the new kind of obligations it permits the Treasury to issue. Presumably that decision is left by omission to the discretion of the Secretary of the Treasury, especially given that Chapter 31, Title 31 of the US Code, which is specifically referenced, gives the Secretary broad discretion to decide on the maturities of other government obligations.

The US code also gives the Treasurer the option of prescribing conditions for redeeming T-bills before maturity. So, if the Treasury maintains an abundant stock of short-term debt, redeemable before maturity, it should always have the ability and flexibility to work around any formal debt ceiling constraints by using 807-obligations, all while satisfying market demands for dollar redemption of securities. Suppose the Treasurer wants to issue a bunch of 90-day T-bills with a total value of $500 million, and do so in such a way that the purchasers are guaranteed to be paid the face value in cash at exactly 90 days. It could sell 89-day T-bills, redeem them with 1-day 807-obligations on day 89, bringing the debt down $500 million below the debt limit. It could then sell $500 million more in conventional securities, and on day 90 redeem all of the 807-obligations it issued on the previous day. If the creditors want dollars, Treasury can get them the dollars.

Of course, such complex operations will probably never be required to get the public to be fully confident in the new 807-obligations, and treat them as something close to money. Like other obligations of the Treasury, 807-obligations would be negotiable. One assumes that once issued they would be highly liquid. Perhaps the Treasury could even issue the paper versions of these obligations in roughly the shape and size of a Federal Reserve Note, and encourage their use as money in ordinary transactions. In principle they are no different than other forms of money. After all, a Federal Reserve Note is also an obligation of the US government, but can’t really be redeemed for anything besides other obligations of the US government. If you have an 807-obligation that might only be redeemable for other 807-obligations, how is that different from what the Fed does?

Finally, even if statutes require that people pay their taxes in dollars, and can’t use 807-obligations, the Treasury could set up special tax processing accounts that allow people to deposit their 807-obligations. Each day, by redeeming ordinary debt subject to limit with new 807-obligations, the Treasurer could create space to issue more conventional debt to raise dollars sufficient to redeem all of the 807-obligations in the tax processing accounts. The holders of those accounts, or their agents, could then use to pay the tax obligations. As far as the public is concerned, anything you can use to pay your taxes is as good as money, and should be willingly accepted as such.

___________________

ADDENDUM RAISED FROM COMMENTS:

In the original piece above, I parsed this phrase from HR 807:

“the Secretary of the Treasury shall … issue obligations … to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) etc.”

to mean:

“the Secretary of the Treasury shall issue obligations to pay with legal tender, and use those obligations solely for the purpose of paying the principal and interest on obligations of the United States described in subsection (b) etc.”

That is I took the bill to be authorizing some new kind of California-style IOUs. But others have suggested to me it more likely means:

“the Secretary of the Treasury shall issue and sell obligations to obtain legal tender, and then use that legal tender solely for the purpose of paying the principal and interest on obligations of the United States described in subsection (b) etc.”

Yet I think the general point of the piece still stands, since whether the new 807-obligations are sold for dollars which are then used to pay of debt, or are a new kind of IOU used to pay off debt themselves, the Treasurer can still undertake the manipulations I described in the piece. The Treasurer can sell the 807-obligations to retire old conventional debt, and then sell new conventional debt to carry out other kinds of spending. This wouldn’t violate the law, because the dollars raised from the sales of 807-obligations wouldn’t be used to carry out the kinds of spending not specified in section 2(b). Those dollars would come from regular debt issuance after debt retired via sales of 807-obligations opens up room under the debt ceiling for more ordinary debt.

So, then, suppose Congress says there are two kinds of debt:

1. Regular debt, the funds raised from which can be used to carry out any authorized spending, and

2. Special debt, the funds from which can be used to retire regular debt.

And suppose it imposes a nominal limit on regular debt, but says special debt can be issued whenever regular debt is at the nominal limit. Then there is no practical debt limit so long as there is always regular debt available to be retired. The Treasurer can always issue regular debt up to the nominal limit, then swap in special debt for the nominal debt, which creates more room for regular debt.

By Nathaniel Cline and Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus. Cross-posted from INET.

Organizational capacity

In the preface to the forthcoming Festschrift to Alain Parguez, Mosler argues that in the mid 1990s he thought, “the theory of the monetary circuit was correct to the point of being entirely beyond dispute”. However, he also argues that the theory “could be further enhanced by starting from the beginning”. This beginning for Mosler was of course why the workers accepted the units of a currency as payment for their labor services. His answer (which is quite well known among heterodox economists by now) was that imposed debts denominated in that unit of account, give it’s units value; in other words taxes.

This is an important part of the story, but we would argue it is in fact not the beginning. The true beginning to the circuit is the question of where people and organizations gain the ability to tax.

In order to impose liabilities onto a population (i.e., build a tax system), an organization or group needs to have the resources to impose a tax, collect a tax, and use the real resources it gains through spending to expand and institutionalize its power. The catch-22 is that all of these tasks take real resources and personnel, which is precisely what the tax system is supposed to get.

This brings us to history and why this approach has fruitful insights for understanding growth and development. Western Europe was in many ways set up for the modern period by having a deeply institutionalized system of taxation and tribute (some of it in tally sticks and some of it in real resources) before capitalism started developing. They already had the ability and authority to extract real resources and thus it took minimal institutional change to do this purely through a monetary system run by a nation state rather then city-states and feudal hierarchies.

In contrast, elsewhere, such as Latin America, there were traditional systems of authority destroyed or at least greatly damaged by colonial struggle. During the periods in which they were colonies there were colonial authorities that were extracting real resources through tax systems, but they had little to no legitimacy and had little to no interest in deploying that system for domestic development, unlike in Western Europe.

The process of getting rid of the colonial powers itself has importance for development because the revolutionaries have great amounts of leeway for determining the tax system and development strategy for their new government. They are the only ones with the resources and authority to impose taxes, even though sometimes they don’t have enough to start building a state. They also encounter the problem of legitimacy, which is what makes the domestic population more willing to accept the imposition of taxes. They have little to no historical or institutionalized authority to draw from.

In this regard the United States’ uniqueness comes from the fact that the revolutionaries there were largely European colonists and descendents of European colonists who were able to derive authority from their prominent position in colonial governments. Much of the population they ruled over more or less believed in the legitimacy of government and the revolutionaries already had the organizational capacity to tax and use the real resources they get through spending. They also had a lot of experience with this system and knew how to wield it to their advantage, which they saw as domestic development and gaining the loyalty of financiers (who just happened to be their friends) through a massive yet stable public debt.

In a situation where there are other developed nations with institutionalized systems, one way to build a state is to borrow money from abroad and import the resources you need or purchase them domestically from people who know they can import real goods and services. This however, brings us to the problem of original sin. Once they start borrowing foreign denominated currency, then they have to both build a state and build up enough industry to net export and thus achieve a balanced balance of payments. This is very difficult to do and in many cases hasn’t happened.

Thus many developing nations get mired in balance of payment crises before they even have a chance to develop. In turn, their need to accumulate foreign currencies (what is now often referred to as dollarization) loosens the balance of payments constraints of the countries they owe money to.

Three instances of financial development

This paper seeks to propose that the balance of payments constraint should be understood as a historical process and that it is a quite useful tool for historical analysis. What a historical balance of payments analysis requires is an understanding of the domestic and international financial development of countries, which in turn depends on their institutional capacity as outlined above.

Indeed, a (relatively) recent trend among historians has been to argue that the dominance of states historically had much more to do with the role of their financial sector, fiscal powers, and the empire building these allowed. In these histories, the transition to the “tax state,” or the “fiscal state” as opposed to the “domain state” or the “tribute” state is a defining moment. Thus the strength of the state (and in particular its fiscal organization) is associated with development, as opposed to the “light” state described by the “New Institutionalist” authors.

The rise of the public debt that allowed the state to finance nation building was thus associated not with equality of property and democratic reform but with the alignment of financial elites and state governments. In what follows we offer a short outline of the experience of three states during the 19th century to suggest the path which this line of research will take.

For much of the 19th century, the British were able to settle their balance of payments deficits in sterling. That is, short-term inflows allowed a permanent deficit on goods, and long-term outflows.

Short-term inflows were the result of peripheral countries that desired short-term British assets rather than accumulating gold. In addition, non-factor services, investment income, and trade within the empire (particularly India) all played a role in balancing Britain’s external accounts.

British financial dominance was ensured by the building of fiscal, bureaucratic, and military capacity. Indeed, the Glorious Revolution is now seen by many historians as an essentially financial revolution for its new tax structure, the creation of the Bank of England to manage public debt, and the growth of the London stock market. This financial revolution was a prerequisite for the industrial revolution, in part because it ensured that industrial growth could be financed sustainably.

The next major event we should mention is the expansion of British debt during the Napoleonic Wars (to around 250% of GDP). This led to a growth in the size of financial markets, so that not only were consols widely traded, but other private bonds and equities also found a larger number of buyers. In addition, it is in this key period that the Rothschilds, flush from earnings on Napoleonic war consols, began to impose a requirement that foreign borrowers borrow in sterling and make interest payments in London (Ferguson, 2008). Thus the Rothschilds were the first to demand sovereign debt be denominated in foreign currency – and they were able to do this as a direct result of the depth of London’s financial markets, which in turn resulted from the British fiscal state.

Great Britain was not only to issue external debt in pounds, but to demand that others do so as well. This lead to an asymmetric BOP experience for the British as compared to others. The role of sterling in international finance led to a stylized cycle between England and peripheral nations. Long waves of increasing external debt and subsequent default among peripheral countries began in the 1820s and continued throughout the 19th century. In each wave, the British were the primary lenders (Suter, 1992).

While the United States initially issued debt in foreign currency (mostly to other nations), it was not long after the constitutional convention that the U.S. issued external debt in domestic currency. However, there were implicit gold and silver clauses in most of U.S. debt as a result of legal tender laws. Specie clauses were made explicit on US debt after the Civil War, and then finally repealed in 1933(Bordo, Meissner, and Redish, 2002).

The development of a national currency and the initial success in placing domestic currency denominated debt in foreign markets was the result of a build up of fiscal and bureaucratic capacity in the U.S.

In U.S. tax history over the 19th century, the structure and size of taxation can readily be split into two periods on either side of the Civil War. Prior to the Civil War customs taxes were the primary source of revenue, while after the Civil War revenue was drawn from internal taxes. In addition, the Civil War generally marks a turning point in the ability of the Federal Government to wrest control over currency from the states (see Sylla, 1999 on the role of the federal government in the development of US finance). Though the well-known establishment of fiscal capacity by Hamilton (through establishment of federal taxation and the First Bank of the US) ended foreign-denominated debt, it was not until the Civil War that a true movement toward a national currency was established.

The experience of much of Latin America stands in contrast to the U.S. in at least three respects. First, foreign debts that financed revolutions were privately made and not publicly made. As mentioned earlier, the Latin American sovereign debt boom in the 1820s was the first of its kind. In addition, there was a relative lack of fiscal and bureaucratic capacity developed over the 19th century, despite the impetus of war which had proved so important for the U.S. and Western Europe before it (on this point see Centeno, 1997). And finally, there was no strong movement to develop truly national currencies. Indeed central or national banking arrived late and often at the behest of foreign governments.

A key difference determining the different experience of Latin American countries as opposed to the U.S. was colonial heritage. The extractive structures established during the colonial experience in Latin America and the disruption of independence lead to a process of political and fiscal fragmentation.

Instead of turning inward to finance the war, the new and fragmented states turned outward to private financiers. Indeed, turning inward would have been difficult because of the inability of the central state to establish sovereignty and gain the support of domestic elites, not to mention a lack of already existing administrative mechanisms to ensure the enforcement of taxes. A final difference was the nature of each region’s entry into world trade. The progressive importance of the U.S. in international trade made foreign actors more readily willing to accept U.S. debt.

In both the U.S. and in Great Britain, substantial tax and administrative capacity was built up, with a military event then increasing the fiscal state by orders of magnitude. It was after these wars, in which a large amount of public debt had been issued, that both began to solidify their place in international finance.

In many Latin American countries, without a prior buildup of fiscal and political capacity, wars simply lead to further fragmentation. Thus, though it is true that taxes often drive the acceptability of domestic currency, the process of establishing a system of taxation requires an enormous amount of political will and is a process that can easily be interrupted.

Political balance of payments constraint

Among certain portions of Post-Keynesianism, there is much focus on the balance of payments constraint. While we don’t disagree with the idea that there is a balance of payments constraint, we do feel that too often Post-Keynesians are willing to take it’s existence for granted to the point of arguing that balance of payment deficits will adjust automatically. When pushed, these writers will acknowledge other factors, but those “other factors” are at best not a focus.

We take the opposite approach. For us the construction of balance of payment constraints for some countries and their loosening to the point of elimination for others, is a deeply political process. A classic (although under-read and under-cited) example comes from Michael Hudson’s 1970 book “A financial payments-flow analysis of U.S. international transactions”:

“Analysis can highlight the adjustment process, which if it is to work on the cause of today’s balance-of-payments disequilibrium, must work not so much “through the marketplace” as through self-controlling policies by the governments of the “key currency” deficit countries. Otherwise, disequilibrium must continue to be financed through compensating diplomatic arrangements (for example, troop offset-cost agreements such as have been drawn up with Germany), swap lending, and a reconstructing of the IMF to increase U.S. credit lines. Balance-of-payments evolution in this event becomes a function of international power politics.”

From this perspective the ability of a country to run persistent balance of payment deficits depends on how they finance those deficits and whether that financing can potentially go on indefinitely.

The running down of foreign currency reserves clearly can’t go on indefinitely while borrowing in a foreign denominated currency usually can’t either. (That is, unless one has a peculiar situation in which an unimpeachable lender rolls over one’s debts indefinitely. This of course is rare enough to be ignored here.) In our modern world, however, the United States has found a way. It pays in American dollars.

This system relies on the willingness of foreigners (particularly foreign central banks) to accept dollars. This decision is ultimately political. For us the important questions to ask is why other countries are willing to hold foreign currencies and what affects this decision? This brings us somewhat away from the analysis of import propensities and growth rates towards fundamental questions of international systems of politics and power.

Works Cited:

Abrams, Philip. “Notes on the Difficulty of Studying the State (1977).” Journal of historical sociology 1.1 (1988): 58-89.

Bordo, M.D., Meissner, C.M., and A. Redish (2002). “How ‘Original Sin’ was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions.” NBER Working Paper No. 9841.

Centeno, M. A. (1997). Blood and debt: War and taxation in nineteenth century Latin America. American Journal of Sociology, 102(6), 1565-1605.

Ferguson, N. (2008). The ascent of money: A financial history of the world.
London, UK: Penguin Press.

Hudson, Michael. A financial payments-flow analysis of US international transactions, 1960-1968. No. 61-63. New York University, Graduate School of Business Administration, Institute of Finance, 1970.

Suter, C. (1992). Debt cycles in the world-economy. Boulder, CO: Westview
Press.

Sylla, R. (1999). Shaping the US financial system, 1690-1913: The dominant
role of public finance. In R. Sylla, R. Tilly, & G. Casares (Eds.), The state, the financial system, and economic modernization (pp. 249–270). Cambridge, UK: Cambridge University Press.

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

The new CBO budget projections showing debt stabilization over the next decade and a reduction of the expected FY 2013 deficit to $642 billion hasn’t been deemed by Washington as a “scandal,” although falling deficits amid high unemployment and below-trend growth is actually, you know, a bit scandalous. But even more unremarked upon is one of the primary reasons for this near-term deficit drop, mentioned in passing by CBO on page 1:

CBO’s estimate of the deficit for this year is about $200 billion below the estimate that it produced in February 2013, mostly as a result of higher-than-expected
revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac.

In fact, CBO estimates those payments at $95 billion for the entire fiscal year, almost half of the entire reduction in the estimate between February and May. And of that sum, the lion’s share comes from the recent lump payment of nearly $60 billion by Fannie, which results basically from some borrowing-by-extension. Basically, Fannie wrote down the deferred tax value of its assets after the bubble collapse, and due to the recovery, they wrote the assets back up (Freddie’s likely to do this as well, though the lump sum will wind up smaller). It’s essentially a benefit based on taxes that Fannie won’t pay in the future. It’s not like Fannie HAD $60 billion sitting around, but under HERA, the law governing the conservatorship, they must turn over that realized gain to the Treasury. But they’re doing it through borrowing the money. James Hamilton has a good writeup of how this all works, and Steven Pearlstein goes so far as to call it an Enron-style off-balance sheet accounting play. It’s hard to argue with him.

We know that Fannie and Freddie’s profits are coming directly from monetary policy keeping mortgage rates low (subsequently giving them a massive spread on their lending), and their dominance in the marketplace, with the GSEs involved in 9 out of every 10 new mortgages in the country. But they’re “helping” federal finances so much that it’s just incredibly unlikely to see this gravy train end for some time, and everybody knows it. GSE dividend payments have already pushed back the distasteful debt limit fight and halved deficit projections. No way the Administration (the “proudest lil’ deficit hawks in Washington”) or Congress gives that up, at least not until they “make back” all $188 billion sunk into the GSEs (they’re at $132 billion or so now). Just as a side note, the GSEs may not be hedging interest rate risk in such a way that protects them from a potential spike down the road, suggesting that the walls could come down on this money-making machine sooner than anyone thinks. But that’s certainly not on anyone’s minds in DC. They just have dollar signs in their eyes.

And that’s where the vultures come in.

Some of the hedge funds that made fortunes in the housing-market crash are now betting on the recovery of Fannie Mae and Freddie Mac, the government-controlled mortgage giants.

Paulson & Co. and Perry Capital LLC are among a handful of hedge-fund firms that have bought so-called preferred shares in Fannie and Freddie, which collapsed in value in 2008 after the companies were taken over by the federal government.

These firms are hoping Fannie and Freddie’s recent return to profitability on the back of a recovering housing market will lead the companies eventually to make payments to preferred shareholders.

Hedgies win here if the government sells its preferred shares on the market, essentially keeping the GSEs the same and privatizing the profits. In the short and possibly medium term, government balance sheets will look stronger post-sale, and the private investors will take all the subsequent dividend profits and none of the tail risk.

The report claims that recapitalization is a “nonstarter,” but of course, the shares are going up now even without the dividends to investors, and the forced inertia to not mess with what is perceived as a “good thing” will be incredibly strong. This will cement our Government Mortgage future. Why would private investors shoulder risk on mortgage backed securities when they can just latch on to Fannie and Freddie? Moreover, the hedgies have rolled out their lobbying strategy:

Preferred shareholders may need to persuade Congress or the courts to revisit the current structure if they hope to recoup the full value of the shares. Paulson, Perry and others have been circulating plans before lawmakers that Fannie and Freddie should be restructured or privatized in some form, according to people familiar with the matter.

Hedge funds have stepped up their lobbying of Congress to encourage the sale of the government’s stake in the firms, said Sen. David Vitter (R., La.) at a hearing on Capitol Hill last month. “And to some extent, investors are already speculating that the companies will be returned to the marketplace.”

Those preferred shares are going to be worth something very soon. And while a few in Congress (including the aforementioned Vitter, actually) have legislation at the ready to prevent the cash grab, the temptation is going to be very great. And regardless of whether we just continue in this conservatorship limbo or return to the public/private past, you’re going to keep taxpayers at risk for more bailouts ahead.

Patient readers: There seems to be rather lot going on, and so I failed to triage Links ruthlessly enough. –lambert

Swedish Man Dies After Having Sex With Hornet’s Nest International Business Times. Richard Smith Anti-Antidote Seal of Approval™.

Humboldt Bay Eagle Cam UStream (direction)

Invasive species: The 18-km2 rat trap Nature

White House scandal watch

Obama ousts IRS commissioner after Tea Party controversy USA Today (cf. the totally unproblematic new normal).

Phony IRS “Scandal” — We’ve Been O’Keefe’d Again Seeing the Forest. Sure. But notice how Obama went out of his way to reinforce the credibility of the Republican Party.

AP phone records seizure reveals telecom’s risks for journalists CJR

The major sea change in media discussions of Obama and civil liberties Glenn Greenwald, Guardian

White House Releases Complete Benghazi Emails NPR. Aren’t document dumps supposed to happen Friday at 5:00PM?

What Are They Hiding? Eschaton. Kayfabe.

Introducing Strongbox New Yorker. Freedom of the press belongs to those who can protect their sources.

Bulls vs. Bears

Bullish investors drive equities higher FT. Front page link: “Gains defy gloomy economic data.”

U.S. Stocks Rise on Stimulus Bets as Manufacturing Falls Bloomberg

Habits of the Bear, Bull Markets and Agency Issues Big Picture

The Song Remains the Same The Archdruid Report

The super soaraway Nikkei [updated] FT Alphaville

Farmland Price Boom Continues, but Pace Moderates Online WSJ

Builder Confidence increases in May Bill McBride, Calculated Risk

doesn’t look like much of a housing recovery- purch app’s down The Center of the Universe

Actually Lehman’s Bankruptcy Worked Out Well For A Lot Of People Dealbreaker

Google chief touts utopian ambitions FT

Will Yahoo! return to its portal roots? Medium

The Fed is not “Printing Money.” It’s Retiring Bonds and Issuing Reserves Angry Bear

How the Case for Austerity Has Crumbled Paul Krugman, NYRB

Why do people support austerity? A conjecture Noahpinion

The New Sick Man of Europe: the European Union Pew Research

The Resistible Fall of Europe: An Interview with George Soros Project Syndicate

More Economic Possibilities for Our Grandchildren… Brad DeLong. I, for one, welcome….

Climate Change Has Shifted the Locations of Earth’s North and South Poles Scientific American

Ice Melt, Sea Level Rise, to Be Less Severe than Feared Reuters

Faulkner County: ExxonMobil’s “Sacrifice Zone” for Tar Sands Pipelines, Fracking FDL Welcome back.

Cormac McCarthy Flaunts Sexy New Beach Body America’s Finest News Source

Dirty medicine Fortune. Harry Lime disease.

PhillyDeals: SEC spares individuals in Harrisburg case Philadelphia Inquirer (and see Bond Girl).

Israel has highest poverty rate in the developed world, OECD report shows Haaretz

The problem with poor people is quite simple… Stop Me Before I Vote Again

Have Plot, Will Unravel Jacob Bacharach. Gatsby.

Some of My Best Friends Are Germs Michael Pollan, Times

Antidote du jour (furzy mouse):

Checking the queues, I keep noticing Rust harmed borrowers returning to comment on the threads for the three posts Yves did on Rust and the OCC (here, here, and here). It’s almost like they have no other place to tell their stories! Incredible though that may seem.

So I thought I would collect all their comments into a single post, most importantly to show the harmed borrowers that there was a place where they were heard, and to serve as a resource for decision makers,* and possibly to serve as the basis for further analysis at NC. I would also like to ask any Rust employees (temporary or permanent) who encounter this post to read the whole thing, and to reflect.

Herewith, the voices of the Rust harmed borrrowers, post by post. There’s a little bit of commentary at the end.

2013-04-19 (More Foreclosure Review Fiasco: Paying Agent Rust Consulting Sends Letters to Different Addresses Than on Borrower Letters, Refuses to Make Corrections)

2little2late (2013-04-19)

My first encounter with the OCC was, as anyone who ever confronted them on bank fraud, simply unbelievable. I sent them a letter five or six years ago detailing the wildly abusive behavior on the part of B of A, only to receive a letter back from the OCC stating that they had forwarded the letter to B of A. End of story, case closed. That’s how this so-called regulator handled regulation way back when, which dovetails exactly with their present form of non-regulation. Derelicts. Banker whores.

I was one of the earliest responders to the IFR, delivering a well ordered packet of information complete with documentation detailing undeniable, systematic fraud. I went all in on this review, feeling like I had nothing to lose, and every chance at backing them into an indefensible corner. All I received from the OCC over a two year period was notice, sent on two occasions, that my file was being reviewed. I ended up losing the five year battle with CW/BofA as any pro se litigant eventually will, as there’s simply no defense against a system setup to protect the banks at any cost.

I called Rust a couple of months ago to question them on the status of my review, and to ask them why I hadn’t received the “postcard”. They still had my address listed as the house that I lost to a fraudulent eviction process, even though Camper’s World, Home Depot, and every single bank’s credit card solicitation department had been able to find me at my new address. I also had a valid change of address at my local post office attached to the foreclosed property.

The guy on the phone took down my new address, assuring me that everything was OK. Two months went by, and the checks were mailed out according to the recent press releases. I called Rust back last week, and got with a lady who confirmed to me that they still had my old address, and she again went through the motions of entering in my new address, unlike others on NC who were told that they needed to do this in writing. This time I asked for written confirmation from Rust to be sent to my new address, confirming what they were telling me in phone conversations, that I was in fact going to be receiving a malfeasance check, and that they in fact had my new address information. She told me that I could rest assured that I was on the list of fund recipients, that they had my address, but that there was no way that they could send me any documentation on any of this. I don’t believe them.

The OCC is guilty of hanging offenses. As Yves intimated, the entire agency should be burned to the ground. Its employees and directors and their families need to be shunned from society for generations. Let them starve, without shelter, like the rest of us.

Dion (2013-04-19)

Yes, I received my wonderful $500.00 check from the independent foreclosure review. I was placed in Hamp in 09. I made 13 payments in their so called trial. The refused to convert me to perm mod. Then put me in foreclosure with David stern and his foreclosure mill. I looked at the brackets and rust claims I am in the approved frame if I did not received any other loan. Which I did not. Okay and what exactly did all of this prove. What’s this $500.00 going to do food for a month…electric bill…what a load of crap and a stupid waste of everyone’s time and money..

rox (2013-04-19)

There full of it….lies. lies and more lies they still have my forclosure address on file from 2009 did not get a letter or postcard but im getting a check. And there sending it to the forclosure address. someone lives there now…they said they will send me a forum to fill out takes 10to14 days but there still sending the check. What a lot of BS

Jill (2013-04-19)

So when are the rest of the checks mailed? I’ve been waiting. I filed complaints with OCC and all those others back in 2010 and got the run around as well. I was told I was not in foreclosure but they auctioned by house 8 days later without me knowing. Then they said my loan would be rescinded. Never happened. They said I had to talk to their attorneys. Yep, BANK OF AMERICA. So now they say checks mailed April 12 thru end of July. They have the money, send it to the people now.

arlene higley (2013-05-04)

Change of address rust consulting maybe they get to keep all the payments that are not delivered. I also tried to change my address. Rust said send letter did that next call to rust we need to send form still have not received after a month. What ever mail they sent is flying around in space. They say they are making attempts not the truth. First Taylor Bean screwed me over requested mod they went bankrupt and BOA took over loan. Requested mod waiting over a year and was denied and ended doing short sale. boa sold the home for 42,500 if they had done a mod I could of afforded the home. Boa received a insurance check for 10,000 for a flood had at the home. I had home inspection before purchasing the home but they failed to tell me the piping was involved in a class action suit and was illegal. Been screwed by everyone no they did not ask me to been over.

ann (2013-04-19)

same here. I’ve been trying to update my address with them for a couple of months. 1st time i was told it was updated, 2d time was told to send in written request, 3rd time told to send written request with explanation, 4th time told they would send me a form. over 2 weeks and still waiting. last week they told me they couldn’t tell me if the form had been mailed or not. what a bunch of incompetent idiots!

marty (2013-04-19)

I contacted the National Mortgage Settlement Administrator and my State Attorney General when I moved, giving both of them my new address.

The AG’s office was the first place I heard of Rust Consulting, when they called me to tell me that they would be the ones handling payments. I do not know if I contacted Rust directly at that point (several months ago), but the recent postcard from Rust informing us that checks were on the way DID come to me new address.

I am assuming my check will as well.

Desiree Finley (2013-04-19)

I need someone to speak to regarding the way Rust Consulting have been treating. I have missed many work hours and actually burned up phone batteries talking to them my longest call being over 70 minutes, I think there needs to be a help line or some way to make these people compensate us for the trouble they put us through. It has actually been worse then the foreclosure the OCC has not been any better. Hell I even called Wells Fargo.
They are REFUSING to give my my check I have given them my proper address and followed procedusers since the beginging of March now that are denying phones I have made they OCC is the black…I want people to ban together and fight for us. Then Lenders have also been scammed. Wells Fargo provided the money to Rust Consulting and because of their fraudulent skip tracing in locating people they are profiting of the interest of OUR money

Melinda (2013-04-20)

Even better – there are THOUSANDS of us out here who never even received an opportunity to file for a review. Apparently Rust is so incompetent that they mail the request for reviews to THE FORECLOSED ADDRESS!! Even though the address has been changed, and I have been out of the house for years now, I received no option to even request a review. Out of the blue I receive a postcard…just a postcard. Now if the postcard could find me with my current address on it, why not the review request? Because they didn’t want people requesting reviews – thats why!! What I would like is an opportunity to request a review, and restitution for the years I have been forced to rent due to the incompetence of the banking industry. I would like my equity, my down payment, my good credit standing, my dignity, my attorney fees, and lastly my peace of mind returned to me. And what I will get? Probably a lousy $500 check. I think the banks might take heed and start to think seriously about what they have done, there are social media sites that are gathering enormous forces of people who have simply had enough. We want what they took back!! Many of us have been shamed into silence by their actions, but no more. There is power in numbers, and we are growing!

NH (2013-04-21)

I work at the post office a woman received a certified check from them for almost 32000.00 not sure what category she fell in but this is the largest check I heard of. I haven’t lived in my house for 4 years but I’m being reported to the credit bureau as late and I’m 50,000 behind I surrendered my house in bankruptcy in 2009 it seems like I should’ve stayed there and just not have paid because I’m still being penalized and now my credit is shot to hell I tried to get a loan for a car and I can’t get one high enough because of my credit score. I don’t even think there is a category which I fall in. Bank of America never foreclosed they have kept this going for four years and my name is still on the house. And now since February I got a letter from select portfolio servicing saying they now own my mortgage and now I have yet another servicer on my credit report reporting me 50,000 late and my score continues to plummet

K Barajas (2013-04-22)

Same case here – sent in the IFR form in Feb 2012 with CURRENT address. However, when I spoke with them a couple of weeks ago, they had my PRIOR address in another state! I was told to send in a forwarding address change to the Post Office even thought I stressed to them that I had not lived in the other state for over 2 years and had provided my correct address on the form submitted. I called the post office and was able to get the address change sent. I was told my check was sent on 4/12; however, to date have not received it. A change of address form from Rust takes 4 weeks or more to get to you and I sit here still waiting for it. This is ridiculous.

Mac (2013-04-22)

I was foreclosed on twice! The first time the judge ruled it out due to robo signing. Then a year later with no notification I was informed the property was foreclosed and a judgment was placed. BOA told me I had to be behind 3 months before I could modify my loan, then because I kept those 3 months of payments in savings, BOA told me because of the funds in savings I didn’t qualify.

After 14 months I had to do a strategic walk away. I wasn’t even the State to fight it. BAO sold the property 7 months later for a profit and the judgement was for part of the legal fees. Not full because they made extra profit on the home.

Today I got a check from Rust for 300.00. All I can say is “I give up” I was fortunate to rebuild my life. I am moving forward and I will never do any business with BOA. And now I do almost 4 million in business annually so it’s their loss! It was 4 years of Hell, but it’s over. Long term, BOA will be the one to suffer. My hearts and prayers go out to the people who have suffered and haven’t been fortunate enoigh to rebuild their lives.

Sharon By Accident (2013-04-22)

For over 4 years I was force into a foreclosure on my home that wasn’t my fault. I tried to explain to my lawyers that I have made all of my payments that I never missed a payment. I might be late a couple time out of a year, but only by one or three days. The lawyers just look at me as If I was lying and that really hurted. I was giving a pre modication, but the bank took that back. I started to cry because I was losing my home with no fault of my own. I refuse to give the bank my home. I Got another lawyer to help me to do another modication.

The bank sent me and my lawyer at lease 6 modication package. They modify my home for $400 a month more than what I was paiding for previous. The lawyer had me to turn that down. He said to me Sharon If only you could fine the proof. That they made a error on your payments when you wasn’t behind on your payment and they was the cause of your home being wrongly filed foreclosure. As I was going to a program last month to help me re-instate my mortgage, and the counselor told me I needed the last 5 years tax returns I said what.

As I was digging and looking for my last five years tax return I came across a statement summery from my bank. It was the year of my Mortgage payments that were credit to my account than later sent back . I read the statement over and over again. I call my lawyer and read the statement to him. My four payments within a year was credited to my account than remove. I found other statements from resent years that had been one or two of the statement summery had been credited to my account than remove. The bank representive said it was a computer error. The computers have been kicking out payments with no fault of the borrow. It also kick borrows out of trail modication. I now have what I have been needing for the past four years. I even have the bank representive name and ID number. I will see them in court.

Mandy

Bank of America ruined us too! Never will I deal with them again. We requested modification, waited almost a year to get a 200 per month break from a 2400 monthly payment. Our property had halved in value and we were seriously under water. But we struggled on paying them what they wanted to be told we were in foreclosure. After days and days of talking to idiots who couldn’t add up finally one lady recognized that we had made payments that had not been applied to our account and that they had increased our payment due to incorrect interest rate being applied. They foreclosed anyway. Do they seriously expect people to be satisfied with a 300 check?? These incompetent fools have no idea of the heartache, humiliation and despair they have put MILLIONS of good hardworking Americans through!! What have I learnt from this. That I will first and foremost never let a bank take a penny if my hard earned cash in interest again. Cash is king.

Dgtal

I am sick over this. I didn’t miss a single trial payment, and in fact came home to a post it note on the garage saying “You’re foreclosed” 4 days after my last payment was cashed. I thought the taped on note was junk mail to tell you the truth. But according to the loan provider I was foreclosed. How could it be possible? After calling around and getting the run around, I got a hold of someone at Aurora who finally listened to me saying over and over I never missed a payment how can you do this if I didn’t miss a payment. She asked me to hold on to review my file, then as nice as can be, said “I will get this looked into ASAP and call you tomorrow”. So I get a call and she tells me not to worry a perm mod deal will be sent the next day. The next day there was a fed-ex deal on my door step. I called the lady back and asked about all the added fee’s and “extra’s” on the perm mod deal? She said “You can keep your house or not”. After living through all that and to be told (via the BS check) that my paperwork was over looked again. Sicking

Sandy

we are going to talk to our lawyer and see if we can take legal action against them. We lost everything, and they only want to pay out $300.00? Whay happened to the $125,000?

Jimbo

I just got off the phone, after 30 minutes with good old Rusty Ass consulting, they said no your check did not go out in batch two but it is going out Friday April 26 in batch three. I wonder if their is signifigance to the OCC order on their website of who gets paid what, the bottom third of the page are the next to nothing pay outs. Yeah, that’s probably right after I gave thousands of dollars to CHASE to reinstate and after they received the funds there was no one to speak to, they would not call back and the MF’ers filed foreclosure. Would like to hear ffrom someone, anyone that received funds and how much.

Natalie

My husband and I also got screwed by Bank of America when our mtg co countrywide went bankrupt. Rust consulting is a complete waste of time to call they give out NO helpful info. I spoke to customer service yesterday a girl named valarie employee #2505 she was reading from a script of course her boss Jim as well so I have been leaving messages with the entire “leadership team” starting with the #1 liar David holland 612-359-2054, the CFO Paul Vogel 612-359-2064 and the three vp’s Daniel marotto 415-500-4597, Eric hudgens 612-359-2041 and Matthew potter. Lets hold them responsible for the empty promises their CEO and buddy David holland is making.

trailblazer

Woohoo, I got a big fat consolation prize of 500.00. I was in the 6000.00 category but apparently good old Rust Consulting decided to keep the other 5500.00 for themselves. Afterall, who is there to check up on them and make sure the payouts are being made correctly? FYI for all of us, go to your local court house and file a suit for an ANSWER TO INTERROGATORIES against the Registered Agent for Rust Consulting. I am going to do this to shake things up. You don’t need a lawyer and it will be a nominal filing fee. If enough people do this, it will get their attention and cost them $$$$$ to defend themselves. I just want answers and hold them accountable.

Dabz

I am so glad to see that I’m not alone. I received a postcard in the mail in October of last year. I continued checking online for changes, and when I saw the news that checks would be mailed on April 12, I called Rust Consulting… For some reason, they decided to send the check to a mailing address I was using over a year and a half ago… which was crazy because the postcard was sent to my current address. The representatives at Rust Consulting refuse to change my address. I even told them that they sent the check to the wrong address and they are telling me that there is nothing I can do but wait on the “change of address” form. It’s been almost 3 weeks, and no form. This is almost as annoying as what I experienced with the mortgage servicer prior to my foreclosure :-\

ILOSTEVRYTHING

I LOST MY INTER LIFE BECAUSE OFF THE GREEDY BANKS YES WELLS FARGO .I LOST MY HOME,MY WIFE,MY KIDS, MY GRAND KIDS ,MY TRUCK,AND EVEN MY DOGS AND CAT SO YOU TELL ME IF BEING HOMELESS IS NOT PAIN AND SUFFERING I NOW LIVE WITH MY SISTER AND BROTHER IN LAW THANK FOR FAMILY I CAN NOT WORK BECAUSE OF SEVER BACK AND LEG PAIN 15 YEARS NOW BUT STILL GOING I DON’T HAVE A DESIRE TO LIVE ANY MORE SO YOU TELL ME I NEED TO KNOW W.T.F THANK YOU WELLS FARGO FOR TARING MY LIFE APART HOPE YOU BERN IN HELL

Desiree Finley

Believe it or not I have had the address issues with Rust Consulting since February. I have followed 3 procedures to change may address. Then they again sent me a change of address form to my home I live in now after the denied every having it. The original post card was sent to an address that does not exist today I checked with the other Settlement National Mortgage. This is also being handled by Rust Consulting…..Guess what they had the right address for that issue. I also contacted Wells Fargo several weeks ago…..Rust has not returned any of my calls, the OCC has not returned any of my calls……But guess who called me today listened to the rest of my dreaded story (Corporate Offices) Wells Fargo calling to make sure I got my pay out. They are less then pleased at the way the OCC and Rust Consulting are handling these payouts. They were not responsible for providing the addresses….Rust was to do skip traces. The pleasant woman from Wells Fargo had kept all my information took detailed notes 3 weeks ago. I never in a million years thought that I would ever hear from them again. Well, she did call is sending a letter to me, Rust and the Occ demanding to know why people that are going through efficient measures to see that they receive. She stated that there was an agreement made on behalf of Wells Fargo for the consumers to be awarded the monies and obviously the measures are not being taken to see to it we are notified and paid. I can tell you right now that Wells Fargo is not to happy. And I believe that the other banks that were involved are in the same boat…..Rust Consulting is being paid by the OCC and collecting interest off our money…my theory and the woman at Wells Fargos. Oh, by the way my check did get mailed to the address that does not exist and is sitting in my file. I will be receiving a replacement in July that is when those go out. The woman from Wells Fargo said that I will be getting my money way before then and is also having me speak to some other people about this nightmare.

Victor

I actually received an okay amount of 6K

Susan

I lost my home and over 50,000 in equity although I worked with the mortgage company and they assured me foreclosure would not happen. I provided documentation of wrongdoings in every step of the process to IFR, and for what? None of it was reviewed or read. Rust Consulting is the same as every other entity I have dealt with during this process. They have hired individuals with script answers that know ABSOLUTELY NOTHING about what’s going on and you can speak to no one who does. Not only do you have to deal with losing your home and never being able to get another one at this stage of my life, but having to deal with incompetent individuals is almost too much. I have written my representative and President Obama but truly doubt that I will receive a response there either.

Becky

I just received a check for $400.00 from Rust Consulting. I have no idea who they are or how I got in on this agreement. I assumed it was bogus, but maybe not…? I would like to know how they figure whom is owed what amount.

My home was put into foreclosure in April 2010 and this February 2013, a judge dismissed it at a non-jury trial. I was out of work for two years and tried to keep up with the payments, but wasn’t able to. I went through my savings and 401K…it’s all gone now. So will be my home that I’d just bought in 2007, gutted, and then sunk my savings into to restore. When I met with the mortgage representative for PNC BANK in August 2012, they finally flat out admitted that the investors who owned my property refused to negotiate; they would not reduce principal or interest, and would only take 100% of back payments up front, or financed over 24 months on top of my regular monthly payment. Impossible. Unfortunately, after the economy tanked, I’m not making the money I was 5 years ago. The rep suggested that I ride it out as long as I can in my home, take what I want out before it’s sold, and possibly buy another short sale property in the meantime. *shrug* Not sure what else to do…

arlene

Received check BOA was for 800 should of been for 6000 was denied mod from BOA but since they made the decision we are at their mercy. Where is the justice from the government. Commit a crime and be the judge of your own punishment. of course they have had plenty of time to shred documents. All started with the Taylor Bean mess. Was never advised of the National settlement did not receive anything in the mail.

Mitzi

I received a minute check (dated 4/19/2013) but cannot cash it because my Father passed in 2013 and even after submitting his death certificate, it is still made out to him. I repeatedly attempted to email Rust with no reply so, I called them and was told they would send me a form, which I needed to return with another copy of his death certificate and also the check. I have not received anything yet. It’s not for a lot of money but every little bit helps!

Ariel Jones

I received a check from Rust at my old business address. An address I haven’t used in over 10 years. An address that is completely different from the forwarding address at the post office. An address that is completely different from my REAL address that WF has been mailing to for the last 2 years. Thankfully I’m friends with the woman who owns the maildrop store or I would have never received it!

2013-04-29 (OCC Misses Another Conflict of Interest: Foreclosure Review Outreach/Payment Processor Rust Consulting Owned By Residential Real Estate Player Apollo, Being Sold to VC Arm of Citigroup)

Debbie (2013-04-29)

I am so angry that when you call Rust to ask them specific questions, all they respond to you with is a scripted reply. Why don’t they have a website that we can go into and see when our checks are scheduled to be mailed and how much the checks are. This Rust Consulting is running such a sloppy job, and their customer service is horrible. Its crazy to be expecting a check but they can NOT or WILL NOT tell us WHEN the check will be mailed and how much the check is for. For their recording and their staff to keep saying they will not tell us how much our checks are over the phone is STUPID! Why won’t they communicate with us, if its our money why can’t they tell us how much the check is for. What’s the BIG secret????

Betty (2013-04-29)

Its a secret because when you finally get your check you will be pissed. We got ours an it was $500. what a joke

Jamaylaboss (2013-04-29)

Well I got my check today, and yes I was pissed!!!! $500 for what I have been through should be more like $500,000.

I have been fighting with Countrywide, Bank of America, New Century Mortgage, and SPS Servicing now. Are you ready for this, I have been fighting since Aug. 2006!!!!!! Yes, 2006.

I have had Forensic Audits, Court Arbitration, Bankruptcy, Judgements, Produce The Note, Attorney Generals, Lawyers,

and now Rust Consulting. Same old Same old. Rob the nation, and cry about paying more taxes. We all know what is going on here. The working stiff gets stiffed again.

Lorraine (2013-04-29)

I received mt check fron Rusty today – $2,000. Admittedly, it was $1,700 more than I was expecting based on the comments I’ve read from others. According to the remediation framework, the 2K is to compensate me for B of A’s failure to respond to my modifcation requests. I wonder which one I’m being compensated for, since I requested and sent in docs numerous times and never received a response from the banksters. I wish all the people who received insultingly small payouts could throw the money in a class action pot. I wonder how a private citizen can obtain the actual results of their own ‘review’, if any, and use them to sue the bank

Laura (2013-04-29)

I received my check today a whole $500.00, and Wells Fargo foreclosed on me and my husband by accident and even sold our house. We found out by someone coming to the door telling us we had 2 months to move. Our attorney got our house back in 4 days. The thing is I got $500.00 but paid $2500.00 to get my house back. I had also done a request for modification and even was under BK-7. Everything was so messed up for so long and we paid and paid over & over. Now with only getting $500.00 I think it maybe attorney time again, just because this has me very up set. We do have our house and we having been paying on time for 2 1/2 years now. I don’t understand the category list at all. We fell under several areas. I would love to see my review.

Sharon By Accident (2013-04-30)

Hi, Laure,

I received my check today for 2K I’am thankful for the money, but I was file foreclosure on by seriver error. My payments was deliverated route else where other then my monthly payments. The mortgage servicer blame it on a computer error. I had to go to the court house and stop the foreclosure on my home. I later find out that my mortgage payments has been re’route to escrow. Almost a 12k escrow account. I’m trying to find a lawyer that handle these types of foreclosure errors. According to my check category I was place in fail to modify loan. It should’ve been default of servicer.

Ron Ricci (2013-04-30)

I HAD A MODIFICATION IN PLACE WHEN I HAD A HEART ATTACH ON MAY 27,2010. I RECEIVED A CALL FROM AURORA THAT I NEEDED TO UPDATE MY MODIFICATION. I TOLD THE GIRL ON THE PHONE THAT I WAS IN INTENSIVE CARE AND ASKED IF SHE COULD CALL BACK IN A WEEK OR SO AND SHE MADE SOME VERY RUDE COMMENT AND SAID IF THAT’S THE WAY I WANT TO HANDLE IT THEY ARE GOING TO FORECLOSE ON ME. I WAS PRETTY SEDATED AND DID NOT REMEMBER MOST OF HER CONVERSATION. WHEN I WAS RELEASED I CONTINUED TO MAKE MY AGREED PAYMENTS ON TIME AND WAITED FOR THEIR CALL BUT INSTEAD THEY FORECLOSED EVEN THOUGH I WAS CURRENT ON MY AGREED PAYMENTS I WILL FORWARD THEM TO YOU. AS YOU CAN SEE NOT ONLY DID I SEND CASHIER’S CHECKS I FED-EX THEM SO I HAVE A SIGNATURE SHOWING THAT MY PAYMENTS WERE ALWAYS EARLY.

I LIVED IN THIS HOUSE FOR 20 PLUS YEARS AND RAISED THREE CHILDREN IN IT. THE HOUSE WAS IN NEED OF A UPDATE. I SPENT OVER $80,000 ON NEW TILE,REMODELED 3 BATHROOMS RE-CARPETED THE WHOLE HOUSE PAINTED THE INSIDE AS WELL AS THE OUTSIDE PUT IN ALL NEW APPLIANCES PUT IN ALL NEW BATHROOM AS WELL AS KITCHEN FIXTURES. I REDID THE SWIMMING POOL AND ALL THE COOL-DECKING. I REDID ALL OF THE LANDSCAPING AND MADE THE HOUSE ALL BRAND NEW. I DID NOT BELIEVE THAT IT WAS GOING BE BE FORECLOSE OR I WOULDN’T HAVE SPENT $80,000

I am very frustrated with the Independent Foreclosure Review. After about a year and a half of waiting I received my check for $500. I was insulted and very mad. I was expecting to be on the high end of the table. My home was sold when I was in fact 1 payment ahead. I didn’t find out I was ahead a payment until it was sold at auction. When I called Aurora to find out what had happened they told me that I was a payment ahead and nothing would have happened.However that was not true it sold. If you have any suggestions on how to proceed please call me. No one ever contacted me from the review. I waited over two years for $500

JIMBO (2013-04-20)

well, got my check yesterday for $6000.00, wrong classification, I paid those bastards at CHASE over $6K for reinstatement/ modification, settlement should of been $50k because they never did the modification, however the OCC list shows $6k for modification denied, it was never denied just CHASE did nothing and then foreclosed.

LORI (2013-04-30)

can we get a lawyer to sue rust consulting in aq class action lawsuit! this is ridiculous I have done everything they ask to update my address and now they just deleted my mailing address all together!!! they laugh at me hang up on me and leave me on hold..they promise to ESCALATE my problem but that’s BS! someone has to be able to help us, someone has to be over them!

Stephen Harness (2013-05-01)

Well I got my big check for $400.00 Today. Wells Fargo Stole my house, sold it to someone else for 80 k more than I owed and then they send me $400. WHAT A BUNCH OF CROOKS. I AM GOING TO BITE THE BULLIT, HIRE A LAWER AND SUE THEM!!!

Family Ascua (2013-05-01)

We also paid more than 10 years of our home, $900 dollars per month, with an interest of 7.85% percent. Wells Fargo took our home and sold it to someone else for 80K. Now, we received a check for $2,000. What do we have to do? We should all band together and sue them all!! The government, rust consulting and the banks, but we all have to unite, all of us who were duped and go out and protest, for our rights!! It’s a misery how little they pay for how tremendous they scam us out of. We lost our homes, what else do we have to lose. What they have done is an insult to all of us. It’s time they paid their dues!

Sucker (2013-05-02)

I got my check today!!! I paid $200,000 in payments between 2007 when I purchased and 2009 when I joined Hamp. I gave HAMP $18,000 in 6 payments + $6,000 “good faith” to qualify (this was arranged by my government HUD counselor) while they were secretly foreclosing.

I even made a $3,000 payment after the foreclosure date.

Check: $2,000
not even interest on the money they stole.
They could have given one of the HAMP payments back.

I wish they would have given me enough to hire representation.

Another 15 months go by in yet another scam:
IndependentFROMDOINGforeclosurereviews
Independent of morality & accountability

wendy stephens (2013-05-07)

I have yet to get a check. I have called numorous times to Rust Consulting. They don”t have any information for me. My question is. Why hold the money until July. Makes no sense at all. Banks still get off scott free. Ugh

Chase (2013-05-15)

I got a postcard from Rust in March that said I would receive a check in 4-8 weeks or something requesting additional information. I’ve received neither, yet they tell me I will definitely be receiving a check, but probably not until mid-July. Why have so many people still not gotten their checks and why do they have to wait? They wouldn’t be receiving such a backlash from at least some people if they would have sent out the correct timeframe on the initial postcard. It looks like something’s up.

2013-05-09 (More Foreclosure Settlement Fiascoes: Rust Consulting Underpays Some Harmed Borrowers)

bittersweet (2013-05-09)

What a weird experience to receive a check in the mail for my foreclosure. I did not claim malfeasance, but the check was VERY welcome. (I been earning about 1/8 of my prior yearly income, since the financial collapse in 2008.)

Was it a mistake for me to even be included in this payout? I feel like hiding in case Rust tries to claw it back. What category did I fall under? Why did I receive a relatively large check?

This morning, I finally found the OCC chart that shows the payout amounts.

http://www.occ.gov/news-issuances/news-releases/2013/nr-ia-2013-60a.pdf

My foreclosure was initiated when I was in bankruptcy. According to the chart, I should receive $3,700.

Instead, I received a check from Rust for $3000. What happened to the other $700? So, I am grateful, but confused.

They must have paid me according to some other category. I have to conclude that the actual payout categories were applied randomly. If they audit Rust consulting, am I going to have to write a check back to HSBC?

Cindi (2013-05-09)

I too was in Bankruptcy when Wells Fargo Initiated foreclosure. I recieved $500.00 from Rust and I also filed for a review of my loan.

I did the trial Modification made all my payments on time for 10 months , not the three months that was the original agreement.

They denied my Modification 2 times before they finally approved it BUT my loan that I had had for 11 years was now again a 30 year loan and I owed 25K more than I borrowed in the beginning. The math just isn’t there. It was very frustrating to believe that Wells Fargo may finally have to pay for what they did to so many, to open the envelope and see $500.00. And the service men and women that lost their homes Seriously??? That really gets me and many others. Just plain wrong!

bittersweet (2013-05-09)

Well Cindi, I will jump in.

It is a crime in itself that you received so small a check. As I said, their classifications must have been totally random!

You really need to contact your Federal Representatives, the OCC, Rust and anyone else you can think of, and demand your payment according to the OCC chart!

And I for one would like to hear what they tell you!

rocky

i have not received anything from rust not even a post card they keep ol lying

Rick Hauk

tried calling your firm 3 times today with no responce back on my forecloser check I got in the mail for $1,000 reference number 1201996260. I do not know how you came up with $1,000 when I purchased my home January 2008 for a price of $525,000. I put $110,000 down on this home and with working in the auto business for 21 years the auto business took a hard hit later that year and then I was getting a divorced. I had a mortgage through citibank who assured me my remod was done, I made my monthly agrred payments on time for 9 months, not the 3 months they said would be needed. Long story shory they foreclosed my home, sold the house for $450,000 and poceted the $45,000 in equity and citi bank did not pay the 2nd mortgage off. Here I am 2 years later still paying a second mortgage every month because citi bank kept the profit of the home, and your company wants me to take a $1,000? I spent $40,000 fixing the home up with new windows, roof, stucco and made it my dream home. Now i am stuck with a 2nd mortgage, credit issues due to my forecloser. I cannot even get a replie back from your company.

Richard Hauk

Sean A

Rick

Your story reads exactly like mine….wife,2nd mortgage,equity loss,payment schedule was setup,private aviation instead of auto….except my house was $120k and they sent me $600…WOOHOO

francie (2013-05-11)

House value now is 2012 is 60k,owe 151k due to all of the attorney’s fees that were added to this loan. In 2009 after going into foreclosure, paying Saxon 5000 and working with an attorney to get the modification, Saxon agreed on a payment with taxes included for $700.00, the next month when the statement came it was for $1400.00 and we were back to going into foreclosure again. During 2009 t from through April 2011 I was unemployed. Started calling the State of Ohio Attorney’s general office and sent the documents that I requested when they contacted me when they started the investigation and working with my Congressman. Finally in late 2011 we were able to finally get a loan modification. We received a check for $300. After following the chart and they said Saxon loans would receive more, I have spent more than the 300 in time and money from attorney’s fees and time and that includes lost sleep and other issues that went with this

Karen M (2013-05-14)

Who can we contact about this situation or who might be able to help?

Here’s the story: My son and his then-wife bought a condo here in California. Subsequently they were divorced. He stayed in the condo but lost it in a Wells Fargo foreclosure action while he was working on a short-sale. She now lives in Louisiana. My son is here in California. He has been unemployed for over 2 years.

About 2 weeks ago he received a $6000 check from the Independent Foreclosure Review process – the check came from Rust. It is made payable to my son and his ex-wife. They want to split the check 50/50.

Here’s the immediate problem:

1) His bank will not let him deposit the check as it’s payable to both of them and his account is not a joint account with her.

2) He spoke to Rust and asked if they could issue 2 checks, 1/2 to her, 1/2 to him – and he would send the check he has back to them. They say no.

3) He has been told the only way they can cash this check is for either she comes to Calif, they open a joint bank account, deposit the check & wait for it to clear, and then cash it. Or he goes to Louisiana and they follow the same process. Neither one of them are in a financial position to do this.

4) The Fed Reserve Office of Consumer Complaints says there’s nothing they can do and to call Rust. He has called Rust several times. They won’t do anything.

5) When he applied for the Independent Foreclosure Review he says the application did not ask anything about his marital status. If it had, this whole mess would have been avoided.

There must be thousands and maybe even hundreds of thousands of people in this same situation – he can’t be the only divorced person trying to cash one of these checks. I feel as though it has been done this way intentionally so that the checks won’t/can’t be cashed. What if he didn’t know where she is or vice versa?

Thank you for any thoughts you might have on this mess

sharon (2013-05-14)

my husband left the state..leaveing me with house i couldnt pay for.thats why i had forecloser..but i have check with his name on it so i cant even try ro cash .i really could use 300.but most of u lost alot more then i did,im sorry for u

cheryl vialpando (2013-05-15)

I received $600.00. I owed $72,000.00 on my home. It was sold out from under me for $32,000.00. What a joke all of this is… I too was expecting so much more for THERE mistake. Now it sounds like we all are going to get screwed again on this so called national mortgage settlement. (I sent my reply and got a answer last year.)

I found out last week that Rusk is apart of citi bank. All the banks are in on it. The OCC is paid by the banks. The banks are paying Rusk. It’s all one big circle….

* * *

I myself am not religious, and I see the Bible as a great work of literature. That said, it seems to me that the iniquity here — the sheer wickedness — is of Biblical proportions. And so I’ll quote Psalm 64 (English Standard Version):

To the choirmaster. A Psalm of David.

1 Hear my voice, O God, in my complaint;
preserve my life from dread of the enemy.

2 Hide me from the secret plots of the wicked,
from the throng of evildoers,

3 who whet their tongues like swords,
who aim bitter words like arrows,

4 shooting from ambush at the blameless,
shooting at him suddenly and without fear.

5 They hold fast to their evil purpose;
they talk of laying snares secretly,
thinking, “Who can see them?”

6 They search out injustice,
saying, “We have accomplished a diligent search.”
For the inward mind and heart of a man are deep!

7 But God shoots his arrow at them;
they are wounded suddenly.

8 They are brought to ruin, with their own tongues turned against them;
all who see them will wag their heads.

9 Then all mankind fears;
they tell what God has brought about
and ponder what he has done.

10 Let the righteous one rejoice in the Lord
and take refuge in him!
Let all the upright in heart exult!

I picked the ESV because I liked the translation of verse 6:

6 They search out injustice,
saying, “We have accomplished a diligent search.”
For the inward mind and heart of a man are deep!

Here the Psalmist, in my reading, is double-tongued, like all poets. I imagine one of the harmed borrowers finally, after an age on hold, getting to speak to a representative. The harmed borrower believes that the Rust rep has “accomplished a diligent search” for “injustice,” and tried to rectify it; meanwhile, the Rust rep has “accomplished a diligent search” for “injustice” and committed it.

But not all Rust reps, surely? You’d have to have a heart of stone not to be moved by these stories. Surely there’s at least one Rust rep who’s willing to contact Naked Capitalism (in strict confidence) and make amends by telling us what was going on? Especially since this wicked system was created by the suits “laying snares secretly” to capture and cripple caller and rep alike, and all for immense profits neither will share?

NOTE * Readers, you might consider forwarding this post to your Congress critter, and ask them what they plan to do about these gross injustices. If anything.

NOTE I would also like to thank commenters 2little2late, Ariel Jones, Becky, Betty, Chase, Cindi, Dabz, Debbie, Desiree Finley, Dgtal, Dion, Family Ascua, ILOSTEVRYTHING, JIMBO, Jamaylaboss, Jill, Jimbo, K Barajas, Karen M, LORI, Laura, Lorraine, Mac, Mandy, Melinda, Mitzi, NH, Natalie, Rick Hauk, Ron Ricci, Sandy, Sean A, Sharon By Accident, Stephen Harness, Sucker, Susan, Victor, ann, arlene, arlene higley, bittersweet, cheryl vialpando, francie, marty, rocky, rox, sharon, trailblazer, and wendy stephens for leaving comments on their experience with Rust Consulting at NC. I hope I didn’t miss anybody.

UPDATE Note on method: These comments aren’t authenticated, the way that Yves authenticated the whistleblowers that she interviewed on BoA and Promontory. All I can say by way of authentication is that I’ve processed a ton of comments in my ten years of daily blogging, and these comments don’t read like trolling, or sock puppetry, or anything but puzzled, outraged, ordinary shubs like the rest of us trying to make sense of it all.

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Not that it should be a surprise to most MB [and NC] readers, but the economic data coming out of nations within the Eurozone is once again “worse than expected”. Last night it started with Italy:

Italy’s economy contracted more than expected in the first quarter of 2013, shrinking 0.5% from the previous three months as activity fell in all sectors except farming, national statistics institute Istat said Wednesday.
Gross domestic product in the euro zone’s third-largest economy has now contracted for seven consecutive quarters, the longest recession since Istat began compiling comparable data in 1990.

The preliminary figure, adjusted for seasonal factors and the number of working days, was markedly worse than the average forecast of a 0.3% quarterly contraction in a Dow Jones Newswire poll of 19 economists.
Italy’s GDP shrank 2.3% from the fourth quarter of 2012, Istat said, slightly worse than the average forecast of a 2.2% annual decline.

While dismal, Italy’s economy didn’t decline as sharply as it did in the final three months of 2012, when it shrank 0.9% from the previous quarter.

I’ve spoken about Italy a number of times previously, what the country needs is growth, it isn’t coming. From January 2012:

Italy does have the advantage that over 75% of its public debt is long term with an average maturity of approximately 7 years and only about 12% of that is variable interest rate. This means that even though Italian yields are high now ( 10yr @ 7.11) the flow-on effect to the overall deficit is relatively limited.

The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.

On top of stalling growth, Italy has a demographics issue. With a debt to GDP ratio at 120% along with a population with a median age of approximately 45 Italy really does look like the Japan of Europe. The only problem is Japan is competitive, runs a trade surplus and is sovereign in its own currency. Italy has none of these things.

Given all of these problems it will be interesting to see what Mario Monti can come up with to get the country back onto a path to growth while staying in the Euro and meeting the countries existing obligations. It would appear to be a monumental task.

And we can now see, even with the steerage of Mario Monti, nothing has changed. The long term trend of shrinking rates of GDP growth continues and, given current EZ policies, its hard to see that changing in the coming year. We’ve seen over the last month that the economic retrenchment is slowly seeping into the banking system through bad loans as unemployment remains over 10%. On top of that the latest PMI data continues to show that manufacturing is in contraction and forward looking data suggests it will stay there for the coming year at least.

But Italy certainly isn’t alone. France too, is back into recession:

France has entered its second recession in four years after the economy shrank by 0.2% in the first quarter of the year, official figures show.

Its economy shrank by the same amount in the last quarter of 2012.
President Francois Hollande has said he expects zero growth in 2013, lower than a 0.1% growth forecast by the French government.

Separate figures showed that the recession across the 17-nation eurozone has continued into a sixth quarter.
A recession is defined as two consecutive quarters of negative growth.

The economy of the 17-nation bloc shrank by 0.2% in the January to March period, according to the EU’s statistics office Eurostat, with nine of its members now in recession. Within the zone, France has record unemployment and low business and consumer confidence.

Again this should come as no surprise, I’ve been speaking about France for nearly 2 years. The structure of its economy at present is based on internal consumption which requires external capital. Attempted austerity in the government sector was always going to slow the economy, the issue now, as it is with many European nations, is exactly what is the credible plan to make the transition from this model to one of export-led growth in an environment of non-floating currency and while major trading partners are all trying the same trick. The most likely outcome, unfortunately, is a deflationary spiral across the zone leading to much higher unemployment, large loss of private sector wealth and eventually political and social unrest.

I’ve discussed previously that monetary policy of the kind being implemented by the ECB can only do so much and is very unlikely to be able to offset the fiscal policy being implemented across Europe, no matter what Mr Draghi says about it every month, and that continues to show in the data.

France now joins Greece, Spain, Italy, Cyprus, Portugal, the Czech Republic, Hungary, Belgium, Finland and the Netherlands into recession, but there will be more to come.

By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus

Since the Reagan/Thatcher era, it has been common to view politics vs. infrastructure as simply a battle between right wing forces attempting to privatize infrastructure and others trying to defend it. (I covered the latest attack by President Obama on the TVA.) However, this is only the recent history of United States infrastructure policy. Much of America’s public works infrastructure was privately built (with public subsidy of course) by businessmen attracted by the possibility of huge crowds of customers. Transit in New York City was no different. By the 1920′s the two privately owned subway lines were the Interborough Rapid Transit Company (J.P Morgan’s subway) and the Brooklyn–Manhattan Transit Corporation (Chase National Bank’s subway). They were known respectively as the IRT and the BMT. Additionally, Rockefeller owned the elevated railway lines (we’ll get back to this in a future post) but leased them to the IRT. If you have had much experience with New York City subways, you can easily tell that there is a significant difference between the lines built and managed by different companies.

New York City transit was very profitable in the late 19th century to early 20th century. It was the fastest way to travel around the city and served a large and growing industrial sector. Each transit company was given exclusive city franchises and received substantial financial subsidies. The most significant of these subsidies was that the City agreed to pay the construction costs of the new lines. The first subway was built under a contract between the IRT that was signed on February 21, 1900. This became known as Contract 1. Contract 2 was signed with the IRT on September 11, 1901.

After the success of the first two contracts, J.P. Morgan sought to expand his transit system and Chase National Bank became interested in expanding theirs. This would allow both to capture more ownership rents from running the transit system (as well as drive up the value of more of their property by making it more accessible). The next round of negotiations ended in the Dual Contracts of 1913 (signed March 19, 1913), which was the beginning of the end for privately owned subway and railways in New York City, although their owners didn’t yet know it.

Fearing what progressive mayors around the United States were accomplishing (for example, Tim Johnson in Cleveland), the BRT and IRT owners were adamant about fixing a 5 cent subway fare. This quickly became a progressive guarantee of a low fare once labor costs and inflation rose because of the World War I. Additionally, the deals made before the war were based on financial projections from a pre-automobile era. The number of people using their transit systems fell tremendously as cars started to be mass produced and marketed. On the elevated railways, for example, carried 500 million fewer passengers than projected between 1917 and 1922 (Horan 1985).

More profit pressure ensued. Tammany Hall and the Hearst newspapers supported Brooklyn politician John Francis Hylan in his mayoral run of 1917. He proposed and built the Independent Subway System (referred to as the IND), the first municipally-owned subway system. He inveighed against the robber barons, and he won re-election by fighting proposals to raise the subway fare. However, this wasn’t exactly out of the goodness of his heart. Tammany Hall and these oligarchs were in competition over looting the budget and Hylan’s policies should be seen in that light. Additionally, he was silent about the garment industry and the battles it was fighting with unions at the time – suggesting a possible relationship with this industry. His subway policy would make sense in this light. More subways would lower the commute time of workers (by bringing closer subways and less congestion) and the IND would help to prevent a rise in subway fares, which would keep down the cost of living and thus necessary pay of their workers.

All of these factors led to dramatic financial problems for these companies. The BRT went into receivership in 1918, a form of financial reorganization where a person is appointed (often by a court) to run an organization. Usually the organization has failed in some major way to keep up with their obligations. Meanwhile, the IRT had a default in 1921 which required a major reorganization to avoid banktruptcy. In response, both operators did what any good capitalist would do: try to charge higher prices and dump their losses onto government. However, they were unsuccessful during the 1920s. Absorbing losses on the scale the robber barons sought would impinge on the funds available to Tammany Hall’s patronage system. Meanwhile, these companies were massively unpopular and there was enormous political pressure to resist their demands. By the end of the 1920′s it seemed as if they were in the wilderness. Like most things, the Great Depression changed all that.

The failure of Creditanstalt (Lehman Brothers an Austrian bank) in 1931 produced an international financial panic that harmed, among many other things, the municipal bond market. Anticipating Rahm Emanuel’s dictum to never let a serious crisis go to waste, a veritable list of who’s who among New York bankers organized to hold the city for ransom. “Spokesmen for a syndicate of J.P Morgan & Co, National City Bank, Chase National Bank, Kuhn, Loeb, Guaranty Trust, First National Bank, Bankers Trust, and Bank of Manhattan Trust refused to bid on the issue,” that is, a New York City bond offering (Horan 1985, pg 212). Apparently this was a time when bankers had to point a gun to other people to get what they want, rather then themselves. The consortium then went into negotiation with the city over their finances. As you can imagine their interest was as much in getting higher subway fares and municipalization at high prices as it was in making sure they could get paid back. This was not a secret. In a New York Times article, “Bankers to demand rise in subway fare,” this statement appears:

…speedy unification, with provision for a self-sustaining fare, it is understood, is so attractive to these groups as to make them willing, despite the general weakness of the bond market, to undertake the flotation of such city corporate stock and board of transit control bonds as may figure in the unification deal… [these direct negotiations] are taken in some quarters as an indication that the question is closely allied with the city’s general financial situation.

The eventual agreement was a bonanza for the bankers. The city agreed to unify the transit system, increase subway fares, and segregate all tax revenues from the general budget for the purpose of paying off bonds. All these concessions were in exchange for the ability to borrow at higher interest rates than ever before. In order to finance even minimal relief spending, the city was forced to impose a regressive sales tax. As former Roosevelt man A. A. Berle said: “The bankers have virtually stated as a condition of any relief credits they want a sales tax” (letter to president Roosevelt, October 23 1934, cited in Horan 1985). The city finally purchased these bankrupt companies for an enormous $315 million in city bonds. Yet, by the 1970′s the city’s financial problems were blamed on “the fucking blacks and Puerto Ricans,” as a spokesman for the Municipal Assistance Corporation told Robert Fitch.

Thus, the city paid out massive subsidies to major financial interests to build city transit that was massively profitable for a time. Then, when these going concerns turned sour, J.P Morgan, the Rockefellers and the top bankers at Chase National Bank did everything they could to coerce the city into buying the transportation system and the bankrupt companies along with them. The prices they demanded were outrageous and helped bleed the City’s finances dry. In modern times, the descendants of these same interests push (and sometimes succeed) in getting the same infrastructure privatized in the name of “efficiency”. Don’t be surprised if in the future privatized property is nationalized again for many multiples of what was originally paid by governments and what their profit margins would recommend. It seems oddly appropriate given this history that the financial descendents of J.P Morgan and Chase National Bank have merged and are now considered “too big to fail”.

Most of this post and follow up posts are based on two articles in the 1985 issue of Research in Political Economy. I would like to thank current editor of the journal Paul Zarembka for access to them.

Sources:

Fitch, Robert. “The Family Subway.” Research in Political Economy 8 (1985): 163-200.
Horan, Cynthia. “Agreeing with the bankers: New York City’s depression financial crisis.” Research in political economy 8 (1985): 201-232.
Bankers to demand rise in subway fare. (1932, Mar 28). New York Times (1923-Current File). Retrieved from http://search.proquest.com/docview/99689614?accountid=14701

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

While there are numerous definitions of economics, the most widely used is:

Economics is the study of how economic agents – households, businesses, governments – allocate limited resources across competing uses.

The definition encompasses market, command and mixed economies as the need to allocate resources transcends legal, institutional and other societal arrangements. Various sub-fields of economics have area-specific operational definitions, but the core, the fundamental economic problem, is the same: the allocation of resources. The relative scarcity of resources implies opportunity costs or tradeoffs, e.g., guns versus butter, labor versus leisure, present versus future.

However, current monetary policymakers (largely economists) have designed and employed macroeconomic models and a policy framework that allow only one goal for central banks: price stability. They did not solve the problem of how to allocate scare resources (in this case limited policy tools) in pursuit of competing ends, e.g., stable prices, full employment, sustainable growth, financial stability, external balance. They simply designed models that assumed the problem away and freed central banks from the fundamental problem of finding acceptable, if not optimal tradeoffs when setting policy.

Post the financial crisis, the great recession and in the midst of a painfully slow recovery, economists and central bankers are moving in the direction of flexible inflation targeting, i.e., allowing for the possibility that monetary policy should pursue goals other than just price stability. However, the flexibility appears to be limited to sequential shifts from inflation-only targeting to employment targeting and back. Policymakers are still talking as if they will never be faced with policy tradeoffs.

More recently, and very belatedly, monetary policymakers have acknowledged the existence of a link between monetary policy and financial stability. The existence of the link implies that the Fed faces potential tradeoffs not only between inflation and unemployment, but among inflation, unemployment and financial stability. Given that financial instability implies the possibility of increased unemployment in the future, there are also potential tradeoffs between current unemployment and future unemployment.

With financial stability as a goal in addition to its dual mandate, i.e., price stability and full employment, the Fed has three policy goals. How many resources, aka policy tools, does the Fed have? In terms of monetary policy per se, the Fed has one tool, either interest rates or the quantity of reserves. It also has a set of regulatory tools, but as Yellen has pointed out:

The Federal Reserve has been working with a number of federal agencies and international bodies since the crisis to implement a broad range of reforms to enhance our monitoring, mitigate systemic risk, and generally improve the resilience of the financial system. Significant work will be needed to implement these reforms, and vulnerabilities still remain. Thus, we are prepared to use any of our many instruments as appropriate to address any stability concerns.”

Policymakers do not have the necessary regulatory tools in place. The financial industry also has a well established record of innovating to avoid regulation. Hence, the Fed and other regulatory authorities will likely continue to lag the markets on the regulatory front. Furthermore, financial regulation and supervision will not control the behavior of financial institutions that innovate to avoid regulation, operate outside the regulatory border or across political boundaries. The remote likelihood of a lasting and sufficiently robust regulatory system raises the possibility that there will be times when it is advantageous for a central bank to alter interest rate policy to reflect financial stability concerns.

Interest rate policy also has advantages over regulatory policy in promoting financial stability. Interest rate policy has a non-discriminatory impact on regulated and non-regulated entities as well as across financial products. Furthermore, interest rate policy can alter the incentive that financial entities have to engage in regulatory arbitrage or to innovate to avoid the costs of regulation. This effect has been noted by Fed Governor Stein:

For example, if low interest rates increase the demand by agents to engage in below-the-radar forms of risk-taking, this demand may prompt innovations that facilitate this sort of risk-taking.

Consequently, interest rate and regulatory policies are not independent. The Yellen statement implies that the Fed is prepared to address financial stability concerns with interest rate policy. Plosser of the Philadelphia Fed has said that some members of the FOMC are concerned about the low interest rate policy because of increasing potential costs of financial instability. However, the Fed has not shown any inclination to do so and still asserts that interest rates were not “too low for too long” prior to the crisis. In fact, economists, central bankers and pundits continue to resist calls to acknowledge the possibility that it might be advantageous to design monetary policy with more than just one target in mind. They mustered a number of arguments. They include 1) the Tinbergen separation principle and 2) arguments based on the idea that central banks should specialize/focus on inflation as they have a comparative advantage in maintaining price stability.

Tinbergen Separation Principle

Wikipedia summarizes the Tinbergen separation principle as follows:

Tinbergen, in his work on macroeconomic modeling and economic policy making, classified some economic quantities as “targets” and others as “instruments”. Targets are those macroeconomic variables the policy maker wishes to influence, whereas instruments are the variables that the policy maker can control directly. Tinbergen emphasized that achieving the desired values of a certain number of targets requires the policy maker to control an equal number of instruments.

Tinbergen’s classification remains influential today, underlying the theory of monetary policy used by central banks. Many central banks today regard the inflation rate as their target; the policy instrument they use to control inflation is the short-term interest rate.

Ben Bernanke espoused this position in 2002 when he was a Federal Reserve Governor.

My suggested framework for Fed policy regarding asset-market instability can be summarized by the adage, “Use the right tool for the job.”

As you know, the Fed has two broad sets of responsibilities. First, the Fed has a mandate from the Congress to promote a healthy economy–specifically, maximum sustainable employment, stable prices, and moderate long-term interest rates. Second, since its founding the Fed has been entrusted with the responsibility of helping to ensure the stability of the financial system. …By using the right tool for the job, I mean that, as a general rule, the Fed will do best by focusing its monetary policy instruments on achieving its macro goals–price stability and maximum sustainable employment–while using its regulatory, supervisory, and lender-of-last resort powers to help ensure financial stability.”

Unfortunately, defense of inflation-only targeting via appeals to the Tinbergen separation principle are over simplified and misplaced. The separation principle was derived in the context of a macroeconomic model comprised of well-behaved linear equations. It is clear that real economies include dynamic non-linear relationships between variables and that behavior is at times chaotic.

Furthermore, Tinbergen’s principle was much more nuanced than one instrument for one target. In the context of his model, Tinbergen found that:

1. When the number of policy instruments exceeds the number of targets, policymakers will be able to chose from a menu of possible combinations of instruments to achieve the goals;

2. When the number of instruments equals the number of targets, all targets can be met and one instrument can be used for each goal; and

3. When the number of targets exceeds the number instruments, it will not in general be possible for policymakers to reach all the goals. Policymakers will be faced with having to make tradeoffs across goals. In general, policies will have to be designed with multiple goals in mind, if all targets are to be pursued.
The number of policy goals far exceeds the number of effective instruments.

Regulatory policy has been and is likely to remain incapable of insuring financial stability. Fiscal policy appears to be driven by concerns other than promoting the goals of economic policy, e.g., full employment. International economic policy is non-existent. Consequently, the Tinbergen separation principle should not be invoked to support inflation-only targeting, as the conditions under which it was derived are not met.

Appeals to Comparative Advantage

Central banks, including the Fed, presumably have both absolute and comparative advantages over other policy institutions in maintaining price stability. The exploitation of comparative advantages gives rise to specialization, trade, markets and increased efficiency. To many, this suggests that it is advantageous for the Fed to specialize in maintaining price stability.

However, there are limits to specialization, aka the division of labor. This was noted by Adam Smith in An Inquiry Into The Nature and Causes Wealth of Nations. Chapter III is titled “The Division of Labour is Limited by the Extent of the Market” and includes the following observations:

As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.

In simple terms, the ability of specialization to enhance efficiency and welfare depends not only on the existence of an agent with a comparative advantage, but also on the market and institutional setting.

If the Fed’s goal is to design and implement the optimal monetary policy for an otherwise perfect world, then complete specialization in the pursuit of a single target is appropriate. If the Fed’s goal is sustained stable growth with full employment in a world characterized by market and institutional failures, e.g., other policy tools are either non-existent or incapable of achieving their intermediate goals, then economics suggests that the Fed must accept the possibility that a one-target-only policy may exacerbate resource misallocation and contribute to inferior outcomes.

It is ironic that economists in pursuit of macroeconomic models with microeconomic foundations have adopted models and an operating framework that preclude the existence of the rationale for economics – the relative scarcity of resources and resulting existence of tradeoffs. In so far as inflation-only targeting contributed to the asset price bubbles, the financial crisis and recession, it was costly as well.

Calling all scholars willing and able to contribute new ideas to economics! The Institute for New Economic Thinking is offering research grants of up to $250,000. For details, see here.

‘Best estimate’ of melting ice caps BBC

Making Gold Green: New Non-Toxic Method for Mining Gold Science Daily (Chuck L)

Robot Econ Primer Robin Hanson

Amazon deforestation may undercut South American hydropower projects arstechnica

Why the world faces climate chaos Martin Wolf, Financial Times

Europeans disillusioned and divided by debt crisis, survey finds Guardian

We are the country’s Civil Defence force Beppe Grillo

Outrage at Syrian rebel shown ‘eating soldier’s heart’ BBC

Did the IRS illegally target the Tea Party? Seven questions answered. Christian Science Monitor

The IRS should do more, not less, scrutinizing of political groups Guardian

Justice Department’s pursuit of AP’s phone records is both extreme and dangerous Glenn Greenwald

Untangling Obamacare: What’s behind the rate increases? CJR

If Only there was a Public Option: Part 1,452 Jon Walker, Firedoglake

Angelina Jolie Under the Knife CounterPunch (Carol B)

Obama Nominates Cable Industry Lobbyist and Campaign Bundler New Head of FCC Real News Network

Are Creepy Dudes Now Using Drone Technology For Their Nefarious Ends? Raw Story. You need to read past the tone for the substance

US deficit falls faster than expected Financial Times

Fed Says U.S. Household Debt Declined to 2006 Level Bloomberg

College Execs have Private Jets? New Report Finds Public University Presidents Live Large Alternet

Rich Manhattan moms hire handicapped tour guides so kids can cut lines at Disney World New York Post (Lambert)

Everyday Socialism, American-Style, Is Happening Now Gar Aplerovitz, TruthOut

Keynes and Keynesianism New York Times

The Vicious New Bank Shakedown That Could Seriously Ruin Your Life Lynn Parramore, Alternet

YARDENI: I’m Troubled By A 9-Week Trend In The Earnings Measure That Drives The Stock Market Clusterstock. Note Yardeni skews bullish.

What Do Weekly Unemployment Claims Tell us About Recession Risk? Global Economic Intersection

Plosser on the Exit Tim Duy

If the Fed Knows Banks Are Too Big, Why Doesn’t It Make Them Smaller? James Kwak

Antidote du jour (martha r):

Yves here There’s been a great deal of consternation over a report that found that the median Spanish and Italian households are more than three times as wealthy as the median German household. This report says that these differences aren’t what they seem to be.

By Tito Boeri, Professor of Economics at Bocconi University, Milan. Cross posted from VoxEU

The ECB’s recent survey on household finances and consumption threw up some unexpected results – counter-intuitively, the average German household has less wealth than the average Mediterranean household. In line with a recent VoxEU.org contribution from De Grauwe and Ji, this article analyses the principal differences in wealth and income between the main Eurozone countries.

The Household Survey (European Central Bank 2013) is a joint project of the ECB and all the Eurozone central banks providing harmonised information on the balance sheets of 62,000 households in 15 Eurozone countries (all except Ireland and Estonia).1

Media hype had been generated by the ranking of the countries’ median household wealth results, especially by the fact that:

• Germany was in last place with €51,400.
• Italy and Spain were significantly above France with wealth equal to €173,500 and €182,700 respectively, compared to the French households’ €115,800.

The mean household wealth averages paint a very different picture to current narratives about the relatively wealth of nations in the Eurozone. The relative dispersion in the estimates is much smaller: the German household mean is €195,200, while for France, Italy and Spain it is €233,400, €275,200 and €291,400 respectively. Moreover, Germany climbs six places in the wealth ranking.

As already noted by De Grauwe and Ji (2013), Germany’s position at the bottom of the median ranking is simply due to its large wealth inequality compared with the others. This is confirmed by observing that the concentration of wealth, measured by a Gini index of 0.76, is much higher in Germany, while for France, Italy and Spain the estimate is smaller (0.68, 0.61 and 0.58 respectively).

Household Size Matters

This analysis does not take account of household composition in the various countries. The distribution of household wealth across countries is affected by differences in the demographic characteristics of households (age, education, household size):

• In northern countries, households are generally small, often composed of a single member.
• In the south it is not unusual to find many people, even from different generations (grandparents, parents and children), living together.

The splitting up of household members produces a sort of partition of wealth among the households they generate, as happens when young members exit the household to form a new family.

A simple way to sterilise for household size is to consider per capita averages:

• The per capita wealth figure for Italy and Spain is €108,700, slightly higher than for France (€104,100) and Germany (€95,500).

Hence, the differences between per capita averages are much smaller than those observed between household medians. Dealing with sample estimates, we observe that most of the above differences are not statistically significant, although National Accounts estimates confirm that per capita wealth in Germany is a little lower than in Italy, Spain or France (by 3%, 4% and 11 % respectively) (European Central Bank 2013).

Thus, there are no substantial differences in the averages for per capita wealth and that the media hype is the result of a specious reading of part of the results.

Income and Poverty

Other economic indicators paint pictures that are more favourable to Germany:

• German mean gross household income is about €43,500.
• In the other three countries the average is between €31,000 and €37,000.

If we consider household equivalent income, a measure of the resources available at the individual level that takes household size and composition into account, the income gap appears larger2: the German mean gross equivalent income is about €28,000 (the median €22,000), compared with averages ranging from €19,000 to €21,000 (and the medians from €15,000 to €17,000). Even taking into account the different purchasing power of income in the four countries, the results are similar for both means and medians. In short, Germans have a significantly higher income with respect to the citizens of the other three major Eurozone countries with similar equivalent income statistics.

Figure 1. Net wealth statistics (1000€)

As to the poverty distribution, the proportion of relatively poor individuals is calculated by adopting a unique poverty line (half the Eurozone median equivalent income adjusted for the different price levels3) and a specific poverty line for each country.The second clearly defines poverty only in terms of the relative position (and prices) of the household in its country’s income distribution, while the first treats all households as belonging to a single area, although accounting for the different level of price among countries. Figure 3 shows that the two definitions do not produce the same picture. In the first definition:

• Poverty appears to be more widespread in Italy and Spain and less widespread in France and Germany.
• Adopting national poverty lines, poverty is more widespread in Italy and Germany than in Spain and France.

These results are only a small part of what can be obtained analysing the rich database that is available to researchers. It would be worthwhile taking the study of households’ economic behaviour in the Eurozone further by means of analyses that consider various dimensions (socio-demographic, economic and institutional) of cross-country heterogeneity while avoiding hasty conclusions.

Figure 2. Income statistics (1000€)

Figure 3. Distribution of poverty (per cent)

It’s been slow in coming, but religious leaders are starting to speak out against the mechanisms and high social cost of austerity. One dramatic but ineffective effort was when the Archbishop of Cyprus offered to contribute all the church land in Cyprus to a rescue package. He also urged Cyprus to exit the eurozone:

Archbishop Chrysostomos II of Cyprus said his country should withdraw from the European Union as the EU will fall apart and cease to exist in the future.
“The economies of Spain, Portugal and Italy are currently in danger. And if the economy of Italy is destroyed just like our economy, the EU will not withstand,” Archbishop Chrysostomos said in an interview with Russia’s Channel One television channel.

“People who rule the European Union, and particularly those making decisions in the so-called troika, do not understand many things and it leads to the collapse of the EU. This is why I believe we [Cyprus] should withdraw from the union before the collapse takes place,” he added.

On May Day, the new pope called for less austerity and more jobs. From the New York Times via Daily Kos:

I think of how many, and not just young people, are unemployed, many times due to a purely economic conception of society, which seeks selfish profit, beyond the parameters of social justice,” the pope said. “I wish to extend an invitation to solidarity to everyone, and I would like to encourage those in public office to make every effort to give new impetus to employment.

A much starker depiction of what is at stake came today in the Telegraph, when Ambrose Evans-Pritchard wrote up an interview with the Archbishop of Toledo. The prelate discussed not only the severity of individual suffering, but more important, the cracks in the social order. This is a much bigger danger, and one that the Troika seems to treat far too casually. Greece has been broken on the rack and is in the process of becoming a failed state. Ireland escaped a similar fate by having a disproportionately large export sector (over 100% of GDP) which meant deflating early was tantamount to a currency devaluation. Even so, large-scale emigration has also helped reduce the level of official unemployment.

Spain is going down the Greece path, and having such a large country unravel socially and politically is likely to have bigger, if not readily foreseen, consequences. Unemployment around Toledo is 31%, 4 points over the national average, and youth unemployment is a mind-numbing 64%. Distress is widespread:

Europe’s Catholic bishops know first-hand from their Cor Unum charitable network just how desperate it has become. “We can try to mitigate the effects by giving basic help to people left totally unprotected, but we can’t create jobs,” said the Archbishop.

“We are seeing families who used to middle class needing help. This is totally new. As a matter of honour, they won’t come to us until they have exhausted everything.”…

Marisa Martinez, the volunteer director of Caritas in Toledo, said the Catholic charity is now helping 40,000 people in a province of 700,000, often with bags of food. Each family receives 12 kilos a month, mostly beans, oil, milk, and pasta. “We pass on whatever we get in donations. It is all done quietly to protect the dignity of the families. They take the food away and cook it at home,” she said.

Spanish bourgeois pride works to the government’s advantage, since people have to be willing to admit to their desperation in order to figure out how to work together to alleviate it. Even so, some commentators seem to think there’s a riptide beneath the resigned surface:

El Mundo fears a slow-fermenting ‘crisis of the regime’, with almost every institution — including the monarchy — in disrepute. It likens the mood to “pre-revolutionary” France in the late 1780s.

The Archbishop, speaking in the austere episcopal palace of Spain’s ancient capital, said the current crisis is doing far more damage than the recession in the mid-1990s when unemployment briefly spiked above 24pc. On that occasion peseta devaluations let Spain regain competitiveness and recover gradually despite austerity cuts.

This time the country seems trapped in slump. The long-term jobless rate is much higher. Unemployment benefits taper off after six months, and stop after two years. There are almost two million households where no family member has a job.

Catholic leaders are pushing for change in an effort spearheaded by the “firebrand” cardinal Reinhard Marx of Munich. Criticism from the church may be harder to brush off than that of politicians.

Nevertheless, so far, the objections are carefully worded and mild in comparison to the level of distress. In advanced economies, except for pet issues like abortion, the Catholic Church has steered clear of politics. It’s not clear that mere finger wagging would do, and this Church lacks the appetite to encourage protests. But its leaders do have media access. Given that there is now a rift among Eurozone leaders as to whether it is necessary to ease up on budget-trimming and focus more on growth, they might be able to provide more visceral images and stories of the long-term costs of putting budget targets over vulnerable social orders. But orthodox economic views are so deeply entrenched that having Catholic leaders speak out is likely to be too little, too late. And sadly, they seem to be the only prominent figures who can invoke the language of morality and justice against a cruel and destructive economic calculus.

Josh Rosner of Graham Fisher testifies before a subcommittee of the House Financial Services committee today on why Dodd Frank has not ended too big to fail, but also has managed to entrench the megafirms’ advantaged position.

Rosner provided Congressional testimony on this same topic in 2011, and deemed Dodd Frank’s plans for winding down systemically important firms to be unworkable. Rosner has good company here; the BIS and the international bank lobbying group the IIF reached the same conclusion.

Rosner stresses that he’s not advocating the repeal of Dodd Frank but describing what is flawed so it can be remedied or replaced, and that he sees the sort of fixes embodied in the bills approved in the House to weaken derivatives regulations as a step in the wrong direction.

Rosner focuses on Articles I and II of Dodd Frank and describes how their plans to deal with resolving large firms has only made matters worse. It’s key to understand that these two sections are somewhat at odds with each other. Dodd Frank peculiarly provides for two ways to wind up systemically important firms. Title I says they should prepare for bankruptcy. They need to clean up how they are organized and make sure activities fit or can be mapped into legal entities and prepare living wills, which are plans for how they would wind themselves up. But confusingly, banks can also be “resolved” which is more like “rescued with a little pain inflicted on investors” under Title II. Title II provides for a second way to deal with stressed financial firms, which includes having the government provide what amounts to debtor-in-possession financing while the bank is restructured. This, sports fans, is what is otherwise known as a bailout.

In his previous testimony, Rosner criticized how having two ways to resolve a firm would create uncertainty in times of stress:

It is especially problematic that Dodd-Frank allows for ambiguity when defining institutional failure. The manner in which one is allowed to fail determines and defines its “going concern” value when alive. Every firm must be able to fail under the same regime—a different resolution regime for a select group of firms will create incentives for creditors of those firms to treat them differently in life than the “less important” firms. It was this ambiguity that created the incentives for Lehman to make itself less able to fail and thus less easily resolved.

Put it another way: you wouldn’t need Title II resolutions, described in the bill as the Orderly Liquidation Authority, if the authorities believed they could put them down using the bankruptcy code.

And, not surprisingly, the banks haven’t been fully cooperative in drawing up those living wills. And why should they? Follow the incentives. In a bankruptcy, top management is out and a trustee is in charge. By contrast, in a Title II resolution, the odds are good they’d survive. As Rosner writes:

While a true liquidation would result in the replacement of management, in the FDIC’s proposed regime, key management of failed operating subsidiaries would be able to continue to manage the newly recapitalized firm. Although the FDIC claims they would replace personnel there is no requirement to do so. Their decisions will be arbitrary and driven by both the perceptions of regulators and market realities. The risk remains that, even in instances in which it is clear that management should be replaced there may be a lack of a deep bench of available industry management. This was the reality during the past crisis. Artificial enrichment of personnel responsible for corporate failure is only one of the major problems with Title II.

So not surprisingly, the latest reports, filed a month ago, showed that the banks were going through the form of preparing living wills and far from having viable plans. From the Wall Street Journal:

U.S. regulators are demanding extensive new information from banks detailing how the government could dismantle their operations in the event of a crisis, saying information provided so far presents “obstacles” to an orderly resolution….

Banks are being asked to provide specific discussions of each of the five “obstacles” identified by regulators in the living wills, as well as a discussion of what steps they plan to take to mitigate the problems.

Now in fairness, the banks have a point. We’ve said the the OLA is unworkable, and so are bankruptcies, because resolution is a national process but these firms are international, with many trading books passed from time zone to time zone over a 24 hour day. Another major impediment are derivatives. Internationally recognized expert Satyajit Das has written about how “largely untested legal arrangements failed to work as intended” in the Lehman bankruptcy. He has also discussed at some length about “standardized” derivatives documentation isn’t as standard as you’d think, how many contain options as to how and when they are closed out (which will inevitably be exploited whenever possible) and how their valuation is often contested. This implies that reducing TBTF firm OTC derivative exposures and revisiting how they are wound down in bankruptcy and resolutions are essential to making a resolution a real possibility, but no one seems willing to cut that Gordian knot.

Rosner draws out the implications of the OLA:

The FDIC recognized that a “liquidation” authority would be deleterious to financial markets in a moment of crisis. Restructuring a firm, not liquidating a firm, is the proven way to preserve an institution’s value….Bankruptcy has and should continue to be the preferred means to restructure the assets of failed firms. Instead, OLA is effectively a cram down that requires a huge amount of debtor-in-possession (DIP) financing from the Treasury.

This financing is a taxpayer-funded and anti-competitive subsidy. It supports the continuation of a banking system in which “All animals are equal but some animals are more equal than others”. This is perhaps the easiest way to understand that these companies are far too large; the system simply can’t fund them in bankruptcy..

Simply stated, Title II creates further subsidies for a handful of firms that will be costly to taxpayers and bestow further advantages to systemically important financial institutions (SIFIs) relative to non-SIFI firms…. The OLF will be cheap and will provide great benefit – only the non-systemically holding company creditors will take losses, and the company will emerge from OLA much as it entered, to do it all again. We can’t allow this to happen – OLA rewards companies for becoming “systemically important” and overly influential, it hurts smaller companies, and stifles innovation. The government created it and the government can and should take it away

I urge you to read Rosner’s testimony in full. It’s short, well written, and makes some important technical issues accessible to laypeople. And it makes the key point deadly clear: Dodd Frank didn’t address too big to fail adequately, but measures that water it down only make a bad situation worse.

Rosner Testimony on Title II – 05/14/2013

By Claude Salhani, journalist, author and political analyst based in Beirut, specializing in the Middle East, politicized Islam and terrorism. He is also the former editor of the Middle East Times and. C the former International Editor with United Press International and also ran UPI’s Terrorism & Security Desks. Cross posted from OilPrice

A timely article by Wade Stone for Global Research examines what would happen to the oil producing nations of the Gulf in the event that Israel would target Iran’s nuclear reactors and facilities; the reply and the scenario given is nothing short of a nightmare. Most, if not all, the cities in the region of the Arabian Gulf – Dubai, Abu Dhabi, Kuwait City, Riyadh and others – would become uninhabitable for decades to come.

The article provides a good study of the ensuing catastrophe that would result. Though frightening as it is, the article looks at the issue mostly from a technical perspective and does not convey enough the hellish reality of the immediate panic that would befall the region and indeed the world, given the repercussions resulting from the inter-dependency of nations today.

In the event of an attack by Israel on the Iranian sites at Bushehr, Natanz, Arak and Isfahan in order to prevent the Islamic Republic’s efforts to acquire nuclear weapons, and if the fallout was to hit certain weather conditions prevalent in the Gulf region the result is that nearly the entire region would become uninhabitable for decades to come. And says the author, the disaster would not be limited to the region, but depending on the weather pattern, the fallout may very well hit Israel and even Turkey.

Much of what would happen depends largely on the climatic conditions at the time of the attacks. Great desert storms known as the shamal and the sharqi, sweep down and blankets the entire region and would bring with it contaminated sand particles.

If you saw one of the Mission Impossible movies where Tom Cruise chases one of the bad guys through the streets of Dubai as a monstrous sand storm blows in, then you may have a better idea of what these storms refer to. Now imagine that same sand storm blow through the region only this time each little particle of sand contaminated by nuclear fallout. A single particle is all that is needed to contaminate a human being.

The author of the article states that the storm travels in a semi-circular route, at a speed of 30 to 300 kilometers through the United Arab Emirates, Qatar, Bahrain, Oman, Kuwait and Saudi Arabia. In other words the major oil producing centers as well as a large number of refineries would become contaminated.

Aside from the ecological disaster of which there would be no precedent, there is also the human aspect of the tragedy. And then the economic fallout as oil production from the region would plummet overnight.

Think of the disaster that such an impact would have on the price of oil if suddenly more than 17 million barrels per day comprising the joint production form Saudi Arabia (10 million bbl/d), the UAE (3.087 million bbl/pd) Qatar (1.63 million bbl/pd) and Bahrain (44,800 bbl/pd). Not to mention the oil from Iraq and Iran, that would plunge the world into one of the greatest crisis ever experienced.

Consider the consequences: the first tier would be ground zero, the immediate areas affected by the fall out. Here there would be sheer hysteria and pandemonium on a biblical scale as that area would witness a mass exodus by hundreds of thousands of residents, foreign and nationals, all trying to get out of the contaminated area as people in total panic would end up fighting each other for the last seats on airplanes out of the region.

Then imagine if you will the insanity as those who failed to secure air travel would get in their cars and start driving west.

The second tier of trouble would immediately be felt as an unprecedented oil shortage would create havoc on the world markets and stock exchanges. Wall Street, the FT100 and other international markets would crash, companies would collapse overnight.

The third tier of disaster would come from countries slightly removed from the front-line states as the after effects begin to settle in.

In terms of damages, said the author of the report “Think of the nuclear accident at Fukushima” in Japan says the author, “and multiply it by ten.” Fukushima was unquestionably the world’s worst nuclear disaster to date, surpassing Chernobyl in Ukraine, where the death from cancer reached a million.

“Bombing Iran’s nuclear facilities would leave the entire Gulf State region virtually uninhabitable,” writes Stone.

Okay, those in favor of military action by Israel and/or the United States on Iran’s nuclear facilities may argue that this is a worst case scenario and that any strike by Israel would be “surgical and tactical and precise.” And they may well be right. But even a best-case scenario where minimum nuclear waste is released into the atmosphere and claims that the heat from the fires caused by the bombing would incinerate all nuclear particles, there would still be some contamination.

So after all perhaps the great cities of the region would not become uninhabitable as imagined by one writer. Indeed, it may be hyped in order to grab readers’ attention. Maybe in the best case scenario there would be “minimum collateral damage” where “only” a million or so people would die over the span of a decade from cancers brought about by the attacks. What was it that Josef Stalin used to say about killing a million people? “It’s only a statistic.

Witty kitty! Intrepid cat easily opens FIVE doors to get outside Daily Mail

Edible insects: Future prospects for food and feed security Food and Agriculture Organization of the United Nations. Chained CPI implications?

Study: Plants communicate with each other via underground fungi The Sideshow (SW). Terrestrial intelligence?

The ‘unnamed feeling’ named ASMR Mind Hacks

Govt obtains wide AP phone records in probe AP (emptywheel; and emptywheel).

The day the Obama administration went all Nixon on us Will Bunch, Philadelphia Daily News

IRS kept shifting targets in tax-exempt groups scrutiny: report Reuters (and up the food chain we go).

Treasury, Fed may probe Bloomberg News breach USA Today

Central banks question Bloomberg privacy FT (and with good reason).

Ongoing rule: Once a demon, always a demon! Daily Howler. Benghazi, from old school media critic blogger.

U.S. Labor Participation May Be Low for Years: Fed Study Bloomberg. Thanks, Obama. We owe you a solid.

The Fed dials the wrong unemployment number Gavyn Davies, FT (cf. Tim Duy).

Wal-Mart v. the Feds: Who’s the Low-Wage Job King? CNBC (WM)

Wall Street is back Economist

Donations, lobbying by high-speed traders on the rise: report Reuters

Cayman Islands Spars With Sachs Over Hedge Fund Directorships Bloomberg

Bloomberg: “Coup d’Etat to Trade Seen in Billionaire Toxic Lead Fight” Eyes on Trade

Neo-liberalism – the antithesis to democracy Bill Mitchell – billy blog

Banks’ right to foreclose in dispute Denver Post (RH)

A Case Of The Mondays Eschaton. Just give people money. Works for banksters!

Chinese activity is solid Macrobusiness

Shane Todd had looked up suicide on web, Singapore inquest hears FT. Hmm. Digital evidence?

On Bangladesh’s Textile Disasters Ian Welsh

Netanyahu’s $140,000 In-Flight Bed Becomes Political Nightmare ABC

Embattled Pirates Looking for Rapid Reboot Der Spiegel

Spain is officially insolvent: get your money out while you still can Telegraph

Mexico – Ground Zero in the Fight Against Monsanto for the Future of Maize Truthout

US Supreme Court finds for Monsanto in seed patent battle (Update 2) AFP

Interview: NATO Supreme Allied Commander on Syria and Soft Power Atlantic

Hunger strike reinvigorates movement to close Guantánamo Waging Nonviolence

Sovereignty Without Territoriality? Dart-throwing Chimp

A new type of growth is emerging Izabella Kaminska, FT. P2P triumphalism?

Antidote du jour (furzy mouse):