Wednesday, May 6, 2009

Change we can believe in?

Yves Smith at naked capitalism asks the classic question, "Quis custōdiet ipsōs custōdēs?"

I love Obama, but his economic team are foxes, working for wolves, and we, the American Public, are the sheep and the chickens.

Yves Smith has a great example.

Quoting the foxes' PR: "The Financial Industry Regulatory Authority (FINRA), [formerly, National Association of Securities Dealers (NASD) -- clever name change, for one of "our SROs", don't you think?] is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 653,000 registered securities representatives. . . . FINRA is a trusted advocate for investors, dedicated to keeping the markets fair, ensuring investor choice and proactively addressing emerging regulatory issues before they harm investors or the markets."

It seems the FINRA, with a $3 billion balance sheet, at one point held roughly $800 billion in Auction-rate securities. Trouble was on the horizon in the Auction-rate securities market. FINRA sold all its holdings. Six months later, in February 2008, the auction-rate securities market froze-up, making these previously high-rate liquid securities into low-rate illiquid, long-term bad investments on a death march. Turns out the auctions, in which auction-rates were set, were rigged, by the market-makers, who were making big underwriting profits. The market-makers are the giant brokerages that own and run FINRA.

FINRA, by the way, runs the arbitration process through which an individual investor must appeal the fraud, under which he was sold these bad investments.

But, here's the kicker.

Obama made the FINRA Chair and CEO, the lovely lady, who, as a well-informed institutional investor, sold her organization's holdings, without disclosure, chair of the SEC.

Wolves: Merrill Lynch and friends.

Foxes: Mary Schapiro, SEC and formerly, FINRA.

Chickens and Sheep: Us.

Tuesday, May 5, 2009

Where's the Fat Lady?

The economy downshifted rather dramatically in September-October 2008 -- "fell off a cliff", in Calculated Risk's version of rosy-fingered dawn. An inventory adjustment followed, which gave everyone a big shock -- a sense of freefall, as trade seemed to just stop, as inventories were run down to the new level of economic activity. The inventory adjustment is over. The financial panic appears to be over.

Now, we're stuck at the new, lower level of economic activity.

Politically, the relief from panic feels like we're returning to "normal" whatever "normal" is. (Hint: it's a lower level of economic activity, characterized by persistent high unemployment. With an end to the panic, there's a sense that the Administration has muddled through.

Matthew Yglesias » Dinner With Prize-Winning Critics: "The administration has hit on what it thinks is a reasonable satisficing solution and they believe the economy is starting to turn around. Critics respond that having taken more forceful action in the past would have been better, but to a large extent the water is now under the bridge. What’s more, it’s very likely that a few months hence we’ll start seeing slightly positive GDP growth and continued weakness in the labor market and that both sides in the Great Democratic Party Banking Family Feud will view that data as vindication for their position."

I don't think so. Like Atrios at Eschaton: "I see round 2" I mean I think Yglesias is right on the general outlines -- slightly positive GDP growth, high unemployment. But, I think one side in the Great Democratic Party Banking Family Feud was fundamentally and importantly right, and one side -- unfortunately the Obama Administration side -- was fundamentally and critically wrong.

Policy has consequences. Obama is the best politician I've ever seen, and he has a fantastically good sense of the politically possible. What he doesn't have is economic advisers, who can teach him, realistically, about the necessary and sufficient -- the consequences of policy -- the non-negotiable tendency of reality to bite.

Monday, May 4, 2009

The Real Villains

Matthew Ygelsias reviews the current political dynamics of health care reform, and discovers the "real" villains: the centrists and moderates, who are for reform, BUT . . .

Matthew Yglesias » Killing Health Reform With Kindness:
"My great fear is that this is how health care reform is going to die. A handful of very conservative members of congress may position themselves as “against” reform. But many people on the center and the right are going to say that they’re all for reform. They’re just going to be against particular things such that reform is impossible. . . .

we should be clear on who the real villains are here—Senators in the center who killed the Obama administration’s revenue concept without either putting a new revenue concept on the table or admitting that their actions are imperiling health reform. Thus far, people have been very eager to build “momentum” for reform by trumpeting all the different people and groups who say they’re for reform. But you need to watch out for a scenario in which reform’s false friends kill it with kindness. If there’s a battle between white hats and black hats we can fight the battle and perhaps win. But if we let too many black hats inside the tent, then reform’s false friends can kill universal health care with kindness. In other words, as far as I’m concerned anyone who’s “for” health reform but “against” all the ways of paying for it is against reform. Someone who’s really for reform—like me—is for paying for reform through any reasonable measures."

This is the dynamic on a lot of vital issues, not just health care reform. The centrist middle has lots of power, but presents no critique and undertakes no advocacy and, therefore, assumes very little responsibility. But, they wield a heck of a lot of power -- or, at least the six or eight conservative/moderate/centrist Democrats in the Senate do: Ben Nelson of Nebraska, Evan Bayh of Indiana, newly converted Arlen Specter of Pennsylvania, being prime examples.