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Posted by: Doug Henwood | April 23, 2010

Radio commentary, April 22, 2010

financial “reform”

Our president gave a speech on Thursday in the Great Hall at Cooper Union, the site of Abraham Lincoln’s rather conservative 1860 speech on slavery. Obama’s speech was on a much less elevated topic—financial regulation. He made a lot of appealing sounds, and the financial execs in the front row mostly sat on their hands, but while he was talking, Congress was busy working out compromises—with Wall Street’s army of lobbyists at their sides.

So I’m going to reserve commentary until we see what’s actually in the thing. Will there be a consumer protection agency, or will that be sacrificed on the altar of bipartisanship? And how strict will the regulations on derivatives be—will there be custom-crafted loopholes already pre-written into the legislation? My guess is that the consumer protection agency will at best be notional, and the loopholes will be wide enough to fit a truckload of custom derivatives through—otherwise the Republicans and moderate Dems wouldn’t be going so quitely along with the negotiations. Perhaps I’m being too cynical. We’ll see soon enough.

One of the controversial bits in the prospective legislation is the idea of imposing a special tax on big banks to build up a fund to pay for the next bailout. (The idea has been endorsed by no less orthodox an authority than the IMF.) This does sound in some sense like the routinization of disaster, when instead the emphasis should be on preventing disaster—but I guess it never hurts to be prepared. The Republicans hate the idea, and so does the Obama administration, so word is that this may be the “public option” of financial reform—something for the sacrificial altar.

bailout profits

But, surprisingly, the government looks to be spending a lot less on all the bailouts than initially feared. GM has now paid back its government loans—early. And the Federal Reserve has just turned over almost $50 billion in profits from its 2009 operations to the U.S. Treasury.

The Fed is a curious institution for a government body: it’s entirely self-financing. It buys up government bonds using money it creates out of thin air and pockets the resulting interest payments. Banks who want currency get it from the Fed by turning over valuable interest-earning assets and getting pieces of paper that cost pennies to print in return. The Fed spends whatever it wants on its own operations—it’s never audited—and then hands over what’s left to the Treasury every spring. It never has to ask Congress for money, and its internal workings remain mostly opaque. Nice for them.

In recent years, the Fed’s annual profits have averaged around $25 billion. Last year, it made almost twice that—mainly by buying up mortgage-backed securities in the heat of the financial crisis at beaten-down prices when no one else wanted them. Now that things are recovering, the Fed was able to sell these securities at a profit.

And it looks like the government is spending far less than was initially offered on capital injections to bolster the financial system. (See the IMF document linked to above for details.) Only a bit over half of the announced amount has actually been spent—and, if present trends continue, a lot of what has been spent will be recovered. That’s good news. The bad news is how little has changed. Wall Street is back to its old tricks; it’s not outlandish to assume they’re already cooking up the next crisis.

Goldman in the dock

I’m coming late to this, such are the limitations of a weekly show, but how satisfying it is to see the SEC’s complaint against Goldman Sachs. As everyone probably knows by now, the SEC is accusing Goldman of tricking clients into buying some crappy mortgage securities, ones that were handpicked as likely to go under by another of its clients, hedge fund hotshot John Paulson. To bet against these securities, Paulson needed someone to take the other side of the trade; basically, Goldman brokered a deal so that the buyer’s almost-certain losses would be the source of Paulson’s almost-certain gains. It all worked out for Paulson, or so the SEC says. But Goldman can afford the best lawyers in the world, among them a former top Obama advisor, and the SEC is staffed by civil servants, so it’s quite likely that Goldman will get off lightly or better.

Still, it’s deeply satisfying to see this immensely rich and well-connected firm take a few hits. One wonders, though, why anyone would continue to do business with Goldman if this is how they allegedly treat their clients. It wasn’t all that long ago that Goldman chair Lloyd Blankfein described his firm as doing God’s work. I’m about as secular as they come, but I don’t see that sort of thing in any god’s job description that I know of.

to hell with the Tea Party

Moving on, Jonathan Martin and Ben Smith of Politico.com posted an article on Thursday saying, as Smith put it in his Facebook status update, enough already with the Tea Party. The media is obsessed with these nutters even though their actual numbers are quite small. They even quote Cindy Sheehan as pointing out that they’re getting far more coverage than the antiwar movement ever got, even though that movement was able to turn out hundreds of thousands of people, a hundred or more times as many as the Tea Party has been able to mobilize. Something similar with demos in defense of immigrants’ rights—a recent one in DC turned out many times more people than a Tea Party action ever did, but it was mostly ignored. As a friend points out, a rally in Springfield, Illinois, on Wednesday to protest likely budget cuts in education and social services turned out 15,000—about 15 times as many as a Tea Party a week earlier that got far more media attention.

The TPers represent a fervent minority of Americans, a brand of hard-right anti-government sentiment that is as old as the hills, but is treated as an exciting new phenomenon. Politico.com often publishes some fairly debased political gossip and horserace-type speculation, but thanks to Martin and Smith for doing this. Let’s hope the rest of the media follow suit.

A footnote: liberals have done their fair share of puffing up the Tea Party. They love nothing more than getting hot and bothered over the fascist threat as a way of scaring people into voting for Democrats as our last line of defense against the brownshirts. Yeah, the TP is awful, and a lot of people hate Obama for all the wrong reasons, starting with his skin color, but he’s earned plenty of criticism for the way he serves money and empire.

Oxfam: cowards or hypocrites?

Finally, a quick word about Oxfam America. I got an email the other day from Anuradha Mittal, the excellent director of The Oakland Institute, pointing to an open letter that her institute and several other groups wrote to Oxfam America, protesting Oxfam’s stance in favor of genetically modified foods.

I’m actually more sympathetic to bioengineering than Mittal or, probably, many in the audience, but that’s not what I want to talk about. I invited Oxfam to provide a representative to debate Mittal on this show. Oxfam declined in a rather haughty and dismissive way (press officer Laura Rusu: “Thanks for thinking of us. However, we are not interested in debating Ms. Mittal on her views on GMOs.”). And Rusu sort of denied that they’re promoting genetic engineering. While they don’t have an official position, she said in an email that they think it diverts attention from investment in other, more fruitful areas.

Well, it turns out they’ve got an application into the Gates Foundation for a grant to support their work on the application of biotech in Africa—I’ve seen the document, so I’m not relying on hearsay. So if you’re going to take that position, why not have the nerve to defend it publicly, instead of dissimulating? Huh, Oxfam?

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Responses

  1. Hello Doug,

    I always appreciate your reflex to think for yourself, but isn’t there a very real problem with genetically-engineered foods, namely, that they represent the privatization of the gene pool?

    Their introduction into the food supply and elsewhere may not, or may yet, lead to some evil mutant genetic Devil’s Child that destroys us all, but it certainly gives Monsanto, ADM and Bill Gates a tighter grip on a significant commons.

  2. I think you are too optimistic in assessing cost of the bailout.

    a) Much of the cost was in providing below-market rates and govt. backing to many of these entities. Without this these corporations could hardly survive. What is the cost of providing essentially unlimited money at zero interest?

    b) Even with the amount of money the govt. spent, it could own some of these entities outright. Of course “nationalization” is a dirty word, but the crucial point is, did the US get enough in return for saving these companies from bankruptcy? I don’t think so, as you note in your article, Wall street is up to its old tricks.

    I would say these profits are chump change in view of the above.

  3. Re: the privatization of the gene pool. I’d like to separate the technology from who does it – i.e., I don’t trust Monsanto, but that doesn’t mean that one should be opposed on principle to GM. I think a lot of opponents don’t make this distinction and worry that we’re somehow transgressing on cap-N Nature, as if humans haven’t been messing with genetics for thousands of years.

  4. Hello Again,

    Two points:

    Is there even a scintilla of likelihood that anyone but Monsanto, et. al. is going to control this technology? They’re copyrighting genes, fer Chrissakes, something I’d expect you to oppose and ring alarms about on principal. You seem far too sanguine about the dangers here.

    Second; the traditional forms of “messing with genetics,” namely hybridization, are a far cry from putting pig genes in plants, for example. Its a difference in kind and degree.

    Sorry, Big Guy, but you should be a little more skeptical on this one.

  5. Doug:
    “(The idea has been endorsed by no less orthodox an authority than the IMF.) This does sound in some sense like the routinization of disaster, when instead the emphasis should be on preventing disaster—but I guess it never hurts to be prepared. The Republicans hate the idea, and so does the Obama administration, so word is that this may be the “public option” of financial reform—something for the sacrificial altar.”

    According to this article,
    http://www.nytimes.com/2010/04/24/business/24group.html
    Geithner is behind the idea – i mean the IMF is right? – while governments that regulate responsibly, like Canada, oppose it. Who knows, maybe behind the scenes the U.S. is working against it. Anyway it’s a great idea, a tax on the global financial sector will shrink it and they can pay to fix their own messes.
    (maybe the IMF read Wall Street????)

    I have a feeling Goldman Sachs is going to get hit pretty hard by this scandal.

    About the cost of the crisis, most seems to be with Freddie and Fannie as a result of the housing bubble and the fact that America’s politicians make home ownership a priority.

  6. One correction, Doug. The Fed’s finances and most of its operations are in fact regularly audited by the GAO. A 1978 law exempted areas such as the discount window and the making of certain policy decisions from auditing in the name of central bank independence. The Audit the Fed legislation would change this. However, most of the Audit the Fed rhetoric obscures the degree to which much of the Fed’s operations are currently audited.

  7. Yes, most of the “Audit the Fed” hype is a form of capitalist apologia intended allow Ron Paul to appear as one fighting the powers that be even as he remains a cheerleader for Ronald Reagan. There are audits performed every year and most of the information from these audits is published annually. Also, the Fed turns over about 90% of its profits every year to the US Treasury.


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