Relevant and even prescient commentary on news, politics and the economy.

Interview of Mr. John Reed regarding banking fixing the game

In case you are not aware, Bill Moyers is back and he doing his best work to date concentrating on our the changing of the rules regarding the economy. This episode where he interviews John Reed, former Citi Bank CEO and current MIT chair is most telling as it relates to the issue of why we as a nation need to do what is required by law: investigate and prosecute as the investigations dictate.

First, let me just say, you need to watch the interview. What is most telling for me is the denial that still exists in Mr. Reed. Sure, he acknowledges that it all went wrong, but it is done in the temperance of “mistake”: 

1. an error in action, calculation, opinion, or judgment caused by poor reasoning, carelessness, insufficient knowledge, etc.
2. a misunderstanding or misconception.

Here, in the interview is what puts the delusion of self preservation in applying the word “mistake” to the decisions that lead to what we have today, and I’m not just talking recession:

Setting up the question to Mr. Reed by showing a video clip, SENATOR BYRON DORGAN: (Speaking on Senate Floor) What does it mean if we have all this concentration and merger activity? Well, the bigger they are, the less likely this government can allow them to fail.
BILL MOYERS: Were you aware of the few senators who raised real concerns about removing Glass-Steagall, about what would happen?
JOHN REED: No one that I’m aware of it saw it clearly. You point out to some Senators and Congressmen who did, but somehow we described them peripheral. And I simply said, “They’re wrong.” Turned out they weren’t.
SENATOR BYRON DORGAN: (Speaking on Senate Floor) I think we will in ten years’ time look back and say, “We should not have done that, because we forgot the lessons of the past.”

The issue of calling it a “mistake” becomes even clearer when you watch the interview of Senator Dorgan which follows Mr. Reed. This is why you need to watch it. Mr Reed knows what happened. He knows why it happened. I am certain he knows where the culpability lays. But, as they say in our neck of the woods: He wouldn’t say “shit” even if he had a mouthful.

What happened and what these people did was not a benign experience as the word “mistake” implies and as Mr. Reed is using it. It was intentional and wanton action taken on behalf of money. (See below: Where their heads were at)

Explaining Glass Steagall’s importance beyond not letting commercial banking marry investment banking.

JOHN REED: Well, that and even more importantly, or equally importantly, since the FDIC came into existence at approximately a similar time where the government was guaranteeing deposits so that people didn’t lose if a bank got into trouble.

But not only did they want to keep the banks from the business for reasons of not risking the money. They didn’t want them to use the guarantee that the government provided for those deposits to leverage their position. Because, you know, if you have a deposit base that’s guaranteed by the government, it sure puts you at a great advantage in terms of going into the market and playing around.
Regarding the take down of Glass Steagall

JOHN REED: When Sandy approached me on the merger [Travelers/Citi] I knew that it was right on the forefront of the legal thing. … And what we basically were told was, “If you all want to do this within the two years we’ll get the law changed.”
BILL MOYERS: But you got the blessing in this two-year period of President Clinton, of the Fed, of–
JOHN REED: We had that blessing prior to.
JOHN REED: Yes. In other words, I went with Sandy to call on Chairman Greenspan. We told him we were contemplating this merger. But that it would required that the Fed would be prepared to grant us permission. And we were assured that they would.
We went and saw the Chairman of the House Banking Committee, the Chairman of the Senate Banking Committee. And we said we’re talking about this merger but it could not take place if we were not assured that it would be approved at the Congressional level. We talked to the Secretary of the Treasury, I don’t recall–
BILL MOYERS: Robert Rubin? He was the Secretary of the Treasury at the time.
JOHN REED: Yeah, we would’ve spoken to him, I’m sure. And had Bob Rubin said, “No, the Treasury feels this is wrong,” we would’ve been careful. Because obviously, the Treasury recommends to the President on an issue of this sort. And there was no argument. No one said, “We’ll have to think about it.” And so a consensus built up. I don’t think it started in the Fed. I would guess it started in the industry, it certainly got into the Congress.

Regarding where their heads were at

JOHN REED: Which happened, yeah. I mean if you had asked me under oath, what probability I would have given that you would have gotten the whole group of Wall Street participants to get it wrong so to speak, I would have said zero.
BILL MOYERS: What do you think they saw that Wall Street didn’t see?
JOHN REED: They simply didn’t participate in the exuberance.
But I do think that, you know, this setting up the deck of cards so that we could produce what we currently are trying to withdraw from. Turns out to have been something that the word disaster is maybe not strong enough. (“Criminal” is the word we all know he is resisting.)
JOHN REED: We were carried away by the enthusiasm. And like everything else, you know, once you start you probably go a little further than you should have.
JOHN REED: Sandy Weil. I mean, his whole life was to accumulate money. And he said, “John, we could be so rich.” Being rich never crossed my mind as an objective value. I almost was embarrassed that somebody would say out loud. It might be happening but you wouldn’t want to say it.
JOHN REED: Yeah, Sandy Weil. And I sort of say, “Sandy, you know, we didn’t do very well.” And he’s not comfortable with that conversation at all. I think he would still defend that it was a good merger, it just went off the tracks afterwards. I —

Regarding the economics of it

JOHN REED:No, no. It’s not something you’d like to end your career with. That is for sure. No, look. We got carried away.It wasn’t any small group, it was a consensus that reached the press, it reached the political world. It certainly had reached the intellectual world. I’m now, as you know, at MIT,and I say to some of my academic friends that the intellectual underpinnings of this was created at MIT and places like that, I mean—
BILL MOYERS: With the technology of the computers?
JOHN REED: Well, no. It’s all of this mathematics of finance and the presumption in much of this mathematics that you can capture risk by looking at historical volatility and so forth and so on.
BILL MOYERS: Are you saying, suggesting that — the chairman of the board of MIT’s suggesting –that human intelligence no longer runs our financial system?
JOHN REED: Well, it’s a little wisdom balance that judgment wouldn’t hurt.

The Criminality of it (at least as I see it): See: Regarding the take down of Glass Steagall above

Showing an historical video clip, Mr. Reed speaking with Sandy Wiel

JOHN REED: Sandy called his friend the President last night and invited me to join in on the conversation and we had a good talk. So the President was in fact told last evening about what was going to happen.

JOHN REED: Well, they originated and sold into the marketplace things that should never have been originated.
BILL MOYERS: Derivatives, unregulated derivatives?
JOHN REED: Well, it was the excess mortgages, the no-doc, low-doc mortgages. And then the derivatives were a byproduct. Once you had those, then you could chop ’em up and so forth. And of course they had changed their mindset. They were in the business to make money, period.

The psyche that is protecting the conscience: Note his choice of words

JOHN REED: You’re– I mean, a consensusdeveloped. The fact that we took it [regulation, Glass Steagall] out was a byproduct of this mistaken beliefin this modern financial system that was, quote, “more efficient,” was very lucrative for the United States and the U.S. economy in global terms.
And which was supposed to handle risk better. In fact, it handled risk worse. I mean, this is what the facts are because there was a much greater concentration of risk created. And so we got it wrong.
But the restraint of the government and it’s agencies disappeared in the enthusiasm. (Yeah, just a “byproduct”)
And so it was this combination of the participants getting carried away, the normal checks and balances that should exist against participants.
And the thing that is astounding, frankly, and there’s a lesson here that we probably haven’t yet learned, is that the system can get it so wrong. It wasn’t–
BILL MOYERS: So wrong?
JOHN REED: It wasn’t that there was one or two or institutions that, you know, got carried away and did stupid things. It was, we all did. And then the whole system came down. You know, it became illiquid, the government stepped in. Had the government not stepped in, it really would have come to an end.


BILL MOYERS: But they left in place the very people who had driven the ship into the iceberg.
JOHN REED: I’m quite surprised at that. It clearly has not been a clean sweep. In other words, those of us who made mistakes, and so forth and so on, are still floating around the system. And–
BILL MOYERS: Floating it? You’re running it.
JOHN REED: Well, I am not, but —
BILL MOYERS: You’re not running it, they’re running it.
JOHN REED: But there are many who are. I wasn’t involved, obviously. I had retired in the year 2000. We’re now talking 2008. So I was a knowledgeable spectator, but certainly not a participant. I was quite surprised because, frankly, the worst thing that can happen to a businessman is to go bankrupt. (Shades of Greenspan confessions?) That’s the sign of ultimate failure. You ran a business and it was unable to succeed under the terms and conditions of private capital. Namely, you went bankrupt.
It’s not a crime. But it certainly is a mistake. And these companies, even though they didn’t have to file for bankruptcy, de facto went bankrupt. And so the managements and the boards and the regulators should have, in my mind stepped aside.
BILL MOYERS: Sounds to me like you’re calling the Glass-Steagall Act back from the grave.
JOHN REED: I think I am. (At this point, he still could not say it “shit”.)

There is more in the interview. You need to see and hear it to understand. I think Mr. Reed is struggling with his conscience and wanting to clear it versus what I believe he feels is a real risk of getting tied up with the Justice Department. It has to be working on him. Though I interpret an air of feeling protected in Mr Reed do to his own wealth. As much as he knows wrong and not a mistake was done, he has no experience of the anxiety as what those in the labor economy are experiencing. He is still in denial to an extent which stops him from using his position to truly work to correct this wrong. Or maybe he just is not of the character to participate on the just side of the fight.
Mr. Reed does get one thing correct:

BILL MOYERS But when the financial community can buy the rules they want —
JOHN REED: Then you’ve got an unstable situation. That’s an intolerable situation. I mean, obviously.

He knows.  He knows that regulation is a necessity. As the head of MIT, he could be doing so much more.
Come-on Mr. Reed, destiny is calling you.

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Post-traumatic stress disorder (PTSD) responses

Past Angry Bear posts started in 2007, but here are four later posts 2008 and 2009:

Brain injury awareness
Pattern of misconduct
PTSD and our military response
What are we going to do now is your choice

GAO report 12-154 addresses the notion that this sort of thing is being taken care of. There are about 80 projects now ongoing to determine best practice within the military culture and organization, which is of course very different than civilian demands placed on personnel. :

Post-traumatic stress disorder (PTSD), which falls into the broader field of psychological health (PH), and traumatic brain injury (TBI) are recognized as the signature wounds of the wars in Afghanistan and Iraq. In two reports issued in 2011 (GAO-11-219 and GAO-11-611), GAO cited numerous management weaknesses at the Defense Center of Excellence for PH and TBI (DCOE). For the present report, GAO reviewed (1) funding for DOD’s PH and TBI activities in fiscal years 2007 through 2010 and the accuracy of its reporting on these activities to Congress and (2) DOD’s ability to coordinate its PH and TBI activities to help ensure that funds are used to support programs of the most benefit to service- members. GAO interviewed DOD officials, reviewed legislation and DOD’s annual reports, and obtained relevant documentation.

From fiscal year 2007 through fiscal year 2010, DOD activities for the treatment and research of PH and TBI received more than $2.7 billion. In fiscal year 2007, funding for these activities totaled $900 million; in fiscal year 2008, it was $573.8 million; in fiscal year 2009, $395 million; and in fiscal year 2010, $838.6 million. GAO found, however, that the reports DOD provided to Congress on these activities did not include expenditures, as required by law, and that the obligations data they contained were unreliable. Governmentwide policies call for agencies to have effective internal controls to assure accurate reporting of obligations and expenditures. 

However, the Office of the Assistant Secretary of Defense for Health Affairs has not developed quality control mechanisms to help ensure that data on PH and TBI activities are complete and accurate. Further, although DOD listed patient care among reported costs, it did not specify what those costs included, making it difficult for decisionmakers and Congress to fully understand the costs.
No one organization coordinates DOD’s PH and TBI activities.

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Why This Time Is Different

A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:


We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen’s been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Asymptosis.

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Remembering Howard Zinn

Noam Chomsky writes on the anniversary of Howard Zinn’s death:

Howard’s remarkable life and work are summarised best in his own words. His primary concern, he explained, was “the countless small actions of unknown people” that lie at the roots of “those great moments” that enter the historical record – a record that will be profoundly misleading, and seriously disempowering, if it is torn from these roots as it passes through the filters of doctrine and dogma. His life was always closely intertwined with his writings and innumerable talks and interviews

In those same years, Howard also became one of the most prominent supporters of the resistance movement that was then developing. He was one of the early signers of the Call to Resist Illegitimate Authority and was so close to the activities of Resist that he was practically one of the organisers. He also took part at once in the sanctuary actions that had a remarkable impact in galvanising anti-war protest. Whatever was needed – talks, participation in civil disobedience, support for resisters, testimony at trials – Howard was always there.


Even more influential in the long run than Howard’s anti-war writings and actions was his enduring masterpiece, A People’s History of the United States, a book that literally changed the consciousness of a generation. Here he developed with care, lucidity and comprehensive sweep his fundamental message about the crucial role of the people who remain unknown in carrying forward the endless struggle for peace and justice, and about the victims of the systems of power that create their own versions of history and seek to impose it. Later, his “Voices” from the People’s History, now an acclaimed theatrical and television production, has brought to many the actual words of those forgotten or ignored people who have played such a valuable role in creating a better world.

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Economies Need a Gardener’s Invisible Hand

I haven’t posted on Nick Hanauer and Eric Liu’s stuff, and I should have, long ago. Nick, along with Bill Gates Senior, was one of the big proponents of the Washington State high-earner income tax initiative a while back (which failed utterly, I’m sad to say). As was I, in my little way.

I think this new Bloomberg piece says what they’re trying to say better than I could, so I’ll just say “go read it.” It’s short.

Economies Need a Gardener’s Invisible Hand: Hanauer and Liu – Bloomberg

Cross-posted at Asymptosis.

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Machines Replacing Humans: They Shoot Horses, Don’t They?

Eric Brynjolfsson and Andrew McAffee have a new Kindle instant book out, Race Against the Machine, that very nicely describes the issues related to technological unemployment. It’s well-written, content-packed, cogently argued, usefully hyperlinked, and well worth the $3.99 they’re asking.
But I think there’s one crucial topic they don’t address, highlighted by the following.
They deliver a quotation from Gregory Clark’s 2007 Farewell to Alms, speaking of the decline in employment of horses in England in the 19th and 20th centuries. The quotation concludes:

There was always a wage at which all of those horses could have remained employed. But that wage was so low that it did not pay for their feed.

The question that B&M fail to ask or answer: Why couldn’t those horses continue working for a living wage?
Answer: because they couldn’t upgrade their skills (to drive trains and tractors, or whatever). They were biologically incapable of “improving” themselves in such a way that they and the new machines were “complements.” So the machines replaced them instead of complementing them.
Imagine that those horses had been free to mate and have offspring at will (as opposed to the PRC-style, top-down population control imposed by breeders). They couldn’t work (nobody would hire them because their marginal productivity relative to machines was so low), so they couldn’t make any economic claim to a share of the (massively increasing) pie of production and prosperity.
They would have faced an unequivocally Malthusian situation: large numbers of horses would have starved.

Now suppose that the population-control option was … not an option. And that laissez faire – letting them just live (and die) with their subsistence or sub-subsistence incomes — was also not an option. The only solution would be to subsidize their lives, transferring money from those who own and profit from the machines to those who can’t benefit economically from using those machines.
You know where I’m going. (I’ve taken you there before.) Human capacity has limits. By definition, 50% of people have an IQ below 100. The prescription we so often hear — that those folks should train to operate computer-driven lathes, and to perform in the sophisticated, information-driven organizational structures associated with that kind of equipment — is … less than realistic.
Rapidly accelerating machine capabilities can result an economy in which those people’s marginal productivity drops to near zero, or even negative — so no matter how hard they work or train, their contributions aren’t great enough for them to “deserve” a decent share of the pie. (Define “decent” as you will; for me in our wildly prosperous society it extends to a good chunk of leisure/recreation time with friends and family, taking family vacations now and then, such like that. Let’s hear it for “family values.”)
If you’re reading this, then like me you probably can’t even imagine what it would be like to have really low intelligence (or other below-average capacities) — how desperately hard it would be to make a go of things, to raise a family and give them a good life, in the country we live in today. Imagine just trying to get through high school.
Some people may get unsavory feelings from this thinking, so (to quote BHO), let me be perfectly clear: I’m not saying that less-capable people are horses. Quite the contrary. They’re people. So yes, I’ll say it: at least if they’re willing to work (or are unable to do so), they deserve a decent share of the pie. They shouldn’t be driven to the bottom while the machine owners wallow in luxury, just because the technological economy they happen to have been born into doesn’t value them any more.
In wonk-speak: income and purchasing power must be decoupled from human participation in production. Not completely, of course — requiring participation in the work force is necessary to solve the free-rider problem. But in an economy that’s bursting with surplus, we can be better off overall if individual incomes (at least at the low end) are not rigidly associated with individual capabilities.
Which brings me back, yet again (getting practical here), to a greatly expanded Earned Income Tax Credit — encouraging both work and hiring — with benefit levels indexed to some measure of unemployment. This would require, of course, that we implement a tax system that actually is progressive, to pay for the increased EITC.
Imagine a post-scarcity future (or … present?) in which high productivity (think: Star-Trek-style replicators) means there’s plenty for all, with little work required. My utopian image is of something like an Athenian Agora — people of all types gathering in public spaces, meeting their friends, and exchanging their wares and their news — instead of constantly scrambling to make a buck and collapsing in their homes when they’re done.
In fact, it looks a whole lot like the zillions of public squares you find throughout Europe — surrounded by residences, and cafés and such where people mingle and spend time with their friends — the kind of environment that pretty much doesn’t exist in America.
And I haven’t even touched here on the idea that this redistribution may be economically efficient, even necessary, to maintain aggregate demand and support productive enterprises, keeping the log that is our economy, rolling.

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Wealth vs Income

Usually my articles present facts and data and try to drive down to a conclusion. This time, I’m going to drive down to a couple of questions.

Recently, Noah Smith had a post on the subject of economic models titled Filling a hole or priming the pump?  It did quite a bit to restore my lack of faith in the pseudoscience of Economics, but that is more or less beside the point.  Roger Farmer, cited in the post, left a long comment that Noah hoisted up the main page.  Farmer concludes:

My reading of the evidence is that consumption depends primarily on wealth rather than income. That was the lesson of work by Ando and Modigliani, Modigliani, and Friedman in the 1950s. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.

Ok – I’m taking on decades of economic research here, but my first question relates to: “My reading of the evidence is that consumption depends primarily on wealth rather than income.”

First, let’s remember that wealth distribution is on the order of the top 1% owning 40% of the wealth, and the bottom 80% owning 7% of the wealth. And that 7% is not evenly distributed.  There are significant fractions of the population who have a) no wealth at all, or b) negative net worth. Either way, they are living hand to mouth.  This suggests that 1) they have unmet needs, and 2) will spend the next available dollar trying to satisfy one of them. 

So far, this is just a thought experiment.  Let’s take a look at how personal consumption expenditures track disposable income.  Here is percent change from previous year:

Both in the grand sweep and in the year-to-year detail, the curves are pretty much in lock-step.

 Here is the data on a Log Scale:

That’s coordination about as close as you could ever hope to see in real world data.

And if wealth – or it’s perception – were the determinant, wouldn’t you expect some sort of a consumption bump during the housing bubble, when people felt wealthier than their incomes justified?  Let’s look at consumption expenditures per capita.

Here, there is a slope increase, mid last decade, but it’s not great, and it’s no greater than the slope of the late 90’s.  I suppose the tech boom must have had some people feeling wealthy then, as well.  But they weren’t that bottom 80%.  Note that the first graph indicates the personal disposable income was up in those periods as well.  In fact, they were the only up periods since about 1980.

There was also relatively low unemployment in those times, and thus more people with incomes.

Also, it just seems counter-intuitive in a world where, if real people think about money at all, it’s in a personal cash flow context, not in terms of wealth aggregates.  Consuption decision reasoning, to the the extent that it even occurs, is along the lines of: “If I buy this thing, can I still afford to feed my cat?”

So, here is question number 1:

Since to most people “wealth” is miniscule, non-existant, or worse, and given empirical data that closely links consumption to income, how can consumption depend “primarily on wealth rather than income?”

Now let’s look at Excess Reserves of Depository Institutions.

There’s 1.6 trillion QE dollars.  Any left-overs have gone to leveraged speculation causing commodity inflation.

But Farmer says: “I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.”

If any wealth has been boosted here, it is in the upper reaches of the already wealthy, not among the working stiffs who are highly inclined to spend the next dollar rather than hide it away in Luxombourg or the Cayman Islands.

So, here is question number 2:

How can QE money help the economy when it is either sitting idle or inflating commodity prices?

I have nothing in particular against Roger Farmer, about whom I know nothing, but I am also prompted to ask economists in general:

What in the hell is the matter with you?

So maybe my lack of faith in Economics is the point, after all.

Cross-posted at Retirement Blues.

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Class warfare or fairness…or what?

But Gingrich seems to have noticed that the key to his South Carolina landslide last weekend was overwhelming support from blue-collar and middle-class Republican voters. With those making between $30,000 and $50,000 a year, Gingrich crushed Romney by 20 points. With those making between $50,000 and $70,000, the margin was 16. But at the top end of the scale, it was a completely different story: Romney won by 15 points with voters making more than $200,000.
As I noted the other day, this same basic dynamic was evident in New Hampshire and Iowa, where exit polls found a direct relationship between enthusiasm for Romney and income level.
via Salon.

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