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

Guest post: “Mother” of All Bank Frauds Shocks and Awes Regulators

“Mother” of All Bank Frauds Shocks and Awes Regulators,
As LIBOR Victims Seek Justice

By Jeff McCord of The Investor Advocate
August 21, 2012

Many wonder why Federal regulatory precincts are so quiet several weeks following discovery that the London Interbank Offered Rate (LIBOR), a key interest rate determining charges to and earnings by American borrowers, lenders, pension funds, retirees and consumers had been rigged for years to benefit a handful of the world’s largest banks. Experts estimate damages to the economy can be measured in multiples of trillions of dollars.

Predictably, a relatively minor fine of $450 million – chump change in Jamie Dimon’s world – was levied by US and British regulators upon Barclays Bank, the most obvious of several likely perps in history’s biggest bank heist. Fortunately, the vigilant attorneys general of New York and Connecticut are issuing subpoenas to JP Morgan Chase and Citigroup, among other banks too big to regulate federally. And, private class action lawsuits charging violations of securities and anti-trust laws have been launched.

But, where are the expressions of horror and outrage, and other hot air emissions from the people’s elected representatives in Washington? We look in vain for a William Jennings Bryan, the Nebraska Congressman and 1896 presidential candidate who shouted at bankers: “You shall not crucify mankind on a cross of gold!”

Time to Order Golden Crosses?
Should middle-Americans use remaining credit on nearly maxed-out cards to buy life-sized gold-plated crosses at mall jewelry stores and report to their local mega-bank offices? Will bank “relationship managers” provide the nails, or will we need to pay for those as well?

These are just a few of the questions that cannot be fully answered until after the election. But, we can draw some conclusions from the statements of our presidential candidates and the views of well-informed observers.

Mitt Would Roll-back Regulations; President “Can’t get Too Involved”

First, let’s try on the Mitt. Governor Romney has long said he would roll back the regulatory knuckle raps enacted in the Dodd-Frank financial reform law. On the LIBOR fraud, he is apparently voting with his wallet. During his much publicized Olympic trip to London, Governor Romney met privately with bankers from Barclays and other financial behemoths, pocketing $2 million in campaign contributions for his time and this promise:

“I’d like to get rid of Dodd Frank and go back and look at [all financial] regulation piece by piece.”

With his Treasury Secretary accused of looking the other way years ago when as NY Fed Bank president he learned of LIBOR rigging, it is unlikely President Obama will call for “heads to roll.” Indeed, in one comment made by the White House on what is now being called the “Crime of the Century” by at least one syndicated columnist, White House press secretary Carney admitted he hadn’t discussed LIBOR with the President, but assured reporters the Administration supports financial reform, adding:

 “I don’t want to get too involved in Libor because I know it’s under investigation.”

What of the announced SEC and Department of Justice investigations? Based on their record pursuing the mortgage-backed securities and derivatives swindlers, we can’t hope for much. A Zachs financial analyst writes in a NASDAQ blog that a few more fines may be levied:

“Currently, we remain skeptical for JPMorgan and wait to see what the future beholds. If it is found guilty in this LIBOR scam, it is liable to be fined by authorities. Notably, in June, Barclays already faced a fine of $450 million by certain U.S. and U.K. authorities for rigging the rate.”

With recently revised and reported profits of $4.92 billion in just the first quarter of this year and with Cracker Jack PR and lobbying teams operating effectively, Jamie Dimon and his senior managers are likely sleeping soundly. After all, if anyone gets jail time, it will be line traders or lowly underlings.

Hedge Fund Says Private Lawsuits Will Recover LIBOR Damages
No wonder James Rickards, a New York hedge fund manager, author and columnist, wrote in US News & World Report that recovery of the immense financial damages suffered in this “mother of all bank scandals” by US mortgage holders, investors, small financial institutions and so many others will not come through regulators. Although a few criminal prosecutions may be launched and more fines levied, justice will be achieved and damages recovered by private lawsuits prosecuted by class action attorneys on behalf of victims, Rickards suggests.

He even dares to give voice to what many on Main Street have been thinking since 2008:

“Of course, the insolvency of a major bank in the face of LIBOR rate rigging charges cannot be ruled out. In that case, good riddance. The big banks have perpetrated a crime wave longer than that of Bonnie and Clyde. If it has taken the law this long to catch up with them, it’s better late than never.”

Lonely Federal Candidate Calls for Accountability

At least one federal candidate this year joins Rickards in demanding accountability for LIBOR fraudsters. Elizabeth Warren, whose Massachusetts Senate campaign is not bank-rolled by financial services giants, says:

“Real accountability would mean prosecuting the traders and bank officials who violated federal laws and prosecuting the executives who knew what they were up to. It would mean forcing executives to pay back any inflated compensation that was based on padded profits.”

Syndicated columnist and University of Southern California professor Robert Scheer seconds Ms. Warren’s call for justice. Unfortunately, he doesn’t see jail cells for LIBOR fraud masterminds:

“Modern international bankers form a class of thieves the likes of which the world has never before seen. . . . The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend.”

Federal Judge Calls Time-out for LIBOR Suits, But Invites More

That brings us back to lawsuits and private enforcement of securities laws. Despite a decade or more of Congressional and Supreme Court efforts to reduce liability for those corporate and financial officers who design and perpetrate such complex crimes, investor and consumer lawsuits filed in federal and state courts can still recover damages and discipline robber barons with the only punishment they understand: taking away their money.

Small banks, municipalities, pension funds and other victims of the rigged LIBOR market are lining-up to do just that. In response to the magnitude and intricacy of the alleged violations of securities and anti-trust laws, on August 6th US District Judge Naomi Reice Buchwald in Manhattan placed a hold on new LIBOR lawsuits while she sorts out the complaints already filed. She did, however, encourage the filing of new complaints, as she explained to the Chicago Tribune:

“While parties are free to file new complaints—and, indeed, are encouraged by the court to do so if they do so promptly . . . I am imposing a stay on any action that is not the subject of a pending motion to dismiss. The stay will last until the current motions to dismiss are resolved.”

Once again, hedge fund manager Rickards explained in layman’s terms what is likely to happen:

“Bank defendants in cases like this typically ask a judge to dismiss the case because the claims are too vague. However, the facts in this case have already been made plain by Barclays . . . Once the plaintiffs get past the motion to dismiss, they begin discovery, which gives the class action lawyers access to internal E-mails, tape recordings, depositions, and other books and records of the perpetrator banks. Based on small glimpses of the doings at Barclays, the communications of the other major bank LIBOR trading desks could be shocking.”

Banks May Be Held Accountable This Time

Once the undoubtedly “shocking” internal documents of the mega-banks come to light and the public learns the sordid details of the “crime of the century,” politicians may find standing idle a difficult posture. Regulators and the Department of Justice may be handed the evidence to seriously prosecute the perpetrators (whether they want to or not).

If the private actions and discovery process are permitted to proceed, the mega-banks who have caused global economic mayhem of historic and biblical proportions may finally be brought to justice. Middle-Americans may get their day in court.
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Guest post: “The Pay Off: Why Wall Street Always Wins”

By Jeff McCord  is a former US Senate staffer, Securities Investor Protection Corp (SIPC) executive and has been a free-lance journalist for Dow Jones publications. His academic background in economics includes post-graduate work at the London School of Economics and George Washington University. He can be read at Investors Advocate.   


Book Review of “The Pay Off: Why Wall Street Always Wins” by Jeff Connaughton Published by Prospecta Press, August 2012-08-21

Brief Bio of Jeff Connaughton:
Mr. Connaughton served as Chief of Staff to U.S. Senator Ted Kaufman during the 111th Congress. He previously served as Special Assistant to the Counsel to the President (Abner Mikva) in the Clinton White House (1994-95) and as Special Assistant to then-Chairman Joseph R. Biden, Jr. of the Senate Judiciary Committee (1988-91). Following work as a lobbyist for Arnold & Porter (1998-2000), he was co-founder and a principal of Quinn Gillespie & Associates (2000 to 2009), corporate lobbying firm.
August, 22, 2012

The review:

This is the autobiographical coming of age story of Jeff Connaughton, a former aide to Democratic Senators Biden (D-DE) and Kaufman (D-DE) and a Clinton White House adviser. Before becoming Senator Kaufman’s chief of staff, he had struck it rich as a corporate lobbyist, partnering with Republican Ed Gillespie and others to co-found Quinn Gillespie & Associates in 2000. Mr. Gillespie, a former senior aide to House Majority Leader Dick Armey (R-TX) is credited as a principal author of the GOP’s 1994 “Contract with America.” And, during Mr. Connaughton’s years as his partner, Mr. Gillespie advised Senator George Allen (R-VA) on his re-election campaign. Allen famously lost that election after he twice publicly used the racial epithet “macaca” to describe a dark complexioned Democratic activist of Asiatic Indian descent.

Mr. Connaughton’s unabashed description of his own “revolving door” career goes a long way toward explaining why “Wall Street always wins.” He candidly says he has seen the enemy and it is “us.”
With an MBA from the University of Chicago and law degree from Stanford, Mr. Connaughton was well qualified for his government service and as a top corporate lobbyist. Here’s his description of his million dollar lobbying career prior to serving briefly on Joe Biden’s Vice Presidential transition team and then heading-up Senator Kaufman’s staff:

“For twelve years, I developed and implemented legislative and regulatory campaign strategies for corporate clients, including broker-dealers, banks, accountants, insurance firms, and Silicon Valley. During my years as a lobbyist, I made a big pile of money, enough to have a house in Georgetown, a speedboat on the Chesapeake [and plan a house in Costa Rica].”

Considering that experience, it is difficult to accept Mr. Connaughton’s protestation of innocent bewilderment upon learning of the impending 2008 financial meltdown and its causes:

“I’d been trained in business and law school to believe that corporate governance worked. Even though I knew Wall Street held Washington in a perpetual half nelson,
I still believed our laws would prevent hidden catastrophes and blatant fraud. Our system is based on full disclosure of independently audited financial statements
combined with oversight and enforcement from the Securities and Exchange Commission.”

As one who no doubt ably helped Wall Street hold Washington in a “half nelson” in partnership with the ideologically pure GOP de-regulator Ed Gillespie, Mr. Connaughton was either naïve or had fallen victim to that DC disease: ‘believing one’s own press releases.’

Because he seems to tell his personal story frankly, readers can forgive Jeff Connaughton for a few self-serving remarks. Who among us wouldn’t do the same? But, anyone who lobbied for Wall Street and accounting firms during first eight years of the 21st Century and had witnessed Enron, WorldCom and so many other blatant frauds up-close, knew that corporate governance had become a quaint anachronism and financial statements barely worth the paper or digitized distribution.

Nevertheless, Mr. Connaughton’s insider description of the struggle among a few in Congress to gain meaningful post-meltdown financial regulation is worth the read.

He begins by describing the intellectual abduction of the young President Obama by the Goldman Sachs/Citigroup vetted and cleared team of William Geithner and Larry Summers. Readers who want more detail on their stranglehold on Administration economic policy and undermined the President’s goals should look no further than “Confidence Men,” by Ron Susskind.

Against great odds, Mr. Connaughton details the good faith efforts he and Senator Kaufman made in 2009 and beyond to push the seemingly conflicted Securities and Exchange Commission and Justice Department to launch civil and criminal prosecutions of those culpable for the financial meltdown. Although he concludes DOJ lacked the will to prosecute, Mr. Connaughton also describes testimony by SEC Enforcement Director Robert Khuzami who at a 2009 hearing explained why such prosecutions are exceedingly difficult in today’s world. Here’s how Mr. Connaughton tells it:

Khuzami put it this way during the hearing:
‘White-collar area cases, I think, are distinguishable from terrorism or drug crimes, for the primary reason that, often, people are plotting their defense at the same time they’re committing their crime. They are smart people who understand that they are crossing the line, and so they are papering the record or having veiled or coded conversations that make it difficult to establish a wrongdoing.’
In other words, Wall Street criminals not only possess enormous resources, they’re also sophisticated enough to cover their tracks as they go along, often with the help, perhaps unwitting, of their lawyers and accountants.

Messrs. Khuzami and Connaughton hit the nail on the head. Time after time, civil cases and a few criminal ones demonstrate that corporate and financial law and accounting firms actually knowingly help design, cover-up and otherwise aid and abet fraud. And, they do so with the knowledge that a combination of Congressional and Supreme Court actions have virtually relieved these professional advisers of liability for client advisory services.

In short, it is hard to prosecute securities fraud perps in a world in which Congress has decriminalized much of enabling behavior and actions required to plan and successfully execute fraud.

Mr. Connaughton ably describes the first major assault in the accounting and financial services’ industries’ war upon securities fraud laws and financial regulation. As a White House lawyer he saw:

President Bill Clinton steamrolled by Wall Street (and by its biggest booster, the most Machiavellian of United States Senators, Chris Dodd) circa 1995. Dodd had led Congress to overturn President Clinton’s veto of the Private Securities Litigation Reform Act, which he and the Republicans had drafted to gut the class action securities-fraud laws. It was the only Clinton veto given the back-of-the-hand by two-thirds of Congress. And it was my first taste of how Wall Street had come to own Washington.

The Private Securities Litigation Reform Act was merely the first of a decade-long effort by Congress and the Supreme Court to shield corporate securities fraud perpetrators and their professional aiders and abettors from shareholder and consumer accountability. During the same period, the dismantling of the Glass-Steagall Act’s separation of commercial and investment banking (this time supported by the Clinton Administration), enabled banks to use customer money to engage in the high-risk securities and derivatives practices — aided and abetted by their lawyers and accountants who covered-up the magnitude of risks taken — that led to the catastrophic 2008 meltdown.

Mr. Connaughton, whose Wall Street epiphany may have come too late to help correct Congress’ mistakes, describes how he and Senator Kaufman, a Member of the Senate Judiciary Committee, worked with other sincere reformers such as Senators Pat Leahy (D-VT) and Chuck Grassley (R-IA), among others, to build-up white collar crime fighting resources and push the SEC and DOJ to go after financial wrongdoers.
Sadly for all of us, Mr. Connaughton concludes:

Despite our nearly fanatical dedication, we and other reformers failed. To date, there have been no high-profile Wall Street prosecutions for financial wrongdoing. The stock market has become even more volatile and dominated by computer-driven trading. Too-big-to fail banks continue to act lawlessly, teeter on the brink, and destabilize the global economy. The post-crisis regulatory reforms (particularly, the Dodd-Frank Act) were and are being written by over-matched regulators with the help of Wall street lawyers instead of by the elected representatives of Americans, a substantial majority of whom support rules to rein in Wall Street excesses.

He knows personally of what he speaks.

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Is Harry Reid’s Bain-Investor Friend the Gawker Leaker?

Having now read the Gawker articles summarizing some of the Bain documents leaked to Gawker and published there today, I’m speculating that the leaker of the documents is also Harry Reid’s source for Reid’s allegation that Romney paid no taxes for at least a decade, and that the leaker believes that the documents suggest either that Romney paid nowhere near the 13% per year that he claims to have paid, or that in 2009 Romney back-paid taxes as part of the IRS’s temporary amnesty program that year, so that his annual tax rate then came to at least 13%.

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Debt, Recession, and That Ol’ Devil Denominator

Krugman recently presented this graph, showing household debt as a percentage of GDP.

and made this comment.

Second, a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression.

There are those who seem to believe that if Krugman says it, it must be wrong.   Here is Scott Sumner’s reaction.

What do you see?  I suppose it’s in the eye of the beholder, but I see three big debt surges:  1952-64, 1984-91, and 2000-08.  The first debt surge was followed by a golden age in American history; the boom of 1965-73.  The second debt surge was followed by another golden age, the boom of 1991-2007.  And the third was followed by a severe recession.  What was different with the third case?  The Fed adopted a tight money policy that caused NGDP growth to crash, which in turn sharply raised the W/NGDP ratio.  Krugman has another recent post that shows further evidence of the importance of sticky wages.  Forget about debt and focus on NGDP.  It’s NGDP instability that creates problems, not debt surges.

Bold emphasis is provided by Marcus Nunes, who goes on to say:

Why does the share of debt rise? I believe it reflects peoples “optimism” about future prospects. In the chart below I break down Krugman´s chart and separate mortgage and non-mortgage household debt as a share of NGDP. I also add the behavior of the stock market (here represented by the Dow-Jones Index).

[See the linked Nunes post for his chart.]

Eye of the beholder, indeed.  Nunes makes an expectations-based argument, and adds:

Non-mortgage debt remains relatively stable after 1965, fluctuating in the range of 17% to 22% of NGDP. No problem there.

But the reality is that non-mortgage debt has grown quasi-exponentially in the post WW II period.

Sumner, as always, beats the NGDP drum. 

My friend Art takes a jaundiced view of the Sumner-Nunes interpretation.  He gets it exactly right.  To see why, let’s go back and have a look at the data.  Here is straight CMDEBT (Household Credit Market Debt Outstanding,) presented as YoY percent change – not distorted by a GDP divisor.

Sumner sees a debt surge from 1952 to 1964.  I see a secular decrease in the YoY rate of debt growth from over 15% to under 5% by about 1966.

Sumner sees a debt surge from 1984 to 1991.  I see a decrease in the YoY rate of debt growth from over 15% to about 5% over that same span.

Sumner sees a debt surge from 2000 to 2008.  I see a modest rise into a broad peak between 2003 and 2006, with a net decrease in the rate of debt growth over the 2000 to 2007 period.  In CY 2008 debt growth goes negative.  Here’s a close-up view.

So much for optimism-fueled debt growth. 

Between the non-existent debt surges Sumner sees a golden age from 1965 to 1973.  I’m a bit puzzled by a golden age boom that straddles one recession and leads directly into another; though I will admit that average GDP growth then looks impressive compared to the GDP growth of the last decade.  But the thing that Sumner misses within his “golden age” is the big debt surge from 1971 to 1974. 

By my reckoning, Sumner is incapable of identifying either a debt surge or an economic boom.  

So what is going on here?  Sumner and Nunes either fail to realize or deliberately ignore that the quantity CMDEBT/GDP has a denominator.  Let’s look at GDP.  Here is YoY GDP growth over the post WW II period.  And, of course, this is NGDP – not inflation adjusted – the very quantity to which Sumner ascribes so much gravitas.

The average GDP growth over the period 1948 to 2007 is 7.04%
The average over the “debt surge” period 1952 to 1964 is 5.35%
The average over the “debt surge” period 1984 to 1991 is 6.85%
The average over the “debt surge” period 2000 to 2007 is 5.24%

What we have are three periods of below average GDP growth, two of them substantially so.  The middle one is only slightly below average, but that is misleading since there is a steep decline in GDP growth over the period.

Consider C = A/B.  If B is small or decreasing, it will tend to make C large or increasing.  To ascribe all of the changes in C to changes in A is to ignore that Ol’ Devil Denominator.  

Sumner does bring up NGDP growth late in the passage quoted above, but I don’t get his point.  If I’m reading him correctly, he claims that NGDP growth crashed between 2000 and 2008, and that caused the Debt/GDP ratio to rise.  But NGDP growth was sharply up from 2001 to 2003, relatively steady through 2006, and never crashed until 2008.  If there is any sense in his argument, somebody will have to explain it to me.   

What actually happened was a real debt surge – but it was between 1997 and 2004.  Meanwhile, GDP growth both before and after the 2000-2003 dip was around 6 to 7%.  Then, in 2006, household debt growth and GDP growth both started to slump, and in 2008 took a nose dive together.

Sumner and Nunes have made a very fundamental error – not so much in the math itself as in the application of logic.  This is sloppy thinking, and any conclusions drawn from it must be highly suspect.

To get a handle on what is really going on, let’s look at debt growth and GDP growth together.

They don’t move in lock-step, but the similarity is striking.  Specifically, every recession except 2001 corresponds exactly to a minimum in debt growth.  So Sumner’s advice to “forget about debt” looks like it’s missing something very important – specifically that the household component of spending [aka GDP growth] has been debt financed.  To put it in context, have a look at Krugman’s first graph in the article linked above.   It shows what we all know, but some chose to ignore – that median wages have stagnated for 40 years.

In my narrative, the reason household debt grew to almost 100% of GDP is that stagnating incomes have not been able to support the cost of the American life style – due to decades of inflation, but probably largely driven by the costs of health care and education.  Remember – contra the prevailing view of economists today – spending, and therefore GDP growth, is directly dependent on income, not on wealth

Debt is a useful tool that develops into a problem when it becomes too burdensome to service.  Looking at debt as a percentage of GDP provides a clue as to how serviceable the debt is.  When you also consider that all of the GDP growth over several decades has gone to the top income earners, you can see that the debt servicing problem is made that much worse for the average person. 

Nunes thinks debt rises when people are optimistic about the future, and he weaves a narrative based on that idea.  He then blames the 2008 collapse on bad policy, including a contractionary Fed.   He appears to want spending growth, but refuses to recognize the exhausted ability of ordinary people to spend.

In my view – and I think the data supports it – Krugman and Art have this exactly right.  And, as is nearly always the case, those who disagree with PK on what is happening in the real word have to invent a fantasy-world explanation – or, if I can borrow an especially tortured metaphor from Nunes,  pull a red herring out of a hat.

Cross-posted at Retirement Blues.

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Unethical Commentary, Newsweek Edition

 I don’t usually pass along a Krugman piece, but the ACA is familiar territory for AB.

By Paul Krugman, The New York Times
21 August 12
here are multiple errors and misrepresentations in Niall Ferguson’s cover story in Newsweek – I guess they don’t do fact-checking – but this is the one that jumped out at me. Ferguson says:

The president pledged that health-care reform would not add a cent to the deficit. But the CBO and the Joint Committee on Taxation now estimate that the insurance-coverage provisions of the ACA will have a net cost of close to $1.2 trillion over the 2012-22 period.

Readers are no doubt meant to interpret this as saying that CBO found that the Act will increase the deficit. But anyone who actually read, or even skimmed, the CBO report (pdf) knows that it found that the ACA would reduce, not increase, the deficit – because the insurance subsidies were fully paid for.

Now, people on the right like to argue that the CBO was wrong. But that’s not the argument Ferguson is making – he is deliberately misleading readers, conveying the impression that the CBO had actually rejected Obama’s claim that health reform is deficit-neutral, when in fact the opposite is true.

We’re not talking about ideology or even economic analysis here – just a plain misrepresentation of the facts, with an august publication letting itself be used to misinform readers. The Times would require an abject correction if something like that slipped through. Will Newsweek?

See Also: Niall Ferguson Publishes Embarrassing Defense Of Newsweek Article

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Health Care Thoughts: Physician Burnout

by Tom aka Rusty Rustbelt

Health Care Thoughts: Physician Burnout

During the years I worked every day with physicians I learned a great deal, including about the time pressure, the relentless work flow and the sleep deprivation during physicians’ “on call” days.
A Mayo Clinic ( has been published and 50% of physicians are feeling impacts of burnout. Not a surprise to me.

Some of this stress may be alleviated by the trend of physicians becoming hospital employees and hospitalists covering inpatients rather than family practice and internal medicine docs.

Will PPACA crank up the stress? We have high expectations of our physicians and the health system in general, may we have to temper those expectations just a bit?

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Kemp Roth Reagan Miller

Matt Miller has an excellent column in The Washington Post in which he coins the phrase “Drawbridge Republicans.” Basically he accuses Romney and Ryan of being pro-rich class warriors who aim to eliminate equality of outcome and of opportunity. A very standard Rhetorical gesture is to concede in the second or third paragraph of an essay that there are shades of grey and fault on both sides each of which has a point. I think that for Miller that this is a reflex(also for others including say the President — I call the trope an “obamanation”). I also think that a part of this phase of writing a well made essay all critical facilities are turned off. Such an aside must be part of a good essay and no data are relevant. The alleged obamanation follows

(In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent , were truly damaging to the economy. But as GOP business leaders now tell me privately, the Clinton-era top rate of 39.6 percent, let alone today’s 35 percent, are hardly a barrier to work or investment).

(parentheses his). Disclaimer: This post will include exactly 1 link. All claims of fact will be based on my memory. Note the complete lack of any data supporting the flat claim that 70 percent marginal rates were truly damaging. The only hint of an explanation of the alleged damage is in the following paragraph “a barrier to work or investment.”

 I don’t have to remind readers of this blog that 70% marginal rates sure don’t seem to have been a barrier to work and investment in the 60s nor were 90% marginal rates obviously a barrier to work and investment in the 40s and 50s. First there is very little evidence for an effect of taxes (or wages or interest rates) on male labor supply. This was well known in 1981. The elastic labor supply is married women’s labor force participation. This increased enormously during the period of 70% marginal tax rates. Notably, the labor supply choice doesn’t depend only on marginal rates (it isn’t a small change). There is no evidence that the elimination of 70% rates removed a significant barrier to work.

 The idea that the Kemp-Roth-Reagan tax cuts removed a barrier to investment just can’t be reconciled with the data.

 In fact they were followed by a period of extremely low fixed capital investment. This is unsurprising given the extremely high real interest rates which, in turn, are unsurprising given the high budget deficits caused by the Kemp-Roth-Reagan tax cuts. One mildly odd thing in the Miller parenthetical aside is the equation of saving and investment. I will accept the equation which makes sense in the long term although our current problem is high planned saving and low planned investment. But the Kemp-Roth-Reagan tax cuts did not have the effect on private savings which proponents predicted. Instead there was anomalously high private consumption. This is in addition to the massive resulting public dis-saving (deficits). There is vastly vastly vastly less than no evidence that the end of 70% marginal tax rates contributed to capital formation. The more nearly rational advocates of low marginal rates (by which I mean the more nearly rational critics of 70% marginal rates) argue that the important issue is tax avoidance not labor supply or consumption savings decisions.

 The argument is that there are efficiency losses due to tax avoidance strategies such as investing in tax shelters (to obtain income losses and capital gains). So a semi-rational defender of Kemp-Roth-Reagan could ask if there was a marked reduction in the vigor of tax sheltering etc. That’s a good question, but the answer is that there was a huge gigantic massive increase in the vigor of tax sheltering. This was widely noted at the time. But surely there must be something good that can be said about the Kemp-Roth tax cuts which isn’t based on ignoring all available data ? I suppose there probably is, but for the life of me, I can’t think of it.

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Dutch Domestic Demand Dragging Real Home Values

by Rebecca Wilder

Dutch Domestic Demand Dragging Real Home Values

Today Statistics Netherlands (CBS) warned ”House Prices Nosedive“.

Prices of existing owner-occupied dwellings sold in July 2012 were on average 8.0 percent down from July 2011. This is the most substantial price drop since the price index of existing residential property was first recorded in 1995.

In real terms and indexed to 2005, home values are down 10.1% over the year in July and dropped 21.3% since the August 2007 peak.

What explains this real depreciation in home values? I’ll give you one chart: the unemployment rate.

The labor market is sinking, and taking with it household demand. Companies probably hoarded labor in the crisis – the peak to trough drop in GDP was 4.9% versus a 1.6% cyclical drop in employment around that period. However, in late 2011 employment peaked and unemployment is surging – the quarterly employment data through March 2012 indicate a peak was seen in Q3 2011.
On balance, the downtrend in Dutch home values is probably here to stay. FYI: the balance sheet of Dutch households and non-profits is roughly 2.5 times levered.

Rebecca Wilder

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Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

by Kenneth Thomas

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

The U.S. trade deficit figures heavily in the analysis of Jeff Faux’s new book, The Servant Economy. Faux, the founder of the Economic Policy Institute (EPI), was one of the most important voices speaking out against NAFTA when it was debated and ultimately passed by Congress in 1993.
According to EPI’s 2011 Annual Report,”Presently, the United States’ non-oil deficit alone costs more than five million U.S. jobs.” This underscores the importance of the deficit and what is at stake. In the book, Faux points out that the theoretical benefits of free trade assume full employment, but that is hardly ever the case. Thus, he argues, the trade deficit is indeed a job killer.

Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!

How have these trade agreements performed? At present, according to the U.S. Trade Representative, the U.S. has free trade agreements with 19 other countries, with a 20th (with Panama) approved but not yet implemented. The 19 countries are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.
The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements’ coming into effect through 2011, in one case it’s too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.

Unfortunately, that’s the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country’s overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The losses, on the other hand, have been huge, with the culprits being NAFTA and liberalizing trade with China (not even a full free trade agreement, just making it easier for U.S. firms to offshore their production to China). In the wake of NAFTA, the U.S. goods trade balance with Mexico has worsened by $66.2 billion, while our Canadian goods trade balance has worsened by $23.7 billion. Just since 2001, when China joined the WTO, and 2011, the goods trade deficit has increased from $83 billion to $295 billion. Robert E. Scott of the EPI estimates that this massive deficit has “eliminated or displaced nearly 2.8 million U.S. jobs since 2001.” In addition, our Israel free trade agreement has added about $10 billion more to the deficit.

As Faux argues, the trade deficit reduces demand for U.S. labor, and pushes wages down in the aggregate. Indeed, this is the tendency of trade in general for a labor-scarce country like the United States. Faux’s vision of where this is leading us in the long term is a depressing one, which I will discuss in more detail in a future column.

cross posted with Middle Class Political Economist

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Polls and reporting

Lifted from Robert’s thoughts:

by Robert Waldmann

Polls and reporting

It is clear that, whenever respected non-partisan media adopt rigid rules, Republicans abuse those rules. The Swift Boat Veterans for Truth are a very clear example. Since news organizations often present both sides of a debate without fact checking in each article, it is possible for a mass of lies to balance all available documentary evidence. Something similar is happening this year. New polling organizations are appearing and making Rasmussen look like less of an outlier.

A new mechanical approach to covering polls is to present an average of recent polls or a time weighted average of polls or to do what Nate Silver does which he explains very clearly (and which works). It is universally believed by politicians and their campaign staff that a poll which would be good news for a candidate if accurate is helpful to the candidate. This means that an effort to game the new poll averaging system will be based on polls which show higher support than in the population for the candidate the pollster wants to support.

It is obvious that unscrupulous operators are doing this. I have long believed that Rasmussen doesn’t do a terrible job just because they value quantity not quality. The basic problem (says Silver) is that they poll all in one day. This means that they don’t call back day after day if no one answers the phone, which means that they oversample people who are home a lot.

There is no doubt that Scott Rasmussen is a very partisan Republican. Rasmussen carefully removes noise without removing bias. They weight by self reported party affiliation. This keeps the numbers from their sloppy swift polls from bouncing around. But they weight using the average party affiliation from Rasmussen polls in the preceding month. This doesn’t remove any oversampling of Republicans which is undoubtedly there. They could weight using the proportions from polls by reputable pollsters. They chose not to. This is a deliberate effort to bias the results. they had an estimated bias of 3.8% in 2010.

The cost to Rasmussen of their demonstrated bias has been less than zero. Liberals ignore them, but Fox News loves them. (In passing, Silver stresses that he is using “bias” as a statistical term and not arguing that the Rasmussen bias is due to partisanship. In contrast, I assert that it is. This is not just because the estimated statistical bias fits Scott Rasmussen’s ideology and party affiliation. It is for the reason given above. There is no legitimate reason to use only old Rasmussen polls to get the proportions of Democrats, Republicans and independents to weight new Rasmussen polls.

I am absolutely sure that Rasmussen does this to generate results pleasing to Scott Rasmussen. I think that the success of this deliberate fraud has earned him emulators. A problem for fraudsters like Scott Rasmussen is that they stand out making their bias obvious. This problem can be solved at modest cost by setting up say 3 other Republican biased pollsters. Poll aggregators are unwilling to exclude pollsters based on their subjective judgment. That means they can be lead wherever the unscrupulous want to lead them. Nate Silver explains this too

But once in a great while, a poll comes along with methodology that is so implausible that it deserves some further comment. The Foster McCollum White Baydoun poll of Florida is one such survey.


For instance, we have our house effects adjustment, which corrects for most of these tendencies. Based on this poll, and a prior survey the firm conducted in Michigan, we calculate the firm’s house effect as leaning Republican by roughly 11 percentage points relative to the overall consensus. We do not subtract out the entire 11-point house effect from the polling firm’s results — the model allows polling firms to retain some of their house effect — but the model does adjust the poll substantially, treating it as about a 7-point lead for Mr. Romney rather than a 15-point one. That’s still a very good number for Mr. Romney — enough to make him a slight favorite in our forecast for the state — but at least a little bit more reasonable relative to common sense. Is there argument for just throwing the poll out? In this case, perhaps. But as I said, I’d rather design a system where we have to make fewer of those judgment calls and err on the side of inclusivity. Our threshold for calling out a poll’s technique as being dubious, as we have here, is pretty high — but our threshold for actually throwing a poll out is higher.

Silver is by far the most sophisticated aggregator published by mass media. He notes that outrageous nonsense which is pro-Romney by 11 points compared to the average of other pollsters only counts as if it were pro-Romney by 7 points. I think the 11 point estimated house effect is a new record. I don’t like to make predictions, but I am willing to predict that it will be surpassed. The other plainly biased pollsters are “We Ask America” (which belongs to a business lobby) and “Purple Strategies” whose CEO is the notorious Alex “hands” Castellanos one of the vilest partisan operatives in the business.

Lifted from Robert’s Stochastic thoughts

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