IN-PUT OUT-PUT THEORY
Some stuff, and some politics; why it will never
be like it was again; how, in 1965,
I found out the answer to the previous question...2013 and more problems in EURO-land?
the economy went wrong: 20/20 hindsight for the
21st century - gotta run, guys!
its graphic capabilities, we thank you!
Foxwoods' Slot Revenues Improve, Breaking Nearly Two Years Of Decline
The Hartford Courant
By MATTHEW STURDEVANT
10:23 AM EST, December 16, 2013
Foxwoods Resort Casino reported an improvement in monthly slot revenue
for the first time since December 2011, with the casino's take in
November improving over the same month a year earlier.
In August, Mohegan Sun broke its own streak of year-over-year decline
in slot revenues that dated back to December 2011.
Foxwoods, in Mashantucket, reported slot revenue of $43.9 million, up
2.1 percent compared with the same month a year ago. Mohegan Sun, in
Uncasville, reported slot revenue of $49.3 million for the month, down
1 percent compared with November 2012.
The total amount wagered at Foxwoods, which is referred to as the
slot's handle, was $510 million, down 2.1 percent for the month.
Mohegan Sun's handle was $627.5 million for the month, up 6 percent
compared with November 2012.
When the November 2012 slot revenues were released last year, Foxwoods'
slot revenue had declined 10 percent over the same month in 2011 as the
late-October tropical storm Sandy hurt spending. Mohegan Sun had a 9
percent decline in slot revenue in November 2012 compared with the same
month in 2011.
The casinos contribute 25 percent of their slot revenue to the state
For November, Foxwoods contributed $11 million and Mohegan Sun
contributed $12.3 million to the state's special revenue fund.
Copyright © 2013, The Hartford
ALWAYS GOOD TO LOOK AT A MAP OR TWO...
For those who remember the 1970's and earlier, Cyprus was
divided into the Greek and Turkish sections, and there was a
geopolitical aspect too, during the "cold war." Then. the
E.U. Officials Agree to a Deal Rescuing
By JAMES KANTER, LIZ ALDERMAN and ANDREW HIGGINS
March 24, 2013
BRUSSELS — Struggling into the early-morning hours to avoid a collapse
of Cyprus’s banking system, European Union leaders on Monday agreed on
a bailout package intended to keep Cyprus in the euro zone and rebuild
its devastated economy.
The deal, struck after hours of meetings here, was approved by the
finance ministers from the euro zone, the 17 countries that use the
common currency. It would drastically prune the size of Cyprus’s
oversize banking sector, bloated by billions of dollars from Russia and
elsewhere in the former Soviet Union.
The deal would scrap the highly controversial idea of a tax on bank
deposits, although it would still require forced losses for depositors
“We have a deal,” President Nicos Anastasiades was quoted as saying by
Greek media. “It is in the interests of the Cypriot people and the
The head of the finance ministers, Jeroen Dijsselbloem of the
Netherlands, said the agreement could “be implemented without delay”
without a new vote by the Cypriot Parliament, which had rejected a deal
last week. Lawmakers on Friday passed legislation that set the
framework for the new action, he said.
“This has indeed been an arduous week for Cyprus,” he said.
He did not have exact timing for when Cyprus’s banks, which have been
closed for more than a week, would reopen. Cyprus would receive the
first payment of the bailout package worth 10 billion euros, or $13
billion, in early May.
Under the agreement, Laiki Bank, one of Cyprus’s largest, would be
wound down and senior bondholders would take losses.
Depositors in the bank with accounts holding more than 100,000 euros
would also be heavily penalized but the exact amount of those losses
would need to be determined.
The plan to resolve Laiki Bank should allow the Bank of Cyprus, the
country’s largest lender, to survive. But the Bank of Cyprus will take
on some of Laiki’s liabilities in the form of emergency liquidity,
which has been drip-fed to Laiki by the European Central Bank. That
short-term financing, which the E.C.B. had threatened to cut off on
Monday, is expected to continue.
Depositors in the Bank of Cyprus are likely to face forced losses
rather than any form of tax. That plan, which set off outrage last week
in Cyprus and as far away as Moscow, has now been dropped entirely.
Mr. Dijsselbloem said he was “convinced this is a much better deal”
because under the revised agreement, the heaviest losses “will be
concentrated where the problems are, in the large banks.”
These provisions should help reverse what, in recent days, has been
Cyprus’s steady retreat into a surreal pre-modern economy dominated by
Retailers, gas stations and supermarkets, gripped by uncertainty over
whether Cyprus would really secure a 10 billion-euro financial
lifeline, have increasingly refused to take credit cards and checks.
“It’s been cash-only here for three days,” said Ali Wissom, the manager
at Il Forno di Jenny’s restaurant off Cyprus’s main square in Nicosia.
“The banks have closed, we don’t really know if they will reopen, and
all of our suppliers are demanding cash — even the beer company.”
With major banks in Cyprus shut for more than week, a trip to the cash
machine became a daily ritual for anyone in need of money. The initial
limit on withdrawals was 400 euros. It then fell to 260. As of Sunday
night, it slipped to a meager 100 euros.
At the Centrum Hotel, Georgia Xenophontes, 23, an employee in the front
office, said she drained her bank account at a cash machine last week —
just in time to avoid being hit with the latest withdrawal limit.
“This is affecting everything in our lives,” she said. “Even though you
don’t want to count on money, you need it. But we don’t have stability.”
In Brussels, the day was filled with confusion and rancor. Reports
filtered out of heated confrontations between Mr. Anastasiades and
European Union negotiators, and especially with the International
Monetary Fund, which Mr. Anastasiades has accused of trying to push
Cyprus up against a wall.
Mr. Anastasiades told officials including Christine Lagarde, head of
the monetary fund, that accepting harsh terms might force him to step
By early morning, the tone has softened, with Ms. Lagarde telling
reporters that the experience of reaching a deal had been “laborious”
but yielded “a good result.” She said she would recommend to the fund’s
board that it make a contribution to the bailout package, but said that
sum still needed to be determined.
“We believe that this will form a lasting, durable and fully financed
solution,” she said.
A key issue has been the enormous size of Cyprus’s banking sector,
which is eight times bigger than the economic output of Cyprus, which
has only 860,000 people.
Germany and other countries have criticized the banks as far too big
and too indulgent toward money tainted by crime, and the deal
represented a triumph for them. Cyprus, though, fought bitterly to keep
the sector intact as a way of sustaining its lifeblood and continuing
to draw international investors, including wealthy Russians and
thousands of businesses with hefty accounts.
Last summer, Cyprus’s banks took steep losses on their large holdings
of Greek bonds when that nation was given its own bailout and
bondholders had to take losses. Coupled with a decline in real estate
values, the banking troubles forced Cypriot leaders to formally ask for
As the negotiations lasted into the night, people in Cyprus cursed
being in the dark about their fate.
“They have confused us so much over the past week, we don’t have any
idea what is going on,” said Rami Suleiman, a businessman who owns six
shops, two hotels and a restaurant.
Back in his office after a trip to a cash machine that resulted in only
100 euros and not the 260 he had sought, Mr. Suleiman settled at his
desk, piled with receipts from his previous trips to get cash, and
began combing TV channels to find out what had happened a in Brussels.
“Nothing. Nothing. Nothing. There is no news at all,” he said,
lamenting the uncertainty that has pushed him and others here into a
state of quiet despair about the future of their country.
While Mr. Anastasiades, who took office less than a month ago, has
faced mounting criticism from many Cypriots for his handling of the
crisis, he was cheered like a soccer star before a big game by a
dwindling band of die-hard fans Sunday.
“Go Nikos, Go!” wrote Danae Karayianni on the Facebook page of the
president’s re-election campaign headquarters. “Don’t back down
president. We are with you and fully supporting you,” wrote another
Having secured a deal, Mr. Anastasiades and his country face an arduous
future, even if the immediate threat has been lifted.
“The near future will be very difficult for the country and its
people,” Olli Rehn, the European Union commissioner for economic and
monetary affairs, told the news conference. But the deal was “necessary
for the Cypriot people to rebuild their economy on a new basis.”
James Kanter reported from Brussels,
and Liz Alderman and Andrew Higgins from Nicosia, Cyprus.
here for another view and more news
Cyprus Makes Plan to Seize Portion of
By LIZ ALDERMAN and JAMES KANTER, NYTIMES
March 23, 2013
NICOSIA, Cyprus — With Cyprus facing a Monday deadline to avoid a
banking collapse, the government and its international negotiators
devised a plan late Saturday to seize a portion of savers’ deposits
above 100,000 euros at all banks in the country, in a bid to raise
money for an urgently needed bailout.
A one-time levy of 20 percent would be placed on uninsured deposits at
one of the nation’s biggest banks, the Bank of Cyprus, to help raise
5.8 billion euros demanded by the lenders to secure a 10 billion euro,
or $12.9 billion, lifeline. A separate tax of 4 percent would be
assessed on uninsured deposits at all other banks, including the 26
foreign banks that operate in Cyprus.
An agreement was still far off, though, as Cyprus’s lenders left for
the night without reaching an accord. The proposal still requires
approval by the Cypriot Parliament and by the European Central Bank,
International Monetary Fund and European Union leaders. Finance
ministers from the 17 euro zone countries have scheduled an emergency
meeting at 6 p.m. Sunday in Brussels.
Under the plan, savings under 100,000 euros would not be touched — a
rollback after a controversial plan last week to tax insured deposits
was rejected by Cyprus’s Parliament, amid outrage among ordinary savers
and widespread concern that a precedent had been set for governments
anywhere to tap insured bank savings in times of a national emergency.
Cypriot officials on Saturday also pulled back on a plan to raise
billions of additional euros by nationalizing state-owned pension
funds, after Germany, whose political and financial clout dominates
euro zone policy, had indicated it opposes the move.
Cyprus’s president, Nicos Anastasiades, was meeting Saturday night with
political parties to explain the plan. He was scheduled to fly to
Brussels on Sunday.
Cyprus’s finance minister, Michalis Sarris, said on Saturday that there
had been “significant progress toward reaching an agreement” with
European officials on raising money for a bailout.
All parties were working against a deadline imposed by the European
Central Bank, which has said it will cut off crucial short-term
financing to Cyprus’s teetering commercial banks on Monday if a bailout
deal is not reached by then.
Facing what he has called the worst crisis for Cyprus since the 1974
Turkish invasion, Mr. Anastasiades said on Saturday on his Twitter
account: “We are undertaking great efforts. I hope we will have a
A noisy crowd, estimated at around 2,000 people, gathered outside the
presidential palace in the early evening, far more than the hundreds
who had gathered there in recent days. With flanks of riot police
standing guard, many demonstrators chanted, “Resign! Resign!” as they
inveighed against the imminent consolidation of the Laiki Bank, one of
Cyprus’s biggest and most troubled lenders. In a move demanded by the
I.M.F., which will cost thousands of jobs, the toxic assets of Laiki
will be hived off into a so-called bad bank, while healthy assets and
accounts will be moved to the Bank of Cyprus. There, accounts over
100,000 euros would be subject to the 20 percent tax.
A cutoff of central bank financing and the absence of a bailout
agreement could cause Cypriot banks to collapse. It could also lead to
a disorderly default on the government’s debt, with unpredictable
repercussions for the euro monetary union, despite the country’s tiny
Asked on Saturday whether Cyprus had a backup plan if a deal is not
reached, a government spokesman, Christos Stylianides, said, “We are
doomed” if a solution is not found.
Olli Rehn, the European Union commissioner for economic and monetary
affairs, said in a statement on Saturday evening that it was “essential
that an agreement is reached by the Eurogroup on Sunday evening in
But Mr. Rehn also suggested that opportunities had been squandered to
find a less painful way out of the crisis. In a thinly veiled reference
to the Cypriot Parliament’s rejection of an earlier deal, Mr. Rehn that
“the events of recent days have led to a situation where there are no
longer any optimal solutions available” and that, “Today, there are
only hard choices left.”
European Union leaders “may conclude that it is best to let Cyprus
default, impose capital controls and leave the euro zone,” Nicolas
Véron, a senior fellow at Bruegel in Brussels and a visiting
fellow at the Peterson Institute for International Economics, said in a
recent assessment. “But such a move would violate the promise of
European leaders to ensure the integrity of the euro zone no matter
what and potentially set off a chain reaction, including possible bank
runs in other euro zone member states, starting with the most fragile
ones, such as Slovenia and, of course, Greece.”
Parliament was still deciding when to vote on the new proposal to tax
uninsured bank deposits.
The finance ministers and the troika on Saturday were still calculating
how much money those deposit-tax alternatives would raise for the
“The good news is that banks were shut last week, and so depositors
couldn’t cut up their money into smaller accounts to avoid any tax,”
said one European Union official, who spoke on the condition of
anonymity. “But it’s sure that depositors did do this before, so this
needs to be assessed.”
At the insistence of the central bank, lawmakers also voted on Friday
to impose capital controls to limit withdrawals and bank account
closings once Cyprus’s banks reopen. The current plan is to reopen them
on Tuesday morning, after a nine-day emergency holiday meant to prevent
a classic run on the banks.
But without a bailout, the banks would probably be unable to open.
Liz Alderman reported from Nicosia,
Cyprus, and James Kanter from Brussels. Andreas Riris contributed
reporting from Nicosia.
'scraps bank levy' in new bailout plan
21 March 2013 Last updated at 08:52 ET
Political leaders in Cyprus appear to have dropped an
unpopular levy on bank deposits in a new bailout plan. There was
outrage over an earlier plan to tax all bank deposits. Cyprus'
banks, which have been shut all week to prevent mass withdrawals, are
to stay closed until next Tuesday.
Cyprus is required to find 7bn euros (£6bn; $9bn) to get a
10bn-euro EU-IMF loan. Cypriot officials now propose a state investment
fund and special bond issue to raise 5.8bn euros. The other 1.2bn
would be raised through privatisations and by increasing capital gains
tax and the corporate tax rate. Details of the new plan are still
being worked out, and it is not clear if it will be put to a
parliamentary vote on Thursday.
The European Central Bank (ECB) has warned it may halt emergency
funding on Monday if Cyprus fails to come up with a viable rescue plan
Cypriots are finding it increasingly difficult to perform everyday
financial transactions as cash and credit dries up.
"We didn't discuss a [deposit] haircut and we are not
reverting to it," Cypriot parliament speaker Yiannakis Omirou told
reporters, in remarks quoted by Reuters. He was speaking after an
emergency meeting between politicians and President Nicos Anastasiades.
The deputy leader of the ruling Democratic Rally party, Averof
Neophytou, said party leaders had unanimously agreed to create a
"solidarity fund" with state assets, which would be used for an
emergency bond issue, Reuters reported. That plan was confirmed
by government spokesman Christos Stylianides.
But one senior government MP, who did not want to be named because he
said discussions were not over, said the bank levy would remain in some
form, the BBC's Chris Morris reports from Nicosia. Without it, the MP
said, Cyprus could not raise all the money it needed.
The previous proposals had included a levy on deposits between 20,000
and 100,000 euros, which had outraged many Cypriots.
There has been much speculation that the new Cypriot plan could include
Russian help, as Russia has multi-billion dollar investments in
Cyprus. Russians, including wealthy tycoons, hold between a third
and half of all Cypriot bank deposits. Russian Prime Minister
Dmitry Medvedev has poured scorn on the eurozone's bailout plan for
Cyprus, accusing EU leaders of behaving "like a bull in a china shop".
In Moscow on Thursday he told European Commission President Jose Manuel
Barroso that all interested parties, including Russia, should be
included in a deal for Cyprus.
The Cypriot Finance Minister Michalis Sarris is in Moscow for a second
day to negotiate assistance.
Analysts say Russia may provide more funding in return for interests in
Cyprus' offshore energy fields.
The country's two biggest banks, Bank of Cyprus and Laiki, are believed
to be reliant on the ECB's Emergency Liquidity Assistance, provided via
the Central Bank of Cyprus. The ECB's governing council can halt
ELA if it believes the banks receiving it are no longer solvent, the
Financial Times newspaper reports. The banking sector dominates
Cyprus' economy and if a viable rescue is not organised soon the island
state risks having to abandon the euro.
Cypriot banks were among the bondholders who had to take a big
"haircut" in the second massive bailout for Greece. Since 2008
the eurozone has been badly bruised by the massive bailouts provided
for Greece, the Republic of Ireland and Portugal. There is a widespread
reluctance to commit more EU taxpayers' money to ailing banks in
The BBC's Mark Lowen, in Nicosia, says Cyprus is a resilient nation and
the banks are still giving out cash through machines - although with
limits, and some are running low.
Some businesses are now refusing credit card payments, our
Rejects Bank Deposit Tax,
Scuttling Bailout Deal
By LIZ ALDERMAN, NYTIMES
March 19, 2013
NICOSIA — The Cypriot Parliament on Tuesday overwhelmingly repudiated a
€10 billion international bailout package that would have set an
extraordinary precedent by taxing ordinary depositors to pay part of
The lawmakers sent President Nicos Anastasiades back to the drawing
board with international bailout negotiators to devise a new plan that
would allow the country to receive a financial lifeline and avoid the
specter of a devastating default that would reignite the euro crisis.
Lawmakers rejected the plan with 36 voting no and 19 abstaining arguing
that it would be unacceptable to take money from account holders. Some
in the opposition party even suggested abandoning a European Union
bailout altogether and appealing to Russia or China to lend Cyprus the
funds it needs to keep the economy and its banks afloat. One member of
Parliament who was out of the country did not vote.
Analysts had also raised the possibility of bank runs and a halt in
liquidity to Cypriot banks from the European Central Bank if the
measure did not pass, meaning banks might not be able to open their
doors Thursday, the day that a scheduled bank holiday was supposed to
The measure failed despite a revision that would remove some objections
by exempting small bank accounts from the levies.
The original terms of the bailout called for a one-time tax of 6.75
percent on deposits of less than €100,000, or $129,000, and a 9.9
percent tax on holdings of more than €100,000. The levies, a condition
imposed by Cyprus’s fellow E.U. members, are designed to raise €5.8
billion of the total €10 billion bailout cost.
Under a new plan put forward by Mr. Anastasiades early Tuesday,
depositors with less than €20,000 in the bank would be exempt, but the
taxes would remain in place for accounts above that amount.
The rejection drew loud cheers and cries of joy from a crowd of more
than 500 protesters who had gathered in front of Parliament since late
afternoon, carrying banners denouncing what they said was a
confiscation of their private funds. Some wielded unflattering posters
of Chancellor Angela Merkel of Germany, a day after a demonstrator
breached security at the German Embassy and climbed to the roof,
throwing down the German flag.
“Today, Germany is engaging in Nazism again, not with the weapon of
force, but with money,” said a pensioner, Dimitris, 67, who would give
only his first name.
The central bank governor, Panicos O. Demetriades, had said the revised
plan would fall €300 million short of the €5.8 billion demanded by the
international lenders. The gap would be considered a breach of the
bailout agreement, he said, and “perhaps might not be accepted” by the
And even as Mr. Anastasiades submitted the revised plan to Parliament,
he had acknowledged that the changes probably would not be enough to
secure a majority in the 56-member legislature. “I estimate that the
Parliament will turn down the package,” he said on state television as
he headed into a series of meetings.
The managing director of the International Monetary Fund, Christine
Lagarde, said earlier Tuesday that she was in favor of modifying the
agreement to put a lower burden on ordinary depositors. “We are
extremely supportive of the Cypriot intentions to introduce more
progressive rates,” she said in Frankfurt.
She had urged leaders in Cyprus to quickly approve the plan agreed by
European leaders in Brussels last weekend. “Now is the time for the
authorities to deliver on what they have commented,” Ms. Lagarde said.
She complained that critics have not recognized the value of the
agreement, in that it would force banks in Cyprus to restructure and
In Brussels, Simon O’Connor, a spokesman for Olli Rehn, the E.U.
commissioner for economic and monetary affairs, said Tuesday that
finance ministers from countries using the euro had agreed the previous
night in a teleconference that Cyprus could adjust the way the levy
But Mr. O’Connor said the E.U. authorities were still waiting to see
whether the adjustments being discussed in Cyprus delivered “the same
financial effect” as the agreement between Cyprus and international
lenders in the early hours of Saturday.
“On the parameters of this levy, we will not comment as long as that’s
a process that’s still under way,” Mr. O’Connor said.
On the prospect that expatriates in Cyprus may not have access to their
bank accounts any time soon, the British Ministry of Defense said
Tuesday that it had sent a Royal Air Force plane to Nicosia with €1
million on board to offer loans to British military personnel there.
The money, it said, was meant to “provide military personnel and their
families with emergency loans in the event that cash machines and debit
cards stop working completely.”
The ministry also said that it offered to pay the salaries of employees
in Cyprus into British bank accounts. “We’re determined to do
everything we can to minimize the impact of the Cyprus banking crisis
on our people,” the ministry said in a statement.
E L E C T I O N D A
Y T U E S D A Y , N O V E M B E R 6
, 2 0 1 2
Four more years...
8, 2011 4:00 A.M.
The zombie youth “occupying” Wall Street are contemptuous of the world
that sustains their comforts.
Michael Oher, offensive lineman for the Baltimore Ravens, was online on
Wednesday night when his Twitter feed started filling up with tributes
to Steve Jobs. A bewildered Oher tweeted: “Can somebody help me out?
Who was Steve Jobs!”
He was on his iPhone at the time.
Who was Steve Jobs? Well, he was a guy who founded a corporation and
spent his life as a corporate executive manufacturing corporate
products. So he wouldn’t have endeared himself to the “Occupy Wall
Street” crowd, even though, underneath the patchouli and lentils, most
of them are abundantly accessorized with iPhones and iPads and iPods
loaded with iTunes, if only for when the drum circle goes for a
The above is a somewhat obvious point, although the fact that it’s not
obvious even to protesters with an industrial-strength lack of
self-awareness is a big part of the problem. But it goes beyond that:
If you don’t like to think of Jobs as a corporate exec (and a famously
demanding one at that), think of him as a guy who went to work, and
worked hard. There’s no appetite for that among those “occupying”
Zuccotti Park. In the old days, the tribunes of the masses demanded an
honest wage for honest work. Today, the tribunes of America’s leisured
varsity class demand a world that puts “people before profits.” If the
specifics of their “program” are somewhat contradictory, the general
vibe is consistent: They wish to enjoy an advanced Western lifestyle
without earning an advanced Western living. The pampered, elderly
children of a fin de civilisation overdeveloped world, they appear to
regard life as an unending vacation whose bill never comes due.
So they are in favor of open borders, presumably so that exotic Third
World peasants can perform the labor to which they are noticeably
averse. Of the 13 items on that “proposed list of demands,” Demand Four
calls for “free college education,” and Demand Eleven returns to the
theme, demanding debt forgiveness for all existing student loans. I
yield to no one in my general antipathy to the racket that is American
college education, but it’s difficult to see why this is the fault of
the mustache-twirling robber barons who head up Global MegaCorp, Inc.
One sympathizes, of course. It can’t be easy finding yourself saddled
with a six-figure debt and nothing to show for it but some watery
bromides from the “Transgender and Colonialism” class. Americans
collectively have north of a trillion dollars in personal college debt.
Say what you like about Enron and, er, Solyndra and all those other
evil corporations, but they didn’t relieve you of a quarter-mil in
exchange for a master’s in Maya Angelou. So why not try occupying the
dean’s office at Shakedown U?
Ah, but the great advantage of mass moronization is that it leaves you
too dumb to figure out who to be mad at. At Liberty Square, one of the
signs reads: “F**k your unpaid internship!” Fair enough. But, to a
casual observer of the massed ranks of Big Sloth, it’s not entirely
clear what precisely anyone would ever pay them to do.
Do you remember Van Jones? He was Obama’s “green jobs” czar back before
“green jobs” had been exposed as a gazillion-dollar sinkhole for
sluicing taxpayer monies to the president’s corporate cronies. Oh,
don’t worry. These cronies aren’t “corporate” in the sense of Steve
Jobs. The corporations they run put “people before profits”: That’s to
say, they’ve figured out it’s easier to take government money from you
people than create a business that makes a profit. In an amusing
inversion of the Russian model, Van Jones became a czar after he’d been
a Communist. He became a Commie in the mid-Nineties — i.e., after even
the Soviet Union had given up on it. Needless to say, a man who never
saw a cobwebbed collectivist nostrum he didn’t like no matter how long
past its sell-by date is hot for “Occupy Wall Street.” Indeed, Van
Jones thinks that the protests are the start of an “American Autumn.”
In case you don’t get it, that’s the American version of the “Arab
Spring.” Steve Jobs might have advised Van Jones he has a branding
problem. Spring is the season of new life, young buds and so forth.
Autumn is leaves turning brown and fluttering to the ground in a big
dead heap. Even in my great state of New Hampshire, where autumn is
pretty darn impressive, we understand what that blaze of red and orange
leaves means: They burn brightest before they fall and die, and the
world turns chill and bare and hard.
So Van Jones may be on to something! American Autumn. The days dwindle
down to a precious few, like in whatever that old book was called, The
Summer and Fall of the Roman Empire.
If you’ll forgive a plug for my latest sell-out to my corporate
masters, in my new book I quote H. G. Wells’s Victorian Time Traveler
after encountering far in the future the soft, effete Eloi: “These
people were clothed in pleasant fabrics that must at times need
renewal, and their sandals, though undecorated, were fairly complex
specimens of metalwork. Somehow such things must be made.” And yet he
saw “no workshops” or sign of any industry at all. “They spent all
their time in playing gently, in bathing in the river, in making love
in a half-playful fashion, in eating fruit and sleeping. I could not
see how things were kept going.” The Time Traveler might have felt much
the same upon landing in Liberty Square in the early 21st century,
except for the bit about bathing: It’s increasingly hard in America to
“see how things are kept going,” but it’s pretty clear that the members
of “Occupy Wall Street” have no plans to contribute to keeping things
going. Like Michael Oher using his iPhone to announce his ignorance of
Steve Jobs, in the autumn of the republic the beneficiaries of American
innovation seem not only utterly disconnected from but actively
contemptuous of the world that sustains their comforts.
Why did Steve Jobs do so much of his innovating in computers? Well,
obviously, because that’s what got his juices going. But it’s also the
case that, because it was a virtually non-existent industry until he
came along, it’s about the one area of American life that hasn’t been
regulated into sclerosis by the statist behemoth. So Apple and other
companies were free to be as corporate as they wanted, and we’re the
better off for it. The stunted, inarticulate spawn of America’s educrat
monopoly want a world of fewer corporations and lots more government.
If their “demands” for a $20 minimum wage and a trillion dollars of
spending in “ecological restoration” and all the rest are ever met,
there will be a massive expansion of state monopoly power. Would you
like to get your iPhone from the DMV? That’s your “American Autumn”: an
America that constrains the next Steve Jobs but bigs up Van Jones.
Underneath the familiar props of radical chic that hasn’t been either
radical or chic in half a century, the zombie youth of the Big Sloth
movement are a paradox too ludicrous even for the malign alumni of a
desultory half-decade of Complacency Studies: They’re anarchists for
Big Government. Do it for the children, the Democrats like to say.
They’re the children we did it for, and, if this is the best they can
do, they’re done for.
Wall Street’s winter
By NICOLE GELINAS
Last Updated: 3:09 AM, October 7, 2011
Posted: 9:45 PM, October 6, 2011
Tick-tock. Thanks to Washington’s support for big banks, New York City
has been a cocoon of prosperity compared to the rest of the nation over
the last three years.
But banks can’t stay on the dole forever -- and the city’s done nothing
in the 37 months since Lehman Bros. collapsed to prepare for a leaner
Wall Street. Without endless financial-industry profits, New York
can’t afford to make good on the promises it’s made to workers and pick
up the trash and keep criminals off streets. From 1997 to 2007,
the city’s tax collections nearly doubled, from $20.4 billion to $38.6
billion, growth nearly three times the inflation rate. Why? The
financial industry was making record profits from debt and derivatives.
Yet even during these “good” years, New York could barely keep its head
above water. That is, the city needed the biggest bubble that the
modern world has ever seen just so it could continue to:
* Let cops and firefighters continue to retire after 20 years.
* Provide nearly free health benefits to its army of workers and
retirees and their dependents.
* Throw a few dollars to bridges and transit.
* Oh, and double the schools budget.
Without a bubble, doing this stuff isn’t tricky. It’s impossible.
In the four fiscal years since Lehman collapsed (including this year),
the city has run an average deficit of 4.6 percent of its tax
collections. We’ve kept going thanks to an $8 billion surplus we had
built up in the five years pre-meltdown -- but that money is now
gone. And those budget holes would’ve been bigger were it not for
our other reprieve: Washington’s decision, post-Lehman, to protect Wall
Street at all costs.
First came the TARP bailouts, which kept some companies afloat when
they should have gone bankrupt. Then came the Federal Reserve’s
zero-percent interest rates -- which essentially meant free money for
Wall Street, which made it easy to turn a profit. Then, too,
regulators have ignored the fact that banks have had no idea how to do
foreclosures (when millions of houses need them) without, um, bending
Welfare-for-Wall-Street worked for a while. The banks even started
adding back jobs. After shedding 41,100 positions between 2007 and 2010
-- 8.8 percent of the total -- New York’s financial firms hired back
10,600 people starting in spring 2010.
That may not sound impressive. But each of those 10,600 people makes an
average $262,195 -- more than four times what a New Yorker who’s not in
the financial sector makes. And each of these new workers has supported
other local jobs -- in the private sector via consumer spending, and in
the public sector through higher tax payments. Last year, for
example, the city took in $2.1 billion more in “economically sensitive
taxes” -- closely tied to Wall Street -- than it had the year before.
That staved off a lot of wolves.
But the wolves aren’t dead -- and now Wall Street is shedding jobs
again -- 4,000 since May, and that’s just the beginning. If tax
revenues surprise us this year, it’ll be on the way down, not up.
As bailout anesthesia wears off, Wall Street can’t figure out how to
make money -- and the problem’s not just the European crisis or new
regulations. It’s worse: Investors and clients are increasingly
skeptical of the Wall Street business model, and of the Western
governments upon which too-big-to-fail finance depends. And the
demonstrators in Zuccotti Park are a reminder to astute bank investors
that the broader public remains inconveniently white-hot angry about
bailouts. The Tea Party hasn’t gone away, either
In other words, banks and their investors have no idea how the shifting
business and political climate will affect their profits in the years
to come. But it’s pretty clear they won’t enjoy the growth they
experienced before 2007 -- and neither will New York. Nor has
Mayor Bloomberg (or anyone else in city government, like mayoral
wannabe Christine Quinn) used the four-year reprieve to prepare for
wrenching change in our bread-and-butter industry.
Pension costs for public workers will reach $8.4 billion this year --
up from $5.7 billion when Lehman collapsed. Add in health and other
non-wage benefits for workers and retirees, and this year’s total is
$16.4 billion -- 39 percent of city tax revenues. Almost every dollar
of property tax that the city collects goes toward these costs.
These numbers are an existential threat to everything New York has
gained in the past 20 years -- declines in crime included.
Though it may be hard to believe, we may soon wish we had the last
three years back.
Martin Gruenberg (right), acting chairman of the FDIC, and Sen.
Tim Johnson speak to the media Wednesday before a roundtable discussion
with area banking executives at University Center. Gruenberg talked
about the implementation of the Wall Street Reform and Consumer
Protection Act and how it affects small community banks. kelly thurman
/ argus leader
Acting FDIC chief predicts
concerns about new regulations
Written by Kelly Thurman
12:00 AM, Aug. 18, 2011 |
Community banks, which have faced challenging years, probably will
continue to consolidate, Martin Gruenberg, acting chairman of the
Federal Deposit Insurance Corp. said Wednesday.
But Gruenberg also said community banks are a vital part of the
economy, and while there are challenges ahead, there is a reason to be
"A majority will come through in viable condition," he said of
community banks. "Under any scenario, we are going to have a
significant and viable community bank structure in America going
Gruenberg spoke during a roundtable discussion hosted by Sen. Tim
Johnson at University Center. Executives from the financial industry
attended the discussion which focused on the Wall Street Reform and
Consumer Protection Act and other issues.
The roundtable also included a number of executives from banks across
Both Gruenberg and Johnson, who is chairman of the Senate Banking
Committee and will oversee implementation of the law, said one of the
main priorities with the new law will be community banks.
Panelists also pointed to some of the positive notes the Wall Street
Reform Act has provided smaller banks, such as increasing the cap for
FDIC coverage from $100,000 to $250,000.
While community banks make up 11 percent of banking assets, they handle
about 40 percent of small business loans nationwide, Gruenberg said.
But they also have been hit hard by the financial crisis the past few
In 2009, 140 banks failed. Last year, that number increased to 157,
with many of them community banks possessing assets of less than $1
But with 60 bank failures already this year, Gruenberg said the number
is starting to slow. The FDIC's problem bank list in the past two
fiscal quarters also started to stabilize after growing the past three
Provided the economy is able to sustain modest growth, the financial
industry should be able to move through the crisis, he said.
Bruce Haerter, of Farmers State Bank in Hosmer, said things are mostly
good in the community which has a strong agricultural foundation. But
he also said getting a mortgage can be a challenge.
He has two homes under construction in the community. One couple needed
a mortgage, which he referred to another bank. After starting the
process in early April, the couple wasn't able to break ground until
late July after a lengthy and costly appraisal process.
Meanwhile, the other couple broke ground in May.
"The process isn't right, and I'm concerned about that," he said. "I
really am concerned about rural America if that continues."
Curt Hage, chairman and CEO of Sioux Falls-based HF Financial, parent
company of Home Federal Bank, and Jack Hopkins, president and CEO of
CorTrust Bank, cited regulatory concerns and increased costs as
Hopkins also talked about the increased cost of appraisals and the need
to simplify the mortgage process, blaming the large amount of paperwork
as a cause of the mortgage fiasco. People had to go through a high pile
of paperwork for a mortgage, he said.
"Nobody understood what they were signing," he added.
Hage said 3,100 jobs in the financial sector have been lost in South
Dakota since 2008 because of the recession and acts of Congress.
It is important for the government to create sensible regulations with
an understanding of how banks function, he said.
While the new regulations had good intentions for regulating large Wall
Street banks, "it's killing the smaller banks," he said.
many reports does it take to know we have a problem? And how many
does it take to lay the blame?
DEEP BACKGROUND, TO GO
CRISIS" PAGE, CLICK
INQUIRY COMMITTEE (F.C.I.C.)
reports: Weston High School graduate on the F.C.I.C.!
MAJORITY OPINION, (6)
IMMEDIATELY BELOW "THE MOMENT OF
BIPARTISAN DEFICIT COMMISSION DRAFT REPORT ONLINE HERE
Erskine Bowles (left) and former Wyoming Sen. Alan
co-chairmen of President Obama's bipartisan deficit commission,
for a news conference on Capitol Hill on Thursday. (Associated
FROM NYTIMES "Economix" pages
settles SEC fraud charges over bond sales
By MARCY GORDON, AP Business Writer
18 August 2010
WASHINGTON – The state of New Jersey has settled federal civil fraud
charges of failing to inform bond investors that it had not met
obligations to its largest pension plans, federal regulators said
In announcing the settlement, the Securities and Exchange Commission
said New Jersey did not give municipal bond investors enough
information to fully assess the state's financial picture.
New Jersey was the first state ever charged for violations of the
securities laws. New Jersey neither admitted nor denied the
allegations. It did agree to refrain from future violations of the
No financial penalty was levied against the state. The SEC said it took
into account state authorities' cooperation in its investigation and
action taken by the state to correct the situation.
The case marked the latest action by the SEC touching on the $2.7
trillion bond market, used to finance schools, roads and hospitals
around the country. Retail investors increasingly participate in the
market, seeking safe investments with reliable returns. At the same
time, crises in several municipalities have underscored the importance
of the municipal bond market.
The SEC had charged that New Jersey sold more than $26 billion in
municipal bonds between 2001 and 2007 to raise money for economic
development projects, such as roads and power lines. But the bond sale
documents didn't disclose that the state had failed to meet its
financial obligations to two state employee pension funds. New Jersey
likely couldn't contribute to the pension funds without raising taxes
or cutting services, the SEC said.
As a result, investors in New Jersey's bonds lacked sufficient
information to assess the state's financial status, the SEC said.
"All issuers of municipal securities, including states, are obligated
to provide investors with the information necessary to evaluate
material risks," Robert Khuzami, the SEC's enforcement director, said
in a statement. "The state of New Jersey didn't give its municipal
investors a fair shake, withholding and misrepresenting pertinent
information about its financial situation."
The SEC last year proposed requiring brokers in municipal bonds to make
fuller and more timely disclosures to investors.
Many states around the country have been unable to fully fund their
public employee pension plans in the financial crisis.
"It is an area of concern," Elaine Greenberg, chief of the SEC's
municipal securities and public pensions unit, said in a telephone
interview. "We want to make sure that states and municipalities are
adequately disclosing" their pension fund liabilities, she said.
State budget gaps to total $84
billion for fiscal 2011: study
improve, states struggle
with less federal support for medical aid
By Deborah Levine, MarketWatch
July 27, 2010, 12:03 a.m. EDT
NEW YORK (MarketWatch) -- State budget gaps are now expected to total
$83.9 billion for fiscal 2011, with shortfalls anticipated for the next
couple of years, according to a study released Tuesday by the National
Conference of State Legislatures.
That bleak assessment contains one ray of good news: The total is
slightly less than the estimate in March for an $89 billion gap.
The biggest shortfall to make up may be the reduction in federal aid
for medical programs. Congress hasn't approved extending this aid after
increasing support as part of last year's stimulus package.
Officials in many states told NCSL that revenues have started to
improve, or at least the rate of decline has slowed. But they still
worry stabilizing revenues won't be enough to replace the loss of
federal stimulus funds, and several states project deficits through
"For the first time in a long time we're seeing some slight improvement
in the state revenue situation," said Corina Eckl, NCSL's fiscal
program director. "But glimmers of improvement are tarnished by looming
Almost half of all states said fiscal 2011 gaps would be 10% or more of
their general fund. The largest was Nevada, with its budget deficit
amounting to 45% of its general fund, NCSL said.
New Jersey, Arizona, Maine, North Carolina and three others had gaps of
at least 20%.
Five states that previously said they didn't have a deficit reported
one had developed.
Of the 44 states that provided 2011 tax forecasts, half said they
expect revenue growth between 1% and 4.9%.
Three states see revenue growing at least 10% -- Oregon, Washington and
Colorado -- all because of various tax increases.
As of now, seven states project deficits at the end of fiscal 2010,
which for some doesn't end until later this calendar year.
The biggest is Illinois, followed by Oregon, Michigan, Kansas,
Washington, Pennsylvania and South Carolina.
Many did cut spending to bring the budget into balance, with 45 states
saying fiscal 2010 general fund spending fell 4.6% percent below 2009
Economists have noted that public budget cuts would limit the recovery
of the national economy, though municipal bond investors generally have
little to fear. See story on municipal budgets, bonds.
NCSL notes that the report includes complete or partial information on
49 states. Only partial information was available from California,
Florida and New York.
2012 and 2013
Two-thirds of the states already forecast another round of double-digit
budget gaps in FY 2012. The deficit tally so far is $72.1 billion.
Eighteen states expect the gap to be at least 10% of their general fund.
Of states that have budget forecasts extending to fiscal 2013, 23
project budget gaps, which mostly can be traced in part to the end of
federal stimulus funds, NCSL analysts said.
to the full collection of NYTIMES' series of articles...
States making employees
longer for retirement benefits
Keith M. Phaneuf, CT MIRROR
August 3, 2010
When it comes to pushing back the retirement age for state employees,
Connecticut is testing waters that many states have plunged into over
the past year. A new report from the National Conference of State
Legislatures found 10 states have passed laws this year to keep
public-sector employees working longer.
"I think it's clear other states are doing this because they recognize
the benefits are becoming unaffordable," Michael J. Cicchetti, Gov. M.
Jodi Rell's deputy budget secretary and chairman of her Post Employment
Benefits Commission, said Monday.
The administration, which created the commission in February to propose
solutions to the huge funding gaps facing state retirement benefit
programs, has suggested raising the normal retirement age for new state
employees from 62 to 65 for workers with at least 10 years of
experience. According to its last, full actuarial valuation, the
pension fund had $19.2 billion worth of obligations, or liabilities,
and held just under $10 billion, an amount equal to 52 percent of its
liability. Actuaries typically cite a funded ratio of about 80 percent
"It's something you just can't ignore," Cicchetti added.
According to the NCSL, it's a problem shared by many other
Missouri Gov. Jay Nixon called his state's legislature into special
session in late June to reform the pension system, securing bipartisan
support for a law that - among other actions - raises the retirement
age for workers hired after Jan. 1 from 62 to 67.
"We believe that these changes bring Missouri's retirement system more
in line with the private sector," Nixon spokesman Scott Holste said
Illinois Gov. Pat Quinn also made pension reform a priority this year,
signing legislation to raise the retirement age for new workers
starting next year from 60 to 67, according to spokeswoman Annie
Thompson. That change was part of a larger package of retirement
reforms Quinn projected would stabilize the pension system and save
over $200 billion over 35 years.
Other states that increased their retirement age for state workers this
year, according to the NCSL report, are Iowa, Michigan and
Some states base eligibility for retirement benefits on a combination
of age and years of service. The 2009 concession agreement negotiated
by Gov. M. Jodi Rell and Connecticut's state employee unions codified
the so-called "rule of 75," which requires worker's age and years of
service to total 75 before retirement health benefits can be accessed.
The minimum combination for all retirement benefits in Arizona was
raised from 80 to 85, and in Colorado from 85 to 88, according to the
NCSL report. Virginia increased the minimum combination for new state
and municipal employees from 80 to 90.
Changes such as those enacted in Virginia effectively require eligible
retirees not only to spend several decades in government service, but
in most cases to retire at a later age.
Utah allows anyone with 30 years of state service, regardless of age to
retire. But according to the NCSL report, the limit for new workers was
raised this year to 35.
In Minnesota, lawmakers tried a different approach to keep workers on
the job longer, doubling the pension reduction for state police and
correction officers who seek to take advantage of early retirement
Connecticut's pension fund has been plagued by two problems: decades of
legislatures and governors authorizing annual contributions less than
the level needed both to cover current costs and save for future
payments; and periodic retirement incentive programs that trim salary
expenses in the short-term while prematurely stripping the pension fund
of assets that would have earned more in interest.
According to June report from an actuary and health care consultant on
the effects of the 2009 incentive program on the Connecticut pension
fund, the state's annual contribution to the pension fund would have to
rise next year by $217 million, from $844 million to $1.06 billion.
But that report didn't assess the fund's overall investment earnings
over the past two years, or the impact of $314.5 million in pension
fund payments that Rell and the legislature have deferred - with union
approval - since 2009.
Matt O'Connor, spokesman for the State Employees Bargaining Agent
Coalition, said state government doesn't have to be at odds with its
unions as it tries to strengthen its pension fund.
SEBAC, which negotiates benefits for about 45,000 unionized state
employees, 42,000 retirees and roughly 100,000 dependents, offered a
plan last spring to undo damage caused by early retirement programs.
Union leaders suggested reversing the process, offering incentives to
workers willing to defer retirement - and thereby spend more years
contributing to the pension fund rather than drawing benefits from it.
That idea was rejected by the Rell administration this year as it asked
the unions to consider a second round of wage and benefit concessions.
SEBAC rejected that request.
"We might be able to find some common ground if they would take a
closer look at this," O'Connor said, adding the coalition believes it
would interest enough workers to provide savings both the state
government and employees.
"We really do believe it would be popular," he said. "We may be in a
so-called recovery, but we are still facing unemployment close to 10
percent. We think a lot of people would see the advantage of staying on
for another few years."
Pension Woes, Maine Looks to
By MARY WILLIAMS WALSH
July 20, 2010
Lawmakers in Maine have found an unusual tool for tackling their
state’s pension woes: Social Security.
Just as workers in the private sector participate in Social Security in
addition to any pension plan at their companies, most states put their
workers in the federal program along with providing a state pension.
Maine and a handful of others, however, have long been holdouts,
relying solely on their state pension plans. In addition, most states
have excluded some workers — often teachers, firefighters and police —
from the national retirement system and its associated costs, 6.2
percent of payroll for the employer and an equal amount for the worker.
Now, Maine legislators have prepared a detailed plan for shifting state
employees into Social Security and are considering whether to adopt it.
They acknowledge it will not solve their problem in the short term but
see long-term advantages.
Some variation on this idea could ultimately appeal to other states
grappling with their own exploding pension costs and, in extreme cases,
quietly looking for help from Washington. In troubled states, some
employees have wondered whether they might be allowed to begin paying
in and collecting from the federal system even before they have
contributed a career’s worth of taxes.
The potential effect on the Social Security program is hard to
estimate. Maine’s proposal would mean new members and a small
additional source of payroll tax revenue for the federal system.
Even if it fully embraces the proposal, Maine will have to come up with
a considerable sum to sustain its existing pension plan, presumably
through some combination of taxes and service cuts. After a phase-in
period, Social Security would cover part of state retirees’ benefits,
with the state pension as the remainder. Many pension plans in
corporate America coordinate their benefits in this way.
The proposal has the advantage of not reducing promised benefits,
guaranteed by the constitution in many states. The change would not be
cheap, but it would reduce the role of Maine’s pension fund and thus
the risk of having to suddenly cover giant losses down the road.
A Social Security spokesman said the agency did not expect many of the
holdout states to join, citing the cost of participation. The only
other state known to have talked recently about adding Social Security
More than six million public employees work outside the Social Security
system, including roughly 1.7 million teachers in California, Illinois
and Texas, and nearly two million employees of all types in Alaska,
Colorado, Massachusetts, Nevada and Ohio, as well as Louisiana and
Maine. For years, these and other states have insisted they could
provide richer pensions at a lower cost, both to workers and taxpayers,
because of investments.
Some of those states’ pension plans now have shortfalls so large that
they need outsize contributions. Virtually all state pension funds have
had big losses in the last two years, but the go-it-alone states appear
Not only are these states trying to provide richer benefits with
smaller contributions than the payroll tax for Social Security, but
they have promised to do it for workers who can retire 10 and sometimes
20 years younger.
With pension costs ballooning and taxpayers lashing out, many workers
in states with deeply underfunded plans fear their benefits will be
cut. Those being asked to put more into their pension funds complain
they feel caught up in Ponzi schemes. Some wish they had been part of
Social Security after all.
“Had I known back then, I would not have stayed in Illinois,” said John
Gebhardt, a university employee in that state, which keeps teachers and
university personnel out of Social Security. He has even offered to pay
both his own and his employer’s payroll tax to join Social Security,
but was told no.
Maine lawmakers who support shifting state workers into Social Security
say they believe it would be fairer. Social Security may not be sexy,
but it is portable.
A recent study in Maine underscored the penalty paid by the mobile work
force. Only one in five state employees stays around long enough to get
a full pension. The majority leave, taking neither a pension nor any
Social Security credits with them. This practice, not investment gains,
has sustained the state’s pension system.
“The current system is immoral,” said Peter Mills, who, as a state
senator, started the push to join Social Security. “It takes younger
people and feeds off of them. You can withdraw from teaching at age 40
and realize you’ve got nothing to look ahead to for your old age.”
Dallas L. Salisbury, president of the Employee Benefit Research
Institute, said he was surprised by how few public workers ever got
pensions in Maine, where he provided advice on a pension overhaul. He
said he checked and found similar turnover in other states.
Whether Maine joins Social Security or not, painful choices must be
made. The state pension fund lost $2.25 billion in 2008, and taxpayers
will have to replace the lost money. But they have less time to do so
than most states, thanks to tough financing rules in the constitution.
Projections show that Maine will not have enough money to do much else
in the coming years if it adheres to those rules.
“It’s going to rip the guts out of our budget,” said Mr. Mills. “I
don’t think you can find a budgetary parallel in my lifetime, and I’m
Unlike laggard states, including Illinois and New Jersey, Maine had in
recent years been making its required pension contributions annually,
and it avoided the common mistake of sweetening benefits when markets
Its looming fiscal crisis stems primarily from investment losses,
points out Sandy Matheson, executive director of the state plan. “Maine
is almost like a petri dish,” she said, showing how things can go awry
even if a state is responsible.
Mr. Mills, a Republican, initially envisioned shifting workers into
Social Security and a 401(k) plan. But he now views Social Security
combined with a traditional pension as a safer option. That puts him on
common ground with Democrats in the statehouse.
The proposal may meet resistance, however, because it does not fill the
gaping hole in the state’s pension fund.
A shift into the federal program is also hard to plan because Social
Security has a financial imbalance — one that will worsen as the
population ages. At some point, Congress is expected to either raise
taxes or cut benefits.
Still, Social Security’s future is easier to predict than that of a
state pension fund, because its pressure stems from broad demographic
trends, not the vagaries of the stock market. Social Security keeps its
reserves in conservative Treasury securities.
“You’ve got reviews taking place all over the country,” said Mr.
Salisbury. Most places are asking painful questions about their
investment strategies. But what Maine has discovered, he said, is just
how expensive it really is to provide a guaranteed retirement benefit.
Debt commission leaders paint
By GLEN JOHNSON, Associated Press Writer
11 July 2010
BOSTON – The heads of President Barack Obama's national debt commission
painted a gloomy picture Sunday as the United States struggles to get
its spending under control.
Republican Alan Simpson and Democrat Erskine Bowles told a meeting of
the National Governors Association that everything needs to be
considered — including curtailing popular tax breaks, such as the home
mortgage deduction, and instituting a financial trigger mechanism for
gaining Medicare coverage. The nation's total federal debt next
year is expected to exceed $14 trillion — about $47,000 for every U.S.
"This debt is like a cancer," Bowles said in a sober presentation
nonetheless lightened by humorous asides between him and Simpson. "It
is truly going to destroy the country from within."
Simpson said the entirety of the nation's current discretionary
spending is consumed by the Medicare, Medicaid and Social Security
"The rest of the federal government, including fighting two wars,
homeland security, education, art, culture, you name it, veterans, the
whole rest of the discretionary budget, is being financed by China and
other countries," said Simpson. China alone currently holds $920
billion in U.S. IOUs.
Bowles said if the U.S. makes no changes it will be spending $2
trillion by 2020 just for interest on the national debt.
"Just think about that: All that money, going somewhere else, to create
jobs and opportunity somewhere else," he said.
Simpson, the former Republican senator from Wyoming, and Bowles, the
former White House chief of staff under Democratic President Bill
Clinton, head an 18-member commission. It's charged with coming up with
a plan by Dec. 1 to reduce the government's annual deficits to 3
percent of the national economy by 2015. Bowles led successful
1997 talks with Republicans on a balanced budget bill that produced
government surpluses the last three years Clinton was in office and the
first year of Republican George W. Bush's presidency. Simpson, as the
Senate's GOP whip in 1990, helped round up votes for a budget bill in
which President George H.W. Bush broke his "read my lips" pledge not to
Despite their backgrounds, both Simpson and Bowles said they were not
100 percent confident of success this time around. Simpson
labeled the commission members "good people of deep, deep difference,
knowing the possibility of the odds of success are rather harrowing to
say the least."
Bowles also said Congress had to be ready to accept the commission's
"What we do is not so hard to figure out; it's the political
consequences of doing it that makes it really tough," he said.
Arkansas Gov. Mike Beebe was one of those leaders who sat in rapt
attention during the presentation, one of the first in public by the
"I don't know that I ever heard a gloomier picture painted that created
more hope for me," said Beebe, commending its frankness.
Debtors’ Prism: Who Has
By JACK EWING
June 4, 2010
IT’S a $2.6 trillion mystery.
That’s the amount that foreign banks and other financial companies have
lent to public and private institutions in Greece, Spain and Portugal,
three countries so mired in economic troubles that analysts and
investors assume that a significant portion of that mountain of debt
may never be repaid.
The problem is, alas, that no one — not investors, not regulators, not
even bankers themselves — knows exactly which banks are sitting on the
biggest stockpiles of rotting loans within that pile. And doubt, as it
always does during economic crises, has made Europe’s already
vulnerable financial system occasionally appear to seize up. Early last
month, in an indication of just how dangerous the situation had become,
European banks — which appear to hold more than half of that $2.6
trillion in debt — nearly stopped lending money to one another.
Now, with government resources strained and confidence in European
economies eroding, some analysts say the Continent’s banks have to come
clean with a transparent and rigorous accounting of their woes. Until
then, they say, nobody will be able to wrestle effectively with
Europe’s mounting problems.
“The marketplace knows very little about where the real risks are
parked,” says Nicolas Véron, an economist at Bruegel, a research
organization in Brussels. “That is exactly the problem. As long as
there is no semblance of clarity, trust will not return to the banking
Limited disclosure and possibly spotty accounting have been long-voiced
concerns of analysts who follow European banks. Though most large
publicly listed banks have offered information about their exposure —
Deutsche Bank in Frankfurt says it holds 500 million euros in Greek
government bonds and no Spanish or Portuguese sovereign debt — there
has been little disclosure from the hundreds of smaller mortgage
lenders, state-owned banks and thrift institutions that dominate
banking in countries like Germany and Spain.
Depfa, a German bank that is now based in Dublin, is one of the few
second-tier European banking institutions that have offered detailed
disclosures about their financial wherewithal, and its stark troubles
may be emblematic of those still hidden on other banks’ books.
Despite boasting as recently as two years ago of its “very conservative
lending practices,” Depfa, which caters primarily to governments, has
flirted with disaster. It narrowly avoided collapsing in late 2008
until the German government bailed it out, and today its books are
still laden with risk.
DEPFA and its parent, Hypo Real Estate Holding, a property lender
outside Munich, have 80.4 billion euros in public-sector debt from
Greece, Spain, Portugal, Ireland and Italy. The amount was first
disclosed in March but did not draw much attention outside Germany
until last month, when investors decided to finally try to tally how
much cross-border lending had gone on in Europe.
Before Greece’s problems spilled into the open this year, investors
paid little heed to how much lending European banks had done outside
their own countries — so it came as a surprise how vulnerable they were
to economies as weak as those of Greece and Portugal.
“Everybody knew there was a lot of debt out there,” said Nick Matthews,
senior European economist at Royal Bank of Scotland and one of the
authors of the report that tallied up Greek, Spanish and Portuguese
debt. “But I think the extent of the exposure was a lot higher than
most people had originally thought.”
Concern has quickly spread beyond just the sovereign bonds issued by
the three countries as well as by Italy and Ireland, which are also
seriously indebted. Private-sector debt in the troubled countries is
also becoming an issue, because when governments pay more for
financing, so do their domestic companies. Recession, along with higher
interest payments, could lead to a surge in corporate defaults, the
European Central Bank warned in a report on May 31.
Hypo Real Estate has hundreds of millions in shaky real estate loans on
its books, as well as toxic assets linked to the subprime crisis in the
United States. In the first quarter, it set aside an additional 260
million euros to cover potential loan losses, bringing the total to 3.9
billion euros. But that amount is a drop in the bucket, a mere 1.6
percent of Hypo’s total loan portfolio. Hypo has not yet set aside
anything for money lent to governments in Greece and other troubled
countries, arguing that the European Union rescue plan makes defaults
The European Central Bank estimates that the Continent’s largest banks
will book 123 billion euros ($150 billion) for bad loans this year, and
an additional 105 billion euros next year, though the sums will be
partly offset by gains in other holdings.
Analysts at the Royal Bank of Scotland estimate that of the 2.2
trillion euros that European banks and other institutions outside
Greece, Spain and Portugal may have lent to those countries, about 567
billion euros is government debt, about 534 billion euros are loans to
nonbanking companies in the private sector, and about 1 trillion euros
are loans to other banks. While the crisis originated in Greece, much
more was borrowed by Spain and its private sector — 1.5 trillion euros,
compared with Greece’s 338 billion.
Beyond such sweeping estimates, however, little other detailed
information is publicly known about those loans, which are equivalent
to 22 percent of European G.D.P. And the inscrutability of the problem,
as serious as it is, is spawning spoofs, at least outside the euro
zone. A pair of popular Australian comedians, John Clarke and Bryan
Dawe, who have created a series of sketches about various aspects of
the financial crisis, recently turned their attention to the bad-debt
problem in Europe. After grilling Mr. Clarke about the debt crisis in a
mock quiz show, Mr. Dawe tells Mr. Clarke that his prize is that he has
lost a million dollars. “Well done,” says Mr. Dawe. “That’s an
On a more serious front, Timothy F. Geithner, the United States
Treasury secretary, visited Europe at the end of May and called on
European leaders to review their banks’ portfolios, as American
regulators did last year, to separate healthy banks from those that
need intensive care.
Others say that if such reviews do not occur, the banking sector in
Europe could be crippled and the broader economy — dependent on loans
for business expansions and job growth — could stall. And if that
happens, says Edward Yardeni, president of Yardeni Research, the
Continent’s banks could find themselves sinking even further because
“European governments won’t be in a position to help them again.”
LENDING practices at Depfa may have seemed conservative before its 2008
meltdown, but its business model had always been based on a precarious
assumption: borrowing at short-term rates to finance long-term lending,
often for huge infrastructure projects.
From its base in Dublin, where it moved from Germany in 2002 for tax
reasons, Depfa helped raise money for the Millau Viaduct, the huge
bridge in France; for refinancing the Eurotunnel between France and
Britain; and for an expansion of the Capital Beltway in suburban
Virginia. Depfa was also a big player in the United States in other
ways, like lending to the Metropolitan Transportation Authority in New
York and to schools in Wisconsin.
Before the current crisis, Depfa was proud of its engagement in
Mediterranean Europe. In its 2007 annual report, the company boasted of
helping to raise 200 million euros for Portugal’s public water supplier
and 100 million euros for public transit in the city of Porto. In
Spain, it helped cities such as Jerez refinance their debt and helped
raise money for public television stations in Valencia and Catalonia as
well as raise 90 million euros for a toll road in Galicia. And in
Greece, Depfa raised 265 million euros for the government-owned railway
and in 2007 told shareholders of a newly won mandate: providing credit
advice to the city of Athens.
Depfa said it performed a rigorous analysis of the creditworthiness of
its customers, including a 22-grade internal rating system in addition
to outside ratings. More than a third of its buyers earned the top AAA
rating, the bank said in 2008, while more than 90 percent were A or
The public infrastructure projects in which Depfa specialized were
considered low-risk, and typically generated low interest payments. Yet
because long-term interest rates were typically higher than short-term
rates, Depfa could collect the difference, however modest, in profit.
To outsiders, Depfa still looked like a growth story even after the
subprime crisis began in the United States. Hypo Real Estate, which
focused on real estate lending, acquired Depfa in 2007. After the
acquisition, Depfa kept its name and its base in Dublin.
But when the United States economy reached the precipice in September
2008, banks suddenly refused to make short-term loans to one another,
blowing a hole in Depfa’s financing and leaving it with a loss for the
year of 5.5 billion euros and dependent on the German government for a
As Hypo’s 2008 annual report said of Depfa: “The business model has
proved not to be robust in a crisis.”
Even with Depfa’s myriad travails, most investors weren’t aware of the
extent of its cross-border problems until it disclosed them this year.
The question now hanging over Europe is how many other banks have
problems similar to Depfa’s, but haven’t disclosed them.
On May 7, the cost of insuring against credit losses on European banks
reached levels higher than in the aftermath of the Lehman Brothers
collapse in the United States. Officials at the European Central Bank
warned that risk premiums were soaring to levels that threatened their
ability to carry out their fundamental role of controlling interest
Three days later, European Union governments joined with the
International Monetary Fund to offer nearly $1 trillion in loan
guarantees to Europe’s banks. At the same time, the European Central
Bank began buying government bonds for the first time ever to prevent a
sell-off of Greek, Spanish and other sovereign debt.
The measures, widely regarded as a de facto bank rescue, restored some
calm to the markets, but critics said that the aid merely bought time
without reducing overall debt load. Europe’s major stock indexes and
the euro have continued to fall as investors remain dubious about the
ability of Greece and perhaps other countries to repay their debts.
Even so, figuring out which banks may be most exposed to those
countries largely remains a guessing game.
Regulators in each country know what assets their domestic banks hold,
but have been reluctant to share that information across borders. Lucas
D. Papademos, vice president of the European Central Bank, which gets
an indication of banks’ health based on which ones draw heavily on its
emergency credit lines, said at a news conference Monday that a small
number of banks were “overreliant” on that funding.
But Mr. Papademos, who retired last Tuesday at the end of his term,
wouldn’t be more specific. He said European banks would undertake a
vigorous round of stress tests by July.
It’s obvious that Greek and Spanish banks hold large amounts of their
own government’s bonds. Spanish banks hold 120 billion euros in
sovereign debt, according to the Spanish central bank. But a central
bank spokesman said that those holdings were not a problem because,
thanks to the European Union’s rescue plan, the prices of Spanish bonds
Guessing also falls heavily on public and quasipublic institutions like
the German Landesbanks, which are owned by German states sometimes in
conjunction with local savings banks. Five of Germany’s nine
Landesbanks required federal or state government support after they
loaded up on assets that later turned radioactive, ranging from
subprime loans in the United States to investments in Icelandic banks
According to the Royal Bank of Scotland study, banks in France have the
largest exposure to debt from Greece, Spain and Portugal, with 229
billion euros; German banks are second, with 226 billion euros. British
and Dutch banks are next, at about 100 billion euros each, with
American banks at 54 billion euros and Italian banks at 31 billion
“Banks continue to not trust each other,” says Jörg Rocholl, a
professor at the European School of Management and Technology in
Berlin. “They know other banks are sick, but they don’t know which
DEPFA and Hypo Real Estate, meanwhile, face continued setbacks as they
try to steer back to health. Hypo reported a pretax loss for the group
of 324 million euros in the first quarter, down from 406 million euros
a year earlier.
At the end of May, the German government raised its guarantees for Hypo
to 103.5 billion euros from 93.4 billion. Some analysts say they think
the bank may need more aid in the future.
“I don’t think it’s over yet,” says Robert Mazzuoli, an analyst at
Landesbank Baden-Württemberg in Stuttgart.
Raphael Minder contributed reporting
State Debt Woes Grow Too Big to
By MARY WILLIAMS WALSH
March 29, 2010
California, New York and other states are showing many of the same
signs of debt overload that recently took Greece to the brink — budgets
that will not balance, accounting that masks debt, the use of
derivatives to plug holes, and armies of retired public workers who are
counting on benefits that are proving harder and harder to pay.
And states are responding in sometimes desperate ways, raising concerns
that they, too, could face a debt crisis.
New Hampshire was recently ordered by its State Supreme Court to put
back $110 million that it took from a medical malpractice insurance
pool to balance its budget. Colorado tried, so far unsuccessfully, to
grab a $500 million surplus from Pinnacol Assurance, a state workers’
compensation insurer that was privatized in 2002. It wanted the money
for its university system and seems likely to get a lesser amount,
perhaps $200 million.
Connecticut has tried to issue its own accounting rules. Hawaii has
inaugurated a four-day school week. California accelerated its
corporate income tax this year, making companies pay 70 percent of
their 2010 taxes by June 15. And many states have balanced their
budgets with federal health care dollars that Congress has not yet
Some economists fear the states have a potentially bigger problem than
their recession-induced budget woes. If investors become reluctant to
buy the states’ debt, the result could be a credit squeeze, not
entirely different from the financial strains in Europe, where markets
were reluctant to refinance billions in Greek debt.
“If we ran into a situation where one state got into trouble, they’d be
bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics
professor at Harvard and a former research director of the
International Monetary Fund. “But if we have a situation where there’s
slow growth, and a bunch of cities and states are on the edge, like in
Europe, we will have trouble.”
California’s stated debt — the value of all its bonds outstanding —
looks manageable, at just 8 percent of its total economy. But
California has big unstated debts, too. If the fair value of the
shortfall in California’s big pension fund is counted, for instance,
the state’s debt burden more than quadruples, to 37 percent of its
economic output, according to one calculation.
The state’s economy will also be weighed down by the ballooning federal
debt, though California does not have to worry about those payments as
much as its taxpaying citizens and businesses do.
Unstated debts pose a bigger problem to states with smaller economies.
If Rhode Island were a country, the fair value of its pension debt
would push it outside the maximum permitted by the euro zone, which
tries to limit government debt to 60 percent of gross domestic product,
according to Andrew Biggs, an economist with the American Enterprise
Institute who has been analyzing state debt. Alaska would not qualify
State officials say a Greece-style financial crisis is a complete
nonissue for them, and the bond markets so far seem to agree. All 50
states have investment-grade credit ratings, with California the
lowest, and even California is still considered “average,” according to
Moody’s Investors Service. The last state that defaulted on its bonds,
Arkansas, did so during the Great Depression.
Goldman Sachs, in a research report last week, acknowledged the pension
issue but concluded the states were very unlikely to default on their
debt and noted the states had 30 years to close pension shortfalls.
Even though about $5 billion of municipal bonds are in default today,
the vast majority were issued by small local authorities in
boom-and-bust locations like Florida, said Matt Fabian, managing
director of Municipal Market Advisors, an independent consulting firm.
The issuers raised money to pay for projects like sewer connections and
new roads in subdivisions that collapsed in the subprime mortgage
The states, he said, are different. They learned a lesson from New York
City, which got into trouble in the 1970s by financing its operations
with short-term debt that had to be rolled over again and again. When
investors suddenly lost confidence, New York was left empty-handed. To
keep that from happening again, Mr. Fabian said, most states require
short-term debt to be fully repaid the same year it is issued.
Some states have taken even more forceful measures to build creditor
confidence. New York State has a trustee that intercepts tax revenues
and makes some bond payments before the state can get to the money.
California has a “continuous appropriation” for debt payments, so
bondholders know they will get their interest even when the budget is
The states can also take refuge in America’s federalist system. Thus,
if California were to get into hot water, it could seek assistance in
Washington, and probably come away with some funds. Already, the
federal government is spending hundreds of millions helping the states
issue their bonds.
Professor Rogoff, who has spent most of his career studying global debt
crises, has combed through several centuries’ worth of records with a
fellow economist, Carmen M. Reinhart of the University of Maryland,
looking for signs that a country was about to default.
One finding was that countries “can default on stunningly small amounts
of debt,” he said, perhaps just one-fourth of what stopped Greece in
its tracks. “The fact that the states’ debts aren’t as big as Greece’s
doesn’t mean it can’t happen.”
Also, officials and their lenders often refused to admit they had a
debt problem until too late.
“When an accident is waiting to happen, it eventually does,” the two
economists wrote in their book, titled “This Time Is Different” — the
words often on the lips of policy makers just before a debt bomb
exploded. “But the exact timing can be very difficult to guess, and a
crisis that seems imminent can sometimes take years to ignite.”
In Greece, a newly elected prime minister may have struck the match
last fall, when he announced that his predecessor had left a budget
deficit three times as big as disclosed.
Greece’s creditors might have taken the news in stride, but in their
weakened condition, they did not want to shoulder any more risk from
Greece. They refused to refinance its maturing $54 billion euros ($72
billion) of debt this year unless it adopted painful austerity measures.
Could that happen here?
In January, incoming Gov. Chris Christie of New Jersey announced that
his predecessor, Jon S. Corzine, had concealed a much bigger deficit
than anyone knew. Mr. Corzine denied it.
So far, the bond markets have been unfazed.
Moody’s currently rates New Jersey’s debt “very strong,” though a notch
below the median for states. Moody’s has also given the state a
negative outlook, meaning its rating is likely to decline over the
medium term. Merrill Lynch said on Monday that New Jersey’s debt should
be downgraded to reflect the cost of paying its retiree pensions and
In fact, New Jersey and other states have used a whole bagful of tricks
and gimmicks to make their budgets look balanced and to push debts into
One ploy reminiscent of Greece has been the use of derivatives. While
Greece used a type of foreign-exchange trade to hide debt, the
derivatives popular with states and cities have been interest-rate
swaps, contracts to hedge against changing rates.
The states issued variable-rate bonds and used the swaps in an attempt
to lock in the low rates associated with variable-rate debt. The swaps
would indeed have saved money had interest rates gone up. But to get
this protection, the states had to agree to pay extra if interest rates
went down. And in the years since these swaps came into vogue, interest
rates have mostly fallen.
Swaps were often pitched to governments with some form of upfront cash
payment — perhaps an amount just big enough to close a budget deficit.
That gave the illusion that the house was in order, but in fact, such
deals just added hidden debt, which has to be paid back over the life
of the swaps, often 30 years.
Some economists think the last straw for states and cities will be debt
hidden in their pension obligations.
Pensions are debts, too, after all, paid over time just like bonds. But
states do not disclose how much they owe retirees when they disclose
their bonded debt, and state officials steadfastly oppose valuing their
pensions at market rates.
Joshua Rauh, an economist at Northwestern University, and Robert
Novy-Marx of the University of Chicago, recently recalculated the value
of the 50 states’ pension obligations the way the bond markets value
debt. They put the number at $5.17 trillion.
After the $1.94 trillion set aside in state pension funds was
subtracted, there was a gap of $3.23 trillion — more than three times
the amount the states owe their bondholders.
“When you see that, you recognize that states are in trouble even more
than we recognize,” Mr. Rauh said.
With bond payments and pension contributions consuming big chunks of
state budgets, Mr. Rauh said, some states were already falling behind
on unsecured debts, like bills from vendors. “Those are debts, too,” he
In Illinois, the state comptroller recently said the state was nearly
$9 billion behind on its bills to vendors, which he called an “ongoing
fiscal disaster.” On Monday, Fitch Ratings downgraded several
categories of Illinois’s debt, citing the state’s accounts payable
backlog. California had to pay its vendors with i.o.u.’s last year.
“These are the things that can precipitate a crisis,” Mr. Rauh said.
Back to Business: Wall Street
Profit in Bundles of Life Insurance
By JENNY ANDERSON
September 6, 2009
After the mortgage business imploded last year, Wall Street investment
banks began searching for another big idea to make money. They think
they may have found one.
The bankers plan to buy “life settlements,” life insurance policies
that ill and elderly people sell for cash — $400,000 for a $1 million
policy, say, depending on the life expectancy of the insured person.
Then they plan to “securitize” these policies, in Wall Street jargon,
by packaging hundreds or thousands together into bonds. They will then
resell those bonds to investors, like big pension funds, who will
receive the payouts when people with the insurance die.
The earlier the policyholder dies, the bigger the return — though if
people live longer than expected, investors could get poor returns or
even lose money.
Either way, Wall Street would profit by pocketing sizable fees for
creating the bonds, reselling them and subsequently trading them. But
some who have studied life settlements warn that insurers might have to
raise premiums in the short term if they end up having to pay out more
death claims than they had anticipated.
The idea is still in the planning stages. But already “our phones have
been ringing off the hook with inquiries,” says Kathleen Tillwitz, a
senior vice president at DBRS, which gives risk ratings to investments
and is reviewing nine proposals for life-insurance securitizations from
private investors and financial firms, including Credit Suisse.
“We’re hoping to get a herd stampeding after the first offering,” said
one investment banker not authorized to speak to the news media.
In the aftermath of the financial meltdown, exotic investments dreamed
up by Wall Street got much of the blame. It was not just subprime
mortgage securities but an array of products — credit-default swaps,
structured investment vehicles, collateralized debt obligations — that
proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on
Wall Street. Even as Washington debates increased financial regulation,
bankers are scurrying to concoct new products.
In addition to securitizing life settlements, for example, some banks
are repackaging their money-losing securities into higher-rated ones,
called re-remics (re-securitization of real estate mortgage investment
conduits). Morgan Stanley says at least $30 billion in residential
re-remics have been done this year.
Financial innovation can be good, of course, by lowering the cost of
borrowing for everyone, giving consumers more investment choices and,
more broadly, by helping the economy to grow. And the proponents of
securitizing life settlements say it would benefit people who want to
cash out their policies while they are alive.
But some are dismayed by Wall Street’s quick return to its old ways,
chasing profits with complicated new products.
“It’s bittersweet,” said James D. Cox, a professor of corporate and
securities law at Duke University. “The sweet part is there are
investors interested in exotic products created by underwriters who
make large fees and rating agencies who then get paid to confer
ratings. The bitter part is it’s a return to the good old days.”
Indeed, what is good for Wall Street could be bad for the insurance
industry, and perhaps for customers, too. That is because policyholders
often let their life insurance lapse before they die, for a variety of
reasons — their children grow up and no longer need the financial
protection, or the premiums become too expensive. When that happens,
the insurer does not have to make a payout.
But if a policy is purchased and packaged into a security, investors
will keep paying the premiums that might have been abandoned; as a
result, more policies will stay in force, ensuring more payouts over
time and less money for the insurance companies.
“When they set their premiums they were basing them on assumptions that
were wrong,” said Neil A. Doherty, a professor at Wharton who has
studied life settlements.
Indeed, Mr. Doherty says that in reaction to widespread securitization,
insurers most likely would have to raise the premiums on new life
Critics of life settlements believe “this defeats the idea of what life
insurance is supposed to be,” said Steven Weisbart, senior vice
president and chief economist for the Insurance Information Institute,
a trade group. “It’s not an investment product, a gambling product.”
Undeterred, Wall Street is racing ahead for a simple reason: With $26
trillion of life insurance policies in force in the United States, the
market could be huge.
Not all policyholders would be interested in selling their policies, of
course. And investors are not interested in healthy people’s policies
because they would have to pay those premiums for too long, reducing
profits on the investment.
But even if a small fraction of policy holders do sell them, some in
the industry predict the market could reach $500 billion. That would
help Wall Street offset the loss of revenue from the collapse of the
United States residential mortgage securities market, to $169 billion
so far this year from a peak of $941 billion in 2005, according to
Dealogic, a firm that tracks financial data.
Some financial firms are moving to outpace their rivals. Credit Suisse,
for example, is in effect building a financial assembly line to buy
large numbers of life insurance policies, package and resell them —
just as Wall Street firms did with subprime securities.
The bank bought a company that originates life settlements, and it has
set up a group dedicated to structuring deals and one to sell the
Goldman Sachs has developed a tradable index of life settlements,
enabling investors to bet on whether people will live longer than
expected or die sooner than planned. The index is similar to tradable
stock market indices that allow investors to bet on the overall
direction of the market without buying stocks.
Spokesmen for Credit Suisse and Goldman Sachs declined to comment.
If Wall Street succeeds in securitizing life insurance policies, it
would take a controversial business — the buying and selling of
policies — that has been around on a smaller scale for a couple of
decades and potentially increase it drastically.
Defenders of life settlements argue that creating a market to allow the
ill or elderly to sell their policies for cash is a public service.
Insurance companies, they note, offer only a “cash surrender value,”
typically at a small fraction of the death benefit, when a policyholder
wants to cash out, even after paying large premiums for many years.
Enter life settlement companies. Depending on various factors, they
will pay 20 to 200 percent more than the surrender value an insurer
But the industry has been plagued by fraud complaints. State insurance
regulators, hamstrung by a patchwork of laws and regulations, have
criticized life settlement brokers for coercing the ill and elderly to
take out policies with the sole purpose of selling them back to the
brokers, called “stranger-owned life insurance.”
In 2006, while he was New York attorney general, Eliot Spitzer sued
Coventry, one of the largest life settlement companies, accusing it of
engaging in bid-rigging with rivals to keep down prices offered to
people who wanted to sell their policies. The case is continuing.
“Predators in the life settlement market have the motive, means and, if
left unchecked by legislators and regulators and by their own
community, the opportunity to take advantage of seniors,” Stephan
Leimberg, co-author of a book on life settlements, testified at a
Senate Special Committee on Aging last April.
In addition to fraud, there is another potential risk for investors:
that some people could live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s,
when new treatments prolonged the life of AIDS patients. Investors who
bought their policies on the expectation that the most victims would
die within two years ended up losing money.
It happened again last fall when companies that calculate life
expectancy determined that people were living longer.
The challenge for Wall Street is to make securitized life insurance
policies more predictable — and, ideally, safer — investments. And for
any securitized bond to interest big investors, a seal of approval is
needed from a credit rating agency that measures the level of risk.
In many ways, banks are seeking to replicate the model of subprime
mortgage securities, which became popular after ratings agencies
bestowed on them the comfort of a top-tier, triple-A rating. An
individual mortgage to a home buyer with poor credit might have been
considered risky, because of the possibility of default; but packaging
lots of mortgages together limited risk, the theory went, because it
was unlikely many would default at the same time.
While that idea was, in retrospect, badly flawed, Wall Street is
convinced that it can solve the risk riddle with securitized life
That is why bankers from Credit Suisse and Goldman Sachs have been
visiting DBRS, a little known rating agency in lower Manhattan.
In early 2008, the firm published criteria for ways to securitize a
life settlements portfolio so that the risks were minimized.
Interest poured in. Hedge funds that have acquired life settlements,
for example, are keen to buy and sell policies more easily, so they can
cash out both on investments that are losing money and on ones that are
profitable. Wall Street banks, beaten down by the financial crisis, are
looking to get their securitization machines humming again.
Ms. Tillwitz, an executive overseeing the project for DBRS, said the
firm spent nine months getting comfortable with the myriad risks
associated with rating a pool of life settlements.
Could a way be found to protect against possible fraud by agents buying
insurance policies and reselling them — to avoid problems like those in
the subprime mortgage market, where some brokers made fraudulent loans
that ended up in packages of securities sold to investors? How could
investors be assured that the policies were legitimately acquired, so
that the payouts would not be disputed when the original policyholder
And how could they make sure that policies being bought were legally
sellable, given that some states prohibit the sale of policies until
they have been in force two to five years?
Spreading the Risk
To help understand how to manage these risks, Ms. Tillwitz and her
colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear
engineering — traveled the world visiting firms that handle life
settlements. “We do not want to rate a deal that blows up,” Ms.
The solution? A bond made up of life settlements would ideally have
policies from people with a range of diseases — leukemia, lung cancer,
heart disease, breast cancer, diabetes, Alzheimer’s. That is because if
too many people with leukemia are in the securitization portfolio, and
a cure is developed, the value of the bond would plummet.
As an added precaution, DBRS would run background checks on all
issuers. Also, a range of quality of life insurers would have to be
To test how different mixes of policies would perform, Mr. Buckler has
run computer simulations to show what would happen to returns if people
lived significantly longer than expected.
But even with a math whiz calculating every possibility, some risks may
not be apparent until after the fact. How can a computer accurately
predict what would happen if health reform passed, for example, and
better care for a large number of Americans meant that people generally
started living longer? Or if a magic-bullet cure for all types of
cancer was developed?
If the computer models were wrong, investors could lose a lot of money.
As unlikely as those assumptions may seem, that is effectively what
happened with many securitized subprime loans that were given triple-A
Investment banks that sold these securities sought to lower the risks
by, among other things, packaging mortgages from different regions and
with differing credit levels of the borrowers. They thought that if
house prices dropped in one region — say Florida, causing widespread
defaults in that part of the portfolio — it was highly unlikely that
they would fall at the same time in, say, California.
Indeed, economists noted that historically, housing prices had fallen
regionally but never nationwide. When they did fall nationwide,
investors lost hundreds of billions of dollars.
Both Standard & Poor’s and Moody’s, which gave out many triple-A
ratings and were burned by that experience, are approaching life
settlements with greater caution.
Standard & Poor’s, which rated a similar deal called Dignity
Partners in the 1990s, declined to comment on its plans. Moody’s said
it has been approached by financial firms interested in securitizing
life settlements, but has not yet seen a portfolio of policies that
meets its standards.
Despite the mortgage debacle, investors like Andrew Terrell are
Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality
desk — which traded unrated portfolios of life settlements — and later
worked at Goldman Sachs’s Institutional Life Companies, a venture that
was introducing a trading platform for life settlements. He thinks
securitized life policies have big potential, explaining that investors
who want to spread their risks are constantly looking for new
investments that do not move in tandem with their other investments.
“It’s an interesting asset class because it’s less correlated to the
rest of the market than other asset classes,” Mr. Terrell said.
Some academics who have studied life settlement securitization agree it
is a good idea. One difference, they concur, is that death is not
correlated to the rise and fall of stocks.
“These assets do not have risks that are difficult to estimate and they
are not, for the most part, exposed to broader economic risks,” said
Joshua Coval, a professor of finance at the Harvard Business School.
“By pooling and tranching, you are not amplifying systemic risks in the
The insurance industry is girding for a fight. “Just as all mortgage
providers have been tarred by subprime mortgages, so too is the concern
that all life insurance companies would be tarred with the brush of
subprime life insurance settlements,” said Michael Lovendusky, vice
president and associate general counsel of the American Council of Life
Insurers, a trade group that represents life insurance companies.
And the industry may find allies in government. Among those expressing
concern about life settlements at the Senate committee hearing in April
were insurance regulators from Florida and Illinois, who argued that
regulation was inadequate.
“The securitization of life settlements adds another element of
possible risk to an industry that is already in need of enhanced
regulations, more transparency and consumer safeguards,” said Senator
Herb Kohl, the Democrat from Wisconsin who is chairman of the Special
Committee on Aging.
DBRS agrees on the need to be careful. “We want this market to flourish
in a safe way,” Ms. Tillwitz said.
The Washington Times, July 23, 2010...
Roubini: "U-shaped" recovery is
Fri Sep 4, (2009) 10:27 am ET
CERNOBBIO, Italy (Reuters) – Nouriel Roubini, a leading
economist who predicted the scale of global financial troubles, said a
U-shaped recovery is possible, with leading economies undeperforming
perhaps for 3 years.
He said there is also an increasing risk of a "double-dip" scenario,
"I believe that the basic scenario is going to be one of a U-shaped
economic recovery where growth is going to remain below trend ...
especially for the advanced economies, for at least 2 or 3 years," he
said at a news conference here.
"Within that U scenario I also see a small probability, but a rising
probability, that if we don't get the exit strategy right we could end
up with a relapse in growth ... a double-dip recession," he added.
Roubini, a professor at New York University's Stern School of Business,
said he was concerned economies which save a lot, such as China, Japan
and Germany, might not boost consumption enough to compensate for any
fall in demand from "overspenders" such as the United States and
"If U.S. consumers consume less, then for the global economy to grow at
its potential rate, other countries that are saving too much will have
to save less and consume more," he said.
"My concern is that for a number or reasons ... (it is unlikely that)
countries like China, other emerging markets in Asia, Japan, Germany in
Europe, will have a significant increase in the consumption rate and a
reduction in the savings rate."
Roubini said he thought central banks should pay more attention to
asset prices when deciding interest rate policy and encouraged U.S.
Federal Reserve Chairman Ben Bernanke to follow this route.
"I think that asset prices, asset bubbles should become much more
important in the setting of interest rates, in addition to concerns
about inflation and growth. (Bernanke's) views until now have been
different. Hopefully this crisis has taught a lesson."
Roubini's outlook remains downbeat, however.
"I think that too many people are hopeful that everything is fine and
unfortunately the road ahead is going to be at best bumpy, if not
worse," he said.
(Reporting by Jo Winterbottom; editing by Chris Pizzey)
Rise of the Super-Rich Hits a Sobering
By DAVID LEONHARDT and GERALDINE FABRIKANT
August 21, 2009
The rich have been getting richer for so long that the trend has come
to seem almost permanent.
They began to pull away from everyone else in the 1970s. By 2006,
income was more concentrated at the top than it had been since the late
1920s. The recent news about resurgent Wall Street pay has seemed to
suggest that not even the Great Recession could reverse the rise in
But economists say — and data is beginning to show — that a significant
change may in fact be under way. The rich, as a group, are no longer
getting richer. Over the last two years, they have become poorer. And
many may not return to their old levels of wealth and income anytime
For every investment banker whose pay has recovered to its prerecession
levels, there are several who have lost their jobs — as well as many
wealthy investors who have lost millions. As a result, economists and
other analysts say, a 30-year period in which the super-rich became
both wealthier and more numerous may now be ending.
The relative struggles of the rich may elicit little sympathy from less
well-off families who are dealing with the effects of the worst
recession in a generation. But the change does raise several broader
economic questions. Among them is whether harder times for the rich
will ultimately benefit the middle class and the poor, given that the
huge recent increase in top incomes coincided with slow income growth
for almost every other group. In blunter terms, the question is whether
the better metaphor for the economy is a rising tide that can lift all
boats — or a zero-sum game.
Just how much poorer the rich will become remains unclear. It will be
determined by, among other things, whether the stock market continues
its recent rally and what new laws Congress passes in the wake of the
financial crisis. At the very least, though, the rich seem unlikely to
return to the trajectory they were on.
Last year, the number of Americans with a net worth of at least $30
million dropped 24 percent, according to CapGemini and Merrill Lynch
Wealth Management. Monthly income from stock dividends, which is
concentrated among the affluent, has fallen more than 20 percent since
last summer, the biggest such decline since the government began
keeping records in 1959.
Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune
and the founders of Google each lost billions last year, according to
Forbes magazine. In one stark example, John McAfee, an entrepreneur who
founded the antivirus software company that bears his name, is now
worth about $4 million, from a peak of more than $100 million. Mr.
McAfee will soon auction off his last big property because he needs
cash to pay his bills after having been caught off guard by the
simultaneous crash in real estate and stocks.
“I had no clue,” he said, “that there would be this tandem collapse.”
Some of the clearest signs of the reversal of fortunes can be found in
data on spending by the wealthy. An index that tracks the price of art,
the Mei Moses index, has dropped 32 percent in the last six months. The
New York Yankees failed to sell many of the most expensive tickets in
their new stadium and had to drop the price. In one ZIP code in Vail,
Colo., only five homes sold for more than $2 million in the first half
of this year, down from 34 in the first half of 2007, according to MDA
Dataquick. In Bronxville, an affluent New York suburb, the decline was
to two, from 17, according to Coldwell Banker Residential Brokerage.
“We had a period of roughly 50 years, from 1929 to 1979, when the
income distribution tended to flatten,” said Neal Soss, the chief
economist at Credit Suisse. “Since the early ’80s, incomes have tended
to get less equal. And I think we’ve entered a phase now where society
will move to a more equal distribution.”
No More ’50s and ’60s
Few economists expect the country to return to the relatively flat
income distribution of the 1950s and 1960s. Indeed, they say that
inequality is likely to remain significantly greater than it was for
most of the 20th century. The Obama administration has not proposed
completely rewriting the rules for Wall Street or raising the top
income-tax rate to anywhere near 70 percent, its level as recently as
1980. Market forces that have increased inequality, like globalization,
are also not going away.
But economists say that the rich will probably not recover their losses
immediately, as they did in the wake of the dot-com crash earlier this
decade. That quick recovery came courtesy of a new bubble in stocks,
which in 2007 were more expensive by some measures than they had been
at any other point save the bull markets of the 1920s or 1990s. This
time, analysts say, Wall Street seems unlikely to return soon to the
extreme levels of borrowing that made such a bubble possible.
Any major shift in the financial status of the rich could have big
implications. A drop in their income and wealth would complicate life
for elite universities, museums and other institutions that received
lavish donations in recent decades. Governments — federal and state —
could struggle, too, because they rely heavily on the taxes paid by the
Perhaps the broadest question is what a hit to the wealthy would mean
for the middle class and the poor. The best-known data on the rich
comes from an analysis of Internal Revenue Service returns by Thomas
Piketty and Emmanuel Saez, two economists. Their work shows that in the
late 1970s, the cutoff to qualify for the highest-earning one
ten-thousandth of households was roughly $2 million, in
inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5
The gains for the merely affluent were also big, if not quite huge. The
cutoff to be in the top 1 percent doubled since the late 1970s, to
By contrast, pay at the median — which was about $50,000 in 2007 — rose
less than 20 percent, Census data shows. Near the bottom of the income
distribution, the increase was about 12 percent.
Some economists say they believe that the contrasting trends are
unrelated. If anything, these economists say, any problems the wealthy
have will trickle down, in the form of less charitable giving and less
consumer spending. Over the last century, the worst years for the rich
were the early 1930s, the heart of the Great Depression.
Other economists say the recent explosion of incomes at the top did
hurt everyone else, by concentrating economic and political power among
a relatively small group.
“I think incredibly high incomes can have a pernicious effect on the
polity and the economy,” said Lawrence Katz, a Harvard economist. Much
of the growth of high-end incomes stemmed from market forces, like
technological innovation, Mr. Katz said. But a significant amount also
stemmed from the wealthy’s newfound ability to win favorable government
contracts, low tax rates and weak financial regulation, he added.
The I.R.S. has not yet released its data for 2008 or 2009. But Mr.
Saez, a professor at the University of California, Berkeley, said he
believed that the rich had become poorer. Asked to speculate where the
cutoff for the top one ten-thousandth of households was now, he said
from $6 million to $8 million.
For the number to return to $11 million quickly, he said, would
probably require a large financial bubble.
Making More Money
The United States economy experienced two such bubbles in recent years
— one in stocks, the other in real estate — and both helped the rich
become richer. Mr. McAfee, whose tattoos and tinted hair suggest an
independent streak, is an extreme but telling example. For two decades,
at almost every step of his career, he figured out a way to make more
In the late 1980s, he founded McAfee Associates, the antivirus software
company. It gave away its software, unlike its rivals, but charged fees
to those who wanted any kind of technical support. That decision helped
make it a huge success. The company went public in 1992, in the early
years of one of biggest stock market booms in history.
But Mr. McAfee is, by his own description, an atypical businessman —
easily bored and given to serial obsessions. As a young man, he
traveled through Mexico, India and Nepal and, more recently, he wrote a
book called, “Into the Heart of Truth: The Spirit of Relational Yoga.”
Two years after McAfee Associates went public, he was bored again.
So he sold his remaining stake, bringing his gains to about $100
million. In the coming years, he started new projects and made more
investments. Almost inevitably, they paid off.
“History told me that you just keep working, and it is easy to make
more money,” he said, sitting in the kitchen of his adobe-style house
in the southwest corner of New Mexico. With low tax rates, he added,
the rich could keep much of what they made.
One of the starkest patterns in the data on inequality is the extent to
which the incomes of the very rich are tied to the stock market. They
have risen most rapidly during the biggest bull markets: in the 1920s
and the 20 years starting in 1987.
“We are coming from an abnormal period where a tremendous amount of
wealth was created largely by selling assets back and forth,” said
Mohamed A. El-Erian, chief executive of Pimco, one of the country’s
largest bond traders, and the former manager of Harvard’s endowment.
Some of this wealth was based on real economic gains, like those from
the computer revolution. But much of it was not, Mr. El-Erian said.
“You had wealth creation that could not be tied to the underlying
economy,” he added, “and the benefits were very skewed: they went to
the assets of the rich. It was financial engineering.”
But if the rich have done well in bubbles, they have taken enormous
hits to their wealth during busts. A recent study by two Northwestern
University economists found that the incomes of the affluent tend to
fall more, in percentage terms, in recessions than the incomes of the
middle class. The incomes of the very affluent — the top one
ten-thousandth — fall the most.
Over the last several years, Mr. McAfee began to put a large chunk of
his fortune into real estate, often in remote locations. He bought the
house in New Mexico as a playground for himself and fellow
aerotrekkers, people who fly unlicensed, open-cockpit planes. On a
157-acre spread, he built a general store, a 35-seat movie theater and
a cafe, and he bought vintage cars for his visitors to use.
He continued to invest in financial markets, sometimes borrowing money
to increase the potential returns. He typically chose his investments
based on suggestions from his financial advisers. One of their
recommendations was to put millions of dollars into bonds tied to
For a while, Mr. McAfee’s good run, like that of many of the American
wealthy, seemed to continue. In the wake of the dot-com crash, stocks
started rising again, while house prices just continued to rise.
Outside’s Go magazine and National Geographic Adventure ran articles on
his New Mexico property, leading to him to believe that “this was the
hottest property on the planet,” he said.
But then things began to change.
In 2007, Mr. McAfee sold a 10,000-square-foot home in Colorado with a
view of Pike’s Peak. He had spent $25 million to buy the property and
build the house. He received $5.7 million for it. When Lehman collapsed
last fall, its bonds became virtually worthless. Mr. McAfee’s stock
investments cost him millions more.
One day, he realized, as he said, “Whoa, my cash is gone.”
His remaining net worth of about $4 million makes him vastly wealthier
than most Americans, of course. But he has nonetheless found himself
needing cash and desperately trying to reduce his monthly expenses.
He has sold a 10-passenger Cessna jet and now flies coach. This week
his oceanfront estate in Hawaii sold for $1.5 million, with only a
handful of bidders at the auction. He plans to spend much of his time
in Belize, in part because of more favorable taxes there.
Next week, his New Mexico property will be the subject of a no-floor
auction, meaning that Mr. McAfee has promised to accept the top bid, no
matter how low it is.
“I am trying to face up to the reality here that the auction may bring
next to nothing,” he said.
In the past, when his stock investments did poorly, he sold real estate
and replenished his cash. This time, that has not been an option.
Stock Market Mystery
The possibility that the stock market will quickly recover from its
collapse, as it did earlier this decade, is perhaps the biggest
uncertainty about the financial condition of the wealthy. Since March,
the Standard & Poor’s 500-stock index has risen 49 percent.
Yet Wall Street still has a long way to go before reaching its previous
peaks. The S.& P. 500 remains 35 percent below its 2007 high.
Aggregate compensation for the financial sector fell 14 percent from
2007 to 2008, according to the Securities Industry and Financial
Markets Association — far less than profits or revenue fell, but a
“The difference this time,” predicted Byron R. Wein, a former chief
investment strategist at Morgan Stanley, who started working on Wall
Street in 1965, “is that the high-water mark that people reached in
2007 is not going to be exceeded for a very long time.”
Without a financial bubble, there will simply be less money available
for Wall Street to pay itself or for corporate chief executives to pay
themselves. Some companies — like Goldman Sachs and JPMorgan Chase,
which face less competition now and have been helped by the
government’s attempts to prop up credit markets — will still hand out
enormous paychecks. Over all, though, there will be fewer such checks,
analysts say. Roger Freeman, an analyst at Barclays Capital, said he
thought that overall Wall Street compensation would, at most, increase
moderately over the next couple of years.
Beyond the stock market, government policy may have the biggest effect
on top incomes. Mr. Katz, the Harvard economist, argues that without
policy changes, top incomes may indeed approach their old highs in the
coming years. Historically, government policy, like the New Deal, has
had more lasting effects on the rich than financial busts, he said.
One looming policy issue today is what steps Congress and the
administration will take to re-regulate financial markets. A second issue is taxes.
In the three decades after World War II, when the incomes of the rich
grew more slowly than those of the middle class, the top marginal rate
ranged from 70 to 91 percent. Mr. Piketty, one of the economists who
analyzed the I.R.S. data, argues that these high rates did not affect
merely post-tax income. They also helped hold down the pretax incomes
of the wealthy, he says, by giving them less incentive to make many
millions of dollars.
Since 1980, tax rates on
the affluent have fallen more than rates on any other group; this year,
the top marginal rate is 35 percent. President Obama has proposed
raising it to 39 percent and has said he would consider a surtax on
families making more than $1 million a year, which could push the top
rate above 40 percent.
What any policy changes will mean for the nonwealthy remains unclear.
There have certainly been periods when the rich, the middle class and
the poor all have done well (like the late 1990s), as well as periods
when all have done poorly (like the last year). For much of the 1950s,
’60s and ’70s, both the middle class and the wealthy received raises
that outpaced inflation.
Yet there is also a reason to think that the incomes of the wealthy
could potentially have a bigger impact on others than in the past: as a
share of the economy, they are vastly larger than they once were.
In 2007, the top one ten-thousandth of households took home 6 percent
of the nation’s income, up from 0.9 percent in 1977. It was the highest
such level since at least 1913, the first year for which the I.R.S. has
The top 1 percent of earners took home 23.5 percent of income, up from
9 percent three decades earlier.
Tax Hikes and the 2011
corporate profits reflect an income shift into 2010. These profits will
tumble next year, preceded most likely by the stock market.
Wall Street Journal (via National Review)
By ARTHUR LAFFER
7 June 2010
People can change the volume, the location and the composition of their
income, and they can do so in response to changes in government
It shouldn't surprise anyone that the nine states without an income tax
are growing far faster and attracting more people than are the nine
states with the highest income tax rates. People and businesses change
the location of income based on incentives.
Likewise, who is gobsmacked when they are told that the two wealthiest
Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth
in the nontaxed form of unrealized capital gains? The composition of
wealth also responds to incentives. And it's also simple enough for
most people to understand that if the government taxes people who work
and pays people not to work, fewer people will work. Incentives matter.
People can also change the timing of when they earn and receive their
income in response to government policies. According to a 2004 U.S.
Treasury report, "high income taxpayers accelerated the receipt of
wages and year-end bonuses from 1993 to 1992—over $15 billion—in order
to avoid the effects of the anticipated increase in the top rate from
31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses
yet again to avoid the increase in Medicare taxes that went into effect
Just remember what happened to auto sales when the cash for clunkers
program ended. Or how about new housing sales when the $8,000 tax
credit ended? It isn't rocket surgery, as the Ivy League professor said.
On or about Jan. 1, 2011, federal, state and local tax rates are
scheduled to rise quite sharply. President George W. Bush's tax cuts
expire on that date, meaning that the highest federal personal income
tax rate will go 39.6% from 35%, the highest federal dividend tax rate
pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%,
and the estate tax rate to 55% from zero. Lots and lots of other
changes will also occur as a result of the sunset provision in the Bush
Tax rates have been and will be raised on income earned from off-shore
investments. Payroll taxes are already scheduled to rise in 2013 and
the Alternative Minimum Tax (AMT) will be digging deeper and deeper
into middle-income taxpayers. And there's always the celebrated tax
increase on Cadillac health care plans. State and local tax rates are
also going up in 2011 as they did in 2010. Tax rate increases next year
Now, if people know tax rates will be higher next year than they are
this year, what will those people do this year? They will shift
production and income out of next year into this year to the extent
possible. As a result, income this year has already been inflated above
where it otherwise should be and next year, 2011, income will be lower
than it otherwise should be.
Also, the prospect of rising prices, higher interest rates and more
regulations next year will further entice demand and supply to be
shifted from 2011 into 2010. In my view, this shift of income and
demand is a major reason that the economy in 2010 has appeared as
strong as it has. When we pass the tax boundary of Jan. 1, 2011, my
best guess is that the train goes off the tracks and we get our worst
nightmare of a severe "double dip" recession.
In 1981, Ronald Reagan—with bipartisan support—began the first phase in
a series of tax cuts passed under the Economic Recovery Tax Act (ERTA),
whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983.
Reagan's delayed tax cuts were the mirror image of President Barack
Obama's delayed tax rate increases. For 1981 and 1982 people deferred
so much economic activity that real GDP was basically flat (i.e., no
growth), and the unemployment rate rose to well over 10%.
But at the tax boundary of Jan. 1, 1983 the economy took off like a
rocket, with average real growth reaching 7.5% in 1983 and 5.5% in
1984. It has always amazed me how tax cuts don't work until they take
effect. Mr. Obama's experience with deferred tax rate increases will be
the reverse. The economy will collapse in 2011.
Consider corporate profits as a share of GDP. Today, corporate profits
as a share of GDP are way too high given the state of the U.S. economy.
These high profits reflect the shift in income into 2010 from 2011.
These profits will tumble in 2011, preceded most likely by the stock
In 2010, without any prepayment penalties, people can cash in their
Individual Retirement Accounts (IRAs), Keough deferred income accounts
and 401(k) deferred income accounts. After paying their taxes, these
deferred income accounts can be rolled into Roth IRAs that provide
after-tax income to their owners into the future. Given what's going to
happen to tax rates, this conversion seems like a no-brainer.
The result will be a crash in tax receipts once the surge is past. If
you thought deficits and unemployment have been bad lately, you ain't
seen nothing yet.
Mr. Laffer is the chairman of Laffer
Associates and co-author of "Return to Prosperity: How America Can
Regain Its Economic Superpower Status" (Threshold, 2010).
By ERIC ZENCEY, Montpelier, Vt.
August 10, 2009
IF there’s a silver lining to our current economic downturn, it’s this:
With it comes what the economist Joseph Schumpeter called “creative
destruction,” the failure of outmoded economic structures and their
replacement by new, more suitable structures. Downturns have often
given a last, fatality-inducing nudge to dying industries and
technologies. Very few buggy manufacturers made it through the Great
Creative destruction can apply to economic concepts as well. And this
downturn offers an excellent opportunity to get rid of one that has
long outlived its usefulness: gross domestic product. G.D.P. is one
measure of national income, of how much wealth Americans make, and it’s
a deeply foolish indicator of how the economy is doing. It ought to
join buggy whips and VCRs on the dust-heap of history.
The first official attempt to determine our national income was made in
1934; the goal was to measure all economic production involving
Americans whether they were at home or abroad. In 1991, the Bureau of
Economic Analysis switched from gross national product to gross
domestic product to reflect a changed economic reality — as trade
increased, and as foreign companies built factories here, it became
apparent that we ought to measure what gets made in the United States,
no matter who makes it or where it goes after it’s made.
Since then it has become probably our most commonly cited economic
indicator, the basic number that we take as a measure of how well we’re
doing economically from year to year and quarter to quarter. But it is
a miserable failure at representing our economic reality.
To begin with, gross domestic product excludes a great deal of
production that has economic value. Neither volunteer work nor unpaid
domestic services (housework, child rearing, do-it-yourself home
improvement) make it into the accounts, and our standard of living, our
general level of economic well-being, benefits mightily from both. Nor
does it include the huge economic benefit that we get directly, outside
of any market, from nature. A mundane example: If you let the sun dry
your clothes, the service is free and doesn’t show up in our domestic
product; if you throw your laundry in the dryer, you burn fossil fuel,
increase your carbon footprint, make the economy more unsustainable —
and give G.D.P. a bit of a bump.
In general, the replacement of natural-capital services (like
sun-drying clothes, or the propagation of fish, or flood control and
water purification) with built-capital services (like those from a
clothes dryer, or an industrial fish farm, or from levees, dams and
treatment plants) is a bad trade — built capital is costly, doesn’t
maintain itself, and in many cases provides an inferior, less-certain
service. But in gross domestic product, every instance of replacement
of a natural-capital service with a built-capital service shows up as a
good thing, an increase in national economic activity. Is it any wonder
that we now face a global crisis in the form of a pressing scarcity of
natural-capital services of all kinds?
This points to the larger, deeper flaw in using a measurement of
national income as an indicator of economic well-being. In summing all
economic activity in the economy, gross domestic product makes no
distinction between items that are costs and items that are benefits.
If you get into a fender-bender and have your car fixed, G.D.P. goes up.
A similarly counterintuitive result comes from other kinds of defensive
and remedial spending, like health care, pollution abatement, flood
control and costs associated with population growth and increasing
urbanization — including crime prevention, highway construction, water
treatment and school expansion. Expenditures on all of these increase
gross domestic product, although mostly what we aim to buy isn’t an
improved standard of living but the restoration or protection of the
quality of life we already had.
The amounts involved are not nickel-and-dime stuff. Hurricane Katrina
produced something like $82 billion in damages in New Orleans, and as
the destruction there is remedied, G.D.P. goes up. Some of the remedial
spending on the Gulf Coast does represent a positive change to economic
well-being, as old appliances and carpets and cars are replaced by new,
presumably improved, ones. But much of the expense leaves the community
no better off (indeed, sometimes worse off) than before.
Consider the 50 miles of sponge-like wetlands between New Orleans and
the Gulf Coast that once protected the city from storm surges. When
those bayous were lost to development — sliced to death by channels to
move oil rigs, mostly — gross domestic product went up, even as these
“improvements” destroyed the city’s natural defenses and wiped out
crucial spawning ground for the Gulf Coast shrimp fishery. The bayous
were a form of natural capital, and their loss was a cost that never
entered into any account — not G.D.P. or anything else.
Wise decisions depend on accurate assessments of the costs and benefits
of different courses of action. If we don’t count ecosystem services as
a benefit in our basic measure of well-being, their loss can’t be
counted as a cost — and then economic decision-making can’t help but
lead us to undesirable and perversely un-economic outcomes.
The basic problem is that gross domestic product measures activity, not
benefit. If you kept your checkbook the way G.D.P. measures the
national accounts, you’d record all the money deposited into your
account, make entries for every check you write, and then add all the
numbers together. The resulting bottom line might tell you something
useful about the total cash flow of your household, but it’s not going
to tell you whether you’re better off this month than last or, indeed,
whether you’re solvent or going broke.
BECAUSE we use such a flawed measure of economic well-being, it’s
foolish to pursue policies whose primary purpose is to raise it. Doing
so is an instance of the fallacy of misplaced concreteness — mistaking
the map for the terrain, or treating an instrument reading as though it
were the reality rather than a representation. When you’re feeling a
little chilly in your living room, you don’t hold a match to a
thermometer and then claim that the room has gotten warmer. But that’s
what we do when we seek to improve economic well-being by prodding
Several alternatives to gross domestic product have been proposed, and
each tackles the central problem of placing a value on goods and
services that never had a dollar price. The alternatives are
controversial, because that kind of valuation creates room for
subjectivity — for the expression of personal values, of ideology and
How, after all, do we judge what exactly was the value of the services
provided by those bayous in Louisiana? Was it $82 billion? But what
about the value of the shrimp fishery that was already lost before the
hurricane? What about the insurance value of the protection the bayous
offered against another $82 billion loss? What about the security and
sense of continuity of life enjoyed by the thousands of people who
lived and made their livelihoods in relation to those bayous before
they disappeared? It’s admittedly difficult to set a dollar price on
such things — but this is no reason to set that price at zero, as gross
domestic product currently does.
Common sense tells us that if we want an accurate accounting of change
in our level of economic well-being we need to subtract costs from
benefits and count all costs, including those of ecosystem services
when they are lost to development. These include storm and flood
protection, water purification and delivery, maintenance of soil
fertility, pollination of plants and regulation of our climate on a
global and local scale. (One recent estimate puts the minimum market
value of all such natural-capital services at $33 trillion per year.)
Nature has aesthetic and moral value as well; some of us experience
awe, wonder and humility in our encounters with it. But we don’t have
to go so far as to include such subjective intangibles in order to fix
the national income accounts. As stressed ecosystems worldwide
disappear, it will get easier and easier to assign a nonsubjective
valuation to them; and value them we must if we are to keep them at
all. No civilization can survive their loss.
Given the fundamental problems with G.D.P. as a leading economic
indicator, and our habit of taking it as a measurement of economic
welfare, we should drop it altogether. We could keep the actual number,
but rename it to make clearer what it represents; let’s call it gross
domestic transactions. Few people would mistake a measurement of gross
transactions for a measurement of general welfare. And the renaming
would create room for acceptance of a new measurement, one that more
accurately signals changes in the level of economic well-being we enjoy.
Our use of total productivity as our main economic indicator isn’t
mandated by law, which is why it would be fairly easy for President
Obama to convene a panel of economists and other experts to join the
Bureau of Economic Analysis in creating a new, more accurate measure.
Call it net economic welfare. On the benefit side would go such
nonmarket goods as unpaid domestic work and ecosystem services; on the
debit side would go defensive and remedial expenditures that don’t
improve our standard of living, along with the loss of ecosystem
services, and the money we spend to try to replace them.
In 1934, the
Kuznets, in his very first report of national income to Congress,
warned that “the welfare of a nation can ... scarcely be inferred from
a measure of national income.” Just as this crisis gives us the
opportunity to end the nature-be-damned, more-is-always-better economy
that flourished when oil was cheap and plentiful, we can finally act on
Kuznets’s wise warning. We’re in an economic hole, and as we climb out,
what we need is not simply a measurement of how much money passes
through our hands each quarter, but an indicator that will tell us if
we are really and truly gaining ground in the perennial struggle to
improve the material conditions of our lives.
Eric Zencey, a professor of
historical and political studies at Empire State College, is the author
of “Virgin Forest: Meditations on History, Ecology and Culture” and a
Hurrying Into the Next Panic?
By PAUL WILMOTT
July 29, 2009
ON vacation in Turkey, I am picked up at the airport by a minibus. It’s
past midnight, pitch-black, the driver is speeding around corners. Only
one headlight is working. And I have my doubts about the brakes. In my
head I’m planning the letter of complaint to the tour company. And then
the driver’s cellphone rings, he picks it up and answers it, he has
only one hand on the steering wheel. Now I’m mentally compiling the
list of songs to be played at my funeral.
That’s rather how I feel when people talk about the latest fashion
among investment banks and hedge funds: high-frequency algorithmic
trading. On top of an already dangerously influential and morally
suspect financial minefield is now being added the unthinking power of
The idea is straightforward: Computers take information — primarily
“real-time” share prices — and try to predict the next twitch in the
stock market. Using an algorithmic formula, the computers can buy and
sell stocks within fractions of seconds, with the bank or fund making a
tiny profit on the blip of price change of each share.
There’s nothing new in using all publicly available information to help
you trade; what’s novel is the quantity of data available, the
lightning speed at which it is analyzed and the short time that
positions are held.
You will hear people talking about “latency,” which means the delay
between a trading signal being given and the trade being made. Low
latency — high speed — is what banks and funds are looking for. Yes, we
really are talking about shaving off the milliseconds that it takes
light to travel along an optical cable.
So, is trading faster than any human can react truly worrisome? The
answers that come back from high-frequency proponents, also rather too
quickly, are “No, we are adding liquidity to the market” or “It’s
perfectly safe and it speeds up price discovery.” In other words, the
traders say, the practice makes it easier for stocks to be bought and
sold quickly across exchanges, and it more efficiently sets the value
Those responses disturb me. Whenever the reply to a complex question is
a stock and unconsidered one, it makes me worry all the more. Leaving
aside the question of whether or not liquidity is necessarily a great
idea (perhaps not being able to get out of a trade might make people
think twice before entering it), or whether there is such a thing as a
price that must be discovered (just watch the price of unpopular goods
fall in your local supermarket — that’s plenty fast enough for me), l
want to address the question of whether high-frequency algorithm
trading will distort the underlying markets and perhaps the economy.
It has been said that the October 1987 stock market crash was caused in
part by something called dynamic portfolio insurance, another approach
based on algorithms. Dynamic portfolio insurance is a way of protecting
your portfolio of shares so that if the market falls you can limit your
losses to an amount you stipulate in advance. As the market falls, you
sell some shares. By the time the market falls by a certain amount, you
will have closed all your positions so that you can lose no more money.
It’s a nice idea, and to do it properly requires some knowledge of
option theory as developed by the economists Fischer Black of Goldman
Sachs, Myron S. Scholes of Stanford and Robert C. Merton of Harvard.
You type into some formula the current stock price, and this tells you
how many shares to hold. The market falls and you type the new price
into the formula, which tells you how many to sell.
By 1987, however, the problem was the sheer number of people following
the strategy and the market share that they collectively controlled. If
a fall in the market leads to people selling according to some formula,
and if there are enough of these people following the same algorithm,
then it will lead to a further fall in the market, and a further wave
of selling, and so on — until the Standard & Poor’s 500 index loses
over 20 percent of its value in single day: Oct. 19, Black Monday.
Dynamic portfolio insurance caused the very thing it was designed to
This is the sort of feedback that occurs between a popular strategy and
the underlying market, with a long-lasting effect on the broader
economy. A rise in price begets a rise. (Think bubbles.) And a fall
begets a fall. (Think crashes.) Volatility rises and the market is
destabilized. All that’s needed is for a large number of people to be
following the same type of strategy. And if we’ve learned only one
lesson from the recent financial crisis it is that people do like to
copy each other when they see a profitable idea.
Such feedback is not necessarily dangerous. Take for example what
happens with convertible bonds — bonds that can be converted into
stocks at the option of the holder. Here a hedge fund buys the bond and
then hedges some market risk by selling the stock itself short. As the
price of the stock rises, the relevant formula tells the fund to sell.
When the stock falls the formula tells it to buy — the exact opposite
of what happens with portfolio insurance. To the outside world — if not
necessarily to the hedge fund with the convertible bonds — this mix is
usually seen as a good thing.
Thus the problem with the sudden popularity of high-frequency trading
is that it may increasingly destabilize the market. Hedge funds won’t
necessarily care whether the increased volatility causes stocks to rise
or fall, as long as they can get in and out quickly with a profit. But
the rest of the economy will care.
Buying stocks used to be about long-term value, doing your research and
finding the company that you thought had good prospects. Maybe it had a
product that you liked the look of, or perhaps a solid management team.
Increasingly such real value is becoming irrelevant. The contest is now
between the machines — and they’re playing games with real businesses
and real people.
NOTE: Standard & Poor's
500-stock index, adjusted for inflation, using 10-year average earnings
NOTE: Existing home resale
NOTE: Savings patterns
If "Reagan did it" then the Presidents since haven't reversed his policies...housing a key
The Inflation Canard
distorts Allan Meltzer.
NATIONAL REVIEW ONLINE
July 14, 2010 4:00 A.M.
Where’s the inflation? The calls have come tauntingly, from the usual
suspects. The Keynesian economists who warned of deflation in the
aftermath of the 2008 financial crisis are trying to declare victory
now, pointing to falling price levels as evidence that they were right.
The most illustrative example is a recent blog post by Paul Krugman, the New York Times
columnist, entitled, “What Have We Learned?” The post featured one
chart showing a decline in inflation since late 2008, and another
showing a decline in the rate of interest paid on ten-year Treasury
notes. “The other side declared that we were in imminent danger of
runaway inflation,” Krugman scoffed, “and that federal borrowing would
lead to very high interest rates.”
The first link — “imminent danger of runaway inflation” — takes readers
to a May 2009 op-ed by Carnegie Mellon University economist Allan
Meltzer, author of the acclaimed History of the Federal Reserve.
Nowhere in the op-ed did Meltzer warn that runaway inflation was
“imminent”; in fact, he specifically stated:
When will it come? Surely not right away. But sooner
or later, we will see the Fed, under pressure from Congress, the
administration and business, try to prevent interest rates from
increasing. The proponents of lower rates will point to the
unemployment numbers and the slow recovery. That's why the Fed must
start to demonstrate the kind of courage and independence it has not
I phoned Meltzer to ask him about Krugman’s distortion of his work, of
which Meltzer was unaware. “I don’t read him,” he said. “And I wouldn’t
attempt to convince Paul Krugman, because he has a set of beliefs that
he won’t give up.” The kinds of policies Krugman has been advocating
lately — e.g., more quantitative easing from a Fed that has already
over-extended its balance sheet — are precisely the kinds of policies
Meltzer was warning against, and Krugman is offering precisely the
justification that Meltzer predicted.
The danger of an inflationary fire, as Meltzer took pains to note, was
not imminent in early 2009. Rather, his point was that the Fed and the
U.S. Congress had done the equivalent of laying an enormous amount of
newspapers and gasoline around a house that was not exactly fireproof
to begin with, making it vulnerable to two possible sparks: (1) An
economic recovery could begin in earnest, leading banks to start
lending out the nearly $1 trillion dollars in excess reserves the Fed
had pumped into them; or (2) a big domino in the sovereign-debt markets
— Japan, say — could fall, sparking a re-pricing of sovereign debt
across the board and a spike in U.S. borrowing costs.
On the first point, some note that the Fed has recently started paying
interest on reserves. If interest rates start to rise, tempting banks
to loan out their reserves, the Fed can offer them a similar rate in
order to keep them from flooding the economy with new money. But
Meltzer doesn’t believe this strategy is likely to work. In an op-ed
for the Wall Street Journal last January, he noted that politicians
want banks to lend the money. The demand for the Fed to keep interest
rates low — including the rate it pays on reserves — will be strong, as
Keynesians such as Krugman encourage the Fed to put concerns about
unemployment ahead of concerns about inflation.
In this context it is worth remembering that, after the tech bubble
burst, Krugman cheered on the Fed’s disastrous policy of using easy
money to fight the ensuing recession, even as he acknowledged that the
logical endpoint of the policy was “a housing bubble to replace the
Nasdaq bubble.” It is also worth noting that most measures of inflation
do not include home prices, but rather use a “rent equivalent” measure
to incorporate the cost of shelter into most price indices. Thus, most
measures of the general price level completely missed the enormous
flood of cheap money into real-estate speculation. If a sudden doubling
or tripling of the price of housing doesn’t constitute a form of
inflation, what does?
On the second point, the risk of inflation stems from the concern that,
in the event that a crisis of confidence precipitated a sudden increase
in Treasury’s borrowing costs, the Fed would print money to fund the
deficit rather than allow the U.S. government to default on its debt.
Such an event could have any number of triggers, but Krugman tells us
not to worry about the “invisible bond vigilantes.” It would be one
thing if Krugman had a better track record of appropriately evaluating
the risks associated with his preferred fiscal and monetary policies.
But he doesn’t (see above).
In other words, the fact that we haven’t seen inflation yet isn’t proof
of anything, much less proof that critics of our current fiscal and
monetary policies are wrong. Meltzer is correct that it’s pointless to
try to change Krugman’s mind. But it’s important to keep pointing out
how his ideology blinded him to the risks of his brand of
recession-fighting before, and to note that those risks are present —
and growing — today.
Reagan Did It
By PAUL KRUGMAN
June 1, 2009
“This bill is the most important legislation for financial institutions
in the last 50 years. It provides a long-term solution for troubled
thrift institutions. ... All in all, I think we hit the jackpot.” So
declared Ronald Reagan in 1982, as he signed the Garn-St. Germain
Depository Institutions Act.
He was, as it happened, wrong about solving the problems of the
thrifts. On the contrary, the bill turned the modest-sized troubles of
savings-and-loan institutions into an utter catastrophe. But he was
right about the legislation’s significance. And as for that jackpot —
well, it finally came more than 25 years later, in the form of the
worst economic crisis since the Great Depression.
For the more one looks into the origins of the current disaster, the
clearer it becomes that the key wrong turn — the turn that made crisis
inevitable — took place in the early 1980s, during the Reagan years.
Attacks on Reaganomics usually focus on rising inequality and fiscal
irresponsibility. Indeed, Reagan ushered in an era in which a small
minority grew vastly rich, while working families saw only meager
gains. He also broke with longstanding rules of fiscal prudence.
On the latter point: traditionally, the U.S. government ran significant
budget deficits only in times of war or economic emergency. Federal
debt as a percentage of G.D.P. fell steadily from the end of World War
II until 1980. But indebtedness began rising under Reagan; it fell
again in the Clinton years, but resumed its rise under the Bush
administration, leaving us ill prepared for the emergency now upon us.
The increase in public debt was, however, dwarfed by the rise in
private debt, made possible by financial deregulation. The change in
America’s financial rules was Reagan’s biggest legacy. And it’s the
gift that keeps on taking.
The immediate effect of Garn-St. Germain, as I said, was to turn the
thrifts from a problem into a catastrophe. The S.& L. crisis has
been written out of the Reagan hagiography, but the fact is that
deregulation in effect gave the industry — whose deposits were
federally insured — a license to gamble with taxpayers’ money, at best,
or simply to loot it, at worst. By the time the government closed the
books on the affair, taxpayers had lost $130 billion, back when that
was a lot of money.
But there was also a longer-term effect. Reagan-era legislative changes
essentially ended New Deal restrictions on mortgage lending —
restrictions that, in particular, limited the ability of families to
buy homes without putting a significant amount of money down.
These restrictions were put in place in the 1930s by political leaders
who had just experienced a terrible financial crisis, and were trying
to prevent another. But by 1980 the memory of the Depression had faded.
Government, declared Reagan, is the problem, not the solution; the
magic of the marketplace must be set free. And so the precautionary
rules were scrapped.
Together with looser lending standards for other kinds of consumer
credit, this led to a radical change in American behavior.
We weren’t always a nation of big debts and low savings: in the 1970s
Americans saved almost 10 percent of their income, slightly more than
in the 1960s. It was only after the Reagan deregulation that thrift
gradually disappeared from the American way of life, culminating in the
near-zero savings rate that prevailed on the eve of the great crisis.
Household debt was only 60 percent of income when Reagan took office,
about the same as it was during the Kennedy administration. By 2007 it
was up to 119 percent.
All this, we were assured, was a good thing: sure, Americans were
piling up debt, and they weren’t putting aside any of their income, but
their finances looked fine once you took into account the rising values
of their houses and their stock portfolios. Oops.
Now, the proximate causes of today’s economic crisis lie in events that
took place long after Reagan left office — in the global savings glut
created by surpluses in China and elsewhere, and in the giant housing
bubble that savings glut helped inflate.
But it was the explosion of debt over the previous quarter-century that
made the U.S. economy so vulnerable. Overstretched borrowers were bound
to start defaulting in large numbers once the housing bubble burst and
unemployment began to rise.
These defaults in turn wreaked havoc with a financial system that —
also mainly thanks to Reagan-era deregulation — took on too much risk
with too little capital.
There’s plenty of blame to go around these days. But the prime villains
behind the mess we’re in were Reagan and his circle of advisers — men
who forgot the lessons of America’s last great financial crisis, and
condemned the rest of us to repeat it.
The Return to Irrational
March 2, 2009, 11:32 am
Another stock market milestone was reached last week, when the
S.&P. 500 fell under the Dec. 5, 1996, close of 744.38. The Dow,
for what it is worth, is still above the 6,437.10 level it sported then.
(As I write this, the S.&P. is at 714 and the Dow at 6,880.)
That night Alan Greenspan uttered his legendary “irrational exuberance”
comment. It was actually a question:
”How do we know when irrational exuberance has unduly escalated asset
values, which then become subject to unexpected and prolonged
contractions as they have in Japan over the past decade?”
Mr. Greenspan’s comments unsettled the stock market. The Dow fell 55
points the next day, which seemed like a lot at the time. But the bull
market soon continued, and Mr. Greenspan stopped worrying. By the
spring of 2000, he was quoting Wall Street analysts to justify high
technology stock prices.
There are five stocks now in the Dow that trade for more than twice
their level when Mr. Greenspan spoke, and six that trade for less than
half as much. (Prices are through about 11 a.m. today.)
Wal-Mart, up 282%
Exxon Mobil, up 180%
United Technologies, up 136%
I.B.M., up 130%
McDonald’s, up 120%
General Motors, down 95%
Citigroup, down 89%
Bank of America, down 86%
Alcoa, down 63%
DuPont, down 63%
General Electric, down 52%
MOUNTAIN OF DEBT: Rising Debt
By THE ASSOCIATED PRESS
Filed at 9:32 p.m. ET
July 3, 2009
WASHINGTON (AP) -- The Founding Fathers left one legacy not celebrated
on Independence Day but which affects us all. It's the national debt.
The country first got into debt to help pay for the Revolutionary War.
Growing ever since, the debt stands today at a staggering $11.5
trillion -- equivalent to over $37,000 for each and every American. And
it's expanding by over $1 trillion a year.
The mountain of debt easily could become the next full-fledged economic
crisis without firm action from Washington, economists of all stripes
''Unless we demonstrate a strong commitment to fiscal sustainability in
the longer term, we will have neither financial stability nor healthy
economic growth,'' Federal Reserve Chairman Ben Bernanke recently told
Higher taxes, or reduced federal benefits and services -- or a
combination of both -- may be the inevitable consequences.
The debt is complicating efforts by President Barack Obama and Congress
to cope with the worst recession in decades as stimulus and bailout
spending combine with lower tax revenues to widen the gap.
Interest payments on the debt alone cost $452 billion last year -- the
largest federal spending category after Medicare-Medicaid, Social
Security and defense. It's quickly crowding out all other government
spending. And the Treasury is finding it harder to find new lenders.
The United States went into the red the first time in 1790 when it
assumed $75 million in the war debts of the Continental Congress.
Alexander Hamilton, the first treasury secretary, said, ''A national
debt, if not excessive, will be to us a national blessing.''
Since then, the nation has only been free of debt once, in 1834-1835.
The national debt has expanded during times of war and usually
contracted in times of peace, while staying on a generally upward
trajectory. Over the past several decades, it has climbed sharply --
except for a respite from 1998 to 2000, when there were annual budget
surpluses, reflecting in large part what turned out to be an overheated
The debt soared with the wars in Iraq and Afghanistan and economic
stimulus spending under President George W. Bush and now Obama.
The odometer-style ''debt clock'' near Times Square -- put in place in
1989 when the debt was a mere $2.7 trillion -- ran out of numbers and
had to be shut down when the debt surged past $10 trillion in 2008.
The clock has since been refurbished so higher numbers fit. There are
several debt clocks on Web sites maintained by public interest groups
that let you watch hundreds, thousands, millions zip by in a matter of
The debt gap is ''something that keeps me awake at night,'' Obama says.
He pledged to cut the budget ''deficit'' roughly in half by the end of
his first term. But ''deficit'' just means the difference between
government receipts and spending in a single budget year.
This year's deficit is now estimated at about $1.85 trillion.
Deficits don't reflect holdover indebtedness from previous years. Some
spending items -- such as emergency appropriations bills and receipts
in the Social Security program -- aren't included, either, although
they are part of the national debt.
The national debt is a broader, and more telling, way to look at the
government's balance sheets than glancing at deficits.
According to the Treasury Department, which updates the number ''to the
penny'' every few days, the national debt was $11,518,472,742,288 on
The overall debt is now slightly over 80 percent of the annual output
of the entire U.S. economy, as measured by the gross domestic product.
By historical standards, it's not proportionately as high as during
World War II, when it briefly rose to 120 percent of GDP. But it's
still a huge liability.
Also, the United States is not the only nation struggling under a huge
national debt. Among major countries, Japan, Italy, India, France,
Germany and Canada have comparable debts as percentages of their GDPs.
Where does the government borrow all this money from?
The debt is largely financed by the sale of Treasury bonds and bills.
Even today, amid global economic turmoil, those still are seen as one
of the world's safest investments.
That's one of the rare upsides of U.S. government borrowing.
Treasury securities are suitable for individual investors and popular
with other countries, especially China, Japan and the Persian Gulf oil
exporters, the three top foreign holders of U.S. debt.
But as the U.S. spends trillions to stabilize the recession-wracked
economy, helping to force down the value of the dollar, the securities
become less attractive as investments. Some major foreign lenders are
already paring back on their purchases of U.S. bonds and other
And if major holders of U.S. debt were to flee, it would send shock
waves through the global economy -- and sharply force up U.S. interest
As time goes by, demographics suggest things will get worse before they
get better, even after the recession ends, as more baby boomers retire
and begin collecting Social Security and Medicare benefits.
While the president remains personally popular, polls show there is
rising public concern over his handling of the economy and the
government's mushrooming debt -- and what it might mean for future
If things can't be turned around, including establishing a more
efficient health care system, ''We are on an utterly unsustainable
fiscal course,'' said the White House budget director, Peter Orszag.
Some budget-restraint activists claim even the debt understates the
nation's true liabilities.
The Peter G. Peterson Foundation, established by a former commerce
secretary and investment banker, argues that the $11.4 trillion debt
figures does not take into account roughly $45 trillion in unlisted
liabilities and unfunded retirement and health care commitments.
That would put the nation's full obligations at $56 trillion, or
roughly $184,000 per American, according to this calculation.
On the Net:
Treasury Department ''to the penny'' national debt breakdown: http://tinyurl.com/yrxrsh
Peter G. Peterson Foundation independent assessment of the national
''Deficits do Matter'' debt clock:
The American Engine Still Can
BY Irwin M. Stelzer
August 14, 2010 12:00 AM
The American economy is in serious trouble, and the remaining weapons
we have available to prevent a double dip are few indeed. We will try
to avoid a long period of deflation of the sort that doomed Japan to a
lost decade, but are not confident we can. That’s a free translation of
what the Federal Reserve Board’s monetary policy committee said after
last week’s meeting. Of course, central bankers are not so blunt. The
Fed’s committee actually said that “the pace of recovery in output and
employment has slowed in recent months.” The economy “remains
constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit.Housing starts remain at a depressed level.
Bank lending has continued to contract.”
The Fed could have mentioned:
♦ Revised economic data that show the recent recession to have been the
worst of the post-war years.
♦ The slowdown in economic activity in China.
♦ The absence of any long-term plan to rein in the deficit.
♦ The possibility of a “shock” to the world banking system if Greece
defaults on its sovereign debt as seems increasingly likely, or if any
one of our several states finally drown in their own red ink.
♦ The negative effect of the increase in health care, energy costs, and
taxes, the latter planned by President Obama for year-end.
♦ The 2.6 percent decline in already-depressed pending home sales in
June, despite record-low mortgage rates.
♦ The 1.2 percent decline in factory sales, indicating that the
manufacturing recovery might be stalling.
♦ The pile up in inventories of durable goods.
♦ The widest trade deficit since October 2008.
♦ And, perhaps most important of all, the increasing number of workers
unemployed for so long that their skills are atrophying, while economic
growth no longer seems to produce very many jobs, causing two-thirds of
Americans to believe that the economy has further to fall.
The worse news is that the bad news cited above is only the tip of the
iceberg: The lethal out-of-sight 90 percent is a more dangerous threat
to the good ship Robust Recovery.
Start with the state of the nation’s finances. The federal deficit
remains untamed, at 10 percent of GDP, topping the decade’s pre-Obama
high of 3.5 percent in 2004. Given the slowing of the recovery, a
reasonable argument can be made that what is needed is continued
spending, but only if combined with a medium-term plan for bringing the
deficit under control. No such plan is on the horizon, in part because
of the political paralysis produced by the impending congressional
elections, and in part because “kicking the can down the road” –
leaving every problem to the next generation of politicians – has
become a durable feature of American political life.
The second longer-term problem is the Obama-created imbalance between
the private sector that creates wealth and the public sector that
depends on that wealth. A recent analysis by USA Today, based on
government compensation data, shows that federal government employees
earn, on average, twice as much as private sector workers. That’s a
result of the recent stagnation in private sector compensation and a
steady rise in the pay of public sector workers. This situation was
exacerbated earlier this week when Congress decided to spend $26
billion to prevent lay-offs of teachers and other state employees,
funded in part by higher taxes on U.S. corporations that do business
overseas. Teacher lay-offs, of course, are used by politicians to
attract sympathy and bail-out money, rather than fire less useful
workers in their over-manned bureaucracies.
Then there is the perverse incentive created by a badly structured tax
system. A small businessman in New Jersey took to the op ed pages of
the Wall Street Journal to point out that it costs him $74,000 to pay
an employee $59,000 per year, when taxes and benefits are factored in.
But when the employee pays her taxes, she is left with only $44,000. So
the gap between his cost of hiring and her incentive to work is
substantial. Not a prescription for full employment.
Still, all is not lost. Most economists believe that the economy will
not drop into double dip territory, but will instead rack up low growth
this year and next. Corporate earnings are quite healthy, close to the
record highs reached before the downturn. Corporations have a $2
trillion hoard that they will soon have to spend or continue the
emerging trend of increasing dividends, something that corprocrats are
always reluctant to do since that means surrendering control of unused
funds to their owners – the shareholders. Businesses are already
increasing spending on equipment and software to replace stuff that is
at the end of its useful life. The inflation-adjusted annual increases
of more than 20 percent in each of the last two quarters were the most
rapid since the latter part of the 1990s and far outstripped the rate
of upturn that characterized past recessions.
Moreover, the Fed has not really emptied its quiver, even with interest
rates effectively at zero. Last week it decided to stop shrinking its
portfolio and instead to reinvest cash coming from maturing mortgages
into Treasury IOUs, keeping long-term interest rates low to encourage
businesses to invest and consumers to spend. Should it decide that
things are getting worse, it can resume money creation, known as
quantitative easing (QE), leading pundits to joke that Fed chairman Ben
Bernanke might decide to captain the QE2, and is already preparing his
job application. Whether he can steer the economy into more agreeable
waters is not certain, since making it cheaper for businesses to borrow
is, as Keynes once noted, like pushing on a string. So far, cash-laden
banks say they can’t find credit-worthy small business borrowers, and
cash-strapped borrowers say the banks won’t lend even to sound small
Then there is fiscal policy. A new Congress will be in place in 2011,
and is likely to have more deficit hawks than the existing bunch, many
of whom won election by riding on Barack Obama’s coattails, now so
frayed that these same politicians are asking him not to come into
their districts. If the election returns follow the polls, the
probability of the introduction of some sanity into federal fiscal
policy will increase, especially if the presidential commission’s
post-election report on the deficit can come up with suggestions for a
politically acceptable mix of tax increases and spending cuts, perhaps
using the new British government’s ratio of £4 of spending cuts
for every £1 of tax increases as a guide.
All of which brings me to share prices. This week’s Fed confession that
the economy was not moving along at the pace it had expected rattled
markets, which sometimes affects the real economy by producing a drop
in consumer confidence and spending. Take heart: After dropping about 3
percent on the day after the Fed’s announcement, the Standard &
Poor’s index of 500 stocks hit 1093, the precise level that prevailed
at the end of last year, and closed the week at 1079. For investors,
although not for in-and-out traders, there has been much ado about very
little: The tailwinds provided by good profits have been offset by the
headwinds created by negative economic reports.
In the end, with the fuss created by the Fed report behind us, a
longer-than-one-week look shows that jobs are indeed being created in
the private sector, share prices are relatively unchanged, retail sales
are sluggish but nevertheless up a bit, profits are ample, and
businesses have started to reinvest. The American economy just might
once again prove to be the engine that could.
crisis when our debt goes 'pop'
By THOMAS SOWELL
Last Updated: 1:56 AM, August 4, 2010
Posted: 12:48 AM, August 4, 2010
Without naming names or making political charges, the Congressional
Budget Office last week issued a report titled "Federal Debt and the
Risk of a Fiscal Crisis." The report's dry, measured words paint a
painfully bleak picture of the long-run dangers from the current
runaway government deficits.
The CBO report points out that the national debt, which was 36 percent
of the gross domestic product three years ago, is now projected to be
62 percent of GDP at the end of fiscal year 2010 -- and rising in
Tracing the history of the national debt back to the beginning of the
country, the CBO finds that the national debt did not exceed 50 percent
of GDP, even when the country was fighting the Civil War, the First
World War or any other war except World War II. Moreover, a graph in
the CBO report shows the national debt going down sharply after World
War II, as the nation began paying off its wartime debt when the war
By contrast, our current national debt is still going up and may end up
in "unfamiliar territory," according to the CBO, reaching
"unsustainable levels." They spell out the economic consequences -- and
it is not a pretty picture.
Although Barack Obama and members of his administration constantly talk
about the so-called "stimulus" spending as creating a demand for goods
that is in turn "creating jobs," every dime they spend comes from
somewhere else, which means that there is less money to create jobs
White House press secretary Robert Gibbs' recent rant against Rush
Limbaugh for criticizing the bailout of General Motors went on and on
about how this bailout had saved "a million jobs." But where does Gibbs
think the bailout money came from? The Tooth Fairy?
When you take money from the taxpayers and spend it to rescue the jobs
of one set of workers -- your union political supporters, in this case
-- what does that do to the demand for the jobs of other workers, whose
products taxpayers would have bought with the money you took away from
them? There is no net economic gain to the country from this, though
there may well be political gains for the administration from having
rescued their UAW supporters.
As the Congressional Budget Office puts it, if the national debt
continues to grow out of control, a "growing portion of people's
savings would go to purchase government debt rather than toward
investments in productive capital goods such as factories and
computers; that 'crowding out' of investment would lead to lower output
and incomes than would otherwise occur."
place where there is growth in the economy...as we've been saying:
Obama Team Sees Jobs Growth In
Filed at 7:57 a.m. ET, July 13, 2009
WASHINGTON (Reuters) - Jobs in the healthcare and environmental sectors
are growing at a faster rate than those of the U.S. economy as a whole,
President Barack Obama's Council of Economic Advisers will say a report
to be released on Monday.
The report, which looks at how the U.S. labor market is expected to
develop in the next few years, says a rebound in employment in
construction and some manufacturing sectors is expected as stimulus
spending approved early this year invests in projects around the
The report is based on an analysis of recent labor market data, a White
House official said. The report identifies likely changes in the U.S.
labor market as economic drivers shift from sectors like financial
services to the growing sectors that are transforming the economy, the
The report, entitled "Preparing the Workers of Today for the Jobs of
Tomorrow," will also discuss the skills and training that will likely
be most relevant in growing occupations, the official said. It also
will discuss the type of education and training system needed to
prepare workers for those jobs.
Obama said in an opinion piece in The Washington Post published on
Sunday that he would be talking this week about how to ensure workers
have the skills needed to compete for the jobs of the future.
"In an economy where jobs requiring at least an associate's degree are
projected to grow twice as fast as jobs requiring no college
experience, it's never been more essential to continue education and
training after high school," he wrote.
Obama has said he wants the United States to lead the world in college
degrees by 2020.
"Part of this goal will be met by helping Americans better afford a
college education. But part of it will also be strengthening our
network of community colleges," he said.
"We believe it's time to reform our community colleges so that they
provide Americans of all ages a chance to learn the skills and
knowledge necessary to compete for the jobs of the future," Obama wrote.
Obama's chief of staff, Rahm Emanuel, told a meeting of the Democratic
Leadership Council several weeks ago that the administration was
planning a major education initiative dealing with community colleges.
GOINGS IN GOVERNMENT FINANCIAL INSTITUTIONS...
Treasury Department's "Office of
Thrift Supervision" - just
like some other government institutions - a misnomer if ever I
Freddie Mac exec killed himself - so this story below is a sign
that pressure is lessining? Remember, the housing industry can be
both a critical indicator of "turnaround" as well as a lagging
indicator - when the economic music stops, housing industry left
holding the bag. And mortgage ind
Embattled Thrift Agency
Retiring July 3
By THE ASSOCIATED PRESS
Filed at 10:45 a.m. ET
June 19, 2009
WASHINGTON (AP) -- The previous head of the federal thrift agency is
leaving the government amid criticism of the agency's role in the
run-up to the financial crisis.
The Treasury Department's Office of Thrift Supervision says Scott
Polakoff, who was placed on leave in March from his position as acting
OTS director, is retiring on July 3.
Polakoff, who was the agency's chief operating officer, held the
acting-director position only since February following the resignation
of OTS Director John Reich. John Bowman is now acting director.
The Obama administration's new plan for overhauling financial
regulation calls for abolishing OTS. It oversaw insurance conglomerate American International Group Inc.
-- whose near-collapse last fall led to about $180 billion in federal
The case for Clinton
Cyprus considers zero tax on smaller bank
I-BBC19 March 2013 Last updated at 10:27 ET
The Cyprus finance ministry suggests savers holding less than 20,000
euros (£17,000) would be exempt from a bank levy which has caused
alarm. The plan was changed following outrage that ordinary
would be forced to pay a levy of 6.75%. However, President Nicos
Anastasiades has said that parliament is still likely to reject the
The controversial tax is a condition for Cyprus to get a 10bn-euro loan
from the EU and IMF, to rescue its banks. The new plan would keep
6.75% levy on deposits over 20,000 euros, with those over 100,000 euros
charged at 9.9%. A crucial vote on the bailout deal in the
parliament is expected to start at 18:00 (16:00 GMT), but it may be
Mr Anastasiades has urged all parties to back the bailout, saying
Cyprus will be bankrupt if the deal does not go ahead.
The Cyprus central bank chief, Panicos Demetriades, has warned that
scrapping the tax on small savers would scupper the plan to raise 5.8bn
euros in total from bank deposits. He also predicted account holders
could suddenly withdraw 10% or more of the total in Cypriot banks if
the levy was imposed. At the same time, Mr Demetriades said he
favoured imposing the levy only on accounts above 100,000.
Late on Monday eurozone finance ministers urged Cyprus to rethink the
levy on bank deposits, which had been agreed on Saturday in Brussels.
They have warned that Cyprus's two biggest banks will collapse if the
deal does not go through in some form.
Fearing a run on accounts, Cyprus has shut its banks until at least
Thursday. The local stock exchange also remains closed.
Cyprus' banks were badly exposed to Greece, which has itself been the
recipient of two huge bailouts.
On Monday there were jitters on global markets over Cyprus, amid shock
that for the first time in the eurozone crisis ordinary savers would
suffer a "haircut" on their bank accounts - a slice of their savings.
Eurozone finance ministers are now calling on the Cypriot government to
exempt all savers with deposits of under 100,000 euros. Instead,
argue that wealthier savers should pay the levy at a higher rate -
losing more than 15% of their investments, the BBC's Chris Morris
reports. However, many of those larger deposits are held by
and Russian leaders have already reacted angrily to the Cypriot levy -
on Monday President Vladimir Putin called it "unfair, unprofessional
Of the estimated 68bn euros in total held in Cypriot bank accounts
about 40% belongs to foreigners - most of them thought to be
Russia says it may reconsider the terms of a 2.5bn-euro loan it made to
Cyprus in 2011, which was separate from the proposed eurozone bailout.
The BBC's Mark Lowen in Nicosia says it now appears that a proxy battle
of sorts is taking place over Cyprus: on the one side the EU is pushing
for a lighter burden on lower savers and on the other, Russia is angry
because its wealthy nationals would be taxed hard in Cyprus. Meanwhile,
the tiny Cypriot economy's future hangs in the balance.
The latest proposal, removing the levy from small savers, may not
satisfy the eurozone because it would leave a shortfall, our
Do the Greeks
and Turks agree on this?
Cyprus Set to Reject Bailout, Citing
Tax on Bank Deposits
By LIZ ALDERMAN, NYTIMES
March 19, 2013
NICOSIA — Cyprus’s Parliament is likely to reject an international
bailout package that involves taxing ordinary depositors to pay part of
the bill, President Nicos Anastasiades said Tuesday, despite a revision
that would remove some objections by exempting small bank accounts from
the levies. Lawmakers were scheduled to vote late Tuesday on the
€10 billion, or $13 billion, bailout.
Should the measure fail in Parliament, Mr. Anastasiades and his E.U.
partners would have to return to the negotiating table. Analysts have
also raised the possibility of bank runs and a halt in liquidity to
Cypriot banks from the European Central Bank if the measure did not
The bailout plan, negotiated over the weekend, has aroused harsh
criticism in many quarters for its unprecedented inclusion of ordinary
bank depositors — including those with insured accounts — among those
who would have to bear part of the cost.
The original terms of the bailout called for a one-time tax of 6.75
percent on deposits of less than €100,000, and a 9.9 percent tax on
holdings of more than €100,000. The moves are designed to raise €5.8
billion of the total €10 billion bailout cost — a condition imposed by
Cyprus’s E.U. partners.
Under a new plan put forward by Mr. Anastasiades early Tuesday,
depositors with less than €20,000 in the bank would be exempt, but the
taxes would remain in place for accounts above that amount. But
Mr. Anastasiades said that the changes probably would not be enough to
secure a majority in the 56-member legislature to approve the bailout
“I estimate that the Parliament will turn down the package,” he said on
state television as he headed into a series of meetings.
A government spokesman, Christos Stylianides, echoed that opinion,
telling state radio, “It looks like it won’t pass.”
The managing director of the International Monetary Fund, Christine
Lagarde, said Tuesday she was in favor of modifying the agreement to
put a lower burden on ordinary depositors.
“We are extremely supportive of the Cypriot intentions to introduce
more progressive rates,” she told an audience in Frankfurt.
She urged leaders in Cyprus to quickly approve the plan agreed to by
European leaders in Brussels last weekend.
“Now is the time for the authorities to deliver on what they have
commented,” Ms. Lagarde said.
She complained that critics have not recognized how much the agreement
will force Cyprus banks to restructure and become healthier. In
Brussels, Simon O’Connor, a spokesman for Olli Rehn, the E.U.
commissioner for economic and monetary affairs, said Tuesday that
finance ministers from countries using the euro had agreed the previous
night in a teleconference that Cyprus could adjust the way the levy
But Mr. O’Connor said that E.U. authorities still were waiting to see
whether the adjustments being discussed in Cyprus deliver “the same
financial effect” as the agreement between Cyprus and international
lenders in the early hours of Saturday.
“On the parameters of this levy, we will not comment as long as that’s
a process that’s still under way,” Mr. O’Connor.
Cypriot banks were closed Monday for a bank holiday that has been
extended through Wednesday. The governor of the Cypriot central
bank governor, Panicos Demetriades, warned lawmakers on Tuesday that as
much as 10 percent of the €65 billion in deposits placed in Cypriot
banks would flee the country as soon as banks’ doors open Thursday
morning, should Parliament approve the deposit tax.
He also cautioned that the plan to exempt deposits under €20,000 from
the tax posed a new problem, since the government would only be able to
raise €5.5 billion, instead of the full €5.8 billion required by
lenders. The gap would be considered a breach of the bailout agreement
and “perhaps might not be accepted” by Cyprus’s lenders, he said.
It could also mean that Cyprus could eventually seek a higher tax on
bigger deposits, a move that raised further alarms in Russia, where President Vladmir
Putin has condemned the tax as unfair.
On Tuesday, Russia’s envoy to the European Union, Vladimir Chizhov,
said in Brussels that the levy was “similar to forceful expropriation,”
and warned that “the whole banking system can collapse,” Reuters