Apr 30

IMF Chief Calls for Mortgage Principle Forgiveness in U.S.

International Monetary Fund Chief Christine Legarde has added her voice to the growing chorus of economists not bought and and paid for by the banking sector in calling for the United States to begin to reduce the principal on underwater mortgages purchased during the fraudulent run-up in housing prices between 2002 and 2008. She recommends doing so in order to stimulate growth across the globe, but doing so would also significantly impact the economy at home.

She called upon Fannie Mae and Freddie Mac, both of which are overseen by the Federal Housing Finance Agency, to reduce the principal owed on homes, whether the homeowner is in arrears on payments or simply underwater and current in their obligations. Unfortunately, FHFA boss Edward DeMarco has steadfastly maintained that he will not support policies that allow for widespread mortgage write-downs. Mr. DeMarco was to make a decision by April 30, 2012 whether or not he would move forward on a plan under Obama’s HAMP program to allow principal reductions on properties backed by Fannie Mae and Freddie Mac where the mortgage holder is seriously delinquent. Unfortunately Mr. DeMarco recently announced that he would ignore the deadline, imposed by Congress, and continue to study the problem.

The HAMP program reductions that are under consideration by Mr. DeMarco would only affect about 10% of all underwater mortgages backed by Fannie Mae and Freddie Mac because homeowners who are underwater but continuing to make timely payments are not eligible for reductions. Mr. DeMarco has said in the past that he fears mass purposeful mortgage delinquencies if the program is permitted to move forward, a prospect that has not been supported by evidence. The likelihood of damaging ones credit rating and potentially losing a home in exchange for a principal reduction that may or may not come at all has not convinced any significant number of borrowers to stop making their mortgage payments.

The Obama administration has been reported as putting pressure on Mr. DeMarco to make a decision allowing the contemplated principal reductions to move forward, but I am dubious as to how extraordinary the insistence has truly been from the White House. The administration has offered a deluge of failed and ill-conceived fixes to the mortgage mess since 2008, none of which truly aimed at forcing the banks and Fannie Mae and Freddie Mac to allow principal write-downs of underwater properties. A wisely constructed plan by the FHFA and the administration could easily limit any reductions to those homes actually purchased during the fraudulent run-up in home prices, and those homes who value exceeds that of the original mortgage, excluding refinancing undertaken to make additional unnecessary purchases. Configuring a program to address this problem and stimulate the economy would not be a herculean task.

It is wholly objectionable that the already incommensurate principal reductions proposed by Congress and the President are being insubordinately rejected. However, it should come as no surprise to anyone given the administration’s posture concerning this problem from the very beginning. Setting aside the earlier mentioned waterfall of half-assed programs previously concocted, the furthest the President has been willing to travel down the write-down road has been to propose federally assisted and voluntary refinancing of a small number of homes under lower interest rates. Not a single legitimate attempt has been made to reduce the principal of homes currently in repayment and dramatically underwater. Offering a homeowner the ability to pay twice the value of a home under a lower interest rate is no program at all. It is an insult to each American who had their tax dollars spent drowning large banks and mortgage institutions in liquidity in order to ensure their solvency.

So, Mr. DeMarco, no one is surprised by your decision. Further, only a fool should be surprised by the administration’s lack of movement on this issue. You’re a homeowner, not a bank, and as such, you don’t matter. The most logical course of action is to walk away from any home that is seriously underwater, because help is not coming.

Christine Legarde was right to call upon the American government to offer significant principal reductions to underwater homeowners. She is right because it will boost the American economy, setting free cash to be spent consuming goods and services and alleviating business and personal uncertainty. She is right because it will boost the world economy. She is right because it represents remuneration for the fraud perpetrated upon the people. She is right, quite simply, because it is the moral thing to do.

Apr 30

Wages, Productivity, and You

Assembly LilePerhaps the most underreported aspect of the past few decades, specifically the aftermath of the financial collapse, has been the extraordinary increases in worker productivity and the accompanying stagnation of wages. Whatever the profession or occupation, employers have been demanding more and more from employees and failing to compensate them for the increased output. The phenomenon is referred to as a “speedup.” Rather than hiring additional workers, employers have been capitalizing on workers’ fears of unemployment by requiring that they do more for less. Ultimately it is a case of supply and demand. A greater supply of applicants than open positions to be filled has allowed bosses young and old to pad their own purses at the expense of employees. It has represented a  near complete break from basic morality.

This is nothing short of a sea change. As University of California-Berkeley economist Brad DeLong notes, until not long ago, “businesses would hold on to workers in downturns even when there wasn’t enough for them to do—would put them to work painting the factory—because businesses did not want to see their skilled, experienced workers drift away and then have to go through the expense and loss of training new ones. That era is over. These days firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity to their workers.”

Real wages and total compensation have also eked along just barely keeping pace with inflation recently, continuing a long term trend that has continued since the 1970′s. While it is true that when total compensation–wages plus benefits–is measured and adjusted for inflation, workers compensation has indeed grown more quickly than inflation, the ultimate effect is less money in the pockets of workers, fewer retirement options, greater debt, increasing number of multi-generational households, and a lower standard of living generally. It is also true that the employer foots the bill for much of the benefit cost, but the added investment ultimately benefits neither the employee or the employer.

Productivity has vastly outpaced real wage growth over the past two decades and the prediction going forward is that the downward pressure on wages will continue.

The income story in America is deeply troubling. Inflation-adjusted average hourly earnings for production and nonsupervisory workers (a category that encompasses 80% of the workforce and leaves out higher-paid managers and supervisors) rose by an anemic 0.1% a year from 1979 to 2007, according to the EPI. A potent combination of economic and social forces has conspired to keep wages down for most workers with the exception of a brief period of white-hot economic growth in 1995-2000. Private-sector unions have largely disappeared. Companies have outsourced all kinds of tasks to cheaper places overseas and low-cost contractors at home. The upward spiral in health-care costs has eroded wages.

What the downward spiral of real wage growth means for the economy is simple–stagnant growth. With less real buying power remaining after fixed costs, retirement savings, and debt service have been factored in, workers will not be able to purchase the necessary goods and services in order to sustain growth in the larger economy. The economy has shown evidence of this recently, with orders for durable goods down and recent manufacturing spurred by a short term need to increase inventories also now trending downward.

I do maintain a certain level of sympathy for employers however, as costs to provide medical insurance continue to outpace inflation by nearly 7% on average. Each dollar spent on inefficient and expensive health care plans is a dollar necessarily unable to be spent on wages employer sponsored retirement plans. While there is no guarantee that employers would pass along any health care savings to the employees should costs somehow be reined in, under the current system employers have not been provided with that option. Obviously, as labor supply outstrips labor demand, employers lack any real incentive to do so even if given the choice, but at some point the labor supply will more evenly mirror demand, yet it is unlikely that reductions in health care costs will have come to pass in the interim.

If you are like me you have a twitter account. If you are are interested in finance you probably also follow several respected economists using that very same twitter account. If you take the time to track back and read the vast majority of posts and links to all of the mind-numbingly dense economic data–charts, charts of charts, charts within charts clarifying other charts, bar charts, line graph charts, area charts, government labor data, Federal Reserve data, Census data, articles, studies, blogs, scholarly publications, and on and on–you will find a dearth of discussion concering real wage growth and inflation. You will be peppered with astonishing amounts of information concerning inflation, unemployment, productivity, compensation costs, among other data sets, but you will not find a bona fide widespread discussion among mainstream economists surrounding real wages and productivity.

Unfortunately the trend should surprise no one. It is a consequence of decades of deregulation, attacks on public sector workers, attacks on labor unions,  and above all an intense campaign by corporate American to manitain the myth of Horatio Alger and the American Dream. Look, I even capitalized it, “American Dream.” I am not certain that it is required, but my very first instinct was to make sure that everyone is able to distinguish the idea from each of the other meaningless words surrounding it. The fact of the matter is that as worker productivity has increases and wages have stagnated, the profits of the employers have not showed a correlative decrease. In fact, profits have increased, as has executive pay and compensation. In other words, corporate America has used your otherwise laudable American work ethic to pound you into dust.

You know the feeling–guilt for not completing a task or set of tasks, no matter how unreasonable. The feeling of anguish at the thought of calling in sick. The overwhelming barrage of conflicting information you are faced with when you dare demand to have a modicum of work-life balance. The idea that working two, three, or four jobs is admirable and worthy of respect and recognition. You’re a hero, because that is what Americans do–we get up every day to make someone else filthy rich and we’re damn proud of it. It has all been orchestrated to brainwash you into believing that you are a failure if you do not do whatever is required of you by your employer. Astonishingly, corporate America has been able to maintain this myth even as it demanded more and more from you for less and less in return. It’s wrong and it has to stop.

Apr 28

Neither Side is being Reasonable on Taxes

Ryan - ObamaAs the election draws near and the competing interpretations of deficit bean counting becomes louder and louder, taxes, specifically income taxes, will be occupying a more pronounced amount of the political space. On the one side, Republicans, who oppose raising taxes on anyone for any reason, and who have been so dreadfully frightened by Grover Norquist and his ridiculous tax pledge that its reasonable members don’t dare speak honestly. On the other side–because we only have two sides after all–are the Democrats, who oppose raising taxes on anyone making less than $250,000. How the Democrats arrived at that number has been the subject of debate, but the party has sufficiently pigeon-holed itself on that number, so it is just as if Moses himself carried it down the Capitol steps and announced it as God’s will. Neither side is correct, and neither side is moving.

The Republican position is uniquely barbaric. Assuming no legislative change from status-quo, the top wage earners in the United States in 2012 will pay a top rate of 35% on incomes over $388,350 and 33% on incomes roughly over $218,000. Comparatively, most European nations carry a top tax rate of over 40%, and significant sales taxes and luxury taxes. Germany has a top income tax rate of 42%, and is currently the only thing standing between Europe and total economic destruction, rightly or wrongly. The Republicans are demanding not only that the top tax rate not be raised, but rather that it and other taxes affecting top earners be lowered dramatically, to 25%. Each of the lower marginal tax brackets would be lowered to 10%. They offer no compromise on this position.

Democrats on the other hand are standing pat on the position that taxes should be raised to pre-Bush levels for top earners of as high as 39.6%, and proposing that marginal tax rates for lower income earners not be changed from current levels for families earning less than $250,000 and individuals earning less that $200,000. There is also a surtax on unearned income at the higher income levels of 3.8%. Further, any individual earning more than $1 million would pay a minimum income tax rate of 30%.

Setting aside any debate concerning the United States’ arcane corporate tax code, neither party is being reasonable. First, the Republican plan leaves the government $6.2 trillion short on revenues and would necessarily lead to drastic cuts in discretionary spending, be it from programs boosted by Democrats, or from Defense. Second, the Democratic proposal, although much more equitable, also leaves in place the irresponsible Bush tax cuts for lower wage earners. It isn’t smart economics or smart politics to propose tax changes that affect only a small group of taxpayers. Moreover, Obama and the Democrats had their chance to avoid this fight altogether in late 2010. With the Bush tax cuts set to expire, they instead chose to negotiate with the Congress for a two-year extension. That decision was neither politically smart or economically responsible. With deficts almost certainly to be a more resounding issue during the 2012 campaign than tax rates, the Democrats, primarily out of fear, intentionally exacerbated the deficit by signing the 2010 agreement, playing directly into the Republicans’ wheelhouse. Allowing the Bush tax cuts to expire for everyone would have been a much easier political sell for the President and Democrats if they had painted the Republicans as unreasonable and focused on the shared sacrifice inherent in allowing a return to Clinton era rates. Instead, Democrats must fight the battle battle again during an election year. Continue reading

Apr 27

Is Americans Elect the Real Deal?

Americans ElectIn a very well written post over at The Atlantic, Lawrence Lessig argues that Americans Elect, a self-purported “2nd way” of nominating a Presidential ticket–carefully avoiding even the numerical mention of three or third so as not to not be labeled a third party–is the best hope that the United States has to rid itself of the corrupting influence of money on our political system.

But we who believe with Uygur (who believes that campaign finance reform is the largest issue facing American politics) must recognize that waiting is not costless either. The nature of campaign spending in the two elections since Citizens United has changed American politics fundamentally. After this election, that change will seem normal. The outrage that now courses through this Republic — on the left and at least the silenced right (squashed by four to one spending) — will fade. The idea that 196 Americans — the .0000063 percent — can contribute close to 80 percent of super PAC expenditures will seem ordinary. The tiniest slice of the 1 percent will then gladly accept the role of funding America’s elections, in exchange for the continued acquiescence by the rest of us — acquiescence in its dominant role in American politics, and because that role has been privately, not publicly focused, the continued plundering of our children’s futures.

If we let this issue go unremarked now, we could well pass a point of no return. The new normal is too profitable for those who control our government. Lobbyists can now promise clients triple digit returns on lobbying investments — what rational CEO would invest in a better mousetrap when more lobbyists on Capitol Hill promise more profit? And when the average salary increase for moving from the Hill to K St. is 1,452 percent, what rational congressperson is going to make it her cause to end the corruption that is this system?

We cannot afford this silence now. We can’t afford to wait. We must find a way to put this issue into the center of this presidential campaign. And the only way to do that just now is the most misunderstood movement in this election cycle so far — Americans Elect. (emphasis added, content not in original)

But the right answer here is not easy. And it begins with a recognition that we all must accept: America has lost the capacity to govern. By handing over the funding of elections to the tiniest slice of the 1 percent, we have guaranteed that any important policy choice can be blocked by a fraction of that tiny slice of the 1 percent. There will be no climate change legislation. There will be no simplification of the tax code. Health-care costs will not go down. Wall Street will be bailed out again. You pick your issue. Here is the fact: Our government hasn’t the ability to decide any important question of governance sensibly. And it will remain that way until we find the will to end this pervasive system of corruption.

Americans Elect claims:

Americans Elect is a “2nd way” to nominate a President, not a traditional 3rd party. Our process is open to any qualified candidate and any registered voter—no matter their party. We have no ties to any political group—left, right, or center. We don’t promote any issues, ideology or candidates. None of our funding comes from special interests or lobbyists. Our only goal is to put a directly-nominated ticket on the ballot in 2012.

I am certainly tempted to entertain the notion that because no other third party or so-called “alternative” movement has been able challenge the status-quo in the United States and our two-party system, that I should support Americans Elect on grounds of principle alone. I have in fact registered on the site, completed the questionnaire, and made my opinion clear. I have done the same with the Justice Party. I have not shied away from the possibility that Americans Elect could somehow grow into a serious challenge to the Democratic and Republican machines. However, I share many of the concerns highlighted by the Lessig piece. I also have independent concerns of my own. But all things considered, I support Americans Elect and its efforts to at the very least scare the pants off of the two major parties. Continue reading

Apr 26

Bill Clinton Part II – Starring Barack Obama

Obama and ClintonWe all remember the wonderful carefree days of the Clinton Administration, notably the second lame-duck term during which much was accomplished, for good and for bad. The economy was growing, unemployment was low, and the stock market performed swimmingly. Congress impeached the President, but most of the balding white men involved in the Broadway production secretly played intern with their Bill Clinton action figures. President Clinton did not embroil us in some meaningless conflict murdering innocent civilians and upending an entire civilization for no good reason. Instead, although late and saturated with poor political and policy decisions, he brought an end to the bloody and disturbing conflict in former Yugoslavia.  With this and other foreign policy successes and a humming economy, it was peaches and cream in the United States. At least we thought it was.

What was overlooked  at the time was the legislative unraveling of significant and efficacious financial regulation that took place in the final years of the Clinton Presidency. Following a decade of banking deregulation, Glass-Steagall was demolished by the Gramm–Leach–Bliley Act, the depression era law that had kept banks and investment houses separate entities, and ensured that bank deposits were not ultra-leveraged and gambled with on risky Frankensteinesque financial products cooked up by some MIT graduate using complicated algorithms. The benign sounding and exceptionally complex Commodity Futures Modernization Act of 2000 also passed and was signed into law by President Clinton. The law ensured that over-the-counter derivatives, you know, those adorable little weapons of mass financial destruction that helped fuel the financial crisis and sank AIG into bankruptcy, would not be regulated by the SEC or the CFTC, or by anyone else for that matter. Each of these laws was boosted by Republican lawmakers, specifically Senator Phil Gramm, and his financial backers. Unfortunately, the economic and financial markets advisers that held Clinton’s ear signed on to the right wing plan willingly as well.

Times were great, and after more than a decade of lesser financial regulation, the conventional wisdom was that more regulatory downsizing would ultimately juice the system to yet new highs, lifting all ships and dominating the world’s financial system. Nothing could go wrong, well, at least that’s what President Clinton’s advisers counseled, notably Larry Summers, Alan Greenspan, Arthur Levitt, and William J. Rainer. Each man an imbecile in his own unique way. The first signs that the The Commodity Futures Modernization Act was a flop came not one year later when Enron Corporation crashed due to the collapse of unregulated single-stock futures and over-the-counter energy futures given the stamp of approval by the act. Continue reading

Apr 25

Obama and Department of Education Outsourcing Student Loan Servicing

On April 15, 2012 I received a letter in the mail from EdFinancial, a so called “nonprofit” financial services company, informing me that it would be taking over the serving of my William D. Ford direct consolidation loan, effective April 5, 2012. First and most obviously, the letter was postmarked seven days after the effective date. Most upsetting, the notice arrived just three days prior to my payment being due. I received no contact from the Department of Education, who had been servicing my loans since I graduated from Law School. So, I was left with only a small window of time in order to determine on my own if the letter was legitimate, and then register on the new website and adjust my automatic payments accordingly.

The federal government through the Department of Education has been has been transferring large tranches of federal student loans to new loan-servicing companies for some time now. It has plans to continue to do so through the end of 2012 and beyond.

As our federally-owned loan portfolio continues to grow, we are ready to move to the next step in ensuring an efficient and effective multi-servicer, borrower-centric approach to servicing.  We will further expand our federal loan servicer team through contracts awarded under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation.  This solicitation offered NFP entities the opportunity to submit proposals individually or in teams for servicing borrower accounts on our behalf.  Whether individual or team award, our customers will know and face one servicer.  The Department will annually measure each servicer’s performance in the areas of borrower satisfaction and default management and use the results to assign additional volume when applicable.

I am left only to assume that not directly informing borrowers in advance that hundreds of billions of dollars in student debt will be transferred to private entities is an indispensable element of this new “borrower-centric” approach. I also assume that not informing me in a timely fashion of the transfer carries no penalty. I should say loudly that I was very happy with the past service provided by the Department of Education and found its staff to be knowledgeable, helpful, and responsive. Over the years I have had several questions and need for assistance, and each request was handled professionally. I have no doubt that the level of service provided previously will not be duplicated by the private entities paying lower wages and benefits, and providing no job security to its collection agents and staff.

The change was pushed by several nonprofit student loan corporations and their trade groups, including the Education Finance Council, during the health care debate in 2009 and 2010. The rule change was hidden away nicely as part of legislation passed concurrently with the Affordable Care Act. As has been true often during Obama’s tenure, an idea first floated to enable common sense reform, has been bastardized by moneyed interests. The motivation for the law was primarily to allow the government to break from guaranteeing loans offered through banks and credit unions and to begin lending directly to the public. The change made sense, and it has saved the federal government from having to pay fees to the large banks to originate and service the loans. It has also meant that the federal government would be forced into servicing a larger number of loans. However, the apparently influential nonprofit collection servicing business groups won a provision which guaranteed that its members would be granted the rights to service the loans.

As a consequence of the right hand helping while the left hand pummels, many borrowers have suffered problems during the transition. Many borrowers’ payments have been adjusted upwards or downwards without explanation. The vast majority of these same borrowers have since provided the new servicer with the requested information needed to correct the issue, but have not found a resolution. In my case I was simply notified in an unprofessional and untimely manner, although I am certain that additional problems will arise in the future.

I have some initial questions for the Department of Education. For example, how will loan forgiveness procedures be handled? Who will make decisions regarding public service loan forgiveness? How will borrowers’ payments be tracked for purposes of forgiving loan balances once the loans become eligible under the 25 or 20 year provisions? Are we to trust these private companies to keep accurate records and base decisions on government policies and interpret those policies accurately? What new collection rights, if any, will the servicers enjoy that the federal government did not? Will there be an oversight board set up to handle complaints from borrowers when these servicers ultimately engage in fraudulent behavior? Who will punish these entities if they begin to intimidate borrowers? At least six of the servicers that Uncle Sam has negoitiated these no-bid contracts with with have been involved in scandals in the past. How are we borrowers to have any confidence in this process?

The fact of the matter is that this type of government outsourcing never functions as planned. Just ask anyone who has run afoul of parking regulations in Chicago, or the folks who were recently renumerated for fraudulent fines and penalties paid to private operators of toll roads in California. This loan servicing outsourcing was a terrible idea and it will have terrible consequences. Unfortunately, it will be nearly impossible to unwind it.

It is a despairing situation because the President, I believe, had no intention of placing student borrowers into a precarious situation. In attempts to streamline the process he simply traveled down the path of least resistance, likely believing that the servicers’ nonprofit status would in some way shield borrowers from the type or predatory behavior that they had been subjected to by the large banks and private collection companies. In return, he was able to carve out a change that removed billions in fees from the large banks as the government became a direct lender to students. As I write this, the President is traveling around the country attempting to rally support for an extension of lower interest rates for student loan borrowers, and I believe he intimately understands the harm that will be caused by failure. However, outsourcing nearly a trillion dollars in student loan debt to ill-trained, ill-informed, ill-motivated private entities was a poor decision, and one that will likely adversely affect borrowers for decades.

Apr 24

Criminal Charges Finally Filed Against BP Employee

Today the Department of Justice filed the first criminal charges in a Louisiana court related to the devastating oil spill in 2010 involving BP’s Macondo well off the Gulf of Mexico. The named defendant in the case, Kurt Mix, was an engineer employed by BP working on efforts to measure the amount of oil leaking into the Gulf as a result of the spill, as well as on efforts to contain the leakage. Mix is charged with two counts of Obstruction of  Justice. The affidavit and the complaint include contentions that Mix deleted several email and text message exchanges he had with contractors and his superiors at BP. The text messages and email communications contained estimates of oil leakage that far exceeding the amounts provided to the public. Moreover, the messages contained candid discussions regarding the likelihood of success of efforts to cap the well which were overstated in public comments by BP and communications with government officials.

As discussed in detail below, MIX deleted numerous electronic records relating to the Horizon disaster response, including records concerning the amount of oil potentially flowing from the well, after being repeatedly informed of his obligation to maintain such records and after it became apparent that his electronic records were to be collected by an outside vendor retained by BP’s counsel to collect electronic documents….

From the Department of Justice’s statement:

On or about Oct. 4, 2010, after Mix learned that his electronic files were to be collected by a vendor working for BP’s lawyers, Mix allegedly deleted on his iPhone a text string containing more than 200 text messages with a BP supervisor.  The deleted texts, some of which were recovered forensically, included sensitive internal BP information collected in real-time as the Top Kill operation was occurring, which indicated that Top Kill was failing.  Court documents allege that, among other things, Mix deleted a text he had sent on the evening of May 26, 2010, at the end of the first day of Top Kill.  In the text, Mix stated, among other things, “Too much flow rate – over 15,000.”  Before Top Kill commenced, Mix and other engineers had concluded internally that Top Kill was unlikely to succeed if the flow rate was greater than 15,000 barrels of oil per day (BOPD).  At the time, BP’s public estimate of the flow rate was 5,000 BOPD – three times lower than the minimum flow rate indicated in Mix’s text.

In addition, on or about Aug. 19, 2011, after learning that his iPhone was about to be imaged by a vendor working for BP’s outside counsel, Mix allegedly deleted a text string containing more than 100 text messages with a BP contractor with whom Mix had worked on various issues concerning how much oil was flowing from the Macondo well after the blowout.  By the time Mix deleted those texts, he had received numerous legal hold notices requiring him to preserve such data and had been communicating with a criminal defense lawyer in connection with the pending grand jury investigation of the Deepwater Horizon disaster.

While I am heartened by Eric Holder’s decision to prosecute someone with ties to any of the various criminal conspiracies that have occurred or continued to occur on his watch, I hope this does not close the book on the BP oil spill prosecutions. Mr. Holder has indicated that this complaint represents only the initial charge in an ongoing investigation. I will have to take him at his word. More importantly however, the charge is not related any criminal behavior that may or may not have caused the spill itself, rather it represents elements of the cover-up after the fact. It is an open question as to whether anyone will be charged criminally for any of the decisions that were made that led to the spill, or whether Mr. Mix was acting on instructions from supervisors higher up the chain of command at BP or other entities. It hardly makes sense that Mr. Mix would put his career in jeopardy by deleting electronic communications in which it appears that he is being forthright concerning the spillage amounts and likelihood of success of capping the well during “top kill” efforts in 2010.

Apr 24

Time for Debt Forgiveness

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy recently published a piece over at Project Syndicate in which he strongly advocates for the forgiveness of debt as a means to push the economic recovery along. Most economic prediction models have forecast growth around the world at far higher levels than what has come to pass, and there is talk that forecasts going forward will have to be revised downward. The reason for this, he argues, is that the medicine prescribed to alleviate the damage caused by the financial crisis was contraindicated. While the lowering of interest rates, the printing of money, the infusion of capital into failing banks, and the increasing government spending all serves to buoy the economy, but the real silver bullet is debt forgiveness. I agree.

With fiscal, monetary, and exchange-rate policies blocked, is there a way out of prolonged recession? John Geanakoplos of Yale University has been arguing for big debt write-offs. Rather than waiting to get rid of debt through bankruptcies, governments should “mandate debt forgiveness.” They could buy bad loans from lenders and forgive part of the principal payable by borrowers, simultaneously reducing lenders’ collateral requirements and borrowers’ debt overhang. In the US, the Term Asset-Backed Securities Loan Facility (TALF) program and the Public-Private Investment Program (PPIP) were in effect debt-forgiveness schemes aimed at sub-prime mortgage holders, but on too small a scale.

But the principle of debt forgiveness clearly has applications for public debt as well, especially in the eurozone. Those who fear excessive public debt are the banks that hold it. Junk public bonds are no safer for them than junk private bonds. Both lenders and borrowers would be better off from a comprehensive debt cancelation. So would citizens whose livelihoods are being destroyed by governments’ desperate attempts to de-leverage.

Philosophically, the debt-forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place. As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transaction.

Here in the United States, much of the sluggishness of the recovery can be pinned directly to the so-called housing and debt  overhang. There are simply too many foreclosures to work through quickly and far too many people servicing loans that exceed the value of the home. There are too many people servicing student loans, credit cards, and other debt. Toss in a heavy dose of unemployment, consumer deleveraging, and banks hoarding cash–desperate to firm up their balance sheets lest the public be made aware of how financially troubled they really are–and you have a recipe for a sluggish recovery. Unfortunately, we here in the United States cling to a ridiculous notion that consumers who took on debt, even fraudulently inflated debt, must pay back what they owe at any cost. The theory goes that to do otherwise is to “reward irresponsible behavior.”

The theory has no merit. This principled position has the practical effect of suffocating the economy far longer than necessary. The pragmatic approach, albeit ethically unsavory to some, frees up disposable income to make better investments, purchase goods, and save for retirement. With consumers–like the banks–finally out from under student loan debts, failed mortgages an exorbitant credit card balances, the economy is resuscitated. The government, being the only entity with the means to both force the creditors to take their medicine and the ability to take on debt itself in order to purchase the debt of the consumers should do so. Most notably, it is specifically at this point, when interest rates are predictably low, that borrowing costs make such an action less troublesome. Once the economy regains its footing, the government is free to restructure its fiscal policy in order to service its own debt effectively. It is the knowing failure to take this approach seriously that has led to the near collapse of Greece, and may lead to a near collapse in Spain and other southern European nations as well.

If the United States and Europe do not finally succumb to fundamental and practical fiscal policy soon, the recession is nearly certain to stretch on for at least a decade. Millions more will lose their homes and jobs. Trillions of dollars in potential growth will be forfeited to satisfy a misguided notion of responsibility.

Update: At the cost of contradicting my own argument, recent reports indicate that American debt as a percentage of disposable income is at 1984 levels. I simply can not buy this data yet. If it is true however, then there is something dramatically wrong with the very foundation of our economy.

Apr 23

Petty Settlement Reached by CFTC with Oil Price Manipulator

The CFTC settled a case late Thursday with a multinational liquidity provider for alleged oil and gasoline futures manipulation. While this settlement comes nearly five years too late, it may mark a turning point in the Obama administration’s general reluctance to take on Wall Street.

Late Thursday, the CFTC announced the $14 million settlement with Optiver over oil and gasoline futures manipulation in March 2007. The CFTC said that traders in Optiver’s Chicago office engaged in a trading scheme where they accumulated large positions in Trading at Settlement contracts in NYMEX light sweet crude, heating oil or gasoline contracts and then offset those positions by trading futures contracts shortly before and during the closing period for those contracts, a scheme known as “banging” or “marking” the close, according to the CFTC.

It has been no secret that the administration has been under significant pressure from the left and the right alike to initiate investigations into what many experts have been reporting are inconsistencies between the market price for oil and gasoline and market forces. Political instability in the Middle East, primarily surrounding Iran, has long been the straw man used by the mainstream media and those with ties to Wall Street to distract the public from oil speculators and their effect on oil prices.

While the $14 million cash portion of the settlement is a relatively insignificant sum to a firm the size of Optiver, the settlement also includes a provision forbidding current and former members of the firm from commodities trading for as long as four years, a substantial penalty. The trading ban almost assuredly is intended to send a message to individual traders and managers to watch their step.

The settlement prohibits van Kempen from trading commodities for two years, Randal Meijer, who was then Optiver’s head of trading, for four years and Christopher Dowson, Optiver’s head trader, for eight years. Dowson is the only defendant that Optiver still employs, according to the CFTC.

The investigation has been ongoing for more than three years. The CFTC claimed in response to questions from the media that the announcement of the settlement was timed to coincide with a speech by President Obama in which he called for investigations into oil speculation and more funding for investigators and staff. I am inclined to believe the administration in this regard. Investigations of this sort, once initiated, tend to take on a life of their own, and settlements are generally reached when both sides have sufficiently vetted each other and are satisfied that the agreement fairly represents either’s chances of success or failure on the merits.

Optiver may not be a household name, but it is well known in Chicago and Amsterdam.

According to the CFTC, Optiver reaped a $1 million profit in 2007 by “banging the close” in crude, gasoline and heating oil markets with a rapid-fire trading program nicknamed “the hammer.”

Optiver is a household name in Chicago’s and Amsterdam’s electronic trading communities, where it is known for high-speed market making and arbitrage strategies in options and other derivatives using super-fast computer algorithms.

Evidence in the CFTC case includes emails and phone recordings showing efforts by traders at Optiver’s Chicago branch to “move,” “whack” and “bully” oil prices in 2007.

High-frequency trading has come under scrutiny in commodity markets in 2011 following a series of violent and seemingly inexplicable price moves that many traders have blamed on its growth.

While I am far from satisfied that the CFTC and the Department of Justice–which has apparently been on sebatical since 2008–has done enough to protect world consumers from predatory commodities trading practices, this settlement and accompanying trading ban is certainly a step in the right direction. It didn’t include any of the usual cast of unscrupulous equity sucking characters as Goldman Sachs or Morgan Stanley, but perhaps further investigations are underway. I wouldn’t hold out hope in that regard, but perhaps this settlement will encourage the big boys to tread lightly.

As far as Optiver is concerned, I believe a recent company job announcement says it all:

For our Trading department we are looking for final-year students or recent graduates from a an analytically related field of study such as Finance, Economics, Econometrics, Financial Engineering, Engineering, Mathematics, Computer Science or Physics. A flair for numbers, a passion for finance and the markets, and a hugely competitive streak are also a must.  (emphasis added).

“A flair for numbers.” Well, that’s rich, but refreshingly honest.

Apr 20

Olympia Snowe has it all Wrong

Before the ink was dry on the press release alerting the media and her colleagues that she was retiring after three terms in the United States Senate, journalists and bloggers were busily penning posts and pieces lamenting her loss as more evidence that bipartisan Washington was dead. With all due respect to the retiring Senator, she has it all wrong. Senator Snowe has reasoned that because the “sensible center” has disappeared from the legislative branch, specifically the Senate, that there is no longer “political reward for consensus building.” As such, she has chosen to retire rather than to fight. The fact of the matter is that consensus building and compromise can not exist in an environment where one side refuses to negotiate. Moreover, when that same side becomes entrenched in support of ideas and policies that are objectively ridiculous, there is no middle ground on which to stand.

Ms. Snowe also misplaces the blame for the current state of affairs at the feet of both parties. While I do not generally believe that either party can legitimately represent the interests of the people in the current money-driven system we entertain as effective today, the road to the complete loss of consensus building has hardly been paved with equal bricks from each party. Take for example Ms. Snowe’s insistence that she pleaded with President Obama to reach across the aisle in 2009 while the $800 billion stimulus package was being drafted and negotiated. At the time, the Democrats had an overwhelming majority in the Senate and a sizable majority in the House, yet the President had to adjure support from three Republicans in the Senate to pass a measure already stripped down of large chunks of spending that the vast majority of sapient economists believed would actually create or save jobs. The bill included nearly as much in tax cuts as it did in “spending,” yet not a single member of the House Republican Caucus voted to support it. Where exactly was Mr. Obama supposed to look to build this mystical “consensus” Ms. Snowe refers to? Would it have taken 100% tax cuts and a measure to exempt all corporations from assessments for a decade to secure a few Republican votes? The fact of the matter is that the Republican Party had made conscious decision following the 2008 election to oppose any measure that would stimulate the economy, unless forced into support by overwhelming public consensus.

Ms. Snowe also opined that the Affordable Care Act was in essence jammed down her throat with little explanation of certain provisions. As such, she had no choice but to oppose the measure. This is simply not the case. The entire piece of legislation was stalled for an extraordinary period of time while the President and Democrats in the Senate frustratingly attempted to win the support of Ms. Snowe, and her fellow Republican Senator from Maine, Susan Collins. Moreover, Ms. Snowe’s reticence is underscored by the fact that it has been widely reported that the bulk of what was contained in the legislation itself originated from Republican think-tanks and Republican legislators and intellectuals. Again, who does Ms. Snowe speculate that Mr. Obama was to meet in the “sensible middle?” The truth is that the President spent the bulk of his time negotiating with Democrats like Ben Nelson and others, who wanted give-backs for their own states. Ultimately, not a single Republican Senator voted  for the act. Quite frankly, I don’t believe there was any offer of compromise short of imploding the effectiveness of the legislation that would have attracted Ms. Snowe’s vote. Where is the middle ground when the compromise offered, most of which benefited the corporations that Republicans generally support, was not able to rustle-up a single vote? If anything, Ms. Snowe is simply soured by the fact that at some point the President simply gave up and walked away from her, leaving her out of the debate entirely.

The retiring Senator also believes that Mr. Obama dropped the ball on deficit reduction by refusing to bring the findings of the Bowles-Simpson commission up for debate. She claims that the President rejected the findings out of hand. Again, she is mistaken. First, the President publicly acknowledged much of what the commission recommended. However, it became clear that in order to negotiate on any of the sensible recommendations, Medicare and Social Security would have to be on the table for Republicans to take a seat. Moreover, the Republicans remained steadfastly opposed to any new taxes or any new revenue generating fees in order to lessen the blow. This placed the President in the position of having to some degree not only compromise his integrity, but also programs that millions of Americans depend upon. Most economists agree that the reason for the failure of the United States economy to recover more quickly following this recession as compared to recessions past, is that the government has been unwilling to raise revenues and borrow significant sums in order to replace the demand gap left by deleveraging and unemployment. The Republicans were and are opposed to both, and refused to even negotiate if the President placed either up for debate.

The cold hard reality is that Ms. Snowe is correct, the sensible middle is gone from the United States Senate. However, blame is not properly paced equally at the feet of the Democratic and Republican parties. While the Democratic Party is certainly not without blame, it has bent over backwards in the recent past to befriend Wall Street and major corporations generally, while remained somewhat firm on social issues and so-called entitlements. The problem in the United States Senate is Ms. Snowe’s own party. There is simply no way to find a sensible point of compromise when one side refuses to negotiate. Claims that the Democrats refuse to meet her in the middle are simply false and disingenuous. Take for example the JOBS Act that recently passed with overwhelming Democratic and Republican support. A piece of legislation that runs counter to the economic ideology of the Democratic Party. The act is almost certain to result in fraud, most of which will come at the expense of small investors. Moreover, the act provides incentives to companies with revenues of $1 billion, hardly a core Democratic constituency. The recently passed  National Defense Authorization Act is also replete with provisions anathema to traditional Democratic Party values, as is the amended Patriot Act, and numerous other pieces of legislation passed with Democratic Support over just the past decade.

We need not hearken back to yesteryear to extirpate Ms. Snowe’s theory. President Bush was able to convince twelve Democrats to support the sweeping and irresponsible tax cuts passed in 2001. President Bush was also able to rally Democrats to support several other pieces of controversial legislation. For example, President Bush was able to negotiate the support of ten Democrats to cross party-lines and support his Medicare Part D proposal. Moreover, due to several Republican defections on the legislation, the bill would not have passed without Democratic support. The Democrats in the Senate also stood with the President on a cloture vote of  61-39, with Democrat Ron Wyden riding in to rescue the President at the final hour. Just three years later the Republicans uniformly refused to work with Democrats in an effort to limit the hundreds of billions of dollars the prescription drug benefit would add to the long-term deficit. Furthermore, following the September 11, 2001 terrorist attacks, Democrats rallied around President Bush and Republican measures to inhibit civil liberties, the bulk of which was opposed by a majority of the Democratic Base.

Democrats also worked closely with Republicans during the Clinton Administration. Democratic Senators worked with Republicans to bring an end to the consumer protections of the Glass-Steagall Act with the Gramm–Leach–Bliley Act. Democrats offered an olive branch of compromise when negotiating welfare reform. Bill Clinton worked closely with Newt Gingrich and Trent Lott in fashioning welfare reform legislation, that although more conservative that the Democratic base found acceptable, passed with Republican support. Democrats likewise worked closely with Republicans in dismantling commodities futures and derivatives trading regulation with the Commodity Futures Modernization Act of 2000. Democrats also worked closely with President George H.W. Bush in passing civil rights legislation to protect the disabled and increased funding for education.

This has not been the case between President Obama and the Republicans in the Senate, who have all but remained a united front in opposition to almost anything that he proposes, even if  such proposal is based upon ideas first championed by the Republican Party. If Ms. Snow truly wishes to convey her forthrightness concerning the legislative mood of the United States Senate, she would be well served to speak truthfully to the American People. The current caustic relationship between Democrats and Republicans in the chamber is primarily a function of the radicalization of the Republican Party, and it is irresponsible of Ms. Snowe to confuse the public with her assertion that each side shares equal responsibility. Ms. Snowe could preserve her self-conveyed legacy of “peacemaker” she clearly covets by simply calling out her own party in a mature and dignified fashion.

Apr 19

EPA Announces New Fracking Regulations

FrackingWell, apparently today’s theme is going to be the environment, and the real differences in policy preferences between the two major political parties in the United States. Yesterday, the Democrats and the Obama administration’s EPA took a-something-is-better-than-nothing approach to hydraulic fracturing pollutant regulation.

The Obama administration took a heavy swing in the ongoing battle over fracking today by imposing new rules that would, for the first time, restrict the release of smog-causing pollutants from natural gas wells. But the law turns a blind eye to greenhouse gases released by fracking; the EPA admits fracking accounts for 40 percent of the nation’s overall methane (an even stronger greenhouse gas than carbon dioxide) emissions.

By 2015, all fracked wells will be required to implement “green completion” equipment, which catches toxic gases like benzene on its way out of the earth and into the atmosphere. But the rule does not directly limit emissions of greenhouse gases.

While the new rules will prevent toxic pollutants like Benzine from leaking into the air, reports, like the one above, say it will do little to prevent the largest and most dangerous pollutant from leaking into the atmosphere, methane. While other reports claim that the new regulations could reduce methane leakage by up to 25%.

The new rules seek foremost to cut down on cancer-causing chemicals released during hydraulic fracturing, or “fracking.” But the new regulations will have another benefit: They’ll reduce by 25 percent the amount of methane gas that escapes during fracking operations. This is critical, because methane is at the center of a growing debate whether natural gas really is a “cleaner” source of energy than coal.

The official EPA final rule, fact sheets, additional information, and summary can be found here and here. From the EPA press release:

“The president has been clear that he wants to continue to expand production of important domestic resources like natural gas, and today’s standard supports that goal while making sure these fuels are produced without threatening the health of the American people,” said EPA Administrator Lisa P. Jackson. “By ensuring the capture of gases that were previously released to pollute our air and threaten our climate, these updated standards will not only protect our health, but also lead to more product for fuel suppliers to bring to market. They’re an important step toward tapping future energy supplies without exposing American families and children to dangerous health threats in the air they breathe.”

When natural gas is produced, some of the gas escapes the well and may not be captured by the producing company. These gases can pollute the air and as a result threaten public health. Consistent with states that have already put in place similar requirements, the updated EPA standards released today include the first federal air rules for natural gas wells that are hydraulically fractured, specifically requiring operators of new fractured natural gas wells to use cost-effective technologies and practices to capture natural gas that might otherwise escape the well, which can subsequently be sold. EPA’s analysis of the final rules shows that they are highly cost-effective, relying on widely available technologies and practices already deployed at approximately half of all fractured wells, and consistent with steps industry is already taking in many cases to capture additional natural gas for sale, offsetting the cost of compliance. Together these rules will result in $11 to $19 million in savings for industry each year. In addition to cutting pollution at the wellhead, EPA’s final standards also address emissions from storage tanks and other equipment.

While dangers to drinking water continue, and the relationship between earthquakes and fracking continues to be explored, the new regulations are certainly a step in the right direction. We will need to further restrict the emission of methane from well sites and prevent the contamination of groundwater supplies in the future. Several scientists are describing the new regulations as a floor rather than anything truly meaningful, but it is more than we could expect from a Republican administration.

“It sets a floor for what the industry needs to do,” said attorney Erik Schlenker-Goodrich of the Western Environmental Law Center. “The reality is we can do far better.”

Over the past few years, more information has come out about fracking’s potential harms to the environment and human health, particularly relating to the risk of groundwater contamination. In addition to the many potentially toxic components of the highly pressurized fluid injected into the ground during the natural gas drilling process, fracking can also release cancer-causing chemicals like benzene and greenhouse gases like methane into the air. The federal government has made moves to tighten regulations, and we’ve chronicled the history of those regulations.

The EPA’s new rules don’t cover most of those issues. Instead, they address a single problem with natural gas: air pollution.

Unfortunately, the only legitimate means of preventing contamination of drinking water and the emission of greenhouse gasses is to outlaw the practice altogether. While I am generally loathed to approach an issue of human health and environmental destruction pragmatically, I am nonetheless somewhat heartened by what appears to be a thoughtful analysis by the EPA. It is important that activists and members of the public continue to protest peacefully and write and call their representatives so that we can ultimately restrict this behavior, which will ultimately exacerbate climate change, inconvenience millions, and certainly lead to the deaths of thousands. Many of those affected continue to be in rural areas of little influence. The economic despair and dearth of good paying jobs wrought by the financial collapse has made it less troublesome for oil and gas companies to convince residents as well as state and local governments to permit fracking in their jurisdictions. It is also important that we work diligently to provide alternative employment in these areas.

Apr 19

Energy Differences

While there isn’t a lick of difference between the Democrats and the Republicans when it comes to dealing with Wall Street, on energy policy, to the Democrats credit, they have carved out real and distinct differences. In a recent piece published at Think Progress by Rebecca Leber, that stark contrast is laid out clearly.

For example, on perhaps the primary issue that drives all other energy issues, climate change, Romney is stuck in the dark ages:


  • “I know that there are those who disagree with the overwhelming scientific evidence on climate change. But here’s the thing — even if you doubt the evidence, providing incentives for energy-efficiency and clean energy are the right thing to do for our future -– because the nation that leads the clean energy economy will be the nation that leads the global economy.” [White House, 1/27/10]
  • State Department is leading a group of countries in a program that cuts global warming pollutants like soot, methane and hydrofluorocarbons. [NYT, 2/16/2012]
  • Issued the first ever carbon pollution rules for power plants, affecting new coal-fired power plants. [NPR, 3/27/12]


  • Doesn’t believe carbon pollution is a threat, reversing his stance as governor: “I don’t think carbon is a pollutant in the sense of harming our bodies.” [Politico, 7/18/11]
  • My view is that we don’t know what’s causing climate change on this planet. And the idea of spending trillions and trillions of dollars to try to reduce CO2 emissions is not the right course for us.” [CBS, 10/28/2011]
  • Says the Clean Air Act doesn’t apply to carbon emissions: “My view is that the EPA in getting into carbon and regulating carbon has gone beyond the original intent of that legislation, and I would not take it there,” [Politico, 7/18/11]

Romney also vows to fight to roll-back energy efficiency standards on everything from automobiles to light-bulbs. He plans to continue oil subsidies, increase drilling, cut green technology grants and subsidies, expand drilling and exploration on public lands, expand coal mining, and eliminate any incentive to create “green jobs.” While the Democrats and Republicans stand together on the vast majority of economic issues, they could not be further apart on environmental issues, and Obama would be smart to hammer this point home through November. Romney doesn’t believe most of the crap he spews on this subject, but he is terrified of alienating his base by speaking rationally. He won’t be able to back off these positions during the campaign, and the left should hit him again and again and again with his ridiculous positions.

Apr 19

Could the Banks Fail Anyway?

Brian Moynihan

Bank of America CEO Brian Moynihan

Unless you just recently returned from a four-year vacation on the moon or have been trapped in a Massey Energy coal mine, you are aware that the American taxpayers have provided tens of trillions of dollars in direct bailout money and near zero-percent loans to the largest banks operating in the United States since 2008. While specific banks appear to have emerged from living for free in the American People’s pool house quite profitable and have regained their footing, several large banks remain on the verge of–or are currently operating in–insolvency.

Moody’s rating agency recently put nearly each of the large banks in the United States as well as several international banking behemoths on its watch list for a potential downgrade. Bank of America for example, reported first quarter revenues this year nearly $1.4 billion less than last year’s first quarter revenues of $2 billion. The primary reason for the decreased profitability is a  new rule that prevents the bank from reporting junk loans as performing loans.

Moody’s Investors Service has announced a review of 17 banks and securities firms with global capital markets operations. Underpinning this review is Moody’s view that these firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.

The New York Times ran an earlier story on this development at the large banking conglomerates in late May. In the report, the Times also uncovered a major concern for the large banks: The largest mutual fund players may seek to renegotiate contracts with certain banks or walk away from the relationship entirely in search of more financial stable partners. Without these trading contracts with the mutual fund companies, further stress with beset the overall profitability of the banks.

Nearly four years after the largest financial institutions in the world were bailed out by the American and European taxpayers, the very same banks are hat in hand demanding more assistance. Perhaps most importantly, the sheer magnitude of the bailouts and loans fail to capture the entirety of the destruction supervened upon the people. Budget cuts and ensuing layoffs, unemployment, trillions in lost home value and investment value, higher education and public school cuts, public park closures, unanticipated bankruptcies, infrastructure funding cuts, public health and assistance cuts, just to name a few. This entire adventure illustrates precisely why it is bad policy to allow any industry group to blackmail a government into action. It never ends, and eventually the crook comes banging at the door for more, and more, until policymakers are forced to act responsibly, as they should have from the very beginning. It is at this point that the industry is forced to take its medicine. It is time for the Obama administration to follow through on its first failed attempt to break up one or more of these large banking leeches and sell off the parts to smaller community banks rather than to continue to throw good money after bad. Maybe this time Timmy Geithner and company will do as their told. Or maybe we’ll continue down the same failed path.

Apr 18

Congress Nearly Fails in its Efforts to Prevent Oil Spills

So, with all the talk of the need for compromise and conciliation in the Congress when it comes to keeping the American people safe, we certainly must have new effective regulations concerning oil drilling safety and cleanup in place nearly two years after the Deep Water Horizon Disaster, right? Not so much. According to a recent report issued by a presidential panel, Congress ranks below big oil in its responsiveness to the explosion and subsequent environmental disaster left by the BP rig.

The report cited significant progress by the Obama administration and the oil industry, giving them a B and a C+ grade, respectively, for their efforts to bolster safety, spill response and resources. Congress, however, got a D grade for its inability to “enact any legislation responding to the explosion and spill.”

The report by members of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling complained that Congress had failed to pass legislation requiring the offshore oil and gas industry to bear the costs of federal oversight through fees on leasing and permitting reviews. The presidential panel had also recommended that the $75-million liability cap for offshore oil spills be increased substantially.

It is inconceivable that the two parties that control every piece of federal legislation that leaves the Congress en route to the President have not passed a single bill addressing oil rig safety and cleanup response. At least three oil rigs around the world have caused significant environmental damage in just the past ten months. This isn’t Medicare reform or the defense budget. This is simple straightforward legislation that will protect American businesses, homes, jobs, and the environment. Moreover, Congress is awash in bipartisan studies and recommendations concerning what should be done to ensure that disasters like the one that befell the Deep water Horizon are few and far between, and that when it does occur, that response is swift, adequate, and based on sound science. This development should infuriate the American people.

Sens. Mary L. Landrieu(D-La.) and Lisa Murkowski (R-Alaska) said in a statement that they shared the commission’s frustrations and blamed other colleagues for the gridlock on legislation.

“A bipartisan majority in the Energy Committee and the full Senate would be happy to pass common-sense legislation addressing new production, safety and a fair share of revenue for the affected states,” they said. “Unfortunately, a small number of senators are opposed to engaging in a debate that includes revenue sharing.”

To be fair, the Gulf state and Alaskan Senators are in effect crushing any effort to get this done over more demands from them that coastal states share in more revenue from off-shore oil leases and oil-producing efforts, an idea that runs in conflict with the Obama administration’s reasonable request to pass a clean bill. Gulf of Mexico states previously were granted oil and gas revenue sharing in a 2006 law, ensuring a 37.5 percent cut from specific leases, but much of the revenue does not begin to ooze until 2016.  Other committee members are sure to offer up amendments, but the revenue sharing provision which Landrieu seems to be pushing on the hardest is ultimately what is stalling the legislation. Even so,if a “small number” of “mostly Republican” Senators are holding up this legislation, let’s call them out and publicly humiliate these enemies of sound judgment. The folks over at The Hill have published some great coverage of the issue (click the links in the article to read more detailed coverage) and they also describe how it has been a bipartisan effort to ensure that increased safety measures and stepped-up environmental preparedness do not come to pass.

Apr 18

Obama attempts to Overcome Institutional Insolence on Oil Prices?

Yesterday President Obama stood at the White House with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Federal Trade Commission (FTC) Chairman Jon Leibowitz, and proclaimed that he will be putting “more cops on the beat” to investigate Wall Street oil price speculation and potential wrongdoing. I have written on this subject before here, here, and here. While I have little confidence that anything will come of this third call by the President for the Department of Justice, the FBI, and the CFTC to investigate oil futures speculation and other speculation in the commodity derivatives markets, he is at least taking his act public this time.

“We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit,”

Many argue that the President can not do much at all to influence oil prices. Many simply buy the Wall Street rhetoric hook, line and sinker, and even go so far as to turn sheer conjecture into fancy charts in order to confuse the public. I disagree. First, there is no greater motivator than personal freedom, and under current law Eric Holder can punish those found to have run afoul of the law by sending them to federal prison. Moreover, while the fines currently permitted are small change, the embarrassment that would accompany fines has consequences. I do not have any explanation for the extraordinary impotence and insolence at the Department of Justice under Eric Holder. The entire soap opera could just as easily be an elaborate act wherein the President calls for investigations of this thing or the other thing, and subsequently sends Eric Holder privately on his way with instructions to do nothing.

I find it extraordinarily difficult to believe that if Eric Holder made the decision to call in the FBI and begin interviewing the big Wall Street players in the commodity futures derivatives markets and put a few of them in prison, that the oil prices wouldn’t drop in an instant. I envision FBI agents and federal regulators walking through hallways at Goldman Sachs, owner of the Goldman Sachs Gold Index, and other large firms carrying lawfully issued subpoenas and search warrants. I have a hunch that some of the more egregious activities would stop immediately if people realized they might actually be sent to prison. Exxon Mobil, the Saudi Oil Minister, among others, are on record as believing that the current price of oil has no basis in the realities of supply and demand nor the potential disruption in delivery that could ensue following a conflict with Iran. Holder’s behavior with regard to oil futures speculation is not dissimilar from his approach to both the larger mortgage and financial instrument fraud which caused the recession, and his utter infecundity with regard to prosecuting those responsible for the BP oil spill. It is as if the entire Department of Justice loathes prosecuting anyone, for anything, at any time.

What is particularly troublesome about Obama’s footing on oil prices is that it is not Republicans who are obfuscating efforts to initiate investigations, make arrests, and prosecute those responsible. It is his own administration and administration officials who stand in his way. It is cerytainly true that Republicans, Mitch McConnell in particular that are placing the blame at Obama’s feet, but the President has the tools to demonstrate through concrete actions that he takes Wall Street fraud and price manipulation seriously. One man, let alone the President of the United States, can alone control the world price of oil, but one man can use the tools available to him to take action. Some time ago CBS’s 60 Minutes ran a piece in which it interviewed the chief prosecutor at the Department of Justice concerning the lack of criminal prosecutions stemming from the financial collapse. His response was a contemptuous “just wait.” Well, the American people have been patiently waiting for nearly four years for the administration to show that it will prosecute wrongdoing perpetrated by the golden boys of Wall Street. My guess is that the wait will continue.

Ian Masters interviewed Michael Greenberger, the former Director of Trading and Markets at the Commodity Futures Trading Commission, on this subject yesterday. It’s worth a listen.

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