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JEFF COX, JEFF COX, BUSINESS NEWS
By: Peter J. Tanous, President of Lepercq Lynx Investment Advisory
CNBC.com | Tuesday, 2 Apr 2013 | 12:19 PM ET
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CAYMAN ISLANDS, January 2016 - Today's paper says we should have seen it coming.
The facts were all there. Were we really that stupid?
For three years, the Federal Reserve was the largest buyer of Treasury securities, scooping up two-thirds of all U.S.securities sold at auction, driving interest rates down to practically nothing. In the process, the Fed built up a $4 trillion dollar balance sheet and no one asked where that money was going to go.
How did the Fed pay for these securities?
They "printed money." And look what they got out of thin air: Interest-paying U.S.government bonds that produced an annual profit of more than $80 billion!
The Fed magnanimously turned over most of those profits to the Treasury every year. Media editorials congratulated the wise men for their financial acumen and their sterling sense of responsibility.
It took far too long for other purchasers of U.S. Treasurys to realize that they were buying into a house of cards.
Last year, the governor of the British Central Bank went to parliament and announced that the U.S.had perpetrated the biggest financial swindle of all times. Imagine printing money and buying securities that paid interest! And nobody seemed to mind.
Amidst a chorus of yeas, the Central Bank of Great Britain announced that it would no longer buy U.S. Treasury securities at unrealistically low interest rates.
The world took notice.
China followed suit and so did Japan. Now the Fed was in the awkward position of being the only substantial buyer of U.S. bonds.
The next treasury auction failed and the bottom dropped out.
The stock market plummeted 35 percent in one week. Gold rose to a record $3600 an ounce, and interest rates on the 2-year Treasury note spiked to 6.5 percent.
Alas, that was just the beginning.
This past year, more than $1 trillion had poured into safe bond funds that were now trading at a significant loss. Investors who thought their money was safe rushed to redeem. Of course, the market wasn't able to accommodate the rush of withdrawals so fund redemptions were suspended and the panic spread.
If money wasn't safe in bonds, would it be safe in banks? The next run, this time against banks, soon began and lines snaked around the block.
That's when I decided to move to Grand Cayman.
My stock portfolio was decimated but my stash of gold helped me get through. I read the news every day and watch as the new Fed board promises never again to condone such irresponsible activities.
It's fair to ask how clear thinking leaders could have allowed all this to happen. The answer became obvious after the crisis.
In 2012, interest on the national debt was more than $360 billion, and that was when interest rates were at record lows!
The "wise men" knew that an increase in rates would devastate the economy. For example, if interest rates went back to their 20-year average of 5.7 percent, interest costs alone on our national debt would amount to nearly $1 trillion a year.
That would mean that all of the revenue collected from our personal income taxes would go to service our debt.
The nation wouldn't stand for that, would it? Of course not, so they had to do something to stop it.
What they did was to drive interest rates as low possible for as long as they could. Then the music stopped, the buyers realized they were being conned, and the crisis began.
But today economic and financial conditions are improving. Unemployment is down to 11 percent and the economy will improve to a GDP of minus-3 percent this year.
In a couple of years, I may want to move back. Right now, I'm going for a swim.
Peter J. Tanous is president of Lepercq Lynx Investment Advisory in Washington D.C. He is the co-author (with Arthur Laffer and Stephen Moore) of The End of Prosperity (2008), and co-author (with CNBC.com Senior Writer Jeff Cox) of Debt, Deficits, and the Demise of the American Economy (2011).
© 2013 CNBC.com
URL: http://www.cnbc.com/100609988JEFF COX, JEFF COX, BUSINESS NEWS
By: Peter J. Tanous, President of Lepercq Lynx... more
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By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus
I can’t emphasize enough how satisfying it is to see Timothy Geithner finally leave government. True, it would have been more enjoyable to see him leave in handcuffs, but I take my satisfaction where I can get it.
The unfortunate part about high level government officials who are utter failures leaving government is that when they leave, journalists still fawn over them. Timmy got plenty of interviews from major media outlets but the longest, and thus most nauseating, came from the Wall Street Journal. Reading it is like watching a horror movie where everyone knows what’s about to happen to the character and are trying to warn him/her through the screen. Except in this horror movie I’m throwing my hands in the air and saying “that lie was debunked years ago!” I don’t have the patience to go through each and every lie told in this interview, but I’d like to hit on the major ones.
Crisis as “Exogenous Shock”
To repeat a theme on Naked Capitalism, this crisis wasn’t, and most crisis aren’t, are exogenous shocks. They come from variables endogenous (internal) to the system at hand. It’s easy however, for policymakers to frame their responses to crises as responses to external trauma. First, it removes the agency of important players from within the private sector and the public sector. Second, it portrays whatever society is experiencing as inevitable, like sand castles washing away in the beach. Tim “I’ve never been a regulator ” Geithner evokes this blatantly false conception here:
Of course, in a severe crisis — the once in a century event, or hopefully it’s a once-in-a-century event — then the system will inevitably come under much, much more pressure. And even the strongest firms come under pressure then. And in that context, our successors are going to have to do exceptional things again if they want to protect the economy from a failing financial system. That’s inevitable.
After all, every century or so humans just happen to be giving out “liar’s loans”, pushing them on unsuspecting investors around the world, and then because they couldn’t find enough real economy risky borrowers, they had to use credit default swaps to create synthetics versions of them, and they did all that so big that they blew up the casino. Don’t you remember the liar loan and derivative trading scandal of 1908, 1808, 1708, 1608 etc? It’s just natural, so please look away.
This is what criminals and deviants tell themselves about their behavior. They just can’t “help” it and it will happen inevitably. In reality, the financial system is a social institution and its malfunctioning is the result of purposeful human action, not the law of gravity. Individual people and institutions were central to setting the stage and developing this crisis to maturity. The entire U.S. regulatory community and large swaths of are banking system were involved. Those loans don’t just pour out like an overfilled cup. Someone chooses to make them. Someone chooses to lie to a borrower until he buys the con. Real people defended this decrepit behavior and real professionals were pushed out of their jobs for not being slimy and criminal enough.
Incidentally, if you know a flood happens once every century, why wouldn’t you spend your time PREPARING for it? What, is this a Ricardian equivalence thing where any attempt to prepare for floods just makes the flood worse? With the exception of the rotting American state, most places prepare for flood season.
In reality, the financial system is a social institution and its malfunctioning is the result of purposeful human action, not the law of gravity.
“The enforcement response… is still unfolding”
This is an incredible one. According to Geithner, it’s not that bankers haven’t gone to jail, it’s that they haven’t gone to jail yet. In the fantasy world Geithner is selling to the public, all the bankers that deserve jail are going to be put in jail… at some future date. See the full quote below:
MR. WESSEL: And other side is, there were repeated accusations about not enough of them were punished to pay for what they did. You never were comfortable with that.
MR. GEITHNER: No, I felt from the beginning and I think this was always a great strength of our system that you had to have an overwhelmingly strong, powerful, credible enforcement response for the rules that they had to live with. And two things happened. One is that the enforcement response, which is still unfolding, took a lot of time to get traction because these things are very complicated. And the public saw a long lag. And of course, the other thing is that a huge part of what happened across the system was just a mixture of ignorance and greed, or hope over experience, and not illegal. Most financial crises are not caused by fraud or abuse. They’re caused by people taking on risks they don’t understand, too much risk. when the tide turns, it can have catastrophic damage.
When exactly are these “enforcement actions” supposed to take effect? The statute of limitations is running out. In addition, the cases the SEC and Department of Justice have pursued they’ve been quick to settle without an admission of guilt and with liability waivers. The most infamous was the much-ballyhooed mortgage settlement in early 2012, which amounted to a few billion dollars in cash, “billions more” in “writedowns” on various mortgage debts of questionable meaning. Perhaps they will pass a special law allowing convictions well past the statute of limitations, as long as the subject is already dead.
Suddenly though, Geithner jumps into a completely different lie that contradicts the lie he was just telling. How can the investigations into criminal behavior be “complicated”, have “a long lag” while he’s completely sure that “a huge part of what happened… was not illegal”? Put aside the fact that we have piles of evidence that contradicts that drivel. It doesn’t even internally make sense to that paragraph. It’s like detectives showing up to a crime scene, taking one glance at the dead body and going “this is going to be a long investigation but I can say right now the subject wasn’t murdered”.
“We were worried”
Geithner then goes on to muddy the waters about his role in the boom. He says things like“My colleagues and I at the Fed….were worried about the risks you saw building up across the system”. He does know that we have meeting transcripts right now that show as late as 2007 he was playing down concerns about the mortgage market and financial institutions like Bear sterns. Yet we’re supposed to believe that in 2004 he and the rest of the Fed were fighting to rein in risk taking but didn’t have the regulatory authority (which is clearly a lie)? Even if they did believe this, why weren’t they in front of Congress asking for more regulatory powers? This is all rather damning whichever way you look at it.
Goodbye Timmy, or so I can Dream
Good riddance. Unfortunately Geithner’s history as a complete and utter failure will probably guarantee him a place as “wise sage” for decades to come. I can at least hope to see and hear of him much less. I must confess to not having the stomach to unpack all the lies and the depth of them in this interview nor the other hagiographies floating around. Feel free to do so in the comments! There are still plenty of juicy lies in there just waiting to be untangled. He even begs for a history lesson about Mexico in 1995, which I may provide in another post.
Somehow I think Jack Lew won’t live up to Timmy’s vileness. But perhaps that’s just wishful thinking.By Nathan Tankus, a student and research assistant at the University of Ottawa. You... more
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The fascist cabal known as the Bilderbergers, CFR, committee of 300 etc., is desperately and without hope trying to start WW3 and install a fascist world government in an attempt to pre-empt criminal investigations closing in on them from all sides. Their efforts will fail because the Pentagon and the agencies in the US (with the exception of homeland Gestapo) are preparing to remove them from power, according to CIA and other sources. For example, multiple investigations are closing in on alleged President Obama, including one for illegally declaring war on Libya. A count among US representatives show the votes necessary to impeach him are there, US law enforcement officials say. In addition, evidence of bribery and other forms of illegally tampering with government is being compiled against George Soros, among others. There is also a lot going on under and on the surface in Europe, Japan and the Middle East. I highly recommend you watch this first, as it will draw you directly into the mystery -- which flickered for the briefest moment in mainstream media, only to disappear into shuddering silence: http://www.makeahistory.com/index.php/bizzareweird/43041-the-trillion-dollar-lawsuit-that-could-end-financial-tyrannyThe fascist cabal known as the Bilderbergers, CFR, committee of 300 etc., is... more
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The 57,000 Page Tax Return
by Alex Tabarrok
The NYTimes reported earlier this year that through an extraordinary use of tax breaks and clever accounting:
[General Electric] reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
The Times highlighted the skill of GE’s dream team:
G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
More recently from The Weekly Standard we find what kind of effort it takes to pay no taxes on $14 billion in profits:
General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.
(FYI, the length of GE’s tax return has doubled since 2006 when it (first?) filed electronically at an equivalent of 24,000 pages.)
GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low.
Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue.
Hat tip: TaxProf blog.The 57,000 Page Tax Return
by Alex Tabarrok
The NYTimes reported earlier this... more
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JP Morgan is Foreclosing on the US Treasury
I am not making this up. Hat tip reader Deontos.
Here is the high level story: JP Morgan Chase and Northwest Trust foreclosed on a property in Hillsboro, Oregon. Treasury (more accurately, the IRS) has a tax lien on the property. So this is pretty cheeky. The plaintiffs didn’t notify the IRS, who they claim was an existing junior lien holder, of the “sale”. Query what the IRS’s status is given the failure to give notice. So does JP Morgan want to own up to its error and pay the lien? Noooooo. THEY WANT TO FORECLOSE ON THE US GOVERNMENT. They are asking for the IRS to act in 30 days or go bye bye.
The compliant is silent on how the tax lien came about, but I thought as a general rule that tax liens were senior to mortgages. Reader input welcome.(the affidavit is at site)
J.P. Morgan what maroon';s LOL foreclosure-gate takes out the US govt. this is classic ...JP Morgan is Foreclosing on the US Treasury
I am not making this up. Hat tip reader... more
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How the Super-Rich are Bleeding the Treasury
Understanding the Federal "Debt Crisis"
By SAM PIZZIGATI
Once upon a time in America, back a century ago, our nation's rich paid virtually nothing in taxes to the federal government. And that same federal government did virtually nothing to better the lives of average Americans.
But those average Americans would do battle, over the next half century, to rein in the rich and the corporations that made them ever richer. And that struggle would prove remarkably successful. By the 1950s, America's rich and the corporations they ran were paying significant chunks of their annual incomes in taxes — and the federal projects and programs these taxes helped finance were actually improving average American lives.
America's wealthy, predictably, counterattacked — and, by the 1980s, they were scoring successes of their own.
Today, the rich and their corporations no longer bear anything close to their rightful share of the nation's tax burden. The federal government, given this revenue shortfall, is having a harder and harder time funding initiatives that help average working families. The result: a "debt crisis."
This "debt crisis" in no way had to happen. No natural disaster, no tsunami, has suddenly pounded the United States out of fiscal balance. We have simply suffered a colossal political failure. Our powers that be, by feeding the rich and their corporations one massive tax break after another, have thrown a monkey wrench into our national finances.
Some numbers — from an Institute for Policy Studies report released this past spring — can help us better visualize how monumental this political failure has been.
If corporations and households amassing $1 million or more in income each year were now paying taxes at the same annual rates as they did in 1961, the IPS researchers found, the federal treasury would be collecting an additional $716 billion a year.
In other words, if the federal government started taxing the wealthy and their corporations at the same rates in effect a half-century ago, the federal debt to investors would almost totally disappear over the next decade.
Similarly stunning numbers have just come, earlier this month, from MIT economist Peter Diamond and the University of California's Emmanuel Saez, the world's top authority on the incomes of the ultra-rich. These two scholars have calculated some fascinating "what ifs" that dramatize just how spectacularly the incomes of our wealthiest have soared over recent decades.
In 2007, Diamond and Saez point out, taxpayers in the nation's top 1 percent actually paid, on average, 22.4 percent of their incomes in federal taxes. If that actual tax burden were to about double to 43.5 percent, the top 1 percenter share of our national after-tax income would still be twice as high as the top 1 percent's after-tax income share in 1970.
So why aren't we taxing the rich? Why are we now suffering such fearsome "debt crisis" angst? Why are our politicos so intent on shoving the "fiscal discipline" of layoffs and cutbacks — austerity — down the throats of average Americans?
No mystery here. Our political system is failing to tax the rich because the rich have fortunes large enough to buy off the political system. Again, some numbers can help us better visualize the plutocratic big picture.
In 2008, the IRS revealed this past May, 400 Americans reported at least $110 million in income on their federal tax returns. These 400 averaged $270.5 million each, the second-highest U.S. top 400 average income on record.
In 1955, by contrast, America's top 400 averaged — in 2008 dollars — a mere $13.3 million. In other words, the top 400 in 2008 reported incomes that, after taking inflation into account, amounted to more than 20 times the incomes of America's top 400 a half-century ago.
But 1955's top 400 didn't just make far less than 2008's top 400. The rich in 1955 paid far more of their income in taxes than today's rich. In 2008, the new IRS data show, the top 400 paid only 18.1 percent of their total incomes in federal income tax. The top 400 in 1955 paid 51.2 percent of their total incomes in tax.
The bottom line: After taxes, and after adjusting for inflation, 2008's top 400 had a staggering $38.5 billion more left in their pockets than 1955's most awesomely affluent. Multiply that near $40 billion by the annual tax savings the rest of America's richest 1 percent have enjoyed over recent years and you have an enormous war chest for waging class war, billions upon billions of dollars available for bankrolling think tanks and candidates and right-wing media.
In the face of these billions, should the rest of us, America's vast non-rich majority, just throw in the towel and give up? Our counterparts a century ago certainly didn't. They challenged their rich, on every front imaginable. They eventually sheared their rich down to democratic size.
We can do the same.
http://counterpunch.com/pizzigati07202011.html
Sam Pizzigati, a veteran labor journalist, edits Too Much, the Institute for Policy Studies weekly newsletter on excess and inequality. To keep updated on the growing pushback against that inequality, sign up to receive Too Much in your email inbox and check Inequality.Org for more background on the groups working to narrow the economic gaps that divide us.How the Super-Rich are Bleeding the Treasury
Understanding the Federal "Debt... more
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http://www.washingtonsblog.com/
The Treasury announced today:
As US Reaches Debt Limit, Geithner Implements Additional Extraordinary Measures to Allow Continued Funding of Government Obligations
Some of those "extraordinary measures" include raiding federal pensions.
Many pundits claim that governments cannot default on their debt. But as I've previously noted:
One of the world's leading economic historians - Niall Ferguson - has previously pointed out that too much debt can drive countries into default:
There are economic professors in American universities who think they are masters of the universe, but they don't have any historical knowledge. I have never believed that markets are self correcting. No historian could...
"The idea that countries don't go bust is a joke... The debt trap may be about to spring ... for countries that have created large stimulus packages in order to stimulate their economies."
And as I've previously shown, we can't just print our way of our debt crisis.http://www.washingtonsblog.com/
The Treasury announced today:
As US Reaches... more
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Dear Mr. Leader:
I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily.
In our previous communications to Congress, we provided regular estimates of the likely time period in which the debt limit could be reached. We can now make that projection with more precision. The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011. This is a projection based on the expected level of tax receipts, the timing of our commitments and obligations over the next several weeks, and our judgment concerning the level of cash balances we need to operate. Although these projections could change, we do not believe they are likely to change in a way that would give Congress more time in which to act. Treasury will provide an update of this projection in early May.
If the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures, described in detail in the appendix, to temporarily postpone the date that the United States would otherwise default on its obligations. These actions, which have been employed during previous debt limit impasses, would be exhausted after approximately eight weeks, meaning no headroom to borrow within the limit would be available after about July 8, 2011. At that point the Treasury would have no remaining borrowing authority, and the available cash balances would be inadequate for us to operate with a sufficient margin to meet our commitments securely.
As Secretary of the Treasury, I would prefer to avoid resorting to these extraordinary measures. The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations.
If Congress does not act by May 16, I will take all measures available to me to give Congress additional time to act and to protect the creditworthiness of the country. These measures, however, only provide a limited degree of flexibility—much less flexibility than when our deficits were smaller.
As the leaders of both parties in both houses of Congress have recognized, increasing the limit is necessary to allow the United States to meet obligations that have been previously authorized and appropriated by Congress. Increasing the limit does not increase the obligations we have as a Nation; it simply permits the Treasury to fund those obligations that Congress has already established.
If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds. This would cause severe hardship to American families and raise questions about our ability to defend our national security interests. In addition, defaulting on legal obligations of the United States would lead to sharply higher interest rates and borrowing costs, declining home values and reduced retirement savings for Americans. Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.
For these reasons, default by the United States is unthinkable. This is not a new or partisan judgment; it is a conclusion that has been shared by every Secretary of the Treasury, regardless of political party, in the modern era.
Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a “fire sale” of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States.
Selling the Nation’s gold, for example, would undercut confidence in the United States both here and abroad. A rush to sell other financial assets, such as the remaining financial investments from the Emergency Economic Stabilization Act programs, would impose losses on American taxpayers and risk damaging the value of similar assets held by private investors without generating sufficient revenue to make an appreciable difference in when the debt limit must be raised. Likewise, for both legal and practical reasons, it is not feasible to sell the government’s portfolio of student loans.
Nor is it possible to avoid raising the debt limit by cutting spending or raising taxes. Because of the magnitude of past commitments by Congress, immediate cuts in spending or tax increases cannot make the necessary cash available. And, reductions in future spending commitments cannot supply the short-term cash needed. In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately.
As the Congressional Research Service stated in its February 11, 2011 report:
“If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed. To put this into context, the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.” [1]
None of those budget policy choices is feasible or responsible. As a consequence, given that Congress has imposed on itself the requirement for periodic increases, there is no alternative to enactment of an increase in the debt limit.
I am encouraged that the leaders of both parties in both houses of Congress have clearly stated in public over the last few weeks and months that we cannot default on our obligations as a nation and therefore have to increase the debt limit. Because the date by which we need to increase the limit is growing nearer, I hope that the leadership in both houses will help us impress upon all Members the gravity of this issue and the imperative of timely action.
President Obama is strongly committed to working with both parties to restore fiscal responsibility, and he looks forward to working with Congress to achieve that critically important objective. In the meantime, it is critical that Congress act to increase the debt limit so that the full faith and credit of the United States is protected.
I hope this information is helpful as you plan the legislative schedule for the coming weeks.
Sincerely,
Timothy F. Geithner
http://www.treasury.gov/connect/blog/Pages/letter-to-congress.aspxDear Mr. Leader:
I am writing to update you on the Treasury Department’s... more
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On Monday, January 3, 2011 the national debt, as calculated by the U.S. Treasury, topped $14 trillion for the first time. Ever!
In 2010, the Financial Forecast Center, an independent entity, predicted that the Gross Domestic Product, the value of goods and services, would reach $14.834.1 trillion by October of last year and predicted the GDP would reach $14.952 trillion by January 2011.
I’m no mathematical whiz, but it would appear that the U.S. is just barely managing to produce enough income to cover the amount of its National Debt.
A percentage point more or less means nothing as the 112th Congress convenes to tackle the problem of the nation’s debt. It is being discussed in terms of how high to raise the “debt ceiling” so the current administration can borrow and presumably spend more.
In 2008 when Obama was elected, the national debt was about $9 trillion. When the Obama administration began in 2009, it had rocketed passed $10 trillion, then $11 trillion, and, by the time 2010 began, it stood at $12 trillion! A year later, it stands at $14 trillion.
More...
http://canadafreepress.com/index.php/article/31768
U.S. National Debt Clock:Real Time
http://www.usdebtclock.org/On Monday, January 3, 2011 the national debt, as calculated by the U.S. Treasury,... more
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by Zach Carter, Media Consortium blogger
Over the past decade, Fannie Mae and Freddie Mac transformed themselves into some of the worst-run companies in recent history. But contrary to current talking points, the firms’ failings had almost nothing to do with their programs for low-income borrowers. As policymakers debate what should be done with the mortgage giants, a battle is now beginning in which the very availability of affordable housing for the middle class may be at stake.
A history of affordable housing
As Tim Fernholz emphasizes for The American Prospect, before the U.S. government created Fannie Mae in 1938, mortgages were very pricey 5-year loans, so expensive that only very wealthy Americans could ever hope to own a home. Fannie Mae changed all that by rolling out the 30-year mortgage, which lowered monthly payments for borrowers by providing a government guarantee against losses for banks. It worked.
But as Fernholz notes, without some kind of government involvement in the housing market, home ownership will revert to its pre-Depression status a privilege reserved for elites. Policymakers will have to implement significant changes in the mortgage finance system to ensure stability in the U.S. housing market, but whatever changes may come, a robust role for the government in housing will be essential.
Fannie and Freddie have been justifiably but inaccurately maligned in the aftermath of the mortgage crisis. In recent years, their executives ran the firms like out-of-control hedge funds, lobbied Congress like arrogant Wall Street banks and did nothing beyond the bare minimum required by law to help low-income borrowers. But Fannie and Freddie did not go headlong into subprime mortgages—the primary source of their losses came from loans to relatively high-quality borrowers.
The terrible mortgages that crashed the economy were issued by banking conglomerates and Wall Street megabanks—Fannie and Freddie were almost entirely divorced from that line of business. The problem with Fannie and Freddie was largely structural– investors and managers saw the potential for big profits from taking on loads of risk, but believed (accurately) that the government would eat losses if those risks backfired. So Fannie and Freddie ramped up risk, taking on as many mortgages as they could while keeping as little money as possible on hand to cushion against losses. Eventually the strategy destroyed them.
Fixing the mortgage system
Exactly how the government stays involved in the mortgage market is still open to debate, as Annie Lowrey emphasizes for The Washington Independent. Nearly every member of the private sector who testified at a recent housing forum sponsored by the Treasury Department endorsed some kind of government backing for the housing market. This was a meeting of private-sector bigwigs—no community groups or affordable housing advocates were invited to speak at the meeting. Proposals ranged from scaling back government support for some types of mortgages, to the full nationalization of Fannie Mae and Freddie Mac (Fannie was a nationalized entity for the first 30 years of its existence).
In other words, the government is going to have to keep subsidizing housing, but it will have to find new ways to do it. The old Fannie and Freddie model didn’t work, but the private sector will be unable to get the job done by itself. Private-sector banks and mortgage brokers, after all, were the source of all the predatory loans issued during the subprime crisis, and the source of all of the most offensive loans that drove the economy off a cliff.
Inefficient and often predatory players on Wall Street are still causing problems today. As Ellen Brown highlights for Yes! Magazine, the mortgage system is so bizarre that banks are finding themselves unable to document their right to foreclose on properties—and courts are (fortunately) refusing to let them do it.
It’s a rare situation in which borrowers may actually hold the higher legal ground against powerful corporations. About 62 mortgages are registered through an electronic documentation system called the Mortgage Electronic Registration System (MERS), which helps banks with the foreclosure process. But MERS has repeatedly been unable to show proper documentation assigning a mortgage to a specific bank, and courts are now challenging its right to foreclose on behalf of big banks.
That’s good news, Brown notes, because MERS’ shoddy documentation has made it very difficult for borrowers to figure out who actually owns their loan. If you don’t know who owns your mortgage, it’s impossible to modify it if you find yourself unable to pay it off.
As Shamus Cooke argues for Truthout, even successful innovations like the 30-year mortgage are beginning to look a little outdated in an era of heavy, chronic unemployment. Many people can no longer expect to be gainfully employed for three decades on end. If the government refuses to repair our damaged jobs infrastructure, even simply maintaining the status quo in housing could become impossible.
Deficit reduction is not a cure-all
That brings us to another favorite conservative bogeyman, the federal budget deficit. The deficit and jobs generally stand in direct opposition. Creating jobs costs money, and spending that money expands the deficit. Cutting the deficit, by contrast, means cutting support for jobs.
As Steve Benen emphasizes for The Washington Monthly, conservative lawmakers are still harping on deficit reduction as a cure for everything that ills the nation, when the real solution to our problems is a serious jobs bill.
Even if the deficit were a huge problem, trying to cut important social services in the middle of a deep recession is not a good way to go about solving it. Drastic cuts to government spending in a recession result in lower tax returns for the government, which can often be self-defeating, especially in the face of expanding joblessness. The resulting push for deficit reduction—known in economic circles as an “austerity policy,” is better understood as the active pursuit of economic decline. As economist Robert Johnson notes in a New Deal 2.0 piece carried by AlterNet:
Deterioration of government services is bad enough, but imposing austerity due to lack of trust in a time of high unemployment and slack resources is tragic. It is a means to accelerate the decline of living standards of those who have taken a beating since 2007. Double dip or stagnation is too subtle a distinction. We are amidst an unfolding collective choice to pursue a downward spiral.
The government has taken several dramatic steps to repair the nation’s financial system, but it has done almost nothing to help troubled borrowers and not nearly enough to create jobs. Some of this is due to misguided policies enacted by President Barack Obama, and much of it is due to cynical obstructionism. But we cannot repair the economy without fixing jobs and housing. Both are still in a full-blown crisis, and policymakers should feel an urgent need to deal with them.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.by Zach Carter, Media Consortium blogger
Over the past decade, Fannie Mae and... more
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Bad timing for today's PMQs? (and the comments by the Chancellor that the budget hid nothing in the small print) After a leaked assessment from the Treasury states the possible numbers of jobs loses in the public and private sector due to the cuts.
"Unpublished estimates of the impact of the biggest squeeze on public spending since the second world war show that the government is expecting between 500,000 and 600,000 jobs to go in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015."-Guardian, which also points out the paper saw aslide from a budget presentation saying "100-120,000 public sector jobs and 120-140,000 private sector jobs" were to be lost every year over 5 years.Bad timing for today's PMQs? (and the comments by the Chancellor that the budget... more
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The Obama administration, seeking to build on the momentum of the Iran resolution passed last week by the United Nations, announced Wednesday that it had imposed sanctions on more than a dozen Iranian companies and individuals with links to the country’s nuclear and missile programs.
link : http://www.nytimes.com/2010/06/17/world/middleeast/17sanctions.html?hpThe Obama administration, seeking to build on the momentum of the Iran resolution... more
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Below is the rough transcript of some remarks I made at the campaign’s successful fun-raiser at the American Sandwich Company in Coopersburg on June 6, the 66th anniversary of D-Day. More details on the fundraiser in tomorrow’s post. The event began with a moment of silence for veterans, especially the 5,490 soldiers who have died so far in Iraq and Afghanistan.
“Today we face a D-Day of a different sort, and while there is still war, the causes are economic. At the last Towne Hall, I presented “The Economy in Pictures” where I demonstrated that unemployment is >>17%, 1 in every 8 Americans is on food stamps, the FDIC that “insures” bank accounts is hopelessly insolvent, and the true national debt is really $120 Trillion - when the $13 trillion in US treasury debt is added to the unfunded liabilities of Social Security and Medicare - a vast sum that is best put into personal terms as $400,000 for every man, woman, and child in the United States. At this point, even if the government were to tax 100% of each citizen’s dollars and properties, there still would not be enough to theoretically pay off this deb....
http://www.peacefreedomprosperity.com/?p=3552Below is the rough transcript of some remarks I made at the campaign’s... more
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It's reported by the Guardian, the Child Benefits for the middle class will face reduction in plans "to bring the £164bn deficit under control."-Guardian
As the coalition settles down, news of the future cuts appeared in today's newspapers, letting journalists go back to the normal political routine (since they've spent the last few days outside the negotiation progress)
According to the paper, all departments (excluding the ringfenced) spent the last month finding 15% cuts to reduce spending. One reported plan from the Treasury is to reduce the benefits for the middle class like child benefits.
It's suggested the cuts could strain the coalition relationship because the Liberal Democrats would be against cuts that will slice welfare for the poor.
"He urged colleagues to pursue "a distinctive path" to ensure the poor did not suffer when spending cuts are speeded up, as promised by Osborne."-The GuardianIt's reported by the Guardian, the Child Benefits for the middle class will face... more
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I should note that just because he puts these headlines on his website doesn't mean he actually believes this. But thats not the point, the point is that now its out there. And considering the media is obsessed with reporting on whatever drudge thinks is newsworthy, no doubt this will actually be a story in the coming days.
Citing a Vanity Fair article that can only be sarcastic, Drudge's headlines read: "Even Obama $100 Looks European" and "Might As Well Be A Euro".
Matt Drudge is what's wrong with America.I should note that just because he puts these headlines on his website doesn't... more
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US Treasury Secretary Timothy Geithner is due in China for talks with Vice-Premier Wang Qishan to discuss a long-running dispute over the yuan.
link : http://news.bbc.co.uk/2/hi/business/8608564.stmUS Treasury Secretary Timothy Geithner is due in China for talks with Vice-Premier... more
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From the Department of the Treasury:
"The U.S. Department of the Treasury today announced the United States will work with its partners around the world to relieve all debts owed by Haiti to international institutions and to ensure grant financing to support Haiti's reconstruction and recovery from the devastating earthquake in January."
Geithner also supports the relief of Haiti's debt to the IMF.
Great news for Haiti.
The full statement: http://ustreas.gov/press/releases/tfg537.htm
Image:From the Department of the Treasury:
"The U.S. Department of the Treasury today... more
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Corporate forces, long before the Supreme Court’s decision in Citizens United v. Federal Election Commission, carried out a coup d’état in slow motion. The coup is over. We lost. The ruling is one more judicial effort to streamline mechanisms for corporate control. It exposes the myth of a functioning democracy and the triumph of corporate power. But it does not significantly alter the political landscape. The corporate state is firmly cemented in place.
The fiction of democracy remains useful, not only for corporations, but for our bankrupt liberal class. If the fiction is seriously challenged, liberals will be forced to consider actual resistance, which will be neither pleasant nor easy. As long as a democratic facade exists, liberals can engage in an empty moral posturing that requires little sacrifice or commitment. They can be the self-appointed scolds of the Democratic Party, acting as if they are part of the debate and feel vindicated by their cries of protest.
Much of the outrage expressed about the court’s ruling is the outrage of those who prefer this choreographed charade. As long as the charade is played, they do not have to consider how to combat what the political philosopher Sheldon Wolin calls our system of “inverted totalitarianism.”
Inverted totalitarianism represents “the political coming of age of corporate power and the political demobilization of the citizenry,” Wolin writes in “Democracy Incorporated.” Inverted totalitarianism differs from classical forms of totalitarianism, which revolve around a demagogue or charismatic leader, and finds its expression in the anonymity of the corporate state. The corporate forces behind inverted totalitarianism do not, as classical totalitarian movements do, boast of replacing decaying structures with a new, revolutionary structure. They purport to honor electoral politics, freedom and the Constitution. But they so corrupt and manipulate the levers of power as to make democracy impossible.
Inverted totalitarianism is not conceptualized as an ideology or objectified in public policy. It is furthered by “power-holders and citizens who often seem unaware of the deeper consequences of their actions or inactions,” Wolin writes. But it is as dangerous as classical forms of totalitarianism. In a system of inverted totalitarianism, as this court ruling illustrates, it is not necessary to rewrite the Constitution, as fascist and communist regimes do. It is enough to exploit legitimate power by means of judicial and legislative interpretation. This exploitation ensures that huge corporate campaign contributions are protected speech under the First Amendment. It ensures that heavily financed and organized lobbying by large corporations is interpreted as an application of the people’s right to petition the government. The court again ratified the concept that corporations are persons, except in those cases where the “persons” agree to a “settlement.” Those within corporations who commit crimes can avoid going to prison by paying large sums of money to the government while, according to this twisted judicial reasoning, not “admitting any wrongdoing.” There is a word for this. It is called corruption.
Corporations have 35,000 lobbyists in Washington and thousands more in state capitals that dole out corporate money to shape and write legislation. They use their political action committees to solicit employees and shareholders for donations to fund pliable candidates. The financial sector, for example, spent more than $5 billion on political campaigns, influence peddling and lobbying during the past decade, which resulted in sweeping deregulation, the gouging of consumers, our global financial meltdown and the subsequent looting of the U.S. Treasury.
More at the link:Corporate forces, long before the Supreme Court’s decision in Citizens United v.... more
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