05/24/2013 archive

Since the 2008 financial crisis, the five Too Big Too Fail banks are 30% larger. Dodd-Frank has yet to be implemented and already banking lobbyists are working with congress to derail it. In March, Attorney General Eric Holder testified that some banks are just too large which makes them too hard to prosecute. Part of Holder’s justification that bringing criminal charges against large financial institutions would harm the economy, doesn’t quire hold water:

The U.S. Department of Justice appears to have neither conducted nor received any analyses that would show whether criminal charges against large financial institutions would harm the economy, potentially undermining a key DOJ argument for why the world’s biggest banks have escaped indictment.

Testimony by a top Justice official and fresh documents made public on Wednesday during a House financial services committee hearing revealed that financial regulators and the Treasury Department did not provide warnings to prosecutors weighing the economic consequences or fallout in the financial system of criminal indictments against large financial groups. DOJ also could find no records that would substantiate its previous claims that it weighed potentially negative economic or financial impacts when considering criminal charges, said Mythili Raman, acting assistant attorney general for the criminal division.

Wednesday’s revelations are likely to increase criticism of the Obama administration, which has been accused of a lackluster enforcement record against big banks in the financial crisis and other matters.

This week Treasury Secretary Jack Lew appeared at a Senate banking committee hearing where Sen. Elizabeth Warren (D-MA) questioned him on whether it’s time to cap the size of the banks deemed “too big to fail”:

Can we have more Liz Warrens? Like 60 of her?

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

May 24 is the 144th day of the year (145th in leap years) in the Gregorian calendar. There are 221 days remaining until the end of the year.

On this day in 1775, John Hancock is elected president of the Second Continental Congress.

ohn Hancock is best known for his large signature on the Declaration of Independence, which he jested the British could read without spectacles. He was serving as president of Congress upon the declaration’s adoption on July 4, 1776, and, as such, was the first member of the Congress to sign the historic document.

John Hancock graduated from Harvard University in 1754 at age 17 and, with the help of a large inherited fortune, established himself as Boston’s leading merchant. The British customs raid on one of Hancock’s ships, the sloop Liberty, in 1768 incited riots so severe that the British army fled the city of Boston to its barracks in Boston Harbor. Boston merchants promptly agreed to a non-importation agreement to protest the British action. Two years later, it was a scuffle between Patriot protestors and British soldiers on Hancock’s wharf that set the stage for the Boston Massacre.

Hancock’s involvement with Samuel Adams and his radical group, the Sons of Liberty, won the wealthy merchant the dubious distinction of being one of only two Patriots-the other being Sam Adams-that the Redcoats marching to Lexington in April 1775 to confiscate Patriot arms were ordered to arrest. When British General Thomas Gage offered amnesty to the colonists holding Boston under siege, he excluded the same two men from his offer.

President of Congress

With the war underway, Hancock made his way to the Continental Congress in Philadelphia with the other Massachusetts delegates. On May 24, 1775, he was unanimously elected President of the Continental Congress, succeeding Peyton Randolph after Henry Middleton declined the nomination. Hancock was a good choice for president for several reasons. He was experienced, having often presided over legislative bodies and town meetings in Massachusetts. His wealth and social standing inspired the confidence of moderate delegates, while his association with Boston radicals made him acceptable to other radicals. His position was somewhat ambiguous, because the role of the president was not fully defined, and it was not clear if Randolph had resigned or was on a leave of absence. Like other presidents of Congress, Hancock’s authority was limited to that of a presiding officer. He also had to handle a great deal of official correspondence, and he found it necessary to hire clerks at his own expense to help with the paperwork.

Signing the Declaration

Hancock was president of Congress when the Declaration of Independence was adopted and signed. He is primarily remembered by Americans for his large, flamboyant signature on the Declaration, so much so that “John Hancock” became, in the United States, an informal synonym for signature. According to legend, Hancock signed his name largely and clearly so that King George could read it without his spectacles, but this fanciful story did not appear until many years later.

I wish.

Japan the Model

By PAUL KRUGMAN, The New York Times

Published: May 23, 2013

A generation ago, Japan was widely admired – and feared – as an economic paragon. Business best sellers put samurai warriors on their covers, promising to teach you the secrets of Japanese management; thrillers by the likes of Michael Crichton portrayed Japanese corporations as unstoppable juggernauts rapidly consolidating their domination of world markets.

Then Japan fell into a seemingly endless slump, and most of the world lost interest. The main exceptions were a relative handful of economists, a group that happened to include Ben Bernanke, now the chairman of the Federal Reserve, and yours truly. These Japan-obsessed economists viewed the island nation’s economic troubles, not as a demonstration of Japanese incompetence, but as an omen for all of us. If one big, wealthy, politically stable country could stumble so badly, they wondered, couldn’t much the same thing happen to other such countries?

Sure enough, it both could and did. These days we are, in economic terms, all Japanese – which is why the ongoing economic experiment in the country that started it all is so important, not just for Japan, but for the world.

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It would be easy for Japanese officials to make the same excuses for inaction that we hear all around the North Atlantic: they are hamstrung by a rapidly aging population; the economy is weighed down by structural problems (and Japan’s structural problems, especially its discrimination against women, are legendary); debt is too high (far higher, as a share of the economy, than that of Greece). And in the past, Japanese officials have, indeed, been very fond of making such excuses.

The truth, however – a truth that the Abe government apparently gets – is that all of these problems are made worse by economic stagnation. A short-term boost to growth won’t cure all of Japan’s ills, but, if it can be achieved, it can be the first step toward a much brighter future.

Land of the Rising Sums

By PAUL KRUGMAN, The New York Times

May 10, 2013, 8:58 am

The good news for Abenomics keeps rolling in; of course, it’s not over until the sumo wrestler sings, but there has clearly been a major change in Japanese psychology and expectations, which is what it’s all about.

Why does this seem to be working as well as it is? Long ago I argued that to gain traction in a liquidity trap, the central bank needed to credibly promise to be irresponsible – that is, convince investors that it would not rein in monetary expansion once the economy was at full employment and inflation was starting to rise. And this is a hard thing to do; no matter what central bankers may say, history shows that they often revert to type at the first opportunity. The examples of successful changes in expectations tend to involve drastic regime changes, like FDR taking us off the gold standard.

Monetary Policy In A Liquidity Trap

By PAUL KRUGMAN, The New York Times

April 11, 2013, 7:22 am

I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness. But I gather that some readers are confused – haven’t I been arguing that monetary policy is ineffective in a liquidity trap? The brief answer is that current policy is ineffective, but that you can still get traction if you can change investors’ beliefs about expected future monetary policy – which was the moral of my original Japan paper, lo these 15 years ago. But I thought it might be worthwhile to go over this again.

So, at this point America and Japan (and core Europe) are all in liquidity traps: private demand is so weak that even at a zero short-term interest rate spending falls far short of what would be needed for full employment. And interest rates can’t go below zero (except trivially for very short periods), because investors always have the option of simply holding cash.

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Under these circumstances, normal monetary policy, which takes the form of open-market operations in which the central bank buys short-term debt with money it creates out of thin air, have no effect. Why?

Well, the reason open-market operations usually work is that people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.

But if rates are zero, there is no cost to liquidity, and people are basically saturated with it; at the margin, they’re holding money simply as a store of value, essentially equivalent to short-term debt. And a central bank operation that swaps money for debt basically changes nothing. Ordinary monetary policy is ineffective.

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Here’s the thing, however: the economy won’t always be in a liquidity trap, or at least it might not always be there. And while investors shouldn’t care about what the central bank does now, they should care about what it will do in the future. If investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.

So the central bank can still get traction if it can change expectations about future policy.

The trouble is that central bankers have a credibility problem – one that’s the opposite of the traditional concern that they might print too much money. Instead, the concern is that at the first sign of good news they’ll revert to type, snatching away the punch bowl. You can see in the figure above that the Bank of Japan did just that in the 2000s.

The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”.

And that’s why I’m bullish on the Japanese experiment, even though current monetary policy has little effect.

I’m sure my many, many MMT friends will be happy to point out how wrong the theoretical basis for this analysis is, but I’ve always been a pragmatic centrist- ask Armando; and as long as our policy dogs hunt in the same direction, who cares?

Jeremy Scahill & Noam Chomsky on Secret U.S. Dirty Wars From Yemen to Pakistan to Laos

Transcript

No experiment can be more interesting than that we are now trying, and which we trust will end in establishing the fact, that man may be governed by reason and truth. Our first object should therefore be, to leave open to him all the avenues to truth. The most effectual hitherto found, is the freedom of the press. It is, therefore, the first shut up by those who fear the investigation of their actions.

  ~Thomas Jefferson, Letter to Judge John Tyler (June 28, 1804)~

The perpetrator of a crime cannot investigate himself. Yet that is what Pres. Barack Obama has proposed over  growing concerns about press freedom following the Justice Department’s secret seizure of AP records and its accusation that Fox News reporter James Rosen could be part of a criminal conspiracy for soliciting information from a source. The president said that he would have Attorney General Eric Holder review the Justice Department guidelines for investigations that involve journalists. Although Holder did not sign the subpoena for the phone records of the Associated Press, Holder had to recuse himself from the investigation because he was in possession of the leaked information. Now, it has been revealed that Holder, himself, who signed the off on the warrant that allowed the Justice Department to search Fox News reporter James Rosen’s personal email.

The report places Holder at the center of one of the most controversial clashes between the press and the government in recent memory. The warrant he approved named Rosen as a “co-conspirator” in a leak investigation, causing many to warn that the Justice Department was potentially criminalizing journalism. The warrant also approved the tracking of Rosen’s movements in and out of the State Department, as well as his communications with his source, Stephen Kim. [..]

The Attorney General is usually required to approve requests to search journalists’ materials, but that rule does not extend to email records.

Now Pres. Obama says that it will be Holder who reviews the guidelines. This is the man who also said he doesn’t know how many times he had authorized the search of journalists’ records.

In an interview with Amy Goodman at Democracy Now, Matthew Rothschild, editor and publisher of The Progressive magazine, has called for Eric Holder’s resignation over spying on journalists and Occupy Wall Street protestors.

As much as many criticize Fox News and the Associated Press for their penchant for a right wing biased reporting, they are the press. The First Amendment applies to them, as well as, to the other news organizations and their reporters. In this we stand together.