You DID Build That: Uncle Sam Helped Make Bain Capital And Mitt Romney Rich

Jon Perr at Crooks & Liars points out how much of Bain Capital’s success is dependent on U.S. tax policies that favor the wealthy. “As it turns out, the U.S. tax code doesn’t merely allow Romney to pay a lower rate than many middle class families. Without the public subsidy that is the corporate debt interest deduction, there might not be a Bain Capital—or a private equity industry as we know it—at all.” For more on how this tax subsidy hurts Main Street job creation, read this post by Jeff Madrick on OurFuture.org.

Campaign Cash: How Citizens United Will Change Elections Forever

by Zach Carter

I’m working on a new blog project through the election on campaign finance, focusing on the impact of the Citizens United Supreme Court decision. Campaign for America’s Future and The Media Consortium are behind it, and I’ll probably do a few radio and TV spots.

There will be a new blog every weekday until Nov. 4, and the first post is already up, so go take a look!



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Wall Street’s Tea Party

by Zach Carter / Oct 20

The Tea Party likes to wrap itself in “grassroots” contempt for wealthy elites, but the 12 leading Tea Party Senate candidates have accepted over $4.6 million in campaign contributions from Wall Street for the upcoming election.

Despite all the Tea Party rhetoric against big, bad bailouts, the leading candidates have had no problem accepting millions of dollars from Big Finance to further their electoral prospects. Every single candidate has taken money from what the Center for Responsive Politics characterizes as the FIRE lobby—finance, insurance and real estate—a category that includes all of the big financial interests who benefited from the Wall Street bailout.

A full tally of Wall Street contributions to the Tea Party’s Senate team is below, but some of the Tea Party’s biggest figures have been top recipients: Pennsylvania candidate Pat Toomey, Florida hopeful Marco Rubio and Sen. Jim DeMint, R-S.C., have all brought in over $1 million each, while Washington candidate Dino Rossi has pulled in more than $750,000 from Wall Street.

This orgy of Wall Street funding stands in stark contrast to many of the candidates’ campaign postures. Toomey, in particular, has been vocal about his supposed outrage over the Wall Street bailout, but didn’t mind raking in almost $1.2 million from Wall Street to fund his campaign. Toomey worked in the derivatives business on Wall Street for years before jumping through the revolving door into politics. He even helped write the repeal of Glass-Steagall—one of the landmark acts of financial deregulation that paved the way for the Great Crash of 2008. Kentucky Tea Partier Rand Paul has an entire section of his website dedicated to bashing bailouts, but he’s raked in over $180,000 from Wall Street for this election. After blasting Sen. Bob Bennett, R-Utah, in the Republican primaries for his vote in favor of the Wall Street bailout, Utah Tea Partier Mike Lee accepted over $82,000 from the financial world. Take a look at the Senate Tea Party’s Wall Street haul (click image for larger view):

Other Tea Party candidates openly advertise their willingness to do Wall Street’s bidding. Washington Tea Partier Dino Rossi has vowed to appeal the financial reform bill that Congress passed this year, and he has $750,253 worth of reasons to make such a pledge. Still others blast both “bailouts” and “regulations,” while shying away from specific mentions of “Wall Street.” Florida’s Marco Rubio, Colorado’s Ken Buck, West Virginia’s John Raese and Delaware’s Christine O’Donnell all take this tack. All of them accepted big bucks from Big Finance.

This lack of specificity from high-profile Tea Partiers is astonishing, given the economic significance of Wall Street’s recent excess. Tea Party candidates love to claim that government spending is wasteful while bashing regulation and praising the private sector. But in all of human history, no entity—public or private— has spent money more wastefully than Wall Street did during the housing bubble. By inflating an $8 trillion housing bubble, Wall Street poured money that could have supported sustainable jobs into a speculative cesspool. When that bubble burst, the economy lost 8 million jobs, and American families were decimated. Deregulation will only make things worse—the sheer lack of regulations in the mortgage market was what allowed Wall Street to wreak havoc over the past decade.

It’s easy for politicians to make vague statements against bailouts. But far more should be expected from serious Senate candidates. Tea Partiers need to specify how they will rein in Wall Street to make sure our economy functions properly. And they need to explain how the $4.6 million they’ve accepted from Wall Street will affect their governing decisions.

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Foreclosures And Guilt: The “Home Loan Moral Hazard Scorecard”

By Richard Eskow

Jamie Dimon and the other mega-bankers who derailed the economy have a new PR campaign to sell you. They’re saying that families who can’t pay their mortgages must bear the blame - all the blame - for the foreclosure crisis. That means the public should just ignore banks’ widespread lawbreaking in the registering and transfer of property titles. For the bankers who would appoint themselves the nation’s moral arbiters, It’s always somebody else’s fault.

Not that we should be surprised. After all, the Mortgage Bankers Association, which calls itself “the voice of the real estate finance industry,” did a short sale on its Washington DC headquarters which left CEO John Courson uncharacteristically speechless. It seems he didn’t want to talk about how he walked away from the loans he took out to buy that building. But before the cat got his tongue, Courson managed to lecture homeowners on their “legal obligation” and the terrible “message they would send” by walking away from their mortgages.

Morality and law for thee, but none for me.

John Courson paid $79 million for his Association’s headquarters and sold it three years later for $41.3 million. In his defense, anyone who loses nearly $38 million on a single real estate deal is, in fact, uniquely qualified to speak for the real estate finance industry. They mismanaged their finances so badly that they brought down the economy. They needed to rescued by the rest of us, a privilege they’re working overtime to deny others. They claim that struggling homeowners are “undeserving” of help, even if the other party in their transaction has broken the law or violated a contract.

The bankers have benefited from a stacked deck, or what’s known as “moral hazard.” That’s the term for what happens when people don’t bother protecting themselves from risk because they know somebody else will take care of it for them. The banks are saying they’ve been reasonable business partners, giving their borrowers all the information they need to make good decisions while asking no special favors for themselves. Does that sound right? We created the “Home Loan Blame Game Scorecard,” which is at the end of this post, to find out.

As CEO of JPMorgan Chase, you’d think that Jamie Dimon might hesitate before saying “We’re not evicting people who deserve to stay in their house.” His argument rests on the idea that homeowners bear sole responsibility for taking out loans they couldn’t repay. He might be shocked, shocked, to learn that his own employees have relentlessly been trying to push these loans on people:

2010-10-18-chaseexclusives.JPG

The “blame homeowners” argument is hypocritical, but it’s been effective. It helped bankers get themselves massive bailouts, pay themselves huge bonuses, and walk away with the profits they made by selling and trading these mortgages at inflated prices. And it’s helped them avoid having to write down their books to reflect the actual, reduced value of the assets they’re holding. That means millions of homeowners are propping them up by paying mortgages at property values that the banks themselves artificially inflated.

Now they want to use the same argument to get around the fact that they’ve been breaking property laws on a massive scale for years. It’s just “paperwork,” they say. But any homeowner who filed false affidavits - a crime that’s legally equivalent to perjury - would be looking at jail time. Remember: Law and morality for thee …

"But if these people had paid their mortgages, there wouldn’t been a problem." That’s a pretty compelling argument (if you’re willing to ignore the widespread lawbreaking by the banks). But why couldn’t they pay their mortgages? In many cases, it’s because banks have violated HAMP rules for helping distressed homeowners modify their loans. That’s breaking the law.

As the Wall Street Journal reported last week, the banks are “largely unsympathetic” to the idea of a foreclosure freeze, and they consider reports of widespread lawbreaking merely a bureaucratic problem. “”If you didn’t pay your mortgage, you shouldn’t be in your house,” said a portfolio manager at Greenwood Capital Associates. “People are getting upset about something that’s just procedural.”

"Procedural" … you know. Abiding by the law. Doing what the little people do …

Bank of America has been a particularly egregious violator of HAMP’s legal requirements, which means that many of the people it’s foreclosing on shouldn’t even be in that position. Yet you could almost see CEO Brian Moynihan rolling his eyes sarcastically as he said of the missing titles, “We’ll go back and check over our homework one more time.”

Please, Mr. Moynihan, don’t trouble yourself. Allow us to check your “homework” for you. Surely bankers that hold homeowners to such high moral standards won’t object to a thorough and very detailed audit of these transactions by the proper authorities. I’m sure such ethical and meticulous leaders want to know how many home appraisals were carried out by “friendly” appraisers, for instance, rather than ones who were known to come up with whatever number the bank wanted. And I’m sure they’d want to know if any of their employees had misled borrowers, perhaps by telling them that they could be sure that refinancing would be available long before their adjustable rate mortgages went up.

Remember, they’re lecturing homeowners for not managing their finances well, when their entire industry would have collapsed because they didn’t manage their finances well.

In a famous (and probably apocryphal) story, it’s said that FDR finally got frustrated during a meeting of his economic advisors. After hearing talk about loan rates, interest, borrowing, and various financial mechanisms, the story says that FDR finally blurted out “What the hell! It’s all our money, isn’t it?”

That’s how bankers feel about the current foreclosure crisis: It’s all their money. Who cares about titles and property laws? If a homeowner hasn’t been making their mortgage payments, the argument goes, then surely they should lose their house to somebody . It doesn’t matter whether its Chase or Citi or Wells Fargo. As long as the banks agree among themselves who gets to put that family into the street, what’s it to you, pal? And if the family’s only in trouble because their bank (whoever it was) broke the law, well, we can’t blame the bank if we can’t find them, can we?

We’re not saying that no homeowners bear responsibility for defaulting on their mortgages. Sure, some people should’ve known better. But three million homes have been foreclosed upon in the last three years. That’s a systemic problem. One in every five houses is underwater. That’s a systemic problem, too. The only factors common to the system as a whole are the bankers, and the rules that let them get away with running up housing prices in a gambling frenzy and walking away with everything when they fell. They’ve written millions of loans without proper risk management. Many experts were warning us that the housing bubble was about to burst, and they were getting paid extraordinarily well to understand the dangers.

Bank stocks took a steep hit last week, and why shouldn’t they? The executives running them aren’t very good at what they do. It’s about time bankers took some responsibility for their failures. It’s about time banks shared some of the lost value of these properties with homeowners - not just those who are defaulting, but all affected homeowners.

Stockholders should can the executives who have so badly mismanaged their banks. To paraphrase Jamie Dimon, we’re not about talking evicting people who deserve to stay in the corner office. Word to Brian Moynihan: If you can’t manaqe your business, you don’t deserve to keep your job. Nothing personal, of course. For those who want to see the finance industry run by competent people, firing you is what we would call “just procedural.”

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MEET THE HAZARD MASTERS:  THE HOME LOAN MORAL HAZARD SCORECARD


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Final score:  To be determined in the court of public opinion, and in the corridors of Washington power.

This post was produced as part of the Curbing Wall Street project.

Cold Case File: Who Shot Down a 70-Year-Old Attack on Social Security?

by Richard Eskow

Heard the one about the Social Security Trust Fund that holds nothing but “IOUs”? That phony claim goes back to at least 1939, when a rabidly anti-Roosevelt journalist named John T. Flynn used a colorful analogy about a tin box in a drawer in order to argue that Social Security was a “monstrosity.” But where Flynn was simply mistaken, many of those who repeat his arguments today have more cynical motives.

Flynn’s essay, The Social Security “Reserve” Swindle, contains all the same arguments we hear today: The government’s just writing IOUs to itself. Social Security is “an offense against younger workers” (who would be about ninety years old now) that will give older generations a free ride. “The best thing to do with this monstrous child,” wrote Flynn, would be to slay it at once …”

Years later a group of people came together to write a comprehensive rebuttal to the anti-Social Security arguments thrown around by John T. Flynn and the hundreds who came after him. They took on all of the myths one by one, demolishing them with a passion that was but thinly concealed by the dryness of their prose.

So who were these pseudo-socialist troublemakers? Was Krugman among them, or Stiglitz, or Dean Baker? Surely there must have been at least one bearded, malcontented economist. There must’ve bloggers, too, and other members of the “professional left,” right? Meet the crazy hippies who took on the anti-Social Security crowd and won:

2010-10-14-58council.jpg

They’re members of the 1957-59 Advisory Council for Social Security, appointed by HEW Secretary Marion B. Folsom (he’s the dude standing fifth from the left with his hands folded) during the Administration of Dwight D. Eisenhower. Who was on the Council? The editor of Business Week, who was also head of McGraw-Hill’s Executive Committee. The Chief Actuary for Metropolitan Life. (Didn’t I meet him at Netroots Nation?) The President of Pacific Lighting Corporation. Some eminent economists and business professors. And three union leaders.

In 1959 they issued a paper called “Misunderstandings of Social Security Financing,”.and here are the misconceptions they identified and rebutted:

  • "The idea that the old-age and survivors insurance trust fund is now …’in the red’
  • "The idea that an excess of trust fund disbursements over trust fund receipts in a given year indicates financial weakness in the program  
  • The idea that payment of interest on, and the redemption of, securities held by the trust funds means that people are taxed twice for social security 
  • The idea that most trust fund assets are fictitious because they are IOU’s issued by the federal government to itself 
  • The idea that the purchase of federal obligations by the trust funds increases the national debt 
  • The idea that contribution income not needed for current program expenditures has been wrongly spent for the expenses of the federal government 
  • The idea that each person covered by the program has an individual reserve account 
  • The idea that payment of full-rate benefits to insured persons who have contributed only a short period of time is inappropriate

They did such a thorough job that they probably thought they had put these issues to rest. But then, they have dreamers’ eyes, don’t they? (Especially Mr. R. A. Hohaus, the Met Life Chief Actuary, if you ask me. He’s third from the left, and the bow tie shows he’s not afraid to reach for the stars. )

It might have killed this group’s bubbly and childlike idealism to know that fifty-three years later we’d be seeing blog posts like this one, entitled “I.O.U.? More Like ‘You Owe You’ By Way Of Social Security.” It contains the same specious arguments first trotted out by Flynn in 1939, and decisively laid to rest by the 1958 Advisory Council report. (What’s worse is that this guy claims to be a financial advisor.)

And it might have broken the visionary, I-see-a-better-world-to-come heart of Mr. Robert A. Hornby of the Pacific Lighting Corporation to read letters to the editor like this one, addressed to the editors of the Knoxville, Tennessee News-Sentinelfrom Tea Party supporter Karen F. Laffredi: “Social Security is broke. There are not enough workers to support current Social Security payouts and Congress has already spent the money in the trust fund leaving IOU’s.” (She goes on to make equally inaccurate statements about health care too, bless her heart, but that’s not today’s topic.)

A letter writer to the Greeley Tribune makes the same point:

"There is no real money in the "trust fund" — it’s an accounting gimmick — a stack of government IOU’s … As an illustration, put some cash in a box every month for your kid’s college education, then once a year Uncle Ned visits, borrows the cash for booze and puts an IOU in the box. When it’s time for college, you’ll have a box full of Uncle Ned’s IOU’s — and he’s drunk and flat broke."

It’s John T. Flynn all over again, with a little Eugene O’Neill thrown in for color. Could this really be the state of public knowledge, so many years after the Advisory Council issued its paper? After all, the financial advisor has a vested interest into scaring people. And Ms. Laffredi’s probably a person of good intentions who’s been manipulated by cynical leaders.

But wait … it gets worse. As we’ve discussed before, a Washington Post columnist and Senior Editor at Fortune is making the same “IOU” argument. A blogger who is also (disturbingly) an economics professor argued in 2005 that repeated the discredited Flynn argument with an even more vacuous example (at least Flynn’s hypothetical saver actually puts money in a tin box. This guy just writes himself promissory notes for a million bucks.)

Worse, we have candidate for the United States Senate comparing Social Security to Bernie Madoff’s crimes and calling it a “Ponzi scheme.” As a fact-checking site pointed out, “A Ponzi scheme is based on a lie … The IOU to the fund, on the other hand, is backed by the full credit and faith of the U.S. government. It must be repaid, with interest …”

How did it come to this? How did we reach such a state of confusion about the solvency of Social Security? Actuaries deal in probabilities and statistics. What were the odds we’d be so confused in 210? It isn’t accidental, of course. It’s the result of a concerted public relations effort, kicked off in 2005 by George W. Bush. Bush called reporters into his office and said “There is no trust ‘fund’ — just IOUs that I saw firsthand.” He showed them a file drawer to illustrate his argument that the government’s obligation to the Social Security Trust Fund are just pieces of paper.

So is a dollar bill. But if the government ever refused to honor one it would set off a panic. Most Treasury obligations are electronic nowadays, and not written on paper, but the principle’s the same. As for Madoff, he never had a team of actuaries who verified the financial soundness of his fund, but Social Security does. (Yes, we know that inside every actuary is a butterfly yearning to be free … but they get certified to do this sort of thing.)

Former President Bush’s message has been consistently promoted by billionaire Pete Peterson, too, through a variety of funded vehicles that include the "America Speaks" Social Security town halls and his Fiscal Times ”news” service.

My money’s on the actuaries. They have to take tests … hard tests … before they issue opinions. Check out Actuarial Note No. 142 from the Social Security Administration’s Chief Actuary if you want to understand the nature of those “pieces of paper.”(1) Here’s what it explains: Lawmakers rightly thought that the money people pay into Social Security should earn interest when it’s not used. It was invested in Treasury bonds, certificates, and notes because lawmakers thought that was the safest place to put the people’s money.

The safest place? These lawmakers hadn’t met Alan Simpson. He’s the head of the Deficit Commission, that group that wants to keep the money instead of paying it back. If he and his fellow-travelers succeed, it would be the first time in the history of the United States Government that it has ever defaulted on an obligation. Why would they want to do that? Because then they wouldn’t have to raise taxes on the wealthiest Americans. They’d have to cut benefits to get away with it, but that doesn’t bother them.

But before they succeed, they’re going to have to get past the Advisory Council. (You may say that Robert A. Hornby of the Pacific Lighting Corporation is a dreamer, but he’s not the only one.) And they’re going to have to deal with … the actuaries. That’s why they’ve mounted an enormous public relations campaign: to convince you that these government certificates of indebtedeness are just IOUs, and that Social Security is “broke.” They’re using arguments that are seventy-one years old, which is old enough to collect Social Security - although if they have their way, it may not be for long.

The “IOU” story isn’t true. The Social Security Advisory Council told you that in 1959, and so did the Head Actuary himself. Tell everyone: The Social Security Trust Fund has investments backed by the full faith and credit of the US government, not IOUs. It has a surplus, not an empty file cabinet. It’s financially sound, and with a minor adjustment (raising the payroll cap will do it) it will be financially sound forever.

If they ask how you know all that, tell ‘em R. A. Hohaus of Metropolitan Life told you so.

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(1) The Note was written in 1999, so the figures aren’t updated, but it puts these obligations in the right context. “The law has required,” says the Note, “that trust fund assets be invested only in ‘interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.”

The Note explains that these investments “may be either short-term ‘certificates of indebtedness’ or longer-term special issues in the form of notes or bonds,” which “the Treasury is authorized to issue …” Why invest in Treasury notes, bonds, or certificates? Because “this provides the investments of the funds with the greatest possible protection against the risk of loss of principal or interest due to default.”

This post was produced as part of the Strengthen Social Security campaign.

The First Domino: Foreclosure Fraud And The “Invisible Bailout”

by Richard Eskow

The foreclosure fraud scandal is a big deal (or a big “effin’” deal, as Joe Biden might say). But its real significance is an even bigger deal. Foreclosure fraud is one domino, and if it falls others will follow. The result could be an end to the “invisible bailout” - the one you never hear about, the one that forces millions of people to subsidize bad lending practices in order to prop up Wall Street.

The invisible bailout is the reason why the government isn’t pushing to freeze foreclosures. If the foreclosure process is halted and lending practices are thoroughly investigated, it might eventually force bankers to own up to their own lawlessness - and write down billions of dollars in artificially inflated assets. How are they going to pay themselves record bonuses if that happens?

How much could that cost? One in four US homes is underwater, which means that proper accounting would require a writedown of enormous proportions. And, as the AP reported, “forecasters at John Burns Real Estate Consulting predicted that 41 percent of residential sales this year would be on distressed properties.” The banks have been counting on that revenue.

Write down one mortgage in four? Halt nearly half of all home sales?

Now that’s a big effin’ deal.

To play the game, first place the blame

Ever wonder why so many pundits and politicians keep hammering underwater homeowners as morally reprehensible, while giving bankers a free pass for lending to them? It’s because the ongoing success of the bank bailout depends in part on protecting banks from having to account for the billions of dollars in bad loans they generated. How do you do that? By convincing the public that borrowers are the ones who were irresponsible, if not downright criminal, and that they have a moral obligation to pay banks the full value of these loans.

That’s the agenda that gets served by pieces like last year’s “Homeowner Bailouts Reward Irresponsibility,” which singled out real estate flippers and lambasted people who overspent for houses they couldn’t afford. But flippers are a tiny percentage of the real estate market, and those people with houses they “can’t afford” were told they could afford them … by the banks!

That’s also why so many stories of mortgage fraud singled out homeowners who overstated their incomes or otherwise provided falsified information in obtaining a mortgage. But the FBI - hardly a bastion of socialism - estimated that 80% of mortgage fraud was performed by businesses (“Fraud for Profit”) and not individuals (“Fraud for Housing”). Yet homeowners are being stigmatized in order to reduce political pressure to provide them with some form of mortgage relief.

As for the noncriminal loans, which presumably remain the majority of those outstanding, borrowers didn’t take them out as part of a nationwide attempt to live beyond their means. These loans were aggressively marketed to homeowners by banks. A lot of people got rich giving out these loans. But our “invisible bailout” policy requires a public belief that homeowners are morally obligated to pay full value on loans written at inflated house prices.

That’s where pieces like one written by Fareed Zakaria (and discussed here) were so important. For this argument to succeed, it was necessary to believe that the economic crisis was the result of their “bad habits” and their own native greed. “We … took out a massive mortgage and financed our fantasies,” Zakaria writes.

But who fueled the fantasies? Who offered consumers these mortgages?

Catch-22 for Homeowners

Banks convinced people their homes were worth an inflated amount and persuaded them to borrow against that amount. The “invisible bailout” strategy relies on homeowners to pay them the full amount of that inflated loan, with no penalty to the bank for its role in that transaction. To help homeowners, the government’s response has been to lower interest rates. But the banks won’t lend money to someone whose collateral is worth less than the value of the loan! (Banks suddenly get religion about a home’s real value when it’s time to issue credit.)

That leaves homeowners in a Catch-22. Who benefits? The banks, of course. They still collect against the inflated value of the house, and at older, higher interest rates - while pocketing the zero-interest money the Fed is throwing their way.

That’s the invisible bailout, and it’s worked like a charm … until now.

Bled dry

Of course, when you’re bleeding people like they’re meatlocker inventory in a vampire delicatessen you’re going to lose some of them. Foreclosures - lots of them - are the cost of doing business this way. But the banks must have decided that it’s better to go through the foreclosure process than to write down their stated assets to a reasonable level.

But there’s a problem with that. They had themselves quite a little party by swapping these inflated mortgages as securities, but now that the party’s over it’s getting messy. Nobody knows who owns what, exactly. That left them with a choice: Admit that they can’t always trace the chain of ownership, or falsely claim that they had this information when they really didn’t.

Remember, if banks admit that they can’t prove ownership, then they have to write down a lot of assets. If their lack of information had become known, they might have had to negotiate with homeowners … for the actual, current value of the home! That’s exactly what they don’t want to do.

Blackmail on the books

So the banks bluffed it out instead and hoped they’d get away with it. That’s a reasonable enough assumption. After all, they’ve gotten away with so much already. As “Synthetic Assets" points out: "over the past half century the financial industry has not treated the law as a bedrock institution that constrains … its activities, but rather as a set of rules that can be forced to adapt to the industry’s needs and desires."

As long as a financial collapse threatens the entire economy, these bankers understand that the government will retrofit the law to fit their behavior. The alternative would be an economic crisis. (That’s why we need to break up the big banks.)

Bankers. Aren’t they supposed to know something about managing money?

Mortgage fraud was a huge business in the 2000’s, leading to more than a billion dollars in restitutions in 2003-2005 alone (and identified cases were a tiny fraction of the total). Bank assets are loaded down with fraudulently written loans which, if acknowledged, would hit them hard (and make it more difficult for bankers to pay themselves record bonuses again this year).

Then there are the legally obtained but still highly overpriced assets, mostly real estate that’s worth much less than what’s on the books.

And consider this: We have a massive problem with homes under foreclosure, because bank haste and greed have left them with no clear title. That means it’s not clear who owns these houses. We only learned about it through the foreclosure process, but the same title problems must exist for homes that aren’t going through foreclosure. We could be looking at millions of homes whose ownership is unclear. No wonder bankers tried to hide the problem with fraudulent affidavits.

The IMF estimated that banks worldwide still needed to write down $550 billion in bad debt - and that was before this problem arose.

Investors hate banks right now, and no wonder. Non-interest revenue has fallen by more than $10 billion since 2007, while this kind of problem will cause their expenses to rise. Banks are trading below book value on the open market, which should be (but won’t be) celebrated by the Right as an instance of an informed market making a wise decision. (Only 8% of banks traded below their book value in 2001, and by 2008 that was up to 60%.)

As the IMF says, bankers are running a “very fragile” business. Even with a license to break the law, profits are down and they can’t dig their way out of the hole they made. That suggests they’re not very good at their jobs. What’s the right set of incentives for that kind of record? Record bonuses, of course - even if it means taking a bigger percentage of their reduced profits to do it.

But what they must do at all cost to protect those bonuses is pretend everything’s fine. They’re not even writing down second liens on homes, which are notoriously over-borrowed. (Did I mention that these guys are giving themselves record bonuses?)

Dominoes

Nobel prizewinner Joseph Stiglitz, who also bears the distinction of having been correct about the housing bubble, thinksit’s time for the banks to write down the excess value of these loans. As Stiglitz observes, that will be painful for the banks in the short term, although it would be “nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.”

But the Administration’s reluctant to do that. That’s why we heard such tepid remarks from the White House about the foreclosure fraud scandal over the weekend. If the foreclosure fraud issue is pursued too aggressively, it throws 41% of all expected housing sales into question. It raises even more questions about the ownership of millions of loans in good standing, potentially giving homeowners leverage to renegotiate based on the actual market value of their homes. And it reopens the issue of “writedowns.”

Illegal submission of foreclosure documents was part of a larger cover-up. People need to be arrested for it - but that, of course, would open up a larger can of worms. The legal process could very well reveal the extent of the title problem, as well as other potentially widespead criminal practices.

Still, that’s no reason not to cuff ‘em and book ‘em. If you can’t do the time, don’t do the crime …

Foreclosure fraud is the first domino. If it’s tipped over, the “invisible bailout” would end. Banks would no longer be subsidized by American homeowners. Know what that means? Bye-bye, bonuses. Hello, increase in discretionary spending for American consumers. And hello there, new jobs.

Anyone for a game of dominoes?

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This post was produced as part of the Curbing Wall Street project.

Automated Greed Factories: How Soulless Banking Is Crushing The Economy

By Richard Eskow

Two seemingly unrelated stories from the past week illustrate a fundamental problem with today’s financial system. While this problem may seem “philosophical” or abstract, it’s very real, and we won’t put our economy back on a sound footing until we get a handle on it. The problem is this: Banking institutions no longer want to perform the human functions they’ve performed for a thousand years. Financing has become a robotic form of mass production, designed to generate ever-increasing wealth within an artificial system by draining it from the real world.

In a word, banks have lost their souls.

A recent report blames last May’s “flash crash” on software run wild, while the new “robo-signing” mortgage scandal looks a lot like (and is) old-fashioned fraud. The “flash crash,” which caused the stock market to plunge 600 points and bounce back within minutes, was computer-driven. In the “robo-signing” scandal the “robots” weren’t machines, but bank employees who “mechanically” signed legal statements without checking their accuracy. But both are symptoms of a common disease. They both stem from the banks’ insatiable desire to earn the maximum amount of money while expending the minimum amount of effort ,with the least possible real-world interaction. That’s led to a mechanized form of banking that’s devouring the economy.

Whether it’s computerized trading or “robot” bankers, greed is the Ghost in the Machine.

Bankers with soul?

It may sound odd to speak of banks or bankers as having once had “souls.” While it’s true that they may not have had soul in the same way that, say, Otis Redding did when he sang “These Arms of Mine,” financiers have always played a certain human role in the economy. They existed to make sure that capital was available when it was needed, whether it was to outfit sailing fleets for an voyage or plant seeds for next year’s grain harvest. While bankers have never been confused with philanthropists, their role in well-functioning economies was clearly defined and useful.

Bankers throughout history lived and worked in the real world. Somebody had to inspect the granaries of ancient Egypt to see if they were full or not. The bankers financing a trading fleet had to meet the ship’s captains, inspect the riggings, and make sure there was room in the holds for the treasures of the East. Back then, the money people did whatever they needed to do to see that their money was being safely handled. That’s because there were never too many degrees of separation between a bank’s money and events in the physical world.

That’s changed. For a long time there have been financial transactions that dealt only with other financial transactions, rather than concrete phenomena. But these “abstract” transactions have grown exponentially with the explosion of derivatives and other sophisticated instruments. And it’s easy money, comparatively speaking. You won’t find anybody from Goldman Sachs inspecting the wheelhouse of a four-masted clipper ship bound for Madagascar.

Automated greed machines

It’s natural for anybody, no matter what their level of income, to want the maximum amount of income for the minimum amount of work. This aspect of human nature only becomes a problem when society gives them too much power to indulge that urge. That’s exactly what’s happening today.

Take automated banking - or “algorithmic trading,” as it’s now known. The idea isn’t evil - or if it is, then I have a streak of evil myself. Back in my systems analyst days (the early 1980’s) I went to my bosses with a proposal for something similar, just like hundreds of my contemporaries probably did. I was told that it was too risky, and that automation couldn’t substitute for human judgement. That was before it had become clear that large financial institutions could count on being bailed out if they got into trouble.. That was before the financial sector metastasized to gobble up 40% of the nation’s profits, and before the growth of derivatives and similar transactions made the disconnect between “real world” economic activity and non-reality-based financial dealings so extreme.

Today it’s a different story: Welcome to the Brave New World. “High frequency trading” - automated transactions that buy and sell massive numbers of transactions faster than the human brain can react - now accounts for a reported 73% of all US equity trades. In its report on the “flash crash,” the SEC identified six different types of players: “Intermediaries, High Frequency Traders, Fundamental Buyers, Fundamental Sellers, Noise Traders, and Opportunistic Traders.” Not a rigging inspector among them …

Wall Street Journal article traces the (de)regulatory decisions that helped turn the stock market over to unsupervised computer programs, leading to so-called “dark pools” where trading takes place outside traditional market exchanges.

The house always wins … and the software runs the house

The result is a system of such complexity that nobody really understands how it works. It’s a system where computers, and those who own them, don’t just react to changing prices: They can control them. These ultrafast transactions also provide an ideal way for traders to engage in “front running,” making money by placing trades for themselves a millisecond ahead of those their customers ask them to make. Since the financial market is dominated by a few large players like Goldman Sachs, each of them has enough data to manipulate the market in their own benefit without ever being detected.

(To this day, nobody has explained yet how the four largest banks - Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase - went an entire quarter without losing money in their trading operations for even one day. The chances of that happening by chance in a legitimate system are infinitesimal.)

The mortgage market: Incentives to lie (and be lied to)

Mike Konczal’s introduction to bank mortgage fraud includes a series of charts that nicely illustrate the separation of mortgage-backed securities from real-world economics. His illustration of the transactional layers between a homeowner and a mortgage-backed security shows how remote a trust holding these securities is from the actual banking transaction. What’s more, it shows where the incentives exist to lie and exaggerate the value of the mortgages being sold.

Not only have financial institutions lost the incentive to touch and inspect the physical objects (homes) behind their loans, but many of them have had the incentive not to know if they’re being lied to. That dovetails perfectly with the incentive that sellers had, which was to lie to them.

As with algorithmic trading, all that mattered was to accelerate the buying and selling process. Traders like Goldman Sachs could make money on each trade, while speculating on the overall outcome to make evey more money. In software terms, the process became the output. As a result, the speed with which these mortgages were bought and sold left the actual chain of ownership to many of these homes in question.

Why bankers become robots

Now that many of these houses are in foreclosure, lazy and fraudulent bankers chose to “robotize” themselves by signing documents for court statements without bothering to verify their accuracy. But these documents were affidavits which, as one of Yves Smith’s readers points out, “is a legal document which can substitute for live witness testimony in court … (requiring) that the witness swears to tell the truth, is competent and has personal knowledge of the facts they are testifying about … (and) swears to tell the truth by being placed under oath by the notary.”

These are not “paperwork errors,” as bankers and many compliant journalists have described them. Signing an affidavit when you don’t know it’s true is a crime. In many cases, the banks had to know the claims in these documents couldn’t be proven. In a way, they had no choice but to submit fraudulent documents. Their financial edifice was a house of cards, and without proof of their claims they were forced to add more cards to it. “Robo-signing” was the natural next step, after the “robo-lending” and “robo-betting” that built the house of cards in the first place.

This behavior is the end result of lazy, greedy, non-reality-based banking. It is the ultimate - and probably inevitable - product off a system that has turned banks into factories for the automated production of profits without any connection to the outside world.

The soul of a dead machine

The bankers signing these documents were performing a criminal act. But they were also like Mickey Mouse as the Sorcerer’s Apprentice in Fantasia, running harder and harder to keep up with the creatures they had animated to do their bidding. As for the “flash crash,” we’ve been assured that new “circuit breakers” will prevent future calamities. But we’ve also seen a series of subsequent “mini crashes,” including one plunge in aluminum prices that was described as the “Jumpin’ Jack Flash mini crash" (after the Whoopi Goldberg hacker movie, not the Stones song.)

How did the system get so irrational, so abstract, so voracious and uncontrollable? Another story this week tells us. The US Senate, acting as swiftly and invisibly as a algorithmic trading program, approved legislation that would have created new hurdles for people trying to protect themselves banks from illegal “robo-signed” documents. After a public outcry the President refused to sign the bill, but its very passage showed how a mechanized banking sector can use campaign contributions and political connections as its robotic arms and legs.

While they’ve been convincing us how busy and important they are, bankers have actually been doing less and less real work, with less grounding in reality as the rest of us know it. The Soul in the Machine has died, especially at the largest and most powerful banking institutions - the ones that remain Too Big to Fail and Too Inhuman to Live.

Don’t just repair the machines. Give them a different purpose.

Sure, “circuit breakers” are a good idea, and so are the other reforms many of us focus upon. But while we’re all debating the Basel III accord or the “finreg” bill, it’s easy to lose sight of the bigger picture. Banking has become detached from human experience and turned into a mechanical, self-replicating function, one that exists only to grow and perpetuate itself.

The real solution is to return banking to its original function as a source of capital for real-life human activities. That means encouraging banks to once again become lenders, rather than merely speculators, while cracking down on all forms of human and “mechanical” lawlessness.” Banks can automate themselves, but “cyborg finance” will need to obey Isaac Asimov’s Three Laws of Robotics, with special attention to Law #1: “A robot may not injure a human being or, through inaction, allow a human being to come to harm.”

I don’t disagree with Jon Stokes when he compares the entire stock market to ”a single, very big piece of multithreaded software" (in an essay that will be particularly intriguing to geeks like this writer). The only problem with the analogy is that it doesn’t go far enough. The entire economy is being driven by software now. Software’s only as good as the intentions, knowledge, and wisdom of its programmers. Things aren’t going to change until we take the source code back from the people running things now.

As programmers have always said: Garbage in, garbage out.

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This post was produced as part of the Curbing Wall Street project.


Want To Create Jobs? Break Up The Banks.

by Zach Carter

I attended two big economic gatherings this week, one on financial reform organized by finance blogger Mike Konczal for The Roosevelt Institute, another on the economic outlook, presented by the American Enterprise Institute. Each event was depressing in its own right, but combined, they spell out very big trouble for the U.S. economy. Things are about to get much, much worse for just about everybody, even as big banks deploy their lobbying armies to secure the right to make things even more miserable. Despite all of this bad news, I think we might actually be on the verge of some real economic progress. Let me explain.

The general mood at the Roosevelt Institute forum was one of caution bordering on pessimism. Congress passed Wall Street reform legislation that gives regulators a lot of powers to rein in banks that behave badly. Without intense and sustained pressure from reformers, those powers will not be used, especially if Republicans take control of at least one house of Congress next year, and use it to divert regulatory attention with intentionally meaningless inquiries and investigations. The regulatory battle has just begun, and further legislative action is needed to deal with some of the most pressing problems, particularly too-big-to-fail and the foreclosure mess. With a few exceptions, the thirty or so people who attended the Roosevelt Institute event were the individuals most responsible for getting that legislation through Congress—for them to be sounding the alarm is significant (see Annie Lowrey’s write-up of the conference for more details).

The AEI panel was packed with a cadre of intellectually boring conservatives, notable for the fact that many were actually advocating strong federal action to right the economic ship. But the discussion was unquestionably dominated by the remarks of Nouriel Roubini and Christopher Whalen, two very smart people who don’t work for AEI.

Whalen made the most persuasive case of the group. We haven’t fixed the banking system. Banks aren’t lending, they aren’t trying to lend, and they aren’t going to try until they’ve finished absorbing all the foreclosures embedded in their balance sheets. Left to their own devices, banks will drag that process out as long as possible in order to avoid immediate losses. And the past four years of horrific foreclosure statistics are just the beginning—Whalen thinks we’re, at best, about 25 percent of the way through process.

What’s worse, the mortgage situation is effectively serving as a blockade against economic policy. Any action the government takes is going to be stymied by the fact that millions of American households are struggling to pay of homes that aren’t worth their sticker price.

Fortunately, there’s a solution to that problem. Take over the banks, and write-down the amount that troubled borrowers owe so that they can stay in their homes without pissing away their money to banks that don’t lend. In Whalen’s view, if we want to solve unemployment and get the economy growing again, we have to break up the banks and help troubled homeowners.

That just happens to be my view, as well. Essentially, Whalen—who describes himself as a conservative libertarian—and the progressive braintrusters from the Roosevelt Institute agree about what needs to be done. The critical question is whether there is any political will to do it. And that’s where Nouriel Roubini’s presentation gets scary.

If we don’t fix the banks and don’t fix foreclosures and don’t get serious about fiscal policy to ease unemployment, we’re going to have another financial crisis within a few years. And the next time around, a financial crisis will mean a real fiscal crisis for the U.S.— not just phony fear-mongering by opportunistic traders.

This isn’t the first time Roubini has issued that warning. He said the same basic thing when I interviewed him in May. The trick is, back in May, none of the bank analysts and traders who attended yesterday’s AEI event really took him seriously. Now even those elites believe that the economy is in deep trouble and in need of a major shot in the arm from the federal government.

Perversely, all of this bad news gives me some cause for optimism. Wall Street’s lobbyists are as powerful as ever, but the intellectual debate over the economic path forward is getting more reasonable as the economy deteriorates and people realize that conservative policies and liberal half-measures are simply not working.

That doesn’t mean that securing real reform will be a walk in the park. Both panelists and attendees of the AEI shebang bemoaned the new Basel III capital regime as overly onerous for banks and a barrier to economic recovery—a view which is simply wrong on both points. Given that they’re averse to higher capital requirements for the banking industry—the bare minimum move for greater financial stability—convincing them to break up Bank of America and Wells Fargo will be a major task.

But at least those people aren’t laughing the reformers out of the room anymore. That’s a step in the right direction, and it shows that financial reform isn’t really about any kind of ideological divide between the left and right. It’s about the basic functioning of the economy, and more broadly speaking, of democratic systems. Coupled with the fact that banks have created a legal nightmare for themselves by cutting corners on their mortgage paperwork, there’s quite a bit of room for persuasion.

Of course, if things don’t get fixed prior to another crisis, then we not only have prolonged social misery, we have an unimaginable economic disaster. But hell, we might actually fend it off. Get out there and make a fuss.

Obama Must Reject The Foreclosure Fraud Bailout

by Zach Carter

Unbelievably, the U.S. Senate has approved legislation making it easier for banks to get away with foreclosure fraud. The bill would make it much harder for consumer advocates to show that banks are engaging in fraud, bailing out megabanks who cut corners in order to boost bonuses and slap borrowers with massive, illegal fees. The political fight between big banks and troubled homeowners is on, and President Barack Obama must take a side.

If President Obama signs this legislation into law, he’s sending a clear signal that his administration stands ready to bailout the banks again, whatever the consequences for American homeowners. The new legislation is a clear attempt to provide legal cover to GMAC’s robo-signing scandal, and should be firmly opposed by Obama.

Banks are running into big trouble in foreclosure courts right now because they have kept shoddy mortgage records for years in order to cut costs and boost bonuses. Those records are so bad that banks routinely cannot prove that they have the legal right to foreclose on the homes they attempt to foreclose on. That’s a major problem, because banks have repeatedly demonstrated that they cannot be trusted to figure out their own foreclosures for themselves. They’ve foreclosed on people who haven’t missed any mortgage payments, and even on borrowers who have fully paid off their loans.

So banks and their lawyers have been fabricating documents, forging signatures, and lying to judges in order to go through with foreclosures. All of this is fraud— especially when committed systematically, en masse by large corporations and their clients. It gets even worse when banks try to use fraudulent documents to slap borrowers with thousands of dollars in illegal fees.

The legislation currently awaiting President Obama’s signature tries to bailout banks on one aspect of this documentation problem. Banks push through a lot of bogus documents with the help of corrupt notaries. Notaries are people who witness some legal event, like the signing of a contract, and then testify in print that they saw the contract being signed. It’s one way for courts and lawyers to show that documents have not been forged.

But the major foreclosure fraud scandal at bailout behemoth GMAC that ignited the current furor involved what appear to be totally bogus notaries. One GMAC employee, Jeffrey Stephan, signed thousands of affidavits and had them all notarized in Pennsylvania, even though they were being used in foreclosure cases in many different states. Since different states have different standards for notary approval, these documents should have been unacceptable in the vast majority of state courts.

That made the GMAC scandal illegal in most states. But the GMAC scandal got much worse once Stephan acknowledged that he had never actually examined the affidavits before approving them. All of Pennsylvania’s notaries who signed off on the Stephans Documents were totally unreliable. They were approving fraudulent documents en masse.

So for the Stephens Documents, there are two levels of impropriety—the notaries who didn’t do their homework, and Stephens, who illegally robo-signed hundreds of thousands of documents.

The bill approved by the Senate on September 30 addresses the notary side of things. It says that all states must accept a notary from any other state, and even allows notaries to sign-off on electronic documents. That means notaries don’t have to be present at the signing of documents—somebody can forge a document, scan it into a computer, and ship it off to a notary for approval, replicating the GMAC scam online.

The good news is that the GMAC documents were still illegal even without the false notarizations. The fact that Stephans robo-signed these without examining them was itself an act of fraud (barring other extenuating circumstances). So even if this bill is signed by Obama, wronged homeowners have some hope for redress.

But the legislation would still create a major new hurdle for borrowers seeking relief. If a bogus notarization is deemed legal, it’s much harder to prove that the document itself is just a big fat fraud. Most states only accept notarizations from their own state—this makes perfect sense for mortgages. Nobody from Pennsylvania needs to fly-in to witness my mortgage closing in Virginia—a Virginian notary will do just fine.

By requiring any state’s notarizations to be acceptable nationwide, the bill establishes a new race-to-the-bottom in standards: Whichever state has the weakest notary rules gets all the business. It means all of the crap Pennsylvania notaries on the GMAC robo-signings would be deemed acceptable in any state. Borrowers could still challenge the GMAC robo-signings, but it would be much harder to win the challenge, since an official, authorized notary had stated that the fraudulent robo-signings were in fact legitimate.

The bill is an obvious attempt to bailout banks from the consequences of their own bonus-fueled shortcuts—shortcuts which are being used to slap individual American families with tens of thousands of dollars in illegal fees. President Obama has no business bailing out our biggest banks again—especially on the backs of troubled borrowers those banks are attempting to defraud.

And the future political ramifications are dire. If this bill proves insufficient to bailout GMAC, JPMorgan, Bank of America, and the other major banks implicated in the foreclosure fraud scandal, there will be future legislative efforts to help them. If this bill becomes law, then politicians will have created political cover for the next round of bailouts, which will be characterized as a mere “technical fix” to this attempt.

President Obama must veto this bill. American homeowners deserve to be protected from fraud. The American government shouldn’t be bailing out fraud.

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Ben Bernanke Wants Your Social Security Money

by Richard Eskow

Federal Reserve chair Ben Bernanke took another swing at Social Security and Medicare today, saying yet again that they’ll need to be cut to protect our nation’s financial health. Based on his record, any roadmap Bernanke lays out for the future is worth following … as long as you hold it up to a mirror first so that it’s reversed.

For those of you who prefer equations to words, let me put it this way: BB on SS = BS.

Bernanke’s comments about Social Security yesterday weren’t just wrong. They were spectacularly wrong. They were as wrong as his comments on housing in 2005, when he denied there was a housing bubble and said that a rapid decline in housing prices was “a pretty unlikely possibility.”

They were as wrong as his comments in 2007, when he said “there’s a reasonable possibility that we’ll see some strengthening in the economy sometime during the middle of the new year” and added that “there’s not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy.”

They were as wrong as his comments in April of this year, when he said that “my best guess is that economic growth, supported by the Federal Reserve’s stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year” (a year that’s now half over). He added: “If economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery.”

Let’s hear a big shout from all those small business owners who are having an easier time getting bank loans. And if there any consumers in the house feeling more optimistic, wave your hands in the air like you just don’t care.

Didn’t think so …

You’d think a record like that would inject even the most self-confident prognosticator with a little humility. Yet an unfazed Bernanke insists on issuing pronouncements about matters that are well outside his purview as Fed chair.

Bernanke’s been on an anti-Social Security tear for some time. He took a run at it, and Medicare, in Congressional testimony last December. The seemingly mild-mannered economist even went so far as to remind Congress that it had the freedom to abolish Medicare and Social Security if it so wished: “”(Social Security is) only mandatory until Congress says it’s not mandatory,” he helpfully observed.

Why go after Social Security? Bernanke quoted bank robber Willie Sutton last December for his answer: “”That’s where the money is.”

Now Bernanke’s no Willie Sutton. He’s a decent enough guy, by all reports. They even say he drives a Ford Focus, for crying out loud. That’s hardly a bankrobber’s getaway car. So why is he gunning for Social Security? Ideology, for one thing, along with a massive dose of Washington tribalthink. Yesterday in Providence he once again sounded his klaxon, an alarm that remained deafeningly silent in the runup to the economic collapse, on the issue of entitlements. His stated concern was for future economic problems caused by government debt — although he could neither describe how a crisis might be triggered or draw “a clear bright line” beyond which real troubles might begin.

Never mind. We need to cut entitlements anyway, says Bernanke, and the public will have to “accept some sacrifices.” (Man, am I getting tired of comfortably well-off people asking others for “sacrifice.” To paraphrase the old religious saying: I met a man who thought he was austere because he drove a Ford Focus, until I met a man with no feet …)

Said Bernanke: “Expectations of large and increasing deficits in the future could inhibit current household and business spending — for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending — and thus restrain the recovery.’

You know what’s inhibiting spending and restraining the recovery (besides the fact that folks don’t have jobs, and the Fed’s ignoring its mandate to maintain employment levels)? People keep hearing that their Social Security and Medicare benefits are going to be cut! It’s hard to go out and stimulate the economy with part of your paycheck (if you’re lucky enough to have one) when times are hard and all you hear is that they’ll be taking another piece of your retirement security away.

Having sunk the economic ship, Bernanke and his fellow-thinkers now want to set it afloat again … by puncturing the liferafts.

One part of Bernanke’s assessment isn’t completely off-base, at least at first. He cites two long-term trends, an aging population and health care costs, as major contributors to the deficit. There’s no question that health care costs are eating the economy alive, and the added government cost of Medicare as more people age will place more and more of that cost burden in the government’s hands. So did Bernanke propose a single-payer health care system with the power to reduce the overall cost burden? Or did he explore other ways to restructure the health economy so that it more closely resembles lower-cost European systems?

No. Aside from mass euthanasia for Baby Boomers — an inhumane approach, no matter how sick you are of hearing “Hotel California” — that leaves either massive tax increases or gutting Medicare as the only other options. Guess which way Bernanke’s leaning? While he’s been uncharacteristically Sphinxlike on the specifics, he thought extending tax cuts would be a good way to maintain a “stimulus.” He didn’t exclude tax cuts for the wealthy from that statement, a telling omission that flies in the face of most analyses.

So tax increases, while they receive lip service, aren’t really called for in the Bernanke approach.

While he had no solutions for health care costs, at least his assessment of the problem was fair. But Bernanke’s assessment of Social Security was completely off the mark. When it comes to retirement benefits, he doesn’t have a clue “where the money is.” Yesterday, for example, he raised the alarm about the ratio of younger adults to retirees: “This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase.”

That’s wrong. Really, really wrong. There’s a lot that could be said about the life expectancy issue and worker/retiree ratios, but for now let’s consider this: This wave of coming retirees was equally large when it was contributing to Social Security. That’s one of the reasons why the expected shortfall doesn’t occur until 2037, and why the program would still be able to contribute 75% of benefits after that (and 100% with a minor fix like lifting the payroll cap).

We’ll say it again: Social Security isn’t broken. Say it often enough and you might even stimulate a little more consumer spending.

Bernanke’s honest, whatever his other flaws. He added: “Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers.”

True. Then why fixate on Social Security? First, because the Washington elite finds it easy to stomach the kind of “sacrifice” that benefit cuts would require … of others, especially those who aren’t big campaign donors. Second, because there’s no political will to raise taxes. Third, because nobody wants to address the real issue: health care costs.

Lastly, and most importantly, because there’s a politician/economist orthodoxy on this topic that’s truly strange to observe up close. There’s a shared a set of folkways and beliefs around the subject of Social Security that DC outsiders can’t understand or penetrate. And there’s a ritualized aspect to this austerity talk, one that’s worthy of ethnological study. It’s as if the sacrifice of the elders was an initiation rite for Washington policymakers.

The Beltway Bubble: You can check out any time you like, but you can never leave …

Some headlines today emphasized the fact that Bernanke wants to make these cuts slowly, rather than immediately. Bernanke said the following: “The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes. Indeed, in the past, long lead times have helped make necessary adjustments less painful and thus politically feasible.”

We are not without sympathy, Mr. Bond. We will give you time to put your affairs in order …

Bernanke’s comments crystallize a strain of thinking that unfortunately dominates Beltway thinking right now: We can’t make drastic cuts immediately but we can schedule future cuts now to demonstrate our “seriousness.” This line of thinking says that cuts must be focused on the only area that can be addressed politically: partially repealing the New Deal by reducing Social Security benefits. Presumably it’s hoped that this will create the political will, not for tax increases, but for subsequently cutting Medicare and other New Deal programs.

That sort of thinking begins by assuming that current political realities, established by the Right and compliant Democrats, are fixed and unchanging. But the political equation may be shifting: So far, more than 112 members of the House of Representatives have signed a pledge to block any cuts to Social Security.

Does the deficit need to be addressed? Yes — at the right time, after the economy has returned to health. Is the groupthink Bernanke represents the right way to do it? Absolutely not. Health care costs need to be cut. And if you really want to know “where the money is,” it’s in the pockets of hedge fund managers and other ultra-rich Americans who, according to Beltway lore, will forever remain immune from significant tax hikes. And it’s in the pockets of bankers who are enriching themselves by playing games with low-interest money from the Fed — Ben Bernanke’s Fed — rather than lending it to get the economy moving again.

Sure, Social Security is where some money is. But that’s money that working Americans paid into a trust fund through their payroll taxes, in the expectation that it would be there when they retire. Raiding it would be the act of a bank robber, not a policymaker.

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This post was produced as part of the Strengthen Social Security campaign.