Thursday, May 27, 2010

Once Hopeful Northern Afghanistan is Disillusioned

So, just how many years do you think winning hearts & minds will take>? How can we afford to be in Afghanistan? Look at the counters running to the right. Our deficit? Debt? Our economy and infrastructure needs require us to get this fiscal nation-building off taxpayers' backs.

Wednesday, May 26, 2010

Wall Street's Victory Lap: How they beat gov't by the people

Simon Johnson
MIT Professor and co-author of 13 Bankers
Posted: May 26, 2010 08:56 AM

By now you have probably realized -- correctly -- that "financial reform" has turned into a victory lap for Wall Street.

When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they -- and Congress -- manifestly have failed to do.

Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).

There is only one small chance for any sensible progress remaining -- and you are about to see this crushed in conference by the supporters of unfettered big banks.

Senator Blanche Lincoln's proposal with regard to derivatives has much to commend it. A fiduciary duty for swaps dealers vis-à-vis customers would be entirely appropriate -- in fact long overdue.

Real time price reporting should also help regulators at least begin to understand what is driving market dynamics, for example around the May 6 "flash crash" -- a point that Senator Ted Kaufman has also been making most forcefully.

Legal authority against market manipulation would be greatly strengthened and there would be more protection for whistleblowers. And the kind of transaction that Goldman entered into with Greece -- a swap transaction with the goal of reducing measured debt levels, effectively deceiving current and future investors, would become more clearly illegal. All of this is entirely reasonable and responsible -- and completely opposed by the most powerful people on Wall Street.

Of course, most of the anti-Lincoln fire has been directed against the idea that "swaps desks" would be "pushed out" to subsidiaries -- i.e., the big broker-dealers could still engage in these transactions, but they would need to hold a great deal more capital against their exposures, thus making the activities significantly less profitable.

It is striking that while Treasury argues that increasing capital is the way to go with regard to financial reform, they are adamantly opposed to what would amount to more reasonable capital levels at the heart of the derivatives business.

This is beyond disappointing.

No doubt the administration feels good about what it has "achieved" on financial reform. The public aura of mutual congratulation will last for about three weeks.

But outside of the inner White House-Capitol Hill bubble, it is very hard to find anyone well-informed about the financial system who thinks that anything substantial has changed or that risks will be better managed as we head into the next cycle.

"Business as usual" is the abiding legacy of the Obama administration with regard to the systemic risks posed by this financial system. Treasury and White House let us down repeatedly and completely in the last 18 months on financial sector issues -- just as they did (as decision-making bodies and as some of the same individuals) at the end of the 1990s.

At one point in early 1998, Larry Summers called Brooksley Born -- the last person who really tried to rein in the dangers posed by derivatives (and it was a much lower level of danger then compared with now). Summers reportedly said, "I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II."

We now seem to have come full circle to exactly the same people saying exactly the same things -- no doubt top people in the administration are now calling Senator Lincoln and impressing upon her a version of the same point made by Summers to Born.

The 13 bankers have won, completely. Here we go again.

This post originally appeared at The Baseline Scenario.

Saturday, May 22, 2010

Hooray for Sen. Cantwell. (Be sure to send her thx).

Firedoglake's David Dayen says Lincoln is phony on derivatives reform: "And while Maria Cantwell was trying to make sure that Lincoln's derivatives legislation didn't pass with a massive loophole contained in it, Lincoln happily voted with the majority to move the bill. She wouldn't fight for her own amendment to fix her own signature piece of the legislation. And her post-passage statement makes no mention of this loophole...It's very clear that Cantwell, not Lincoln, was the driving force behind the derivatives title. According to Business Week, Lincoln couldn't even defend her own derivatives proposal at a Democratic caucus meeting, and Cantwell had to step in and bail her out. Lincoln was clearly fed the strong language, when she was planning a much weaker proposal with Saxby Chambliss (R-GA), to project an image of a populist Wall Street reformer for her suddenly tough primary challenge from Bill Halter.

More Than Just an Oil Spill

The warm, soft winds coming in off the gulf have lost their power to soothe. Anxiety is king now — all along the coast.
“You can’t sleep no more; that’s how bad it is,” said John Blanchard, an oyster fisherman whose life has been upended by the monstrous oil spill fouling an enormous swath of the Gulf of Mexico. He shook his head. “My wife and I have got two kids, 2 and 7. We could lose everything we’ve been working all of our lives for.”
I was standing on a gently rocking oyster boat with Mr. Blanchard and several other veteran fishermen who still seemed stunned by the Deepwater Horizon catastrophe. Instead of harvesting oysters, they were out on the water distributing oil retention booms and doing whatever else they could to bolster the coastline’s meager defenses against the oil making its way ominously and relentlessly, like an invading army, toward the area’s delicate and heartbreakingly vulnerable wetlands.
A fisherman named Donny Campo tried to hide his anger with wisecracks, but it didn’t work. “They put us out of work, and now we’re cleaning up their mess,” he said. “Yeah, I’m mad. Some of us have been at this for generations. I’m 46 years old and my son — he’s graduating from high school this week — he was already fishing oysters. There’s a whole way of life at risk here.”
The risks unleashed by the explosion of the Deepwater Horizon oil rig are profound — the latest to be set in motion by the scandalous, rapacious greed of the oil industry and its powerful allies and enablers in government. America is selling its soul for oil.
The vast, sprawling coastal marshes of Louisiana, where the Mississippi River drains into the gulf, are among the finest natural resources to be found anywhere in the world. And they are a positively crucial resource for America. Think shrimp estuaries and bird rookeries and oyster fishing grounds.
These wetlands are one of the nation’s most abundant sources of seafood. And they are indispensable when it comes to the nation’s bird population. Most of the migratory ducks and geese in the United States spend time in the Louisiana wetlands as they travel to and from Latin America.
Think songbirds. Paul Harrison, a specialist on the Mississippi River and its environs at the Environmental Defense Fund, told me that the wetlands are relied on by all 110 neo-tropical migratory songbird species. The migrating season for these beautiful, delicate creatures is right now — as many as 25 million can pass through the area each day.
Already the oil from the nightmare brought to us by BP is making its way into these wetlands, into this natural paradise that belongs not just to the people of Louisiana but to all Americans. Oil is showing up along dozens of miles of the Louisiana coast, including the beaches of Grand Isle, which were ordered closed to the public.
The response of the Obama administration and the general public to this latest outrage at the hands of a giant, politically connected corporation has been embarrassingly tepid. We take our whippings in stride in this country. We behave as though there is nothing we can do about it.
The fact that 11 human beings were killed in the Deepwater Horizon explosion (their bodies never found) has become, at best, an afterthought. BP counts its profits in the billions, and, therefore, it’s important. The 11 men working on the rig were no more important in the current American scheme of things than the oystermen losing their livelihoods along the gulf, or the wildlife doomed to die in an environment fouled by BP’s oil, or the waters that will be left unfit for ordinary families to swim and boat in.
This is the bitter reality of the American present, a period in which big business has cemented an unholy alliance with big government against the interests of ordinary Americans, who, of course, are the great majority of Americans. The great majority of Americans no longer matter.
No one knows how much of BP’s runaway oil will contaminate the gulf coast’s marshes and lakes and bayous and canals, destroying wildlife and fauna — and ruining the hopes and dreams of countless human families. What is known is that whatever oil gets in will be next to impossible to get out. It gets into the soil and the water and the plant life and can’t be scraped off the way you might be able to scrape the oil off of a beach.
It permeates and undermines the ecosystem in much the same way that big corporations have permeated and undermined our political system, with similarly devastating results.

Friday, May 21, 2010

Tired of the Wars Making You Poor? Act here:

From Alan Grayson:

Next week, there is going to be a "debate" in Congress on yet another war funding bill. The bill is supposed to pass without debate, so no one will notice.
What George Orwell wrote about in "1984" has come true. What Eisenhower warned us about concerning the "military-industrial complex" has come true. War is a permanent feature of our societal landscape, so much so that no one notices it anymore.
But we're going to change this. Today, we're introducing a bill called 'The War Is Making You Poor Act'. The purpose of this bill is to connect the dots, and to show people in a real and concrete way the cost of these endless wars. We're working to get co-sponsors in Congress, but, we need citizen co-sponsors as well. Become a citizen cosponsor today at Act Now.
Next year's budget allocates $159,000,000,000 to perpetuate the occupations of Afghanistan and Iraq. That's enough money to eliminate federal income taxes for the first $35,000 of every American's income. Beyond that, leaves over $15 billion to cut the deficit.
And that's what this bill does. It eliminates separate funding for the occupation of Iraq and Afghanistan, and eliminates federal income taxes for everyone's first $35,000 of income ($70,000 for couples). Plus it pays down the national debt. Does that sound good to you? Then please sign our petition in support of this bill, and help us build a movement to end our permanent state of war.
The costs of the war have been rendered invisible. There's no draft. Instead, we take the most vulnerable elements of our population, and give them a choice between unemployment and missile fodder. Government deficits conceal the need to pay in cash for the war.
We put the cost of both guns and butter on our Chinese credit card. In fact, we don't even put these wars on budget; they are still passed using 'emergency supplemental'. A nine-year 'emergency'.
Let's show Congress the cost of these wars is too much for us.
Tell Congress that you like 'The War Is Making You Poor Act'. No, tell Congress you love it.

Read it & Weep. Then get the hell to work.

Simon Johnson

Posted: May 21, 2010 09:21 AM

After nine months of hard fighting, yesterday financial reform came down to this: an amendment, proposed by Senators Jeff Merkley and Carl Levin that would have forced big banks to get rid of their speculative proprietary trading activities (i.e., a relatively strong version of the Volcker Rule.)
The amendment had picked up a great deal of support in recent weeks, partly because of unflagging support from Paul Volcker and partly because of the broader debate around the Brown-Kaufman amendment (which would have forced the biggest 6 banks to become smaller). Brown-Kaufman failed, 33-61, but it demonstrated that a growing number of senators were willing to confront the power of our biggest and worst banks.
Yet, at the end of the day, the Merkley-Levin amendment did not even get a vote. Why?
Partly this was because of procedural maneuvers. Merkley-Levin could only get a vote if another amendment, proposed by Senator Brownback (on exempting auto dealers from new consumer protection rules) got a vote. Late yesterday afternoon, Senator Brownback was persuaded, presumably by his Republican colleagues and by financial lobbyists, to withdraw his amendment.
Of course, Merkley-Levin was only in this awkward position because of an earlier lack of wholehearted support from the Democratic leadership -- and from the White House. Again, the long reach of Wall Street was at work.
But the important point here is quite different. If Merkley-Levin did not have the votes, it was in the interest of the megabanks to have it come to the floor and be defeated. That would have been a clear victory for the status quo.
But Merkley-Levin had momentum and could potentially have passed -- reflecting a big change of opinion within the Senate (and more broadly around the country). The big banks were forced into overdrive to stop it.
The Volcker Rule, in its weaker Dodd bill form ("do a study and think about implementing"), perhaps will survive the upcoming House-Senate conference -- although, because this process likely will not be televised, all kinds of bad things may happen behind closed doors. Regulators may also take the Volcker Rule more seriously -- but the most probable outcome is that the Fed and other officials will get a great deal of discretion regarding how to implement the principles, and they will completely fudge the issue.
Most importantly, everyone who wants to rein in the largest banks now has a much clearer idea of what to push for, what to campaign on, and for what purpose to raise money. This is the completely reasonable and responsible ask:
  1. The Volcker Rule, as specifically proposed in the Merkley-Levin amendment

  2. Constraints on the size and leverage of our largest banks, as proposed by the Brown-Kaufman amendment

When the mainstream consensus shifts in favor of these measures, or their functional equivalents, we will have finally begun the long process of reining in the dangerous economic and political power of our largest banks.
This post was originally published on The Baseline Scenario.

Wednesday, May 19, 2010

Finally, the Republicans Come Out to Fight: Where Is the President?

Simon Johnson

Posted: May 19, 2010 10:22 AM

The Senate Republicans are refusing to allow a vote on the Merkley-Levin amendment, which would put a meaningful version of the Volcker Rule into law (splitting off proprietary trading from major banks).
After weeks of dancing around, the Democrats finally have a signature issue on which to fight. Senator Carl Levin frames it exactly right: "It's a sad day when the power of Wall Street can overwhelm the power of the American people in the US Senate."
This is the opportunity that White House claims it has long sought -- to have an intense fight on a financial reform issue that everyone can understand. Paul Volcker made his determination long ago: the big banks are too big and must, in this fashion, be broken up. Senators Merkley and Levin negotiated the precise language of their amendment in good faith. The Republicans have made their answer clear: No way.
Time for President Obama to make the call.
Only the president can break through the daily logjam of information. Only the president can define the issues in the simple, powerful and convincing terms that people can grasp. Only the president can insist -- this is a matter of urgent national priority.
The economic analysis (Volcker), political back-story (Brown-Kaufman and all that involved), and just the right rhetoric are already in place:
"We got into this financial crisis because Wall Street set the rules to benefit itself, and now with an assist from Senate Republicans, they're doing it again," said Merkley. "Obviously the lobbyists are afraid they'll lose this vote, and in typical Wall Street fashion their solution, with help from Senate Republicans, is to rig the result. Main Street is being shut out of this debate. It is time to stop letting Wall Street call the shots -- let this amendment have a vote."

"The long arm of Wall Street reached directly into the Senate chamber today," Levin said. "By blocking us from even debating this amendment, the Republican leadership is carrying Wall Street's water and standing in the way of real reform."
This is a defining issue for the president. Either he takes up the Volcker Rule -- proposed by his administration, to great fanfare (and some skepticism) in January. Or he rolls over -- admitting that Wall Street has won.
We know where Goldman Sachs and its fellow travellers stand on this issue -- adamantly and publicly opposed. And we pointed out here in February which way the Republicans were likely to go.
"But if you don't have the votes in the Senate, what can you do?" This one is easy. You stop the clock and put everything else on hold. The president calls the American people to order and asks them to take a long hard look at the issues and the corporate interests at stake.
And then you start to pound away. Day in and day out, the president and other leading members of his administration need to come out swinging with relentless pursuit of substance on TV talk shows and prime time speeches -- demanding an up-or-down vote on Merkley-Levin.
Admittedly, this may be awkward for leading officials, who have been rather accommodative to financial interests over the past 15 months or so. That's unfortunate (for them), but now entirely water under the bridge. All is forgiven to the policymaker who finally gets it and changes course in the right direction.
Don't move on. Pick up the baseball bat that Paul Volcker has given you. Either that or go down to the most embarrassing, humiliating, and memorable defeat in the history of Wall Street-Washington confrontations. It's the president's call.
This post was originally published on The Baseline Scenario

Monday, May 17, 2010

BP Stands for Bad Petroleum

Robert Reich

Saturday the White House warned BP that it expects the oil giant to pay all damages associated with the disastrous oil leak into the Gulf of Mexico, even if the costs exceed the $75 million liability cap under federal law. BP responded Sunday saying its public statements are "absolutely consistent" with the administration's request.
When you hear dueling public statements like these, watch your wallets. You can safely assume BP's lawyers are already at work to ensure that the firm pays not a cent more than $75 million -- not to taxpayers bearing cleanup costs, not to consumers whose gas bills will rise, not to businesses along the coasts that will lose a fortune. And BP won't pay more unless or until there's a law requiring it to.
BP has been making public statements about its supposed corporate social responsibility for as many years as it's behaved irresponsibly. It's the poster child for PR masquerading as CSR.
It was just eight years ago British Petroleum shortened its name to BP and began promoting itself as the environmentally-friendly oil company with a vision that went "Beyond Petroleum" to embrace solar cells and wind power. In a $200 million advertising campaign organized by Ogilvy & Mather, BP transformed its corporate brand insignia from a shield to the more wholesomely natural green, yellow, and white sunburst. BP's chief executive, Lord John Browne, issued warnings about global warming and said the company had a social responsibility to take action.
Notwithstanding its new image, BP continues to be one of the largest producers of crude oil on the planet. Although it committed itself to devoting $8 billion to alternative fuels over ten years, the sum was tiny compared to BP's annual profits from oil that have averaged over $20 billion and its annual capital expenditures of over $14 billion.
Nor has the firm distinguished itself by its commitment to the law. Several years before the Gulf oil rig explosion, an explosion at BP's Texas City plant killed fifteen workers and triggered a $21.3-million fine from safety regulators.
In March 2005, corrosion of BP's pipes and equipment on the North Slope in Alaska led to a spill of 270,000 gallons of oil, the largest spill ever recorded in that fragile territory. Critics said BP wasn't spending enough money to prevent such spills. Only in 2006, after it was forced by the U.S. government to inspect all its pipelines with an automated device that crawled through the pipes, did the company discover so much additional corrosion and leakage it had to shut down a sixteen-mile feeder line to the Trans Alaska Pipeline.
In August 2006, Congress demanded BP executives appear in person to be held accountable. At the ensuing hearing, members from both sides of the aisle accused BP executives of crass negligence. Representative Joe Barton (R-Texas), chairman of the oversight committee, excoriated them: "If one of the world's most successful oil companies can't do simple basic maintenance needed to keep the Prudhoe Bay field operating safely without interruption, maybe it shouldn't operate the pipeline." Barton went on: "I am even more concerned about BP's corporate culture of seeming indifference to safety and environmental issues. And this comes from a company that prides itself in their ads on protecting the environment. Shame, shame, shame."
Committee members then grilled the BP executives about why the company had failed for as long as fourteen years to do the sort of internal inspection and maintenance on its pipelines that were performed every two weeks on the Trans-Alaska Pipeline, into which the BP pipelines feed. The BP executives solemnly promised to be more careful in the future.
But neither the members of Congress nor the BP executives mentioned the most pertinent fact: Frequent inspections of the Trans-Alaska Pipeline were required by law but no similar inspections were required on feeder pipelines such as those owned by BP. If the panel was serious about getting BP to change its ways it would have introduced legislation to close this loophole. The panel did not introduce such legislation because the hearings were for show. Barton and his colleagues on both sides of the aisle had pushed many bills favorable to the oil industry and weren't about to impose any burdens on it.
Ad campaigns about corporate social responsibility are cheap. So are public scoldings by politicians about a corporation's irresponsibility. Watch not what they say but what they do. The only way BP will pay more than $75 million -- and the costs of the spill will easily top that -- is if they're required by law to do so.
Cross-posted from

Wednesday, May 05, 2010

Swill, Baby, Swill: Sex, Lies and Oil Spills

Robert F. Kennedy Jr.

A common spin in the right wing coverage of BP's oil spill is a gleeful suggestion that the gulf blowout is Obama's Katrina.
In truth, culpability for the disaster can more accurately be laid at the Bush Administration's doorstep. For eight years, George Bush's presidency infected the oil industry's oversight agency, the Minerals Management Service, with a septic culture of corruption from which it has yet to recover. Oil patch alumnae in the White House encouraged agency personnel to engineer weakened safeguards that directly contributed to the gulf catastrophe.

The absence of an acoustical regulator -- a remotely triggered dead man's switch that might have closed off BP's gushing pipe at its sea floor wellhead when the manual switch failed (the fire and explosion on the drilling platform may have prevented the dying workers from pushing the button) -- was directly attributable to industry pandering by the Bush team. Acoustic switches are required by law for all offshore rigs off Brazil and in Norway's North Sea operations. BP uses the device voluntarily in Britain's North Sea and elsewhere in the world as do other big players like Holland's Shell and France's Total. In 2000, the Minerals Management Service while weighing a comprehensive rulemaking for drilling safety, deemed the acoustic mechanism "essential" and proposed to mandate the mechanism on all gulf rigs.
Then, between January and March of 2001, incoming Vice President Dick Cheney conducted secret meetings with over 100 oil industry officials allowing them to draft a wish list of industry demands to be implemented by the oil friendly administration. Cheney also used that time to re-staff the Minerals Management Service with oil industry toadies including a cabal of his Wyoming carbon cronies. In 2003, newly reconstituted Minerals Management Service genuflected to the oil cartel by recommending the removal of the proposed requirement for acoustic switches. The Minerals Management Service's 2003 study concluded that "acoustic systems are not recommended because they tend to be very costly."
The acoustic trigger costs about $500,000. Estimated costs of the oil spill to Gulf Coast residents are now upward of $14 billion to gulf state communities. Bush's 2005 energy bill officially dropped the requirement for the acoustic switch off devices explaining that the industry's existing practices are "failsafe."
Bending over for Big Oil became the ideological posture of the Bush White House, and, under Cheney's cruel whip, the practice trickled down through the regulatory bureaucracy. The Minerals Management Service -- the poster child for "agency capture phenomena" -- hopped into bed with the regulated industry -- literally. A 2009 investigation of the Minerals Management Service found that agency officials "frequently consumed alcohol at industry functions, had used cocaine and marijuana and had sexual relationships with oil and gas company representatives." Three reports by the Inspector General describe an open bazaar of payoffs, bribes and kickbacks spiced with scenes of female employees providing sexual favors to industry big wigs who in turn rewarded government workers with illegal contracts. In one incident reported by the Inspector General, agency employees got so drunk at a Shell sponsored golf event that they could not drive home and had to sleep in hotel rooms paid for by Shell.
Pervasive intercourse also characterized their financial relations. Industry lobbyists underwrote lavish parties and showered agency employees with illegal gifts, and lucrative personal contracts and treated them to regular golf, ski, and paintball outings, trips to rock concerts and professional sports events. The Inspector General characterized this orgy of wheeling and dealing as "a culture of ethical failure" that cost taxpayers millions in royalty fees and produced reams of bad science to justify unregulated deep water drilling in the gulf.
It is charitable to characterize the ethics of these government officials as "elastic." They seemed not to have existed at all. The Inspector General reported with some astonishment that Bush's crew at the MMS, when confronted with the laundry list of bribery, public theft and sexual and financial favors to and from industry "showed no remorse."
BP's confidence in lax government oversight by a badly compromised agency still staffed with Bush era holdovers may have prompted the company to take two other dangerous shortcuts. First, BP failed to install a deep hole shut off valve -- another fail-safe that might have averted the spill. And second, BP's reported willingness to violate the law by drilling to depths of 22,000-25,000 feet instead of the 18,000 feet maximum depth allowed by its permit may have contributed to this catastrophe.
And wherever there's a national tragedy involving oil, Cheney's offshore company Halliburton is never far afield. In fact, stay tuned; Halliburton may emerge as the primary villain in this caper. The blow out occurred shortly after Halliburton completed an operation to reinforce drilling hole casing with concrete slurry. This is a sensitive process that, according to government experts, can trigger catastrophic blowouts if not performed attentively. According to the Minerals Management Service, 18 of 39 blowouts in the Gulf of Mexico since 1996 were attributed to poor workmanship injecting cement around the metal pipe. Halliburton is currently under investigation by the Australian government for a massive blowout in the Timor Sea in 2005 caused by its faulty application of concrete casing.
The Obama administration has assigned nearly 2,000 federal personnel from the Coast Guard, the Corps of Engineers, the Department of Defense, the Department of Commerce, EPA, NOAA and Department of Interior to deal with the spill -- an impressive response. Still, the current White House is not without fault -- the government should, for example, be requiring a far greater deployment of absorbent booms. But the real culprit in this villainy is a negligent industry, the festering ethics of the Bush Administration and poor oversight by an agency corrupted by eight years of grotesque subservience to Big Oil.

Tuesday, May 04, 2010

Life in the Age of "Much Worse Than We Thought It Would Be"

Arianna Huffington

Posted: May 3, 2010 06:54 PM

What was just a troubling oil spill a week ago is now,according to Interior Secretary Salazar, "a very grave scenario," and "potentially... very catastrophic."
In other words, it's much worse that we thought it would be. Has there been a crisis in the last decade that turned out to be better than we thought it was going to be? We are still fighting two wars that were going to be cakewalks, but have now lasted nine years and seven years -- much worse than we thought it would be.

Katrina looked like it could be bad but -- even though there were plenty of people warning about a Category 5 storm breaching the levees -- the devastation ultimately was much worse than we thought it would be.
Same with the housing bubble that was fueled by the Wall Street casino. Even though we now know that people in the Fed were warning of big trouble ahead as early as 2004, the warnings were ignored -- and when the bubble burst in 2008, it was much worse than we thought it would be.
The foreclosure crisis hit hard in 2009. But the government promised to protect homeowners... so when the first quarter of 2010 brought the highest number of foreclosures since they began keeping records, the scope of the calamity was much worse than we thought it would be.
In October 2009, the unemployment rate hit 10.2 percent, a 26-year high. But the $787 billion stimulus package was going to bring that down. It has, but not by much. Turns out, the unemployment crisis is also much worse than we thought it would be.
Perhaps we should start calling this the Age of "Much Worse Than We Thought It Would Be."
Our shortsighted thinking is still on full display in the Gulf of Mexico, even as the enormity of the crisis becomes undeniable. In a speech on Sunday in Louisiana, President Obama called it a "potentially unprecedented environmental disaster," and said the spill "is unique and unprecedented." And in downplaying BP's responsibility for the spill, a spokesman for the company also called it "unprecedented," saying "it's something that we have not experienced before."
That's the nature of unprecedented things -- they've never happened -- until they happen. But just because something is unprecedented doesn't mean it's unpredictable or that we're unable to plan for it. We can't see the future, but we can prepare for it.
In practically every sector of our society, the old order is exhausted. But we seem incapable of making fundamental changes without the loaded gun of a full-blown crisis pointed at our heads. For example, the financial crisis -- and what it has exposed about the behavior of Wall Street -- has caused us to rethink the relationship between Wall Street and rest of our economy. It's obvious the old way of doing things is no longer viable. But, absent the sense that everything is about to collapse, we are dragging our feet on deciding what will replace it.
And there are some other "unprecedented," "unique" -- and potentially catastrophic -- problems headed our way if we continue to accept the old order's lack of imagination about what is possible. I'm thinking, first and foremost, of our debt problem.
And no, I'm not joining the forces of those who use the debt explosion as a backdoor way of cutting or killing Social Security or Medicare. But ceding this issue to such retro-thinkers makes it that much harder to seriously tackle the problem.
America is like a patient in danger of suffering a massive heart attack. We may be able to postpone things with a bit of outpatient surgery, but we won't be able to avoid it without some serious lifestyle changes. The economic coronary isn't quite here yet, but it's on the way. And when it hits, it will, of course, be "unprecedented" and "unique." But not unforeseen -- let alone unforeseeable. Here are just a couple of the symptoms of big time trouble ahead:
  • By 2020, interest on the debt alone will reach $900 billion per year.
  • That same year, five segments of government spending -- Medicare, Medicaid, Social Security, net interest and defense spending -- will account for an estimated 77 percent of all government expenditures. All other federal spending will have to come out of the remaining 23 percent.

And a recent report by the Bank of International Settlements makes it clear that this is a worldwide phenomenon. Financial advisor John Mauldin distills the report's bottom line: "Everyone and their brother intuitively knows that the current government fiscal deficits in the developed world are unsustainable."
The numbers in the Bank of International Settlements study make this clear. For instance, in Greece, the problem child of the moment everyone is looking at with horror, government debt could reach 130 percent of GDP next year. But Greece is far from alone. In the UK, it will hit 94 percent, and continue to go up 10 percent per year. And in the U.S., we could approach nearly 100 percent. As a Greek American, I'm all in favor of the two nations co-mingling, but sporting matching crippling debt is not what I had in mind.
"While fiscal problems need to be tackled soon," says the Bank of International Settlements report, "how to do that without seriously jeopardizing the incipient economic recovery is the current key challenge for fiscal authorities."
Exactly. And those fiscal authorities also need to remember that there is more to tackling the deficit crisis than just cutting spending. Rather, we need to think bigger -- we need to re-orient our economy so that it's once more an engine for production and productivity, not a vehicle for gambling and speculation. As Mauldin says of the old -- and still dominant -- order on Wall Street: "Let's be very clear. This was purely gambling. No money was invested in mortgages or any productive enterprise. This was one group betting against another, and a LOT of these deals were done all over New York and London."
Mauldin goes on to question why large institutional investors were even gambling on things like synthetic CDOs in the first place: "This is an investment that had no productive capital at work and no remotely socially redeeming value. It did not go to fund mortgages or buy capital equipment or build malls or office buildings."
So instead of limiting the deficit debate to talk of cutting entitlements, how about also having a discussion about moving to an economy that focuses on investing in small businesses and communities, and puts a premium on education and technology rather than on exotic financial instruments.
Last year, the Center for American Progress published its deficit reduction plan, entitled "A Path to Balance," by Michael Ettlinger, Michael Linden, and Lauren Bazel. "Large deficits can reduce national savings, push up interest rates, spark inflation, and adversely affect exchange rates," the authors wrote while warning that they "also provide fodder for those who wish to block new initiatives and scale back existing programs."
The plan calls for a "sloping path" to deficit reduction, as opposed to a "dive off a precipice," and has a goal of a fully balanced budget by 2020, with benchmarks all along the way.
A few months before its plan was released, CAP hosted an event called "Progressives and the National Debt: Consequences and Solutions." Princeton economist Alan Blinder noted that "in 1980 [policymakers] knew about the year 2010 but that was really far away." Well, it's not anymore, and given that much of our deficit problem is about huge numbers of workers born decades ago now hitting retirement age, Blinder quipped that: "the long run is now the short run and they're combining."
The needs of the past and the demands of the present exert a powerful pull on our attention while the future doesn't have many advocates -- it's always something we can get to later. And there was a time when we could get away with pushing our problems down the road, secure that our reserves would always bail us out. And there was a strong safety net to catch those who fell through the cracks. Well, those reserves are gone now and the safety net is frayed and full of holes.
So before the big deficit coronary hits, and is exploited by those who've been itching to slash entitlements ever since FDR and LBJ signed them into law, let's widen the discussion, and think bigger.
For a change, let's imagine a crisis that is worse than we think it will be, and take the necessary steps to avoid it. If we don't, we'll find ourselves facing another "unprecedented" disaster.