Tuesday, 23 December 2008

Repost from 06/06/08: Reagan and Obama - Reforming the Welfare State

In Britain a national election lasts just three weeks and spending by each candidate is strictly capped. Campaigning between elections is not permitted. Accepting so much as a hotel stay from a lobbyist is a resigning offence. As a result, our news is full of the American campaigns to make up for the deficit in newsworthy political conflict locally. I follow the American election, as does most of the world given the potential for good and ill that proceeds from it. Please indulge me in ruminating on one aspect of the Obama candidacy that intrigues me.

Ronald Reagan came to power on a popular backlash against the welfare state. It appears that Barack Obama may come to power on a similar backlash against the welfare state. The difference is the identity of the welfare claimants.

Ronald Reagan inflamed the public’s righteous anger against a stereotyped ghetto “welfare queen” who raised a brood of illegitimate, proto-criminal children on public funds. Barack Obama will inflame the public’s righteous anger against the corporate welfare queens who have raised a brood of profiteering executives and lobbyists in the generation since. Under Reagan and succeeding presidents, including Clinton, the K Street lobbying machine transformed Washington DC into a government by the lobbyists, of the lobbyists and for the lobbyists. Subsidies, market distortions, tax breaks, earmarks, selective protectionism, regulatory forbearance, cost-plus government contracts, relaxed accounting oversight, criminal and civil immunity, war profiteering and other policy depredations promoted a corporate welfare state beyond the dreams of ghetto avarice.

Ronald Reagan partisans demonised citizens who paid no taxes but claimed public housing, medical care and food stamps as their right. Barack Obama appears prepared to challenge corporations who pay no or nominal taxes (worth clicking through just for the graph) but claim government subsidies, earmarks and tax breaks as their right. Corporations have further stripped the US tax base by outsourcing or relocating jobs abroad, leveraged speculation rather than productive capital investment, and transfer pricing to avoid US tax. If Obama does parallel Reagan, both campaigns will tap a deep well of public anger against the perceived injustice of those who degrade the nation’s future prosperity while claiming too much from its taxpayers.

The bankers of Wall Street now toasting the Fed’s recent largesse from their Hamptons beach houses and yachts are the latest in a long line of American corporate welfare queens who have lobbied for and secured generous federal contracts, subsidies and regulatory forbearance. As noted two weeks ago in Looting the Vaults, more has now been lent to banks by the Fed under opaque new facilities than has been appropriated for the war in Iraq. Both the Fed’s new facilities and the war appropriations arguably benefit corporate welfare queens rather than serve the public interest.

The contrast between McCain and Obama on lobbyists alone is striking. Obama has banned contributions from lobbyists to his presidential campaign, even returning $500 donated by Thurgood Marshall, Jr. Instead, Obama has built a novel fundraising machine that reaches out to millions of working class Americans. McCain’s campaign relies almost entirely on wealthy contributors and lobbyists for finance. He has recently suffered a series of staff purges as high-ranking campaign officials - all of them lobbyists - were linked to large corporations and dictatorial regimes. Obama has committed to opening his fundraising events to the press pool. McCain insists on holding his fundraisers behind closed doors, no press allowed.

Obama as the presumptive Democratic nominee and party leader is preparing to drive the contrast home. Yesterday Obama enforced his opposition to special interest money on the wider party. Obama announced that from now on the Democratic National Committee will return cheques from lobbyists and political action committees, mirroring the Obama presidential campaign. This is a significant initiative in positioning the Democrats as the party to reclaim government from the corporate welfare queens.

The media pundits will use the reliable rhetoric of identity politics, religious strife, class war, patriotism and national security, but they are merely masking the fundamental policy conflict that divides the presidential candidates: Should government serve the people or the corporate elite? When Obama invokes Reagan, as he does very effectively in his elegantly crafted speeches, he is tapping the same vein of public outrage against a government promoting the comfort of those who contribute too little to the nation’s wellbeing.

A recession would clarify the public policy choices. When the economic pie is shrinking, fairness becomes a surer focus. The eyes of the hungry are watchful as the slices served get smaller.

Can Obama successfully challenge the K Street machine? He encourages us to hope, but we should be realistic. The K Street machine will not sit idly by as their unfettered control of the corporate welfare state is threatened by the upstart junior senator from Illinois who would not “wait his turn”.

Ghetto welfare queens were powerless to forestall the legislative and regulatory reforms that cut their subsidies. Corporate welfare queens are very far from powerless. We see new evidence of their power to claim public funds and direct public policy every day as the credit crisis closes off private finance options and squeezes profits. Whether the American public can elect enough reform-minded representatives to successfully challenge the corporate welfare queens may be the political test of this generation and may well determine whether the American economy recovers its powerhouse status.

Also on Thursday, Obama introduced legislation on the floor of the Senate to expose the corporate welfare queens hiding in the federal budget: The Strengthening Transparency and Accountability in Federal Spending Act of 2008 (pdf).

Is JP Morgan a welfare queen for the Fed subsidised Bear Stearns buy-out? Discuss.

Next week I promise to stick to economic and regulatory policy.


Post Script on 22/12/08:
JPM's paltry $37 billion subsidy from the Fed back in the Spring seems like chicken feed compared to the over $5 trillion the corporate welfare queens have looted from the Fed and Treasury since then. Worse, I am now sceptical that Obama will be any different to Bush in terms of restraining taxpayer largesse to corporate elites. He seems to endorse every bailout and stimulus, regardless of merit. We shall just have to wait and see what happens, but so far Obama is looking only marginally more fiscally sound than Bush.


Knute Rife said...

The only real hope I have for Obama (and frankly it's always been my only real hope, and it's been enough to convince me to support him) is that DOJ and the judiciary will be less prostituted. If that happens, everything else (an end to: Guantanamo/Iraq/HATRIOT Act, the war on small farms, the war on the environment, the war on science, the war on non-billionaires) is gravy.

Andrew said...

The real problem is that bankster/Fed cartel basically employs all of the career politicians. Obama is as much an employee of the Fed as Bush, Clinton etc, so I expect we'll see little real change, just some good looking fluff picking on the easy targets of the crisis. So long as someone is publicly pilloried the need to make any real change will be held in check. The mood of the pitchforks is largely controlled by the media, who are in bed with the powers that be, so failing a continued series of bank runs that could drain/freeze the FDIC, things here will tick-tock along just the same.

LookOnTheBrightSide said...

It may be true that Obama did not receive money from lobbyists but the Washington Post says he received quite a bit from the wealthy:


Here is another Post story about Obama using untraceable credit card contributions:


Caro said...

If you think that Obama will fight K Street, you have not been paying attention.

Carolyn Kay

Anonymous said...

you are too idealistic. under obama, unions will ruin capitalism. under obama, US will be in long term economic decline like europe because of the power of unions.

do you really want the US to be one large GM?

Elites are always the better way to run the economy. majority of people are stupid. stupid people should not be running the country.

Anonymous said...

The oh-so-smart elites have put the world economy into a tailspin. Their brilliant notions were never sustainable, and their vaunted superiority was smoke&mirrors disguising ravenous self-interest and vile lies.

Anonymous said...

London Banker, please have a Happy and prosperous New Year. Thanks for your posts, which are always insightful.

On this one, I'm afraid you're wrong: the Washington consensus is that we need to feed the monkey on our backs. Whatever Obama wants to do, he'll be dealing with that consensus.

--Charles of MercuryRising

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Anonymous said...

Where is London Banker?

Brad said...

London Banker, I miss you! Fine critical minds are not in vogue in American discourse... Hopefully you'll weigh in sometime soon...

Hugh said...

I'm not so sure London Banker has a valid role in commenting on this crisis. The phrase "we got you into this mess and we'll get you out of it" springs to mind.

Anonymous said...

I don’t know if you see this email address anymore???

Check this out:


What Mervyn talks about… is exactly what the Debt Servicing Corp, did. I even did specs on how to put it together.

If you have that contact ability… I’d appreciate it if you could send it his way (with a date of submission)

(if you take a look, it essentially models the “bad bank concept” but actually keeps the bad assets in place until the stress (which the DSC would see hard proof of) grows to large.)

Are we at the Critical Mass Point yet???

Debt Servicing Corporation – By Rich Hartmann (written in January 2008)


For the purpose of restoring confidence, order, and value to a besieged and suspect fixed-income/asset-backed-security market I have put together the concepts for a Debt Servicing Corporation. In short, debt will be “registered” for tracking, pricing, and oversight. From the security’s origination, to the complex securities where they are housed, a completely interconnected infrastructure will serve as the foundation for the new age of the fixed income and securitized debt industry.

What Went Wrong

The chicken or the egg? Dot.com or Greenspan put? Housing bubble or Secondary market financial voodoo?

From general consensus, “cheap money” led to an overheated Real Estate Market. That led to sub-prime, Alt-A, loan repackaging, ABS, RMBS, CDO’s, CDS’s, leveraging though collateralization and then ultimately, a fresh new batch of “cheap money” based on that collateralization. …The vicious cycle was born. It was neither chicken, nor egg!

From there, inaccurate corporate valuation models, along with rating agency blunders (which where both largely affected by the complexity of the securities, conflicting interests, and their oversights in risks that fell out of standard deviations) have caused a crisis in this market that needs an immediate return to transparency.

The Concept

Currently, there are custodians, accounting firms, and various other financial institutions that already provide debt servicing, but there is no formidable centralized registry that stands as a base for the various types of fixed income products and their underlying debt.

There are existing parallel structures (such as DTC or Euroclear) that stand as conceptual models, but they do not strip the debt to its core, provide tracking of underlying assets/debt or current amortized valuation. The centralized functionality would provide near instantaneous re-valuation for its holders.

A unique security master file will be the first step in organization. All debt is deposited at this depository, will be stripped down to identify every single underlying piece of debt. (for pre-existing debt a cutoff date for deposit and registry may be determined. See restrictions and deadlines for more details) Each and every security will have a unique identifier. (See security master for more details) All underlying assets will be directly linked to their parent security.

The second an underlying asset goes into default, it immediately reflects that risk on the parent. (parent securities value will be broken down into percentages based on the current performance of the underlying assets.) Likewise, official “bankruptcies” are reflected in the same way, but directly deflate the parent asset accordingly.

The Staff

Having a background in custody operations I have a first person view of how rudimentary custodial servicing is. These current providers of debt servicing commonly poorly paid/green/mid level employees that are not nearly guided enough to handle the complexity of these financial instruments.

I have found that when you compartmentalize service functions in the finance industry, you create market specialists. These are the types of people we need to strip these complex assets down for the purpose of truly servicing them. They would be able to tear through the tranches and provide the holders of the securities a much better picture of what they own. They would be able to take quite a bit of speculation out of the current game.

I believe a specialized staff comprised of experienced custodial workers, former traders, and financial engineers could legitimately register all current debt within a few month span. (a staff of 1,000 could easily input 1,000 securities in 2 weeks time. 1,000 * 1,000 = 1,000,000. I estimate that there are less the 50million of these securities in existence, and that significantly less would actually be registered.)

Based on voice recognition software that I am extremely familiar with, the registration process could move far more swift! (I have direct contact with creators of patented software that already provide this technology to over 25% of US Hospitals. The accuracy is impeccable, along with modernized dictionary database capability. I have seen the product first hand and see this as the future in the securities industry.)

Why would holders of debt want to expose their debt?

How would they benefit, other then instantaneous servicing?

As far as the various holders are concerned, this concept would not be something they want, rather something the NEED. The concept of "no bailouts for unregistered securities" is nearly enough to do the trick. (Holders could choose to keep some registered and some un-registered (much like they do with DTC/Euroclear securities), but only the registered portion would be entitled to federal help.) As it stands now, investors, countries, gov’ts want transparency. Until it exists, this market is purely speculative.

If you’re holding junk and want to register it, but you don’t want the world to know it’s value, you just continue to hold it as opposed to selling it.. (Movement via trade of registered securities would require disclosure to new party) …and for those holding registered junk, well upon sale/realized loss, they qualify for “bailout”. Client confidentiality will exist, but there will be regulatory oversight. Likewise, bailouts are not “guaranteed”. The only “guarantee” is that unregistered debt will NOT be eligible for aid.

In addition, quite a few complex securities are selling below their value. Holders of this good debt would be able to trade it at or around fair market value.

How does the government / regulatory authority benefit from this?

The Government or regulatory authority could get a better picture of market stress, along with a central view of total registered market risk. This could streamline aid that is needed in true emergency conditions as participants would receive the first line of relief. (As clients, they would still maintain some confidentiality rather then face panicked market thrashing.) In addition, the reverse tracking of defaulting debt can be retraced to their sources of inception, for the purpose seeing other potential trends and holding responsible parties accountable.

Where we stand now, monoline insurers can NOT come close to covering the debt they insure. Any true collapse will have to be covered by the Government or regulatory authority regardless. This allows the Government or regulatory authority to circumvent the insolvent insurers and the incompetent ratings agencies and helps return much needed legal certainty to this industry.


mannfm11 said...

I think they put LB in the nuthouse. Obama raised $700 million and he got it all out of street people from the way this article reads. It is clear the money came from hedge funds and Goldman Sachs.

Alan said...

I am rapidly losing faith in the Obama's administration in dealing with the financial crisis. You cannot please everybody all of the time.

Greay blog by the way!

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Magento Themes said...

i don't know about any body else but i'm still waiting for the change. still waiting to get our troops back from Iraq, Afghanistan. let the others live their life there is no reason to stay in Iraq and Afghanistan.

- Aansy stone
Magento Themes