For Obama, It’s OK To “Stray The Course.”

By Lon S. Cohen

For better or worse, the President campaigned on some really great platforms the basis of which was “Change we can believe in.” But what he didn’t do was change along with the situation. He forgot that change involves being fluid, changing course when necessary.

The biggest problem that Obama is facing: Despite the woes in the economy, he still tried to deliver campaign promises from more than a year ago. This made his administration appear deaf to the problems of the American people. Sure, when you’re out of work, you worry about healthcare but you worry more about feeding your family and losing your home. It’s understandable. It’s hard to get the public to concentrate on American Idol AND John & Kate Plus Eight at the same time much less Healthcare Reform and Economic Stimulus and Banking Reform and Guantanamo and TARP when all they want are jobs.

Thus you get the Tea Party. A populist group with one agenda: Me First. I’m in no way a Tea Party supporter but I identify with their angst. I wanted change in Washington D.C. just as much as the next guy but Obama was supposed to also be able to shift gears faster and with more grace than our former commander in chief whose increasingly comic refrain was “stay the course” even when the course we were staying was leading us off a cliff.

I voted for a man who was intelligent, insightful, and darn it, well spoken. Okay I went for the guy who wooed me with poetry after eight years of “duh?” But I also thought I was getting someone whose lack of wisdom and experience was made up for in resilience and intuition. Perhaps I was wrong. Maybe I expected too much. But, I also suspect that’s not true.

Memo to Obama: It’s no sin to put aside your promises to the American people and wholly concentrate on the task at hand, the elephant in the room. Don’t ignore the fact that people want action from you. You don’t have to back up every single campaign promise. We know it was not just rhetoric. We know doing things in Washington D.C. is hard and takes toughness and finesse. Just please show that you’re listening.

Make your presidency marked by a new strategy. When the situation calls for it, “Stray the course.”

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Banks Should Be In The Business Of Banking

By Lon S. Cohen

And the government should be in the business of governing. Seems like a simple concept, no? Recently, the blending of government and banking has become troublesome. While the government was right on TARP and other emergency actions since 2008, when banks started falling like dominoes, it hasn’t budged an inch on much needed regulatory reform. The banks have regained strength, become more powerful and profitable than ever, yet here is Congress still dilly-dallying over the details. Before long it will be two full years since Lehman Brothers failed and yet, we’re still going to be no closer to figuring out how the government should regulate banks. Putting the old partisan politics aside seems prudent before the next crisis is upon our heads. It benefits both parties to stop haggling and fighting in public and make something functionally beneficial for America again.

Deregulation and soft policies toward banking (and the shadow banking institutions) resulted in an economic disaster unseen in generations. Can we be the generation to rise up to the challenge and that shepherd financial reform through legislation to make a more sensible, better functioning and modernized economy? It’s clear that less regulation is not the answer. It’s also clear that modern markets are no better at self-correcting than any in the past. In fact it’s the decoupling of regulation that worked since the Great Depression era from the so-called modern banking system that seems to have wrecked our economy.

Hubris played a big part. Our times have changed, they hailed. The markets are smarter now than they have ever been. Speed, technology, innovation and a massive user base make for the sturdiest financial system in history. That crock of bull went out the window around the time Mr. McCain made the statement that the fundamentals of the economy are still strong. It seems that speed, technology, innovation and the user base are what caused the economy to tank, along with some shady, unregulated practices going on all the way through the supply chain from the half blind ratings agencies to the zero percent down, no income, no asset check home buyer who should never have been home shopping except for the buzz about how everyone should, could and would own their own home.

We need regulation reform. We need to get the banks back into the business of banking. Some banks seem to think they are only in the business of making money for their top executives. Bonus pay is a big issue right now, but it’s a distraction because when bonus pay is a long forgotten blip in our collective cultural history, we’ll have a dysfunctional banking system. The banks should serve the needs of the community while making a profit. Banks have had it backwards screwing depositors, small businesses and borrowers while protecting the big bonuses and big profits. Any regulatory reform needs to address this. Products and fees should be tailored to the real needs of the marketplace not to the profitability of the bank.

The government has become a partner in the banking industry. It needs to get out of the banking business. While even critics have to applaud how well most of the banking rescue programs worked and how much less money it will cost the American taxpayers than initially assumed, it’s high time that the government strategize an end game. One of the biggest criticisms encountered in the Iraq War was that there was never a clear exit strategy. Time for the current administration to step up and define one for all the knots it tied itself up into with the banks. We need government regulation. It is a necessary evil. No company likes the government meddling into its affairs. We Americans love our ideal of a free market but anyone with an ounce of historical knowledge can remember that people drive markets and people are imperfect and greedy. The government must help to set controls on the market or else highly complex derivatives explode and shake the foundations of those supposedly self correcting markets. We see how well that worked out. Lehman Brothers failed and it set everything into a tailspin. We needed the government to prop up the economy but only because regulators took their eye off the ball.

Congress needs to hammer out a comprehensive reform bill before the two-year anniversary mark of the Lehman collapse so that we can make the unfortunate words of John McCain true when he said that the fundamentals of the economy are strong.

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Tea Party Queen For President. Off with their heads! (Or are they out of their minds?)

I think that the Tea Party might be getting a little ahead of itself. If they want to be taken seriously I think they need to pick a better spokesperson. Sarah Palin left the duties of her office as Governor of Alaska early because she couldn't take the pressure. Of being Governor of Alaska? I love all our states but please girl, it's Alaska. My home town is more populated that your state?

The Tea Party is annoying but they have the ear of the nation right now (and the media who thrive on conflict alone and not mere annoyances like say, facts and truths.) My goodness, the woman answered "All of them" when asked what magazines she read, then claimed she was blindsided by the questioning. She sat in a chair across from Fox News bad boy, Glenn Beck who called "bull crap" when she couldn't name a favorite Founding Father.

I really feel bad because I like to support any cause that the people feel is important or at least give them consideration. I don't want to see the Tea Party become a bigger joke than they already are. If they keep propping up people like Sarah Palin though they will just prove what the everyone is already saying about the Republican Party - that it's a negative, no ideas party that is fiscally irresponsible and supports government programs that only advance agendas that are no good for average Americans (even dangerous to our security), see: Iraq War, Hurricane Katrina response, Tax cuts for the wealthy and out of control spending with no way to make up the short fall.

The Tea Party is a veiled attempt to hide the Republican agenda behind a so-called populist movement with a new, catchy and patriotic sounding brand name. I have more faith in the American people than to think they'll be fooled by a shiftless, self interest group who see their future in a train wreck of a political candidate. I agree with Eugene Robinson's assessment of Palin in that the more she is out there the more she comes off as smarmy and elitist.

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Political Observations And Implications of Unemployment Numbers.

From government Labor Statistics.

In January 2008 the unemployment rate was 5% and by January 2009 the unemployment rate shot to 7.7%, a 2.7% percent difference with a steady increase.

In January 2009 the unemployment rate was 7.7% and by January 2010 the unemployment rate was at 9.7%, a 2% difference after peaking in October 2009 at 10.1%.

For one year in 2008 the unemployment rate increased by almost 3% and nothing was done about it either in Democratically controlled Congress or in the Republican White House, except a bank bailout (TARP). In 2009 the crisis was obvious and the White House proposed and passed a stimulus bill, adjusted TARP to bail out the automakers, and is now refocusing the TARP again to help community banks and Credit Unions to lend to small businesses as well as trying to formulate a jobs stimulus bill. The budget has increased but it's built upon one that GWB left us with after financing two huge wars and a Medicare prescription subsidy plan (Bush's foray into health care reform) without paying for them.

A job bounce would also be helpful to the current administration’s cohorts in Congress come November midterm elections. it will be interesting to see what difference if any positive or negative these things have on the numbers.

If a president is measured only by fortunate or unfortunate events during his administration and not on what he really, truly does then this should bode well for Obama. If the Republicans can twist meaning out of numbers then I expect the Democrats should be granted the same liberties. (Interesting that the Republicans are more, ahem, liberal with their facts and with their absolution of wayward Congressmen than the supposedly more liberal Democrats!)

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Feds Plan Strategy To Curb Credit

Sure, it seems illogical now when we're struggling to get out from under the worst economic recession since the Great Depression, people are still complaining that the banks aren't lending and unemployment is still bumping up against 10% but the Federal Reserve is looking to a time when it’s needed to stall inflation and back off of assistance.

For better or worse, we're probably stuck with the Fed as is. No major upheavals. No restructuring. No "super regulator" to take over the reigns. But what they are doing now is kind of smart.

They're peppering the dialogue with the idea that there will be a time in the not too distant future when the will have to pull the levers as we rise above this dismal economy. They want the markets and the people to be prepared for some of the things they may be doing, though they don't want to sound too predictable.

Read about it in the Wall Street Journal here.

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Employment Numbers.

In January our unemployment rate improved (9.7%) according to the U.S. Department of Labor. The underemployment rate (http://en.wikipedia.org/wiki/Underemployment) (16.5%) also saw a little improvement. We also see that while the U.S. continues to shed jobs (-20,000 last month) the curve is going in the right direction – toward a positive number.

In August, 2009 the unemployment rate was at 9.7%. By October we hit 10.1%. In January we nudged down to 9.7% again. (November and December, 2009 were flat at 10% even.)

In November, 2009 we added 64,000 jobs the first time we added jobs since December, 2007. In January, 2009 we lost 779,000 jobs! Big number. But since then, that number has steadily if uneasily, declined month over month.

Troubling statistics in the report showed that Blacks (16.5%) and Hispanics (12.6%) were far above the average in the unemployment rate. Meanwhile jobless rate for teens remains very high at 26.4%.

It seems that the slow recovery has started but we have a long way to go to replace all those jobs we lost in the past two years or so. The upside is that when things turn around, they should turn around quick since historically a big economic dip seems to be followed by a big bounce. If that bounce is sustainable is to be determined.

The administration needs to take steps to insure the economy against the unpredictable. Bad news can throw it off like a sharp increase in energy prices or a major terrorist attack. By encouraging community banks to lend and by providing some jobs assistance to small businesses the administration can go a long way towards helping the recovery along. Remember that income is taxable so the more people who work, the less they rely on government assistance (like unemployment benefits, food stamps, etc.) and the more the government can tax their wages, thereby increasing income and helping to offset the big deficit.

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Goldman & AIG.

Insight into the machinations that destroyed the economy from the biggest players, one that lost (AIG) & the other, that won (Goldman) in the New York Times. Testy Conflict With Goldman Helped Push A.I.G. to Edge.

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Taming The Beast of Securitization.

We need some sort of secondary market for mortgage-backed securities that is not one of the many government entities like FHA or Fannie and Freddie. (Notice my lack of the use of the word "sponsored" in there when referring to Fannie and Freddie since they are not in fact GSEs (Government Sponsored Entities) anymore but full on government organizations.) The market for home ownership is too big and for qualified borrowers, the upside to owning your home in America is still very good for both the individual and the community.

In this article titled “Seeking a Safer Way to Securitization” in the New York Times one proposal is to make the bank responsible by requiring a little skin in the game. “Skin in the game” sounds like a good strategy to me. My old manager in my bank used to talk about that all the time for borrowers. If the borrower had no skin in the game what would prevent them from walking away from the mortgage and leaving us holding the bag? Turns out, nothing. Too many foreclosures tell that story.

So if having the borrowers put some skin in the game (with minimum down payments, mortgage insurance and other strategies) might it work for bankers too? I'd expect the answer is yes. Of course this is not the entire solution but it’s a step in the right direction. The article also touches on some other ways regulators could make private securitization of mortgages work.

One thing is clear, we need a good solution that has long term stability or the housing market could be stuck for a long, long time and bank lending in other areas will be stuck equally as long. I think that the market made some terrible decisions based on return without realizing or caring about the risk. (Or they hedged risk with insurance against securities.) We need a combination of strategies on the bank side, client side and regulatory side that will work in tangent to prevent this type of economic collapse based on one silo of the financial market.

Mortgage securitization started off in the early days with the best of intentions but became a monstrosity over the decades. We need to tame the beast so it can be useful once again.

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Quarterly TARP Report Shows Little Done To Reform Bank Behavior That Caused Economy To Crumble.

In a Quarterly Report to Congress dated January 30, 2010, the Office of the Special Inspector General for the Troubled Asset Relief Program had a chilling conclusion about banking reform within the executive summary. It said that it was “hard to see how any of the fundamental problems in the system have been addressed to date.”

Four areas of concern were highlighted:

1) The “too big to fail” institutions have not been reeled in to date and have, in fact gotten bigger.

2) Government action has reinforced the mentality that risky financial markets will be bailed out on the downside.

3) Risky behavior that was driven by the desire for ever-bigger bonuses has not been addressed or regulated in any meaningful way.

4) The government’s actions risks “re-inflating” the real estate bubble with policies that falsely prop up home prices.

“Stated another way,” the report summarized. “Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

Some money in the TARP program is now reallocated for small businesses and community banks. The administration is proposing $30 billion for banks with assets of less than $10 billion. A separate program will use $1 billion for a Community Development Financial Institution (CDFI) program. The CDFI program will make the funds available to CDFI banks at a lower cost to boost small business lending.

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And One More Thing About Complex Derivatives That We Should Be Worried About.

The recent economic crisis exposes only one way that the finance industry is damaging America. The desire for ever more complex derivatives and investment strategies is sucking the mathematical geniuses from our best schools because there’s money to be made in finance and not much fortune in the sciences. This is a backwards idea that is dangerous to the future of this country. Our best valuable assets are being lured from fields where they can contribute to everything from the improvement of the Internet to curing cancer to combining quantum mechanics and relativity into the ultimate physics theory of everything. Our scientific future is being traded for golden crumbs.

But let’s not worry about that. Let’s all drive big, fat SUVs and let the peoples of Asia make all the scientific innovations for us and buy up all our government debt.

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Down In The Mouth At Davos

French President Nicholas Sarkozy summed up populist mentality at the meeting in Davos, Switzerland of the elite corporate bankers when he said, “That those who create jobs and wealth may earn a lot of money is not shocking. But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.”

Many who attended Davos this year were not feeling the love as a host of representatives from governments around the world put a smack down on the entire banking industry from one of its most glamorous events in the Swiss Alps. This past year has been marked by some seriously tough soul searching and critical editorials from popular industry magazines. With a huge backlash from the proposed bonuses at banks like Goldman Sachs, the banking industry seems to be facing a long slog back to the top of the heap, if it even ever gets there again. The Obama administration’s regulatory overhaul plans considers seriously limiting the size of banks and possibly rolling back the clock to Glass–Steagall. Some welcome this downsizing of an industry that almost took the economies of the globe down to a second Great Depression. The damage they did cause was serious and far reaching enough.

It’s time for banks to take a long, hard look not in the mirror but at the populist anger and see what they can do now, before it’s forced upon them. Taxpayers financed the rescue of the banking industry when they needed it most. No “free market capitalist” can sit idly by and allow the very same institutions that benefited so greatly by public support to now rape and pillage without impunity. The call should go out to deconstruct the industry so that it does what it’s meant to do: Finance the economy and provide a safe place for people to put savings. Banks are not for traders to use of capital to place risky bets so that executives can reap enormous benefits in the way of bonuses but endure no downside risk when the gambles fail because they’re using regular people’s savings to double down on the economy.

We need to split traditional banking from high-risk investment. I’d venture to guess that most people don’t realize the extent that their own money was at risk in this latest crisis only because the government has safeguards, namely the FDIC. Much of the other emergency actions – like TARP funding – were taken without much in the way of historical precedent. Of course these were unprecedented times.

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Democrats Cannot Let Republicans Control The Message.

In the political blog FiveThirtyEight, Nate Silver wrote about how Democrats need to clarify their message. One of his points was about Republicans’ obstructionist position on even the most centralist issues – ones they should philosophically be supporting or have supported at least partially in the past. For example, in 2007, the Democrats found themselves back in control of the House for the first time in twelve years. The House then approved "pay-go" rules to reign in Bush-era budget deficit 280 to 152. There were 48 Republicans who voted to approve the rules according to an article in the Washington Post. Three years later, with a bank bailout (passed during the Bush Administration) and a stimulus package that probably cut taxes for 95% of Americans), Republicans in the Senate voted unanimously against reimposing statutory pay-as-you-go. Want to know something else? Not a single Republican voted for the Jobs Bill, either.

So much for the "fiscally responsible" party who care about the average American. Nate Silver is right; Democrats need to highlight this message now and frame Republicans as obstructionists to beneficial legislation and a party with no idea of its own to help America. That way when the economy improves and jobs come back Democrats can rightfully campaign on ownership of the recovery and point to their opponent’s party as the do-nothings that they truly are.

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