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Rep. Mark Amodei and the GOP Big Bank Pacification Program

Amodei 3Nevada Congressman Mark Amodei (R-NV2) is pleased with the Republican version of the House Financial Services Committee and Appropriations Committee 2015 version of a budget for the Department of Justice, the SEC, and the Department of the Treasury.   The Big Banks and Wall Street Players are pleased with it too.  They should be, part of the bill is straight out of the Financial Sector Playbook, one being implemented by Eugene Scalia’s law firm to gut the Dodd Frank Act for financial regulation.   A little background is in order.

The Back Story

The recovery from the latest Recession has been impressive, but perhaps not what it could have been had not some Austerianism crept into the mixture.  Public sector employment (teachers, social worker, firefighters, law enforcement….) is trailing or declining in some areas. Private sector employment has done well.

The Department of Labor issued its “employment situation report” six days ago, in which we discovered 288,000 jobs were created, and the unemployment rate is now 6.1%.  [DoL]

Private Sector Job Growth

About the same time, the St. Louis Federal Reserve tracked corporate profits (after tax) currently at $1,906.8 billion. [FRED] The graph looks like this:

Corporate ProfitsThe data points indicate a recovery for the private sector which took a pounding during the Recession but have bounced back quite nicely. Even during the Recession, corporate profits did not fall below levels seen during the period from 1980 to 2000.

The good news is, obviously, that the economy has generated private sector jobs in positive territory for the last 52 months, which should be tempered by watching corporate activities very closely — given the propensity of the financial sector to create booms/busts of increasingly volatile proportions.  There is also the no-so-small question of corporate hoarding. (A matter for another day.)

What’s happened since those days, not so long ago, when ‘irrational exuberance for asset classes and insane valuations” ran amok an crashed the U.S. economy?  When Wall Street creates new vocabulary like “Quantum Entanglement Trading,” some ears need to perk up.  The argument that faster trading combined with new technologies is nothing new under the Sun is perfectly plausible, what is less comprehensible are terms like Dark Pools, upon which some light cast upon Barclay’s transactions is less than pleasing. [BusWeek]

Even less pleasing was the moment when Goldman Sachs “lost control” of its Dark Pool, and Goldman “lost oversight of what was happening in their dark pool and it ended up that a number of people had trades settled at less than best national price.” [Forbes]

The Dodd Frank Act was supposed to rein in some of these excesses, and to give investors more power to insure they were trading “at the best national price.” It was also supposed to put the brakes on some of the more egregious activities in derivative trading.  The Wall Street boys figured out a way around that too:

“…traders have recently forged a path around these so-called margin requirements in order to allow them to harvest larger profits via larger bets: They are repackaging some derivatives known as swaps into another financial product known as futures. Futures are less stringently regulated, meaning investors can stake out larger positions while reserving smaller amounts of cash.” [HuffPo]

The GOP Big Bank Pacification Program

What do we know so far?  First, that the private sector recovery could be stronger (especially if we’d ever decide to DO something about our crumbling infrastructure and backlog of maintenance). Secondly, that Wall Street will be Wall Street, and with the advent of the financialists new ways to generate ‘wealth’ will be created even if these don’t actually add up to any real expansion of manufacturing or commercial activities.  On the corporate side there’s the stock buy back strategy which can be combined with the offshore parking ploy; on the financial end there’s the newly discovered joys of playing in dark pools and renaming your Swaps as Futures. What could possibly go wrong?

And now we come back to the point wherein Representative Amodei tells us how pleased he is with the House Financial Services Committee rendition of an FY 2015 budget providing for those departments and agencies which regulate financial behavior in this country.

Here’s Representative Amodei’s gush over the budget provisions for the Security and Exchange Commission:

“Included in the bill is $1.4 billion for the Securities and Exchange Commission (SEC), which is $50 million above the fiscal year 2014 enacted level and $300 million below the President’s budget request. The increase in funds is targeted specifically toward critical information technology initiatives. (1) The legislation also includes a prohibition on the SEC spending any money out of its “reserve fund” – essentially a slush fund for the SEC to use without any congressional oversight.  In addition, the legislation contains requirements for the (2) Administration to report to Congress on the cost and regulatory burdens of the Dodd-Frank Act, and a (3) prohibition on funding to require political donation information in SEC filings.”  (numbering, emphasis added)

Let us Parse: (1) What’s so wrong about that SEC Reserve Fund?  It was established in the Dodd Frank Act:

“The Dodd-Frank Act established a Reserve Fund for the SEC and gives the agency authority to use the Fund for expenses that are necessary to carry out the agency’s functions. Each year, starting with FY 2012, the SEC is required to deposit into the Fund up to $50 million a year in registration fees, while the remainder is deposited into the Treasury as general revenue. The balance of the Fund cannot exceed $100 million.” [SEC pdf]

And what will the Reserve Fund be used to do? We know that most of the FY 2013 Reserve Fund money went to upgrade EDGAR and other information technology, and then there was the remainder:

“The remainder of the Reserve Fund in FY 2013 will be used on a number of IT projects, including development of Market Oversight and Watch Systems that will provide the SEC with automated analytical tools to review and analyze market events, complex trading patterns, and relationships; development of fraud analysis and fraud prediction analytical models; and deployment of natural speech, text, and word search tools to assist our fraud detection efforts. Additionally, the SEC plans to develop analytical environment, databases, and intake systems for market data, mathematical algorithms, and financial data.” [SEC pdf]

Then the SEC added another project in its FY 2014 budget justification, the Consolidated Audit Trail.

 “The SEC plans to invest Reserve Fund dollars to develop the SEC’s ability to intake CAT data and store it in the EDW, as well as to develop analytical tools and a single software platform that will allow the SEC to identify patterns, trends, and anomalies in the CAT data. The tools and platform will allow seamless searches of data sets to examine activity to reveal suspicious behavior in securities-related activities and quickly trace the origin.” [SEC pdf]

But what happened to these plans to monitor the financial markets with an eye toward reducing the instances of fraud and abuse?

H.R. 3547, the omnibus 2014 spending bill passed by Congress and signed into law by President Obama last week, contains more bad news for the SEC than just the meager 2% increase it provides for the SEC’s budget. A provision in the new law quietly strips away half of a $50,000,000 Reserve Fund that the SEC uses to improve its technology resources.” [Securities Docket]

Not too put too fine a point to it, but — the Congress of the United States found a way to defund the very activities of the SEC which might allow the agency to technologically keep up with the high frequency traders, the dark pools, and the latest Wall Street tech.  That should keep the Big Banks Pacified?

The Big Banks ought to be especially pleased by the label  “slush fund” attached by Representative Amodei to their funds to improve the technological capacity of the agency.  If Representative Amodei is displeased with the “lack of Congressional oversight” over the expenditures in the SEC Reserve Fund, then he may have missed the two documents readily available online wherein the SEC described for Congress precisely what they wanted the Reserve Fund to implement. See: SEC FY 2014 Budget Justification (pdf) the executive summary of the Reserve Fund is on page 10, and the SEC FY 2013 Budget Justification (pdf), the executive summary of the Reserve Fund is on page 9.

Why would anyone, facing the increasing speed and technicality of modern financial market operations, want to call the funds allocated to assist in the improvement of oversight and fraud detection a “slush fund?”  Perhaps because they don’t want the SEC to keep up with the Big Banks, high flying hedge funds, and wealth management groups?

(2) Oh, those regulatory costs and burdens!  This has a familiar ring to it.  Here’s where Eugene Scalia, son of Antonin,  enters the picture:

“Eugene Scalia is a lawyer of extraordinary skill. In less than five years, the 50-year-old son of Supreme Court Justice Antonin Scalia has become a one-man scourge to the reformers who won a hard-fought battle to pass the 2010 Dodd-Frank Act to rein in the out-of-control financial sector. So far, he’s prevailed in three of the six suits he’s filed against the law, single-handedly slowing its rollout to a snail’s pace. As of May, a little more than half of the nearly four-year-old law’s rules had been finalized and another 25 percent hadn’t even been drafted. Much of that breathing room for Wall Street is thanks to Scalia, who has deployed a hyperliteral, almost absurdist series of procedural challenges to unnerve the bureaucrats charged with giving the legislation teeth.” [MJ]

And what has the Scalia Scion done to create this successful stall ball strategy?

“Scalia’s legal challenges hinge on a simple, two-decade-old rule: Federal agencies monitoring financial markets must conduct a cost-benefit analysis whenever they write a new regulation. The idea is to weigh “efficiency, competition, and capital formation” so that businesses and investors can anticipate how their bottom line might be affected. Sounds reasonable. But by recognizing that the assumptions behind these hypothetical projections can be endlessly picked apart, Scalia has found a remarkably effective way to delay key parts of the law from going into effect.” [MJ]

So, when Representative Amodei says he wants the “Administration to report to Congress on the cost and regulatory burdens of the Dodd-Frank Act,” he’s chiming right in, cheerleading if you will, for the stall ball tactics of the Wall Street barons as practiced rather successfully  by their Scalia Scion lawyer.  That should help keep the Big Banks Pacified?

(3) And, Representative Amodei is only too pleased to help the corporations and Big Banks hide their political donations — because he doesn’t want the SEC to be able to require corporations and large banks to tell the  public and their shareholders about their political activities!

Representative Amodei gives every appearance of being a major cheerleader for Team Wall Street, and its efforts to avoid regulation, supervision, and monitoring by the Securities and Exchange Commission — no doubt he, and other Republicans in Congress, will be delighted to participate in the GOP’s Big Bank Pacification Program.

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Filed under Economy, financial regulation, Politics, Republicans

Economic and Financial Under the Radar News

Occupy Wall Street bankersNevada’s DETR posted the May 2013 employment numbers late last month and the state’s unemployment rate dropped from 9.6% to 9.5% (seasonally adjusted).  [DETR pdf] Good news.  Well, sort of: “this represents a gain of only half the full-time positions lost since pre-recession levels. The number of part-time jobs in Nevada is still trending near all-time highs, although they have leveled off and fallen a bit with the slow improvement in the economy and corresponding rebound in full-time positions…

For those inclined to be optimistic, perhaps it’s time to prescribe some “cautious” optimism.  One of the key phrases in the DETR press release from June 21 is “slow improvement in the economy.”  That would be the REAL economy.

Now, why would the economic recovery be slow?   Maybe we should start with some assumptions.

Assumption One:   American Capitalism works best when there is an increase in aggregate demand  This is old territory on this blog, but for those who might be first timers, let’s review:

“Aggregate Demand (AD) = C + I + G + (X-M) C = Consumers’ expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.”  [Investopedia]

If this looks suspiciously identical to the formula for the Gross Domestic  Product, there’s a reason for that … it is.   Did you notice the “G” in the formula?  Government spending?  Radical conservatives really don’t get to have it both ways.  Government spending is NOT intrinsically wasteful and excessive.  We cannot, by the very way we define aggregate demand/GNP, decrease government spending and logically expect to see an increase in the GNP.

The last report from the Bureau of Economic Analysis (June 26, 2013) was a bit disheartening for those seeking improvement in the REAL economy:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the “third” estimate released by the Bureau of Economic Analysis.  In the fourth quarter, real GDP increased 0.4 percent. […] The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.”  (emphasis added)

Translation: When government spending is down, there is a “negative” contribution, i.e. subtraction from the GDP.  So how does this relate to those employment numbers in Nevada (or several other states)?

Assumption Two: American Capitalism works best when we approach full time employment for as many citizens as possible.   As Nevada dribbles along, cutting the unemployment rate by modest reductions, it’s reasonably clear that the current employment recovery rate is insufficient to create a significant recovery.  Witness the analysis of the Economic Policy Institute:

The average growth rate for the previous 12 months was 169,000, so the current rate is an improvement. However, the current pace of job growth is still slower than what’s needed for the economy to return to full employment any time soon. At this pace, it will be more than five years until we get back to the prerecession unemployment rate.

As economist Paul Krugman points out, this constitutes a “low grade depression.”   Rather like having a “low grade economic fever” for the next five years.

Assumption Three:  There can be no significant recovery in our Aggregate Demand/GDP without an increase in the capacity of employed workers to accumulate funds to spend and invest.   Now that we’ve hitched the horse and cart together, they should point toward some positive end.  So, we should ask again — What’s slowing us down?

(1) Financialism:   This isn’t new territory for this blog either, but it bears repeating that the improvements in wealth and income have been concentrated in the upper tiers of American income earners.  The Brookings Institution provides a chart (pdf)

Concentration of WealthThis is NOT a pattern or trend most likely to increase the capacity of most Americans to make significant contributions to our Aggregate Demand (GDP).    So, what does this have to do with “financialism?”

We should note that of the top 1% income earners, 31% are managers, supervisors, and executives, another 15.7% are in medical fields, and the third component is made up of the 13.9% in the financial sector. [NYUedu]

Thus, if the major gains in income during the post recessionary period have been largely the preserve of those who have vested interests in the creation and manipulation of financial instruments, and those concerned primarily in the increasing value of those investments, then the rest of the economy must slog along compliantly while incomes increasingly concentrate in the hands of the few, at the expense of the many — including most of the American middle class.

(2) Public policy which defers to the needs and desires of the financial sector at the expense of other sectors of the economy.   First, it should be demonstrated that someone has “paid the expense.”  In this instance it’s the middle class, the bulwark of American consumerism.

About five months ago this chart in the Washington Post was getting a bit of online notice:

Job losses by segmentNotice that higher income occupations have  recouped the employment losses, and lower income jobs (perhaps those part time positions mentioned in the Nevada statistics) have “boomed” since Wall Street blew up their housing bubble — but, mid-wage occupations lag far behind the top and bottom in terms of restoring the buying power of the American middle class.

Why the American middle class has been hollowed out since 2001 is controversial.   Pick one — trade liberalization, automation and technological advances, the decline of organized labor, the declining value of the statutory minimum wage, the need for retraining the American workforce, the student debt burden of those seeking retraining and additional education — and you’ll find some institution or economist ready and fully willing to agree with you.

What is much more difficult to find are too many individuals willing to assert that by catering to the needs of the financial sector we have lost sight of the REAL economy, the one not measured by the DJIA or the S&P.  The one we measure by looking at the Aggregate Demand for American goods and services.

What public policies of late have catered to the financial sector?

Example One –  Wall Street would love to drive some tractor-trailer sized loopholes into the regulation of derivatives trading.   Can we say “extra-territoriality?”  This, from June 12, 2013:

 On Monday, the U.S. became the first country in the world to require mandatory clearing of many derivatives contracts, a crucial protection in these previously unregulated markets.  But even as this crucial protection takes effect, Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas.

This loophole could strike at the foundations of financial reform. Almost every major financial scandal involving derivatives – from the collapse of Long Term Capital Management’s Cayman Island operations in the 1990s, to the bailout of AIG’s London-based trades in 2008, to JP Morgan’s recent “London Whale” trading losses – has involved derivatives transactions conducted through a foreign entity. Wall Street banks routinely transact more than half their derivatives through foreign subsidiaries. Through numerous avenues, including an important Congressional vote today, Wall Street is trying to create an “extraterritorial” loophole in derivatives regulation. [USNews]

The efforts were successful in the U.S. House of Representatives:

“In June, the House passed a bill that would completely exempt from U.S. oversight derivatives sold through the nine most popular foreign derivatives jurisdictions. The legislation is occasionally derided as the “London Whale Loophole Act” on Capitol Hill — a reference to the overseas trades that cost JPMorgan Chase more than $6 billion in 2012. London was the epicenter of much of the derivatives trading by U.S. financial firms leading up the 2008 crash, including AIG’s infamous Financial Products division. If banks can simply route trades through loosely regulated overseas affiliates, financial reform advocates warn, the most critical aspects of Dodd-Frank will be effectively nullified.”  [HuffPo]

Simple really, just do all your derivatives trading from overseas desks and avoid the clearing process and American regulation.   So, what the financial sector wants is MORE leeway to do precisely that trading which has gotten them into crashes and slashes since the collapse of LTCM — what could possibly go wrong?

The House passed the “Swaps Jurisdiction Certainty Act” on June 12, 2013 on a 301 to 124 vote.   Nevada Representatives Amodei (R-NV2), Heck (R-NV3) and Horsford (D-NV4) voted in favor of the bill; Representative Titus (D-NV1) voted no.  Good for her.

If the London Whale Loophole Act doesn’t cause you alarm, try the CFTC’s nod to the financialists in its rules for swap pricing.

Example Two –  This gets into the weeds a bit, but suffice it to know that what the CFTC leadership had in mind five years ago was that if investment firms wanted “swaps” they had to get five quotes before entering into a “swap.”  “The proposal was intended to increase price transparency and encourage wider participation beyond the small number of dominant dealers in a bid to diffuse risk and lower prices for institutional investors and companies that purchase swaps to offset risk.”  [HuffPo]

Increase the transparency of these transactions? Encourage wider participation?  The Big Banks Clutched Their Pearls, and staggered towards their fainting couches.

The CFTC caved in.  “In the final rule, swaps buyers will be able to solicit only two prices through swap execution facilities trading platforms for the first year after the rule is in effect, with the minimum requirement increasing to three quotes thereafter, officials said.”  [HuffPo]

Example Three –  The old Supply Side Mythology is still driving the deregulation bus.   Consider the instance of a reduction in business loans and the sleight of hand with headlines.  Do we look at the following chart and see a reduction in lending or borrowing?

Business lendingPerhaps we’d want to pause and give the following analysis some thought:

The idea that the problem’s on the supply side is pervasive, and false or at least wildly overblown. Lending rates are at historic lows. But the credit-crunch storyline gives very effective aid and cover to the financial industry in justifying its inordinate size and power.  [Asymtosis]

No, the sky isn’t falling.   There’s no huge credit crunch going on, and unless you want a student loan the rates are at all times lows — so, we’d probably want to consider the “business lending down” caption a tip of the hat to the time honored myth of Supply Side ascendancy.   Lending rates from the FED are, as noted in a previous post, almost ludicrously low — and the profits for the major financial institutions are equally positive for their ample bottom lines.

The question remains, will Nevada and 49 other states limp along with diminished expectations for economic recovery over the next five years, or will someone — somewhere — notice that while the financial institutions have been raking in the profits, and concentrating yet more wealth into the hands of fewer people, the REAL economy and the battered middle class could use some assistance too?

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Filed under Economy, financial regulation, Nevada economy

Simple Economics Made Complex: Capitalism vs. Financialism

The 2012 election at almost every level will be determined by turn out, and predicated on economics — micro and macro.  The problem for most voters is that we’re talking about two economies.  The economy of the financialists and the economy of the capitalists.  So far, the capitalists are winning.  Barely.

A capitalist believes that our economy works best when consumers have a choice of products from a variety of manufacturers or providers.  The economy expands as the demand for goods and services increases and providers seek to accommodate consumer needs.  A capitalist believes that capital should move from areas of surplus to areas of shortage, for small business lines of credit, for home loans, for student loans, for consumer credit, for business expansion, for commerce and marketing needs.

A financialist believes that the economy serves to accumulate wealth such that we create financial products and services which can be securitized and manipulated to create more wealth.   The financialists have been doing very well, thank you very much.  Not sure, then consider this chart:

That’s right, 93% of the increases in American income (wealth) in 2010 went to the top 1% of income owners in the U.S.  And the stock market has been doing quite well since 2009:

Of course, it’s not just stocks in which we find increased trading.  Other financial products, derivatives included, have been doing a thriving trade.

The traffic in derivatives hasn’t slowed much either.

So, while those whose income comes from the financial sector have been doing quite well, those in the “real” economy — the capitalist economy have been in something of a bind.

Note, Governor Romney’s complaint that the current economy means “stagnating” wages for middle class Americans he’s omitting a crucial bit of information:  When economic policies favor the accumulation of wealth in the coffers of the o.01%, it shouldn’t be the least bit surprising that middle class Americans aren’t seeing the increases in their bank accounts.

In short, the Financialists (and their presidential candidate Governor Mitt Romney) having secured a deregulated financial sector which rewards them disproportionately, are loathe to adopt any policy which might require them to pay more in taxes or to comply with any regulations on the financial product manipulation which constitutes their wealth accumulation strategy.

It’s up to the Capitalists in the 2012 election to secure a level playing field, or at least a more level field, one in which INVESTMENT is rewarded before SPECULATION.   One in which the economic reality of supply and demand means the supply and demand in REAL markets — not in esoteric “markets” for artificially concocted risk management products.

Let’s hope the Capitalists win.

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Filed under 2012 election, banking, Economy, Obama, privatization, Republicans, Romney