No Health Care For All

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China: 'Bribery is widespread' in Rio case

from China Daily

Executives from all 16 Chinese steel mills participating in iron ore price talks this year have been bribed by Rio Tinto employees, an industry insider claimed Tuesday, amid reports that the government is considering invalidating 20 iron ore import licenses to regulate the chaotic ore import business.

The startling claim comes amid a widening probe of alleged business espionage linked to the world's second-largest iron ore miner, Rio Tinto.

Executives from five leading domestic steel makers and officials from the industry association are reportedly under investigation following last week's detention of four employees of Rio Tinto's China operation, including an Australian.

"Rio Tinto got to know the key executives of the 16 steel mills, who have sensitive industry information, when the China Iron and Steel Association (CISA) brought them to the bargaining table," said a senior manager at a large steel company, who requested anonymity.

"And then Rio Tinto bribed them (to get access to industry data), which has become an unwritten industry practice," the source said.

"If companies didn't accept, they would have cut supplies and so the whole steel industry has been bribed."

His words come as the CISA is reportedly mulling over re-examining the iron ore import licensing system because some license holders are said to have abused their rights.

"It is very likely for CISA to cancel about 20 iron ore import licenses held by steel makers and trading companies, with a focus on trading companies," the 21st Century Business Herald reported, citing an anonymous source.

Another industry insider, who also requested to be unnamed, told China Daily: "There are about 1,200 steel mills in China. Most small- and medium-sized mills without import licenses have to buy ore from big ones with licenses.

"Therefore, some big mills don't care about the ore prices because they could transfer the increasing cost to small- and medium-sized ones. Meanwhile, those small- and medium-sized steel mills are forced to sign contracts with global miners privately."

And, Hu Kai, analyst with Umetal, a steel consulting firm, said: "Because of their own interest and intense competition among various steel makers in China, it's unlikely for them to present a united front when bargaining with overseas ore providers."

Related readings: Secrets of Chinese steel mills found in Rio's computers Australia: Rio case not to affect trade ties Detained Rio Tinto executive in good health: Australian FM Govt: Proof against Rio spies sticks FM: China to handle Rio spy case 'according to the law'

But Hu said such measures can't solve the root problems, because huge demand for iron ore in China determines that the price talks will continue and disorder will continue to exist.

"I suggest the country should first control the output of the iron and steel industry. Besides, China should also enhance exploration of domestic mines and increase investment in overseas mining resources," Hu said.

CISA started reducing iron ore import licenses in 2005. By the end of last September, the number of firms possessing licenses in China has been reduced from 500 in 2005 to 112 now, and trading firms from 250 to 40.

The Shanghai State Security Bureau earlier this month detained Stern Hu, an Australian citizen and Rio's chief iron ore salesman in Shanghai, and three of his Chinese colleagues. They are accused of stealing sensitive industry data critical to China's iron ore price talks.

'Stress Tests' Less Stressful?

As Pointer already figured out some weeks ago that the stress tests would be not that stressful because the rules of bookkeeping became altered just in time, in fact making fraud legal, also Alternet reports the Wall Street Journal by now got the point:

This week, the government released the results of the stress tests performed on the nation’s 19 largest banks. According to the report, Bank of America’s $34 billion hole was the largest. The Wall Street Journal reports, however, that the Fed Reserve initially estimated Bank of America’s figure at more than $50 billion. Over the last few weeks, a number of banks successfully lobbied the Fed to make the stress tests less stressful:

The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.

The Wonk Room’s Pat Garofalo notes that one interesting element of the announcement last week is that the banks will now have the opportunity to convert government debt into equity if the need arises, leaving the taxpayer on the hook for a larger bailout of the banks.

Understanding The Financial Crisis--For Kids and Grownups

The $700 Billion plan explained so we can understand

Schwarzenegger Opens California Fairgrounds to Homeless Camp

California Governor Arnold Schwarzenegger said a make-shift tent city for the homeless that sprang up in the capital city of Sacramento will be shut down and its residents allowed to stay at the state fairgrounds.

Schwarzenegger said he ordered the state facility known as Cal-Expo to be used for three months to serve the 125 tent city residents, some of them displaced by the economic recession. The encampment may be shut down within a month, said Sacramento Mayor Kevin Johnson. The move comes after the Sacramento City Council last night agreed to spend $880,000 to expand homeless programs.

“Together with the local government and volunteers, we are taking a first step to ensure the people living in tent city have a safe place to stay, with fresh water, healthy conditions and access to the services they need,” Schwarzenegger said in a statement. “And I am committed to working with Mayor Johnson to find a permanent solution for those living in tent city.”

California, home to one of every eight Americans, has been particularly hard hit by the housing market collapse after many residents turned to exotic mortgages to afford homes. The tent city, which has long existed along the banks of the America River, gained national attention last month when some of its recently homeless residents were featured on the Oprah Winfrey Show.

The state has one of the highest rates of foreclosure, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. California home prices dropped 41 percent last month from a year earlier, more than double the U.S. decline, as surging foreclosures drove down values, the state Association of Realtors said today.

State Unemployment

The state’s unemployment rate rose to 10.5 percent in February, as construction, financial and manufacturing companies eliminated jobs, leaving the most-populous U.S. state with one of the nation’s worst job markets.

The shelter at Cal-Exp currently houses about 150 people. It will be expanded by another 50 beds, and will include facilities for families with children.

Nicolas Sarkozy: Regulate All Finance

LONDON -- For the second time in only five months, the leaders of the world's top 20 economies are meeting to seek a joint response to the unprecedented global economic crisis that we are going through.

Since this crisis first began, I have advocated the idea that, when faced by a challenge of this magnitude, cooperation is a necessity, not an option. Already in September 2008, speaking to the United Nations General Assembly, I called upon the world to rally together to meet the crisis with a response based on coordination and cooperation. Brought forward in concert by the European nations, that initiative led to last November's G-20 meeting of heads of state and government in Washington, which laid the foundations for far-reaching reform of the international financial system. The London Summit must now enable us to go further, and to put into practice the principles that we established in Washington.

The world expects that we speed up the reform of the international financial system. The world expects that we rebuild, together, a new form of capitalism, better regulated, with a greater sense of morality and solidarity. This is a precondition for mobilizing the economy and achieving sustainable growth.

This crisis is not the crisis of capitalism. On the contrary, it is the crisis of a system that has drifted away from the most fundamental values of capitalism. It is the crisis of a system that drove financial operators to be increasingly reckless in the risks they took, that allowed banks to speculate instead of doing their proper business of funding growth in the economy; a system, lastly, that tolerated a complete lack of control over the activities of so many financial players and markets.

At the Washington summit last November, we agreed on the four principles that would guide our response to the crisis: the need for enhanced coordination and cooperation, the rejection of protectionist measures, the strengthening of regulatory systems in financial markets, and a new global governance.

What has been achieved to date? On the first two points, we have made a good deal of progress. We have managed to hold off the specter of protectionism, which, as history has taught us, inevitably compounds existing difficulties. Likewise, all nations have injected massive support for their economies, engaging in ambitious stimulus programs, while those countries that, like France, offer their citizens a high level of social protection have also significantly increased their levels of crisis-related welfare spending. Overall, taking into account all of these measures of support, the world's leading economies have made comparably gigantic efforts in response to the crisis. These measures are only now beginning to take effect and produce tangible benefits, but we must be ready to do even more if circumstances require it.

This is the principle I will be defending in London: to do everything necessary for world growth.
This week, however, we must also attach the same level of priority and sense of urgency to making progress on the issue of regulation of financial markets. World growth will be all the stronger for being sustained by a stable, efficient financial system and by the kind of renewed confidence in the markets that will enable resources to be better allocated, encourage lending to pick up again and allow the return of the flow of private investment capital toward developing countries.

The Washington Summit enabled the establishment of several basic principles regarding regulation that must now be put into practical effect. We decided that in the future not one financial player, not one institution, not one product would be beyond the control of a regulatory authority. This rule must be applied to credit rating agencies, but it should also apply to speculative investment funds and, of course, to tax havens.

On the latter point I want us to go very far indeed, adopting a resolution that clearly identifies these tax havens and sets out in detail both the changes we expect them to introduce and the consequences that will ensue, should they fail to respond accordingly. I may add that I am pleased to observe that the debate on tax havens initiated by the Washington Summit has already begun to bear fruit, in particular in Europe, where several countries have recently announced their intention to introduce legislative changes in response to the expectations of the international community.

I also hope that we will make progress with our joint reflection on the necessary reform of the required disclosure standards and levels of prudential oversight for financial firms. The current regulations failed to prevent abuses. They even made the crisis worse. I shall be putting this aspect to the fore, since sadly in many countries it has not been getting the attention it deserves.

With regard to the reform of global economic governance, it is my long-standing belief that we must offer much more space to emerging nations, in keeping with their real weight and with the responsibilities I would like to see them taking on. This holds true for all international bodies, but especially so for international financial institutions. I am particularly pleased by the expanded membership of the Financial Stability Forum. We must go even further in the future.
Looking beyond the London Summit, in my view there will remain the task of pursuing a process of renewal throughout the entire multilateral system. I shall be making some proposals in this regard over the coming months.

Lastly, we must provide answers to the problems of those who have been hit hardest by the impact of the crisis. This is why we must raise the level of funding we make available to the International Monetary Fund, so that it can aid those countries facing the most serious difficulties. I have taken up at the EU level the question of our contribution to the IMF: The Member States were ready and willing. I have also taken up at the EU level the question of our contribution to the risks that certain countries in Central and Eastern Europe are exposed to: Again, the Member States were ready and willing.

I would also like to emphasize the need, the absolute necessity, for us to offer our support to the poorer nations. They are the victims of this crisis. Some now face the real risk of seeing their considerable efforts in recent years toward achieving the U.N. Millennium Development Goals be completely nullified, if we do not show solidarity. A few days ago I was in Africa. While there, I stated my belief that the destinies of Europe and the African continent are inextricably linked. We will be ready and willing to stand by Africa and by all developing nations in difficulty, on every continent.

I remain convinced that the world can emerge from these troubled times stronger, more united and with a greater sense of solidarity than before, provided we have the will to do so. I am fully aware that we cannot achieve radical change overnight, that there is still a long way to go and that there may well be a need for other meetings, after London, in order to implement the reforms undertaken. I am certain, however, of the need to achieve practical results already this Thursday in London. Failure is not an option; the world would not understand it and History would not forgive us for it.

Dear A.I.G., I Quit!

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Sincerely,

Jake DeSantis

How Fox News Manipulates the News

Fox News: "Historians Pretty Much Agree" That FDR Prolonged the Great Depression That's the title of Huffington Post's article and you know immediately: that can not be true. Or is there a piece of forgotten, even hidden evidence? So we want to hear or read about reliable sources. Who is called "historians"? Pointer's guess is that it is a kind of oral history, like common in the dark ages. Well that's the field of religion or any other kind of devoted believe. It's not factual.
Watch the video:
In the article David Sirota gives us some quote, as is appropriate. Read it, but the finest is this:

Paul Krugman recently explained to a stunningly ignorant George Will on ABC News, 1937-1938 was the period Roosevelt dialed back the New Deal in the name of conservative demands that he stop spending:

By 1937 things were a lot better than they were in 1933. Then [FDR] was persuaded to balance the budget or try to and he raised taxes and cut spending and the economy went back down again and then it took an enormous public works program known as World War II to bring the economy out of the depression.

So with all of that data, let's go back to Fox News' main assertion: Is it really true that "historians pretty much agree" that the New Deal's government intervention prolonged the Great Depression? Of course not, as New York Times economics writer Daniel Gross says:

It was only with the passage of New Deal efforts--the SEC, the FDIC, the FSLIC--that the mechanisms of private capital began to kick back into gear. Don't take it from me. Take it from Federal Reserve Chairman Ben Bernanke, who wrote the following in Essays on the Great Depression: "Only with the New Deal's rehabilitation of the financial system in 1933-35 did the economy begin its slow emergence from the Great Depression."...
The argument that the New Deal's efforts "perhaps had prolonged, the Depression," is a canard. One would be very hard-pressed to find a serious professional historian--I mean a serious historian, not a think-tank wanker, not an economist, not a journalist--who believes that the New Deal prolonged the Depression. (emphasis added)

In other words, it's the opposite of what Fox News says. "Historians pretty much agree" on one thing when it comes to Roosevelt: The New Deal helped end the Great Depression. But I would go even further than that, and agree with economist Brad DeLong who said that whether you are a historian or not - to argue what Jarrett and Crowley argued yesterday is to publicly declare oneself as divorced from the facts as the most ridiculed conspiracy theorists. As DeLong says, "A normal person would not argue that the New Deal prolonged the Great Depression."
But, then, these are not "normal people" - those making these arguments are right-wing automatons whose claim that we shouldn't look at actual data, we should simply accept the truth of their claims because they insist "it's in the books!" or they've supposedly seen "all kinds of studies and academic work" that proves their hysteria true.

Couldn't better say it.

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What’s the worst that could happen?

That’s a question that James Rickards spends a lot of time pondering these days, as he sifts through the national security implications of the financial crisis facing the United States.
Rickards will lay out his worst case scenarios in a lecture sponsored by the Navy and the Office of the Secretary of Defense for Policy tonight. And his forecasts aren’t for the faint of heart.
Rickards calls it the “A to Z” problem: What are the threats that could make the U.S. economy look less like America and more like Zimbabwe? He sees them everywhere – in the Chinese ownership of vast amounts of American debt, in Russia’s increased centralization of its economy, in Al Qaeda’s long-established fascination with damaging the U.S. economy.
In many ways, Rickards is the ultimate bear. He’s not just thinking about whether the stock market will decline, but whether or not the stock market will survive.
All that puts Rickards decidedly outside mainstream economic and political thinking in America. But he does have an influential audience: the United States intelligence and defense communities.
Rickards is a regular adviser on financial issues to the director of national intelligence's office, and he lends his financial advice to the national security community.

His lecture comes as part of an annual “Rethinking Seminar” produced by the Johns Hopkins University Applied Physics Laboratory. Rickards argues that government is not doing nearly enough to prepare for the worst. “Here’s the policy problem for the United States,” he said in an interview. “We have experts in defense and intelligence, and huge depth in capital markets experience at the Fed and at Treasury. But they’re separated by the Potomac River. And they’re not talking to each other.”

Rickards came by his economic experience the hard way. He was the general counsel at Long Term Capital Management, the hedge fund that collapsed in spectacular fashion in the late 1990s and nearly took the global economy along with it. That near-economic death experience gave him a healthy appreciation for risk. Today, he’s the senior managing director for research at Omnis, an applied research firm.

Four of the scenarios keep him up at night:

The Bait Effect
Terrorists, and al Qaeda in particular, are fascinated with the idea of destroying the U.S. economy. Rickards worries that the economic meltdown in the United States could serve as bait of sorts for a terrorist attack, as plotters calculate that a strike now could have a “force multiplier” effect because of the already skittish U.S. stock market.

The China Syndrome
The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billons more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae. And a general sense of mutually assured financial destruction keeps them from wielding that debt like a weapon: if the Chinese dumped U.S. debt on the global market, their own holdings of U.S. debt would decline in value, the U.S. economy would be damaged, ultimately harming the Chinese economy by reducing American ability to buy more Chinese goods.
They’d have to be crazy to try it. But Rickards points out that governments don’t always do the rational thing. And in the meantime, their holdings give the Chinese incredible power over American decision making.

“It gives the Chinese de facto veto power over certain U.S. interest rate and exchange rate decisions,” Rickards explained. “For example, there’s a limit to how much dollar depreciation the Chinese would tolerate.”

That potentially closes off one American economic strategy: allowing the dollar to decline in value in order to help boost U.S. exporters. And China’s leverage is only growing as each federal bailout adds to the U.S. deficit.

The Existential Crash
A pessimist by nature, Rickards believes that many economic forecasters are wrong, and the recession will get far worse than predicted.
He sees an epic disaster scenario in which the U.S. gross domestic product declines by a staggering 35 percent over the next six to seven years. Crippling deflation could take hold. Unemployment, he says, could approach 15 percent.
That’s a calamitous rate, but it would not be an all-time high: unemployment hit 25 percent during the Great Depression.

“The national security community needs to be conversant with this,” Rickards said. “In defense, intelligence, and national security, you earn your money by preparing for things that may be remote, but pose an existential threat if they come to pass.”

In this scenario, the possibilities for global unrest increase dramatically as a staggering United States retreats from foreign aid and global diplomacy and the list of dangerous failed states grows sharply.

The Alternate-Dollar Nightmare
“The Number One vulnerability is the dollar itself,” Rickards concluded. “We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice.” That is, there simply aren’t enough Euro- or Yen-backed securities for investors to shift their money out of dollars and into some other currency.
But what if some kind of global coalition – say a trillion-dollar sovereign wealth fund allied with several countries around the world – banded together to create a gold-backed alternative to the dollar?
Rickards says investors – many of whom already resent that they have no alternative to the dollar – would sell American currency in huge numbers to take advantage of the new opportunity.

“If that happens, that’s the end of the dollar,” Rickards said. “You’d have high unemployment, deflation, and interest rates would go up. It would take what already looks like a strong recession and make it a Great Depression or worse.”

Still, even Rickards sees a silver lining to all this. He looks around the world to the problems facing other countries such as Russia, China, Iran, and those in the Middle East.

“There are vulnerabilities for the United States, but also opportunities,” he said. “I’d rather be the United States than any of these other countries.”

Madoff Ran Vast Options Game

play video
As details emerged about investment strategy used by Bernie Madoff, seen "skulking" out of his apartment today by New York Post photographers, players on Wall Street said it "raised red flags which should have been obvious to the banks and investment firms that promoted Mr. Madoff." The Wall Street Journal reports that Madoff's strategy involved buying stocks and at the same time trading options contracts designed to limit his losses. But several traders "concluded that while Mr. Madoff's stated strategy was valid it would have been impossible to execute with the amount of money he was managing." A client statement made available to The Journal, showing a typical transaction from November 12, makes this glaringly obvious. That day Mr. Madoff bought his client $500,000 worth of stock and purchased 11 options contracts. To make his strategy work across the wide range of clients he represented, Mr. Madoff would have had to purchase 22,000 options contracts to protect just $1 billion, although he claimed to be representing $17 billion. When Madoff's firm was questioned about this by potential investors they always said that they traded contracts "over-the-counter", meaning off the recorded exchange, leaving open the possibility that his strategy might be possible.
Article on the Wall Street Journal

Financial Crisis Tab Already In The Trillions

Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track.

CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved.

Try $4.28 trillion dollars. That's $4,284,500,000,000 and more than what was spent on WW II, if adjusted for inflation, based on our computations from a variety of estimates and sources*.
Not only is it a astronomical amount of money, its' a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and news releases. Strictly speaking, not every cent is a direct result of what's called the financial crisis, but it is arguably related to it.

Some 68-percent of the sum falls under the Federal Reserve's umbrella, while another 16 percent is the under the Troubled Asset Relief Program, TARP, as defined under the Emergency Economic Stabilization Act, signed into law in early October. (The TARP alone is bigger than virtually any other US government endeavor dating back to the Louisiana Purchase. See slideshow.)

"Financial Crisis Balance Sheet"

Government Entity Sum in Billions of Dollars Federal Reserve (TAF) Term Auction Facility 900 Discount Window Lending Commercial Banks 99.2 Investment Banks 56.7 Loans to buy ABCP 76.5 AIG 112.5 Bear Stearns 29.5 (TSLF) Term Securities Lending Facility 225 Swap Lines 613 (MMIFF) Money Market Investor Funding Facility 540 Commercial Paper Funding Facility 257 (TARP) Treasury Asset Relief Program 700 Other: Automakers 25 (FHA) Federal Housing Administration 300 Fannie Mae/Freddie Mac 350 Total 4284.5 Note: Figures as of Nov. 13, 2008

Bold Is Good

What Obama Could Learn From Reagan
Just about everyone is giving President-elect Barack Obama advice based on one interpretation or another of what his victory really means. Obama should be wary of any counsel that the advice-givers had in mind before a single vote was counted.
The worst advice will come from his conservative adversaries, the people who called him a socialist a few days before the election and insisted a few days later that he won because he was really a conservative. The older among them declared after the 1980 election that the 51 percent of the vote won by Ronald Reagan represented an ideological revolution, but argue now that Obama's somewhat larger majority has no philosophical implications.
These conservatives are trying to stop Obama from pursuing any of the ideas that he campaigned on -- universal access to health care, a government-led green revolution, redistributive tax policies, a withdrawal of American troops from Iraq, more robust economic regulation.
Their gimmick is to insist that the United States is still a "center-right" country because more Americans call themselves conservative than liberal. What this analysis ignores is that Americans have clearly moved to the left of where they were four, eight or ten years ago.
The public's desire for more government action to heal the economy and guarantee health insurance coverage, along with its new skepticism about the deregulation of business, suggests that we are a moderate country that now leans slightly and warily left.
But that wariness means that progressives should avoid offering advice based on the assumption that an ideological revolution has already been consummated. They should not imitate the triumphalism of Karl Rove and his acolytes, who interpreted President Bush's 50.8 percent victory in 2004 as the prelude to an enduring Republican majority.
Fundamentally, ours is a non-ideological nation. Many who would like the government to act more boldly still need to be persuaded of government's capacity to succeed.
Here again, Obama's situation closely resembles Reagan's. Like our 40th president, Obama has been authorized to move in a new direction. If Reagan had the voters' permission to move away from strategies associated with liberalism, Obama has sanction to move away from conservative policies. Reagan was judged by the results of his choices, and Obama will be, too.
Yet Reagan offers another lesson: His first moves were bold, and Obama should not fear following his example. The president-elect is hearing that his greatest mistake would be something called "overreach." Democrats in Congress, it's implied, are hungry to impose wacky left-wing schemes that Obama must resist.
In fact, timidity is a far greater danger than overreaching, simply because it's quite easy to be cautious. And anyone who thinks House Speaker Nancy Pelosi and her followers are ultra-leftist ideologues has been asleep for the past two years. As Pelosi noted in an interview in her office this week, her moves have been shaped by a Democratic House caucus that includes both staunch liberals and resolute moderates. She knows where election victories come from.
"We have some fairly sophisticated people here who understand that you win seats in the middle," she said, noting that Democrats did not win their majority in 2006 and then expand it this year "by espousing far left views." The priorities of congressional Democrats, she added, are close to those of the new president.
That's true, and it underscores the fact that you don't have to be "far left" to be bold. This is something that Rahm Emanuel, the new White House chief of staff and no ideologue, understands. In interviews yesterday on both ABC and CBS, Emanuel made clear that Obama's overarching priority is to right the economy and that his other objectives fit snugly into that framework.
He sees Obama acting in four areas of concern to a middle class that "is working harder, earning less and paying more." The list: health care, energy, tax reform and education. All are issues on which Obama should not be afraid to be audacious.
The economic crisis, Emanuel said, provides "an opportunity to finally do what Washington has for years postponed." Here, the model is Franklin Roosevelt, who in the 1930s saw the objectives of economic recovery and greater social justice as closely linked.
President-elect Obama can spend most of his time fretting warily about the shortcomings of past presidents and how to avoid their errors. Or he can think hopefully about truly successful presidents and how their daring changed the country. Is there any doubt as to which of these would more usefully engage his imagination?

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Franklin Delano Obama?

By Paul Krugman
Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world?
The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.

About the New Deal’s long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation’s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.

Can Mr. Obama achieve something comparable? Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.

But the new administration should try not to emulate a less successful aspect of the New Deal: its inadequate response to the Great Depression itself.

Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.

That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn’t all these public works amount to a major fiscal stimulus?

Well, it wasn’t as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

This history offers important lessons for the incoming administration.

The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery.

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.

Lessons Across Six Decades As Clinton Tries to Make Jobs

By STEVEN GREENHOUSE

Eager to put his own stamp on economic policy, President-elect Bill Clinton promises to do what every President since Franklin D. Roosevelt has done: come up with a new program to create jobs.
After President Bush took a largely passive attitude toward creating jobs -- and paid a heavy price for the sluggish economy on Nov. 3 -- Mr. Clinton has made it clear that he plans to be more aggressive.
Hoping to do far better than the one million jobs created under Mr. Bush, just 16,000 in private business and industry, the President-elect has said he intends to use tax credits and increased public spending on roads, airports and high-speed trains. He also promises to provide more job training and cut taxes for the middle class. Judgments From the Past
History shows that such efforts can create jobs. But they can also lead to fraud and inefficiency, and they are sometimes put in place when they are no longer needed. The record from six decades of Federal programs to create jobs leads to several conclusions.
Public works programs are a powerful tool to create jobs while also improving the nation's transportation network and competitiveness. Better highways, railroads and airports make the transportation of goods and people faster and cheaper.
One problem, however, is it sometimes takes so long to establish these programs that by the time they are put into place, the economic slump they were intended to reverse has already ended. Still, according to one study, every $1 billion spent on public works produces 25,000 construction jobs and 15,000 spillover jobs for concrete producers, tractor manufacturers, restaurants and other businesses.
Cuts in personal income taxes do in fact give the economy a quick consumer-led boost that can create tens of thousands of jobs, but they are less effective than public works at making the economy more efficient because the money gained from tax cuts does not go toward job-producing projects, like highway building.
In addition, tax cuts spur the domestic economy less today than they did decades ago because consumers now spend a large percentage of their tax-cut windfalls on imported goods like Sony televisions.
Tax credits for business investment are perhaps the quickest way to give the economy a shove forward. They also encourage investments in new equipment that raise productivity. Some economists predict that if Mr. Clinton introduces a 10 percent investment-tax credit in 1993, it will create about 400,000 jobs next year at the cost of an estimated $3.5 billion in lost tax revenue.
Because of the huge Federal budget deficit, tax cuts and public works spending are less powerful engines than in decades past because by increasing the deficit these programs help drive up long-term interest rates. And that works against the desired effect by hurting housing construction and business investment.
This principle also held true in years past, but with the Federal deficit now at record levels, the negative effects are greater than before.
Still, even with the problems, it is generally agreed that the only sure way the Federal Government can create jobs quickly is to increase the Federal deficit, either by cutting taxes or increasing spending. If a President expands public works spending by $1 billion, while at the same time cutting $1 billion in spending from other programs, the total number of jobs may not increase. After all, some jobs are certain to be lost as a result of the cuts.
At present, the biggest Federal job program is highway construction. It began four decades ago and was expanded greatly by last year's transportation legislation. This year the program will spend $20 billion, creating 800,000 jobs across the nation.
In New Jersey, for instance, the program has put 20,000 people to work this year, completing Interstate highways, resurfacing highways, painting bridges and building new interchanges. Indeed, at just one job site in Northern New Jersey, in and around Wanaque, the highway financing has put 1,200 people to work, building one of the final stretches of Interstate 287, a six-lane, 20-mile leg with a cost of $700 million.
Speaking about the construction industry, Thomas M. Downs, New Jersey's Commissioner of Transportation, said, "I'm not saying that public-works investment is a silver bullet, but it is helping reduce unemployment in the sector with the highest unemployment."
Liberals tend to favor such government building programs because they generally help the poor and unemployed while also addressing pressing needs, like renovating subway lines. The programs also reduce income inequality and provide on-the-job training for the unskilled.
"These programs are a success in the sense that they add to the number of jobs and have a fairly good record of not being make-work, but of getting productive things done," said Robert M. Solow, a Nobel Prize-winning economist who teaches at the Massachusetts Institute of Technology. But many conservatives dislike the programs, saying they bloat budget deficits and bureaucracies. They argue that the best economic stimulus is tax cuts, which allow consumers and companies to spend more, thus providing a boost to the economy.
Despite the continuing debate over Federal job-creation programs, Mr. Clinton plans to embrace a variety of them. As he does, he is likely to draw on lessons learned since the 1930's. The New Deal Deficit Spending, Money in Pockets
President Roosevelt took office in 1933 in a time of searing despair, when one in four Americans was out of work. Desperate for a solution, he embraced the then-novel ideas of John Maynard Keynes, the British economist, and recommended increasing deficit spending to put money in people's pockets.
Soon the New Deal demonstrated for all time that government could fight a slump by putting millions of people to work. It also demonstrated that most people like living on welfare far less than holding jobs.
In 1933, Roosevelt created the Federal Emergency Relief Administration, which gave states money for relief payments and for creating jobs. Two years later, he set up the biggest New Deal program, the Works Progress Administration, later the Work Projects Administration, and within months it had employed three million Americans.
Although there were plenty of make-work projects in the New Deal's early days -- historians recall workers raking leaves from one side of the street to the other -- eventually the program improved. W.P.A. workers helped build and upgrade 2,500 hospitals, 5,900 schools, 13,000 playgrounds and 651,000 miles of roads, among other projects.
"With time, the kinds of work that was done and the efficiency with which it was done increased considerably," said Barbara Blumberg, a historian at Pace University.
Largely because of New Deal programs, the unemployment rate fell from 25 percent in 1933 to 14 percent four years later. But Roosevelt was worried about runaway deficits. So in 1937 he reduced spending on these programs, only to see the jobless rate jump back to 19 percent in 1938.
"Mr. Roosevelt was never fully committed to spending enough money to stimulate the economy sufficiently," said Eli Ginzberg, who began teaching economics at Columbia University during the Depression. "The nation didn't really recover fully until it mobilized for war."
The jobless rate was 14.5 percent in 1940, seven years after Roosevelt took office. Only after the war machine began running flat out did unemployment fall, to 4.7 percent in 1942 and 1.9 percent in 1943.
Still, the New Deal showed for the first time how effectively government programs could reduce unemployment. And with that lesson, future Presidents did not hesitate to try their own approaches. Kennedy's Tax Cuts Stirring Economy, Spurring Debate
John F. Kennedy defeated Richard M. Nixon partly because of the 1960 recession. In circumstances strikingly similar to those facing Mr. Clinton, he took office when the unemployment rate was near 7 percent.
He tried a new approach to get the economy moving: Boldly defying criticisms that he would unwisely push up the budget deficit, Kennedy was the first President to use investment-tax credits and major income-tax cuts. He showed that these tools could work.
Still, the tax credits for business investment have generated decades of debate. Some economists contend that the credits wrongly favored some types of investment, like equipment, over others, like factory buildings.
Kennedy's Council of Economic Advisers was loath to recommend deficit spending and urged him to adopt the tax credit for corporate investments. In 1962, Congress approved the White House's proposal to give a 7 percent tax credit on equipment purchases.
"The investment tax credit looked like a good way to get a lot of bang for the buck," recalled James Tobin, a Nobel Prize-winning economist at Yale University and a member of Kennedy's Council of Economic Advisers.
There certainly was a bang; corporate investment in durable equipment doubled from 1962 to 1964, and employment jumped by 2.5 million.
But the President wanted to do more, hoping to reduce the jobless rate from 5.5 percent to 4 percent. So in 1963 he called for cutting income taxes as well.
Congress did not pass those cuts until 1964, after Kennedy had been assassinated. They reduced the range of personal income tax rates to 16 percent to 77 percent, down from 22 percent to 91 percent. Economic growth rose by 5.6 percent in both 1964 and 1965, and the jobless rate fell to 4 percent in 1965, causing Administration officials to congratulate themselves once again.
The Kennedy tax cuts inspired President Ronald Reagan's economic advisers, who pointed out that after the tax cuts, the Government's revenue actually increased, thanks to faster economic growth. But most economists say the main reasons tax revenue rose were inflation and and the way it pushed people into higher tax brackets.
Looking back today, some economists say Kennedy's advisers may be receiving too much credit. They say the effects of the Federal Reserve's low interest rates were overlooked at that time.
And now the wisdom of investment-tax credits is being called into question. Prof. Dale Jorgenson, an economist at Harvard University, believes they improperly skew investment toward certain areas, like machinery, and borrow from the future by moving up to today investments that would more properly have been made tomorrow.
"The Kennedy investment-tax credits did a lot of good in the early 1960's and a lot of harm at the end of the 60's," he said. When the tax credits were suspended in 1966, corporate investment slipped badly. Carter's Programs Help for Jobless, But With Catches
When Jimmy Carter took office in 1977, he had two big economic worries: high unemployment lingering from the 1974-75 recession and severe unemployment among young blacks in cities and the rural South.
He attacked both these problems by vastly expanding the Comprehensive Employment and Training Act, CETA, a Federal jobs program that was established in 1973. He doubled its size to cover 725,000 people and directed its focus to the hiring and training of the hard-core unemployed.
His efforts showed that government could provide training and valuable work experience for these generally neglected Americans. The employment act also showed that public service programs usually do more than public works spending to provide jobs for these hard-core urban unemployed. Under CETA, many people were hired as City Hall secretaries or park maintenance workers for example.
Had the same sums been spent on gleaming public works projects like highways or high-speed trains, these people would probably not have been hired because they lacked the skills and membership in the unions that often controlled the hiring.
But the act underlined the difficulties of rapidly doubling the size of a government jobs program. It was marred by accusations of fraud, nepotism and inefficiency. For example, city halls hired receptionists who sat in rooms where the phone never rang.
"CETA was a flop," argues William A. Niskanen, chairman of the Cato Institute, a Washington research group, and a member of President Ronald Reagan's Council of Economic Advisers. "It created jobs in the government sector where the work was of no particular value."
Some economists cite CETA, as well as an accompanying public works program, as the foremost examples of jobs programs that came too late, after economic growth had picked up. They say the Carter programs helped produce the economic overheating and double-digit inflation of the late 1970's. But Carter Administration officials say the huge increases in the prices of oil from Arab nations in 1979 caused the high inflation, not CETA.
Although Mr. Carter's Secretary of Labor, Ray Marshall, admits CETA was unwieldy and occasionally inefficient, he praised the program for helping young blacks.
"Thanks to this program, black male employment increased for the first time in the 1970's," he said in an interview. Reagan's Tax Cuts Boom Is Sparked As Debt Deepens
President Reagan stormed into office with a mandate to cut taxes, saying this would unleash American enterprise and spur economic growth. In his first months as President, he muscled Congress into passing the largest tax cut in history, a measure that reduced taxes by $280 billion over three years and included a 20 percent cut in personal income taxes as well as a corporate income tax reduction.
Although the Federal Reserve's high interest rates pushed the nation into a deep recession soon after the tax cuts were enacted, the extra money the cuts put in people's pockets helped pave the way for an economic rebound once interest rates fell.
"The tax cuts played an important role in the long expansion that started in late 1982," argues Murray Weidenbaum, Mr. Reagan's first chairman of the Council of Economic Advisers. Which Perspective Is Right?
A decade later, it is hard to find a dispassionate analysis of the Reagan tax cuts. Indeed, economists and politicians are still locked in a sharp ideological debate. Conservatives argue that the cuts lifted the economy by encouraging companies to invest more and people to work harder. In their view, the cuts helped produce 17 million new jobs in Mr. Reagan's two terms.
But Democratic economists heartily disagree. They note that the Reagan tax cuts did not, as promised, generate enough growth and tax revenue to prevent the deficit from ballooning.
And they say the main reason revenue did not increase as much as taxes were cut, as had happened under President Kennedy, was that the Reagan tax cuts were so much deeper.
These Democratic economists also assert that the tax cuts merely stimulated the economy in the old Keynesian way: generating growth by increasing the Government's deficit.
The truth probably lies somewhere in between. The tax cuts did stimulate consumers to buy more and businesses to invest more. Still, investment increased less than had been predicted and remained weak, compared with both Japan and Germany.
As for the 17 million new jobs created in the Reagan years, Democratic economists argue that they were created mainly because so many baby boomers entered the labor force and so many wives found jobs to supplement their husbands' stagnating incomes.
Whatever the effect of the Reagan tax cuts in the early 80's, most economists agree they have undercut growth late in the last decade and in the early 1990's. By the late 80's the cuts, combined with stepped-up military spending, had created annual deficits of close to $200 billion, leading to high long-term interest rates that dampen business investment and home building.
"Yes, they helped move the economy up" in the early 80's, said Charles L. Schultze, chairman of President Carter's Council of Economic Advisers. "But they did that with far too much consumption and far too little investment needed to prepare America for the future."
With its focus on increasing investment, the program that President-elect Clinton has outlined is in many ways a reaction to the perceived shortcomings of the Reagan tax cuts.
By calling for investment-tax credits, investment in public works and carefully monitored job training at the same time, Mr. Clinton hopes to improve on the job creation experiences of all the Presidents since Roosevelt.

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Intervention Is Bold, but Has a Basis in History

After a week of mounting chaos in financial markets around the globe, the United States took a momentous step that shifts power in the economy toward Washington and away from Wall Street.
The government’s plan to prop up banks large and small — along with recent bailouts as well as guarantees to support business loans, money markets and bank lending — represents the most sweeping government moves into the nation’s financial markets since the Great Depression, and perhaps ever, according to economists and finance experts.
The high-stakes program is intended to halt the worst financial crisis since the 1930s. If successful, it could long be studied by historians as a textbook case of the emergency role that government can play to rescue a teetering economy.
“It is profound, and it is something of a shift back to the state,” said Adam S. Posen, an economist at the Peterson Institute for International Economics. “But is this a recasting of capitalism? I think what we’ll see is that the government acts as a silent partner and gets out as soon as it can.”
Indeed, they say, many questions remain. Is the government picking winners in a plan that initially seems tilted toward the nation’s largest banks? What strings are attached to the investment in matters like executive pay? Will the move presage a more forceful government hand to control financial markets or will it be a brief stint as capitalism’s protector?
The package does call for the government investments to be in three-year securities that the banks can repay at any time, when markets settle and conditions improve. “This is clearly a crisis measure in crisis times, but it’s a good thing there is a sunset provision that limits the length of the government’s investment,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.
The United States is acting in step with Europe, where governments often take a more interventionist stance in economies and the financial systems are in the hands of a comparatively small number of banks.
Britain took the lead last week, declaring its intention to take equity stakes in banks to steady them. In the last two days, France, Italy and Spain have announced rescue packages for their banks that include state shareholdings.
The government’s plan is an exceptional step, but not an unprecedented one.
The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, yet the practice strays at times. Over the last century, the federal government has occasionally taken stakes in railways, coal mines and steel mills, and has even taken a controlling interest in banks when it was deemed to be in the national interest.
The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under federal stewardship.
Finance experts say that having Washington take stakes in United States banks now — like government interventions in the past — would be a promising move to address an economic emergency. The plan by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets.
Elsewhere, government bank-investment programs are routinely called nationalization programs. But that is not likely in the United States, where nationalization is a word to avoid, given the aversion to anything that hints of socialism.
In past times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. After the war ended, bondholders and stockholders were compensated and railways were returned to private ownership in 1920.
During World War II, Washington seized dozens of companies, including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry S. Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industry-wide strike that would cripple the Korean War effort. That nationalization did not last long, though, because the Supreme Court ruled the move an unconstitutional abuse of presidential power.
In banking, the government took an 80 percent stake in the Continental Illinois Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As the nation’s seventh-largest bank, Continental Illinois was deemed “too big to fail” by federal regulators, who feared wider turmoil in the financial markets. In the end, the government lost an estimated $1 billion on the bad loans it bought as part of the takeover of Continental, which eventually became part of Bank of America.
The nearest precedent for the Treasury plan, finance experts say, are the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks, but also bought stock in 6,000 banks, at a cost of $1.3 billion, said Mr. Sylla, the N.Y.U. economist. A similar effort these days, in proportion to today’s economy, would be about $200 billion.
When the economy stabilized eventually, the government sold the stock to private investors or the banks themselves — and about broke even, Mr. Sylla estimated. The 1930s program was a good one, experts say, but the government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis with a forceful government intervention in the marketplace. And Ben S. Bernanke, chairman of the Federal Reserve, has studied the Great Depression and the policy miscues in those years.
“The goal is to get the engine of capitalism going as productively as possible,” said Nancy Koehn, a historian at the Harvard Business School. “Ideology is a luxury good in times of crisis.”
The traditional American reluctance for government ownership is not shared in other countries. After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state’s role in the economy.
Europe remains far more comfortable with government having a strong hand in business. So when Sweden, for example, faced a financial crisis in the early 1990s, the nationalization of much of the banking industry was welcomed. The Swedish government quickly bought stakes in banks, and sold most of them off later — a model of swift, forceful intervention in a credit crisis, financial experts say.
“In Europe, the concept of the social contract is much more social — that is, socialist — than we’ve been comfortable with in America,” said Robert F. Bruner, a finance expert at the Darden School of Business at the University of Virginia.
“The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?” Mr. Bruner said. “The auto industry is in dire straits and the airline industry is in trouble, for example.”
“But the spill-over effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense,” Mr. Bruner said.

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Obama Expands Economic Plans

Senator Barack Obama on Monday expanded his economic platform, including proposals to spur new jobs, to give Americans penalty-free access to retirement savings to help them through the downturn, to urge a 90-day moratorium on home foreclosures and to lend money to strapped local and state governments.
“We need to give people the breathing room they need to get back on their feet,” Mr. Obama said in an afternoon speech here at the Sea Gate Convention Centre before a crowd of more than 3,000 people.

Mr. Obama called on Congress to double by another $25 billion the government loan guarantees for automakers and to temporarily eliminate taxes on unemployment benefits.

Campaign advisers said those steps and several others could be taken before January through current laws or by the Democratic-controlled Congress acting in a lame-duck session.

Mr. Obama outlined his revised plan in Toledo, a struggling city that is representative of the economic crisis and the battle for industrial-belt swing states that could determine the winner of the Nov. 4 election. He is spending three days in northwestern Ohio, sequestered with an advisers to prepare for the third presidential debate on Wednesday.

In a 30-minute address here, Mr. Obama also called on Americans to embrace a new “ethic of responsibility.” His speech was supplemented with visions of optimism, but conceded that tough times faced the nation in the coming months and years.

“I won’t pretend this will be easy,” Mr. Obama said. “George Bush has dug a deep hole for us. It’s going to take a while for us to dig our way out. We’re going to have to set priorities as never before.”

Senator John McCain, his Republican rival, also gave an economic speech in Virginia Beach, Va., with no new policy prescriptions, having rejected his advisers’ options over the weekend as too gimmicky, according to one Republican close to the campaign. He offered a glum sense of the nation’s economic outlook, bracing people for the challenges ahead.

“These are hard times, my friends,” Mr. McCain said. “Our economy is in crisis. Financial markets are collapsing. Credit is drying up. Your savings are in danger and your retirement is at risk. Jobs are disappearing.”

While the Obama campaign billed the speech here as a major economic address, about three-fourths of the proposals had already been announced. But the handful of new plans were intended to highlight how he would immediately help middle-class Americans — if not his own political standing by reassuring voters he is on top of the crisis.
“At a time when the ups and downs of the stock market have rarely been so unpredictable and dramatic,” Mr. Obama said, “we also need to give families and retirees more flexibility and security when it comes to their retirement savings.”
Mr. Obama reprimanded his audience when people started jeering at the mention of Mr. McCain’s name, declaring: “We don’t need that. We just need to vote.”
Mr. Obama praised Mr. McCain’s proposal to waive the rules that penalize retiree withdrawals from 401(k)’s, saying: “I want to give credit where credit is due.”
Before Mr. Obama spoke here, aides announced the highlights of his speech. They did so after word had spread on Sunday evening that Mr. McCain would not be presenting new economic proposals, as had been suggested by some aides.
The Obama campaign was attempting to maintain its hold on the economic message that has lifted the Democratic candidate in recent weeks.
“We have the advantage of sharing ideas that are consistent with the ideas we have shared before,” David Axelrod, the campaign’s chief strategist, said in an interview. New polls suggest mounting economic anxieties among voters are fueling Mr. Obama’s growing lead in many polls against Mr. McCain.

The main new proposals would:

— for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce;
— allow savers with tax-favored Individual Retirement Accounts and 401(k)’s to withdraw 15 percent of those retirement savings, up to a maximum of $10,000, without paying a tax penalty as the law currently requires for withdrawals before age 59 and a half;
— bar financial institutions that take advantage of the Treasury’s rescue plan from foreclosing on the mortgages of any homeowners who are making “good-faith efforts” to make payments;
— direct the Treasury and the Federal Reserve to create a temporary facility for loans to state and local governments, similar to the Fed’s new arrangement to loan corporations money by buying their commercial paper, which are the I.O.U.s that help businesses with daily operating expenses like payrolls.

Tucker Bounds, a spokesman for Mr. McCain, criticized the Obama plan as one that would raise taxes on Americans, which he said would have “a devastating effect.”
“Interestingly, Barack Obama called a moratorium on foreclosures, which is a policy he had previously labeled disastrous when it was proposed by a political opponent,” Mr. Bounds said, referring to a plan proposed by Senator Hillary Rodham Clinton. “Proving yet again that Barack Obama’s positions on the issues are tied to elections, not solutions for the American people.”
During his remarks here, Mr. Obama gently scolded all Americans for “living beyond their means — from Wall Street to Washington to even some on Main Street.” His audience of supporters applauded as he said it was a moment in the nation’s history to pull together and sacrifice.
“We’ve lived through an era of easy money, in which we were allowed and even encouraged to spend without limits; to take out as many credit cards as possible, to take out as many credit cards as possible, to borrow instead of save,” Mr. Obama said. “Now, I know that in an age of declining wages and skyrocketing costs, for many folks this was not a choice but a necessity just to keep up, I understand that.”
“But we now know how dangerous that can be,” he continued. “Once we get past the present emergency, which requires immediate new investments, we have to break that cycle of debt. Our long-term future requires that we do what’s necessary to scale down our deficits, grow wages and encourage personal savings again.”

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Obama’s New Deal for America

Kudos to Sen. Obama for hard-wiring an empathetic connection to the beleaguered American middle class at last night's debate. His winning performance inspired me to go outside my normal national security box to consider how he could construct a greater economic recovery program to meet dead on the fear and apprehension that is undermining confidence in our future.
I believe now is the time for Obama to consider a bolder and more historic approach to the financial crisis by presenting to middle income Americans a step-by-step "big think" FDR-style New Deal program to add greatness and urgency to his economic recovery plan. Tough times call for urgent and big-think measures. Surely, we are in this era, once again.
In 1933, Franklin Delano Roosevelt unveiled a landmark economic recovery plan that created a "New Deal" for America's middle class and restored confidence to a hard-pressed nation. It was imaginative, bold and daring and lifted America up by its bootstraps and restored confidence and stability. It took several years, but it worked.
A similar type of "new deal" program aimed principally at the crux of our financial crisis -- the falling U.S. housing market -- is now urgently needed by our Democratic standard-bearer to create an indelibly understandable and comprehensive framework in the minds of voters that he has the most coherent and bold recovery program that gets at the very heart of what plunged our financial markets into chaos (aside from greedy Wall Street executives peddling credit default swaps, etc.) . Another financial infusion of funds to average Americans modeled after the last economic stimulus proposal may just be too insufficient to meet the emergency that will surely follow us well into 2009.
Accordingly, coupled with his affordable health care program, necessary tax reductions and renewable energy incentives the components of the Obama "New Deal" for middle-income America could include the following options:
-- Setting the table, so to speak: take one day out of the campaign to convene an emergency economic summit of key financial advisors, business leaders and economists to discuss and assess the credit and liquidity crisis with the objective of legitimating this "New Deal" style-emergency recovery program for the middle class, and present it in a easily comprehensible speech to the American people (fireplaces always a good backdrop).
Program elements would include a new across-the-board housing-focused economic stimulus package. It would be be designed to ensure that the plan is directed at incentivizing prospective and existing home buyers to re-enter/remain in the housing ownership market. Such a stimulus would include the following components:
1. A tax credit on 2009 taxes in the amount of $10,000 used to purchase a principal residence for qualifying buyers whose FICO scores are deemed above the sub-prime lending qualifications and who can meet reasonable credit worthiness and income qualifications to manage the special mortgage requirements noted below.
2. A government-guaranty fixed rate mortgage program offered through banks that would set a federally-mandated interest rate ceiling of 5.5% on 30 year fixed rate conforming mortgages. The fixed-rate mortgage would provide an adequate return to banks that would be compelled to hold these mortgages in to assure the government-backed guaranty (thus avoiding the securitization shenanigans that got us into the fix in the first place).
3. A tax credit in the amount of $3,000 on 2009 and 2010 taxes to cover moving and out-of-pocket costs (excluding points) for qualifying purchasers of principal residences.
-- Propose to offer banks that are holding delinquent but not defaulted mortgages a federally financed .875% discount off the then federal rate on short term borrowings in exchange for converting conforming adjustable rate mortgages to fixed rate mortgages plus a "payment holiday" of 90 days to enable borrowers to regain their financial footing. This is significantly different than McCain's plan for the federal government to purchase mortgages.
-- Create a new series of 3-5 year U.S. Treasury bonds targeted to be purchased by Americans participating in 401K plans through licensed asset managers who would be incentivized to promote the purchase of such bonds by receiving a personal tax credit in 2009 and 2010 for the amount of such bonds sold. Pre-redeemed bonds would be used to finance the housing stimulus package components and interest earned would be tax deductible if/if purchasers use bonds as collateral toward housing purchases or qualified renewable energy improvements in existing or newly purchased houses.
-- Given the escalating unemployment rate and the lack of financial incentive to maintain current employment levels, propose an new Unemployment Recovery Program that would extend existing unemployment benefits for unemployed whose benefits have lapsed, AND provide a two year tax credit to employers who maintain their 2008 full and part-time time employee roster at levels not less than two-thirds existing salary and benefits equal up to 33% of any salary reduction for each employee retained; provided that any former full time employee that was laid off due to the economic crisis is rehired at comparable levels.
-- For Americans aged 55 or older who have lost at least 20% of the value in any annuity, retirement or 401K plan in 2008 due to losses directly attributable to passive equity portfolio losses, establish a one-time 2009 and 2010 tax deduction equal to 50% of the loss up to a maximum of $50,000.

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