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By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

But why exactly should America be so concerned? Yes, we export to Europe – but those exports aren’t going to dry up. And in any event, they’re tiny compared to the size of the U.S. economy.

If you want the real reason, follow the money. A Greek (or Irish or Spanish or Italian or Portugese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008.

Financial chaos.

Investors are already getting the scent. Stocks slumped to 13-month low on Monday as investors dumped Wall Street bank shares. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

This week’s biggest economic show occurs Wednesday when Fed chair Ben Bernanke steps in front of the cameras for the Fed’s first-ever news conference. The question on everyone’s mind: Will the Fed signal it’s now more worried about inflation than recession?

Much of Wall Street thinks inflation is now the biggest threat to the U.S. economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession.

The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones.

The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking. (more…)

Sen. Bernie Sanders

By Sen. Bernie Sanders
Independent U.S. Senator from Vermont

At a Senate Budget Committee hearing in 2009, I asked Fed Chairman Ben Bernanke to tell the American people the names of the financial institutions that received an unprecedented backdoor bailout from the Federal Reserve, how much they received, and the exact terms of this assistance. He refused. A year and a half later, as a result of an amendment that I was able to include in the Wall Street reform bill, we have begun to lift the veil of secrecy at the Fed and the American people now have this information.

It is unfortunate that it took this long and it is a shame that the biggest banks in America and Mr. Bernanke fought to keep this secret from the American public every step of the way. But, the details on this bailout are now on the Federal Reserve’s website and this is a major victory for the American taxpayer and for transparency in government.

Importantly, my amendment also required the Government Accountability Office to conduct a top-to-bottom audit of all of the emergency lending the Fed provided during the financial crisis to be completed on July 21, 2011, which will take a hard look at all of the potential conflicts of interest that took place with respect to this bailout. So, in many respects, details that the Fed was forced to divulge on Wednesday about the $3.3 trillion in emergency loans that until now were totally kept from public scrutiny, marked the beginning, not the end, of lifting the veil of secrecy at the Fed.

After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multi-trillion-dollar bailout of Wall Street and corporate America. As a result of this disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions and how we can make our financial institutions more responsive to the needs of ordinary Americans and small businesses. (more…)

--------- Tula Connell --------- Photo by Joe Kekeris

By Tula Connell
AFL-CIO Managing Editor

When the Republicans take over the U.S. House in January, one of the first things on their agenda is payback to those who helped get them in office: Wall Street.

And they’ve already announced one way they plan to do that.

The financial reform legislation that President Obama signed into law in July gave regulators a significant tool to rein in gambling by big Wall Street banks. The “Volcker Rule,” named after former Federal Reserve Chairman Paul Volcker who proposed it, is aimed at preventing Big Banks from speculating on securities or other complex financial products (a.k.a. “proprietary trading”) and putting strict limits on their ability to bet on hedge funds and private equity funds.

Payback time. Wall Street wants House Republicans to remember who brought them to Congress

The Volcker Rule would help prevent taxpayers from having to bail out banks that make risky bets and lose, which is exactly what happened during the recent financial crisis. Bear Stearns bailed out two of its hedge funds for more than $3 billion shortly before it was taken over by JPMorgan Chase in a fire sale orchestrated by federal regulators. In March 2008, Citigroup spent $1 billion to bail out several of its struggling hedge funds. Six months later, U.S. taxpayers were forced to inject billions of dollars into Citigroup to prevent a systemic crisis.

Republicans, however, are more concerned with making sure bank executives keep getting richer than preventing taxpayer bailouts. According to the Financial Times this morning, Republican Spencer Bachus, a potential chairman of the House Financial Services Committee, sent a letter to federal financial regulators expressing concern that shareholders of Goldman Sachs and JPMorgan Chase “will be hurt because the banks will be less profitable.”

The Financial Stability Oversight Council, whose members include Tim Geithner, Treasury secretary, and Ben Bernanke, Fed chairman, is this week asking for public comments on how the rules should be written.

Volcker and some Democratic senators are urging a broadly defined ban on proprietary trading and strong limits on Big Bank’s ability to invest in hedge funds and private equity. If regulators take a strong stance on the Volcker Rule, as Volcker and the Democrats have urged, banks will have to take a step back from making bets on complex financial products like derivatives and they will have more money to lend and invest in American businesses that create jobs for hardworking people.

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Re-posted from the AFL-CIO Blog

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Can the Fed rescue the economy by making money even cheaper than it already is? A debate is being played out in the Fed about whether it should return to so-called “quantitative easing” — buying more mortgage-backed securities, Treasury bills, and other bonds — in order to lower the cost of capital still further.

The sad reality is that cheaper money won’t work. Individuals aren’t borrowing because they’re still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they’re not in a position to borrow. Small businesses aren’t borrowing because they have no reason to expand. Retail business is down, construction is down, even manufacturing suppliers are losing ground.

That leaves large corporations. They’ll be happy to borrow more at even lower rates than now — even though they’re already sitting on mountains of money.

But this big-business borrowing won’t create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They’ve been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.

If Bernanke and company make it even cheaper to borrow, they’ll be unleashing a third corporate strategy for creating more profits but fewer jobs — mergers and acquisitions.

The M&A wave has already started. Continental and United Airlines just got approval to merge. Biotech giant Genzyme is on the auction block after Sanofi-Aventis announced a $18.5 billion bid. On Friday, 3Par, a data storage company, accepted a $1.8 billion takeover offer from Dell — one day after Hewlett-Packard raised its offer. Campbell’s Soup is eying parts of United Biscuits, BHP Billiton has put in a takeover bid for Potash, Oracle or H-P are likely to pay up to $1.5 billion for security software maker ArcSight. Bain Capital is expected to acquire Air Medical Group for almost $1 billion. The insurance industry is headed for the biggest merger boom in recent history.

Who wins from all this? If history is a guide, shareholders of acquired companies do better than shareholders of companies doing the acquiring. Top executives who end up running bigger corporations get fatter pay packages. And Wall Street and big-name corporate law firms who engineer the M&As reap a bundle.

Who loses? Large numbers of ordinary workers will lose their jobs. After all, the purpose M&As is to create greater economies of scale and more “synergies.” Translated: More pink slips.

Last week in Jackson Hole, Ben Bernanke insisted the Fed will do what’s necessary to increase consumer and business spending in order to keep the economy growing. But cheaper money won’t necessarily create the kind of spending that generates more jobs. In fact, right now it’s having the opposite effect. When consumers and small businesses can’t and won’t borrow more, big businesses use cheap money to bid up the prices of corporate assets and cut payrolls.

What we need now is more jobs, not bigger corporations.

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Cross-posted from Robert Reich’s Blog

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Robert Reich served as the nation’s 22nd Secretary of Labor and now is a professor of public policy at the University of California at Berkeley. His latest book, “Supercapitalism,” is out in paperback. For copies of his articles, books, and public radio commentaries, go to www.RobertReich.org.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Last week, the Fed announced that it would use the proceeds from retired mortgage-backed securities to buy up more government bonds. This may have a very modest effect in keeping long-term interest rates low, thereby giving a small boost to the economy.

Such a measure would be reasonable if the economy was basically fine and just in need of a modest lift. But this is not the case.

The unemployment rate is 9.5% and virtually certain to rise in the second half of the year. Job growth has basically stopped and GDP is likely to be in the range of 1-2% in the next four quarters, as state and local governments cut back spending, the stimulus phases down and the housing market resumes its slide.

In this scenario, the Fed should be taking aggressive steps to bring the economy back to full employment. After all, this is part of its job description. Its responsibility is to promote price stability and full employment. There is no concern about price stability in the sense of the rate of inflation being too high right now. Therefore, the Fed’s responsibility should be to do everything within its power to reach full employment; obviously, we are nowhere close now.

Its chairman, Ben Bernanke, even knows exactly what needs to be done, as the Wall Street Journal recently reminded us. He wrote a paper back in 1999 about Japan’s stagnant economy and mild deflation. Following a recommendation by Paul Krugman, he urged Japan’s central bank to target an inflation rate in the range of 3-4%. (more…)

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

It is amazing how people in Washington are so forgiving — of each other. We have close to 15 million people unemployed and more than 8 million people under-employed because the folks managing our economy were incompetent.

In spite of the efforts of economists and policy types to portray the cause of the economic collapse as being complicated, it wasn’t. It was really really simple. Prior to the downturn the economy was being driven by an $8 trillion housing bubble. This led to a boom in residential construction. (A separate bubble in commercial real estate led to a boom in non-residential construction.) The equity generated by the housing bubble also led to a surge in consumption, with the saving rate falling to almost zero at the peak of the bubble.

It was inevitable that the bubble burst. Bubbles do that. They lead to an over-supply and eventually we run out of suckers willing or able to pay bubble-inflated prices for houses. The collapse caused the economy to lose $1.2 trillion in annual demand from the private sector. Annual construction spending fell back by close to $600 billion and consumption fell by roughly the same amount as a result of the loss of housing wealth.

There is no mechanism that allows the economy to easily replace this much demand. Hence we were guaranteed a severe downturn, without massive amounts of spending by the government. (more…)

Les Leopold

By Les Leopold
Author, “The Looting of America”

Is it good news that the hiring of 411,000 temporary census workers finally made a small dent in our enormous jobs crisis… at least temporarily? Shouldn’t we now listen more carefully to Senator Judd Gregg of New Hampshire who wants to cut off extended unemployment benefits? He explained it this way on CNBC:

Because you’re out of the recession, you’re starting to see growth and you’re clearly going to dampen the capacity of that growth if you basically keep an economy that encourages people to, rather than go out and look for work, to stay on unemployment. Yes, it’s important to do that up to a certain level, but at some point you’ve got to acknowledge that we’re not Europe. (Senator Judd Gregg on CNBC)

The honorable senator and many other pols and pundits apparently believe that at least some unemployed Americans are just coasting on their unemployment checks, having a bit of a vacation rather than grabbing one of the many jobs being generated in this red-hot recovery of ours.

Somehow Gregg and company studiously ignore the fact that there still aren’t enough jobs to go around.

As May’s unemployment numbers show, we’re still in a jobs recession, despite the impact of temporary census jobs. More than 29 million Americans are still without work or forced into part-time work — that’s a real jobless rate of 16.6% (BLS U6). (Leo Hindery Jr.’s more precise estimate is 30.16 million for a jobless rate of 18.8 percent.) Nearly 7 million people have been jobless for over 26 weeks (the “long-term unemployed”) — more than at any time since the Great Depression. We still need more than 22 million new jobs to get us anywhere near full-employment.

Senator Gregg is not the only one who is putting the onus on the unemployed. The philosophy behind his statement is shared by many leading governmental officials. (And after all, the Obama administration wanted Gregg to head the Commerce Department. That thought he’s a moderate?)

The philosophy they share is this: In the ideal free market, the price of labor determines the amount of employment, or so the theory goes. If the price of labor goes down, there will be more jobs. By cutting the amount and length of unemployment benefits, we effectively lower the price of labor overall, forcing more people to compete for scarce jobs. Fed Chair Ben Bernanke has blamed high unemployment during the Great Depression on “sticky” labor markets — sticky because resurgent unions and New Deal wage and hour laws prevented employers from cutting wages the way they wanted to during a time of falling prices. (Gregg might say that in those days we were way too much like Europe.)

In short, the way to create jobs is to get those lazy workers off the dole so that they can help lower wages across the economy. Only then will employers find it worth their while to hire more workers.

Interesting theory, but it doesn’t apply to this planet.

In fact, during a major economic crash — like the Great Depression and the current Great Recession — the last thing you want to do is reduce the income of working people and the unemployed. With less income, people spend less. And falling consumer demand is the pathway to double-dip recession. The net result: even more job loss and a continued downward spiral — less demand, fewer business sales, fewer jobs needed, lower tax revenues, more public sector layoffs… and down we go.

Have Gregg and others forgotten that the Great Recession began on Wall Street? Do they really believe that coddled unemployed workers are to blame for our economy’s failure to produce sufficient jobs? (See the New York Times report, “Black in Memphis Lose Decades of Economic Gain” for a graphic picture of how money hungry banks have devastated whole communities, )

How can they be so blind?

Actually, they are far from blind — they’re just covering their eyes. No one in power wants to face up to the enormity of the job crisis. And no one really has a plan to get us out of it. Everyone is praying that “the markets” — the gods who appear to rule our world — will recover and start spewing out the tens of millions of jobs we need. No one has the nerve to say that we’ll never get those jobs back — not until the government (either directly or through contractors) starts hiring people en masse to repair our physical and intellectual infrastructures.

And of course no one has the nerve to point the finger at those who really are on the dole — to the tune of $900,000 an hour, in the case of our hedge fund elites. Or the Wall Street bonus babies who walked off with $150 billion last year as a direct result of our multi-trillion dollar bailouts. No, it’s a lot safer to beat up on the unemployed — no campaign contributions lost there.

It’s time to square up to the jobs crisis. It won’t go away by itself. The key to solving the crisis? Move money from Wall Street to Main Street. The only argument we need to have is over how best to do it. Personally, I’m for massive government investment in renewable energy, conservation, and education (especially for dislocated workers). We could create a million weatherization jobs almost overnight if we had the guts to put a 50 percent windfall profits tax on Wall Street bonus babies and hedge fund billionaires. Not only would we get people back to work, but we’d have better insulated homes and offices, vastly reducing our dependence on oil.

But no. Now that we’ve propped up Wall Street and shoveled out some stimulus money, we’re told that we’re broke. Deficit mania is setting in. So forget creating jobs. Besides, the mysterious and all-powerful “markets” won’t like it if government starts playing a more active role. They’ll jack up interest rates to punish any country that fails to cut government spending. The politicians are on their knees praying to the market gods and offering up sacrifices in the hopes that they can get through the next election cycle.

Catering to the whims of financial markets is madness. Are we living in a theocracy or a democracy? Do we have to grovel before the market gods? Or can we create a world where there is ample work and more harmony with our environment? Who decides? The wrathful gods of Wall Street? Or the people who actually work for a living — or would like to, if only they could find a job?

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Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

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This piece was first published on The Huffington Post

Dean Baker

 By Dean Baker
Co-Director, Center for Economic and Policy Research

While it may not be the job of the Chairman of the Federal Reserve Board to deceive Congress to advance the interests of the big banks, apparently no one has informed Ben Bernanke of this fact.

Some people may recall the role that Mr. Bernanke played in helping to get the TARP through Congress. As part of the effort to build fear among members, he told Congress: “The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper.”

This was a big deal. Most large corporations are now dependent on selling commercial paper to finance their ongoing operations. They borrow money on the commercial paper market to meet their payroll and pay suppliers. If major companies were not able to sell commercial paper, they would quickly be unable to pay their bills and the economy really could shut down.

The extent to which the commercial paper market was actually in danger of freezing up is debatable. However, what is not debatable is the fact that the Federal Reserve Board had the ability to single-handedly keep the commercial paper market operating. In fact, the weekend after Congress approved the TARP, Bernanke announced that he was establishing the Commercial Paper Funding Facility. This facility directly purchased commercial paper from non-financial companies, ensuring that they had the money to stay in business.

In other words, even if the commercial paper market was shutting down, as Mr. Bernanke told Congress, there was no reason that Congress had to rush to pass the TARP. The Fed already had the ability to keep the commercial paper market going and Mr. Bernanke was prepared to exercise this authority before any TARP funds would be entering the system. Bernanke was helping to create the atmosphere of fear that was needed to get Congress to authorize $700 billion in TARP funds for the banks, with few substantive conditions.

It seems that Bernanke is again in his “fool Congress” mode. He sent a letter to the Senate arguing that it should remove language that the Agriculture Committee put into the financial reform bill that would require banks to spin off their derivative trading units. The intent of this language is to separate out the business of the commercial banks, which operate with government insured deposits, from the more risky operations associated with derivative trading.

There are reasonable arguments that can be made on this issue, but these did not appear in Mr. Bernanke’s letter. At the center of Bernanke’s argument are two points that are just not true. He argues that the legislation would prevent banks from buying derivatives to hedge interest rate risk. This was not the intent of the rules and this is not how most people other than Bernanke are interpreting them. The issue is whether commercial banks should be acting as the intermediaries in trading derivatives, not whether they can buy derivatives as end users, just as any other end user would.

The other false concern raised by Bernanke is that derivative trading will be taken away from relatively closely regulated bank holding companies and transferred to more poorly regulated parts of the financial system. This is a false concern because the Ag Committee language only requires that the trading be taken away from the commercial banks that are protected by government insurance. Banks would be allowed to spin off divisions that are still within the bank holding company, however these divisions would not enjoy the special protections provided to commercial banks.

Finally, Bernanke effectively dismisses the concern that motivates removing trading from commercial banks by asserting that the era of “too big to fail” (TBTF) banks has ended. If Mr. Bernanke believes this, he is among a tiny minority of economists. While the financial reform bill includes many elements that will improve oversight and limit risk, there are few economists who believe that if Citigroup or Goldman Sachs were facing bankruptcy, the government would just allow them to collapse.

Of course the whole point of pulling derivative trading away from commercial banks is to ensure that taxpayers will not be liable for the mistakes that banks may make in the derivative trading business. Derivative trading is considerable more risky than the personal and business loans that are the normal business of commercial banks. If we assume that there are no banks that are now TBTF then we need not be concerned about a taxpayer bailout, but few, if any, economists would be as sanguine about this risk as Mr. Bernanke.

In short, this looks like the same sort of effort to misrepresent issues to Congress as we saw with the TARP. Mr. Bernanke is a very accomplished economist and he no doubt has much wisdom to share with Congress. It would be a big step forward if he saw this as being his job, instead of defending the interests of the big banks.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Huffington Post.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The country faces a serious crisis in the form of a manufactured crisis over the budget deficit. This is a crisis because concerns over the size of the budget deficit are preventing the government from taking the steps needed to reduce the unemployment rate. This creates the absurd situation where we have millions of people who are unemployed, not because of their own lack of skills or unwillingness to work, but because people like Alan Greenspan and Ben Bernanke mismanaged the economy.

The basic story is very simple and one that we have known since Keynes. We need to create demand in the economy. The problem is that, as a society, we are not spending enough to keep the economy running at capacity. Prior to the collapse of the housing bubble, the economy was driven by booms in both residential and nonresidential construction. It was also driven by a consumption boom that was in turn fueled by the trillions of dollars of ephemeral housing bubble wealth.

With the collapse of the bubbles, both residential and nonresidential construction have collapsed. There is a huge amount of excess supply in both markets, which will leave construction badly depressed for years into the future. Together, we have lost well over $500 billion in annual demand from the construction sector. In addition, the loss of the ephemeral wealth created by the bubble has sent consumption plummeting, leading to the loss of an additional $500 billion a year in annual demand.

The hole from the collapse of construction and the falloff in consumption is more than $1 trillion a year. The government is the only force that can make up this demand. However, this means running large deficits. To boost the economy, the government must spend much more than it taxes.

The stimulus approved by Congress last year was a step in the right direction this way, but it was much too small. After making adjustments for some technical tax fixes and pulling out spending for later years, the stimulus ended up being around $300 billion a year. Even this exaggerates the impact of the government sector, since close to half of the stimulus is being offset by cutbacks and tax increases at the state and local level.

The answer in this situation should be simple: more stimulus. But the deficit hawks have gone on the warpath insisting that we have to start worrying about bringing the deficit down. They have filled the airwaves, print media and cyberspace with solemn pronouncements about how the deficit threatens to impose an ungodly burden on our children.

This is of course complete nonsense. Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing. But the deficit hawks would rather see our children suffer so that we can have smaller deficits.

In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country’s history.

We can also look to Japan, which now has a debt to GDP ratio of more than 180 percent. Investors are not running from Japanese debt. They are willing to hold long-term debt at interest rates close to 1.5 percent. In our own case, the 3.7 percent interest rate on long-term Treasury bonds remains near a historic low.

The story is that we are forcing people to be out of work – unable to properly care for their children – because people like billionaire investment banker Peter Peterson and his followers are able to buy their way into and dominate the public debate. The reality is that we have an unemployment crisis today, not a deficit crisis. The only crisis related to the deficit is that people with vast sums of money (i.e. the people who wrecked the economy) have been able to use that money to make the deficit into a crisis.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Truthout. Mr. Baker, a macroeconomist,  previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a member of Truthout’s Board of Advisers.