Political Economy category archive

“The industry and its backers are using fear tactics to tar a transparent and accountable health-care option as ‘government-run health care,’ ” Potter told the senators. “But what we have today is Wall Street-run health care that has proved itself an unworthy partner to doctors, hospitals,” and patients.

Brendan has more. Read this and this (warning: language).

Best done out of the light

U.S. banks are fighting the Obama administration plan to create a consumer agency for financial services as they seek to protect fees, such as credit-card penalties that have almost doubled to $19 billion in five years.

Fees imposed by banks accounted for 53 percent of industry income in 2008, up from 35 percent in 1995, according to R.K. Hammer Investment Bankers, a credit-card advisory firm. JPMorgan Chase & Co., the second-largest U.S. bank by assets, said such revenue doubled in the first quarter. A U.S. Consumer Financial Protection Agency also may add costs by expanding scrutiny.

Honestly, you can’t make this stuff up:

McDonald’s developed a complex scheme to keep country-club fees it paid for executive Tim Fenton out of the fast-food giant’s 2007 proxy statement, according to the civil complaint, filed in federal court in Illinois in late March by Lisa Bridges, who formerly worked for McDonald’s as a senior director of executive compensation.

The fees were $2,940.80. Fenton made more than $3.5 million in total compensation during 2006.

The suit, brought under the whistle-blower protection provision of the post-Enron Sarbanes-Oxley Act, claims McDonald’s discriminated against Bridges by firing her when she objected to the company’s alleged scheme.

It’s not just the pay and the bonuses. It’s the perks.

No wonder executives start to think of themselves as somehow anointed, rather than appointed.

The reality is all glitz and packaging and the old shell game:

(Elizabeth) Warren said that banking has changed over the years, from an old model that she called “simple and effective: consumers shopped around for products and terms, and lenders evaluated the creditworthiness of potential borrowers before making loans.

“Today, the business model has shifted. Giant lenders ‘compete’ for business by talking about nominal interest rates, free gifts and warm feelings, but the fine print hides the things that really rake in the cash. Today’s business model is about making money through tricks and traps,” she said.

Needless to say, the proprietors of the financial medicine shows banksters are protesting.

In labor relations, it is a truism that unions are the creation of management. Fair management does not cause unions.

In finance, regulation is the creation of the medicine show guys.

Not for dining. The Guardian of Sasha Abramsky’s book, Breadline USA:

It is Abramsky’s contention that the current sorry plight of low-income workers is a direct result of the “casino-capitalism experiment started by Ronald Reagan and ignominiously concluded under George W Bush”. And he makes a convincing argument to support his case. Whether the reader shares his view or not will largely depend on his or her own political persuasion. Liberals will cheer, and conservatives will cry foul – it must somehow be the fault of the poor. But whatever one deems to be the root cause, no one could argue that allowing the free market to do its thing for the past 30 years has had a positive effect on the lives of the working poor.

You can’t bank on them, not no more:

First National Bank of Anthony, Anthony, KS

Cooperative Bank, Wilmington, NC

Southern Community Bank, Fayetteville, GA

They’re gonna blow, Cap’n!

The Option Adjustable Rate Mortgages, that is:

That (the recent drop in mortgate interest rates) just postponed the problem, however, because most option ARMs have five-year automatic trigger dates. These loans were most prevalent in states such as California, Florida and Nevada, where home prices have sunk so far that many homeowners are underwater: They owe more than their homes are worth.

The bulk of outstanding option ARMs — a product no longer available to homebuyers — were issued between 2004 and 2007. Monthly payments on these mortgages are due to reset to a higher lending rate between 2009 and 2012.

In related developments, I listened yesterday to a discussion of Mr. Obama’s proposals for financial consumer protection. From the website:

The Administration plans the most sweeping overhaul of financial industry regulations since the Great Depression. The new rules expand powers for the Federal Reserve and change how mortgages are underwritten.

One of the guests, the one from the American Enterprise Institute, mouthpiece of the Ayn Rand school of business regulation, wiggled like a worm to blame the current financial situation on “predatory borrowing.”

The other guests did not let him get away with this. Neither did the callers. One caller who had worked for a mortgage broker called in and described the tactics the broker used to pressure persons into whifty mortgages. Another called to describe how, when he wanted a 30-year straight mortgage, his mortgage broker dragged the process out for weeks trying to sell him one anything but a 30-year straight.

Follow the link to hear the show or click here to listen (Real).

Customers didn’t create this mess. Bankers did.

This American Life, in a follow-up to its marvelous show from last year, “The Giant Pool of Money,” investigates why the regulators missed the boat bust:

One of the biggest questions about this financial crisis gripping our economy: How did it happen? Wasn’t someone supposed to watching things? Making sure people were acting prudently? Stopping, say, the largest insurance company in the world from making a 185 billion dollar bet that it couldn’t make good on? This week, we hear the stories of the people who were supposed to be overseeing things.

Follow the link to hear or download the show. Find other This American Life episodes on the economy here.

MarketWatch:

Amusement-park operator Six Flags Inc. filed for bankruptcy protection on Saturday and is seeking an expedited approval from the court of its pre-negotiated reorganization plan.

Bloomberg has a more longer story here. From the Bloomberg story:

Six Flags shares have fallen 86 percent in the past 12 months as investors have grown skeptical about the company’s ability to refinance preferred income equity redeemable shares, or PIERS, before their August redemption date. On Aug. 15, $287.5 million in preferred stock matures and $131 million of 8.875 percent senior notes come due next year.

The issue doesn’t seem to be profitability in the conventional sense. I read elsewhere (can’t remember where–yesterday was a long time ago) that day-to-day operations have been profitable for the last couple of years. Rather, it seems to be “leverage”–debt.

Despite the magic of double-entry bookkeeping (not the same as two sets of books) and Wall Street’s double-talk, the past year has proven that more debt does not magically mean more wealth (or, to use Wall Street’s double-talk, “wealth-creation”) unless the meny obtained through debt is actually used to create something useful, like a bridge or a school or a factory or such.

I haven’t dug it out yet and may never do so, but I got a dollar to a doughnut that a lot of the debt didn’t have anything to do with building new theme parks and improving the business, but just with “taking the cash out.”

I’m betting that cash didn’t go anywhere useful.

Bloomberg (emphasis added):

Fewer Americans filed claims for unemployment benefits last week, indicating the deepest job cuts may be subsiding even as companies hold off on hiring.

Initial jobless claims fell by 24,000 to 601,000 in the week ended June 6, fewer than forecast and the lowest level since January, from a revised 625,000 the prior week, Labor Department figures showed today in Washington. The number of people collecting benefits rose for a 19th straight time to a record 6.82 million in the prior week.

Meanwhile,

U.S. household wealth fell in the first quarter by $1.3 trillion, extending the biggest slump on record, as home and stock prices dropped.

Reuters:

There were 330,477 (U. S. bankruptcy) filings in the January-to-March period, up 10 percent from the previous quarter and up 35 percent from a year earlier, the Administrative Office of the U.S. Courts said this week. Consumer bankruptcy filings rose 33 percent from a year earlier, while business filings rose 64 percent.

The fee hand of the market.

Dour Bauer:

Eddie Bauer Holdings Inc., the U.S. outdoor-clothing chain, may seek bankruptcy protection as soon as this week, according to five people with knowledge of the discussions. The shares lost half their value.

(snip)

Eddie Bauer had $187.9 million in long-term borrowings and $2.62 million in cash in the quarter that ended April 4, according to a company filing. The company reported a loss of $44.5 million in the first quarter on sales of about $180 million.

If you read below the headlines, many of the bankruptcies are coming, not because of what’s happening today, but because of what happened yesterday–companies contracted oodles of debt figuring that they could just keep refinancing it forever.

Via Andrew Sullivan.

Bank of Lincolnwood, Lincolnwood, Illinois, ain’t no more.

The Nation explores tent cities. A nugget:

While recent media accounts portrayed Tent City’s incarnations as creatures of the recession–reborn Hoovervilles for the laid off and the foreclosed–shantytowns have been a periodic but permanent feature of American urban life for at least the past two decades. They are what connects us to São Paulo, Lagos and Mumbai, physical manifestations of our growing inequality and societal neglect. Seattle saw its first Tent City in 1990. The area now boasts three, one dating back to 2000, another to 2004. Portland’s Tent City (“Dignity Village”) has been around since 2001. No one living there, says resident Gaye Reyes, is recently homeless. In California’s San Joaquin Valley, the City of Fresno last fall began distributing a $2.3 million settlement to homeless people whose property was destroyed when the city repeatedly razed its Tent City between 2004 and 2006, at the apex of the economic boom.

Read the whole thing.

Bloomberg estimates:

Unemployment in the U.S. probably exceeded 9 percent in May for the first time in more than 25 years, underscoring the threat job losses pose for an economic recovery, a government report may show today.

The jobless rate jumped to 9.2 percent, the highest level since 1983, according to the median estimate of 75 economists in a Bloomberg News survey. Employers probably cut 520,000 workers from payrolls, the smallest decrease in seven months.

And a lot of the employment has been temp work.

Moral: A healthy economy can’t be built on financial shenanigans boxes of air. And, remember, this mess was not an accident. It was caused by policies. Republican policies.

Reuters:

Medical bills are involved in more than 60 percent of U.S. personal bankruptcies, an increase of 50 percent in just six years, U.S. researchers reported on Thursday.

More than 75 percent of these bankrupt families had health insurance but still were overwhelmed by their medical debts, the team at Harvard Law School, Harvard Medical School and Ohio University reported in the American Journal of Medicine.

(snip)

About 170 million people get health insurance through an employer but President Barack Obama says soaring healthcare costs are hurting the economy and forcing businesses to drop medical insurance for their workers. . . .

“Nationally, a quarter of firms cancel coverage immediately when an employee suffers a disabling illness; another quarter do so within a year,” the report reads.

Have cake, eat it too (emphasis added):

Typically, he (Barry Bosworth, an economist in Washington at the Brookings Institution–ed.) said, a company like Microsoft develops a product like Windows in the United States and deducts those costs against U.S. income. It then transfers the technology to a subsidiary in Ireland, where corporate tax rates are lower, without charging licensing fees. The company then assigns its foreign sales to the Irish subsidiary so it doesn’t have to claim the income in the United States.

“What Microsoft wants to do is deduct the cost at a high tax rate and report the profits at a low tax rate,” Bosworth said. “Relative to where they are now, the administration’s proposals are less favorable, so there will be some rebalancing on their part.”

This bad:

New Castle County Council (Delaware–ed.) members are joining other county employees and reducing their salaries by 5 percent.

Since they do not have authority to change their own salaries–the law prevents them from voting on their own pay–they say they will accomplish this by returning money to the country treasury.