Next Bubble Threatens the American Economy
|September 9, 2009||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
Next Bubble Threatens the American Economy
Six Months of Stimulus: What Weve Learned
All that deficit spending, and still no prosperity for the bottom, and no defense against a repeat recession. We trim, blend, and append five 2009 articles from: (1) ProPublica, Aug 19, on the stimulus by Christopher Flavelle; (2) Weekly Wastebasket, Aug 28, on the federal debt by Taxpayers for Common Sense; (3) Reuters, Aug 31, on the Feds profits; (4) MarketWatch, Sep 3, on CEO pay by Alistair Barr; and (5) AlterNet, Sept 2, on CEO gambling by Sarah Anderson and Sam Pizzigati.
by C. Flavelle, by TCS, by Reuters, by A. Barr, and by S. Anderson & S. Pizzigati
- Six Months of Stimulus: What Weve Learned
The American Recovery and Reinvestment Act celebrated its six-month anniversary mid-August. We cant know what would have happened without the stimulus — or with a different mix of spending and tax cuts. But we can gauge how wisely the money has been spent and if the government met its own pledge of transparency.
Some projects may have deserved snickers:
* a homeless grant for a New York suburb with no homeless
* the Social Security Administration sent 10,000 checks to dead people
* $5 billion for weatherizing homes went disproportionately to cold states, yet heat is just as dangerous as cold
* more than $100 million in stimulus funds went to airports with fewer than one flight an hour, while the countrys busiest airports had received no stimulus money at all.
The Recovery Act isnt only one of the largest bills of its kind in American history; it was also billed as an attempt to set a new standard for transparency in government spending. Like so much of the stimulus, the push for transparency is a work in progress.
- Red Ink Rising
This years $1.6 trillion deficit represents a predicted 11.2% of GDP; we havent seen a deficit that large since World War II. The Congressional Budget Office (CBO) estimates we will add $7 trillion in accumulated deficits over the next ten years. The Office of Management and Budget (OMB) comes up with $9 trillion. All of this is piled on top of our existing debt of $11.7 trillion. CBO estimates that we are looking at a tripling of interest payments and public debt approaching 70% of GDP by 2019.
JJS: How good was the recent financial turmoil for you? For some, it was great.
- Federal Reserve made $14 billion on turmoil loans
The Federal Reserve profited $14 billion on loans (of made-up money) made in the last two years. The US central bank also took in about $19 billion from interest and fees charged to institutions that tapped liquidity facilities during the global financial crisis.
If the Fed had invested the same amount loaned out in three-month Treasury bills since August 2007, it would have received only $5 billion in interest.
This estimate excludes company bailouts and purchases of long-term assets as well as unrealized gains or losses on the Fed’s portfolio of mortgage-backed securities and Treasuries purchased as part of the $1.75 trillion asset purchase program.
- Execs at big bailout recipients get big pay
The financial bubble popped last year, but the bubble in pay for executives who helped inflate it is proving more resilient.
Banks and other financial-services companies that got tens of billions of dollars in government support during the financial crisis gave top executives stock options this year that could result in huge windfalls, undermining claims that the current compensation system is based on pay for performance.
Executives at J.P. Morgan Chase, Wells Fargo, American Express, Capital One Financial, PNC Financial, and SunTrust Banks were granted 5.8 million stock options in early 2009. Those firms received billions of dollars (TARP) and benefited from other injections of government money into the financial companies theyd invested in (so they could get paid back by the bankrupt companies).
As stock markets rallied and shares of financial-services companies surged, the value of these stock options jumped to almost $87 million, as of Aug 14. That potential windfall is shared between 17 executives, which equals more than $5 million per person.
When markets crashed last year, many executives saw their compensation plummet as shares of the companies they ran fell below the strike price of their options, leaving them worthless. However, when this happens, corporate boards often just grant a lot more options to executives at much lower prices. Difficult economic years — like 2008 — become springboards for super windfalls a few years down the road.
Boards, in effect, will just keep lowering the ‘performance’ bar until they find a height executives can jump over.
- Next Bubble Threatens the American Economy
Outrageously large rewards for executives give executives an incentive to behave outrageously — and engage in behaviors that put the rest of us at risk.
Over the years, we’ve documented, for instance, how CEOs who downsize, outsource, and cook their corporate books have consistently collected bigger paychecks than even the average overpaid US top executive.
Lobbying armies from corporate and financial trade associations are battling behind the scenes to keep even modest changes in pay rules off the legislative table.
Reformers seek ways to “empower shareholders” to address the overall size of executive pay and the unconscionable gap between the rewards that executives and workers receive.
We need much more than modest changes.
JJS: Duh. We need to wake up and quit blaming others and to quit concentrating all our savings, all our commonwealth, into the hands of a few Wall Street bankers and brokers. Thats something we can do now without waiting for Washington. All we need do is redirect our spending for land and other natural resources, which we can accomplish via a simple shift in local and state taxation (and subsidies).
The crucial shift is of the property tax: de-tax buildings while re-taxing land. Doing that would strip the value of locations out of mortgages, into local treasuries. Not only would flippers, lenders, brokers, and other speculators turn away from sites, but lands value would then be available for spending to benefit everyone.
For example, instead of bankrolling sprawl, local government could pay residents a Housing Voucher. Such shifts of taxes and subsidies have worked wherever tried. They go by the name of geonomics.
Jeffery J. Smith runs the Forum on Geonomics.
Forbes — AIG’s Larceny
Millionaires’ audit chances fell 36% last year
Foreigners mixed on US debt as Fed & Treasury worsen it
What are your views? Share your opinions with The Progress Report!