BoA, QE2, EU: What To Do?

Wednesday, June 29, 2011

hiring, jobs, business, economy (TheTruthAbout/flickr)

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Nicole Gelinas, contributing editor of the Manhattan Institute's City Journal and author of After the Fall: Saving Capitalism from Wall Street and Washington, and Simon Johnson, former chief economist of the International Monetary Fund and co-founder of the blog The Baseline Scenario, discuss some of the big economic stories in today's news.

The Fed's program known as QE2 is coming to an end — did it work? Bank of America is planning to pay $14 billion back to investors who lost money on mortgage deals gone bad — is it enough? And what's going on in Greece, exactly?

Bank of America

Bank of America and Countrywide, which Bank of America owns, settled with some of their biggest mortgage securities clients. This could have a huge impact on stabilizing American banks and the housing market. The settlement between Bank of America and investors who claim they were defrauded into buying mortgage-backed securities is a big step, but Simon Johnson said it does not mean that the bank is admitting to wrong-doing.

I don’t think their admitting anything but I think that they are conceding that very big mistakes were made and it’s a major reversal for Brian Moynihan, the CEO of Bank of America, who previously said he would be engaging in hand-to-hand combat with investors to prevent having to make this kind of payout.

Many economists predict that this kind of settlement may be the thing that is required for a real sustained recovery to take place — that the banks resolving the real value of homes in America will get credit moving again in the housing market and elsewhere, and thus get the broader economy flowing again. Nicole Gelinas said that may be true but that it should have happened a long time ago.

We are still half a decade into the housing crisis and we’re still talking about the value of mortgage securities. The actual mortgages that are in these securities are still cocooned through many many layers from reality.

Gelinas said the mortgages still have not been written down to any realistic level. While the government has encouraged the lenders to extend the terms, tack on defaulted principal to the end of the mortgage and extend teaser-rate interest rates for longer, Gelinas said that they haven’t touched the real problem — the amount that is owed on the mortgages themselves.

The settlement implies that Countrywide defrauded people, yet whether there will be any sort of criminal sanctions remains to be seen. Gelinas pointed out that there have not yet been any high-level prosecutions for the crisis.

And honestly, that doesn’t bother me too much. I mean, people who committed fraud should certainly be prosecuted and go to prison, but I think in the past, in cases like Enron and many other cases, people have focused too much on “Gee, if we can find this one greedy guy and throw him in prison, we’re going to fix things and make everyone safe”, and that didn’t turn out to be true. I think we need the regulatory fixes even more than we need the criminal side… The criminal side is good for justice, of course, but it’s not the main thing in fixing the financial system.

Johnson agreed that criminal prosecution seems unlikely, both in this crisis and in the future, given current legal frameworks, though he thought jail time would be likely to have an effect.

I think there’s nothing that concentrates the mind quite like the prospect of being prosecuted for crimes and potential jail time.


Greece’s parliament voted today on their austerity plan, leading to angry protests in the street and determining the fate of the banks and possibly even the countries in Europe, creating safer money market funds in the United States. Johnson explained the meaning of the bill.

The Greek government seems to have been able to pass some of the austerity measures that the European Union was asking for, measures that should, in turn, unlock a further disbursement of the existing loan to Greece, but I’m afraid this is far from over. There are going to be more cliff-hangers, both at the European level and at the Greek level, because Greece needs a lot more money if it is to stay reasonably viable and avoid some sort of disorderly restructuring or default on its debt.

Gelinas said a ripple effect on money markets is likely but cautioned against too much optimism, as investors still lack faith in the banks.

The problems that came to the surface in 2008 are still there, they’re just lurking not very far beneath the surface.

The demonstrations in the streets have been ferocious, with workers feeling that the failure of banks and markets is being taken out on them. Johnson said no one is celebrating the measures.

The people in the street have a point, which is when you have a boom, lots of relatively well-off people do extremely well — did extremely well in Greece — and now the austerity measures, they feel, are being disproportionately targeted toward relatively poor people. There is always a distributional fight going on, between the boom and the bust, and Greece is no exception.


Tomorrow will be the last day of the Federal Reserve Banks Quantitative Easing Program, which attempted to stimulate the economy by increasing the amount of money in circulation. No new rounds of economic stimulus are in the works at this time.

Gelinas said while the fed usually works to inject cash into down economies by buying short-term securities to drive down interest rates, QE2 was designed to take that even further In QE2 the fed bought longer-term interest rates, to push bond rates down and in turn drive down mortgage rates. The thinking was that this would allow financial institutions to borrow at low interest rates, and use that money to buy up some of the assets currently dragging down the market.

So basically they conjured up cash form nowhere — they’re allowed to do that — and used it to buy long-dated securities, pushing more money into the market.

Supporters of the program say that the increase in money and credit gave a boost to the economy, while detractors say that it was unsuccessful in lowering long-term rates and instead set the stage for inflation and a weakened dollar. Johnson doesn’t think the program had much impact either way.

I think ultimately employment growth was anemic mostly because of the kinds of programs we’ve been talking about so far, in the sense of housing, the overhang of debt in the consumer sector, especially mortgage debt, and those are not easily fixed just by trying to pull down ten-year treasury rates to artificial lows.

Gelinas thinks the program was unwise.

It’s like if you’re playing a sport and you get an injury, you get a cortisone shot. It allows you to play through the injury. But maybe its not a good idea to play through the injury. Maybe the pain is trying to tell you something, that you are doing more damage in anesthetizing yourself against it. Same thing here. We have a financial industry that has continued to play right on through the economy’s injury.


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Comments [29]

amalgam from NYC by day, NJ by night

@ gary from queens -

You're displaying your ideological dogmatism in your statement that

"It didn't go to anyone. Not even to the banks. It just went. Housing values were too high and the bubble burst. The values were inflated, so it wasnt real wealth to begin with."

Much of the wealth over the past 10 years went to the wealthy and some of it just "went." Both.

For instance, the war machine of the past 10 years enriched right-wing oriented, formerly govt. run programs now-privatized corporations/contractors like Halliburton, KBR, Xe (nee Blackwater), etc. []

On the domestic side, bank CEOs, board members and investors largely gained huge (Mozilo, J. Dimon, etc.) . There was certainly a mix of right-wing and centrists in the investor/CEO class that contributed to both Bush (Repubs) and Obama (Dems), which makes sense considering both parties are at their core corporatist.

On the other hand, like you say gary, there were inflated values on homes as well as too much dependency on debt, so some of that wealth just disappeared, although there are values underlying the real estate sector even if now devalued.

At the same time, unless the investor class's gains over the past 10 years (let alone 30) was totally wiped out by the 2008 crash/recession - which is risible and incorrect - then they the money DID "go" to people. Much of went to "wealthy elites" and _some_ of it was simply money on paper that evaporated.

Your simplistic, one -sided explanation tips your hand showing us no even handedness when discussing the complexity of these issues, blaming the slow climb out of the Great Recession solely on the Obama admin. Fatuous at best.

Jun. 29 2011 04:20 PM
Eugenia Renskoff from Brooklyn, NY

Hi, I find the Greece situation very much like Argentina in the early 2000s. People there were protesting against it (austerity) too. As for Bank of America and the subprime crisis, the thing to do (the honorable and right thing) would be to give back the money to those borrowers, like myself, who were scammed in the subprime mortgage thing. I lost my home to foreclosure and my savings and everything else. It is too much! Eugenia Renskoff

Jun. 29 2011 03:43 PM
gary from queens

I agree with jgarbuz.

A high standard of living can only be maintained when a nation works, and the economy grows.

Workers will profit from this. The investor class will greatly profit. That's how it's always been. That's capitalism.

When you have an ideology that doesn't support that, you get Greece.

Jun. 29 2011 11:07 AM
gary from queens

Dear "BIG GUY from Forest Hills:

Wherever you think the wealth of americans had gone to, it did not go to Bush and his rich friends. (Obama's friends are much wealthier BTW.)

It didn't go to anyone. Not even to the banks. It just went. Housing values were too high and the bubble burst. The values were inflated, so it wasnt real wealth to begin with.

The real wealth is what we are losing under obama. His no-growth, no energy production eco policies, and weakening of the dollar, will create inflation. So will his spending. Bush's largest annual deficit was 250 billion. Obama in just one month last winter exceeded that.

this is the weakest post recession recovery in US history, UNDER OBAMA. Not Bush.

Jun. 29 2011 11:01 AM
Michael Sheehan from Manhattan

Brian, I listen to your show despite the leftward slant (this is NY, after all) because I like your format and guests and enjoy the chance to hear the opinions of people who call in. But, every once in a while, it gets too frustrating. Your "it's just not fair" rant a couple minutes ago egging on a caller angry at banks and wondering if they're responsible for the Greek crisis was really over-the-top. I know this isn't a news show and you have your opinions, but you also claim to desire a two-sided approach to issues, and that goes by the wayside when you vent along with callers instead of moderating open discussion.

Jun. 29 2011 10:49 AM

Mr. Johnson's comments today sound more Peterson spin than MIT conclusions from evidence.

Perhaps Mr. Kwak, also from The Baseline Scenario would have made more interesting conversation.

Jun. 29 2011 10:48 AM
RJ from prospect hts

And why is it that public sector workers--who do all the work the rest of us don't want to (including the wealthy) like pick up garbage, clean poor people's feces in public hospitals, try to take care of children (part of the city's "deal" is to cut ACS spots)--have "lavish" incomes and the wealthy do not--for taking huge examples in their own interests?

Jun. 29 2011 10:46 AM
Mike from n

I can listen to Fox network without any fundraiser! Come on Brian, get some kind of balance among your guests!

Jun. 29 2011 10:44 AM

Rather than restructuring toxic mortgages, have financial institutions (culprit or all) pay a % of the mortgage payments over the life of the loan, including resets

Jun. 29 2011 10:44 AM
BigGuy from Forest Hills

We lost $40,000 per person in wealth from the mal, mis, and nonfeasance of George W Bush's government..

Less than $300 per person per year was spent in stimulus.

We have done very well considering how LITTLE has been invested.

Jun. 29 2011 10:43 AM

It feels like there's nothing we can do to protect our assets (cash, stock, property, etc) unless we're already millionaires and have money in a hedge fund.

Jun. 29 2011 10:42 AM
George from Westchester

Do your guests believe that some banks betting long on Greek debt has anything to do with the energy being put in to save it?

Jun. 29 2011 10:42 AM
Bob from Queens

Both guests, unfortunately, represent the notion that the system, despite all the pain it's inflicted in recent years, is ultimately worth preserving and should be allowed to sort itself out. The situation is seriously beyond that. It's time for a serious re-evaluation of priorities and some serious change. And, yes, perhaps some heads should roll.

Jun. 29 2011 10:41 AM
Robert from NYC

Ahhhh, look WE have sacrificed and continue to sacrifice and the CEOs in the financial sector and corporations have NOT, on the contrary they have benefited and should they who have caused this failure should pay. We have to punish and prevent. I disagree, these folks have to pay for their failures because they were aware they would happen but that they would benefit. This forgiveness Simon and Gelinas are so generous with is simply wrong.

Jun. 29 2011 10:41 AM

No one thinks a millionaire’s tax will pay off ALL of our debts, but it a good start

Jun. 29 2011 10:41 AM
mick from Manhattan

Brian, you have a range of "expert"pinion from the center-right to the far right. Why can't you get a more balanced opinion? Krugman, Stiglitz, Diamond were all too busy or did you or your producers just choose to ignore any opposing opinion? Economics is NOT like physics or biology! It is a mixture of scientific methods and ideological clap-trap that manipulates the application of methods to support unspoken agendas.

Jun. 29 2011 10:41 AM
Barney from nyc

Why are we making this so complicated? It is very simple, our tax code needs to be more progressive. Rolling back the Bush tax cuts would be a start.

Remember Bush said, "som people call you the elites. I call you my constituents."

Jun. 29 2011 10:38 AM
RJ from prospect hts

It's so nice to talk about how, what was it?, "unproductive," "not valuable" to talk about allocating pain, I hear--we can only talk about working class and poor people suffering pain and not "allocate" any to those who caused the mass majority of the problem. Oh, how reasonable!

Jun. 29 2011 10:38 AM
Hugh Sansom

Nicole Gelinas is being dishonest when she lets Wall Street off the hook. And she is being still more dishonest when she says a millionaires' tax would fail to help.

New York City has some 70 _billionaires_ and thousands of millionaires. A tax increase on the wealthiest 5% of New Yorkers would do wonders.

Jun. 29 2011 10:37 AM
Martin Chuzzlewit from Manhattan

Great sports analogy....we wouldn't let our children do what the mandarins in the White House are trying to put past the public !!

Jun. 29 2011 10:37 AM
Robert from NYC

Well this is one socialist who quite frankly thinks Ms. Gelinas is O-K in my book. She knows her stuff and makes perfect sense. I can't say I disagree with anything she's said so far on today's show.

Jun. 29 2011 10:35 AM
Smokey from LES

What specifically will change for the average Greek now? A few examples, please.

Jun. 29 2011 10:32 AM

The reality is, that the western debt crisis is structural. All the countries, and especially the US, have been living well above their means since the 1950s. But it took the rise of the East, that is China, India, et al., to punctuate and make this clear. Americans cannot use twice as much energy as every one else, or waste twice as much money on health care as everyone else, and still expect to remain at the same standard of living.

The end of the story is, that our standard of living is going to fall back to the level of the 1950s, when families did not have 3, 2 or even 1 car in many cases. Where most lived in rented apartments, and not in sprawling suburban McMansions. It'll a decade or so to readjust, but there are no alternatives. What goes up must come down eventually.

Jun. 29 2011 10:29 AM

Goldman Sachs threatening to move to Singapore? Hmmm. What's that about?

Jun. 29 2011 10:28 AM

Speaking of BofA...

Has anyone been getting charged "service fees" only to find out that that bank made a "mistake". It's happened a number of times to friends and family. Could this be a tactic to make some money back on BofA's part?

Jun. 29 2011 10:18 AM

Your intro stated that since the MBS holders are being made whole, then that would stabilize the housing market. How does Wall ST being showered with more $$ help the housing market.
It is not the mortgagees being helped.

It's Goldman Sachs, et al. getting more $$$.

It won't give more people jobs with good incomes so that they can qualify for home loans.

Customers without $$$ cannot buy!

Reality check, please Brian!

Jun. 29 2011 10:15 AM
Martin Chuzzlewit from Manhattan

No doubt the usual loonie lefties who make up the bulk of the listenership here will be screeching about the presence of Nicole Gelinas.....they are afraid that they might hear something that would undermine their religious-like beliefs in socialism

Gelinas should be a regular guest every week !!!!

Jun. 29 2011 10:06 AM
RJ from Prospect Hts

So: Does this mean that Goldman Sachs--in particular its individual top executives--gets away with its deceptive practices in/with Greece? And the same with the heads of BofA/Countrywide? It's striking when corporations are people (e.g., able to buy off politicians) and corporations (e.g., when they get off with paying "settlements" for actions that will cause tremendous individual pain).

Jun. 29 2011 10:05 AM
gary from queens


I commend you for having counterpoint on this issue.

But please be consistent. It seems you make it a point to have counterpoint when a center-right commentator is on your show, such as today with Gelinas. But you don't have counterpoint when you have a center-left, or even a far left, commentator. Why?

And you still need to have longer segments. How much can you examine the national debt in 20 minutes?

Jun. 29 2011 09:54 AM

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