Too Big To Fail, Too Incompetent To Be Profitable, Big Banks On the US Dole, Are America's Biggest Moochers.

Illustration by Bloomberg View

Why Should Taxpayers Give Big Banks $83 Billion a Year?

A Bloomberg editorial

On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.
So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Enlarge image

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.

Regulators can change the game by paring down the subsidy. One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. A third is to prevent banks from using the subsidy to finance speculative trading, the aim of the Volcker rule in the U.S. and financial ring-fencing in the U.K.

Once shareholders fully recognized how poorly the biggest banks perform without government support, they would be motivated to demand better. This could entail anything from cutting pay packages to breaking down financial juggernauts into more manageable units. The market discipline might not please executives, but it would certainly be an improvement over paying banks to put us in danger.

The Best Thing About Sequestration is that it denies Obama the the one thing he really wants... The Chance ot CUT Social Security and Medicare.

Why Sequestration May Not Actually Reduce America’s Deficit

By Travis Waldron

The United States is on the brink of sequestration, the $1.2 trillion in automatic budget cuts included in the summer 2011 deficit deal that will begin taking effect March 1 if Congress does not act to avert them. The goal of the cuts is to reduce America’s budget deficit, which remains Washington’s focus even as unemployment is high and the overall economic recovery is modest at best.

Despite the $85 billion in cuts that will take place this year, it is entirely possible that sequestration won’t actually lead to substantial shrinking of America’s deficit. There are a number of reasons for that, as Scott Lilly from the Center for American Progress explained in a column today. The primary reason, though, is that fiscal contraction caused by sequestration is likely to slow economic growth, reducing tax revenue and preventing meaningful deficit reduction, as CAP’s Adam Hersh notes:

Figure 1 also shows that the projected effect of the sequester will be to lower U.S. economic output by $287 billion from where we would be without any fiscal contraction—barely ahead of where the U.S. economy was at the end of 2012. To be certain—with sequestration on top of other fiscal contraction draining so much momentum—the U.S. economy would need to steer clear of all other risks to growth: potential oil- and commodity-price shocks, slowing global demand for U.S. exports, and the faltering confidence in the governability of U.S. economic policy. It is possible none of those risks will rear their ugly heads in the next year, but it would be foolish to bet America’s economic future on it.

Lilly estimates that the cuts could result in $17 billion in lost revenue this year, but because reducing government investment will also inhibit private sector growth, the effects may be even bigger than the Congressional Budget Office projects:
Read Less

Government is intertwined with private-sector activity throughout much of the economy, and in many instances, a reduction in government activity will cause commensurate reduction in private-sector activity. That will damage not only the nation’s economy but also the revenue that the government collects based on the strength of the economy. It is difficult to project with any accuracy how much overall economic activity might be affected by the sequester, but it is very likely that it will be by an amount much larger than is projected by standard econometric modeling.

It may seem counter-intuitive to say that cutting spending won’t reduce the deficit, but Europe provides evidence that that could be the case. The result of fiscal contraction in Europe has been slower economic growth, second (and possibly third) recessions, and high unemployment, all of which has hampered deficit reduction efforts. Spain and France have both missed deficit reduction targets because of slow growth. When the United Kingdom’s austerity efforts began in 2010, finance leaders projected its deficits would fall from 4.8 percent of the total economy to just 1.9 percent by now. Instead, three years and a second recession later, it stands at 4.3 percent.

If America’s goal is to reduce long-term deficits and debt, the fastest way to do so would be to invest more money now into programs that will foster job creation and economic growth. Previous economic downturns were bolstered by government spending, and the current recovery was aided by initial efforts to stimulate the economy. Focusing on spending cuts and other austerity measures now, however, will only hamper growth, meaning, as Lilly wrote, “the savings that can reasonably be expected from sequestration is far less than $85 billion promised, and the fact is there could be no savings at all.”

The Sequester, a celebration of greed, corruption and stupidity. A Beltway circle jerk..

Sequester of Fools

By PAUL KRUGMAN

Published: February 21, 2013 

They’re baaack! Just about two years ago, Erskine Bowles and Alan Simpson, the co-chairmen of the late unlamented debt commission, warned us to expect a terrible fiscal crisis within, um, two years unless we adopted their plan. The crisis hasn’t materialized, but they’re nonetheless back with a new version. And, in case you’re interested, after last year’s election — in which American voters made it clear that they want to preserve the social safety net while raising taxes on the rich — the famous fomenters of fiscal fear have moved to the right, calling for even less revenue and even more spending cuts.

But you aren’t interested, are you? Almost nobody is. Messrs. Bowles and Simpson had their moment — the annus horribilis of 2011, when Washington was in thrall to deficit scolds insisting that, in the face of record-high long-term unemployment and record-low borrowing costs, we forget about jobs and concentrate exclusively on a “grand bargain” that would supposedly (not actually) settle budget disputes for ever after.

That moment has now passed; even Mr. Bowles concedes that the search for a grand bargain is on “life support.” Let’s convene a death panel! But the legacy of that year of living foolishly lives on, in the form of the “sequester,” one of the worst policy ideas in our nation’s history.

Here’s how it happened: Republicans engaged in unprecedented hostage-taking, threatening to push America into default by refusing to raise the debt ceiling unless President Obama agreed to a grand bargain on their terms. Mr. Obama, alas, didn’t stand firm; instead, he tried to buy time. And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week.

There’s a silly debate under way about who bears responsibility for the sequester, which almost everyone now agrees was a really bad idea. The truth is that Republicans and Democrats alike signed on to this idea. But that’s water under the bridge. The question we should be asking is who has a better plan for dealing with the aftermath of that shared mistake.

The right policy would be to forget about the whole thing. America doesn’t face a deficit crisis, nor will it face such a crisis anytime soon. Meanwhile, we have a weak economy that is recovering far too slowly from the recession that began in 2007. And, as Janet Yellen, the vice chairwoman of the Federal Reserve, recently emphasized, one main reason for the sluggish recovery is that government spending has been far weaker in this business cycle than in the past. We should be spending more, not less, until we’re close to full employment; the sequester is exactly what the doctor didn’t order.

Unfortunately, neither party is proposing that we just call the whole thing off. But the proposal from Senate Democrats at least moves in the right direction, replacing the most destructive spending cuts — those that fall on the most vulnerable members of our society — with tax increases on the wealthy, and delaying austerity in a way that would protect the economy.

House Republicans, on the other hand, want to take everything that’s bad about the sequester and make it worse: canceling cuts in the defense budget, which actually does contain a lot of waste and fraud, and replacing them with severe cuts in aid to America’s neediest. This would hit the nation with a double whammy, reducing growth while increasing injustice.

As always, many pundits want to portray the deadlock over the sequester as a situation in which both sides are at fault, and in which both should give ground. But there’s really no symmetry here. A middle-of-the-road solution would presumably involve a mix of spending cuts and tax increases; well, that’s what Democrats are proposing, while Republicans are adamant that it should be cuts only. And given that the proposed Republican cuts would be even worse than those set to happen under the sequester, it’s hard to see why Democrats should negotiate at all, as opposed to just letting the sequester happen.

So here we go. The good news is that compared with our last two self-inflicted crises, the sequester is relatively small potatoes. A failure to raise the debt ceiling would have threatened chaos in world financial markets; failure to reach a deal on the so-called fiscal cliff would have led to so much sudden austerity that we might well have plunged back into recession. The sequester, by contrast, will probably cost “only” around 700,000 jobs.

But the looming mess remains a monument to the power of truly bad ideas — ideas that the entire Washington establishment was somehow convinced represented deep wisdom.

Of course the pundits on tv and the corrupt politicians in DC will get this storm backward and say it shows the world is not warmer.

Climate Change And The Blizzard: Nor'easters More Fierce With Global Warming, Scientists Say

 

Lynne Peeples
02/08/2013 8:41 pm EST

A car sits in the ditch as a winter snow storm bears down on Buffalo, N.Y., on Friday. (AP)

Climate change may or may not have helped generate the nor'easter lashing the East Coast this weekend. Such storms happen with some regularity, after all. But the amount of snow the storm called "Nemo" ultimately dumps, and the extent of flood damage it leaves in its wake, may well have ties to global warming, climate scientists suggested.

Michael Mann, a climatologist who directs the Earth System Science Center at Pennsylvania State University, compared a major storm like Nemo -- or Hurricane Irene or Superstorm Sandy, for that matter -- to a basketball slam-dunk with a lower net.

"If you take the basketball court and raise it a foot, you're going to see more slam-dunks," Mann said. "Not every dunk is due to raising the floor, but you'll start seeing them happen more often then they ought to."

The two key ingredients in a big snow: just cold-enough temperatures and a lot of moisture. Combine the chilled air converging on the East with the massive moisture coming from the Gulf of Mexico region and you've got the "perfect setup for a big storm," Kevin Trenberth, of the Climate Analysis Section at the National Center for Atmospheric Research in Colorado, told The Huffington Post in an email.

As Trenberth explained, the ideal temperature for a blizzard is just below freezing -- just cold enough to crystalize water into snow. Below that, the atmosphere's ability to hold moisture to create those snowflakes drops by 4 percent for every one degree Fahrenheit fall in temperature.

"In the past, temperatures at this time of year would have been a lot below freezing," Trenberth said. In other words, it's been too cold to snow heavily. But that may become less of an obstacle for snow in the Northeast.

In addition to warming the air, climate change is adding moisture to it.

Sea surface temperatures are about two degrees Fahrenheit warmer than they were before 1980, raising the potential for a big snow by about 10 percent, according to Trenberth. And any individual storm, including this nor'easter, will pick up more moisture as it spins across a warmer ocean. What's more, as Mann explained, a warm ocean clashes with cold air masses from the Arctic. A bigger contrast in temperatures may mean a bigger storm, he said.

Michael Oppenheimer, a climate change expert at Princeton University, said global warming is increasing extreme storms. "Storms like this tend to be heavier than they used to be," he told HuffPost. "That's a fact."

As HuffPost reported on Friday, National Oceanic and Atmospheric Administration records show that the Northeast saw a 74 percent increase in precipitation during the heaviest rain and snow events from 1958 to 2011.

Still, connecting any specific weather event to global warming remains inexact. A new area of study called "event attribution science" is mining data in an attempt to make more definitive links, or at least better gauge the odds of an extreme event in the context of climate change that results partly from human activities, including burning fossil fuels. But the field is young.

And, truth is, nor'easters happen.

In fact, Jeff Masters, a climatologist and founder of Weather Underground, noted that the number of intense nor'easters hasn't increased over the last three or four decades. A warmer climate, he explained, can decrease the length of the snowy season, and therefore the time window for nor'easters.

Further, nor'easters are defined not only by heavy snowfall, but by high winds. There's less evidence for links between winter winds and climate change. Warm weather storms, such as Hurricane Irene and Superstorm Sandy, are another story. "Since hurricanes are heat engines, they drive power from ocean waters," said Masters.

Another climate-linked ingredient could propel this weekend's storm into the history books: rising sea levels.

"A three-foot storm surge, on top of a higher sea level, will do more damage," Masters said, noting that sea levels in Boston, expected to bear the brunt of the nor'easter with an historic storm surge, have risen a foot in the last 90 years.

Penn State's Mann also likes to use baseball metaphors when describing climate's influence on major storms -- "home runs," he calls them. "What we're seeing now with climate change is weather on steroids."