by Frank James

There's been a concerted effort by some to blame the global financial meltdown on lower-income people who got into houses they couldn't afford.

The argument takes different forms. The Community Reinvestment Act or CRA forced banks to make loans to the unqualified minority borrowers. Acorn, the community organizing group, strong-armed financial institutions to make the loans. Democrats allowed their political allies at mortgage giants Fannie Mae and Freddie Mac to run amok and encourage home loans to buyers who couldn't repay.

Sen. John McCain has used that last argument to try and gain traction against Sen. Barack Obama. It doesn't appear to be working. Congressional Republicans have resorted to it too. Maybe it will work better for them but I doubt it.

These explanations are lame. The CRA didn't cause the near collapse of the world's financial order. Nor did lower-income people. Or Fannie or Freddie.

That's not to say that loans weren't given to millions of people who couldn't afford them. They were. But that was only part of the problem, and often a symptom at that, not the cause.

The main causes of the crisis now engulfing us were a tremendous amount of global investment capital -- hot money in constant search for new investments -- low interest rates and a tremendous explosion in global debt levels.

One of my favorite economists of late, Nouriel Roubini of New York University's Stern School of Business puts it this way in a recent blog post:

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity we're (sic) excessive leveraging and bubbles were not limited to housing in the US but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real (estate?) sector and financial sector deleveraging since the Great Depression.

It may be satisfying on some level to blame lower-income people, especially minorities, for tanking the global economy. Being human apparently means liking to find scapegoats, the more powerless the better.

But focusing on red herrings won't get us any closer to solving the current crisis.

Paul Krugman. (Photo by HO/AFP/Getty Images)

by Frank James

All those Paul Krugman haters out there have one more reason this morning. He's won a Nobel Prize in Economics.

According to the Nobelprize.org site, Krugman, who is better known as a New York Times op-ed columnist than a trail-blazing economist won for "for his analysis of trade patterns and location of economic activity."

Krugman, a Princeton University economics professor, has been one of the Bush Administration's most persistent liberal critics. He's certainly one of the smartest. And one of the most consistently interesting. He's also a rarity these days, a liberal who doesn't shy away from that word.

Congratulations to Krugman. Now that he's won the Nobel, we'd all appreciate it if he would get back to work and brainstorm a way out of the global financial meltdown.

by William Neikirk

A major economic stimulus package, including funds to rebuild the nation's infrastructure, is shaping up as one of the top ideas for responding to the worst financial crisis since the 1930s.

Asked to name key measures that would enable the U.S. to get out of the current distress, several analysts cited the need for a big government spending program that might include tax rebates, even if such a plan could drive the budget deficit over $1 trillion.

"Desperate times call for desperate measures," said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. Others said the economic damage inflicted by a deep recession could lead to tremendous human cost and push the deficit higher anyway. It is a time to be bold, counseled Brookings Institution economist Barry Bosworth.

"This is the time for the federal government to 'revenue-share' big time with state and local governments, which are concer ned about laying off teachers, policemen and others," said David Kotz, economics professor at the University of Massachusetts, echoing others. Providing more funds for unemployment insurance should be part of the package, he said.

Extricating the country from a severe credit crisis will require a series of unprecedented steps, many of which are already being taken as the stock market swoons, the analysts said. In addition to the spending package, here are other ideas:

by Frank James

The pressure is only increasing on federal policymakers grappling with the financial and economic slide.

The Dow Jones Industrial Average closed below 9,000, 680 points down this afternoon, signaling that the financial panic continues.

Part of the drop was due to General Motors being placed under review by Standard & Poor's due to concerns that the company might be unable to finance itself because of the credit freeze and general weakness in auto sales. GM is now trading at less than $5 a share.

Added to this is the growing consensus among economists that the U.S. is likely to have to endure one of the most painful recessions in decades.

According to a piece from The Wall Street Journal:

The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey.

It is a challenging scenario for the next president, as the election moves into the home stretch. Either Sen. John McCain or Sen. Barack Obama likely will face an economy in the midst of recession on Inauguration Day, even if the credit crisis begins to ease. The new administration will have to get up to speed quickly, taking over the largest government intervention since the Great Depression.

by Frank James

Looks like the tongue-lashing from Congress earlier this week has gotten the response from insurance giant AIG that lawmakers were seeking.

Earlier today, AIG announced it was canceling a retreat scheduled for next week for dozens of AIG officials and independent insurance agents at a swank California resort.

That announcement came after members of Congress berated former AIG officials earlier this week for a similar event that occurred a week after the federal government rescued the troubled company with an $85 billion loan of taxpayers money.

Lawmakers were outraged that the company spent more than $400,000 for luxury resort stays that included pedicure, manicures, spas, golf greens fees and bar tabs.

Now, AIG has decided to go further. The parties are over. Here's the announcement they issued this afternoon:

Earlier today, AIG announced an important policy change - one that we wanted to be sure you knew about.

As we move forward, we will continue our focus our efforts to pay back the $85 billion loan from the Federal Reserve Bank of New York as quickly as possible.

by Frank James

One of the biggest knocks on the Bush Administration's $700 billion bailout/rescue plan was that buying up toxic assets wouldn't do a lot to put cash in banks' coffers.

Many an expert said a better approach would be to inject U.S. taxpayer dollars directly into banks and getting some ownership in the form of preferred shares in return.

The banks didn't like this idea because it would mean they would have Uncle Sam as a partner which could throw its considerable weight around around. That would obviously be a pain in the neck for any free-wheeling businessman.

Conservatives didn't like the idea because it would mean government ownership of private enterprises, specifically banks. It smacked of socialism, some said and was too reminiscent of the Fannie Mae, Freddie Mac situations. Before federal officials took them over, those companies were quasi-private but with federal government guarantees behind them business practices which many critics believe contributed to the current financial crisis.

Anyway, things move quickly in Washington these days and now it appears the Bush Administration has really warmed to the idea of buying into banks after all.

Here's the exchange between reporters and White House Press Secretary Dana Perino today.

Q Thanks. Does the idea of the federal government taking a part ownership in a number of U.S. banks fit with the president's philosophy of free enterprise?

Part of that package includes a broad range of authorities for the Treasury secretary. What you're referring to, I believe, is capital injections that would actually be investing in banks but not taking them over.

by Frank James

Sacrebleu. Looks like when the G-7 finance ministers meet in the Washington Friday, there could be some awkward moments between Treasury Secretary Henry Paulson Jr. and French counterpart, Christine Lagarde. She thinks has botched things terribly.

This is how Reuters reports it:

Allowing Lehman Brothers to fail last month was a major mistake for the equilibrium of the global financial system, French Economy Minister Christine Lagarde said on Wednesday, adding that France would not abandon its lenders.

"When we let one go, the risk is that others at that moment don't know who their counterparty is anymore and find themselves exposed. Once we let one domino fall, the rest risk collapsing."

Lagarde has a lot of company. In the U.S, many have questioned Paulson's judgment over the year plus since the housing and financial crisis erupted.

By Andrew Zajac

Newly-installed Fannie Mae CEO Herb Allison, Jr. was national finance chair of John McCain's Republican presidential bid in 2000 and as recently as 2006 he wrote a $5,000 check to McCain's Straight Talk America PAC. But a year later Allison switched his party affiliation to Democrat and this year he's contributed $4,600, the maximum allowed by law, to Barack Obama.

Allison, 65, voted as a registered Republican in New York in the November 2006 election, but a year later registered as a Democrat in Connecticut and voted as one in that state's primary on Super Tuesday, February 5, 2008.

Allison sent a pair of $2,300 checks to the Obama campaign, the most recent on August 25, two weeks before the government seized the struggling mortgage guarantor and put him in charge of it. Previously, Allison's political giving favored Republicans, but he's also donated to New York Sen. Charles Schumer and a few other Democrats.

He hasn't given anything to McCain since 2006, according to the non-partisan Opensecrets.org campaign finance web site.

by Frank James

Just how deep a hole are U.S. consumers in? The Wall Street Journal has a story today that gives an important partial answer:

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

These are very troubling numbers given that consumer spending accounts for about 70 percent of U.S. economic activity and that it will be consumers who will eventually have to lift the economy out of its rut.

by Frank James

Federal Reserve Chairman Ben Bernanke hinted yesterday in a speech he gave to business economists that the central bank was disposed to another interest-rate cut because of the economy's weakness.

We didn't have long to wait. The Fed has cut the key Federal Funds rate by half a percentage point, taking it to 1.5 percent, in a coordinated move with several central banks.

It's another attempt by the Fed and the other central banks to get more money flowing through the international financial system. The problem remains, however, that it's not so much a lack of money as it is a lack of trust that is freezing the credit markets. Cheaper money, while welcome in a slowing global economy, does little to restore trust between financial institutions or confidence in the economy's near-term prospects.

Here's an excerpt from the Fed's press release announcing its move:

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

by Mark Silva

For the record, the federal budget defict reached a new record in the 2008 budget year, which ended last week: $438 billion.

For the new year, the president's Office of Management and Budget already has projected another new record of more than $480 billion. And that projection is likely to be shelved soon, in the midst of a $700-billion bailout of the financial system authorized by Congress.

But for the year past, the government has surpassed its past record of $422 billion, according to the Congressional Budget Office. The reason: Spending. The war and more.

The estimated 2008 budget deficit of $438 billion well surpasses the deficit of $276 billion last year. It had been declining after reaching its peak of $422 billion under President Bush.

"Relative to the size of the economy, that deficit was equal to 3.1 percent of Gross Domestic Product, up from 1.2 percent in 2007, CBO Director Peter Orszag reports.

(The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.)

The big expenses that helped drive the deficit highher: $62 billion in tax rebates (from the economic stimulus legislation) that were recorded as offsets to revenues. In contrast, receipts of social insurance (payroll) taxes rose by about $31 billion (or 3.5 percent), and other receipts increased by about $9 billion (or 5.4 percent).

"Spending rose by about 8 percent,'' Orszag notes. "Contributing significantly to the growth in spending were outlays for tax rebates (those rebates that were recorded on the spending side of the budget because they exceeded the recipients' income tax liability), for deposit insurance, and for national defense.

Also for the record, Bush promised to cut the budget deficit in half by the end of his final term. Bush also inherited a budget surplus from President Clinton, but is preparing to hand his successor a runaway new record in the deficit.

Code Pink protesters give former AIG CEO Martin Sullivan piece of their mind. (Photo by Alex Wong, Getty Images.)

by Frank James

Yesterday it was Lehman Brothers, the bankrupt investment bank, that got the congressional autopsy treatment. Today it was AIG, the insurance giant saved from Lehman's fate by the kindness of strangers, that is, taxpayers who ponied up $85 billion to bail them out long enough so the company can be disbanded in an orderly way.

It was also a chance for Congress to rake a couple of AIG executives-- Martin Sullivan and Robert Willumstad--over the coals which they did, though it wasn't the most brutal coal-raking ever witnessed on Capitol Hill.

Congressional outrage settled on a few choice areas:

One, huge pay packages received by senior AIG executives even though it was clear the company's earnings would take a hit because of bad financial-market bets made by some of its executives.

Two, the overly optimistic reports some of those same executives made to the public and investors at a time when the company's financial situation was deteriorating.

Three, the failure of top managers to accept blame for the company being put in such perilous financial straits. Listening to them, it was all the fault of the accountants who made them mark down the value of investments few people wanted to buy who caused AIG's woes.

Four, an executive in AIG's London office who was fired for making many of the bad financial bets that eventually swamped the company's finances but who was given a $1 million a month consulting contract with the company and

Five, the $500,000 or so AIG spent on a week-long retreat orchestrated by one of its subsidiaries for executives. It occurred a week after the federal government's bailout of the company. Even the former AIG execs had to admit the retreat held at a very pricey resort was probably a bad idea.

by Frank James

How bad has the damage to the retirement savings of Americans been due to the financial markets meltdown and the slowing economy? Peter Orszag, head of the Congressional Budget Office told a congressional committee today that retirement funds are an estimated $2 trillion lighter than they were 15 months ago.

Here's an excerpt from the Associated Press report:

WASHINGTON (AP) -- Americans' retirement plans have lost as much as $2 trillion in the past 15 months, Congress' top budget analyst estimated Tuesday.

... Public and private pension funds and employees' private retirement savings accounts -- like 401(k)'s -- have lost some 20 percent overall since mid-2007, he estimated. Private retirement plans may have suffered slightly more because those holdings are more heavily skewed toward stocks, Orszag added.

by Frank James

Federal Reserve Chair Ben Bernanke, one of the world's foremost experts on the Great Depression, has obviously learned much from history and is determined not to repeat it.

One reason the Great Depression became so durable according to experts was that central bankers at the time responded by doing exactly the wrong thing, they tightened access to money.

So Bernanke's Fed has repeatedly pumped vast sums of money into the financial markets in order to lubricate the gears that have essentially ground to a halt due to fear and a lack of trust between financial institutions.

Bernanke's latest move is extraordinary. The Fed has announced that it will be purchasing the short-term loans known as commercial paper, a market that has gotten clobbered by the credit crisis.

Commercial paper is issued by companies to raise money to fund operations, expansions, you name it. They are essentially IOUs.

But the commercial paper market has been drying up in part because the money-market funds that once avidly bought them have been spooked by current conditions and are holding on to their cash.

Ninety percent of the commercial paper is issued by financial institutions. So buy going into the market to buy up commercial paper, the Fed is hoping to kick start banks into lending to each other again since their reluctance to do so has been a major contributor to the current credit freeze.

by Frank James

Treasury Secretary Henry Paulson Jr., whose bald pate has become a fixture on our TV screens in recent weeks, has tapped his similarly bald protege Neel Kashkari as bailout czar.

Kashkari, like Paulson, is a former Goldman Sachs investment banker, as well. And it's impressive that so much trust is being placed in the 35 year old assistant Treasury secretary for international affairs.

Here's an excerpt from the Wall Street Journal's story on Kashkari:

Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday. The position confers substantial power on Mr. Kashkari, who will oversee Treasury's effort to buy bad loans and other distressed securities clogging the books of financial institutions and making them reluctant to lend...