Monday, December 9, 2013

How the Too Big To Fail Banks are driving America broke while pullingwool over pundits eyes

Like most conservatives in sheep’s clothing, Robert J. Samuelson of the Washington Post appears to be delivering sage advice on the woes of world, and has a handy prescription for their fixing.  Today he pontificates (again) on the fact that America is aging, and this aging is THE driver of government spending, which in turn in A MAJOR CAUSE of our economic woes:

We are locked in a generational war, which will get worse before it gets better. Indeed, it may not get better for a long time. No one wants to admit this, because it’s ugly and unwelcome. Parents are supposed to care for their children, and children are supposed to care for their aging parents. For families, these collective obligations may work. But what makes sense for families doesn’t always succeed for society as a whole. The clash of generations is intensifying.

Sounds frightening!  This, we are told is the reason Detroit is backrupt, this is the driver of ever increasing government spending and debt; This has led to heartfelt but bad decision making by shifty and risk averse decisions:

The explanation for this is politics. For states and localities, benefit cuts affect government workers — a powerful but small group — while at the federal level, it’s all the elderly, a huge group that includes everyone’s parents and grandparents. As a result, the combat has been lopsided. Political leaders of both parties have avoided distasteful choices. Younger Americans have generally been clueless about how shifting demographics threaten their future government services and taxes.

Expect when it isn’t (all about politics or generational warfare).  Take elder care – like many Conservatives Mr. Samuleson is appalled, nay apoplectic, that Social Security, Medicare, and Medicaid account for 44% of total federal spending.  Yet, and slo like other conservatives, he NEGLECTS to tell readers that all three are self-funded from payroll taxes; that Congress regularly reassigns monies collected for these three to the regular federal budget; and that if Congress paid back everything actually owed to these program they’d be solvent indefinitely. Once you understand this – which any  Third Grader with Google could have told Mr. Samuelson – then you understand why these programs have been exempt from deficit reduction talks and mini-bargains up to this point.   For those not yet awake enough to grasp the point – Social Security, Medicare, and Medicaid DO NOT add to the National Debt or the Deficit; they are routinely raided by Congress to make both those things lower.

Rather, the federal deficit is caused by the well documents differences in income tax collection and federal spending on the discretionary side.  Again, remember that in total (including the payroll taxes mentioned above) America’s Exceptional Government only takes in 2/3rds of what it needs to operate.  The rest, which creates the debt by accumulating deficits, is on one big giant monetary credit card.  Conservatives want to pay the credit card off by slashing spending on the Mandatory Expenses (those very same Social Security, Medicare, and Medicaid) whose surpluses have kept deficits (and thus debt) at lower than actual levels for years.  The more sensible approach – until recently the Liberal Approach as well – would be to close tax loopholes in the income tax (and possible raise top end rates) while eliminating the income cap on what can be taxed to support Social Security, Medicare and Medicaid.  I personally include in these reforms the need to get rid of  “Carried Interest” as an income category – this is how investment bankers, high power stock brokers, and financiaers who broke our economy in 2008 pay lower actual tax rates the you and I do as wage earners, even though that “carried interest” is their principle form of income.

First and foremost, Detroit suffered from an unprecedented loss of public revenue. As I’ve previously reported, this was brought on by many factors. The most obvious of those were the recession and free-trade-related deindustrialization, both of which decimated the city’s manufacturing job base and drove population out of the city. On top of that, the state of Michigan reduced its revenue sharing with the city.

Second, the city and state spent — and is still spending — big money on wasteful corporate subsidies to politically connected private interests. That includes a reaffirmed commitment to spend $283 million — or more than the city’s entire annual budget shortfall — on a new professional hockey arena. Such profligate expenditures have drained revenues out of city coffers.

But perhaps the least discussed factor is the financing cost associated with a series of Wall Street-engineered debt deals back in 2005 and 2006. These schemes crafted by UBS and Bank of America’s Merrill Lynch were supposed to reduce pension fund obligations by using derivatives to try to “synthetically” convert variable-rate interest instruments into fixed-rate contracts.

Like many cities, Detroit got sold down the river by large (Too Big To Fail) banks, on everything from municipal bonds to interest rate swaps that mad the banks big bucks, but left Detroit hurting. 

Current estimates put 1/4th of the city’s budget shortfall – which has necessitated this bankruptcy filing – squarely in the hands of servicing interest and fees on the interest rate swaps along.  In fact (a set of inconvenient things that, again grade school kids with search engines could help Mr. Samuelson find):

Commissioned by the think tank Demos, the new report out today from former investment banker Wallace Turbeville shows that contrary to the myths about a bloated municipal government overspending on lavish social services, Detroit’s “overall expenses have declined over the last five years” by $419 million thanks to the city “laying off more than 2,350 workers, cutting worker pay, and reducing future healthcare and future benefit accruals for workers.” Today, Turbeville notes that “Detroit has a significantly smaller workforce per capita than comparable cities.” Yet, those draconian cuts still left the city with an annual $198 million shortfall because of three big problems — none of which has anything to do with supposedly greedy public workers and their allegedly overly “generous” pension benefits.

Like it or not, spinning the same, worn out lie doesn’t make it true – and Mr. Samuelson should be ashamed of himself for taking these lies to a national platform.  Someone of his supposed intelligence and moxie would do far better to look at the REAL FACTS, and lead us all to better, more informed judgments about the real causes of a crisis.  Until he and other like him do, our Country is doomed to make the same mistakes we’ve always made in public and government budget policy, and therefore we’re doomed to hurt many of our fellow citizens unnecessarily in the process.

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