Monthly Archives: October 2014

Naked Capitalism: Will the Banksters Really Pay?


Prosecutors Reopening Cases Against Bank Recidivists; Change or “Change You Can Believe in”?

Posted on October 30, 2014 by

The New York Times yesterday published a new story by Ben Protess and Jessica Silver-Greenberg on how Federal prosecutors are investigating reopening cases against big banks and hitting them with additional charges. Reader Richard D, who was curious about the story, wrote, “It is hard for me to know whether this is a momentous event, or a nothingburger.”

It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.

But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.

Here’s the guts of the story:

The reopening of these cases represents a shift for the government, the first acknowledgment that prosecutors are coming to terms with the limitations of how they punish bank misdeeds. Typically, when banks have repeatedly run afoul of the law, they have returned to business as usual with little or no additional penalty — a stark contrast to how prosecutors mete out justice for the average criminal.

When punishing banks, prosecutors have favored so-called deferred-prosecution agreements, which suspend charges in exchange for the bank’s paying a fine and promising to behave. Several giant banks have reached multiple deferred or nonprosecution agreements in a short span, fueling concerns that the deals amount to little more than a slap on the wrist and enable a pattern of Wall Street recidivism.

Even now that prosecutors are examining repeat offenses on Wall Street, they are likely to seek punishments more symbolic than sweeping. Top executives are not expected to land in prison, nor are any problem banks in jeopardy of shutting down.

The reason for initially seeing this story as yet another overhyping of legal actions against banks is that the targets are all foreign banks and hence safe politically. The cases being re-investigated fall into two categories: money laundering and abuses related to Libor fixing settlements.

New York superintendent of financial services Benjamin Lawsky is the driving force behind the money laundering cases. He is identified as the party pushing for the tougher money-laundering settlements, based on evidence that Standard Chartered lied, as in hid evidence about the extent of its misconduct when its settlement was being negotiated. The fact the it was PriceWaterhouseCoopers that provided an unduly rosy report led Lawsky’s office to look into a second settlement, one with Mitsubishi-IBJ, where the bank also used PriceWaterhouseCoopers, and the consultant’s role again looks sus.

Lawsky, as he did during his first high profile action, threatened Standard Chartered with pulling its US banking license, and in the settlement with BNP Paribas, suspended their access to dollar clearing, which is a serious blow to many of their businesses. So Lawsky ability to do real damage to banks has no doubt played a role in securing the cooperation of Federal prosecutors. They do not want Lawsky to pull out his big guns out of frustration about not getting their cooperation. As an aside, Standard Chartered has behaved so badly and has been at points openly defiant that it deserves to be raked over the coals.

The second groups of cases, in which foreign banks are most prominent, is foreign exchange manipulation, which would violate previous settlement related to Libor manipulation. The miscreants flagged in the current New York Times account are Barclays and UBS; the other players under investigation are Deutsche, JP Morgan, and Citigroup. This is a straight-up Department of Justice deal, an apparent last-ditch effort to help burnish Holder’s legacy.

If the New York Times comment section is any guide, there was nary a good word to be said about this new prosecutorial push. Readers want to see executives punished and view mere fines as wrist-slaps at best. And this cynicism is warranted save for the way critical power brokers that have enabled bank misconduct are losing their privileged standing. Here is the germane part of the story:

When Mr. Lawsky made his initial $250 million settlement with the bank last year, the punishment was based partly on an outside consultant’s estimate of the illegal dealings. But the New York State regulator has since uncovered emails indicating that the consultant, PricewaterhouseCoopers, watered down the report under pressure from the bank, according to regulatory records.

In August, Mr. Lawsky imposed a $25 million penalty on PricewaterhouseCoopers, which said at the time that the report was “detailed” and “disclosed the relevant facts.”

After that settlement, people briefed on the matter said, prosecutors at the Manhattan district attorney’s office opened an investigation into the work that PricewaterhouseCoopers did for the Japanese bank, a previously unreported development. Already, the prosecutors have requested the consulting firm’s records in the case.

The investigations, the people said, also unearthed emails showing that PricewaterhouseCoopers changed the report not only at the suggestion of the bank, but also at the behest of lawyers working on the bank’s behalf. Like many banks caught in the government’s cross hairs, the Bank of Tokyo-Mitsubishi turned to Sullivan & Cromwell, an elite law firm as woven into the fabric of Wall Street as the banks it represents. Sullivan & Cromwell also represented Standard Chartered in the bank’s 2012 settlement with the Justice Department in Washington and the district attorney’s office in Manhattan.

More recently, the government has grown skeptical of the argument that some banks are simply too big to charge, an argument that Sullivan & Cromwell often employs for its clients. That argument was tested in a recent case against BNP Paribas, the giant French bank accused of processing billions of dollars for Sudan and Iran.

At a meeting in Washington this year, a lawyer from Sullivan & Cromwell cautioned prosecutors about the potential fallout from BNP pleading guilty to a crime, according to people briefed on the meeting. To illustrate the concern, the lawyer presented prosecutors with a fake newspaper article reporting that a huge bank had pleaded guilty for the first time in decades. The hypothetical report detailed what regulatory problems could befall the bank if prosecutors did not lower their demands for a fine and take precautions when extracting a plea.

Why is this significant? Sullivan & Cromwell, and in particular bank uber lawyer Rodgin Cohen, is in a league by itself in terms of advising banks on regulatory behavior. Cohen has access and clout second to none. Notice that prosecutors chose to leak to the Times the role that Sullivan & Cromwell played not only in the cases now being reopened, but publicized its earlier, dubious arguments in the BNP Paribas case. The sources made clear that the firm’s “don’t touch that dial” scare talk regarding guilty pleas and other tough settlements was no longer working. And prosecutors are no doubt incensed at a law firm pushing a consultant to take the fall for giving misleading information.

This is important not simply regarding the standing of Sullivan & Cromwell, but the use of elite advisors as liability shields. The prosecutors are trying to send the message that if you as the bank client try that sort of thing, you’ll pay even more in the end. And it also means that prosecutors will be more skeptical of supposedly reputable professionals in bank employ and may start getting more independent analyses in high-profile cases.

At this stage, it is incremental change, but it shows a rift among elite regulators and high-powered insiders, that the officialdom is finally putting its foot down and saying certain types of conduct no longer wash. This may seem a modest place to draw the line, but it’s still a meaningful shift in attitudes. It says that within the club, certain types of corruption are no longer tolerated. That’s a long-overdue step in the right direction.

Naked Capitalism: Taking on the Banksters at the SEC


SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

Posted on October 29, 2014 by

One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It’s unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It’s virtually never done to have a commissioner from the same party buck the chairman.

Admittedly, Stein can’t attack the “no one goes to jail” problem, since the SEC lacks prosecutorial powers. But she’s pushing the agency to use tools that it has refused to pick up that can increase the pain level at banks that have misbehaved.

Her current fight is over a practice she called out in April, of the SEC giving waivers to sanctions that are supposed to kick in automatically when a financial firm enters into a settlement in court. Bloomberg explains:

At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.

Stein has opposed the practice of rubber-stamping requests to grant waivers. As we wrote in June:

Stein has called out numerous SEC failures of nerve in her brief tenure as commissioner. For instance, in April she issued a withering dissent on the SEC’s waiver of having Royal Bank of Scotland lose its status as a “well-known seasoned issuer” as provided in both legislation and SEC rules, when it convicted for interest rate manipulation. This standing is valuable because, among other things, it allows securities issues to float offerings at will, rather than wait for the SEC to review and approve their offering documents. Stein also said that the SEC had recently given kid-gloves treatment to another financial institution that had also engaged in criminal abuses. In a statement to the Huffington Post, Elizabeth Warren backed Stein’s position:

When the SEC waives automatic penalties for criminal misconduct by the largest banks, it sends a dangerous signal about how weak it is in its enforcement of the law,…We are still paying the price for a financial crisis that was caused in part by regulators looking the other way while big financial institutions broke the law. Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight, to demonstrate no one is above the rules, and to show some backbone.

Stein this time has managed to do more than just make speeches about not giving these waivers freely. She’s created some consternation by a bureaucratic maneuver to stymie giving Bank of America one for its $16.7 billion settlement for selling toxic mortgages. First, she and her pro-reform fellow Democratic commissioner Luis Aguilar forced a change in internal policies so that staff could no longer grant these waivers unilaterally; the commissioners had to sign off on them. Normally, that would be a no-brainer, since pro-industry Chairman Mary Jo White plus the two Republicans could be relied upon to approve them. But Mary Jo White has had to recuse herself for having represented the Charlotte bank. Stein and Aguilar teamed up to demand tougher punishments for this recidivist lawbreaker.

The sanction that Stein and Aguilar want to impose is that of barring Bank of America from fundraising for private concerns. That stings because Merrill, now Bank of America, has long been a leader in the low-risk, lucrative business of raising money for hedge funds and private equity funds. Of course, if you didn’t know better, you’d think this was a grave injustice being visited upon American engines of growth. From the Bloomberg piece:

“It seems to me it would be important for them to have that waiver,” said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, “there are often banks that will lead some of those private placements,” he said.

Yves here. While I don’t have a breakdown of Bank of America’s revenues in this segment, it’s a safe bet that raising money directly for what by implication are pre-IPO tech companies is less important than either of its hedge fund or private equity fundraising business. Moreover, it’s also likely that companies that re large and successful enough to be candidates for Bank of America’s private placement team would have plenty of other firms competing to get their mandate. In other words, putting Bank of America in this penalty box is extremely unlikely to prevent any promising business from getting capital on good terms.

As Dave Dayen pointed out at Salon:

This is actually pretty simple: Financial firms should have to bear the consequences that the SEC has had on the books for decades. This strengthens the impact of fraud sanctions, and creates greater deterrents to future misconduct. If Bank of America doesn’t want to lose access to profit-making opportunities for its business, it shouldn’t break the law in the first place. The SEC shouldn’t be obligated to do the bank a favor when it makes mistakes.

This is especially true when the lawbreakers return again and again for waivers to clean up their unending series of messes. Bank of America has agreed to 51 legal settlements and regulatory fines since 2008. You can see why officials would get the impression that the bank cannot manage its business properly. Adding regulatory scrutiny and effectively cutting the bank down to size serves as a good corrective to that, not to mention a bulwark against future misbehavior. If the law means nothing to Bank of America, perhaps the risk of losing future profits will.

Cynics may say this is only a small step in the right direction. But change typically comes about via a series of small steps rather than seismic shifts. The more that people like Kara Stein and Luis Aguilar show that the SEC’s leaders are willing to back tougher sanctions, the more that staffers in the agency will be emboldened to pursue misconduct more aggressively.

Naked Capitalism: Drugs and Incarceration


Bob Goodwin: ‘Drug’ is a Teetering Social Concept

Posted on October 28, 2014 by

Yves here. Bob Goodwin discusses how the idea of legal versus illegal drugs has become a more obviously porous barrier than it was in his youth, even given the differences in how those differences are enforced across income/racial groups.

One thing that Bob may have deemed to be so obvious as to not be worth discussing is the casualness of prescribing what amount to performance-enhancing drugs to children, such as Ritalin and Adderall, along with troublingly frequent dispensing of antidepressants. Studies on safety are all short term; the idea of messing with the chemistry of developing brains, save in circumstances when the child is in acute distress, is heinous. Yet in parallel, kids have wised up and use various prescription stimulants, most notably Adderall, as study and test aids. I recall reading a New Yorker article on it at least a decade and maybe even more than a dozen years ago, on how utterly routine it was for kids in elite private schools to get these drugs prescribed, or filch their parents’ supplies, and trade them among their peers. My understanding is that the use of these drugs during exams, and for some students, on an ongoing basis, is routine.

By Bob Goodwin, an investor and medical device entrepreneur who lives in Mercer Island, Washington

I work a few blocks from a legal pot shop near Seattle. It is as legal for me to buy and consume Marijuana at home as it is to buy and consume beer. I used a lot of illegal drugs when I was younger, and I use a lot of legal drugs for a serious illness today. One of the legal drugs I need today, is a schedule 2 drug, because it is commonly resold illegally. Alcohol and tobacco have been legal drugs for most of the last few centuries, based on an uncomfortable accommodation, more than an acceptance, Furthermore there has been precipitous decline in the use of both. (here here here)

I am told that Marijuana is actually a very good drug for my disease here and the pot shop seems clean, well informed, comprehensive and professional. So why not? Well one big problem I have is that I have a 14 year old son, and two daughters 10 and 8. I also have an older son with two children of his own, and he has never used illegal drugs. I would like my younger children to read this essay and make an informed decision about role of drugs in their life. That was the approach my parents took with me when I was young, and I went to a community display of information about drugs. I took it as more of an advertisement FOR drugs, than against them. So I have fallen back to the approach most commonly used by people in my generation: “I used illegal drugs heavily when I was young. Don’t be me.”

I can easily avoid the tension I am hinting at by avoiding the pot shop. But I am intrigued by social tensions. The social tension today is the teetering concept that there are three types of drugs: social, medical and abused. For me, marijuana is uncomfortably all three simultaneously. It is legal, so it is essentially legally the same as alcohol and cigarettes, even if the culture hasn’t caught up. And most abused drugs are exactly the same as medical drugs, except that they exist in the unregulated part of our society.

Marijuana is an unexpected foil, but a natural one. For all its downsides, they are tiny compared even to over-the-counter medications. So most of the tension caused by Marijuana can’t be easily addressed on scientific or legalistic grounds. It is forcing a discussion about the definition of what a drug is.

History is rich with drugs, and has been central in cultures. Think of Greeks dancing in vats of grapes or the fact the word Assassin is derived from word Hashish, or even the Opium wars. But our culture has added two new components: drug companies, and the prison industrial complex.

When I stocked up on illegal drugs in college, my dad stocked up on drugs at the pharmacy. While I was in college, drug use was wide spread, but incarceration was low. In the ghetto’s incarceration for the same activity was rampant. Both of these contrasts were because of policy decisions.

Regulation is necessary, certainly in this space, but there is always an irresistible pressure for capture in regulation. Absentee landlords are fairly blamed for the Irish potato famine, but despite a failure of the potato crop, there was adequate food in Ireland. It actually took a significant military presence to facilitate the exporting of food from Ireland during the famine. The regulatory machinery was protecting legitimate and legal property rights. Crop failure was not new to Ireland, but never before had the regulatory system been strong enough to cause people to starve.

What regulatory rights have been captured in our drug culture? There are two. First, drug companies, hospitals, doctors (16% of our economy) would largely become obsolete if treatments that almost always involve drugs were not funneled through a highly regulated system. Second, A sizable part of the population has no access to this system, and a majority has very limited access to this system. While the regulatory bottleneck of Ireland is not a fair comparison, there is a real regulatory bottleneck in American medicine. No such bottleneck could possibly be an optimum for public health. This bottleneck is an optimum for legacy institutions. Most abuse of illegal drugs occurs from people with limited or no access to the medical industrial complex.

The second capture is more subtle. Access to legal drugs is stratified by wealth and age. Illegal drug users are mostly young or not wealthy enough to have full access to our health care system. But college kids almost never get sent to jail for using drugs, so it is my thesis that drug incarceration is less about drugs than it is about incarceration. There is a regulatory bottleneck for wealth too.

Some very bright black men have built impressive organizational structures for the distribution of medicine to willing customers. Their hall of fame is called Sing-Sing. A struggling family cannot rent a food truck and park it in a rich neighborhood for income, or run a small barber shop inside their isolated apartment for the benefit of the middle class. Like in Ireland, their only legal opportunity for employment is in the food service business, and the pay is proportionate to the potato crop yield.

So celebrate the legalization of Marijuana, but ask your kids not to use it. We know regulation is needed, but let’s find a damn way to make it rational, fair and transparent.

Naked Capitalism on a New Gilded Age

Exploding Wealth Inequality in the United States

Posted on October 28, 2014 by

Yves here. This is a particularly important post on the state of inequality since Emanuel Saez, working with Thomas Piketty, was for over a decade tracking the rise in inequality in the US, particularly the way that the top 1% and 0.1% were pulling away from the rest of the population. Gabriel Zucman has made a recent important contribution to the analysis of wealth disparity by sizing the impact on global figures of the funds stashed in tax havens. A full 6% goes unrecorded, which by his estimates is enough to make the US less of a net debtor, Europe a net creditor, and of course, the rich in those regions even richer.

Saez and Zucman are particularly concerned that this level of wealth inequality is on its way to becoming entrenched.

By Emmanuel Saez, Professor of Economics, University of California Berkeley and Gabriel Zucman, Assistant Professor of Economics, London School of Economics. Originally published at VoxEU

Wealth inequality in the US has followed a U-shaped evolution over the last century – there was a substantial democratisation of wealth from the Great Depression to the late 1970s, followed by a sharp rise in wealth inequality. This column discusses new evidence on the concentration of wealth in the US. Growing wealth disparity is fuelled by increases in both income and saving rate inequalities between the haves and the have nots.

There is no dispute that income inequality has been on the rise in the US for the past four decades. The share of total income earned by the top 1% of families was less than 10% in the late 1970s, but now exceeds 20% as of the end of 2012 (Piketty and Saez 2003). A large portion of this increase is due to an upsurge in the labour incomes earned by senior company executives and successful entrepreneurs. But is the rise in US economic inequality purely a matter of rising labour compensation at the top, or did wealth inequality rise as well?

Before we answer that question (hint: the answer is a definitive yes, as we will demonstrate below) we need to define what we mean by wealth. Wealth is the stock of all the assets people own, including their homes, pension saving, and bank accounts, minus all debts. Wealth can be self-made out of work and saving, but it can also be inherited. Unfortunately, there is much less data available on wealth in the US than there is on income. Income tax data exists since 1913 – the first year the country collected federal income tax – but there is no comparable tax on wealth to provide information on the distribution of assets. Currently available measures of wealth inequality rely either on surveys (the Survey of Consumer Finances of the Federal Reserve Board), on estate tax return data (Kopczuk and Saez 2004), or on lists of wealthy individuals, such as the Forbes 400 list of wealthiest Americans.

In our new working paper (Saez and Zucman 2014), we try to measure wealth in another way. We use comprehensive data on capital income – such as dividends, interest, rents, and business profits – that is reported on individual income tax returns since 1913. We then capitalise this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds, the national balance sheets that measure aggregate wealth of US families. In this way we obtain annual estimates of US wealth inequality stretching back a century.

Wealth inequality, it turns out, has followed a spectacular U-shaped evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratisation of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1% increasing to 22% in 2012 from 7% in the late 1970s (see Figure 1). The top 0.1% includes 160,000 families with total net assets of more than $20 million in 2012.

Figure 1. The return of the Roaring Twenties


Notes: The figure plots wealth share owned by the top .1% richest families in the US from 1913 to 2012. Wealth is total assets (including real estate and funded pension wealth) net of all debts. Wealth excludes the present value of future government transfers (such as Social Security or Medicare benefits).

Source: Saez and Zucman (2014).

Figure 1 shows that wealth inequality has exploded in the US over the past four decades. The share of wealth held by the top 0.1% of families is now almost as high as in the late 1920s, when The Great Gatsby defined an era that rested on the inherited fortunes of the robber barons of the Gilded Age.

In recent decades, only a tiny fraction of the population saw its wealth share grow. While the wealth share of the top 0.1% increased a lot in recent decades, that of the next 0.9% (families between the top 1% and the top 0.1%) did not. And the share of total wealth of the “merely rich” – families who fall in the top 10% but are not wealthy enough to be counted among the top 1% – actually decreased slightly over the past four decades. In other words, family fortunes of $20 million or more grew much faster than those of only a few millions.

The flip side of these trends at the top of the wealth ladder is the erosion of wealth among the middle class and the poor. There is a widespread public view across American society that a key structural change in the US economy since the 1920s is the rise of middle-class wealth, in particular because of the development of pensions and the rise in home ownership rates. But our results show that while the share of wealth of the bottom 90% of families did gradually increase from 15% in the 1920s to a peak of 36% in the mid-1980s, it then dramatically declined. By 2012, the bottom 90% collectively owns only 23% of total US wealth, about as much as in 1940 (see Figure 2).

Figure 2. The rise and fall of middle-class wealth


Notes: The figure plots wealth share owned by the bottom 90% poorest families in the US from 1917 to 2012. Wealth is total assets (including real estate and funded pension wealth) net of all debts. Wealth excludes the present value of future government transfers (such as Social Security or Medicare benefits).

Source: Saez and Zucman (2014).

The growing indebtedness of most Americans is the main reason behind the erosion of the wealth share of the bottom 90% of families. Many middle-class families own homes and have pensions, but too many of these families also have much higher mortgages to repay and much higher consumer credit and student loans to service than before (Mian and Sufi 2014). For a time, rising indebtedness was compensated by the increase in the market value of the assets of middle-class families. The average wealth of bottom 90% of families jumped during the stock-market bubble of the late 1990s and the housing bubble of the early 2000s. But it then collapsed during and after the Great Recession of 2007–2009 (see Figure 3).

Figure 3. The new wealth divide in the US


Notes: The figure depicts the average real wealth of bottom 90% of families (right y-axis) and top 1% families (left y-axis) from 1946 to 2012. The scales differ by a factor 100 to reflect the fact that top 1% of families are 100 times richer than the bottom 90% of families. Wealth is expressed in constant 2010 US dollars, using the GDP deflator.

Source: Saez and Zucman (2014).

Since the housing and financial crises of the late 2000s there has been no recovery in the wealth of the middle class and the poor. The average wealth of the bottom 90% of families is equal to $80,000 in 2012 – the same level as in 1986. In contrast, the average wealth for the top 1% more than tripled between 1980 and 2012. In 2012, the wealth of the top 1% increased almost back to its peak level of 2007. The Great Recession looks only like a small bump along an upward trajectory.

How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fuelling the explosion in wealth inequality. For the bottom 90% of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1% real wages grew fast. In addition, the saving rate of middle-class and lower-class families collapsed over the same period while it remained substantial at the top. Today, the top 1% families save about 35% of their income, while the bottom 90% families save about zero (Saez and Zucman 2014).

The Implications of Rising Wealth Inequality and Possible Remedies

If income inequality stays high and if the saving rate of the bottom 90% of families remains low then wealth disparity will keep increasing. Ten or 20 years from now, all the gains in wealth democratisation achieved during the New Deal and the post-war decades could be lost. While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets. Paris School of Economics professor Thomas Piketty warns that inherited wealth could become the defining line between the haves and the have-nots in the 21st century (Piketty 2014). This provocative prediction hit a nerve in the US this year when Piketty’s book Capital in the 21st Century became a national best seller because it outlined a direct threat to the cherished American ideals of meritocracy and opportunity.

What should be done to avoid this dystopian future? We need policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class. First, current preferential tax rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality and the very high savings rate of the wealthy. Second, estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth – the least justifiable form of inequality in the American meritocratic ideal. Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression (Piketty and Saez 2003, Kopczuk and Saez 2004). The same proven tools are needed again today.

There are a number of specific policy reforms needed to rebuild middle-class wealth. A combination of prudent financial regulation to rein in predatory lending, incentives to help people save – nudges have been shown to be very effective in the case of 401(k) pensions (Thaler and Sunstein 2008) – and more generally steps to boost the wages of the bottom 90% of workers are needed so that ordinary families can afford to save.

One final reform also needs to be on the policymaking agenda – the collection of better data on wealth in the US. Despite our best efforts to build wealth inequality data, we want to stress that the US is lagging behind in terms of the quality of its wealth and saving data. It would be relatively easy for the US Treasury to collect more information – in particular balances on 401(k) and bank accounts – on top of what it already collects to administer the federal income tax. This information could help enforce the collection of current taxes more effectively and would be invaluable for obtaining more precise estimates of the joint distributions of income, wealth, saving, and consumption. Such information is needed to illuminate the public debate on economic inequality. It is also required to evaluate and implement alternative forms of taxation, such as progressive wealth or consumption taxes, in order to achieve broad-based and sustainable economic growth.

Please see original post for references.



Naked Capitalism: Our Corporate IRS


Pro Big Corporate IRS: Agency Guts Whistleblower Program, Leaves Billions on the Table

Posted on October 24, 2014 by

It’s widely known among tax professionals that the US does little in the way of tax enforcement, and the little that it does do is directed against individuals and small businesses.

What is not so widely known is how deep the institutional bias is in the IRS in favor of letting big corporate tax cheats get away with it.

Conventional wisdom is similar to the rationalization of weak enforcement at the SEC: that the agency is afraid that if they go after big companies, they’ll have the penalties and fines challenged in court, and they’ll often lose by virtue of being outgunned by better lawyer (yes, Virginia, even if you have a solid case, that doesn’t mean you’ll win at trial). And top tax litigators are among the most highly paid legal talent. I’m not up on current rates, but in the mid 1980s, Sumitomo Bank fought the IRS on a $100 million assessment and won. Their attorney was a solo practitioner who charged $1000 an hour.

It turns out that the picture is vastly worse than that. In 2006, recognizing that the IRS was losing over $450 billion a year in revenue to tax evasion, Congress mandated that the agency establish a whistleblower office and pay whistleblowers 15% to 30% of amounts recovered from their filings. Unfortunately, as a whistleblower from the IRS’ Office of the General Counsel in New York has revealed, the IRS at its highest levels is opposed to implementing the policy.

This whistleblower, Jane Kim, makes it clear that in this letter, she is acting as a de facto spokesperson for an attorney that represents IRS whistleblowers. The missive, which we’ve embedded at the end of the post, presents three cases where the tax revenue lost exceeded $13 billion. Two of them looked to be particularly egregious. In one, a company set up completely sham foreign companies, with no operations whatsoever in any of these tax jurisdictions. Yet it claimed all of its profits were due to these phony companies and were kept permanently offshore (regular readers may recall that US technology companies who use Ireland and other low-tax domiciles to attribute their profits to “offshore” operations actually keep those “offshore” monies in US banks. For instance, Apple runs what amounts to a hedge fund to manage its “offshore” funds in Nevada). The effect of this scheme was that the company paid corporate taxes nowhere. That scam with that one company alone lost the IRS a purported $3 billion a year in revenues.

Another mind-boggling case involved a criminal case that was peculiarly shut down. The target had foreign brokerage accounts for US individuals. The target clearly knew it had reporting, withholding, and remittance obligations for foreign accounts, since it had come forward to ‘fess up an amnesty program for past abuses. Yet it was still engaged in effectively hiding offshore income of US clients by not keeping the required records. The case had advanced far enough that the DoJ was ready to empanel a grand jury, and was waiting for the final go-ahead from the IRS. The IRS closed the investigation because it went along with the target’s claim that there were too many accounts to be audited (huh?) and therefore it should be permitted to sample them. The target manipulated the “random” sample to hide the misconduct.

So why does this occur? The very top level of the IRS is opposed to the whistleblower program, and more broadly, is effectively in bed with large corporations. As the whistleblower’s letter points out:

The IRS Chief Counsel Donald Korb, under whose tenure the Office was created, openly expressed his views on this issue when stating, “The new whistleblower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS as contemplated by this particular program. The IRS didn’t ask for these rules; they were forced on it by the Congress.”

The letter, which I strongly encourage you to read, includes describing how the IRS adopted specific policies to vitiate the whistleblower program, such as refusing to pay awards if they resulted in the reduction of refunds, as opposed to paying additional taxes, even though the financial impact is the same.

The letter also describes how the IRS bends over backwards to cater to “favored” taxpayers, even going so far as to engage in retaliatory audits against IRS attorneys who publicize the IRS waving through tax scams.

This isn’t the first time Kim has alleged IRS misconduct; David Cay Johnston publicized other charges by Kim in Tax Notes Today, such as pervasive mismanagement of cases and failing to ride herd on abusive union stewards in its New York office. But these charges are vastly more troubling, since they indict the top level of the IRS.

Raw Story interviewed the whistleblower attorney who approached Kim after she made her charges of gross mismanagement and waste of resources. Her letter presumably represents the meatiest of his cases. He describes how the agency has been captured by large corporations:

…the private sector lawyer and ex-IRS attorney explained that since 1998, IRS restructuring has focused on bringing in “outside people.” This led to the employment of an extra layer of executives who were previously “partners from big accounting firms.” Citing active IRS criminal agents, the ex-IRS attorney said: “Almost every large firm or corporation has a person inside the IRS. It’s a revolving door, with the top two or three management layers all from big accounting and law firms, and this is why they won’t work big billion-dollar cases criminally. Private bar attorneys are, in effect, controlling the IRS. It’s a type of corruption – that’s the word used by one IRS agent I’m in touch with whose case was shut down by higher ups without cause.”

The incumbent IRS chief counsel, William Wilkins, was previously a lobbyist at the WilmerHale firm where for 21 years he represented and lobbied on behalf of private sector clients including the Swiss Bankers Association. Swiss banks UBS and Credit Suisse have faced penalties, hearings and convictions for helping wealthy Americans illegally conceal billions of dollars of taxable income.

Attorney James Henry, former chief economist at financial consultancy McKinsey, said that Wilkins’ firm “continued to represent the Swiss Banking Association throughout the 1990s and into the 2000s. Now Wilkins gets appointed chief counsel of the IRS in 2009, and he’s presiding over these whistleblower cases.”

So while we have Treasury attempting to defuse public ire over the latest high-profile form of corporate tax gaming, inversions, by relocating their headquarters overseas to a lower-tax domicile while not changing their US business, we have billions uncollected as a result of the IRS becoming a big-corporate crony. Kim has sent her letter to many of the right Congresscritters: Elizabeth Warren, Maxine Waters, Alan Grayson, Chuck Grassley, Bernie Sanders, Mike Lee, Rand Paul, and Ted Cruz. You can help her effort along by calling their offices, particularly if you are a constituent, and voicing your outrage over the IRS’ policy of “nothing to see here” on big corporate tax fraud. The Capitol Hill switchboard is 202-224-3121 or you can use this page at to find e-mail addresses and their district and DC office phone numbers.

Plutocrats Against Democracy

Paul Krugman

It’s always good when leaders tell the truth, especially if that wasn’t their intention. So we should be grateful to Leung Chun-ying, the Beijing-backed leader of Hong Kong, for blurting out the real reason pro-democracy demonstrators can’t get what they want: With open voting, “You would be talking to half of the people in Hong Kong who earn less than $1,800 a month. Then you would end up with that kind of politics and policies” — policies, presumably, that would make the rich less rich and provide more aid to those with lower incomes.

So Mr. Leung is worried about the 50 percent of Hong Kong’s population that, he believes, would vote for bad policies because they don’t make enough money. This may sound like the 47 percent of Americans who Mitt Romney said would vote against him because they don’t pay income taxes and, therefore, don’t take responsibility for themselves, or the 60 percent that Representative Paul Ryan argued pose a danger because they are “takers,” getting more from the government than they pay in. Indeed, these are all basically the same thing.

For the political right has always been uncomfortable with democracy. No matter how well conservatives do in elections, no matter how thoroughly free-market ideology dominates discourse, there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy.

In fact, the very success of the conservative agenda only intensifies this fear. Many on the right — and I’m not just talking about people listening to Rush Limbaugh; I’m talking about members of the political elite — live, at least part of the time, in an alternative universe in which America has spent the past few decades marching rapidly down the road to serfdom. Never mind the new Gilded Age that tax cuts and financial deregulation have created; they’re reading books with titles like “A Nation of Takers: America’s Entitlement Epidemic,” asserting that the big problem we have is runaway redistribution.

This is a fantasy. Still, is there anything to fears that economic populism will lead to economic disaster? Not really. Lower-income voters are much more supportive than the wealthy toward policies that benefit people like them, and they generally support higher taxes at the top. But if you worry that low-income voters will run wild, that they’ll greedily grab everything and tax job creators into oblivion, history says that you’re wrong. All advanced nations have had substantial welfare states since the 1940s — welfare states that, inevitably, have stronger support among their poorer citizens. But you don’t, in fact, see countries descending into tax-and-spend death spirals — and no, that’s not what ails Europe.

Still, while the “kind of politics and policies” that responds to the bottom half of the income distribution won’t destroy the economy, it does tend to crimp the incomes and wealth of the 1 percent, at least a bit; the top 0.1 percent is paying quite a lot more in taxes right now than it would have if Mr. Romney had won. So what’s a plutocrat to do?

One answer is propaganda: tell voters, often and loudly, that taxing the rich and helping the poor will cause economic disaster, while cutting taxes on “job creators” will create prosperity for all. There’s a reason conservative faith in the magic of tax cuts persists no matter how many times such prophecies fail (as is happening right now in Kansas): There’s a lavishly funded industry of think tanks and media organizations dedicated to promoting and preserving that faith.

Another answer, with a long tradition in the United States, is to make the most of racial and ethnic divisions — government aid just goes to Those People, don’t you know. And besides, liberals are snooty elitists who hate America.

A third answer is to make sure government programs fail, or never come into existence, so that voters never learn that things could be different.

But these strategies for protecting plutocrats from the mob are indirect and imperfect. The obvious answer is Mr. Leung’s: Don’t let the bottom half, or maybe even the bottom 90 percent, vote.

And now you understand why there’s so much furor on the right over the alleged but actually almost nonexistent problem of voter fraud, and so much support for voter ID laws that make it hard for the poor and even the working class to cast ballots. American politicians don’t dare say outright that only the wealthy should have political rights — at least not yet. But if you follow the currents of thought now prevalent on the political right to their logical conclusion, that’s where you end up.

The truth is that a lot of what’s going on in American politics is, at root, a fight between democracy and plutocracy. And it’s by no means clear which side will win.

American Mercenaries


Featured photo - Blackwater Founder Remains Free and Rich While His Former Employees Go Down on Murder Charges

A federal jury in Washington, D.C., returned guilty verdicts against four Blackwater operatives charged with killing more than a dozen Iraqi civilians and wounding scores of others in Baghdad in 2007.

The jury found one guard, Nicholas Slatten, guilty of first-degree murder, while three other guards were found guilty of voluntary manslaughter: Paul Slough, Evan Liberty, and Dustin Heard. The jury is still deliberating on additional charges against the operatives, who faced a combined 33 counts, according to the Associated Press. A fifth Blackwater guard, Jeremy Ridgeway, had already pleaded guilty to lesser charges and cooperated with prosecutors in the case against his former colleagues. The trial lasted ten weeks and the jury has been in deliberations for 28 days.

The incident for which the men were tried was the single largest known massacre of Iraqi civilians at the hands of private U.S. security contractors. Known as “Baghdad’s bloody Sunday,” operatives from Blackwater gunned down 17 Iraqi civilians at a crowded intersection at Nisour Square on September 16, 2007. The company, founded by secretive right-wing Christian supremacist Erik Prince, pictured above, had deep ties to the Bush Administration and served as a sort of neoconservative Praetorian Guard for a borderless war launched in the immediate aftermath of 9/11.

While Barack Obama pledged to reign in mercenary forces when he was a senator, once he became president he continued to employ a massive shadow army of private contractors. Blackwater — despite numerous scandals, congressional investigations, FBI probes and documented killings of civilians in both Iraq and Afghanistan — remained a central part of the Obama administration’s global war machine throughout his first term in office.

Just as with the systematic torture at Abu Ghraib, it is only the low level foot-soldiers of Blackwater that are being held accountable. Prince and other top Blackwater executives continue to reap profits from the mercenary and private intelligence industries. Prince now has a new company, Frontier Services Group, which he founded with substantial investment from Chinese enterprises and which focuses on opportunities in Africa. Prince recently suggested that his forces at Blackwater could have confronted Ebola and ISIS. “If the administration cannot rally the political nerve or funding to send adequate active duty ground forces to answer the call, let the private sector finish the job,” he wrote.

None of the U.S. officials from the Bush and Obama administrations who unleashed Blackwater and other mercenary forces across the globe are being forced to answer for their role in creating the conditions for the Nisour Square shootings and other deadly incidents involving private contractors. Just as the main architect of the CIA interrogation program, Jose Rodriguez, is on a book tour for his propagandistic love letter to torture, Hard Measures: How Aggressive CIA Actions After 9/11 Saved American Lives, so too is Erik Prince pushing his own revisionist memoir,Civilian Warriors: The Inside Story of Blackwater and the Unsung Heroes of the War on Terror.

While the Blackwater verdict is an important and rare moment of accountability in an overwhelmingly unaccountable private war industry, it does not erase the fact that those in power—the CEOs, the senior officials, the war profiteers—walk freely and will likely do so for the rest of their lives.

What is so seldom discussed in public discourse on the use of mercenaries are the stories of their victims. After the Nisour Square massacre, I met with Mohammed Kinani, whose 9-year-old son, Ali, was the youngest person killed by Blackwater operatives that day. As he and his family approached the square in their car:

“[T]hey saw one armored vehicle and then another, with men brandishing machine guns atop each one,” Mohammed recalls. The armored cars swiftly blocked off traffic. One of the gunners held both fists in the air, which Mohammed took as a gesture to stop. “Myself and all the cars before and behind me stopped,” Mohammed says. “We followed their orders. I thought they were some sort of unit belonging to the American military, or maybe just a military police unit. Any authority giving you an order to stop, you follow the order.” It turns out the men in the armored cars were neither U.S. military nor MPs. They were members of a Blackwater team code-named Raven 23.

As the family waited in traffic, two more Blackwater vehicles became visible. Mohammed noticed a family in a car next to his—a man, woman and child. The man was staring at Mohammed’s car, and Mohammed thought the man was eyeing Jenan. “I thought he was checking my sister out,” Mohammed remembers. “So I yelled at him and said, ‘What are you looking at?’” Mohammed noticed that the man looked frightened. “I think they shot the driver in the car in front of you,” the man told him.

Mohammed scanned the area and noticed that the back windshield of the white Kia sedan in front of him was shattered. The man in the car next to Mohammed began to panic and tried to turn his car around. He ended up bumping into a taxi, and an argument ensued. The taxi driver exited his car and began yelling. Mohammed tried to break up the argument, telling the taxi driver that a man had been shot and that he should back up so the other car could exit. The taxi driver refused and got back into his vehicle.

At that point, an Iraqi police officer, Ali Khalaf Salman, approached the Kia sedan, and it started to slowly drift. The driver had been shot, and the car was gliding in neutral toward a Blackwater armored car. Salman, in an interview, described how he tried to stop it by pushing backward. He saw a panicked woman inside the car; she was clutching a young man covered in blood who had been shot in the head. She was shrieking, “My son! My son! Help me, help me!” Salman remembered looking toward the Blackwater shooters. “I raised my left arm high in the air to try to signal to the convoy to stop the shooting.” He said he thought the men would cease fire, given that he was a clearly identified police officer.

“As the officer was waving, the men on the armored cars started shooting at that car,” Mohammed says. “And it wasn’t warning shots; they were shooting as in a battle. It was as though they were in a fighting field. I thought the police officer was killed. It was insane.” Officer Salman managed to dive out of the way as the bullets rained down. “I saw parts of the woman’s head flying in front of me,” recalled his colleague, Officer Sarhan Thiab. “They immediately opened heavy fire at us.”

That’s how the Nisour Square massacre began.

“What can I tell you?” Mohammed says, closing his eyes. “It was like the end of days.”

Mohammed would later learn that the first victims that day, in the white Kia, were a young Iraqi medical student, Ahmed Haithem Al Rubia’y, and his mother, Mahassin, a physician. Mohammed is crystal clear that the car posed no threat. “There was absolutely no shooting at the Blackwater men,” he says. “All of a sudden, they started shooting in all directions, and they shot at everyone in front of them. There was nothing left in that street that wasn’t shot: the ground, cars, poles, sidewalks; they shot everything in front of them.” As the Blackwater gunners shot up the Rubia’ys’ vehicle, Mohammed said, it soon looked like a sieve “due to how many bullet holes it had.” A Blackwater shooter later admitted that they also fired a grenade at the car, causing the car to explode. Mohammed says the Blackwater men then started firing across the square. “They were shooting in all directions,” he remembers. He describes the shooting as “random yet still concentrated. It was concentrated and focused on what they aimed at and still random as they shot in all directions.”

One of the Blackwater shooters was on top of an armored vehicle firing an automatic weapon, he says. “Every time he would finish his clip, he would throw it on the ground and would load another one in and would start shooting again, and finish the new one and replace it with another.” One young Iraqi man got out of his car to run, and as he fled, the Blackwater shooter gunned him down and continued firing into his body as it lay on the pavement, Mohammed says. “He was on the ground bleeding, and they’re shooting nonstop, and it wasn’t single bullets.” The Blackwater shooter, he says, would fire at other Iraqis and cars and then return to pump more bullets into the dead man on the ground. “He sank in his own blood, and every minute the [Blackwater shooter] would shoot left and right and then go back to shoot the dead man, and I could see that his body would shake with every bullet. He was already dead, but his body was still reacting to the bullets. [The shooter] would fire at someone else and then go back to shoot at this dead man.” Shaking his head slowly, Mohammed says somberly, “The guy is dead in a pool of blood. Why would you continue shooting him?”

In his vehicle, as the shooting intensified, Mohammed yelled for the kids to get down. He and his sister did the same. “My car was hit many times in different places. All I could hear from my car was the gun shots and the sound of glass shattering,” he remembers. Jenan was frantic. “Why are they shooting at us?” she asked him. Just then, a bullet pierced the windshield, hitting Jenan’s headrest. Mohammed shows me a photo of the bullet hole.

As gunfire rained on the SUV, Jenan grabbed Mohammed’s hair, yanked his head down and covered him with her body. “My young sister was trying to protect me by covering me with her body, so I forced myself out of her grip and covered her with my body to protect her. It was so horrific that my little sister, whom I’m supposed to protect, was trying to protect me.” Mohammed managed to slip his cellphone from his pocket and was going to call his father. “It’s customary that when in agony before death, you ask those close to you to look after your loved ones,” he says. Jenan demanded that Mohammed put down the phone, reminding him that their father had had two strokes already. “If he hears what’s happening, he’ll die immediately,” she said. “Maybe he’ll die before us.”

At that moment, bullets pierced the SUV through the front windshield. A bullet hit the rearview mirror, causing it to whack Mohammed in the face. “We imagined that in a few seconds everyone was going to die–everyone in the car, my sister and I and our children. We thought that every second that passed meant one of us dying.” He adds, “We remained still, my sister and I. I had her rest her head on my lap, and my body was on top of her. We’d sneak a peek from under the dashboard, and they continued shooting here and there, killing this one and that one.”

And then the shooting stopped.

Kinani thought his family had somehow miraculously survived the massacre. But then the silence of the aftermath was shattered by relatives in his car shouting, “Ali is shot! Ali is shot!”

Mohammed rushed around to Ali’s door and saw that the window was broken. He looked inside and saw his son’s head resting against the door. He opened it, and Ali slumped toward him. “I was standing in shock looking at him as the door opened, and his brain fell on the ground between my feet,” Mohammed recalls. “I looked and his brain was on the ground.” He remembers people yelling at him, telling him to get out while he could. “But I was in another world,” he says. Then Mohammed snapped back to consciousness. He put Ali back in the car and placed his hand over his son’s heart. It was still beating. He got in the driver’s seat of his car, tires blown out, radiator damaged, full of bullets, liquids leaking everywhere, hoping still that he could save [Ali’s] life. Somehow he managed to get the car near Yarmouk Hospital, right near the square. He picked up Ali and ran toward the hospital. He nearly collapsed on the road, and an Iraqi police officer took Ali from his arms and ran him into the hospital.

Mohammed checked that the other children were safe and then dashed to the hospital. “I entered the emergency room, and blood was everywhere, dead people, injured people everywhere,” he remembers. “My son was in the last bed; the doctor was with him and had already hooked him with an IV line.” As Mohammed stood by Ali’s bed, the doctor told him that Ali was brain dead. “His heart is beating,” the doctor said, “and it will continue to beat until he bleeds out and dies.” The doctor told him that if there were any hope to be found, it would require taking Ali in an ambulance to a neurological hospital across town. The fastest route meant that they had to pass through Nisour Square. Iraqi police stopped them and told them they could not pass. “The US Army is here and won’t let you through,” the officer told them. The driver took an alternate route and was going so fast the ambulance almost crashed twice. When they got to the hospital, Mohammed offered to pay the driver–at least for the gas, which is customary. The driver refused. “No, I would like to donate blood to your son if he needs it,” he told Mohammed. A few moments later, Mohammed stood with a doctor who told him there was nothing they could do. Ali was dead.

Filmmaker Richard Rowley and I produced a 30 minute documentary on the Nisour Square massacre and the story of Ali Kinani for Democracy Now! and The Nation magazine:


Naked Capitalism on Stock Market Manipulation

Goldman Makes It Official That the Stock Market Is Manipulated, Buybacks Drive Valuations

Yves Smith

It’s remarkable that this Goldman report, and its writeup on Business Insider, is being treated with a straight face. The short version is current stock price levels are dependent on continued stock buybacks. Key sections of the story:

Goldman Sachs’ David Kostin believes a temporary pullback may explain why the S&P 500 has tumbled from its all-time high of 2,019 on Sept. 19.

“Most companies are precluded from engaging in open-market stock repurchases during the five weeks before releasing earnings,” Kostin notes. “For many firms, the beginning of the blackout period coincided with the S&P 500 peak on September 18. So the sell-off occurred during a time when the single largest source of equity demand was absent. Buybacks dip during earnings reporting months, which have seen 1.2 points higher realized volatility than in other months during the past 25 years.”…

“We expect companies will actively repurchase shares in November and December,” he writes. “Since 2007, an average of 25% of annual buybacks has occurred during the last two months of the year.”


Notice how the bulk of buybacks are concentrated in the fourth quarter, with the obvious intent of goosing prices at year end so as to lead to higher executive pay for “increasing shareholder value”? In fact, these companies are being gradually liquidated. Issuing debt, which public companies have done in copious volumes since the crash, and using it to buy shares is dissipating corporate assets. They are over time shrinking their businesses. That is also reflected in aggressive headcount cuts and cost-saving measures. Even though analysts like to tout the cash that companies have sitting on their balance sheets as a source of potential investment, as we’ve discussed in previous posts, public companies are so terrified of even a quarterly blip in earnings due to incurring expenses relating to long-term investments that they’d rather do nothing, or go the inertial path of cutting costs to show higher profits.

But with borrowing the big source of this corporate munificence to the share-owning classes, this is a self-limiting game. But the end game could be a long time in coming. First, you have economists who believe that the stock market directly drives consumer spending, echoing the Fed’s confidence in the wealth effect. For instance, see this argument from Roger Farmer (hat tip Bruegel blog):

There is a close relationship between changes in the value of the stock market and changes in the unemployment rate one quarter later. My research here, and here shows that a persistent 10% drop in the real value of the stock market is followed by a persistent 3% increase in the unemployment rate. The important word here is persistent. If the market drops 10% on Tuesday and recovers again a week later, (not an unusual movement in a volatile market), there will be no impact on the real economy. For a market panic to have real effects on Main Street it must be sustained for at least three months.

Yves here. The problem is that correlation is not causation. Significant and sustained stock market declines are almost always the result of Fed tightening. The usual lag between an interest rate cycle turn and a stock market peak historically was roughly four months, but in our new normal of seemingly permanent heavy-duty central bank meddling, old rules of thumb are to be used with great caution. Nevertheless, Greenspan was obsessed with what drove stock prices, and the Fed is unduly solicitous of asset price levels, no doubt because people like Janet Yellen have to leave their DC bubble in order to meet actual unemployed people.

Mike Whitney reminds those who manage to miss it that the Fed is so concerned about the actual and psychological impact of stock market prices that it immediately talked investors into getting back into the pool when the market started misbehaving badly last week. From Counterpunch:

For those readers who still think that the Fed doesn’t meddle in the markets: Think again. Friday’s stock surge had nothing to do with productivity, price, earnings, growth or any of the other so called fundamentals. It was all about manipulation; telling people what they want to hear, so they do exactly what you want them to do. The pundits calls this jawboning, and the Fed has turned it into an art-form. All [St. Louis Fed President James] Bullard did was assure investors that the Fed “has their back”, and , sure enough, another wild spending spree ensued. One can only imagine the backslapping and high-fives that broke out at the Central Bank following this latest flimflam….

It’s too bad the Fed can’t put in a good word for the real economy while they’re at it. But, oh, I forgot that the real economy is stuffed with working stiffs who don’t warrant the same kind of treatment as the esteemed supermen who trade stocks for a living. Besides, the Fed doesn’t give a rip about the real economy. If it did, it would have loaded up on infrastructure bonds instead of funky mortgage backed securities (MBS). The difference between the two is pretty stark: Infrastructure bonds put people to work, circulate money, boost economic activity, and strengthen growth. In contrast, MBS purchases help to fatten the bank accounts of the fraudsters who created the financial crisis while doing bupkis for the economy. Guess who the Fed chose to help out?

Do you really want to know why the Fed isn’t going to end QE? Here’s how Nomura’s chief economist Bob Janjuah summed it up:

“I want to remind readers of a message that may be buried in the past: When QE1 ended, the S&P 500 fell just under 20% in a roughly three-month period before the QE2 recovery.

When the QE2 ended, the S&P 500 fell about 20% in a three-month period before the next Fed-inspired bounce (aided by the ECB). QE3 is ending this month…”

Is that why the Fed started jawboning QE4, to avoid the inevitable 20 percent correction?

Whitney continues with one of our favorite tropes: that all QE has done is elevate asset prices. That has not led to a recovery in anything much beyond the balance sheets of the top cohorts and the income of the top 1%. Even worse, it has provide cover for the Administration falling in with investor-favoring austerity, in the form of reducing deficit spending when it ought to be increasing it to take up the considerable and costly slack in the economy.

It’s not surprising to see the Fed double down on a failed strategy. The central bank had apparently finally recognized in 2013 that QE was not helping the real economy, and they needed to exit the policy to reduce the resulting economic distortions. But they lost their nerve during last summer’s taper tantrum, and turned cowardly again in response to a mere stock market hissy fit.

The Fed believes that what is good for the wealthy is good for the US, and that when they are in danger of suffering financially, the central bank should break glass and administer monetary relief. Even though the Fed may think it is serious about ending QE and eventually raising rates, as they say in Venezuela, “They have changed their minds, but they have not changed their hearts.”

Naked Capitalism: Welcome to the Third World

The Mixed International Picture on Poverty and Inequality

Posted on October 17, 2014 by

Yves here. As much as readers may already have an intuitive grasp of the story told in this post, data can help define its contours better. Here we see that the rising tide of global growth has not lifted all boats. The gains of the once-poor in China and India have come at the expense of the what used to be the middle class in more developed countries. Reducing poverty has not been a zero sum game. This post also omits another key piece: the rise and rise of an uber-wealthy class.

By Leith van Onselen who has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. You can follow him on Twitter at Originally published at MacroBusiness

The Economist has published a neat new chart showing the extent of global wealth inequality, drawing on data from Credit Suisse’s latest global wealth report:

Global wealth poverty

According to The Economist:

GLOBAL wealth has increased from $117 trillion in 2000 to $262 trillion this year. That comes to $56,000 for each adult on earth. But the fortune is far from evenly distributed… Today 94.5% of the world’s household wealth is held by 20% of the adult population…

Wealth is so unevenly distributed, that you need just $3,650 (less debts) to count yourself among the richest half of the world’s population. A mere $77,000 brings you among the wealthiest 10%. And just $798,000 puts you into the ranks of the 1%…

Taking a global perspective, the data is more encouraging, with recent research from World Bank researchers, Christoph Lakner and Milanovic Branko, arguing that there has been an overall reduction in poverty via a redistribution of wealth from richer to poorer countries, which has been achieved through greater inequality within rich nations (i.e. a transfer from the poor and middle classes to rich plutocrats). From VOX:

A ‘quasi non-anonymous’ growth incidence curve in Figure 2… shows how the country/deciles that were poor, middle-class, rich, etc. in 1988 performed over the next 20 years…

People around the median almost doubled their real incomes. Not surprisingly, 9 out of 10 such ‘winners’ were from the ‘resurgent Asia’. For example, a person around the middle of the Chinese urban income distribution saw his or her 1988 real income multiplied by a factor of almost 3; someone in the middle of the Indonesian or Thai income distribution by a factor of 2, Indian by a factor of 1.4, etc.

It is perhaps less expected that people who gained the least were almost entirely from the ‘mature economies’ – OECD members that include also a number of former communist countries. But even when the latter are excluded, the overwhelming majority in that group of ‘losers’ are from the ‘old, conventional’ rich world. But not just anyone from the rich world. Rather, the ‘losers’ were predominantly the people who in their countries belong to the lower halves of national income distributions. Those around the median of the German income distribution have gained only 7% in real terms over 20 years; those in the US, 26%. Those in Japan lost out in real terms…

Real income changes poverty

The striking association of large gains around the median of the global income distribution – received mostly by the Asian populations – and the stagnation of incomes among the poor or lower middle classes in rich countries, naturally opens the question of whether the two are associated…

Real per capita China poverty

While the real income of the US 2nd decile has increased by some 20% in a quarter century, the income of China’s 8th decile has been multiplied by a factor of 6.5. The absolute income gap, still significant five years ago, before the onset of the Great Recession, has narrowed substantially.

…if we take a simplistic, but effective, view that democracy is correlated with a large and vibrant middle class, its continued hollowing-out in the rich world would, combined with growth of incomes at the top, imply a movement away from democracy and towards forms of plutocracy.

An updated paper by the World Bank, released last week, also found that global poverty has improved significantly since 1990, whereby “the number of people living in extreme poverty has halved, to around one billion people, or 14.5 percent of the world’s population”. Again, the key drivers of these gains since 1990 are the rise of China and India, which together account for around one third of the global population.

Overall, one’s views on whether inequality and poverty is worsening probably depends upon where one lives. The rapid growth in Asia that has lifted billions out of poverty has been a remarkable achievement. However, this has been achieved, in part, at the expense of lower-to-middle income earners in the developed world, where the middle classes have been hollowed-out.

The World Bank’s argument about the hollowing-out of the middle class in advanced economies, implying a movement away from democracy towards plutocracy, is also supported by a report published earlier this year from Oxfam.  Oxfam found that the richest 1% increased their share of income in 24 out of 26 countries for which data was available between 1980 and 2012, with the wealthiest 1% in the US capturing 95% of post-financial crisis growth since 2009, whereas the bottom 90% became poorer (see below charts).

Richest poverty


Richest share income



Oxfam also warned that the increasing concentration of economic resources in the hands of fewer people (the “plutocrats”) presents a major threat to political and economic systems. In particular, people are becoming increasingly separated by economic and political power, leading to heightened social tensions and increasing the risk of societal breakdown. Laws are also increasingly favouring the rich, driven by a “power grab” by wealthy elites, who have co-opted the political process to rig the rules of the economic system in their favour.

Unfortunately for those living in rich nations, inequality is likely to worsen before it gets better, as improvements in technology and robotics places at risk a large number of skilled jobs, hollowing-out the middle class even further and increasing returns to owners of capital at the expense of labour.

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