The forum was put on by the MacArthur Foundation and included a discussion with Dr. John Palmer and Rudolph Penner. The two speakers, who come from different sides of the political spectrum, recently co-chaired a joint National Academy of Sciences/National Academy of Public Administration committee that produced the report “Choosing the Nation’s Fiscal Future.”

 The report offers U.S. leaders ways to address the nation’s rapidly growing debt burden that it says, “if unchecked will inevitably limit the nation’s futures wealth and risk a disruptive fiscal crisis.”

The committee recommended that policy makers move aggressively to restrain the growth of debt beginning in fiscal year 2012 and set as a benchmark reducing the nation’s debt to GDP ratio to 60% by 2022. Currently the ratio is at 94.27% according to USGOvernementspending.com and has grown rapidly in recent years.

It is an important issue and given that this forum was held in the middle of the week on a beautiful summer day in Chicago in a stuffy old downtown ballroom and still packed the house, is a sign that people understand its importance. The sponsors noted that 500 people responded to the invite and I only saw a handful of empty seats.

The speakers noted the highlights of the report. In an attempt to meet the 60% debt to GDP goal the committee looked at getting there with only cutting spending or by only raising revenue. The conclusion of the speakers was that regardless of your political or economic persuasion the necessary spending cuts would be too painful as would increasing taxes to meet the goal and it would be necessary to use a combination of both to get there. The report put forth two intermediate options combining higher taxes and spending cuts.

The report is a starting point and members of the committee have met with members of Congress to discuss their efforts. The important thing it to recognize the issue and keep the discussion factual.

Palmer and Penner pointed out that other countries have gone through this type of effort and come out on the responsible other side. It can happen and it must. The release after the report was finished this winter noted, “Delaying action will mean even higher levels of taxes than in the committee’s illustrative path’s, or lower levels of government services.”

It is clear that delaying action will increase the problem and decrease our flexibility.

Too often our political leaders have told us what we want to hear and left the burgeoning debt for others to deal with. Hopefully people will look at this report and understand what it means so that the next election it will not be viable for a candidate to say that he or she can cut taxes without also reducing spending or affecting the deficit; or create new entitlements without also increasing taxes or increasing the deficit.

This can sarcastically be placed under “shocking news” of the day category but there is something even more cynical at play in this world of no shame.

While we are all adults here, it seems that the connection between campaign cash and policy formation is closer than ever. They are not even trying to pretend. Look at this line from the Post story:  Republicans, meanwhile, are soliciting Wall Street for donations with the argument that Democratic proposals would hurt the bottom lines of major financial institutions. House Minority Leader John A. Boehner (R-Ohio) told reporters this month that he was urging Wall Street executives to “help our team” oppose the “bizarre policies” coming out of the Obama administration.

Eighteen months ago we were staring at a possible second Great Depression and now any effort to put restrictions on the industry largely responsible for it are referred to as “bizarre policies.” 

We are also still attempting to recover from the worst recession in decades and a financial crisis that can be reasonably tied to a wave of money sent to Washington from the financial services industry over the last decade that helped to erode much of our regulatory structure that was in place since the Depression. We mentioned  in a column last March the report, “Sold Out: How Wall Street and Washington Betrayed America,” which highlights how $5 billion in political contributions loosened rules and created 12 key policy decisions that led to the crisis.

And to add insult to injury the Supreme Court in January overturned a law prohibiting corporations from using money from their general treasuries to pay for campaign ads. The decision treats corporations as individuals, wipes out a 100-year precedent and opens the doors to even greater corporate influence on elections.

The Obama Administration should not be given a pass either. The Post story points out that Obama took in nearly twice as much cash from banks and brokerages as Republican nominee John McCain. 

And while President Obama has had some harsh words for the banking industry in recent months, that tough talk is particularly annoying as he helped approve the Troubled Asset Relief Program (TARP). The time to put conditions on that cash was at the time the legislation was being considered. Why weren’t restrictions on bonuses written into the bill? Most people know that you get tough with negotiations before the check is cashed not after. It is downright silly for President Obama to be shaming public companies for acting in their own interest. The shame is on Congress and the prior Administration for not looking out for our interests BEFORE a dime was given out.

 A moratorium on campaign contributions would have been a nice added touch to the TARP legislation.

If it wasn’t for the mountain of money coming into Washington from financial services institutions there may not have been a TARP, in fact the TARP may not have been needed. 

That is not to say all new regulation is good and every alteration to a rule over the last decade was a political payoff,  but it is extremely disturbing to read about how an industry that was just bailed out by taxpayers is calibrating its political donations. It is pretty clear that political contributions helped to rewrite the rules and the result of that is clear to see.

 The report was anything but shocking as the influence of big money on public policy is no secret. Many depression era reforms were struck down in the past decade, which allowed among other things the merger of commercial and investment banking and an increase in the amount of leverage financial institutions could utilize.

I was reminded of that report when I saw that the Supreme Court ruled today to overturn a 20-year ruling that prohibited corporations from using money from their general treasuries to pay for their own campaign ads.

Yes in spite of a decade-long deregulation spree fueled by corporate largesse that at the very least contributed to the worst economic crisis since the Great Depression, those same institutions will have greater freedom to spend money (some of it provided by us taxpayers) to promote their agendas.

The report lists 12 key policy decisions that led directly to the economic implosion and highlights the money invested (and it was an investment) in lobbying efforts and direct political contributions by commercial banks, accounting firms, insurance companies and securities firms.

 I understand that the purpose of the Supreme Court is to decide on the constitutionality of certain laws and that requires them to strike down often well-intentioned rules that don’t pass the test. But it seems incomprehensible that large financial institutions may have more influence to set policy geared to their bottom line instead less given what we have gone through and are still going through.

There is on old political saying that goes, “if you can’t take their money, eat their food and drink their whiskey (there may have been something in there about women too) and then come in here the next day and vote against them, you don’t belong here.”

Well judging by what happened over the last decade there are a lot of people who don’t belong in Washington as few voted against the banking lobby in the past decade. And these weak willed folks may face more temptation instead of less.

I guess my initial reaction is that this is too important to be left to academia. Several months back I wrote in a blog, “As an editor, one of the first things I tell my reporters is not to be afraid to ask questions when you don’t understand what a source is talking about. …Chances are most of the other people are also afraid to ask the simple question for fear of looking foolish or uniformed. In the end you get jargon and other nonsense being tossed about in boardrooms, congressional hearing rooms and business media outlets….”

I bring that up because that fear of appearing uninformed is the affliction of those who purport themselves to be experts not those displaying simple curiosity.

How many pension fund managers, investment advisors, regulators, CEOs, academicians, ratings agency executives, congressmen, presidential candidates  let alone journalists failed to ask appropriate questions before putting clients, investors, shareholders, students, constituents, readers at risk or otherwise passed on their responsibilities.

While I have read many articles displaying an amazing lack of understanding of the current economic reality and particularly of issues regarding our niche of futures and alternative investments and agree journalists need to become better educated, I’ve seen more appallingly ignorant comments during congressional hearings coming from lawmakers. I know I would have asked more questions before signing a check for $700 billion. Treasury Secretary Paulson is on record just months before the implosion stating what eventually happened would not happen. So why should we attempt to hold journalists to a higher standard than those whose job it is to understand these things?

Yes, it is the media’s role to be watchdog  but that job is best accomplished by asking simple questions and demanding reasonable answers. Remember the experts missed this as well.

A little over a year ago the Yale School of management put out a white paper basically stating that managed futures programs added no value and in utter frustration pondered why so many people continued to invest with commodity trading advisors (CTAs). This came out in the fourth quarter of 2008, a year in which managed futures was the only investment strategy (besides short sellers)  that made money. One of the authors of the study was a director at AIG Financial Services. So much for the excellence of academia.

Sometimes the more educated one believes he or she is, the more afraid they are to ask simple elemental questions. I noted here before, “When we are presented with a crisis, an emergency that requires immediate action, that is when it is particularly important to ask those simple “why” questions. If, in fact, our very financial system was on the brink of ruin, then the specific details and reasons should be made apparent in precise detail. No vague warnings of impending doom.”

  At least some in the media are belatedly asking these questions, while our financial and political leaders are patting themselves on the back for averting a disaster of their own making that by the way has not been averted yet, only delayed.

I’ve read several lists citing people to blame for last year’s financial turmoil and Mr. Dugan, if cited, certainly wouldn’t be on the list of usual suspects.

While there may be many reasons for this chief of which is that the OCC is off of most financial journalists’ radar screens, it could also be that although Dugan has worked in Republican circles, the changes he championed were initiated by both Democratic and Republican administrations and it would be hard to gain a political advantage by pointing a finger at OCC.

The story says Dugan had three objectives:  allowing banks to expand into multiple states without incurring additional regulatory oversight; allowing relatively safe commercial banks to merge with riskier investment banks and insurance companies and allowing commercial firms to purchase a bank.

Dugan recommended these “reforms” as well as others in a document he helped write when working at Treasury in 1991 called, Modernizing the Financial System: Recommendations for Safer, More Competitive Banks. It was basically the blueprint for the appeal of Glass-Steagall Act, which many have cited as a cause for the credit crisis though they rarely mention Dugan’s role.

If you have heard about the OCC it may have been in an editorial written by former New York Governor Eliot Spitzer in 2008. He stated that the Bush Administration had used the OCC to prevent state regulators from exercising its regulatory authority in regard to questionable lending practices by banks. Spitzer wrote,”Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye…  The administration accomplished this feat through an obscure federal agency called the [OCC]. …In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative.”

Less than one month after that op ed piece appeared in the Washington Post the Spitzer sex scandal broker and he eventually resigned his office. Not that we are assuming a connection between the two but those predatory lending practices helped create the subprime loans that fueled the mortgaged backed securities which were bundled and sold by investment banks. 

The Nation certainly does have a point of view but what is disturbing is that so many issues germane to the credit crisis are not being addressed. Yes legislation in the House has been passed that will require most over-the-counter (OTC) derivatives to be centrally cleared. However, that was a given well before the crisis hit.  Futures wrote in the December  2007 Top 50 Brokers issue,  “…there is a consensus among all parties that that [credit derivatives] will trade more and more on listed exchanges or at least with a clearing mechanism.”

More than a year after the Lehman meltdown led to a consensus that we were in the worst financial crisis since the Great Depression, the major regulatory reform passed mandates something that the industry had already basically consented to.

And it has taken a year for widespread coverage of some hard questions of The Treasury Department regarding the AIG bailout. Ironically, it is Spitzer who among others is pointing out Treasury may have forgotten who it is working for.

We noted here back in April and throughout the crisis the importance of asking tough questions and not being ruled by fear. The bailout was force fed to us by the people whose failure to do their jobs was a leading cause of the crisis and many of the folks still making decisions are the ones most responsible. Should we be surprised that we still haven’t gotten the full story?

Republican Rep. Kevin Brady of Texas blamed Treasury Secretary Timothy Geithner for a major role in creating the problem when he was the president of the New York Federal Reserve Bank. Mr. Geithner shot back, ”What I can’t take responsibility is for the legacy of crises you’ve bequeathed this country.”

I can only assume that Brady was referring to Geithner’s backing of bailouts going back to Bear Stearns but he could have meant Geithner not working to rescue Lehman Bros. I also assume Geithner’s retort referred to the profligate spending of the Republican Congress when they where in the majority from 2001-2007. But who knows.

I am not surprised it has come down to a he said/she said shouting match. Like little children our political leaders point fingers at their siblings and can’t take responsibility for their short sided decisions.

They are probably both right. I have held a negative view of Geithner ever since he and Fed Chariman Ben Bernanke laughed off the notion of moral hazard at hearings following  the Bear Stearns bailout. I can’t find the exact quote but he basically said, nobody would follow the example of the executives at Bear Stearns so there is not much risk of moral hazard. However the sweetheart deal for JP Morgan brokered by the Fed and Treasury allowed senior officials to retain multi-million dollar bonuses. Would you take outsized risk if your worst case scenario was that you would be given a multi-million dollars golden parachute?  And I find it hard to stomach the new found fiscal responsibility by House Republicans. For my entire adult like I was hearing warnings about the dire consequences of our growing deficit. Yet at the turn of this century we actually had something resembling a balanced budget and it was simply tossed aside by the previous administration and the Republican Congress.

In a recent speech CME Group Chairman Emeritus Leo Melamed did better job in assessing blame.

Happy Thanksgiving.

The move forced Federal reserve Chairman Ben Bernanke to voice some dollar supportive platitudes at a speech he was giving at the Economic Club of New York. Those platitudes may have helped the dollar rebound the next day but at some point, the dollar will need to be supported by more than empty platitudes.

Economist John Williams recently wrote in an alert, “Beware of Central Bankers Jawboning for a Stronger U.S. dollar. When the Fed Chairman starts talking about watching the U.S. dollar, the greenback is in serious trouble.”

Meanwhile CME Group Chairman Emeritus Leo Melamed was also in China speaking at the International Finance Forum in Beijing. Melamed was making the case for free-market capitalism that has been taking a pounding by some pundits. He noted, “Most authoritative economic experts presently accept the fact that the root cause for the boom and bust we experienced was easy money. And easy money was the creation of government, not lack of regulation, not greed, not financial derivatives. Michael Bordo, professor of economics at Rutgers University stated it precisely: “It was not a failure of capitalism, it was a failure of the central bank.” While (lack of regulatory oversight, greed and derivatives) were factors in the consequential result, they could not have possibly been so without the conditions that only governmental powers can create.”

It is an interesting juxtaposition as many of our political leaders are striking populists themes in regards the recent financial crises but a closer look shows that government action did not just contribute to these problems but in many cases were primary factors.

It is disturbing to hear the new Administration voicing the same folly of a strong dollar policy while maintaining a zero interest rate policy all while claiming the economy is improving. You can’t claim things have improved and continue to improve, hold interest rates at zero and claim you have a strong dollar policy. It doesn’t make sense.

Perhaps more disturbing is that the Administration of change is following the same failed policies on the biggest issues of the day. In the end change will come whether we like it our not.

While many issues were discussed and many points of view presented, there was an unmistakable common theme. That theme is that our current deficit spending and debt levels are unsustainable.

The word “unsustainable” had to be uttered at least two dozen times by various speakers at the two-day conference. While most of the speakers, which included former Federal Reserve officials, current global central bank leaders and a former Fed Chairman felt the emergency measures taken one year ago after the collapse of Lehman Brothers were necessary, they also seemed to intimate that we are on a road to ruin.

Perhaps that is true or perhaps that highlights the problem. The emergency at hand is always more important than long-term stability. It is easy to say we need to get tough, once the current crisis is dealt with. There always seems to be a new current crisis.

That is why the previous administration’s abandonment of pay-as-you-go budgeting was so disastrous. Yes the credit crisis would have forced Congress to abandon, at least temporarily, those rules but it could have been a one time charge. If basic budget discipline had not been abandoned, those fighting TARP (Troubled Asset Relief Program) would have had a stronger case and perhaps been able to work out better terms for the taxpayer.

How can Goldman Sachs be handing out multi-billion dollars in bonuses a year after accepting money from TARP? If this extraordinary intervention was absolutely necessary, why wouldn’t the terms be more advantageous to the entity saving the system?

If our current course is unsustainable, we need to change it now, not at some undetermined time in the future.

1:18 p.m. | An “annoyed” congressman: Mr. Kanjorski signals that he doesn’t want to hear that the S.E.C. can’t discuss the ongoing Madoff investigation. He notes that the lack of cooperation by the S.E.C. over the last several weeks is “unacceptable” and he threatens to shut down the agency if they don’t start cooperating. Mr Kanjorski says one of the officials asked to testify said he was exempt, prompting the congressman to call the head of the S.E.C. because he was so “annoyed.” He called the opening statements “oatmeal.”

The bill passed in the House of Representatives by roll call vote. The totals were 236 in favor; 170 against; 27 voted present or did not vote. Reportedly the bil is running into resistance in the Senate.

The final version of the bill was not yet available, but here is draft I found last night:
Read the bill

In addition to showing support for Michigan families and organized labor, passage of the bill could help postpone more layoffs in the country, an especially compelling argument considering that The U.S. Department of Labor is reporting today that the number of new applications for unemployment insurance last week was 573,000; that’s an increase of 58,000 over the previous week’s figure of 515,000.

Read the release