Jeffrey Sachs: Democrats and Republicans both offer only snake oil for the economy

Jeffrey Sachs, the Director of The Earth Institute at Columbia University, has sharply criticized both the Democrat and Republican approaches to dealing with our failing economy. For instance, Sachs complains that President Obama is seeking to kick up consumer spending through “near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new home-buyers and cash for clunkers.” According to Sachs, though this will simply get us into a new bubble, as the US consumer is encouraged to over-borrow. This is a terrible strategy “with budget deficits of about 10 per cent of gross domestic product.” How about those Republicans? Their “solution” is equally terrible:

For every problem there is a single Republican answer: tax cuts. Simple arithmetic reveals the stunning shortsightedness of this proposition. The federal government collects about 17 per cent of GDP in tax revenues. That roughly equals the outlays on social security, Medicare, Medicaid, veterans’ benefits, defence and interest payments on debt.

All the rest – roads, rail, clean energy, science and technology, diplomacy, international disease control, space, education, job training, water, transport, courts, poverty relief, homeland security, conservation, climate adaptation – is financed on borrowed money. All of these critical areas are underfunded, which hinders productivity, national security and private investment.

What a good idea that is being largely ignored? Sachs likes the idea of jump-starting the green economy:

One where the jobs would come through a massive expansion of low-carbon energy. We were told about plug-in hybrids, intercity fast rail and new water and sewerage plants to replace the crumbling infrastructure. We were told about a new infrastructure bank to fashion complex multi-state projects that would employ huge numbers of workers while building a cutting-edge economy.

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Run from actively managed securities funds

Dan Solin at Huffpo has repeatedly pointed out the folly of paying an investment "expert" to manage a securities fund. His advice goes against the grain; innumerable books, magazines and websites pretend that if you want to grow your investments, you need to pay someone to actively manage them. As Dan Points out in this post, the great majority of fund managers hyperactively stir your investments (which costs you money for all these transactions) and the fund typically does less well than passively managed index funds that cost a fraction of the cost of actively managed funds to maintain. Vanguard, for example, is a prominent company offering many passively managed funds that cost less than 1/10 as much to maintain as actively managed funds. After pointing out new statistics showing the follow of active management, Dan offers this hypothetical conversation that you should have with the next investment professional who offers to help your funds "grow," for a fee, by wheeling and dealing securities for you:

Broker: I recommend this [hyperactively managed] stock [or bond] fund. You: You get a commission if I follow your recommendation, right? Broker: Of course. You: Based on data from both Morningstar and S&P, your recommended fund is likely to underperform a low cost index fund of comparable risk, right? Broker: Yes. You: Is this a farce or a con? Then hang up.

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Dylan Ratigan asks why Tim Geithner still has a job

In a succinct and powerful video, Dylan Ratigan wonders why Tim Geithner still is our Treasury Secretary. Senator Maria Cantwell, who makes an appearance on this video, wonders this too, calling Geithner's job performance "appalling." I agree. It's time for Obama to start fresh while we are not in crisis mode. He can do this without starting a panic by saying something like, "We thank Mr. Geithner for his service getting us through this crisis." But then, by all means, throw the bum out and let's pick an honest outsider (not another Goldman Sachs alum) to lead the way. Am I being harsh when I say "bum"? Nope . . . I'm being restrained. Geithner should be taking the time to use the mass media to teach common people what went wrong, how we can avoid it happening again, and explaining exactly where our public tax dollars have gone. Because he refuses to do any of this, and he refuses to be an powerful advocate for taxpayers, he should step aside. It is clear that he doesn't understand who he is supposed to represent. If I were to speak more bluntly, I would say that Tim Geithner is committing a fraud on the U.S. public. Here are the words of Robert Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee

[Geithner] speaks as though they’re doing very comprehensive reform. Unfortunately, in the United States, one of the reasons we had the bubble and the crisis was because we have a broken political system, where campaign money, lobbying influence of the financial sector is enormous, and it created bad regulations, bad laws. I’m going back into the Reagan period, Bush the senior, particularly the Clinton era. We’ve made a mess, and now we come back from a crisis where the population knows darn well what a mess we’ve made. But the problem is, at this point, the people in power, the moneyed interests are still in power. And a large portion of these reforms are either cosmetic or designed by the industry and quite ineffective. . . Ground Zero, the San Andreas Fault of our financial system, where it blew up last time, was in the intersection between “too big to fail” firms and over-the-counter derivatives and that these derivatives need to be put on exchanges, because they’re too complex, and when they’re combined with the “too big to fail” firms, which have a 95 percent market share in OTC derivatives, five banks, that it can create a situation, like we were talking about moments ago, where Citibank could not be restructured. The spider web of positions in derivatives is so complex and so entangled that it deters policy officials from being able to put them through restructuring, because they’re afraid of what kind of spin-offs and consequences will happen. I spoke about the credit default swap market and the illusion of safety that those credit default swap contracts created when they’re unregulated, because everybody thought AIG was going to be able to pay the bill, but they weren’t, and then the taxpayer got to provide that capital.
It's also time for Cantwell and her Senate colleagues to quit blaming Treasury for failing to lead the way. Congress has the power to make laws; it should should pass the necessary laws to close the "loopholes" she finds so appalling.

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Bond raters hiding behind First Amendment

This is insanity: The bond raters, those three big Wall Street companies that rated crappy mortgages to be great investments, thereby plunging the country into economic chaos, are hiding behind the First Amendment. They are claiming that they can't be sued for the financial equivalent of calling a mouse an elephant, because their work product is just an "opinion." We charge millions of dollars for giving you a rating, and you can't hold us accountable because it's an "opinion." I'll tell you this: I work as a lawyer. If a screw up someone's case because I give him bad advice (in return for charging her a fee), she could (rightfully) sue me for malpractice. If I raised the defense that I can't be sued for terrible advice because it was merely "an opinion," I'd be laughed out of court with an adverse judgment tattooed onto my forehead. That the courts aren't letting these ratings firms get hammered makes you wonder whether the unspoken defense is "too big to fail." If they didn't have this ridiculous "First Amendment" defense, the smug and irresponsible raters would be ripped apart by millions of justifiably irate plaintiffs. And, of course, Congress is in no hurry to beat back the ratings firms' lobbyists and hold these jokers accountable for all of the 401K's they've trashed.

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