Mental Recession or Just Mental?

While Phil Gramm may think Americans are engaged in some macabre game of hide the mortgage check, his friends at the White House seem to think simply wishing the economy in the right direction is a plausible alternative. Bush's speech today was rife with the typical folksy dribble and sincerest regret for misplacing the ever-elusive magic wand. Black magic or no, economic remains a numbers game, and concrete realities have never been Bush's strong suit.

President Bush began Tuesday trying to calm consumers troubled by an increasingly shaky economy, but his words had little effect.

By the end of the day, the Dow had closed at its lowest level in two years, the government reported that prices had jumped at their sharpest pace in 27 years, and the chairman of the Federal Reserve Board warned that "significant challenges" lie ahead.

Even the administration's plan to support the mortgage finance giants Fannie Mae and Freddie Mac — hurriedly announced over the weekend — didn't stem the tide. Both enterprises saw their stocks drop more than 25 percent.

Truth be told, though, one can understand the indifference of Bush, Gramm and the rest of the free-market crusaders, as they're probably doing just fine. A core principle of Friedmanism is that economic success hits the top rung first, and downturns take out the bottom just the same. Gramm and those like him are free to play chicken with the market, assured that when they get in over their heads the Fed will bail them out. Most Americans don't have that benefit.

Despite Bush's valiant effort to paint a rosy picture, the numbers remain unchanged, and aren't nearly as pretty.

_ Wholesale prices were up 1.8 percent last month, the Labor Department reported. Producer price inflation has grown 9.2 percent in the last year, the fastest since 1981.

_ General Motors Corp., battered by the decline in auto sales, suspended its dividend and announced plans to lay off salaried employees and borrow up to $3 billion.

_ Oil prices fell by $6.64 to about $138 a barrel, as investors became concerned that the slow economy will dampen demand. But the price was still well above year-ago levels.

_ Retail sales were up a scant 0.1 percent in June, the Commerce Department reported Tuesday. Gas prices accounted for all the increase, Vitner said. "You take out gasoline prices and sales were down," he added.

Bush and McCain would also like to apply the principle of willing the country to a good economy to oil production, assuring us that simply opening the OCS will invoke OPEC to lower the price of oil and save us all. The faulty logic inherent in that argument has been pointed out ad nauseum, yet it persists.

To recount just a few things I've enumerated before:

• Between 1999 and 2007, the number of drilling permits issued for development of public lands increased by more than 361%, yet gasoline prices have also risen dramatically contradicting the argument that more drilling means lower gasoline prices. There is simply no correlation between the two.


• Oil and gas companies have shown that they cannot keep pace with the rate of drilling permits that the federal government is handing out. In the last four years, the Bureau of Land Management has issued 28,776 permits to drill on public land; yet, in that same time, 18,954 wells were actually drilled. That means that companies have stockpiled nearly 10,000 extra permits to drill that they are not using to increase domestic production.


• Oil companies are only drilling on 27% of the federal lands leased to them and 24% of the offshore acres, leaving the companies with 68 million acres of leased acreage on which they are not producing oil or gas.

At some point, one would think that our leaders would be called to point to some tangible evidence that their rhetoric has even a brush with reality, but that has yet to happen. Consider that the argument at its core is "if we simply allow the oil companies to drill, oil prices will go down."

Now contrast that with reality: We've allowed the oil companies to drill on 68 million acres and oil prices have gone up exponentially.

The market for the empty rhetoric of Bush and McCain should dry up once it becomes so detached from reality as to be absurd, yet the cavalcade of buffoonery marches on.


Related:

Pure Speculation, June 12
McCain, No Stranger to Irony, April 25

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John McCain on How Not to Frame a Speech

Perhaps an all-too-fitting backdrop from a recent economic speech delivered in Youngstown, Ohio by John McCain:

Standing before a nearly shuttered factory pocked with broken windows in a city devastated by the erosion of its industrial base, John McCain on Tuesday urged Americans to reject the "siren song of protectionism" and embrace free trade.

McCain suggested to the five remaining workers at the factory that, "if you just hold on...sometimes life will surprise you."

McCain is no stranger to poor timing, as MSNBC saw fit to interrupt a speech on progress in Iraq with illustrative proof of the opposite a couple of weeks ago.

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Tough Love, With Pillows

Americans have a peculiar habit of skipping from one concern to the next. That which fills hours of continuous coverage on Cable News today will be forgotten before the sun rises on tomorrow. Such is the case with corporate crime.

Back in 2002, George Bush was fully on board with the effort to crack down on shady accounting practices which brought down Enron and Arthur Anderson along with numerous other companies and not least of all the pensions of thousands of innocent employees.

Bush, upon signing the Sarbanes-Oxley Act in 2002:

This new law sends very clear messages that all concerned must heed. This law says to every dishonest corporate leader: you will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is above or beyond the law.

[...]

Corporate misdeeds will be found and will be punished. This law authorizes new funding for investigators and technology at the Securities and Exchange Commission to uncover wrongdoing. The SEC will now have the administrative authority to bar dishonest directors and officers from ever again serving in positions of corporate responsibility. The penalties for obstructing justice and shredding documents are greatly increased. Corporate crime will no longer pay. CEOs who profit by betraying the public trust will be forced to return those gains to investors. And the maximum prison term for common types of fraud has quadrupled from five to 20 years.

[...]

This law gives my administration new tools for enforcement. We will use them to the fullest. We will continue to investigate, arrest and prosecute corporate officials who break the law. The Corporate Fraud Task Force I established is now hard at work, overseeing investigations of alleged fraud and insider trading. More than 200 federal prosecutors are at work detecting and punishing corporate crimes. Every corporate official who has chosen to commit a crime can expect to face the consequences. No more easy money for corporate criminals, just hard time.

Sounds good enough. Corporate accountants risk jail time for playing fast and loose with the all-too-precarious futures of shareholders and employees. Increased SEC scrutiny and audits. All around, promises that major collapses like those of 2001 and 2002 would never happen again.

But, as is often the case, Americans moved on. They moved on to more inane celebrity gossip, got wrapped up in whatever reality show was popular at the moment, or occasionally paid attention to a fleeting political faux-scandal. But mostly, they lost interest. And the tide moved out. Almost immediately.

President Bush's utilization of signing statements to undermine the effectiveness of the bills he signs into law--often effectively nullifying them entirely--is no secret. The corporate crime bill was no exception, as Bush eliminated a provision to protect whistle blowers who bring to light violations by companies not already under investigation. In other words, at the same time he was declaring a new tough stance against corporate crime, President Bush was working to ensure that the process of prosecution would be stamped out at its root.

From there, many of the other mechanisms intended to prevent another catastrophic corporate malfeasance were rolled back or put on the back burner. Kim Clark details many of those efforts in this April, 2006 article in US News. Among other things, Clark details the elimination of SEC oversight positions and illuminates the first glimpse of what would become a theme later, saying "Since 2004, federal prosecutors have struck at least nine deals with companies accused of accounting fraud, to defer prosecution or not prosecute at all. In the previous five years, the Justice Department announced just four, according to the Corporate Crime Reporter."

But that jump--from 4 over 5 years to 9 over 16 months--in deferred prosecutions was but the tip of the iceberg, as Eric Lichtblau reveals in the New York Times.

In a major shift of policy, the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years.

Instead, many companies, from boutique outfits to immense corporations like American Express, have avoided the cost and stigma of defending themselves against criminal charges with a so-called deferred prosecution agreement, which allows the government to collect fines and appoint an outside monitor to impose internal reforms without going through a trial. In many cases, the name of the monitor and the details of the agreement are kept secret.

While the fines levied still carry a modicum of determent by punishment, it is not nearly the substantial and public retribution promised by Bush in 2002. Bush didn't say that corporate misdeeds would merely be met with fines, he promised purveyors of magic accounting and other corporate malpractice would be greeted with "hard time."

Consider, though, that many of those shady accounting practices have made their way into today's economic framework. Much of the attention is payed to inability to pay mortgages, which decidedly misses the point. The failure of a company like Bear Stearns stemmed from lax corporate oversight which allowed companies to take poor investments (sub-prime mortgages) and pass them off further and further up the chain until the system simply couldn't handle it anymore.

And once again, it's the employees of that company that bear the brunt of the fallout. Much is made of the use of federal funds to back JP Morgan's buyout, but nary a peep about the employees whose shares were bought for $2. They pay the price with their retirement plans.

Faced with an economic downturn strongly tied to dishonest and creative accounting practices, withholding of the shaky foundations of investments, and active pushing of disastrous mortgage agreements, attention needs to be given to the role that lax oversight played.

Corporations, like children, only understand and respond to consequenses, not words. Bush spoke strongly six years ago, but his actions illustrated to accountants and bankers that they would be mostly free to practice business as usual. Deferred prosecution agreements instilled an accurate perception that shady practices could be persued with a virtual guarantee that if caught a company would be greeted with a slap on the wrist and a fine.

Proponents of these agreements say they work to "avoid the type of company-wide havoc seen most acutely in the case of Arthur Anderson." While there certainly is credence to that--bringing a company to its knees (along with its innocent employees) out of a sense of retribution does more harm than good--it effectively, as we've seen in the mortgage scene, kicks the can down the road.

Prosecuting every wrongdoing with the zeal required by the Sarbanes-Oxley Act is probably impractical, but simply laying the foundation for a regulation/oversight-free environment that comes back to bite the country cannot be a reliable substitute.

Also, those suggesting that every prosecution would wreak havoc must explain the discrepancy in numbers. Jumping from 4 deferred prosecutions over 5 years to more than 50 over three years and 35 last year alone requires explanation stretching the bounds of credibility. The implication of disaster doesn't sync with the fact that prior to the Bush administration these agreements were rare without a simultaneous rash of company failures. The reality, once again, fails to support the administration's factual maneuvering.

Deferred prosecution agreements on the scale that the Justice Department has utilized them in recent years is indicitive of a larger picture. A picure painted with broad strokes of lax regulation, failure to employ oversight, and attempts to stymie investigations at their very root. Failure on this scale has allowed an entire segment of the economy to be propped up on a foundation of popsicle sticks. Sadly, it's not an accident. The economic issues created by the poor investment practices of the banking industry are a direct result of the nod-and-wink relationship it has with the Bush administration.

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