Oh, NOW he says it:

Former Federal Reserve Chairman Alan Greenspan, whose backing of George W. Bush's 2001 tax cuts helped persuade Congress to pass them, said lawmakers should allow the reductions to expire at the end of this year.

"They should follow the law and let them lapse," Greenspan said in an interview on Bloomberg Television's "Conversations with Judy Woodruff," citing a need for the tax revenue to reduce the federal budget deficit.

But where was he in 2001?

In his 2007 memoir, "The Age of Turbulence," Greenspan attacked Bush for abandoning Republican principles on spending and deficits and expressed regret for his 2001 congressional testimony favoring the tax cuts, recounting how former Treasury Secretary Robert Rubin and Democratic Senator Kent Conrad of North Dakota asked him to hold off on an endorsement.

"It turned out that Conrad and Rubin were right," Greenspan wrote in the memoir.

So Greenspan got that one wrong, too, along with this two years ago:

Almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he told the House Committee on Oversight and Government Reform.

In any event, the following represent revenue lost every year to the Federal Government if Bush's asinine tax cuts from 2001 continue next year:

Bush tax cuts that passed in 2001 and 2003 gave middle- income earners a 10 percent rate on couples' first $14,000 in income; subsidies for college expenses, a higher child-care credit and relief from the marriage penalty. Keeping those and other reductions for the 130 million households earning less than $250,000 would cost about $300 billion a year, according to the congressional Joint Committee on Taxation.

In addition to those benefits, high-income households got reduced top marginal rates, elimination of phase-outs for some deductions and personal exemptions, and benefited the most from lower rates on dividends and capital gains. The cost of continuing the tax cuts for the most prosperous Americans would be about $55 billion for one year.

Bottom line: Bush's $1 trillion unfunded 10-year tax cuts, his $500 billion unfunded medicare revamping in 2005, and his $1 trillion unfunded war on Iraq blew a hole through our long-term budget. The only way to begin to address this mess that he left our country is to reinstate the tax rates that existed during the go-go years of the 1990's. That's right: tax rates were higher in the 1990's and the economy flourished because of them.

It's time to do the right thing and let those tax cuts expire like the 10-year law demanded. And by the way, the reason it was a 10-year law instead of a law with no expiration was because they could only pass it through the reconciliation process. Remember that from the Health Care Debate?

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Tags: Alan Greenspan, Bush tax cuts, capital gains tax

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If you haven't been following the debate going on worldwide whether governments should be increasing fiscal stimulus or cutting deficits, you might want to start paying attention. As Paul Krugman writes, we might very well be insuring a decade of misery with the choices being made right now:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as "depressions" at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost -- to the world economy and, above all, to the millions of lives blighted by the absence of jobs -- will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world -- most recently at last weekend's deeply discouraging G-20 meeting -- governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Inflation vs. deflation; belt-tightening vs. expansionary fiscal policy. These are the dilemmas we're facing, and it seems as if the policy makers around the world are choosing to cut spending in the face of clear evidence that it is precisely the wrong thing to do:

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today's governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, unemployment -- especially long-term unemployment -- remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Krugman continues:

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it's true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners' medicine.

It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

The fact of the matter is that interest rates, the "canary in the coal mine" of inflation (interest rates go up when economic activity - and hence inflation - go up) are at levels last seen in the midst of the credit crises of 2008!

Again, Krugman takes us down memory lane in this blog post:

First, there was a run-up in interest rates in the spring of 2009 -- mainly a reaction to receding fears of a second Great Depression, but widely interpreted as a sign of impending fiscal doom. Then rates went back down.

Second, there was a big scare in the fall of 2009, based on, well, nothing -- which is what led me to write my original post on invisible bond vigilantes. And fear of this phantom menace helped scare the Obama administration away from a second stimulus.

Finally, there was the bond scare of March, in which we were turning into Greece because of a blip in rates barely visible on the charts. Since then, rates have plunged.

So what's with this infatuation with our short-term budget deficits? Brad De Long thinks it's because most folks just haven't done the math:

Whether we spend an extra $100 billion more (or less) this year on anti-recession measures is unimportant--is less than rounding error--in the long-term budget context.

Let's do the math:

Spend $1 billion today. Use the Treasury to borrow the money for 10 years at 3.20%. Expected inflation at 2 1/2% means that the real interest charges on the borrowing are only $7 million a year. And in 25 years the real American economy will be twice it's current size, and so the burden of raising taxes to actually pay off the debt will be half as big as it is today.

And Kevin Drum goes even further:

What's the downside of more stimulus vs. less stimulus? The downside of less stimulus, I think, is obvious: if the Krugmanites are right, it will mean years and years of grinding unemployment and slow growth. It means pain and destitution for millions.

But what's the downside of more stimulus? No one can say, really. The best answer is that it might lead to future interest rate hikes or future inflation or future tax increases. But there's very little evidence to support this, and Brad DeLong, among others, makes an excellent case that even a trillion dollar stimulus would have only a tiny effect on the federal government's future solvency. So even if a big stimulus has little positive effect -- which seems unlikely given current circumstances -- it doesn't create much danger either. So why not try it? The fiscal purists sure don't seem to have much in the way of better ideas.

When put into the context that under Bush, the deficit exploded and the same folks who are screaming about deficits were absolutely silent only 5 years ago, you know that this argument is really only about political power. There's the perception that short-term deficits are a problem, when the true issue is the effect that our long-term deficits will have on economic growth, which neither Krugman nor De Long deny:

We do have enormous long-run deficit problems. They are not the result of any future difficulty in paying off what we are borrowing today. They will be the result of the enormous medical care spending that we have put in train for the 2020s, 2030s, and 2040s. To wonder how we will pay off the debt we are currently accumulating is to fundamentally misunderstand the situation we are in.

So to re-cap: short-term deficits = good; long-term deficits = bad. In the extremely dicey economic situation we find ourselves, the short-term issues outweigh - by far - the long-term structural deficit issues.

It might be too late, though, since it seems like the deficit hawks are winning the argument.

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Tags: Brad de Long, deficit, deficit spending, long-term deficits, Paul Krugman, short-term deficits

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Well, it looks like a deal has been struck on the second big legislation of the Obama administration - Financial Reform:

Nearly two years after the American financial system teetered on the verge of collapse, Congressional negotiators reached agreement early Friday to reconcile competing versions of legislation that would transform financial regulation.

A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial rules culminated at 5:39 a.m. Friday in agreements on the two most contentious parts of the financial regulatory overhaul and a host of other provisions. Along party lines, the House conferees voted 20 to 11 to approve the bill; the Senate conferees voted 7 to 5 to approve.

But is this a good thing or a bad thing?

While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with their own money, they also set a number of new rules that will directly affect consumers.

Investors and those who advocate on their behalf did not get everything they wanted. Stockbrokers and annuity peddlers are still not required to act in their customers' best interest, for instance. But mortgage shoppers stand to gain under the new rules and millions of people will now have access to a free credit score.

Areas of big change are coming, including a new Consumer Financial Protection Bureau:

The bureau is to be headed by a single director appointed by the president and confirmed by the Senate. The new bureau would write and enforce rules for most banks, mortgage lenders, credit-card and private student loan companies. Smaller banks and credit unions, or those with less than $10 billion in assets, would have to obey the consumer bureau's rules -- but the smaller institutions' enforcement and supervision would remain with their current regulators, said Travis Plunkett, legislative director for the Consumer Federation of America.

Auto dealers, meanwhile, are exempt from the bureau's oversight.

And why exactly are auto dealers exempt?

The vast majority of auto dealers would not be covered by the consumer agency if they only arrange loans through banks, credit unions and industry financing companies such as GMAC. The Federal Trade Commission would retain its oversight of auto dealer activities, but would have new powers to enact regulations more quickly.

Democrats from states with a strong auto industry presence joined with Republicans on the committee last year to try to exempt auto dealers from the agency's oversight.

The White House opposed the exemption, and this year the Pentagon made an unusual public plea to senators to subject the dealers to the bureau's oversight. Top Defense Department officials said young members of the military often were victims of unscrupulous auto deals.

The Senate never voted on an exemption in their version of the financial reform legislation. But senators voted 60 to 30 to instruct their negotiators on the conference committee to include an exemption.

Other areas that have been reformed include Credit Scores, Mortgages, Credit & Debit Cards, Fiduciary Duty, and Equity Indexed Annuities. Check out the details here.

Finally, is there teeth in this bill? Well, it depends on who you listen to:

Analysts had a wide array of opinions on the legislation, and some expected banks to pass higher costs associated with the bill on to consumers. Still others saw it as more of a political statement than a measure that could prevent another financial meltdown.

"They have got their work cut out for them, absolutely," said William Fitzpatrick, an equities analyst who focuses on banks for Optique Capital Management

"The terms of this regulation appear to be extremely onerous on the large banks," he said. "It is indeed a tough bill and you are going to see several measures that are going to weigh on the profitability of the large banks."

"I suspect they are going to have a hard time offsetting the increased regulations," said Mr. Fitzpatrick.

Others disagree:

Richard Bove, a banking analyst with Rochdale Securities, said the bill would not severely curtail banks' operations.

"I don't see there being a tremendous clampdown on the ability of banks to make money," he said.

"The banks will have numerous methods of getting around the most onerous provisions in this bill to maintain their earnings growth," he added. "But the things they will do will increase the cost of banking to everybody in this country."

For instance, Mr. Bove pointed to last year's credit card bill, which led banks to push up rates pre-emptively or reduce customers' credit limits.

"You're going to get a letter from your bank saying you now have to pay $1 to $15 a month to pay for this bill," he said. "The banks are going to get the money back because the consumer is going to pay for the bill, and that's the killer for the consumer."

It's that last point which is ridiculous, especially coming from someone who's been in the industry since 1965. Hasn't Mr. Bove ever heard of the capitalist incentive of competition between firms? Does he expect the entire banking industry to collude in pricing and pass on to consumers the same fee amount? One would think that there would be incentive to find cost savings within each bank, thereby allowing said bank to undercut its competitors by NOT charging that extra fee. Sheesh...!!

TheStreet.com thinks this is a big deal, too, as the title of their story says: Financial Reform Bill Looks Like Game-Changer.

In addition, Gretchen Morgenson had an important column a few weeks ago detailing this 3,000 page bill, and as always, the devil is in fact in the details:

For decades, until Congress did away with it 11 years ago, a Depression-era law known as Glass-Steagall ably protected bank customers, individual investors and the financial system as a whole from the kind of outright destruction we've witnessed over the last few years.

Glass-Steagall was a 34-page document.

The two bills that the Senate and the House are currently chewing over as part of what may be a momentous financial reordering weigh in at a whopping 3,000 pages, combined.

Well, yes, but it is 2010, not the 1930's, right?

Some will argue that these bills, at around 1,500 pages each, have to be weighty and complex if they are to curb the ill effects of convoluted and inscrutable financial instruments. That makes it doubly disappointing that the bills don't go far enough in bringing greater transparency and better oversight of everyone's favorite multisyllabic wonderment these days: derivatives.

Hard to believe, but this is indeed true:

Despite their ubiquity and the pivotal role they play in modern finance, many derivatives don't trade openly on exchanges as stocks and other instruments do. When an institution buys a derivative like a credit-default swap, for example, to protect itself against the default of an investment like a bond, that transaction is a private contract, struck between it, the seller and perhaps an intermediary, like a bank.

Because private transactions like these can mask big and risky exposures in the markets (think American International Group), financial reformers decided to make derivatives trading more transparent, which is a good thing. Both the Senate and House bills require standardized derivatives to be traded on an exchange or a swap execution facility.

But the devil is always in the details -- hence, two 1,500-page bills -- and problems arise in how the proposals define what constitutes a swap execution facility, and who can own one.

This was a major issue that was supposedly resolved last night:

Big banks want to create and own the venues where swaps are traded, because such control has many benefits. First, it gives the dealers extremely valuable pretrade information from customers wishing to buy or sell these instruments. Second, depending on how these facilities are designed, they may let dealers limit information about pricing when transactions take place -- and if an array of prices is not readily available, customers can't comparison-shop and the banks get to keep prices much higher than they might be on an exchange.

Nobody lets auto dealers, airlines, hardware stores or an array of other businesses sell their wares without a price on the window, the ticket or the tag, but Wall Street is still getting away with obscuring prices in the derivatives market.

To resolve problems that might arise from derivatives dealers controlling trading facilities, the House bill bars them from owning more than 20 percent of a swap facility. The Senate bill, however, has no such limitations.

It is unclear, therefore, what the final bill will allow on this crucial matter. What is certain is this: Banks will lobby hard to be allowed to own swap facilities.

Stay tuned to see how this turned out...

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