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Because reality right now is telling us that austerity is not only painful but wholly counterproductive. Here's an excellent report from the Wall Street Journal on the wide social unrest that austerity has caused in Greece:

Greece shook global markets, intensifying fears of a default, as tens of thousands of demonstrators protested a new round of budget-cutting plans and its prime minister offered to step down to try to preserve them.

Protests across the capital sometimes turned violent as Prime Minister George Papandreou sought an agreement with opposition parties on austerity measures demanded as the price of a new bailout by euro-zone nations and the International Monetary Fund.

The report also notes that austerity has actually exacerbated the sovereign debt crisis and hasn't made bond holders any more willing to buy Greek bonds at lower interest rates:

Yields on Greek government bonds leapt to new highs, with two-year paper yielding 29%. Bond yields on other troubled euro-zone economies like Portugal and Ireland also moved higher, and stock markets in the U.S. and Europe sank as fears of contagion picked up. The euro plunged 1.9% against the dollar.

Needless to say, it's not only the wacky anarchist college kids who are pissed off about all this. Mama and Papa Greece are none too pleased either:

John Petru, 41 years old, said he had come to block parliamentarians from arriving to debate the budget cuts. "We do not trust them," he said of the politicians. The recession has eaten badly into his cleaning-service business. "Business is down, and prices are up, and we are not sure about anything," he said.

Greeks have already suffered multiple rounds of budget cuts since last year, but they have failed to build confidence in the economy. The budget deficit has turned out to be wider than projected then, with the government failing to cut spending or raise revenues as much as promised. But the biggest gap in its finances has opened up because private investors have refused to buy new Greek government bonds at interest rates the government can afford.

Many protesters said they had gone along with previous budget cuts and wage reductions on the belief that those sacrifices would be enough to right Greece's fortunes. "They have asked us to reduce our wages, to live another standard of life," said Angeliki Kachrimani, a 42-year-old worker for Greece's postal service. She accepted a 15% wage cut; her husband, a history teacher, is unemployed.

And look, this is all pretty simple to understand: Greece is in this mess right now both because its government lied for years about its budget deficits (with an assist from everyone's favorite investment bank Goldman Sachs) and because its monetary policy options are limited by the European Central Bank. In other words, investors know Greece can't print its own money and thus will never be able to pay them back. The problem is exacerbated by the austerity measures that result in cuts to government jobs, cuts to wages and a drop in overall demand. These things aren't exactly making investors feel good about Greece's future economic prospects either.

"Why should I give a damn about this?" you ask. Well, it's pretty obvious that America's own austerity backers, led by Paul Ryan, have similar plans for us as well. And it would behoove us to point to the examples of Greece and Ireland and the U.K. and shout at the top of our lungs, "AUSTERITY DOESN'T WORK, YOU TOOLS!!!!!" Because frankly, I'm not looking forward to widespread social unrest. God forbid the streets of America come to resemble third-world hellhole streets like those of Vancouver.

Happy Holidays

This holiday season, credit card companies are giving the gift of unexpectedly high interest rates. According to an exhaustive report in The New York Times, credit card companies are doubling or tripling interest rates with little warning or explanation, forcing thousands of Americans to pay unreasonable and unwarrantedly higher bills. The slightest slip--like paying a utility bill late--can lead to a rate hike, with card companies "acting like modern-day loan sharks," writes The Times. Halliburton isn't the only one overcharging America.

And of course every time Galbraith says this, wingnut heads explode. Ezra Klein interviews economist Jamie Galbraith:

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It's not overstated. It's completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

EK: Then why are the bulk of your colleagues so worried about this?

JG: Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP.

At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story. So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense.

EK: But couldn't there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.

JG: No, it's not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?

JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.

What people worry about is that the federal government won't be able to buy bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.

EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.

(Hi, dday here from Hullabaloo and Calitics and my own site D-Day. Thanks to John for having me over for the week to fill in for Dave Neiwert.)

I don't think I'm being hyperbolic by saying that the average subprime mortgage broker should probably be in prison by now. They took loans that their customers had no possibility of paying back, often by forcing them into exotic arrangements where their payments would shoot up by double after a reset. They got bonuses for putting people into a higher interest rate than what the borrowers could qualify for. Now lots of those loans have gone sour, but the broker's company has already passed on that risk in the form of mortgage-backed securities. Indeed, these same lenders who preyed upon homeowners by getting them into residences they couldn't afford are now ripping them off again by setting up loan modification companies.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.” [...]

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company. The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because “I really feel bad.”

Before state regulators and the Feds figured out this was going on, hundreds of loan modification companies took probably billions from distressed homeowners and provided virtually nothing in return. They saw opportunity in crisis - and they also CREATED much of the crisis by selling the homes to people who couldn't afford them in the first place.

Special place in hell reserved for them...

Of course the banks are up in arms about any legislation that would turn off the usury spigot they've milked for decades. Ann Logue at Popdose points out just one example:

...my credit card limit is $20,000. I could use the card to fly first class to Paris and go on a spree at Le Bon Marche yet pay no interest if I paid it off in full the first month it was due. But take $140 from an ATM and hold the balance for 20 days or so, and the total fees and interest work out to about $24, an annual interest rate of 208%.

Another crazy practice is late fees: I've received a credit card statement showing my payment as posted (they got my money in time to print it on my paper statement) but because they posted it one day after their "due date" they tried to charge me $29.00 in late fees. I called and complained (which works more often than you might think, do try it) and they reversed it, but how many $29.00 payments do you think got added to their balance sheets this year from people "afraid" to call a creditor?

Obama's bill does not go far enough, and doesn't start soon enough (one year for most of its provisions IF the Senate passes it) but it's a start.

The Fed lowered their lending rate to between 0 and .25% yesterday in an attempt to combat the Bush recession:

In theory, the Fed's action should reduce the cost of borrowing for consumers and businesses, since the prime rate — what banks charge their best customers — moves in tandem with the federal funds rate.

The prime rate typically influences rates for car loans, student loans, credit cards and other debt. With Tuesday's cut, the prime rate is expected to fall to 3.0 to 3.25 percent from 4 percent.

However, despite the attractive rates, banks aren't lending to most consumers and businesses. Weak financial institutions continue to hoard cash and build their balance sheets, with little appetite for risk in new loans. That's worsening the economic downturn, especially since it hurts consumers, who drive almost two-thirds of U.S. economic activity.

In a statement, the rate-setting Federal Open Market Committee said that "The outlook for economic activity has weakened further . . . the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."

Credit card companies, of course, will continue to charge as much as they're legally permitted, driving consumers into a ditch and accelerating mortgage foreclosures.

Isn't untrammeled capitalism fun?

Ever since Kevin Drum invented it, centuries ago in blog years, Friday Cat Blogging has been a tradition in the reality-based community. So, here's a collection of Friday Felinity, in no particular order, they're all cute, dammit. (After giving image and the name of each cat, I've added a parenthetical that links to the cat's staffperson).

The Mighty Fang (Bad Tux, gold bug stomper).

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Ryan responds to the WATB complaints by the Repubs over the the new spending bill that was just passed.

Download | play Download | play (rough transcript)

Ryan: ...on top of all that they [Republicans] leave the new democratic majority an absolute budget catastrophe for us to deal with. And over to course of those 14 years the republican congress and the republican president borrowed more money, more money from foreign interests than all of the previous presidents combined. So now we're going get lectures from the republican majority on how to run the budget process. Now we're going to get lectures from the most incompetent, ineffective congress in the history of this institution, Mr. Speaker, the history of this institution.

Continue reading »

Check out this video from ABC News: "Rising interest rates squeeze homeowners to the breaking point."

(h/t Joan)

via ctx3

"... On NPR this morning I was listening to his interview with Diane Rehm and he was discussing his bankruptcy bill that is being debated in the House. He was drawing a comparison between credit card companies and alcoholic drink companies. His line of comparison was that we do not blame the company that made the alcohol when a person is weak and becomes an alcoholic while a credit card company can get blamed for the misuse of credit when a person is weak and uses their credit card too much."

Memo to Grassler, in 1956 the American Medical Association declares alcoholism an illness. In Physician's News Digest they talk about handling that disease. If Sen.Grassely draws the analogy of credit card debt to alcoholism, then aren't these people suffering from a disease? Shouldn't they be treated like people with an illness, and not a weakness? I can't go a day without getting a credit card offer in the mail with a huge credit line, low interest rate, and those cute, preprinted checks with my name plastered across them. (a huge cause of identity theft) Isn't that like sending an alocholic a bottle of hooch in the mail every day and expect that person not to drink it? Of course this bill does not address the credit card companies culpability in credit card abuse.

Our overall concern is that this isn't a balanced bill," said Travis Plunkett, spokesman for the Consumer Federation of America, a nonprofit consumer research and advocacy group. "There isn't a single curb on abusive lending practices by credit card companies in these bills."