Yesterday, the Inspector General of the Treasury Department released a report showing that regulators at the Office of Thrift Supervision (OTS) — which is responsible for monitoring banks that specialize in mortgage lending — “repeatedly ignored warnings, including from their own employees, about the dangerous excesses at California mortgage lender IndyMac Bancorp.” The collapse of IndyMac last year cost the U.S. government about $10.7 billion.

According to the report, “OTS viewed growth and profitability as evidence that IndyMac management was capable”:

OTS identified numerous problems and risks, including the quantity and poor quality of nontraditional mortgage products. However, OTS did not take aggressive action to stop those practices from continuing to proliferate. OTS had at times as many as 40 bank examiners involved in the supervision of IndyMac; however, the examination results did not reflect the serious risks associated with IndyMac’s business model and practices.

In 2005, the OTS found that IndyMac “was having trouble with its cash flow,” but the office “did not issue any enforcement action, either informal or formal, until June 2008.” And this is not the first such tale to emerge; in October, the SEC’s Inspector General found similarly ignored warnings with regard to Bear Stearns before its federally financed collapse into the arms of J.P. Morgan. If nothing else then, the report underscores the desperate need for regulatory reform, in the wake of a Bush administration that “made it clear they planned to deliver less supervision over the financial services industry.” We all know the outcome of that deregulatory philosophy.

This week, President Barack Obama laid out his framework for regulatory reform. These reforms are still short on detail, but the most important could be the one aimed at ensuring that “companies cannot cherry-pick among competing regulators.” After all, in 2007, Countrywide Financial “simply switched regulators” to come under the more lax supervision of the OTS. Countrywide proceeded to go bust due to risky mortgages, and needed to be rescued by Bank of America. Allowing banks to shop around for the regulator they like best will inevitably lead to trouble, as the banks will settle on the regulator that is most in tune with their business interest.

Rep. Barney Frank (D-MA) has floated the idea of a “systemic risk regulator” — possibly the Federal Reserve — that would be charged with identifying risk that could topple the financial system. This could work, but waiting until risk is systemic to identify it means that risk large enough to endanger the system has been allowed to build up.

Instead, a focus on reforming the smaller agencies, like the OTS, the Commodity Futures Trading Commission, and others may be the key to a successful reform effort. But perhaps most important of all is this — Obama needs to appoint regulators who believe prudential oversight is important, something the Bush administration excelled at not doing.

This morning on Fox News, Chris Wallace gave some advice to conservative politicians who oppose Barack Obama’s proposal to let the Bush tax cuts for the wealthy expire and limit deductions for tax filers in the top two income tax brackets:

I think you do it in terms of what’s best for everybody, and if you’re removing the incentives and profits, and a lot of the people that make over $250,000 a year are small business owners and small businesses, as we all know, are the prime generators of jobs. So I think the better argument for Republicans is going to be this is going to hurt the economy, the generation of jobs, this is going to result in layoffs and say for Joe Six-pack out there. It’s not just the taxes of the rich guy, your livelihood is in jeopardy.

Watch it:

Actually, Mr. Wallace, it is overwhelmingly “just the taxes of the rich guy.” Here are the facts:

Less than 2% of “small businesses” would be affected by Obama’s tax change:

According to an analysis by the Center on Budget and Policy Priorities, only 1.9% of filers with small business income file in the top two income brackets. Even among those 1.9% of filers, many of those individuals don’t have employees, are otherwise employed, and earn their income through passive investments.

A “small business” is very often an employed rich individual declaring business income:

As Len Burman and Eric Toder of the Tax Policy Center explained in October, “Members of corporate boards, for example, report their compensation for that service on schedule C of their individual tax return. Partners in many law firms, accounting firms, medical practices, and Wall Street hedge funds also report business income rather than wages, as do people who receive rents or royalties from investments in real estate and oil and gas partnerships.”

Read more

Yesterday, in the face of “nearly unanimous opposition from Republicans” and “concerns raised by moderate Democrats,” the House delayed voting on a housing bill that would allow judges to “cram-down” mortgage payments for troubled homeowners. Part of the reason for the delay is that the bill has been continually mischaracterized as a bailout for irresponsible homeowners.

Embodying this idea, Rep. Virginia Foxx (R-NC) took to the House floor to decry the bill as helping those “who irresponsibly got mortgages” and now “continue to look for bailouts and continue to look for welfare”:

94 percent of the American people are paying their mortgages and they are paying them on time and they don’t understand why this is happening…Let me tell you a little bit about why that is the case and why I think that people who irresponsibly got mortgages to begin with continue to look for bailouts and continue to look for welfare. This is basically expanding the welfare program in our country.

Watch it:

First, about one-third of residents rent and one-third of homeowners own their homes outright, so how are “94 percent of the American people” paying their mortgages? Are the 62,948 renters in Foxx’s district not Americans? Also, Foxx’s stat isn’t right even if just people with mortgages are included, as about one in ten is behind on payments.

Plus, in 2008, there were 41,750 homes in foreclosure in North Carolina, a 16.2 percent increase from 2007 and a 153 percent jump from 2006. Does Foxx think that all of these homeowners were irresponsible?

What actually caused all of these housing problems is the economy tanked, home prices plummeted, and people got laid off. The proposed housing legislation is meant to complement the Obama administration’s housing plan by giving bankruptcy judges the right to cram-down homeowners mortgages “as a last resort alternative to foreclosure.”

The notion that this constitutes “welfare” is ludicrous. Bankruptcy is unpleasant. Those going through it “have to live under the supervision of a trustee and a judge, and under the observation of creditors for up to five years,” and a bankruptcy can remain on your credit report for up to 10 years. This is not a walk through the park we’re talking about here, but a step for those with, literally, nowhere else to turn.

Now, there will inevitably be some reckless borrowers who will be helped. In an attempt to aid 7 to 9 million homeowners, that’s almost impossible to avoid. But as Clive Crook wrote, this “is a price worth paying if it stems the tide of foreclosures.” Indeed, if the plan is implemented, the average homeowner will be protected from $6,000 in housing price declines as a result of neighbors staying out of foreclosure.

Today, Office of Management and Budget Director Peter Orszag appeared on Neil Cavuto’s show to discuss the budget released by the Obama administration, which “proposes significant tax increases for businesses and wealthy families worth nearly $2 trillion over the next 10 years.” Throughout the course of their conversation, Orszag debunked various conservative tax myths trumpeted by Cavuto including: the budget proposes to raise taxes during a recession, tax increases on the wealthy are a “job killer” that will ruin economic growth, and the increases will discourage investors from playing the stock market. Watch a compilation:

As Orszag said, “we’re returning to the tax rates that applied during the 1990′s. I think all Americans — including high income Americans — did quite well during that decade.”

Last night, Fox’s Sean Hannity defended Gov. Bobby Jindal (R-LA) and attacked our recent analysis of the Louisiana labor market. In response to Jindal’s rejection of stimulus funds to expand unemployment benefits, which would benefit 25,000 unemployed workers in Louisiana, we calculated that there were 430 new unemployed people in Louisiana for each day in December.

Claiming that the “folks at the Center need to make some progress on their math skills,” Hannity pointed to an employer payroll survey showing that Louisiana added jobs in December. Watch it:

We wonder –- are Hannity and Jindal trying to assert that the fundamentals of the economy in Louisiana are strong? While their statements are technically true, the statistic they are highlighting tells us the number of jobs — not the number of people who are unemployed.

Here’s where the confusion lies: In our headline, we should have said Louisiana had 430 new unemployed people for every day in December, as opposed to 430 jobs being lost.

There are two primary ways that the government measures the labor market: the employer payroll survey and the household survey. Hannity and Jindal are relying on the fact that the employer survey, which asks businesses about additions and subtractions from their payrolls, showed that businesses added jobs (although even this measurement is down .4 percent for Louisiana from its peak in August 2008).

The household survey, however, asks members of households whether or not they have jobs or are looking for work. This measures the unemployment rate, which has been rising steadily in Louisiana, from 4 percent in December 2007 to 5.9 percent in December 2008. There was also an increase from 5.3 percent in November 2008 to 5.9 percent in December 2008. This statistic is more pertinent to the discussion at hand, since we are debating unemployment benefits.

We believe that rejecting additional funds for unemployment benefits at a time when unemployment in Louisiana is rising is an unwise decision. However, the people of Louisiana will have the final say on whether that is the right thing to do. Read more

During an interview yesterday with Jim Lehrer, Treasury Secretary Timothy Geithner firmly dismissed nationalization as an option for combating the banking crisis:

GEITHNER: I think that’s the wrong strategy for the country, and I don’t think it’s a necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole.

Now, Geithner is clearly in a tough spot. Openly musing about whether or not to nationalize the banks can have an effect on bank stocks, and as Matthew Yglesias noted, “while it’s fine if the stock market doesn’t like the idea of nationalizing banks, it’s not fine if the stock market goes into a total panic over it.” So there is wisdom in not parading around the fact that nationalization is being considered.

That said, nationalization needs to be considered, and there’s something wrong if Geithner really believes it’s not an option. Adam Posen, Deputy Director of the Peterson Institute for International Economics, explained the logic of nationalizing to Congress today:

[N]ew private owners will always demand majority voting control and removal of current top management who are accountable for the accumulated problems. The American taxpayer would be ill-served to receive anything less for putting in the vast amount of money needed to restructure and recapitalize [the banks]. And the American taxpayer, just like any acquirer of distressed assets, deserves to reap the upside from their eventual resale. That basic logic is why failed banks that are too systemically important to shut down should be nationalized temporarily.

Geithner’s alternative has the government receiving stock in the banks “just like anybody else,” so there will be a return on the investments. But that doesn’t change the fact that the government would be sinking a lot of money into these banks without gaining authority and accountability over the use of taxpayer funds. The banks could simply work to maximize short-term gains — or throw lavish parties — and there would be very little Treasury could do about it.

In the budget that the administration proposed today, there is a $250 billion placeholder for more bank aid. While it’s admirable that the administration acknowledges that more might need to be done to save the banks, there is no sense in spending this amount of money without positioning taxpayers to reap significant rewards. A situation in which the government is providing a “slow intravenous drip that’s enough to keep the banks shambling along” will hinder the economic recovery and be a tremendous waste of money.

Today, the Information Technology and Innovation Foundation (ITIF) released a study examining six areas — human capital, innovation capacity, entrepreneurship, IT infrastructure, economic policy factors and economic performance — to assess the extent to which nations are able to compete globally on the basis of innovation.

The ITIF found that the U.S.’s overall position in terms of innovation-based competitiveness is slipping, and that America “ranks last in progress toward the new knowledge-based innovation economy over the last decade”:

[T]he prevailing view among many Washington policymakers is that the United States has been number 1 for so long it will continue to be number 1. Given this situation, the thinking goes, there is no real need for the United States to develop and implement a national economic development or competitiveness strategy. But this report finds that not only is the U.S. not number 1, but that its position is slipping rapidly. Absent a coherent national innovation strategy, the U.S. position will likely continue to slip, and with it, relative U.S. living standards.

According to the ITIF, “it’s time for U.S. federal policymakers to realize that the U.S. economy now competes with other nations, and like states after World War II did, it too needs to put in place a robust economic development policy.” The U.S. is one of only three industrialized nations that lacks a national innovation policy.

Today, Sen. Jim DeMint (R-SC) unveiled legislation meant to “guarantee workers’ rights to secret ballot elections and create a firewall” against the Employee Free Choice Act. As a preview, DeMint took to Fox News to describe why he thinks his firewall is necessary. Amidst the usual false rhetoric about Employee Free Choice eliminating the secret ballot, DeMint also incorrectly claimed that the act would harm small businesses:

And this is not just for big auto companies, this is for small electrical contractors, companies with 10 or 15 people. It would change the business model of the United States to the same model the U.S. auto industry has in Detroit.

Watch it:

DeMint has this all wrong. The National Labor Relations Act excludes non-retail employers whose interstate commerce is less than $50,000 and retail employers whose gross annual volume is less than $500,000; there are various other size exemptions for all sorts of industries, from newspapers to taxicab companies. These exemptions would not change under the Employee Free Choice Act.

As Sen. John Kerry (D-MA) wrote, “many small business owners in particular have asked me how this legislation would affect their businesses. I don’t think they have much to worry about”:

First, in the decades when our labor laws protected workers’ free choice to join unions, small businesses thrived and America built the strongest middle class in the world…Second, the Employee Free Choice Act makes no changes to the small business exemptions under our nation’s labor laws. Small businesses employing an estimated four million American workers would still be exempt and completely unaffected.

And its not as if unionization is the immediate death knell of a business anyway. The Small Business Administration has actually found that small business bankruptcy rates are lower in states with high unionization rates.

Finally, DeMint is grossly misinformed if he thinks that allowing workers to organize via majority-sign up transforms a business into a failing U.S. auto company. Since 2003, half a million workers have organized in this fashion — because their employers allowed it — including employees at AT&T and Pacific Gas and Electric, neither of which looks anything like one of Detroit’s Big Three.

Today, the House Financial Services subcommittee on oversight and investigations held a hearing to review accountability and transparency in the Troubled Assets Relief Program (TARP). During his testimony, Neil Barofsky, the Special Inspector General of the program, warned that if the Treasury Department is not “vigilant,” TARP could fall victim to fraud, much like the federal response to Hurricane Katrina or Iraq’s reconstruction:

History teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally. Hurricane relief, Iraq reconstruction, and the savings and loan bailout serve as important and difficult lessons. If, by percentage terms, some of the estimates of fraud in those programs apply to the TARP programs, we are looking at the potential exposure of tens if not hundreds of billions of dollars in taxpayer money lost to fraud. We must be vigilant.

This is a wise bit of advice, as billions were wasted during both the Katrina and Iraq reconstruction debacles. At the same hearing, Gene Dodaro of the Government Accountability Office (GAO) said that Treasury is taking steps to improve accountability “consistent with our recommendations,” but that “additional action is needed to better ensure that all participating institutions are accountable for their use of program funds.”

Evidently, George Will isn’t the only one who’s into recycling discredited ideas these days. In response to House Democrats unveiling an omnibus appropriations bill — which consists of nine fiscal 2009 appropriations bills that President George Bush threatened to veto — House Republicans have called for an across-the-board spending freeze.

In a letter to Speaker Nancy Pelosi (D-CA) and Majority Leader Steny Hoyer (D-MD), the GOP explained its rationale:

At a time of record deficits, a freeze would allow the federal government to keep functioning at current spending levels without requiring beleaguered taxpayers to pay for new spending increases. Congress could ensure that essential government functions are carried out without any cuts while still protecting taxpayers from spending increases during a time of economic hardship.

The letter was signed by Rep. John Boehner (R-OH), Rep. Mike Pence (R-IN), Rep. Eric Cantor (R-VA) and Rep. Thaddeus McCotter (R-MI).

Boehner also independently called for Congress to “pass a clean bill that freezes spending at current levels,” while Rep. Roy Blunt (R-MO) and Rep. Tom Price (R-GA) jumped on the bandwagon. Remember, though, that this is the same “solution” to the country’s budget woes that Sen. John McCain (R-AZ) put forth during the presidential campaign. It’s also old hat for Pence, who pushed for a spending freeze back in 2004.

As we noted when McCain made his proposal, freezing spending would allow inflation to eat away at funding for vital programs, including Pell Grants, Head Start and infrastructure investments. It would mean less money, “in real terms,” for just about everything. There are also projects — like the 2010 census — that are already underfunded and need a boost.

But under the current economic circumstances, this is a far more damaging policy then it was six months ago when McCain was touting it. The economic stimulus package’s main purpose is to close the GDP gap and jumpstart the economy by spurring spending by households, government and the private sector. A spending freeze would act as an “anti-stimulus,” cutting spending precisely when it’s too low and the economy is moving too slowly.

Are these Republicans trying to ensure that the stimulus fails? Or is it that this group simply has no new ideas?

On Friday, Louisiana Gov. Bobby Jindal (R-LA) announced that he would reject nearly $100 million in unemployment insurance funding from the federal government. Jindal said the state would only be accepting money to increase the unemployment insurance payments for those who currently qualify for unemployment insurance and would not accept federal funds to expand unemployment benefits.

So how many people would Jindal’s grand-standing policies affect? According to the Bureau of Labor Statistics, the number of unemployed people in Louisiana spiked from 109,000 in November to 122,000 in December, an increase of over 13,000 people without jobs or 430 additional out of work people every day.

The estimate itself is conservative, as it relies on December 2008 (the most recent Louisiana employment data available) data and does not consider January’s higher unemployment numbers.

While Louisiana’s Lt. Gov., Mitch Landrieu (D), has already criticized Jindal for acting like “the spokesman for the national Republican Party,” rather than representing the interests of Louisiana, the state’s growing unemployment rate only underscores the Governor’s recklessness.

Since other conservative governors (like South Carolina’s Mark Sanford, whose state is losing approximately 830 jobs a day) are jumping on the Jindal band wagon and rejecting much needed stimulus funding, the Wonk Room has compiled a chart of how many new unemployed people there are each day in December in all 50 states.

Read more

Last week, former Merrill Lynch CEO John Thain faced six hours of questioning from New York Attorney General Andrew Cuomo regarding “the bonuses that were given out on the eve of Merrill’s merger with Bank of America (BoA).” Thain has evidently been directed by BoA not to discuss specific bonus details, so Cuomo has filed a motion in the Supreme Court of New York in order to get Thain to talk.

During the initial questioning, though, some other details about Thain’s attitude toward bonuses, and the financial crisis in general, were made quite clear. When Thain was asked if he ever considered “whether Merrill Lynch should disclose its [fourth quarter] losses to its investors,” he essentially said no:

THAIN: Merrill Lynch as a policy, doesn’t make projections; doesn’t give guidance and doesn’t disclose interim results.

Q: And a lot of firms have that and depart from that policy in times where there’s a serious deviation, and given the deviation that was occurring in the fourth quarter of 2008, did you consider whether or not it was appropriate to make a disclosure?

THAIN: The market conditions were generally known and we would not have disclosed interim results in that fourth quarter.

As for Merrill shifting when it paid bonuses, to have them out before BoA took over:

THAIN: I don’t think it’s necessarily the case that we can predict what was going to happen between December 8 and December 31. Again, I’m going to repeat what I said, that bonuses were determined based upon performance and the retention of the people, and there is nothing that happened in the world or the economy that would make you say that those were not the right thing to do for the retention and the reward of the people who were performing.

Remember, this is the same guy who “suggested to directors that he get a 2008 bonus of as much as $10 million” after Merrill incurred catastrophic losses and had to be salvaged by BoA.

As for rewarding “the people who were performing,” in the months before the merger between Merrill and BoA closed, “Merrill’s business deteriorated, resulting in a $15.3 billion post-tax loss in the fourth quarter.” This loss prompted BoA “to seek a second round of taxpayer money” just to stay afloat following the merger. That seems to fall short of a bonus-worthy performance.

The Wall Street Journal is reporting that Citigroup “is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank.”

While negotiations are still ongoing, “the government could wind up holding as much as 40% of Citigroup’s common stock,” which would “give federal officials far greater influence” over the bank. The move would require no more TARP funds, but would instead entail the government converting preferred shares it has already bought into common stock.

These talks come at the same time that the Obama administration “will begin taking a hard look at the financial condition of the country’s 20 biggest banks”; this is the “stress test” that Treasury Secretary Timothy Geithner promised as part of the administration’s financial stability plan. Regulators today also “pledged to inject additional funds into the nation’s major banks to prevent their collapse.”

As we discussed earlier, a lot of the signs regarding the banking system are pointing towards nationalization, and the events around Citigroup are no exception. Thus, the same question comes up: if nationalization is not in the picture, then what is?

As Paul Krugman pointed out today, the stress test could be the key for an administration move towards nationalization:

All the administration has to do is take its own planned ‘stress test’ for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

Krugman added that “once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible.” Indeed, the Federal Deposit Insurance Corp. has placed 14 banks into receivership in 2009 alone, blunting the criticism of those who claim nationalization is too scary and can’t work.

As Models & Agents pointed out, we are currently operating in “the worst of every world” when it comes to the banks: injecting capital and essentially taking over firms, without exercising appropriate control. This is not a happy middle ground, but an ambiguous mess that will slow the banking system’s recovery. While there is political wisdom to not openly pondering nationalization, transparently going half-way will not deliver the system’s required fix.

The Wonk Room would like to congratulate Center for American Progress Senior Fellow James Kvaal, who is joining the White House’s National Economic Council.

James was one of the founding contributors to The Wonk Room and helped establish this blog’s credibility as a forum for rapid response on policy issues. He has been an insightful and prolific blogger, covering everything from education and health care to taxes and the budget.

Read all of his posts here and check out his work in the Wonk Room’s resource library.

James’ advice, insights, and wit will surely be missed. We wish him all the best in his future endeavors.

The question that everyone seems to be asking about the Obama administration’s plan for the financial system is: “Should the United States nationalize some banks?”

There’s been a chorus of calls for nationalization — from Paul Krugman and Nouriel Roubini to Alan Greenspan and Lindsey Graham — which thus far the Obama administration has resisted. As Roubini noted, however, the “stress test” that Treasury Secretary Timothy Geithner proposed in his financial stability plan naturally leads to nationalization:

[T]he reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn’t much left to do but nationalize. We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.

Of course, there is the question of the political viability of nationalization. Obama has argued that “America’s different,” and won’t stand for nationalization. And as The Hill noted, federal ownership of troubled banks would play into false claims that Obama is a socialist.

But if not nationalization, then what? Geithner’s public-private investment fund may get toxic assets off the banks’ books, but nationalization is a more straightforward process, and doesn’t depend on Wall St. being willing to buy the junk currently clogging up the banks. And the longer nationalization is delayed, the longer the solvency of the entire banking system will be in question. Thus, more good banks will get dragged down into the mud with the bad.

As Michael Hitzik wrote of the banks, “We bought them. We own them. The only problem is that we’ve failed to exercise our right to control them.” Indeed, another benefit of nationalizing is the opportunity to wipe the bank’s management slates clean. But if nationalization occurs, it needs to be done in a quick manner. There’s danger in allowing the banks to sit on the government’s hands for too long; “prolonged government intervention in the Indian and Chinese banking systems led to major inefficiencies, which stymied economic growth.”

The administration is currently reassuring banks that nationalization isn’t coming. As Matthew Yglesias wrote, “If I were Tim Geithner, I would keep offering these reassurances to executives at large banks right up until the minute I nationalized the first one.” But if the administration is committed to a plan that doesn’t involve nationalization, then it should lay that plan out, because it’s beginning to look like nationalization is where all roads lead and the public needs to be educated about the alternative.

Cross-posted on The Wonk Room.

The question that everyone seems to be asking about the Obama administration’s plan for the financial system is: “Should the United States nationalize some banks?”

There’s been a chorus of calls for nationalization — from Paul Krugman and Nouriel Roubini to Alan Greenspan and Lindsey Graham — which thus far the Obama administration has resisted. As Roubini noted, however, the “stress test” that Treasury Secretary Timothy Geithner proposed in his financial stability plan naturally leads to nationalization:

[T]he reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn’t much left to do but nationalize. We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.

Of course, there is the question of the political viability of nationalization. Obama has argued that “America’s different,” and won’t stand for nationalization. And as The Hill noted, federal ownership of troubled banks would play into false claims that Obama is a socialist.

But if not nationalization, then what? Geithner’s public-private investment fund may get toxic assets off the banks’ books, but nationalization is a more straightforward process, and doesn’t depend on Wall St. being willing to buy the junk currently clogging up the banks. And the longer nationalization is delayed, the longer the solvency of the entire banking system will be in question. Thus, more good banks will get dragged down into the mud with the bad.

As Michael Hitzik wrote of the banks, “We bought them. We own them. The only problem is that we’ve failed to exercise our right to control them.” Indeed, another benefit of nationalizing is the opportunity to wipe the bank’s management slates clean. But if nationalization occurs, it needs to be done in a quick manner. There’s danger in allowing the banks to sit on the government’s hands for too long; “prolonged government intervention in the Indian and Chinese banking systems led to major inefficiencies, which stymied economic growth.”

The administration is currently reassuring banks that nationalization isn’t coming. As Matthew Yglesias wrote, “If I were Tim Geithner, I would keep offering these reassurances to executives at large banks right up until the minute I nationalized the first one.” But if the administration is committed to a plan that doesn’t involve nationalization, then it should lay that plan out, because it’s beginning to look like nationalization is where all roads lead and the public needs to be educated about the alternative.

Cross-posted on ThinkProgress.

Yesterday, the New York Times reported that President Obama, in the budget he’s releasing next week, will not use “four accounting gimmicks that President George W. Bush used to make deficit projections look smaller.”

The changes: account for the Wars in Iraq and Afghanistan (“overseas military contingencies”) in the budget rather than through the use of “emergency” supplemental spending bills, assume the Alternative Minimum Tax will be indexed for inflation, account for the full costs of Medicare reimbursements, and anticipate the inevitable expenditures for natural disaster relief.

These changes would make the debt over ten years look $2.7 trillion larger than the distorted Bush baseline, but that debt was always there. It was just being hidden. President Bush’s budgets hid billions with elaborate budget gimmicks. They took war-spending off the books, tried to eliminate the costs of wildly expensive tax cuts for the wealthy, and claimed savings through unrealistic, unspecified future cuts in vital discretionary spending.

As Steve Benen wrote, “the smoke-and-mirrors approach to which we’ve grown accustomed was ridiculous. It was a problem policymakers recognized, but didn’t want to talk about, and had no interest in fixing. It’s not only heartening to see Obama bring some sanity to the process, it will also have key practical consequences — honest budgets lead to better policy making.”

Today, Phil “mental recession” Gramm has an op-ed in the Wall Street Journal disputing the notion that the deregulation he promoted while in the Senate had anything to do with the financial crisis. Gramm — the poster child for a movement defending deregulation and blaming Clinton-era housing programs for the meltdown — relied on a series of tired conservative tropes in an attempt to exonerate himself from well deserved culpability.

Gramm: It was the Community Reinvestment Act!

No it was not. Only six percent of the subprime loans made by CRA-covered lenders went “to lower-income borrowers or neighborhoods.” It was non-bank mortgage companies — not covered by CRA — that originated 50 percent of subprime loans.

Gramm: Fannie and Freddie encouraged the poor people!

This is a favorite of the right, but Fannie and Freddie “had nothing to do with the explosion of high-risk lending.” The two undeniably fueled the securitization fire, but it was their chief regulator — the Office of Federal Housing Enterprise Oversight — that utterly failed to prevent them from investing in toxic mortgages, while the Bush administration appointed supervisors who made it clear that they planned to deliver less supervision over the financial services industry.

Gramm: Credit default swaps are fine!

No, they’re not. In his finest moment, Gramm shielded swaps from regulatory oversight by slipping a rule into an unrelated budget bill in 2000. The unregulated swap market reached a peak of $62 trillion. Taking advantage of this, AIG issued over $40 billion in swaps that it couldn’t honor, necessitating a government rescue.

The rescue of AIG and the collapse into bankruptcy of Lehman Brothers are the two defining moments of the current financial market meltdown, and Gramm’s fingerprints are all over both. Incidentally, Gramm is not through messing with the banking system. Just yesterday, the bank that he helps run, UBS, was sued by the American government for helping American clients “use secret accounts to evade U.S. taxes.” Old habits evidently die hard.

Today, Campaign for America’s Future organized a call with some prominent economists — including Nancy Altman, former top assistant to Alan Greenspan on the 1983 Social Security Commission and Dean Baker, co- director of the Center for Economic and Policy Research — to discuss the White House’s “fiscal responsibility summit,” which is to be held next week. The point of the summit is “to consider just how the government can get a grip on its increasingly ugly balance sheet.”

While the White House has “put out the word that the summit will not be the occasion to announce a task force on keeping Social Security solvent for the long-term,” there are concerns that it will be a perfect opportunity for Obama “to compromise with deficit hawks” on entitlement reform.

Just in case, Baker and Altman both took the opportunity to set the record straight on the Social Security crisis — or lack thereof:

BAKER: Social Security is not facing a crisis, or anything that any reasonable person could call a crisis…It’s a very distant problem.

ALTMAN: The “entitlement crisis” frame is entirely misleading.

Indeed, there is very little crisis-like about the Social Security situation, and talking about it with such language grossly overemphasizes the problem. The Congressional Budget Office “projects that the program can pay all scheduled benefits for the next 40 years with no changes whatsoever.” That’s not to say that smart reforms shouldn’t be made if someone comes up with them, but it’s not as if there’s a fire that needs to be put out right now.

It should be reassuring, then, that there is very little evidence from the administration that slashing Social Security is anywhere on the radar. In fact, in Politico today, Office of Management and Budget director Peter Orszag explained where the real fiscal crisis is:

“Social Security faces an actuarial deficit over the next 75-100 years. In the past, I’ve resisted the term ‘crisis’ to describe that kind of situation,” he said. “This is not quantitatively as important as getting health care done.”

Indeed, long-term fiscal stability is impossible without addressing health care costs. As Ezra Klein noted, “The simple fact is that the administration is not focused on Social Security…The Obama administration believes that the entitlement problem is a health care entitlement problem, and the health care entitlement problem is a health care system problem.”

It’s only been a day since President Barack Obama released his plan to deal with the foreclosure crisis, but conservatives have already amped up their opposition. One facet of the plan in particular — a provision allowing bankruptcy judges to “cram-down” mortgage payments for troubled homeowners — has drawn the ire of conservative lawmakers.

Yesterday, Rep. Dan Lungren (R-CA) said the provision is “going to affect future mortgages, because that’s going to put an additional risk premium on all mortgages,” while Sen. Jon Kyl (R-AZ) claimed “this is going to raise rates for everyone else because banks have to cover the risk.” Watch it:

Rep. John Boehner (R-OH) circulated a similar statement, asking “should a responsible plan include a ‘cramdown’ provision that could increase the monthly mortgage payments for responsible borrowers?” The conservative argument is that banks will be so wary of cram-downs occurring, they will make it increasingly difficult for borrowers to obtain mortgages.

Changing bankruptcy law to allow cram-downs is the only part of Obama’s plan that requires Congressional approval. As such, it’s important to note the real reason for conservative fearmongering: the banking industry hates cram-downs. As BusinessWeek reported, conservatives are getting their argument straight from the Mortgage Bankers Association (MBA):

[B]anking lobbyists launched a renewed attack on the cramdown legislation, enlisting as an ally Republican Representative Lamar Smith of Texas, among others. [MBA] is distributing talking points to key congressional aides laying out reasons why “Congress should defeat bankruptcy reform legislation.” These include the argument that if lenders can’t be confident that loan terms will survive, they will raise rates and reject riskier borrowers.

The MBA’s “cram-down issue brief” contains the following: “If [cram-downs] were to happen, the mortgage market will have no choice but to respond by pricing this new risk into the cost of mortgages through higher rates, fees and down payments on all consumers.” For the record, in his career, Boehner has received $481,319 from the banking industry; $145,950 in the 2008 election cycle alone. Lungren has received $67,500, while Smith received $145,868.

As for the conservatives’ alleged concern, there shouldn’t be a rush for homeowners to enter bankruptcy, as “sane people don’t subject themselves to Chapter 13 unless they have no alternative.” Indeed, as Henry Hildebrand, a Chapter 13 trustee in Nashville pointed out, “[homeowners in bankruptcy] have to live under the supervision of a trustee and a judge, and under the observation of creditors for up to five years.”

So a picnic, bankruptcy is not. But cram-downs can play an important role in solving the housing crisis for those who have, literally, nowhere else to turn. If addressing foreclosures, and not serving the interests of the banking industry, is the focus of the housing plan, cram-downs need to be a part of it.