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The truth is very different from the rhetoric coming from the Obama administration about helping Main Street America and ordinary workers against "fat-cat bankers," says Goldfarb. Under the Obama administration banks have grown larger and gained more influence over administration decisions. No conditions were made part of the agreement that would require banks to lend a portion of the money handed out to the banks to ordinary borrowers. And not much of significance was done to help homeowners under water, which would enable a faster recovery. In this respect the policies slanted in favor of banks of the Obama administration worsened the prospects of an economic recovery. Experts from Reagan advisor Martin Feldstein- who as early as 2008 advocated serious help to homeowners under water to reduce principal and interest- to the FDIC's Sheila Bair and Princeton Prof. Krugman, across the ideological spectrum, perceived this being in the national interest. Feldstein's first op-ed on his plan appeared in the Wall Street Journal on 3/7/2008, followed by ones on 4/15/2008, 10/4/2008, 1/20/2010/ 10/12/2011 in WSJ, and a oped on 10/30/2008 in the Washington Post, repeating the call for siginificant debt reduction to homeowners. Banks had extraordinary influence on successive administrations in the U.S., both Republican and Democratic- the Clinton, Bush and Obama administrations- so that policy actions could be distorted from what would otherwise take place. A study by two University of Michigan professors shows that banks did not increase lending after receiving government money. Instead taxpayer money was used to invest in risky securities for profits from short term price movements, resulting in gains of about 10% in investment returns. Ran Duchin, one of the two professors, says helping ordinary borrowers was not the most profitable use of capital for banks. Without the necessary conditions from the Obama administration, the banks depolyed capital in ways that did not help the economy. Similiarly when banks needed to be restructured no preparatory action was taken because of resistance within the administration- a request by President Obama to Treasury Secretary Geithner for preparing a plan for the restructuring of Citigroup was ignored, according to a report by Goldfarb and Wallsten on 9/17/2011 in the Washington Post....

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Shiller, Kashyap, Mishkin, Slaughter, Stein, Stulz, Rajan and others are part of a 15 academic economists group called the Squam Lake Group. They first met at a conference in November 2008 at Squam Lake in New Hampshire. The group has come up with a report that they hope gets the prominence of the 9/11 report. It is called the Squam Lake Report. The book will be introduced in a conference at Columbia University by Fed chairman Ben Bernanke. Some of the economists have little faith in regulators and a new Financial Stability oversight Council led by Treasury Secretary Geithner. (Stulz, Kashyap). The group sees need for better disclosure of risks of financial products, especially retirement savings products.The editor Seth Itchik sees the book as today's version of the 1938 book by Harvard and Tufts economists called "An Economic Program for American Democracy." The motivation for this effort in a field where economists have different opinions, is to build a consensus for decisive action by Congress and the government of the U.S. Two new suggestions that are not in the Congressional bills for financial reform. One is issuance of contingent convertible bonds or CoCo bonds. Banks would be encouraged or required to issue such debt which would convert into equity in a crisis. These funds would help recapitalize a bank in a crisis with no taxpayer liability. Another new proposal is to have a fraction of each year's bonus pool for banking executives to be held separately- if the bank ran into trouble, that portion of pay would be withheld from senior managers. And the group sees political aspects and lobbying making sound plans less implementable in Congress. Congress lets regulators curb pay practices and coordinate other actions which has not worked in the past and during the crisis. Congress has even in its best effort acted on only some of the things needed in its bills- this includes higher capital requirements, and compulsory "living wills" for the largest financial institutions, and the Volcker Rule. The rules for derivatives are still being negotiated by Blance Lincoln who introduced this provision, with the result being more transparency. If it is watered down it would not ensure the strict separation of derivatives trading on the capital accounts of banks that Blanche Lincoln envisaged. ...

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Judge Rakoff is interviewed by Adam Liptak as an essay by Rakoff appears in the December 22 issue of The New York Review of Books. Judge Rakoff is critical of the Justice Department for not prosecuting individuals responsible in the 2008-2009 financial crisis and merely offering excuses. He discounts the Justice Department argument that proving intent is difficult or that proving fraud is hard because of the sophisticated counterparties on both sides. He says assistant attorney general in the criminal division Bauer's assertion that you have to prove the individual involved made a false statement, intended to commit a crime, and that the other side depended on this for what they were doing, is misleading. The government is not required to prove that one party to a transaction relied on another party. On the difficulty to prove wilful criminal intent for individuals several layers above those who made and marketed the bad securities, Rakoff says the legal doctrine of wilfull blindness could have been used. Reflecting on why the Justice Department has not prosecuted individuals for wrongdoing the way Milken, Keating and Skilling were prosecuted in prior financial crises, Rakoff comes up with a explanation. He says the government's own role and the role of firms throughout the financial system is suspect in the 2008-2009 financial crisis unlike prior crises. Not only regulators are failing to to do their job. The financial system offers incentives for the packaging of bad debt securities. Fannie Mae has government backing and its management buys these securities to expand access to housing for low income people. The profits made on these securities brings U.S. and foreign banks into this business and leads to a proliferation of these securities around the globe to the point that small towns near the North Pole end up with these securities in their portfolio. This complicates things for prosecutors who in some situations have themselves worked for banks selling these securities. In its slow deliberative way the Obama administration, the Justice Department, and the S.E.C.'s new head, move to prosecute firms during the administration's second term, but not enough is done and tackling individual responsibility for deterring future wrongdoing in the interests of a safe and fair financial system seems a long way off....

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Dionne Jr. says the Republican primaries have opened up an overdue discussion on what American capitalism is, and what the right kind of capitalism is, not just what Europe is.

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The behaviour of the people at private equity in destroying jobs in the midst of the worst job market in decades. In this case the private equity names are Cerberus, Sun Capital, and Lubert-Adler and the jobs are the 30,000 jobs at Mervyns in 2004 when it was acquired by private equity firms for $1.2 billion from Target. All of these jobs are gone. Target bought Mervyns in 1978 for $300 million, but neglected Mervyns even as it focussed on the Target franchise using Mervyn's earnings to do that, it then sold Mervyn's in 2004 to private equity firms. The private equity firms took out $400 million in cash from the firm even as they burdened Mervyns with $800 million in debt. After the acquisition they formed two companies, one with the retail business and the other with the real estate assets of Mervyns, which they went out and sold to get cash out of the company. The real estate was then rented back to Mervyns by the new owners at twice the rent, as Mervyns had a lower rent negotiated many years ago. All that debt and the higher rent and the underinvestment in the brand put Mervyns into a death spiral, with the economic downturn killing the company and pushing it into liquidation, with workers losing even their vacation pay. What does this mean for the rest of the economy? According to Standard and Poors /LCD Group, from 2005 through the third quarter of 2008 private equity firms loaded a huge $741 billion of debt onto their companies'balance sheets. Its not that private equity firms operate without taking on debt, but in the low interest and high liquidity environment of recent years the debt levels soared. Now in the credit collapse lenders are pulling back and debt heavy companies cannot refinance, and fear has set in. According to Capital IQ, of 105 big USA companies that have filed for bankruptcy in 2008, 66 are owned by private equity buyout firms or spun off by them. Investors are nervous about these companies and loans made for these deals are trading at 33 cents on the dollar. ...

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Higgins cites the IMF and other experts on Greece's debt being unsustainable. He includes a long discussion with Charles Dallara who negotiated in the Brady Plan restructurings for Latin American debt, and for the European banks in 2010-2012 with the EU. Dallara says the issue has become politicized with national parliaments involved making it difficult to tackle the issue of debt reduction. Dallara points out that the Brady plan restructurings were possible because national parliaments were not involved.

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Gikas Hardouvelis was finance minister during a crucial period of impementation of the 2012 bailout program for Greece from June 2013 to Jan. 2015. Here he outlines the mistakes he sees made by the IMF in not agreeing to the 7.2 billion payment to Greece in 2014, 4% of Greece GDP, with one third of that not a loan. At the fifth review of the 2012 bailout the EU commissioner for economic affiars, Pierre Muscovici , said Greece had completed its requirements and the 7.2 billion euro funding should be released. Yet he says the IMF to preserve leverage over a future Syriza administration in the 2015 elections decided to hold back. This made it harder for the Samaras administration to tell voters that it had completed the program a year earlier, and the lack of the funds hurt the Samaras administration as it erased signs of growth that had appeared in early 2014. Following this error he points to 4 mistakes made by the Syriza Tsipras government. The first was that it was bitterly opposed to the lenders (IMF, EU and ECB) and failed to focus on the economy. Hardouvelis points out that the maturity of the debt of 16.5 years and low interest rates meant that it was not the immediate issue facing Greece, and he calls it very manageable. This was not to say that it was important but with creditors worried about moral hazard, other issues could be taken up first. Another mistake was to allow a loss of liquidity to the private sector so that prospects of growth were erased. The new finance minister acted as if the $7.2 billion infusion was not important and let payments be delayed. Tsipras and Varoufakis let the uncertainty increase in the private sector, and let the economy decline all the way to the closing of the banks. How costly was this is evident from the IMF's own paper in Juy 2015 and the 3 page update of July 14, 2015, on the Greek debt, showing it cost Greece a total of 60 billion euros in additional financing needed and an additional 25 billion euros for the shock from the closing of the banking system. That 3 page IMF paper shows that within the space of one year a shocking amount of damage was done by Syriza left government- it says Greece went from being on track for reaching Debt to GDP of 105% by 2022 under the Samaras-Hardouvelis administration in July 2014, to 142% by June 2015, and with the closing of the banking system to 170% by July 2015. Some of this would have come from the IMF's own withholding of the 7.2 billion euro payment to the Samaras government. ...

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S.E.C. Inspector General David Kotz says his office will put out a report on the destruction of probe related records at the S.E.C.. Darrell Flynn, an S.E.C. attorney alleged that the S.E.C. destroyed about 9000 files in clear violation of laws that probe records cannot be destroyed. He sought and obtained whistleblower protection. Senator Charles Grassley disclosed the accusations and asked the S.E.C. to explain the effect of this on investigations.

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In a Nov. 8 S&P report S&P's estimate for net government debt to GDP ratio for 2013 is over 80%. What S&P will look for in the debt negotiations is for the parties to produce an agreement that will stick and for the debt to GDP ratio to stabilize at close to current levels. Less important is the Jan. 1 deadline for S&P and Moody's according to executives at the credit ratings firms and more important real agreement that lasts.

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Former U.S. Secretary of Defense, William Cohen, on what the automatic spending cuts from the sequester- after the failure of the Supercommittee in Congress to reach agreement- will mean for the Defense Department and defense preparedness.

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A Wall Street Journal Survey of how the credit ratings firms have performed in prediciting looming defaults. The Journal's Matt Wirz looked at 35 years of data. He found the ratings firms did not do an effective job with predicting defaults in the 12 month period before an actual default. Of the 15 government defaults since 1975 tracked by S&P, S&P's sovereign ratings division rated 12 of the countries single B or higher in the 12 months preceding the default. S&P says a single-B rating on sovereign debt signifies that the government has only a 2% average default rate in the next 12 months. For Moody's Investors Service the figures show that of the 13 governments rated by Moody's, 11 were rated B or higher one year before an actual default. By contrast the investment grade ratings of the credit ratings firms have worked better- as no government defaulted within 15 years of having a tripe-A, double-A, or a single-A rating. Ratings firms say that the ratings indicate a relative default risk for countries and not an actual default probability, a rank ordering for different countries and their relative risk. Research chiefs at investment management firms point out that once a crisis develops the ratings firms are not much help. They also say the ratings firms use static indicators like current account balances and other critical indicators for countries in emerging markets such as political sentiment and bank deposit flows get less attention. Historically bond yields have priced in higher risk premiums into government bonds before a default and investors look at the bond yields in assessing risk conditions, and not at the ratings which change only slowly. Brazil and Argentina both had a double B-minus rating in Jan. 2001. A year later Argentina had defaulted....

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Cochrane says the best option today is for Europe to accept a sovereign default for Greece. He says the European Central Bank which stands behind the euro, should not be used for buying bonds of troubled countries with shaky "collateral." This would only lead to a situation where EU countries would have to recapitalize the ECB. He emphasizes the fact that Greece will not pay back this debt. And the only way out is to have a situation similiar to Argentina where it needs to start over, and it would at some point be able to borrow again. Austerity is deeply unpopular in Greece and with higher unemployment Greece's financial situation is rapidly deteriorating. Making austerity something that was tried to buy time but will not work. Cochrane also makes the point that the euro itself acts like the euro bonds that EU countries are reluctant to support, it means the ECB backs the currency and supports it- which makes it vital to keep the ECB whole and prevent the dilution of its financial strength. Axel Weber, former head of the Bundesbank, resigned to express his opposition to the ECB buying the bonds of troubled eurozone countries, which he said was outside the ECB's mandate to conduct monetary policy....

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E.U. leaders reached a new agreement for solving the debt crisis in Greece and the broader eurozone debt crisis. This time an effort was made to come up with a solution that had some chance of working unlike earlier efforts. Earlier efforts that concentrated on austerity and burdened Greece and other countries in the debt crisis with higher interest rates came under severe criticism as unworkable. The result was higher unemployment, a shrinking economy, higher debt to GDP ratios, and contagion effects. The new plan commits to getting Greece on the path to growth. The European Financial Stability Facility will have powers to buy Greek bonds at their value in the secondary markets which means Greece would owe less to the EFSF, bringing down Greek debt. Greek debt maturities are to be extended over many years and interest rates lowered, with similiar actions for Portugal and Ireland. And private bondholders were given the option of taking 20% less on their bonds or extending the maturities of the bonds at lower interest rates. In return the bonds would have guarantees for repayment by the E.U. so that the private creditors would limit their losses. The draft document of the agreement says all the E.U. countries would commit to fiscal discipline....

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Members of the debt panel from the Republican side are Rep. Jeb Hensarling of Texas, Rep Dave Camp of Michigan, and Rep. Fred Upton of Michigan. From the Senate the members are Sen. Jon Kyl of Arizona, Sen Pat Toomey of Pennsylvania, and Sen. Rob Portman of Ohio. Jeb Hensarling will lead the committee from the Republican side.