When Donald Trump signed the $2 trillion CARES Act rescue on March 27, there was immediate praise across the political spectrum for section 4022, concerning homeowners in distress. Under the rule, anyone with a federally-backed mortgage could now receive instant relief.

Forbearance, the law said:

…shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower.

Essentially, anyone with a federally-backed mortgage was now eligible for a six-month break from home payments. Really it was a year, given that a 180-day extension could be granted “at the request of the borrower.”

It made sense. The burden of having to continue to make home payments during the coronavirus crisis would be crushing for the millions of people put out of work.

If anything, the measure didn’t go far enough, only covering homeowners with federally-backed (a.k.a. “agency”) mortgages. Still, six months or a year of relief from mortgage payments was arguably the most valuable up-front benefit of the entire bailout for ordinary people.

Unfortunately, this portion of the CARES Act was conceived so badly that it birthed a potentially disastrous new issue that could have severe systemic ramifications. “Whoever wrote this bill didn’t have the faintest fucking clue how mortgages work,” is how one financial analyst put it to me.

When homeowners take out mortgages, loans are bundled into pools and turned into securities, which are then sold off to investors, often big institutional players like pension funds.

Once loans are pooled and sold off as securities, the job of collecting home payments from actual people and delivering them to investors in mortgage bonds goes to companies called mortgage servicers. Many of these firms are not banks, and have familiar names like Quicken Loans or Freedom Mortgage.

The mortgage servicing business is relatively uncomplicated – companies are collecting money from one group of people and handing it to another, for a fee – but these quasi-infamous firms still regularly manage to screw it up.

“An industry that is just… not very good,” is the generous description of Richard Cordray, former head of the Consumer Financial Protection Bureau.

Because margins in the mortgage service business are relatively small, these firms try to automate as much as possible. Many use outdated computers and have threadbare staffing policies.

Essentially, they make their money collecting in good economic times from the less complicated homeowner accounts, taking electronic payments and paying little personal attention to loan-holders with issues.

They rely on lines of short-term financing from banks and tend to be cash-poor and almost incompetent by design. If you’ve ever tried to call your servicer (if you even know who it is) and failed to get someone on the phone, that’s no accident — unless you’re paying, these firms don’t much want to hear from you, and they certainly don’t want to pay extra to do it. Their cheapness helped provide some savings for customers, but there’s a downside to this approach.

Last year, the Financial Stability Oversight Council (FSOC), which includes the heads of the Treasury, the Commodity Futures Trading Commission, the Fed, the aforementioned CFPB and others issued a report claiming mortgage service firms were a systemic threat, because they “rely heavily on short-term funding sources and generally have relatively limited resources to absorb financial shocks.”

For Cordray, who has a book out called Watchdog that chronicles his time heading the CFPB, the worry about mortgage servicers was serious.

“Nonbanks are very thinly capitalized,” he says. “They haven’t been very responsible in building up capital buffers.”

Enter the coronavirus. Even if homeowners themselves weren’t required to make payments under the CARES Act, servicers like Quicken and Freedom still had to keep paying the bondholders every month.

It might be reasonable to expect a big bank like Wells Fargo or JP Morgan Chase to front six months’ worth of principal and interest payments for millions of borrowers. But these fly-by-night servicer firms – overgrown collection agencies – don’t have that kind of cash.

How did the worst of these firms react to being told they suddenly had to cover up to a year of home payments? About as you’d expect, by panicking and trying to pass the buck to homeowners.

Soon after the passage of the CARES Act, reporters like Lisa Epstein at Capitol Forum and David Dayen at the American Prospect started hearing stories that servicers were trying to trick customers into skipping the forbearance program. As David wrote a few weeks ago:

I started hearing from borrowers that they were being told that they could apply for three months forbearance (a deferment of their loan payment), but would have to pay all three months back at the end of the period…

It soon came out that many servicers were telling homeowners that even if they thought they were getting a bailout break, they would still have to make it all up in one balloon payment at the end of the deferral period. This was a straight-out lie, but the motivation was obvious. “They’re trying to get people to pay any way they can,” is how Cordray puts it.

Dayen cited Amerihome Mortgage and Wells Fargo, but other names also started to be associated with the practice. Social media began to fill up with stories from people claiming firms like Mr. Cooper, Bank of America and others were telling them they had to be prepared to make big balloon payments.

Same with the CFPB’s complaint database, which began to be filled with comments like the following, about a firm called NewRez LLC:

If you have 4 months of mortgage payments laying around at the end of the COVID-19 pandemic you will be fine if not good buy [sic] to your house. I understand its a business and they will make a lot of money with I'm sure a government bailout and lots of foreclosures from not helping any american home buyers…

Suddenly regulators and politicians alike were faced with a double-edged dilemma. On the one hand, the poorly-designed CARES Act placed servicers in genuine peril, an issue that left unfixed might break the mortgage markets – not a fun experience for America, as we learned in 2008.

The obvious solution was to use some of the apparently limitless funding ammunition in the Federal Reserve to help servicers maintain their responsibilities. The problem was the firms that needed such help the most were openly swindling homeowners. If there’s such a thing as regulatory blackmail, this was it.

Should the Fed open its war chest and create a “liquidity facility” to help mortgage servicers? It seemed like the obvious move — this really was a problem caused by a bailout that encouraged even people who didn’t need forbearance to accept it — but how could this be done in a way that didn’t put homeowners at more risk?

“This is the script of a heist flick, where homeowners get screwed in the end while servicers get the money,” says Carter Dougherty of Americans for Financial Reform. “If you combine money for servicers with strong consumer protections and a vigorous regulator, then the film could have a happy ending. But I'm not holding my breath.”

In early April, a group of Senators led by Virginia’s Mark Warner sent a letter that pleaded with Treasury Secretary Steven Mnuchin to use some of the $455 billion economic stabilization fund to solve the problem. The letter included a passage that essentially says, “We know these companies suck, but there’s no choice but to bail them out”:

While we understand that some nonbank lenders may have adopted practices that made them particularly susceptible to constraints on their liquidity during a severe downturn, imposing a broad liquidity shock to the entire servicing sector is not the way to go about reform…

The Senators put the problem in perspective, noting that as much as $100 billion in payments might be forborne under the CARES Act. This was a major hit to an industry that last year “had total net profits of less than $10 billion.”

The CARES Act was written in March with such speed that it became law before anyone even had a chance to catch, say, a $90 billion-sized hole in the bailout’s reasoning. Still, when the forbearances began and it started to look like the servicers might fail, there was talk among regulators and members of congress alike of letting failures happen, to teach the idiots a lesson.

But the Senators on the letter (including also Tim Kaine, Bob Menendez and Jerry Moran) decided this would ultimately be counterproductive, i.e. letting the economy collapse might be an unacceptably high price for the sending of a message to a handful of companies.

“The focus now should not be on longer-term reform, but on ensuring that the crisis now unfolding does as little damage to the economy as possible,” is how the letter put it.

Although the letter urged the creation of a new bailout facility to contain the mortgage-servicer ick, that didn’t happen, even after mortgage servicers stepped up lobbying campaigns. In mid-April, a string of news stories appeared in which servicers warned reporters of snowballing market terror – as the New York Times put it, the “strain is expected to intensify” – that would only be solved with a bailout.

No dice. In a repeat of the often-halting, often illogical responses to mushrooming crises of 2008, the first pass at a solution came in the form of a move by the Federal Housing Finance Agency (FHFA), the overseer of Fannie and Freddie.

On April 21, FHFA announced they were coming to the rescue: servicers would no longer need to come up with six months of payments. From now on, it would only be four:

Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac.

Which was fine, except for one thing: from the standpoint of most of these undercapitalized servicing firms, having to cover four months of payments is not a whole lot easier than covering six. “It still might as well be ten years for these guys,” is how one analyst put it.

Absent an intervention from the Fed, a bunch of these servicing firms will go bust. There will be chaos if even a few disappear. As we found out in 2008, homeowners facing servicer disruptions can immediately be confronted with all sorts of problems, from taxes going unpaid to payments vanishing to incorrect foreclosure proceedings taking place. Such problems can take years to resolve. Service issues helped seriously prolong the last crisis, as I wrote about in 2010.

Also, if your servicer disappears, someone still has to do the grunt work of managing your loan. To make sure your home payments are collected and moved to the right place, some entity will have to acquire what are known as the Mortgage Servicing Rights (MSRs) to your loan.

But MSRs have almost no value in a battered economy, which means it’s likely no big company like a bank will be interested in acquiring them in the event of mass failures, absent some kind of inducement. “They’re not going to want that grief,” is how one hill staffer puts it.

A third problem is that if some of these nonbank servicers go kablooey, a likely scenario would involve their businesses being swallowed up by big banks, perhaps with the aid of incentives tossed in from yet another bailout package.

This would again mirror 2008, in that a regulatory response would worsen the hyper-concentration problem and make big, systemically dangerous banks bigger and more dangerous, again.

As Dougherty says, the simplest solution would be opening a Fed facility to contain the servicer disaster, coupling aid with new measures designed to a) force servicers to keep more money on hand for a rainy day and b) stop screwing homeowners.

But the more likely scenario is just a bailout for now, with a vague promise to reform later. This would lead either to an over-generous rescue of some of our worst companies, or an industry wipeout followed by another power grab by Too Big To Fail banks.

The whole episode is a classic example of how governmental ignorance married to corporate irresponsibility can lead to systemic FUBAR, though we still don’t know how this particular version will play out. As Cordray puts it, it’s not easy to predict where failures in the mortgage servicer industry might lead.

“What’s easy to predict, though,” he says, “is that it will be a mess.”

Earlier this week, Atlantic magazine – fast becoming the favored media outlet for self-styled intellectual elites of the Aspen Institute type – ran an in-depth article of the problems free speech poses to American society in the coronavirus era. The headline:

Internet Speech Will Never Go Back to Normal

In the debate over freedom versus control of the global network, China was largely correct, and the U.S. was wrong.

Authored by a pair of law professors from Harvard and the University of Arizona, Jack Goldsmith and Andrew Keane Woods, the piece argued that the American and Chinese approaches to monitoring the Internet were already not that dissimilar:

Constitutional and cultural differences mean that the private sector, rather than the federal and state governments, currently takes the lead in these practices… But the trend toward greater surveillance and speech control here, and toward the growing involvement of government, is undeniable and likely inexorable.

They went on to list all the reasons that, given that we’re already on an “inexorable” path to censorship, a Chinese-style system of speech control may not be such a bad thing. In fact, they argued, a benefit of the coronavirus was that it was waking us up to “how technical wizardry, data centralization, and private-public collaboration can do enormous public good.”

Perhaps, they posited, Americans could be moved to reconsider their “understanding” of the First and Fourth Amendments, as “the harms from digital speech” continue to grow, and “the social costs of a relatively open Internet multiply.”

This interesting take on the First Amendment was the latest in a line of “Let’s rethink that whole democracy thing” pieces that began sprouting up in earnest four years ago. Articles with headlines like “Democracies end when they become too democratic” and “Too much of a good thing: why we need less democracy” became common after two events in particular: Donald Trump’s victory in the the Republican primary race, and the decision by British voters to opt out of the EU, i.e. “Brexit.”

A consistent lament in these pieces was the widespread decline in respect for “experts” among the ignorant masses, better known as the people Trump was talking about when he gushed in February 2016, “I love the poorly educated!”

The Atlantic was at the forefront of the argument that The People is a Great Beast, that cannot be trusted to play responsibly with the toys of freedom. A 2016 piece called “American politics has gone insane” pushed a return of the “smoke-filled room” to help save voters from themselves. Author Jonathan Rauch employed a metaphor that is striking in retrospect, describing America’s oft-vilified intellectual and political elite as society’s immune system:

Americans have been busy demonizing and disempowering political professionals and parties, which is like spending decades abusing and attacking your own immune system. Eventually, you will get sick.

The new piece by Goldsmith and Woods says we’re there, made literally sick by our refusal to accept the wisdom of experts. The time for asking the (again, literally) unwashed to listen harder to their betters is over. The Chinese system offers a way out. When it comes to speech, don’t ask: tell.

As the Atlantic lawyers were making their case, YouTube took down a widely-circulated video about coronavirus, citing a violation of “community guidelines.”

The offenders were Drs. Dan Erickson and Artin Massahi, co-owners of an “Urgent Care” clinic in Bakersfield, California. They’d held a presentation in which they argued that widespread lockdowns were perhaps not necessary, according to data they were collecting and analyzing.

“Millions of cases, small amounts of deaths,” said Erickson, a vigorous, cheery-looking Norwegian-American who argued the numbers showed Covid-19 was similar to flu in mortality rate.  “Does [that] necessitate shutdown, loss of jobs, destruction of oil companies, furloughing doctors…? I think the answer is going to be increasingly clear.”

The reaction of the medical community was severe. It was pointed out that the two men owned a clinic that was losing business thanks to the lockdown. The message boards of real E.R. doctors lit up with angry comments, scoffing at the doctors’ dubious data collection methods and even their somewhat dramatic choice to dress in scrubs for their video presentation.

The American Academy of Emergency Medicine (AAEM) and American College of Emergency Physicians (ACEP) scrambled to issue a joint statement to “emphatically condemn” the two doctors, who “do not speak for medical society” and had released “biased, non-peer reviewed data to advance their personal financial interests.”

As is now almost automatically the case in the media treatment of any controversy, the story was immediately packaged for “left” and “right” audiences by TV networks. Tucker Carlson on Fox backed up the doctors’ claims, saying “these are serious people who’ve done this for a living for decades,” and YouTube and Google have “officially banned dissent.”

Meanwhile, over on Carlson’s opposite-number channel, MSNBC, anchor Chris Hayes of the All In program reacted with fury to Carlson’s monologue:

There’s a concerted effort on the part of influential people at the network that we at All In call Trump TV right now to peddle dangerous misinformation about the coronavirus… Call it coronavirus trutherism.

Hayes, an old acquaintance of mine, seethed at what he characterized as the gross indifference of Trump Republicans to the dangers of coronavirus. “At the beginning of this horrible period, the president, along with his lackeys, and propagandists, they all minimized what was coming,” he said, sneering. “They said it was just like a cold or the flu.”

He angrily demanded that if Fox acolytes like Carlson believed so strongly that society should be reopened, they should go work in a meat processing plant. “Get in there if you think it’s that bad. Go chop up some pork.”

The tone of the many media reactions to Erickson, Carlson, Trump, Georgia governor Brian Kemp, and others who’ve suggested lockdowns and strict shelter-in-place laws are either unnecessary or do more harm than good, fits with what writer Thomas Frank describes as a new “Utopia of Scolding”:

Who needs to win elections when you can personally reestablish the social order every day on Twitter and Facebook? When you can scold, and scold, and scold. That’s their future, and it’s a satisfying one: a finger wagging in some vulgar proletarian’s face, forever.

In the Trump years the sector of society we used to describe as liberal America became a giant finger-wagging machine. The news media, academia, the Democratic Party, show-business celebrities and masses of blue-checked Twitter virtuosos became a kind of umbrella agreement society, united by loathing of Trump and fury toward anyone who dissented with their preoccupations.

Because this Conventional Wisdom viewed itself as being solely concerned with the Only Important Thing, i.e. removing Trump, there was no longer any legitimate excuse for disagreeing with its takes on Russia, Julian Assange, Jill Stein, Joe Rogan, the 25th amendment, Ukraine, the use of the word “treason,” the removal of Alex Jones, the movie Joker, or whatever else happened to be the #Resistance fixation of the day.

When the Covid-19 crisis struck, the scolding utopia was no longer abstraction. The dream was reality! Pure communism had arrived! Failure to take elite advice was no longer just a deplorable faux pas. Not heeding experts was now murder. It could not be tolerated. Media coverage quickly became a single, floridly-written tirade against “expertise-deniers.” For instance, the Atlantic headline on Kemp’s decision to end some shutdowns was, “Georgia’s Experiment in Human Sacrifice.”

At the outset of the crisis, America’s biggest internet platforms – Facebook, Twitter, Google, LinkedIn, and Reddit – took an unprecedented step to combat “fraud and misinformation” by promising extensive cooperation in elevating “authoritative” news over less reputable sources.

H.L. Mencken once said that in America, “the general average of intelligence, of knowledge, of competence, of integrity, of self-respect, of honor is so low that any man who knows his trade, does not fear ghosts, has read fifty good books, and practices the common decencies stands out as brilliantly as a wart on a bald head.”

We have a lot of dumb people in this country. But the difference between the stupidities cherished by the Idiocracy set ingesting fish cleaner, and the ones pushed in places like the Atlantic, is that the jackasses among the “expert” class compound their wrongness by being so sure of themselves that they force others to go along. In other words, to combat “ignorance,” the scolders create a new and more virulent species of it: exclusive ignorance, forced ignorance, ignorance with staying power.

The people who want to add a censorship regime to a health crisis are more dangerous and more stupid by leaps and bounds than a president who tells people to inject disinfectant. It’s astonishing that they don’t see this.

Journalists are professional test-crammers. Our job is to get an assignment on Monday morning and by Tuesday evening act like we’re authorities on intellectual piracy, the civil war in Yemen, Iowa caucus procedure, the coronavirus, whatever. We actually know jack: we speed-read, make a few phone calls, and in a snap people are inviting us on television to tell millions of people what to think about the complex issues of the world.

When we come to a subject cold, the job is about consulting as many people who really know their stuff as quickly as possible and sussing out – often based on nothing more than hunches or impressions of the personalities involved – which set of explanations is most believable. Sportswriters who covered the Deflategate football scandal had to do this in order to explain the Ideal Gas Law, I had to do it to cover the subprime mortgage scandal, and reporters this past January and February had to do it when assigned to assess the coming coronavirus threat.

It does not take that much work to go back and find that a significant portion of the medical and epidemiological establishment called this disaster wrong when they were polled by reporters back in the beginning of the year. Right-wingers are having a blast collecting the headlines, and they should, given the chest-pounding at places like MSNBC about others who “minimized the risk.” Here’s a brief sample:

Get a Grippe, America: The flu is a much bigger threat than coronavirus, for now: Washington Post

Coronavirus is scary, but the flu is deadlier, more widespread : USA Today

Want to Protect Yourself From Coronavirus? Do the Same Things You Do Every Winter : Time

Here’s my personal favorite, from Wired on January 29:

We should de-escalate the war on coronavirus

There are dozens of these stories and they nearly all contain the same elements, including an inevitable quote or series of quotes from experts telling us to calm the hell down. This is from the Time piece:

“Good hand-washing helps. Staying healthy and eating healthy will also help,” says Dr. Sharon Nachman, a pediatric infectious disease specialist at New York’s Stony Brook Children’s Hospital. “The things we take for granted actually do work. It doesn’t matter what the virus is. The routine things work.”

There’s a reason why journalists should always keep their distance from priesthoods in any field. It’s particularly in the nature of insular communities of subject matter experts to coalesce around orthodoxies that blind the very people in the loop who should be the most knowledgeable.

“Experts” get things wrong for reasons that are innocent (they’ve all been taught the same incorrect thing in school) and less so (they have a financial or professional interest in denying the truth).

On the less nefarious side, the entire community of pollsters in 2016 denounced as infamous the idea that Donald Trump could win the Republican nomination, let alone the general election. They believed that because they weren’t paying attention to voters (their ostensible jobs), but also because they’d never seen anything similar. In a more suspicious example, if you asked a hundred Wall Street analysts in September 2008 what caused the financial crisis, probably no more than a handful would have mentioned fraud or malfeasance.

Both of the above examples point out a central problem with trying to automate the fact-checking process the way the Internet platforms have of late, with their emphasis on “authoritative” opinions.

“Authorities” by their nature are untrustworthy. Sometimes they have an interest in denying truths, and sometimes they actually try to define truth as being whatever they say it is. “Elevating authoritative content” over independent or less well-known sources is an algorithmic take on the journalistic obsession with credentialing that has been slowly destroying our business for decades.

The WMD fiasco happened because journalists listened to people with military ranks and titles instead of demanding evidence and listening to their own instincts. The same thing happened with Russiagate, a story fueled by intelligence “experts” with grand titles who are now proven to have been wrong to a spectacular degree, if not actually criminally liable in pushing a fraud.

We’ve become incapable of talking calmly about possible solutions because we’ve lost the ability to decouple scientific or policy discussions, or simple issues of fact, from a political argument. Reporting on the Covid-19 crisis has become the latest in a line of moral manias with Donald Trump in the middle.

Instead of asking calmly if hydroxychloroquine works, or if the less restrictive Swedish crisis response has merit, or questioning why certain statistical assumptions about the seriousness of the crisis might have been off, we’re denouncing the questions themselves as infamous. Or we’re politicizing the framing of stories in a way that signals to readers what their take should be before they even digest the material. “Conservative Americans see coronavirus hope in Progressive Sweden,” reads a Politico headline, as if only conservatives should feel optimism in the possibility that a non-lockdown approach might have merit! Are we rooting for such an approach to not work?

From everything I’ve heard, talking to doctors and reading the background material, the Bakersfield doctors are probably not the best sources. But the functional impact of removing their videos (in addition to giving them press they wouldn’t otherwise have had) is to stamp out discussion of things that do actually need to be discussed, like when the damage to the economy and the effects of other crisis-related problems – domestic abuse, substance abuse, suicide, stroke, abuse of children, etc. – become as significant a threat to the public as the pandemic. We do actually have to talk about this. We can’t not talk about it out of fear of being censored, or because we’re confusing real harm with political harm.

Turning ourselves into China for any reason is the definition of a cure being worse than the disease. The scolders who are being seduced by such thinking have to wake up, before we end up adding another disaster on top of the terrible one we’re already facing.

At roughly 6 p.m. last Thursday, Nancy Pelosi held a meeting with Democratic caucus members and explained she was still considering whom to put on the Congressional Oversight Committee (COC), one of three enforcement bodies charged with watching hundreds of billions of bailout dollars go out the door toward Wall Street.

Pelosi addressedDemocrats who’d submitted names – the implication was many names had been submitted – that she needed to weigh “multiple considerations” in making the choice. Some assumed this meant she would be picking a woman of color for the job.

Late the next day, Pelosi announced her choice: Donna Shalala, Florida congresswoman and former Health and Human Services Secretary under Bill Clinton.

Phones buzzed. WTF? I heard a variety of confused exclamations over Shalala’s appointment this weekend, ranging from “baffling” to “curious” to “fucking absurd.” The popular choice among lobbyists and staffers was financial services and oversight committee member Katie Porter (D-CA), who had actually sought the job.

If it was not to be Porter, it was assumed the choice would be someone with with expertise in banking, derivatives, or financial investigation. “You have to really know your shit to have a chance at doing anything here,” is how it was put to me.

Pelosi’s appointment lauded Shalala as a “highly accomplished leader… who has for decades led the fight to defend the health and economic security of the American people.” Apparently there was some thought that health expertise was good in a pandemic relief oversight panel. But the Congressional Oversight Committee is not about health, but high finance, and Shalala appears to know nothing about that.

Worse, as David Dayen pointed out after the appointment, Shalala in her most recent financial disclosure listed shares in a series of companies in line for bailout funds:

She holds shares in Boeing, as well as Alaska Airlines and Spirit Aerosystems, which builds a lot of pieces of Boeing aircraft. She owns Chevron, ConocoPhillips, Royal Dutch Shell, and Occidental Petroleum at a time of a historic crash in oil price… She owns retailers and retail producers Ralph Lauren, L Brands, Burlington Stores, and Five Below… She owns big banks JPMorgan Chase, Wells Fargo, Bank of New York Mellon, BBVA Compass, and HSBC…

Shalala owns between $301,000 and $615,000 in UnitedHealth, suggesting she wasn’t much troubled by the suit accusing the firm of overbilling Medicare for billions – not a great look for someone now charged with watching for the same kind of behavior with significantly larger stakes.

Worse, Shalala has between $202,000 and $550,000 in a series of iShares exchange-traded funds. These are BlackRock funds, at the center of the Fed’s new bond-buying programs already discussed at length in this space.

Two years ago, Shalala’s net worth was somewhere between $4.6 million and $13.5 million. Her chief of staff is Jessica Killin, who spent a decade at USAA –  the military bank now in trouble for snarfing bailout checks from families in debt (not that this is her fault). Killin’s husband is Raj Date, who has a background at the Consumer Financial Protection Bureau, but also worked at Deutsche Bank Securities and was Senior VP for Corporate Strategy and development at Capital One.

Meanwhile, Republican choice Pat Toomey is not only a Pennsylvania Senator, but a longtime Wall Street banker and Club for Growth President who traded currency swaps in his youth. Arkansas congressman French Hill founded an Arkansas Bank and sits on the financial services committee. They both fit the profile of ace double-agent types who’ll advocate aggressively from the inside for laissez-faire oversight, i.e. traditional Republican optics.

The enormous $2 trillion Covid-19 rescue envisages three enforcement mechanisms. One is a Special Inspector General for Pandemic Recovery, within the Treasury and appointed by the president. Donald Trump has already named Brian Miller, a member of his legal team, to that position.

Democrats like Chris Van Hollen have publicly criticized that appointment, but others have noted Miller has done solid work as an Inspector General in the past (Miller led a high-profile probe of General Services Administration officials who among other things spent $136,000 on food over 4 days, plus $75,000 on a team-building exercise in Las Vegas that included building bicycles and blowing bubbles). How how hard he’ll push oversight here is still obviously in question given that he’s overseeing a program his client Donald Trump has invested a ton in politically.

The second prong of enforcement is a panel of Inspectors General called the PRAC, or Pandemic Response Accountability Committee. Trump has already fired the ostensible committee head, acting Pentagon IG Glenn Fine.

That leaves the Congressional Oversight Commission as the only non-Executive Branch body where the Democrats will have any kind of say in watching the roaring Nile of cash now rushing toward Wall Street.

The COC consists of two Dems, two Republicans, and one chair yet to be picked by the leadership of both parties. The first Democratic nominee, picked by Chuck Schumer of New York, was Bharat Ramamurti, a staffer to Elizabeth Warren who gets high marks from a lot of financial regulatory activists – terms like “good guy” and “smart” come up in interviews.

Still, Ramamurti is young and has little experience outside of his work advising Warren on economic issues, both in the Senate and in her presidential campaign. One source I spoke with ventured that maybe Pelosi’s thinking was that Ramamurti would [to paraphrase] guide Shalala through the difficult material.

Others suggested the Shalala pick was just a placeholder, and that the real heavy hitters would be saved for Pelosi’s own, separate oversight panel, headed by Jim Clyburn, which she announced two weeks ago. This second panel would theoretically investigate "waste, fraud and abuse" and "protect against price-gouging, profiteering and political favoritism."

However, that announcement was made two weeks ago, and there’s been no news since. Until that announcement is made, we’re left with two executive branch IG panels, plus the one congressional committee whose Democratic members are Ramamurti and Shalala.

There are theoretical protections in place that should at least provide the public some information about who is receiving the monster amounts of money via the CARES Act and the attendant Fed purchasing programs. The law requires the PRAC to make data about aid recipients publicly available on a website. which shall:

…provide detailed data on any Federal Government awards that expend covered funds, including a unique trackable identification number for each project, information about the process that was used to award the covered funds, and for any covered funds over $150,000…

We’ll see how this looks in practice, but just to be clear: the law says we’re supposed to eventually get granular detail about even relatively small expenditures.

The Fed, however, has an atrocious record of delivering information upon request, even to congress. In a few cases it has complied with information requests from bodies like the Permanent Subcommittee on Investigations, but recall that it took an act of congress before we got even a snapshot look at emergency lending after the last bailout. That’s why political heft and a willingness to be aggressive in putting pressure on bailout officials is going to be paramount. It will require a boat-rocker, underscoring again the oddness of the Shalala decision.

As one other Democratic-friendly lobbyist complained, this feeds into “the politics on this, which suck for us.”

Democrats in 2016 ceded a lot of populist anger over Wall Street by nominating a candidate, Hillary Clinton, who’d taken millions in speaking fees from Wall Street banks and deflected criticisms on major financial issues with absurd non-sequiturs like, “If we broke up the banks tomorrow, would that end racism?”

With the massive Trump tax breaks of two years ago and now a CARES Act rescue package that appears designed to repeat the 2008 pattern of saving the economy by hurling money indiscriminately at Wall Street, Democrats had an opening to turn the tables. The COC could have been a prime perch to lament the use of public treasure to rescue the financial markets at the expense of main street.

Thus putting a big-name Clinton apparatchik with millions invested in the very financial markets that stand to rise from bailout programs seems like a major unforced error, to put it mildly. Even if Democrats just wanted to ineffectually complain about the unequal distribution of bailout funds, they’ll have a harder time doing even that now, with a millionaire BlackRock customer leading the minority review team. It’s a weird, bad look. Again.

Take a look at some contrasting sets of headlines. First, from planet earth:

Weekly Jobless Claims Hit 5.425 Million, Raising Monthly Loss To 22 Million Due To Coronavirus (CNBC)

Worst Case Fears Of 20%-Plus U.S. Jobless Rate Are Now Realistic (Bloomberg)

Then from Wall Street:

Private Equity-Owned Companies Sell New Bonds in Credit Rally (Bloomberg Law)

Fed’s Historic Move Spurs Rally in Junk Bonds: 6 ETF Picks (Nasdaq.com)

As we head into the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue. 

In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions.

A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee. 

A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make half a rent payment. Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before! The cost of a coronavirus test might be free, but you test positive, you could up paying $50,000 or more in hospital costs even with insurance. And so on. 

Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.

Although the $2 trillion coronavirus rescue was approved unanimously, a set of tax breaks was stuck in by Republicans, in the original version of the CARES Act put forward by Mitch McConnell.

When Donald Trump signed his whopper Tax Cuts and Jobs Act two years ago, the bill contained clauses to offset the loss of revenue that would entail from shaving down the top individual tax rate relatively a little (from 39.6% to 37%) and slashing the corporate tax rate a lot (from 35% all the way down to 21%). 

One of those changes limited the amount of losses that could be used to offset taxable income in any given year. Another limited the amount of losses from so-called “pass-through” businesses (i.e. businesses that don’t pay corporate taxes) that wealthy individuals could use to offset taxable income. These provisions particularly impacted real estate developers (!), hedge fund managers, and other high net worth individuals with volatile revenue profiles. 

The second provision only affected people making at least $250,000, or couples earning at least $500,000.

The CARES Act sought to wipe out or alter both provisions. Republicans also tried to include tax relief for multinationals who offshore profits, but that provision was stripped out in favor of these first two loopholes, seemingly reflecting their importance to the caucus. 

As Steve Wamhoff of the Institute on Taxation and Economic Policy points out, the changes on the use of “pass-through” losses only benefit a select group. “It has to be stressed that this exclusively helps wealthy people,” Wamhoff says. “It only has an impact on people already making over $250,000.”

Because the CARES Act was rushed to the floor, members didn’t have all of the information they might have wanted before the vote. After the bill passed, Democratic staffers sent these tax provisions in the CARES Act, sections 2303 and 2304, to the Joint Committee on Taxation, to be scored. They were stunned to learn they would cost $195 billion over ten years.

In other words, what seemed like a run-of-the-mill offhand legislative pork provision ended up dwarfing the airline bailout and other main parts of the bill.

 “The cost of caring for this small slice of the wealthiest one percent is greater than the CARES Act funded for all hospitals in America,” says Texas Democrat Lloyd Doggett. “It’s greater than CARES provided for all state and local governments.”

The JCT analysis found that 80% of the benefit of the bill went to just 43,000 taxpayers each earning over $1 million a year. The average tax break for those 43,000 individuals was $1.6 million, an interesting number when one considers the loudness of the controversy over $1,200 relief checks for everyone else.

Doggett joined Rhode Island Senator Sheldon Whitehouse in sending a letter to the Trump administration, demanding to know the provenance of these tax breaks. “This irresponsible provision must be repealed,” he says. It’s possible we’ll find out someday whose idea it was to insert those breaks. By then, however, other windfalls from the Covid-19 rescue might have rendered the $195 billion bailout appetizer quaint.

With the Fed’s announcement on April 9th of a $2.3 trillion program that includes purchases of junk bonds, the toolkit for support of the financial economy now encompasses nearly every conceivable official response apart from subsidy of stock markets. The sheer quantity of money raining down on the finance sector appears transformational, a “joyful noise” heard around the world. 

“POW!#* @  BAM&$# SMASH! @#$% KABOOM*#!@?% That’s the sound of the Fed’s big bazooka,” reads Forbes in a typical financial news report. 

The Fed deployed many of the bailout tools it used in response to the 2008 crisis at the end of March. These were radical enough, but still confined to the finance version of safe sex: buying investment grade debt, U.S. treasuries, government-backed mortgages, etc. 

On April 9th, the Fed took a walk on the wild side, announcing a spate of new facilities that dramatically expand its footprint in the economy.

Some programs are less controversial, like a Municipal Liquidity Facility providing aid to states and localities.

Others however steer money to “fallen angel”companies with declining credit ratings, longshot problem horses at the global racetrack. As a Wall Street Journal editorial put it in awed tones, “the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies.”

The WSJ went on to dissect the logic of the bailout (emphasis mine):

The Fed may feel all of this is essential to protect the financial system’s plumbing and reduce systemic risk until the virus crisis passes, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices, as the Fed did after the financial panic, and hope that the wealth effect filters down to the rest of the economy.

The coronavirus rescue is a “trickle-down” plan. Many of the Fed programs don’t appear even secondarily concerned with maintaining employment. The basic idea instead has been to hurl money at “assets,” underscoring the bizarre dualistic nature of this rescue.

If the ordinary person during the crisis dreams of being relieved from market stresses like housing and medical costs, only to receive (at best) one $1200 check, it’s Wall Street actors who are seeing the tyranny of markets fundamentally overthrown, replaced by a giant financial happy face called the Federal Reserve that appears to want to simulate real buying and selling, only with the downside removed. Party on, Wayne!

As Marcus Stanley of Americans for Financial Reform puts it, “the Fed’s perspective on this is, they want to create normalcy” in financial markets. What “normalcy” means, however, at a moment when many businesses are closed or careening toward bankruptcy, is not clear. This heads-I-win, tails-the-Fed-loses economy is resulting in win after win across the financial sector, some more malodorous than others.

In late March, for instance, Citigroup bought nearly $2 billion of AAA-rated securitized commercial loans from PGIM, the investment management business of Prudential, at roughly 90 cents on the dollar. According to Bloomberg, Citi then turned right around and sold those bonds “closer to par,” i.e. nearer to 100 cents on the dollar, a nearly instant $100 million windfall. It appears the CLOs were pledged to the Fed’s Primary Dealer Credit Facility. The reader should be able to do the math on who knew what, and when, in that story.

It’s hard to know what is ordinary front-running of this type and what is sincere worship at the altar of the Fed’s new “limitless” purchasing power. Investors are now chasing Fed decisions with seemingly real zeal, causing private money to flow directly into the very risk-laden sectors of the economy they probably would be fleeing absent government intervention.

In one of many hallucinatory headlines from this week, the head of the global allocation team for BlackRock – the company that’s administering Fed buying programs – said his company would henceforth be betting on the Fed’s bets.

“We will follow the Fed and other DM central banks by purchasing what they’re purchasing, and assets that rhyme with those,” said BlackRock’s Rick Rieder.

Other companies are employing the same strategy. “The stimulus seems to be endless,” said Dirk Thiels of KBC Asset Management in Brussels. “Buy what the central bank has been buying and in the short-term it’ll be a good strategy.”

It’s one thing for the Fed to step in and help important companies that have been unduly damaged by coronavirus, firms like Ford, whose debt was downgraded to junk in late March (but which is eligible for support under the Fed programs announced on April 9th).

It’s another thing for the Fed to create fresh bull markets around its own investments in the debt of basket-case companies, especially since it’s not clear how, say, the continuous propping up of junk bond Exchange-Traded Funds (ETFs) addresses issues like unemployment, or anything else for that matter.

“These financial bailouts are unconnected to any real-world crisis strategy,” is how one market analyst puts it. 

Brian Chappatta of Bloomberg added a similar criticism this week, asking, “How exactly do high-yield ETF purchases help Americans get jobs or pay rent?” 

The Bank of England last summer identified the state of such “open-ended funds” as a potential systemic problem:

More than US$30 trillion of global assets are now held in open‑ended funds that offer short‑term redemptions while investing in longer‑dated and potentially illiquid assets, such as corporate bonds…

The Bank added, “the mismatch between the liquidity of a fund’s assets and its redemption terms can create incentives for investors to withdraw funds ahead of other investors.”

It went on to say that under a “severe but plausible set of assumptions,” there could be a rush of redemption requests that could “overwhelm the capacity of dealers to absorb those sales,” causing “market dysfunction.”

This is a fancy way of saying that investment banks and asset managers have been making big bucks trading collections of longer-term, potentially hard-to-sell corporate bonds as highly liquid and relatively safe products. In a crisis, the Bank of England warned, these would suddenly be hard to sell, at which point the possible underlying dogshit-ness of these debt instruments might be exposed, causing further market panic. 

When the Covid-19 crisis hit, exactly this “severe” scenario seemed to take place. Several of the world’s biggest corporate bond funds plummeted in value, and buyers were suddenly scarce. A $30 billion bond fund managed by (again) BlackRock, the iShares iBoxx $ Investment Grade Corporate Bond ETF or “LQD,” went into freefall, only to rebound spectacularly once the Fed announced its first bond-buying program (managed by Black Rock, of course) in late March. 

“A $33 billion ETF sees most cash in 18 years on Fed-fueled rally,” read the cheery Bloomberg headline on March 25th. LQD at this writing is up 23.7% since the Fed announced its bond-buying program. Another troubled BlackRock fund, the $15.8 billion HYG – the world’s largest junk bond fund – now looks like an ascendant product as well.

All of these issues come on top of others inherent with the Fed programs. As Stanley’s Americans for Financial Reform has pointed out:

… the announced terms for these facilities would seem to permit public financing of leveraged buyouts, public financing of share buybacks to enrich already wealthy executives, public support for corporations that are simultaneously engaged in laying off their workers, and a range of other highly problematic outcomes…

Again, there are some restrictions in parts of the CARES Act, and in some of the Fed programs, that take aim at layoffs, buybacks, executive bonuses, and other issue. But the bond purchasing programs in particular have few restrictions on executive compensation, on buybacks, on layoffs or offshoring of labor, on payments to private equity owners, etc. There isn’t much point in restricting the spending of bailout money on handouts with one hand, if you can do it freely with the other hand, yet this is how the coronavirus rescue is structured.

This is in addition to the near-total lack of oversight. To date, the only person assigned to the Congressional Oversight Commission with purview over these programs is former adviser to Elizabeth Warren, Bharat Ramamurti. Ramamurti has no staff, no office, nothing except — this is not a joke — a Twitter account. I asked him if more resources had come his way since early Swiftian news stories identified him as a quixotic “lone” regulator attempting to watch and oversee trillions in spending by himself 

“Nope,” he said. 

Ramamurti has however sent Fed chair Jerome Powell a letter, “to respectfully request that the Federal Reserve publicly release detailed and timely information about each individual transaction” made under the new lending programs.

Remember, much of the Fed’s rescue lending is backed by Treasury dollars, which means the taxpayer is eating what otherwise would have been the market risk of many of its investments. 

However, the Fed has shown no inclination to release any information about its activities. Thus this is a brave new world not just in terms of economics, but also oversight. Essentially, the spending of huge amounts of taxpayer money has been outsourced to the Fed, whose ideas about disclosure suck even worse than those of congress.

It’s early, but the Main Street and Wall Street rescues are looking increasingly disconnected from one another. One looks like it doesn’t work, while the other might work way too well. If only we could see enough to know for sure. 

Longtime friend Yves Smith of Naked Capitalism published an interview today with Richard Vague, Pennsylvania's acting Secretary of Banking and Securities, that takes issue with my last two Substack pieces on the recent bailouts.

Both Vague and Yves seem to think I've been "acrophobic" about modern Monetary Theory and perhaps unconsciously mired in questionable orthodoxies about debt and government spending. In response to my contention that "we're about to find out that the American economy has been living off dying, dysfunctional, or hyper-leveraged markets for more than a decade," Vague notes:

So Taibbi writes that we’ve been living off highly leveraged markets for more than a decade, and, yes, he’s correct, but we’ve been living off highly leveraged markets for a hundred years or more.

What I’m here to tell people is that the government debt component of this is not the problem. The problem has been and continues to be the private sector debt component of this that is. In a crisis like this, we have the capacity to fund higher levels of government spending and support much higher levels of government debt.

To a comment I made on The Hill: Rising about how the bailout "looks like forever," Vague notes:

This comment belies the fact that we did largely unwind from the last bailout. The Fed unwound much of the market support mechanisms it had put in place, and the total notional value of Federal Reserve swap lines has declined from $583 billion at their peak in the crisis to $349 billion most recently.

The interview was interesting and the kind of critique people like myself who are not experts should take to heart. I did however want to push back on a few things, because I think Vague and I are talking about apples and oranges, at least in some areas. So I wrote Yves a letter, part of which I’m excerpting here because I think there are some issues worth going over here.

Professor Vague seems interested in drawing distinctions between public and private debt, and in making clear that the Great Recession was caused by high levels of private sector debt, not public debt. This seems to be the thrust of the interview, i.e. that I’m erring in warning about high levels of public debt and Fed intervention, implying that these solutions are intrinsically bad when they are not.

I don't see it that way. To me the story of the last several decades of bubble economics is very much about cycles of irresponsible/rapacious private sector behavior followed by public bailouts of increasing size and scope. I see this as one ongoing phenomenon, not two different narratives.

The understanding that the government will be there to clean up the messes of Wall Street has effects on the economy that are both tangible (i.e. the implicit subsidy large banks enjoy vis a vis smaller ones, which one study calculated at $83 billion in annual value in 2013) and intangible (psychological inducements to take on more risk, and trading strategies based on those assumptions, e.g. the “Greenspan Put”). The bailouts of 2008-2009 sent a clear message that much of what we understand as “private sector” activity is actually a quasi-protected, quasi-backstopped pseudo-market, in which explicit and implicit guarantees alike are systematically monetized and turned into profits for a handful of companies and executives.

Just to take one example, how do we classify the Money Market Funds market? The Treasury stepped in to guarantee the $3.4 trillion market in 2008 and it was backstopped again this year. Money Market Funds are supposed to be a cash-like product, similar to bank deposits, except bank deposits come with a series of regulations and capital requirements in exchange for an explicit guarantee. But if in practice Money Market Funds are going to be rescued every time, then we’re just using the government to backstop a more systemically dangerous version of government-insured bank deposits.

Vague is right that the last disaster was caused by private sector craziness that people like Yves and I have talked about many times, in particular the financialized casino built around mortgage products like synthetic CDOs that helped create mountains of deadly leverage that collapsed in 2007-2008.

A lot of right-wing critics, desperate to draw a connection between “social engineering” and the 2008 crash, have tried to place the blame for that crash on Fannie and Freddie and on “affordable housing policy.” I’ve always thought this is inaccurate – as the Financial Crisis Inquiry Commission and many others pointed out, the GSEs were really followers rather than leaders in the MBS boom, and actually made much better and safer decisions about subprime than their private-sector counterparts.

However, when the government and the Fed stepped in to bail out the worst actors of 2008, all of that irresponsible mortgage gambling did end up becoming an essentially government-sponsored activity (though not for the reasons right-wing critics suggested). The companies and individuals who were most irresponsible in the subprime era tended to be rewarded, and many even had their market share and power increased via state interventions after the crash.

I think particularly of Bank of America being bailed out and helped in efforts to acquire Merrill Lynch after making the terrible decision to take on Countrywide, of the AIG counterparties bailed out via the AIG bailout, and of the multiple Fed-aided mergers and extensions of regulatory relief that left companies like JP Morgan Chase, Goldman, and Morgan Stanley even bigger and more systemically dangerous than they were before the crash.

My point in all of this is that when Professor Vague says “we did largely unwind” many of the "market support mechanisms" after the last bailout, I think he’s being overly literal. The last bailout took Too Big to Fail companies and made them Too-Big-To-Failier. The continued conquest of market share by those firms, particularly in relation to smaller regional competitors who don't enjoy implicit support, is to me an uncounted ongoing bailout benefit.

So is the absence of regulatory intervention for bailed-out firms who escape prosecution for misdeeds like Forex or LIBOR manipulation because of fears about “collateral consequences” to these "systemically important" organizations (this was spelled out explicitly by officials like Eric Holder over the years).

But more than anything, the promise of future rescues is in itself an enormous ongoing subsidy, one that played at least some part in a variety of questionable behaviors in the last decades, from seeking out riskier investments to increasing shareholder distributions to shifting strategies toward shorter-term profit schemes.

When I look with suspicion at developments like the Fed expanding its footprint in the economy in response to the crisis, I’m not denying that “the Federal government needs to engage in massive spending to prevent a huge deflationary shock” as Yves puts it, or relying on “questionable orthodoxy” about debt and spending to criticize Modern Monetary Theory.

Maybe MMT is the only way out, maybe not, but what I see is that either way, the latest Covid-inspired plan for "QE infinity" isn't going to produce MMT the way its adherents imagine it. Absent big structural changes, we’re going to have a prolonged intervention in a financialized economy that remains designed to disproportionally push resources to a few actors, while socializing losses.

It’s possible a massive Fed intervention is necessary, but I’m pretty sure putting Black Rock in charge of rescuing its own junk bond ETF or retroactively financing half a decade of airline industry buybacks raise questions unrelated to whether or not MMT is the proper solution to our current economic problems.

Vague is talking about monetary theory. I'm talking about what happens when we pump $5 trillion (for starters) into the economy through people who make Somali sea pirates look like the Better Business Bureau. If I'm phobic, it's more about stealing than government debt! At least for now, I think these are two different issues for reporters like me to worry about.