I am about to go out of town for nearly two weeks (including to a conference in my honor in Urbino, Italy), and so will probably disappear from here mostly for awhile. So, will do three posts in a row.
This one is a confession of ignorance and inability to speak by a usual loudmouth. I am one of those like Dean Baker and Robert Shiller who has been calling loudly for a long time that we were in a housing bubble and that this would lead to bad trouble. More recently here I pointed out that we were probably in a period of financial distress, with a much worse panic and crash likely to be coming. As of last Wednesday, when US Treasuries briefly were in negative interest rate territory, we were as close to 1931 as we have been since, well, 1931. Unfortunately, we may yet get a lot closer.
Everybody else seems to have well-formed opinions about the Paulson bailout and what we should or should not do. I do not. The plan has all kinds of problems, money for the undeserving rich, too much power for Paulson and later TreasSecs, not enough protection for homeowners, unclear defense of the global financial markets, not enough protection of US taxpayers, and on and on, see lots of commentators everywhere. Unfortunately, if nothing is done, well, could be into a situation making last Wednesday look like child's play. What is even worse is that even doing it (after all, we have had scads of "saves" during the past year) may not work and could still lead to something worse than 1931. After all, after this bailout, I think that Bernanke and Paulson and Geithner and company will have pretty much used up all their arrows or magic rabbits in hats, or whatever. If it (or whatever variation on it might come out of Congress) does not work, we may really be up that famous creek without a you know what. And, I do not know what to do.
Monday, September 22, 2008
George Bush Sr - "Been there, done that."
1990 - "An economic crisis of colossal proportions". The US Government would become one of the main owners of real estate, buildings, and the worthless junk bonds.
"...the gathering collapse of the real estate market after the stock market crash of October, 1987. The sequence of a stock market panic followed by a real estate and banking crisis closely followed the sequence of the Great Depression of the 1930's....[the] federal government would simply take control of the savings banks, the overwhelming majority of which were bankrupt or imminently bankrupt. ...[Bush Sr] proposed to issue an additional $50 billion in new bonds through a financing corporation, a subsidiary of the new Resolution Trust Corporation...." [1]
After all, it isn't as if these strategies actually resulted in a resolution.
1994 US interest rates rose rapidly and that triggering massive losses in highly
leveraged derivative positions held by 'investors'. That same year the Mexican market collapsed, triggering a significant emerging market liquidity crisis. Then in 1997 the collapse of Asian equity and currency markets followed by corporate collapses and falls in asset prices. A major bad debt crisis is then created within financial institutions.
Then onto the 1998 Russian default on its debt leading to an emerging market
collapse. This also linked to the collapse of LTCM which is bailed out by a group of banks under US Federal Reserve auspices. Market and trading liquidity deteriorates, credit spreads also increase rapidly. The next year central banks announce a reduction in planned gold sales and gold lending programs. Losses for gold hedgers are experienced. Those that have large forward sales programs.
Forward, to the 21st Century with the bankruptcy of Enron and Worldcom and the Argentina default. General Motors and Ford are downgraded to “junk” status in 2005 -->hedge fund crisis. An emerging market correction in 2006; following on its heels, the subprime mortgage crisis of 2007.
Governments that thieve from the public purse to pay banks and hedge funds can always depend on the support of banks and hedge funds. (They're the ones that have financed the two presidential candidates in the upcoming US election, after all).
[1] George Bush: The Unauthorized Biography
by Webster G. Tarpley & Anton Chaitkin
Chapter -XXIII- The End of History
http://killtown.911review.org/bushbio/chapter23.html
"...the gathering collapse of the real estate market after the stock market crash of October, 1987. The sequence of a stock market panic followed by a real estate and banking crisis closely followed the sequence of the Great Depression of the 1930's....[the] federal government would simply take control of the savings banks, the overwhelming majority of which were bankrupt or imminently bankrupt. ...[Bush Sr] proposed to issue an additional $50 billion in new bonds through a financing corporation, a subsidiary of the new Resolution Trust Corporation...." [1]
After all, it isn't as if these strategies actually resulted in a resolution.
1994 US interest rates rose rapidly and that triggering massive losses in highly
leveraged derivative positions held by 'investors'. That same year the Mexican market collapsed, triggering a significant emerging market liquidity crisis. Then in 1997 the collapse of Asian equity and currency markets followed by corporate collapses and falls in asset prices. A major bad debt crisis is then created within financial institutions.
Then onto the 1998 Russian default on its debt leading to an emerging market
collapse. This also linked to the collapse of LTCM which is bailed out by a group of banks under US Federal Reserve auspices. Market and trading liquidity deteriorates, credit spreads also increase rapidly. The next year central banks announce a reduction in planned gold sales and gold lending programs. Losses for gold hedgers are experienced. Those that have large forward sales programs.
Forward, to the 21st Century with the bankruptcy of Enron and Worldcom and the Argentina default. General Motors and Ford are downgraded to “junk” status in 2005 -->hedge fund crisis. An emerging market correction in 2006; following on its heels, the subprime mortgage crisis of 2007.
Governments that thieve from the public purse to pay banks and hedge funds can always depend on the support of banks and hedge funds. (They're the ones that have financed the two presidential candidates in the upcoming US election, after all).
[1] George Bush: The Unauthorized Biography
by Webster G. Tarpley & Anton Chaitkin
Chapter -XXIII- The End of History
http://killtown.911review.org/bushbio/chapter23.html
Sunday, September 21, 2008
An Alternative Bailout Plan
How about instead of giving a couple trillion dollars to the financial institutions, instituting a financial holiday -- something like FDR created -- and use the trillions of dollars to create infrastructure and affordable housing?
We could also raise some more money by ending the wars and cutting back military spending.
Some of the money would be left over to create national health care, alternative energy, and tuition support.
If we needed more money beyond that, we could raise taxes. With all the spying on ordinary people, the NSA must certainly know where the fat cats are hiding their money in tax shelters.
Sure, there would be problems. People would need access to their money to get groceries and the like before the jobs were online. But the plan suggested here seems no more outrageous than rewarding the felons for their crimes.
Something patched together by the Treasury this quickly is sure to do more damage than any outrageous suggestions made above.
We could also raise some more money by ending the wars and cutting back military spending.
Some of the money would be left over to create national health care, alternative energy, and tuition support.
If we needed more money beyond that, we could raise taxes. With all the spying on ordinary people, the NSA must certainly know where the fat cats are hiding their money in tax shelters.
Sure, there would be problems. People would need access to their money to get groceries and the like before the jobs were online. But the plan suggested here seems no more outrageous than rewarding the felons for their crimes.
Something patched together by the Treasury this quickly is sure to do more damage than any outrageous suggestions made above.
You Were Expecting Maybe a Panacea?
by the Sandwichman
Peter S. Goodman offers a revealing summary in this morning's New York Times of the magical thinking behind the Bernanke/Paulson BIG BAILOUT. A $700 Billion Rescue Plan for Wall St., but Will It Work? After the jump Sandwichman elaborates on what is magical about this thinking, if it isn't obvious from the quote.
First, the "central cause of American economic distress" is not the plunge in housing prices. That is merely a symptom and, moreover, only the latest phase in a symptomatic process. The real cause of distress, to state it simply, is the growing disparity between wages and living costs. Rising house prices temporarily enabled consumers to borry money to patch over the gap between the cost of living and wages. And easy credit kept house prices going up. The jig is up on that game.
Second, trust is a two-way street. Just because the banks resume lending doesn't mean consumers will resume borrowing and spending. If we think of the current crisis in the credit-markets as a lender's strike what is likely to come next is a borrower's reluctance. The inflationary buy-now mentality has been stomped out by the market panic. In its place will be an anxious wait-and-see caution by consumers. Sadder but wiser. Presumably that caution will be reinforced by a tighter regulatory regime that discourages concealed-risk lending.
Fixing the credit crisis will not do anything about the gap betweeen wages and the cost of living. If anything, the cost of living will continue to rise in the U.S. because of a shrinking dollar. The trillion-dollar bailout is at root a trillion-dollar devalution. Real wages will continue to fall because the threat of unemployment will impede wage demands.
Ending "the current downward spiral" of house prices doesn't ensure a rebound. There may indeed be a dead-cat bounce after which the economic decline will resume at a more stately pace. What is just around the corner is not a restoration of the pre-collapse boom but a lingering malaise.
The Way Forward: No Free Lunch, No Quick Fix
The Bernanke/Paulson BIG BAILOUT is a shot across the bow of a sinking ship. It is presented by the same folks who brought us the debacle. If it succeeds in stabilizing markets for the time being -- which is by no means certain -- that in itself will be somewhat of a relief. But it won't be a solution. There is no easy solution. The damage done to the financial system was done by the financial system. Recovery requires not restoring that financial system but replacing it.
Did I say something about wages and the cost of living? How can the two be reconciled? It can't be done by legislating price controls or wage increases. That could only change nominal prices or nominal wages. What counts are real prices and real wages. The regulatory tool for bringing about REAL wage increases is, paradoxically enough, reducing the standard hours of work. In the 1870s, Mary Steward wrote this little ditty, "Whether you work by the piece or work by the day, decreasing the hours increases the pay."
It sounds almost magical. Too good to be true. Shorter hours and higher pay. Happy days are here again! But... does it sound any more magical than the Bernanke/Paulson rescue refrain: easier credit and higher house prices?
People hate paradox. It is important to point out that the paradox of shorter hours and higher wages is only apparent. The seeming paradox is an artifact of a frame of thought that sees no contradiction in the notion that debt is the source and foundation of prosperity. A lot of things are also hard to explain if you insist on the unshakeable principle that the sun revolves around the earth.
A sub-head in today's NYT proclaimed, "A Professor and a Trader Bury Old Dogma." Not so fast. Replacing the free market dogma with the government intervention dogma leaves intact the conviction that prosperity is founded on debt, "since," as the Globe and Mail put it yesterday, "US growth has always been fuelled by easy access to debt." Meet the new dogma. Same as the old dogma. Get on your knees and pray we don't get fooled again.
Or, forget about that new dogma and consider this old doggeral instead: "Whether you work by the piece or work by the day, decreasing the hours increases the pay." Put your mind in a different frame. Digest the profoundly radical reasoning underlying that superficial rhyme.
Fragments of a New Synthesis
The Sandwichman apologizes profusely for not completing his new synthesis in time for the financial collapse and bailout. Actually, the Sandwichman wonders if he is up to the task, which entails distilling a weird mixture of scholarship and ballyhoo into a simple but authoritative, sensible, step-by-step treatise. But here are the elements of that treatise: an anoymous 1821 pamphlet, "The Source and Remedy of the National Difficulties: Deduced from Principles of Political Economy, in a Letter to Lord John Russell," "The Economic and Social Importance of the Eight-Hour Movement," by George Gunton and "Hours of Labour," by Sydney J. Chapman.
For those readers interested in connecting the dots themselves or impatient waiting for the Sandwichman to figure out how to do it, here are some links to elements of the work in process dealing with Chapman, Gunton and the Source and Remedy. I will post links to the original documents as soon as I can get around to formatting and uploading them.
The biggest lacuna so far is with regard to George Gunton and his treatment of Ira Steward's eight-hour theory. In part this is due to leaps in Gunton's own analysis and the need to address the resulting gaps by reference to, for example, Chapman's theory, which itself is incomplete... but in different ways.
Peter S. Goodman offers a revealing summary in this morning's New York Times of the magical thinking behind the Bernanke/Paulson BIG BAILOUT. A $700 Billion Rescue Plan for Wall St., but Will It Work? After the jump Sandwichman elaborates on what is magical about this thinking, if it isn't obvious from the quote.
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
First, the "central cause of American economic distress" is not the plunge in housing prices. That is merely a symptom and, moreover, only the latest phase in a symptomatic process. The real cause of distress, to state it simply, is the growing disparity between wages and living costs. Rising house prices temporarily enabled consumers to borry money to patch over the gap between the cost of living and wages. And easy credit kept house prices going up. The jig is up on that game.
Second, trust is a two-way street. Just because the banks resume lending doesn't mean consumers will resume borrowing and spending. If we think of the current crisis in the credit-markets as a lender's strike what is likely to come next is a borrower's reluctance. The inflationary buy-now mentality has been stomped out by the market panic. In its place will be an anxious wait-and-see caution by consumers. Sadder but wiser. Presumably that caution will be reinforced by a tighter regulatory regime that discourages concealed-risk lending.
Fixing the credit crisis will not do anything about the gap betweeen wages and the cost of living. If anything, the cost of living will continue to rise in the U.S. because of a shrinking dollar. The trillion-dollar bailout is at root a trillion-dollar devalution. Real wages will continue to fall because the threat of unemployment will impede wage demands.
Ending "the current downward spiral" of house prices doesn't ensure a rebound. There may indeed be a dead-cat bounce after which the economic decline will resume at a more stately pace. What is just around the corner is not a restoration of the pre-collapse boom but a lingering malaise.
The Way Forward: No Free Lunch, No Quick Fix
The Bernanke/Paulson BIG BAILOUT is a shot across the bow of a sinking ship. It is presented by the same folks who brought us the debacle. If it succeeds in stabilizing markets for the time being -- which is by no means certain -- that in itself will be somewhat of a relief. But it won't be a solution. There is no easy solution. The damage done to the financial system was done by the financial system. Recovery requires not restoring that financial system but replacing it.
Did I say something about wages and the cost of living? How can the two be reconciled? It can't be done by legislating price controls or wage increases. That could only change nominal prices or nominal wages. What counts are real prices and real wages. The regulatory tool for bringing about REAL wage increases is, paradoxically enough, reducing the standard hours of work. In the 1870s, Mary Steward wrote this little ditty, "Whether you work by the piece or work by the day, decreasing the hours increases the pay."
It sounds almost magical. Too good to be true. Shorter hours and higher pay. Happy days are here again! But... does it sound any more magical than the Bernanke/Paulson rescue refrain: easier credit and higher house prices?
People hate paradox. It is important to point out that the paradox of shorter hours and higher wages is only apparent. The seeming paradox is an artifact of a frame of thought that sees no contradiction in the notion that debt is the source and foundation of prosperity. A lot of things are also hard to explain if you insist on the unshakeable principle that the sun revolves around the earth.
A sub-head in today's NYT proclaimed, "A Professor and a Trader Bury Old Dogma." Not so fast. Replacing the free market dogma with the government intervention dogma leaves intact the conviction that prosperity is founded on debt, "since," as the Globe and Mail put it yesterday, "US growth has always been fuelled by easy access to debt." Meet the new dogma. Same as the old dogma. Get on your knees and pray we don't get fooled again.
Or, forget about that new dogma and consider this old doggeral instead: "Whether you work by the piece or work by the day, decreasing the hours increases the pay." Put your mind in a different frame. Digest the profoundly radical reasoning underlying that superficial rhyme.
Fragments of a New Synthesis
The Sandwichman apologizes profusely for not completing his new synthesis in time for the financial collapse and bailout. Actually, the Sandwichman wonders if he is up to the task, which entails distilling a weird mixture of scholarship and ballyhoo into a simple but authoritative, sensible, step-by-step treatise. But here are the elements of that treatise: an anoymous 1821 pamphlet, "The Source and Remedy of the National Difficulties: Deduced from Principles of Political Economy, in a Letter to Lord John Russell," "The Economic and Social Importance of the Eight-Hour Movement," by George Gunton and "Hours of Labour," by Sydney J. Chapman.
For those readers interested in connecting the dots themselves or impatient waiting for the Sandwichman to figure out how to do it, here are some links to elements of the work in process dealing with Chapman, Gunton and the Source and Remedy. I will post links to the original documents as soon as I can get around to formatting and uploading them.
The biggest lacuna so far is with regard to George Gunton and his treatment of Ira Steward's eight-hour theory. In part this is due to leaps in Gunton's own analysis and the need to address the resulting gaps by reference to, for example, Chapman's theory, which itself is incomplete... but in different ways.
The global crisis in dot-point. Part One
** The finance and banking industry is dependent on CHEAP oil. We’re now at peak oil.
"The flow rates from the existing projects are the key. Capacity coming on stream falls fast beyond 2011. On top of that, if the big old fields begin collapsing, the descent in supply will hit the world very hard."[1]
``We can call it an `oil crisis' given the current price, and that it continues to climb even after global efforts to cut consumption.'' ``We see a critical, structural issue in the global oil market, where supply growth isn't catching up with demand.''[2]
** Today’s collapsing financial markets originate with the following: (i) the emergence of the large, modern global corporation; (ii) the concentration of economic and political power encompassed within these TNCs along with their extraordinary (iii) labour-free productive capacities. These developments were intimately linked with the (iv) energy crisis of the 1970s and (v) the continuing and steadily-worsening inequalities in global incomes.
This also marks the recycling of petroleum dollars through the Euromarket and heavy lending to the largest Latin American countries, leading to the debt crisis of the early 1980s. The post-war ‘golden period’ came to a close in the mid 1970s when global productive capacity outran global demand. Inflation also affected the Northen economies, and there was a crisis of import substitution industrialisation in the South.
"corporations that neither have bodies to kick nor souls to damn" Andrew Jackson
** The global financial system is high volume and high velocity. The many coordinated components, are linked rather than regulated. If new measures are made in the context of no other changes, the outcome is likely to be explosive. [Naked Capitalism's interesting post this week.]
** The export of inflation to the rest of the world.
When the US dollar plunged in value due to the US Fed’s easy-money policy the central banks in emerging economies could not tighten monetary policy because it would have led to an appreciation of their currencies as compared to the US dollar. The US Fed thus, defacto, exported rising inflation to these nations. Also consider the Bank of Japan’s low interest rate policy and the rise in the real global cost of oil. This rise occurs when the US dollar deflates due to this currency's monopoly in global oil trades [3]. The globalisation of trade flows is another new transmission mechanism of worldwide inflation. World exports should reach a record of 32.5% of global gross domestic product in 2008, according to the IMF.
** Divergence between the expansive financial global economic crisis, exported economy and the stagnant real economy. This is not accidental.
For example, the Bush Administration "embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from [predatory subprime lending]." [4]
Uncontrolled financial gyrations are an expression of this imbalance.
This ‘disconnect’ stems from stagnationist trends in the real economy such as overcapacity, overproduction. The search for profits is the driving force of capitalism. It evolved in such as way so that profits could only be obtained from financial speculation rather than investment in industry.
** Technology makes it far easier to police an American citizen than an international bank.
** A disconnect between the assessors of risk from those that actually bear the risk
CONTINUED --->
** Fabricated demand for subprime mortgages
“..The subprime mortgage crisis was not a case of supply outrunning real demand. The "demand" was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade…” [5]
** Securitisation
The securitization of standard mortgages was a technique by which Savings and Loans and Mortgage companies originated mortgages which were then packaged as securities for the portfolios of holders such as pension funds, life insurance companies, mutual trusts and various international holders. Because of the way the mortgages were packaged it was possible to sell off a package of mortgages at a premium so that the originator and the investment banking firms walked away from the deal with a net income and no recourse from the holders. The instrument originators and the security underwriters did not hazard any of their wealth on the longer term viability of the underlying projects. Obviously in such packaged financing the selection and supervisory functions of lenders and underwriters are not as well done as they might be when the fortunes of the originators are at hazard over the longer term. All that was required for the originators to earn their stipend was skill avoiding obvious fraud and in structuring the package. Hyman Minsky,1992
** The lifting of controls over capital
The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began being lifted at the onset of the neoliberal [financialisation] era in the early 1980's. [5] Speculative capital then became globalised to take advantage of differentials in foreign exchange and interest rates in disparate capital markets.
[1] Jeremy Leggett, 2008. Author of Half Gone.
[2] Nobuo Tanaka, Executive Director of the International Energy Agency
World Faces `Oil Crisis;' IEA Ready to Tap Reserves. 11th June 2008
http://www.bloomberg.com/apps/news?pid=20601072&refer=energy&sid=a0SE24WXEk5U
[3] Historical Analysis of Real Global Price of Oil: Implications for Future Prices
William D. DeMis, Marathon Oil Company (retired). Houston, TX
www.searchanddiscovery.net/documents/2007/08097demis/images/demis.pdf
[4] Predatory Lenders' Partner in Crime - How the Bush Administration Stopped the States From Stepping In to Help Consumers. By Eliot Spitzer (Governor of New York)
Thursday, February 14, 2008; Page A25
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html
[5] Capitalism in an apocalyptic mood. Walden Bello. Focus on the Global South, 20 February 2008
http://www.tni.org/detail_page.phtml?&act_id=17956
"The flow rates from the existing projects are the key. Capacity coming on stream falls fast beyond 2011. On top of that, if the big old fields begin collapsing, the descent in supply will hit the world very hard."[1]
``We can call it an `oil crisis' given the current price, and that it continues to climb even after global efforts to cut consumption.'' ``We see a critical, structural issue in the global oil market, where supply growth isn't catching up with demand.''[2]
** Today’s collapsing financial markets originate with the following: (i) the emergence of the large, modern global corporation; (ii) the concentration of economic and political power encompassed within these TNCs along with their extraordinary (iii) labour-free productive capacities. These developments were intimately linked with the (iv) energy crisis of the 1970s and (v) the continuing and steadily-worsening inequalities in global incomes.
This also marks the recycling of petroleum dollars through the Euromarket and heavy lending to the largest Latin American countries, leading to the debt crisis of the early 1980s. The post-war ‘golden period’ came to a close in the mid 1970s when global productive capacity outran global demand. Inflation also affected the Northen economies, and there was a crisis of import substitution industrialisation in the South.
"corporations that neither have bodies to kick nor souls to damn" Andrew Jackson
** The global financial system is high volume and high velocity. The many coordinated components, are linked rather than regulated. If new measures are made in the context of no other changes, the outcome is likely to be explosive. [Naked Capitalism's interesting post this week.]
** The export of inflation to the rest of the world.
When the US dollar plunged in value due to the US Fed’s easy-money policy the central banks in emerging economies could not tighten monetary policy because it would have led to an appreciation of their currencies as compared to the US dollar. The US Fed thus, defacto, exported rising inflation to these nations. Also consider the Bank of Japan’s low interest rate policy and the rise in the real global cost of oil. This rise occurs when the US dollar deflates due to this currency's monopoly in global oil trades [3]. The globalisation of trade flows is another new transmission mechanism of worldwide inflation. World exports should reach a record of 32.5% of global gross domestic product in 2008, according to the IMF.
** Divergence between the expansive financial global economic crisis, exported economy and the stagnant real economy. This is not accidental.
For example, the Bush Administration "embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from [predatory subprime lending]." [4]
Uncontrolled financial gyrations are an expression of this imbalance.
This ‘disconnect’ stems from stagnationist trends in the real economy such as overcapacity, overproduction. The search for profits is the driving force of capitalism. It evolved in such as way so that profits could only be obtained from financial speculation rather than investment in industry.
** Technology makes it far easier to police an American citizen than an international bank.
** A disconnect between the assessors of risk from those that actually bear the risk
CONTINUED --->
** Fabricated demand for subprime mortgages
“..The subprime mortgage crisis was not a case of supply outrunning real demand. The "demand" was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade…” [5]
** Securitisation
The securitization of standard mortgages was a technique by which Savings and Loans and Mortgage companies originated mortgages which were then packaged as securities for the portfolios of holders such as pension funds, life insurance companies, mutual trusts and various international holders. Because of the way the mortgages were packaged it was possible to sell off a package of mortgages at a premium so that the originator and the investment banking firms walked away from the deal with a net income and no recourse from the holders. The instrument originators and the security underwriters did not hazard any of their wealth on the longer term viability of the underlying projects. Obviously in such packaged financing the selection and supervisory functions of lenders and underwriters are not as well done as they might be when the fortunes of the originators are at hazard over the longer term. All that was required for the originators to earn their stipend was skill avoiding obvious fraud and in structuring the package. Hyman Minsky,1992
** The lifting of controls over capital
The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began being lifted at the onset of the neoliberal [financialisation] era in the early 1980's. [5] Speculative capital then became globalised to take advantage of differentials in foreign exchange and interest rates in disparate capital markets.
[1] Jeremy Leggett, 2008. Author of Half Gone.
[2] Nobuo Tanaka, Executive Director of the International Energy Agency
World Faces `Oil Crisis;' IEA Ready to Tap Reserves. 11th June 2008
http://www.bloomberg.com/apps/news?pid=20601072&refer=energy&sid=a0SE24WXEk5U
[3] Historical Analysis of Real Global Price of Oil: Implications for Future Prices
William D. DeMis, Marathon Oil Company (retired). Houston, TX
www.searchanddiscovery.net/documents/2007/08097demis/images/demis.pdf
[4] Predatory Lenders' Partner in Crime - How the Bush Administration Stopped the States From Stepping In to Help Consumers. By Eliot Spitzer (Governor of New York)
Thursday, February 14, 2008; Page A25
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html
[5] Capitalism in an apocalyptic mood. Walden Bello. Focus on the Global South, 20 February 2008
http://www.tni.org/detail_page.phtml?&act_id=17956
Saturday, September 20, 2008
THE SPECTRE OF UNEMPLOYMENT
by the Sandwichman
Say economic growth after the BIG BAILOUT is slow for several years (a modest proposition). Inevitably the unemployment rate will mount. People may attribute the increased unemployment to the aftermath of the financial crisis. Post hoc ergo propter hoc. But, rather than being the CAUSE of unemployment, it would be more accurate to view the financial distress as simply the withdrawal of a palliative.
Economic orthodoxy insists that "technology creates more jobs than it destroys" -- a view that by the end of 1932 even Fortune magazine dismissed as unsatisfactory. In an article titled "Obsolete Men", the Fortune editors recalled the mechanistic explanation that the reduced cost from the use of labor-saving devices led to lower prices, increased demand and new employment to meet the greater demand. Where demand for any particular good was inelastic, workers displaced from one industry would find employment elsewhere.
Fortune concluded that it was accelerated economic growth, not lower market prices, that counteracted the job-killing potential of labor-saving technology. But, as an article in today's Globe and Mail puts it, "... U.S. growth has always been fueled by easy access to debt."
Say economic growth after the BIG BAILOUT is slow for several years (a modest proposition). Inevitably the unemployment rate will mount. People may attribute the increased unemployment to the aftermath of the financial crisis. Post hoc ergo propter hoc. But, rather than being the CAUSE of unemployment, it would be more accurate to view the financial distress as simply the withdrawal of a palliative.
Economic orthodoxy insists that "technology creates more jobs than it destroys" -- a view that by the end of 1932 even Fortune magazine dismissed as unsatisfactory. In an article titled "Obsolete Men", the Fortune editors recalled the mechanistic explanation that the reduced cost from the use of labor-saving devices led to lower prices, increased demand and new employment to meet the greater demand. Where demand for any particular good was inelastic, workers displaced from one industry would find employment elsewhere.
Fortune concluded that it was accelerated economic growth, not lower market prices, that counteracted the job-killing potential of labor-saving technology. But, as an article in today's Globe and Mail puts it, "... U.S. growth has always been fueled by easy access to debt."
Hey, Secretary Paulson, Whatever Happened to Shock Therapy?
I thought the believers in the market accepted the logic of shock therapy. You know, when country stray too far from market fundamentals they need tough medicine to make their economy strong.
Consider the case of Jeffrey Sachs writing in his recent book, The End of Poverty. Looking back on his first prescription of shock therapy in the destitute nation of Bolivia Sachs had a revelation. He realized that "Bolivia's physical geography was a fundamental feature of its economic situation, not merely an incidental fact .... Of course I knew that Bolivia was landlocked and mountainous .... Yet I had not reflected on how these conditions were key geographical factors, perhaps the overriding factors, in Bolivia's chronic poverty .... Almost all the international commentary and academic economic writing about Bolivia neglected this very basic point. It bothered me greatly that the most basic and central features of economic reality could be overlooked by academic economists spinning their theories from thousands of miles away." Yet, he concluded: "Monetary theory, thank goodness, still worked at thirteen thousand feet."
Sachs, Jeffrey D. 2005. The End of Poverty (London: Penguin): p. 105.
Jeffrey Sachs is relatively liberal, as far as economists go. After all, economists today confidently tell us that Keynes is dead. Everyone has to accept the discipline of the market: the unemployed, people without medical insurance, and students facing high tuition. If workers wages fall short, they are at fault for lacking the skills of a financial manager.
But wait! Now that the financial managers are in trouble, boy do they need help.
I only have one question for market fundamentalists. If these bailouts succeed in putting Humpty Dumpty together again, will our fundamentalists agree to tax the fat cats or will they revise history and tell us that their rebuilt wealth owes everything to their hard work and intelligence?
Or, what I'm afraid is more likely, is that market fundamentalism is applicable only in impoverished countries 13,000 feet above sea level.
Consider the case of Jeffrey Sachs writing in his recent book, The End of Poverty. Looking back on his first prescription of shock therapy in the destitute nation of Bolivia Sachs had a revelation. He realized that "Bolivia's physical geography was a fundamental feature of its economic situation, not merely an incidental fact .... Of course I knew that Bolivia was landlocked and mountainous .... Yet I had not reflected on how these conditions were key geographical factors, perhaps the overriding factors, in Bolivia's chronic poverty .... Almost all the international commentary and academic economic writing about Bolivia neglected this very basic point. It bothered me greatly that the most basic and central features of economic reality could be overlooked by academic economists spinning their theories from thousands of miles away." Yet, he concluded: "Monetary theory, thank goodness, still worked at thirteen thousand feet."
Sachs, Jeffrey D. 2005. The End of Poverty (London: Penguin): p. 105.
Jeffrey Sachs is relatively liberal, as far as economists go. After all, economists today confidently tell us that Keynes is dead. Everyone has to accept the discipline of the market: the unemployed, people without medical insurance, and students facing high tuition. If workers wages fall short, they are at fault for lacking the skills of a financial manager.
But wait! Now that the financial managers are in trouble, boy do they need help.
I only have one question for market fundamentalists. If these bailouts succeed in putting Humpty Dumpty together again, will our fundamentalists agree to tax the fat cats or will they revise history and tell us that their rebuilt wealth owes everything to their hard work and intelligence?
Or, what I'm afraid is more likely, is that market fundamentalism is applicable only in impoverished countries 13,000 feet above sea level.
Troopergate: Was Monegan Fired Because He Wanted to Reduce Rapes in Alaska?
Justin Rood debunks the latest lie from McCain-Palin on Troopergate. The McCain-Palin latest excuse for the firing of Walt Monegan:
Let’s say we buy this story. This means that the Public Safety Commissioner was pushing for funding of something very important – government efforts to reduce the high rate of rape in his state. One would have thought the governor would be all for this but McCain-Palin now want us to believe that these efforts from Monegan were discouraged by the governor to the point that she fired him. Thank goodness this is not true:
So maybe the governor was not so indifferent towards the high rate of rape in Alaska. But then why did she fire Monegan? The story continues:
In other words, the governor did not want the Public Safety Commissioner discussing means to reduce rape in Alaska with Senator Murkowski? I’m really confused.
Fighting back against allegations she may have fired her then-Public Safety Commissioner, Walt Monegan, for refusing to go along with a personal vendetta, Palin on Monday argued in a legal filing that she fired Monegan because he had a "rogue mentality" and was bucking her administration's directives. "The last straw," her lawyer argued, came when he planned a trip to Washington, D.C., to seek federal funds for an aggressive anti-sexual-violence program. The project, expected to cost from $10 million to $20 million a year for five years, would have been the first of its kind in Alaska, which leads the nation in reported forcible rape. The McCain-Palin campaign echoed the charge in a press release it distributed Monday, concurrent with Palin's legal filing. "Mr. Monegan persisted in planning to make the unauthorized lobbying trip to D.C.," the release stated.
Let’s say we buy this story. This means that the Public Safety Commissioner was pushing for funding of something very important – government efforts to reduce the high rate of rape in his state. One would have thought the governor would be all for this but McCain-Palin now want us to believe that these efforts from Monegan were discouraged by the governor to the point that she fired him. Thank goodness this is not true:
But the governor's staff authorized the trip, according to an internal travel document from the Department of Public Safety, released Friday in response to an open records request. The document, a state travel authorization form, shows that Palin's chief of staff, Mike Nizich, approved Monegan's trip to Washington, D.C., "to attend meeting with Senator Murkowski." The date next to Nizich's signature reads June 18.
So maybe the governor was not so indifferent towards the high rate of rape in Alaska. But then why did she fire Monegan? The story continues:
In response to inquiries about the document Friday, the McCain-Palin campaign provided a statement from Randy Ruaro, another aide to Palin. According to Ruaro, Monegan asked for -- and received -- approval for the travel without telling Palin's staff his reason for going. "As a matter of routine, the travel was approved by Mike Nizich ... weeks before the actual purpose was made clear by former Commissioner Monegan," Ruaro wrote. "When you receive permission to travel, it does not mean that you receive blanket authorization to discuss or do whatever you would like on that trip," he added.
In other words, the governor did not want the Public Safety Commissioner discussing means to reduce rape in Alaska with Senator Murkowski? I’m really confused.
Friday, September 19, 2008
WORK AND THE FINANCIAL CRISIS
by the Sandwichman
Perelman has previously mentioned his forthcoming book on the irrelevance of workers in economic theory. Yesterday, I received a note from David Spencer about his forthcoming book, The Political Economy of Work, which is due out in about a week.
Everybody knows that the BIG BAILOUT heralds "the most radical regime change in global economic and financial affairs in decades." But what has it all got to do with work and workers? Higher unemployment? Increasing cost of living? Quite possibly those things -- but another as yet unspoken dimension of the collapse-and-bailout of the financial system and its impending re-regulation is that it authorizes a re-opening of debate about the regulation of labor markets.
Until recently, the official Anglo-American journalistic line on labor market regulation was that it was bad. Europeans had to liberalize their labor markets or risk falling further and further behind the dynamic US economy. Well, now we know -- as some of us have been pointing out all along -- that the dynamism was contrived. It is time to re-assess ALL the hoary myths about the inherent superiority of "free markets", including that one.
Perelman has previously mentioned his forthcoming book on the irrelevance of workers in economic theory. Yesterday, I received a note from David Spencer about his forthcoming book, The Political Economy of Work, which is due out in about a week.
Everybody knows that the BIG BAILOUT heralds "the most radical regime change in global economic and financial affairs in decades." But what has it all got to do with work and workers? Higher unemployment? Increasing cost of living? Quite possibly those things -- but another as yet unspoken dimension of the collapse-and-bailout of the financial system and its impending re-regulation is that it authorizes a re-opening of debate about the regulation of labor markets.
Until recently, the official Anglo-American journalistic line on labor market regulation was that it was bad. Europeans had to liberalize their labor markets or risk falling further and further behind the dynamic US economy. Well, now we know -- as some of us have been pointing out all along -- that the dynamism was contrived. It is time to re-assess ALL the hoary myths about the inherent superiority of "free markets", including that one.
Financial Health Versus Children's Health
Please help me out here. Bush vetoed the Children's Health Insurance Program fearing that the legislation could add $35 billion over five years.
McCain on Federal Reserve Policy: Don’t Solve the Problem – Make It Worse
I was stunned by this:
The second sentence basically advocates that the government should allow the current financial crisis to worsen. On this one, Brad DeLong needs the microphone:
The call for a strong dollar is a call for higher interest rates and dollar appreciation. How will discouraging investment and reducing net exports lead to an increase in aggregate demand is beyond me. I’d like one of McCain’s economic advisors to explain that!
the Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts. The Fed needs to return to protecting the purchasing power of the dollar. A strong dollar will reduce energy and food prices. It will stimulate sustainable economic growth and get this economy moving again.
The second sentence basically advocates that the government should allow the current financial crisis to worsen. On this one, Brad DeLong needs the microphone:
Since before 1844 central banks have been in the business of managing financial crises. That's what they do. Milton Friedman is spinning in his grave. The prevention of large-scale bank failures--"bailouts," in McCain's terms--is an essential part of responsibly managing the money supply. John McCain does not know that. And nobody working for John McCain knows that
The call for a strong dollar is a call for higher interest rates and dollar appreciation. How will discouraging investment and reducing net exports lead to an increase in aggregate demand is beyond me. I’d like one of McCain’s economic advisors to explain that!
No Bush: No Problem?
Our nominal head of state has been invisible during this latest flare-up of the financial crisis. Of course, we would expect Bernanke and Paulson to be the public face of the administration’s crisis management plans, but in theory they (especially Paulson) do have a boss. We’re talking here about the largest, most consequential domestic program in the entire GWB era. I mean, who’s the decider here?
If congressional Republicans balk at the size and cost of the bailout, will Bush have to come out of confinement to talk them into it?
If congressional Republicans balk at the size and cost of the bailout, will Bush have to come out of confinement to talk them into it?
LIKE, THEY DON'T FLAG, YOU KNOW, THE MOLECULES?
by the Sandwichman
What was that John McCain was saying about valley girl Palin knowing "more about energy than probably anyone else in the United States of America"?
Like, totally.
What was that John McCain was saying about valley girl Palin knowing "more about energy than probably anyone else in the United States of America"?
Like, totally.
Who Will Finance the Bailout?
According to today’s New York Times, it’s the beleaguered US taxpayer. In fact, the word “taxpayer” appears five times in their report on Fed/Treasury actions, always in connection with where the burden will fall. But this is flatly wrong.
In case my previous post was too oblique, let me say it bluntly: Taxpayers are not and will not be the ones to finance the bailout of the financial sector. There will be no tax increase to pay for it, nor will there be drastic (eleven-figure) cuts in other federal spending. It will be financed by substantially greater public borrowing from sovereign creditors, especially the People’s Bank of China and the various entities of the Gulf Cooperation Council. (Russia is an uncertainty in light of its own financial crisis.) The feasibility of the bailout depends entirely on the continued willingness of these deeply authoritarian countries to continue recycling their mountainous piles of dollars into dollar-denominated assets—formerly including private sector debt but now public debt exclusively.
In the absence of this external support, no bailout plan is remotely possible.
In case my previous post was too oblique, let me say it bluntly: Taxpayers are not and will not be the ones to finance the bailout of the financial sector. There will be no tax increase to pay for it, nor will there be drastic (eleven-figure) cuts in other federal spending. It will be financed by substantially greater public borrowing from sovereign creditors, especially the People’s Bank of China and the various entities of the Gulf Cooperation Council. (Russia is an uncertainty in light of its own financial crisis.) The feasibility of the bailout depends entirely on the continued willingness of these deeply authoritarian countries to continue recycling their mountainous piles of dollars into dollar-denominated assets—formerly including private sector debt but now public debt exclusively.
In the absence of this external support, no bailout plan is remotely possible.
Financial Catastrophe: Here We Go Again
I mentioned earlier that I thought that looking at production and distribution of income was crucial to understanding the financial crisis. Of course, the financial side provided the tipping point.
Some thing similar happened a few decades ago with a war, a different Bush, and John McCain.
Many years ago, Lyndon Johnson, who would have just celebrated his hundredth birthday couple days ago, found himself stuck in a war he couldn't win. He also knew that if he raised taxes to pay for the war, the public would demand an immediate halt with an intensity that he could not resist. Johnson relied on borrowing, which raised interest rates.
Savings and loan institutions, like the investment banks today, borrowed short and lent long. In this case, people put their savings in the banks and the banks lent out money on 30 year mortgages. To prevent gouging and make mortgages affordable, the Savings and Loans were prevented from paying interest rates high enough to keep depositors from exiting, which could make them bankrupt.
The Reagan administration, including daddy Bush, moved to deregulate the Savings and Loans. Given this newfound freedom, crooks and nincompoops (including President Bush's younger brother) rushed in to take advantage of profiting from other people's money. As the scope of this disaster was becoming obvious, five senators, including John McCain along with Alan Greenspan (perhaps the Godfather of the recent financial crisis), rushed in to defend one of the more egregious Savings and Loan operations run by Charles Keating. Oh, yes, a small savings-and-loan in Arkansas, which was connected with Bill Clinton (who allowed Congress to deregulate the current financial system, led by Senator Phil Gramm, John McCain's chief economic adviser) also ran into difficulties.
The savings-and-loan scam crashed leaving the government to pick up the pieces at a cost that is still debated, but which was still well over $100 billion -- pocket change today.
The difference today is that our politicians will really do excellent regulation this time, just as they did with Sarbanes-Oxley in the wake of Enron.
Some thing similar happened a few decades ago with a war, a different Bush, and John McCain.
Many years ago, Lyndon Johnson, who would have just celebrated his hundredth birthday couple days ago, found himself stuck in a war he couldn't win. He also knew that if he raised taxes to pay for the war, the public would demand an immediate halt with an intensity that he could not resist. Johnson relied on borrowing, which raised interest rates.
Savings and loan institutions, like the investment banks today, borrowed short and lent long. In this case, people put their savings in the banks and the banks lent out money on 30 year mortgages. To prevent gouging and make mortgages affordable, the Savings and Loans were prevented from paying interest rates high enough to keep depositors from exiting, which could make them bankrupt.
The Reagan administration, including daddy Bush, moved to deregulate the Savings and Loans. Given this newfound freedom, crooks and nincompoops (including President Bush's younger brother) rushed in to take advantage of profiting from other people's money. As the scope of this disaster was becoming obvious, five senators, including John McCain along with Alan Greenspan (perhaps the Godfather of the recent financial crisis), rushed in to defend one of the more egregious Savings and Loan operations run by Charles Keating. Oh, yes, a small savings-and-loan in Arkansas, which was connected with Bill Clinton (who allowed Congress to deregulate the current financial system, led by Senator Phil Gramm, John McCain's chief economic adviser) also ran into difficulties.
The savings-and-loan scam crashed leaving the government to pick up the pieces at a cost that is still debated, but which was still well over $100 billion -- pocket change today.
The difference today is that our politicians will really do excellent regulation this time, just as they did with Sarbanes-Oxley in the wake of Enron.
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