by the Sandwichman
Last week, the fundamentals were strong. This week he suspends his campaign to offer "leadership" in the bailout. aooga! aooga! dive! dive!
Wednesday, September 24, 2008
Plan B: How to Restore Financial Markets Without a Bailout
In the last several days there has been an emerging consensus among well-informed analysts (like this and this) regarding the Fed/Treasury plan to bail out financial markets. It goes something this: the US financial sector faces a liquidity crisis on top of a solvency crisis. The liquidity part is that financial intermediaries (only some of them banks) are increasingly unable to meet their obligations to depositors and counterparties because they have no access to credit. Highly leveraged, they do not have the resources at hand to carry on their business. If this were the entire problem, the Fed could solve it by offering to buy mortgage-backed securities and similar assets at their actual market value. In that case there would be no bailout, just an infusion of liquidity to tide the markets over.
But there is an underlying solvency crisis: as housing values have declined, assets tied to them are no longer worth the financial obligations institutions have incurred in acquiring them. A large portion of the financial system (no one knows at this point how large this is) has negative net worth. This is why Bernanke has spoken of purchasing assets at their face rather than market value.
There are two gigantic problems with the bailout scheme, in addition to all the smaller ones. First, overpaying banks, investment funds and other financial players to the tune of hundreds of billions of dollars is an ethical and moral hazard nightmare. These people have made obscene fortunes in wild speculation; now that their bets have gone sour is it the public’s duty to cover their losses? Second, it is not even clear that the strategy will work. We don’t know how much it will take to bring the financial sector back to life, partly due to the lack of transparency that helped get us into this mess in the first place, and also to the understandable reluctance of firms to mark down all the paper that has declined in value. It may well be that between one and two trillion dollars will be needed to get the markets back on their feet, and this may exceed the financial and political resources of the federal government.
A big improvement (championed by Paul Krugman) would a buyout of the firms rather than the assets, even as an option as formulated in the Dodd proposal. Still, and especially in light of the difficulty in disentangling viable portfolios from moribund ones, the cost may be too great. It would be nice to have something completely different on the table. So read on: here is a Plan B, an alternative to bailouts that might restore a functioning credit mechanism to the US economy.
The concept: The existing approach tries to bring existing institutions out of insolvency and credit gridlock. Plan B allows these institutions to go belly up but rapidly creates a parallel financial mechanism to rescue sound assets from the rubble while offering credit to new borrowers. Rather than providing a public prop, it provides a public alternative.
The plan: Create a new publicly-financed, publicly-run enterprise; for the purposes of this description we can call it Fund US. Its initial capitalization would be provided by a Treasury issue. The amount could well be much less than the $700B (or $1.4 trillion in borrowing authority) that headlines the existing plan. This is because the fund would be permitted to leverage up to some reasonable ceiling—say six-to-one. So give it $300B as an initial allocation.
One initial function of Fund US would be to open a window for the purchase of existing financial assets at fair market value. This is not necessarily the same as the value of the moment, since, by its size relative to the markets as a whole, Fund US would be a price-maker. One possibility would be to honor prices as of September 15, before any general public plan was broached. Another, specifically for MBS’s, would be to use an algorithm based on a decline of the Case-Schiller Index to long run trend. Either way, this would protect the genuine value of financial wealth tied to housing from the cascade of defaults likely to sweep through the private sector.
The other main function would be to serve as an all-purpose financial intermediary to the US economy and to foreign interests that do business here. It would underwrite existing loans or other contracts, originate new credit and assemble a portfolio of financial assets in a manner consistent with prudent management. On the liability side, it would accept deposits and sell instruments like mutual funds and secondary debt. In other words, it would do what the current system does, subject to greater constraint.
What could assure this constraint? Here are some ideas: (1) The limit on leverage would be statutory. (2) Full transparency could be written into the legislation authorizing Fund US. All assets and liabilities would be publicly reported and all terms made explicit. (Small borrowers and lenders could have their individual identities protected for privacy purposes.) (3) There could be systems of oversight and undersight. The first would be provided by an outside board of disinterested specialists, primarily academics in the fields of accounting and finance. For the second, we might have front-line employees, who analyze and perform individual transactions, constitute themselves into a review body. This entity could give frequent public assessments of the quality of the Fund’s activities and their adherence to overall policy objectives—institutionalized, routinized whistle-blowing capacity. (4) All employees of the Fund, top to bottom, should be paid fixed salaries—no commissions or bonuses. (5) The Fund’s goals should be to maintain the value of public equity, minimize aggregate risk and have the capacity to supply credit sufficient to meet the needs of the economy. Profit maximization, returns in excess of what is necessary to supply a net worth buffer, would not be a goal.
Of course, one paragraph cannot possible provide sufficient detail to demonstrate that such an institution is feasible. On the other hand, how many paragraphs do we have at this point for the mega-bailout?
Two additional elements of Plan B are required to complete this brief sketch. First, Fund US would not be a chartered monopoly. Any financial institutions that survive the ongoing shakeout can compete against it, as can startups. Indeed, because of its lack of incentive for aggressive marketing on both sides of the ledger, it may eventually evolve toward being a financial intermediary of last resort. This would be fine. Second, for competition in this market to be constructive, new regulation must be extended to all players along the lines currently being discussed. In particular, limits on leverage and transparency requirements should apply to all intermediaries, whatever their institutional morphology.
I will not make any great claims for Plan B. Its details require much more working out. There is also a valid concern that it may not be possible to get a massive new institution up and running before existing credit channels freeze up. It would have been much better to have developed a public fund slowly and carefully during the pre-crisis phase, but who was thinking this far ahead? I am less bothered by the ideological objection to a public institution taking on the functions of private firms and competing with them. To take one example, more than half of all the assets in the German banking system are in public and cooperative banks. Germany isn’t utopia (and one of its state banks was mauled because it indulged in dubious US assets), but it is, along with China, the world’s leading industrial exporter. It runs a huge trade surplus with the US, largely due to the strength of its small and medium-size enterprises. Small firms in Germany are global players because they have the same access to capital as big ones, something that can’t be said for the US. This is not to say that we should copy the German template, just that there is no reason to assume that public financial institutions can’t support a successful modern economy.
Plan B is offered to you as a stimulus to creative thinking about the current imbroglio. I would be interested to find out if it can withstand scrutiny.
But there is an underlying solvency crisis: as housing values have declined, assets tied to them are no longer worth the financial obligations institutions have incurred in acquiring them. A large portion of the financial system (no one knows at this point how large this is) has negative net worth. This is why Bernanke has spoken of purchasing assets at their face rather than market value.
There are two gigantic problems with the bailout scheme, in addition to all the smaller ones. First, overpaying banks, investment funds and other financial players to the tune of hundreds of billions of dollars is an ethical and moral hazard nightmare. These people have made obscene fortunes in wild speculation; now that their bets have gone sour is it the public’s duty to cover their losses? Second, it is not even clear that the strategy will work. We don’t know how much it will take to bring the financial sector back to life, partly due to the lack of transparency that helped get us into this mess in the first place, and also to the understandable reluctance of firms to mark down all the paper that has declined in value. It may well be that between one and two trillion dollars will be needed to get the markets back on their feet, and this may exceed the financial and political resources of the federal government.
A big improvement (championed by Paul Krugman) would a buyout of the firms rather than the assets, even as an option as formulated in the Dodd proposal. Still, and especially in light of the difficulty in disentangling viable portfolios from moribund ones, the cost may be too great. It would be nice to have something completely different on the table. So read on: here is a Plan B, an alternative to bailouts that might restore a functioning credit mechanism to the US economy.
The concept: The existing approach tries to bring existing institutions out of insolvency and credit gridlock. Plan B allows these institutions to go belly up but rapidly creates a parallel financial mechanism to rescue sound assets from the rubble while offering credit to new borrowers. Rather than providing a public prop, it provides a public alternative.
The plan: Create a new publicly-financed, publicly-run enterprise; for the purposes of this description we can call it Fund US. Its initial capitalization would be provided by a Treasury issue. The amount could well be much less than the $700B (or $1.4 trillion in borrowing authority) that headlines the existing plan. This is because the fund would be permitted to leverage up to some reasonable ceiling—say six-to-one. So give it $300B as an initial allocation.
One initial function of Fund US would be to open a window for the purchase of existing financial assets at fair market value. This is not necessarily the same as the value of the moment, since, by its size relative to the markets as a whole, Fund US would be a price-maker. One possibility would be to honor prices as of September 15, before any general public plan was broached. Another, specifically for MBS’s, would be to use an algorithm based on a decline of the Case-Schiller Index to long run trend. Either way, this would protect the genuine value of financial wealth tied to housing from the cascade of defaults likely to sweep through the private sector.
The other main function would be to serve as an all-purpose financial intermediary to the US economy and to foreign interests that do business here. It would underwrite existing loans or other contracts, originate new credit and assemble a portfolio of financial assets in a manner consistent with prudent management. On the liability side, it would accept deposits and sell instruments like mutual funds and secondary debt. In other words, it would do what the current system does, subject to greater constraint.
What could assure this constraint? Here are some ideas: (1) The limit on leverage would be statutory. (2) Full transparency could be written into the legislation authorizing Fund US. All assets and liabilities would be publicly reported and all terms made explicit. (Small borrowers and lenders could have their individual identities protected for privacy purposes.) (3) There could be systems of oversight and undersight. The first would be provided by an outside board of disinterested specialists, primarily academics in the fields of accounting and finance. For the second, we might have front-line employees, who analyze and perform individual transactions, constitute themselves into a review body. This entity could give frequent public assessments of the quality of the Fund’s activities and their adherence to overall policy objectives—institutionalized, routinized whistle-blowing capacity. (4) All employees of the Fund, top to bottom, should be paid fixed salaries—no commissions or bonuses. (5) The Fund’s goals should be to maintain the value of public equity, minimize aggregate risk and have the capacity to supply credit sufficient to meet the needs of the economy. Profit maximization, returns in excess of what is necessary to supply a net worth buffer, would not be a goal.
Of course, one paragraph cannot possible provide sufficient detail to demonstrate that such an institution is feasible. On the other hand, how many paragraphs do we have at this point for the mega-bailout?
Two additional elements of Plan B are required to complete this brief sketch. First, Fund US would not be a chartered monopoly. Any financial institutions that survive the ongoing shakeout can compete against it, as can startups. Indeed, because of its lack of incentive for aggressive marketing on both sides of the ledger, it may eventually evolve toward being a financial intermediary of last resort. This would be fine. Second, for competition in this market to be constructive, new regulation must be extended to all players along the lines currently being discussed. In particular, limits on leverage and transparency requirements should apply to all intermediaries, whatever their institutional morphology.
I will not make any great claims for Plan B. Its details require much more working out. There is also a valid concern that it may not be possible to get a massive new institution up and running before existing credit channels freeze up. It would have been much better to have developed a public fund slowly and carefully during the pre-crisis phase, but who was thinking this far ahead? I am less bothered by the ideological objection to a public institution taking on the functions of private firms and competing with them. To take one example, more than half of all the assets in the German banking system are in public and cooperative banks. Germany isn’t utopia (and one of its state banks was mauled because it indulged in dubious US assets), but it is, along with China, the world’s leading industrial exporter. It runs a huge trade surplus with the US, largely due to the strength of its small and medium-size enterprises. Small firms in Germany are global players because they have the same access to capital as big ones, something that can’t be said for the US. This is not to say that we should copy the German template, just that there is no reason to assume that public financial institutions can’t support a successful modern economy.
Plan B is offered to you as a stimulus to creative thinking about the current imbroglio. I would be interested to find out if it can withstand scrutiny.
The unpublished history of AIG.
In 1962 the founder of AIG gave control of the company's US holdings to Maurice R. "Hank" Greenberg. Greenberg then changed the focus of AIG from personal insurance to "high-margin corporate coverage" and, in 1987, he appointed Henry Kissinger as chairman of AIG’s International Advisory Board.
Maurice Greenberg's history is a very interesting one to follow. After all, he is a past Chairman, Deputy Chairman and Director of the Federal Reserve Bank of New York - an organisation that loaned money to AIG at AIG's request to prevent the company's collapse this month and on terms that were acceptable to the AIG board.
In 2005 AIG's board forced Greenberg to resign from his post as Chairman and CEO under following criticism from Eliot Spitzer, attorney general of New York State. Spitzer alleged fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws. The charges were dropped later and civil action followed. The year before two AIG executives pleaded guilty to criminal charges in connection with their "illegal course of conduct" relating to 'payoff agreements' with (at least) one other corporation for steering clients to AIG and for soliciting rigged bids for insurance contracts.
Other current positions of AIG's most influential man:
- As current Chairman of the Starr Foundation Greenberg "oversees the disbursement of major financial support to academic, medical, cultural, and public policy institutions."
- He is Honorary Vice Chairman and Director of the Council on Foreign Relations and a member of David Rockefeller's Trilateral Commission.
- Current Chairman and Trustee of 3 institutions founded by the Rockefeller family.
- A former Chairman and current member of the US–Korea Business Council, a member of the US–China Business Council, and the Business Council.
In the past he has served on the Board of Directors of the New York Stock Exchange, the President’s Advisory Committee for Trade Policy and Negotiations, and the Business Roundtable. (Former US President Reagan offered him a job as as Deputy Director of the CIA, which he declined.) in the years of 1998-2005 Greenberg was a member of Hong Kong Chief Executive's Council of International Advisers .
From Wikipedia today.
http://en.wikipedia.org/wiki/Maurice_R._Greenberg
http://en.wikipedia.org/wiki/American_International_Group
Maurice Greenberg's history is a very interesting one to follow. After all, he is a past Chairman, Deputy Chairman and Director of the Federal Reserve Bank of New York - an organisation that loaned money to AIG at AIG's request to prevent the company's collapse this month and on terms that were acceptable to the AIG board.
In 2005 AIG's board forced Greenberg to resign from his post as Chairman and CEO under following criticism from Eliot Spitzer, attorney general of New York State. Spitzer alleged fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws. The charges were dropped later and civil action followed. The year before two AIG executives pleaded guilty to criminal charges in connection with their "illegal course of conduct" relating to 'payoff agreements' with (at least) one other corporation for steering clients to AIG and for soliciting rigged bids for insurance contracts.
Other current positions of AIG's most influential man:
- As current Chairman of the Starr Foundation Greenberg "oversees the disbursement of major financial support to academic, medical, cultural, and public policy institutions."
- He is Honorary Vice Chairman and Director of the Council on Foreign Relations and a member of David Rockefeller's Trilateral Commission.
- Current Chairman and Trustee of 3 institutions founded by the Rockefeller family.
- A former Chairman and current member of the US–Korea Business Council, a member of the US–China Business Council, and the Business Council.
In the past he has served on the Board of Directors of the New York Stock Exchange, the President’s Advisory Committee for Trade Policy and Negotiations, and the Business Roundtable. (Former US President Reagan offered him a job as as Deputy Director of the CIA, which he declined.) in the years of 1998-2005 Greenberg was a member of Hong Kong Chief Executive's Council of International Advisers .
From Wikipedia today.
http://en.wikipedia.org/wiki/Maurice_R._Greenberg
http://en.wikipedia.org/wiki/American_International_Group
Tuesday, September 23, 2008
The global crisis in dot-point. Part Two
[This is such an extraordinary week. So many economic writers are focussing on a very narrow range of financial crises. However, the structural problems that created this catastrophe need also to be addressed quickly.]
** The provision of essential goods and services has been left to ‘market’ demand.
Today’s news: Chesapeake Energy CEO Aubrey McClendon said Tuesday he would not be surprised if US drillers dropped hundreds of rigs in the next couple of quarters due to lower natural gas prices.[1]
** Inflation has been inappropriately treated as a monetary phenomenon with policy implementation resulting in world-wide recessions.
[Inflation] “became a problem which had to be treated, but by means other than those recommended by Dr Friedman and his colleagues. So they decided, because they thought it was a monetary phenomenon, which it wasn't, that the way to cure it was to crack down on the monetary system to tighten money and raise interest rates. And they had a little go at it in 1974-75, and they brought on a little recession, at least in our part of the world. And then in 1980-81, Paul Volker, who was at that time the Chairman of the Federal Reserve Board in Washington, and who had become a disciple of Dr Friedman, said, 'We will put this to the test'. And so he brought on a horrendous recession which was virtually world-wide…”[2]
** The functioning of critical domestic institutions is dependent on the inflow of foreign capital.
“…The fact is that Henry Paulson and this economic team and this failed administration in terms of economic policy, they have to say whatever they can about this money because without that foreign capital we have institution after institution that is simply insolvent.”[3]
** Finance capital is monopolized.
“No bank in the world will loan to a country blacklisted by the World Bank. To obtain funding from any bank, developing world governments must adjust their policies (called structural adjustments) to the dictates of the IMF/World Bank/NAFTA/ GATT/WTO/MAI/GATS/FTAA/military colossus. It is specifically under the imposed structural adjustment rules of that colossus that protections for the fast developing nations were withdrawn. Not only is the developing world locked within the parameters of the decisions of international capital, if any developed world government veers from the prescribed path, enough capital will flee to turn the economy downward, the politicians (not the subtle finance monopolists) will be blamed and—to maintain themselves within the good graces of the voters—the politicians will bend to the wishes of capital, even if it is to the detriment of the nation of their birth or of the world.”[4]
[1] Tuesday, September 23, 2008
Credit Crunch Hitting the Oil Patch
http://www.nakedcapitalism.com/2008/09/credit-crunch-hitting-oil-patch.html
[2] Paul Hellyer, former Deputy Prime Minister of Canada, talking at a conference, 'Reclaiming Democracy', in Sydney
[3] Lou Dobbs 2/4/08 "America being sold to foreign governments"
Submitted by Kim Berry on Mon, 02/04/2008 - 21:31
http://www.economicpopulist.org/?q=content/lou-dobbs-2408-america-being-sold-foreign-governments
[4] Chapter 11. Emerging Corporate Imperialism, from the book, Economic Democracy; The Political Struggle for the 21st Century.
http://www.ied.info/books/economic-democracy/corporatemercantilism
** The provision of essential goods and services has been left to ‘market’ demand.
Today’s news: Chesapeake Energy CEO Aubrey McClendon said Tuesday he would not be surprised if US drillers dropped hundreds of rigs in the next couple of quarters due to lower natural gas prices.[1]
** Inflation has been inappropriately treated as a monetary phenomenon with policy implementation resulting in world-wide recessions.
[Inflation] “became a problem which had to be treated, but by means other than those recommended by Dr Friedman and his colleagues. So they decided, because they thought it was a monetary phenomenon, which it wasn't, that the way to cure it was to crack down on the monetary system to tighten money and raise interest rates. And they had a little go at it in 1974-75, and they brought on a little recession, at least in our part of the world. And then in 1980-81, Paul Volker, who was at that time the Chairman of the Federal Reserve Board in Washington, and who had become a disciple of Dr Friedman, said, 'We will put this to the test'. And so he brought on a horrendous recession which was virtually world-wide…”[2]
** The functioning of critical domestic institutions is dependent on the inflow of foreign capital.
“…The fact is that Henry Paulson and this economic team and this failed administration in terms of economic policy, they have to say whatever they can about this money because without that foreign capital we have institution after institution that is simply insolvent.”[3]
** Finance capital is monopolized.
“No bank in the world will loan to a country blacklisted by the World Bank. To obtain funding from any bank, developing world governments must adjust their policies (called structural adjustments) to the dictates of the IMF/World Bank/NAFTA/ GATT/WTO/MAI/GATS/FTAA/military colossus. It is specifically under the imposed structural adjustment rules of that colossus that protections for the fast developing nations were withdrawn. Not only is the developing world locked within the parameters of the decisions of international capital, if any developed world government veers from the prescribed path, enough capital will flee to turn the economy downward, the politicians (not the subtle finance monopolists) will be blamed and—to maintain themselves within the good graces of the voters—the politicians will bend to the wishes of capital, even if it is to the detriment of the nation of their birth or of the world.”[4]
[1] Tuesday, September 23, 2008
Credit Crunch Hitting the Oil Patch
http://www.nakedcapitalism.com/2008/09/credit-crunch-hitting-oil-patch.html
[2] Paul Hellyer, former Deputy Prime Minister of Canada, talking at a conference, 'Reclaiming Democracy', in Sydney
[3] Lou Dobbs 2/4/08 "America being sold to foreign governments"
Submitted by Kim Berry on Mon, 02/04/2008 - 21:31
http://www.economicpopulist.org/?q=content/lou-dobbs-2408-america-being-sold-foreign-governments
[4] Chapter 11. Emerging Corporate Imperialism, from the book, Economic Democracy; The Political Struggle for the 21st Century.
http://www.ied.info/books/economic-democracy/corporatemercantilism
Monday, September 22, 2008
Possible Economics Nobels?
And on a different note, here are my thoughts on possible recipients for this years Sveriges Bank Prize in Economic Science in Memory of Alfred Nobel. First, I hope that it does not go to either of two prominent macroeconomists who regularly get mentioned. This would be an extremely inappropriate year for such, given what is going on. However, here are five I could live with who I think are on the list, at least one of whom I do not think has been publicly mentioned, or at least not much.
William Baumol, for lots of things
Jagdish Bhagwati with Avinash Dixit, for international trade theory
Gordon Tullock with Anne Krueger, for rent seeking
Benoit Mandelbrot, possibly with Eugene Fama, just to freak everybody out, although Mandelbrot is the more deserving in my view (for complexity) but certainly for recognizing the reality of fat tails in financial markets, now more evident than ever (if they give it Fama and not Mandelbrot, that would be a ridiculous farce).
Richard Easterlin, for happiness. He is the man on that one, and deserving. Of this group, it is him and Mandelbrot whom I would most like to see.
BTW, to Brenda, there ought to be one for ecological economics, but I doubt this is the year, and I am not sure who should get it.
William Baumol, for lots of things
Jagdish Bhagwati with Avinash Dixit, for international trade theory
Gordon Tullock with Anne Krueger, for rent seeking
Benoit Mandelbrot, possibly with Eugene Fama, just to freak everybody out, although Mandelbrot is the more deserving in my view (for complexity) but certainly for recognizing the reality of fat tails in financial markets, now more evident than ever (if they give it Fama and not Mandelbrot, that would be a ridiculous farce).
Richard Easterlin, for happiness. He is the man on that one, and deserving. Of this group, it is him and Mandelbrot whom I would most like to see.
BTW, to Brenda, there ought to be one for ecological economics, but I doubt this is the year, and I am not sure who should get it.
Ruth Marcus Misrepresenting Obama on Social Security
In today's WaPo, Ruth Marcus tries to put herself back into "journalistic symmetry" after having sharply criticizing McCain for his fallacious ads last week by misrepresenting Obama's and McCain's (and more importantly, Bush's) positions on Social Security. She declares that Obama is lying to old people in Miami that privatizing Social Security, which McCain has supported as recently as this Sunday will hurt their pensions, citing the never-quite-fully-explicated "plan" that Bush put forward in 2005 and that McCain supported.
Now, it is true that that plan claimed it would not cut current benefits of current retirees. However, it would start removing revenues from the system to go into the private accounts of young people, with about a six-year window of people in their 40s being targeted to get neither private accounts, but definite cuts in their benefits. There are two problems here.
One is that even though there would be no immediate cuts in benefits, taking away revenues would weaken the system and increase the likelihood of cuts being imposed in the future, quite possibly on people currently receiving benefits. The second is the ongoing hypocrisy of declaring that the future economy is bleak and that therefore the future of social security revenues is bleak, even as in a majority of years in the past decade the revenues did better than the "low cost projection" that has the system never running a deficit, much less going "bankrupt," while on the other hand the stock market is supposed to perform wonders so as to provide these fabulous returns on private accounts.
In any case, Marcus is simply off base in going after Obama. Privatizing Social Security does threaten the system by reducing its revenues, thereby increasing the dangers for current recipients down the road, and his formulation in Miami was about what would have been the case if those seniors did have their Social Security in private accounts, which is accurate.
Now, it is true that that plan claimed it would not cut current benefits of current retirees. However, it would start removing revenues from the system to go into the private accounts of young people, with about a six-year window of people in their 40s being targeted to get neither private accounts, but definite cuts in their benefits. There are two problems here.
One is that even though there would be no immediate cuts in benefits, taking away revenues would weaken the system and increase the likelihood of cuts being imposed in the future, quite possibly on people currently receiving benefits. The second is the ongoing hypocrisy of declaring that the future economy is bleak and that therefore the future of social security revenues is bleak, even as in a majority of years in the past decade the revenues did better than the "low cost projection" that has the system never running a deficit, much less going "bankrupt," while on the other hand the stock market is supposed to perform wonders so as to provide these fabulous returns on private accounts.
In any case, Marcus is simply off base in going after Obama. Privatizing Social Security does threaten the system by reducing its revenues, thereby increasing the dangers for current recipients down the road, and his formulation in Miami was about what would have been the case if those seniors did have their Social Security in private accounts, which is accurate.
I Don't Know What To Do
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.
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.
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.
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