I have just observed one of the more curious disjunctures in the media between what is appearing in the media of one language and in another. I have just returned from France where I was watching Euronews in French and reading French newspapers, as well as various US and British sources in English and have looked through Juan Cole and WaPo and some others. I do not know the explanation of the disjuncture nor which is correct. Actually it is not a matter of disagreement so much as that the French are reporting something that I have seen zero reporting of in any of the English language media.
The matter is the reputed leaking of the actual vote totals from the Ministry of the Interior in the Iranian presidential election. Both on Euronews and in the newspaper Liberation the story is that the ministry was seized early in the aftermath of the election, throwing out the official functionaries. One of those is the reputed source of the vote totals reported in these sources. They are the following, to the nearest million:
Moussavi, 19 million
Kourabi, 13 million
Ahmadinejad, 6 million (actually 5,77)
Rezaie, 3 million.
So, if these numbers reported in the French language media are correct, Ahmadinejad not only did not get 62%, with Moussavi at 34, but he came in third with less than a third of the votes of Moussavi. If this report is correct, nobody in the world should be surprised by what has been happening there.
Thursday, June 18, 2009
The Danger of Boilerplate
by the Sandwichman
Sandwichman cries "Foul!" on the Economist and its blogger, Charlemagne, for perpetrating a LUMP OF CRAP hoax on its readers.
[UPDATE: Dean Baker agrees that The Economist Gets the Arithmetic of Shorter Work Time Wrong.]
"The idea that a fixed quantity of work exists, to be parcelled out among workers, is the so-called lump-of-labour fallacy. It is depressing that supposedly responsible governments continue to pretend to be unaware of the old 'lump of labour' fallacy: the illusion that the output of an economy and hence the total amount of work available are fixed.
"The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the 'lump of labour' fallacy. The idea of the 35-hour week, derided by many economists as the 'lump-of-labour fallacy', is that if employees work less, companies, spurred by tax concessions, will hire more. Although mocked by economists as a prime example of the 'lump-of-labour' fallacy – the idea that there is only so much work to go around – the government claims that it had created 240,000 jobs by the end of 2000. But to conclude from this that overall employment will decline is to succumb to the lump-of-labour fallacy: the long-disproved idea that there is only a fixed amount of output (and hence work) to go round.
"France's own Frédéric Bastiat had pointed out two centuries ago that there is no limit to the work that needs doing. Debunking the 'lump of labour fallacy' before it was even given that label, he suggested that to parcel out the limited amount of work available, people should be required to use only one hand, or even to have a hand chopped off. But -- the lump of labour fallacy strikes again -- the amount of work to be done is not fixed. The quantity of work is not fixed: such a notion is known to economists as the 'lump-of-labour' fallacy.
"The lump of labour fallacy also lies behind paranoia about jobs being 'stolen' by low-wage countries. The accusation that migrants steal jobs is a version of the 'lump of labour' fallacy -- that there is only so much work to go around. In effect, export pessimism involves a fallacy of its own -- a 'lump-of-trade' fallacy, akin to the idea of a 'lump of labour' (whereby a growing population is taken to imply an ever-rising rate of unemployment, there being only so many jobs to go round).
"This is a classic lump-of-labour fallacy (the idea that there is a fixed quantity of work and that if you take a job it is at my expense). Economists call this the 'lump-of-labour' fallacy. Economists call this the lump of labour (or sometimes the lump of output) fallacy.
"The lump of labour fallacy is often to blame for confusion about whether productivity growth (due to more efficient working practices or to new technology) is a good or bad thing. Luddism is also commonly linked to the lump-of-labour fallacy in economics, which first-year students are taught to refute and according to which, as the demand for labour is fixed in the short run, labour-saving machinery is bound to 'kill jobs'. But the assumption that this results in fewer jobs rather than more output (and hence more goods, and more job-stimulating demand, in a beautifully virtuous circle) is based on an economic fallacy known as the 'lump of labour': the notion that there is only a fixed amount of output (and hence work) to go round.
"If new technology or foreign competition do lead to net job losses it will not be because the lump of labour has become a fact rather than a fallacy, but because labour is not sufficiently mobile between sectors and regions, or because relative wages have failed to adjust. Nearly all of these mistakes boil down in the end to the most enduring of all economic fallacies: the idea that there is only so much output to be produced, or capital to be invested. (Europe is currently preoccupied with the 'lump of labour' version of this mistake, see page 18.)
"A recent piece accused conservatives of embracing the 'lump of labour fallacy', the mistaken claim that there is a fixed quantity of work which governments must strive to allocate equitably. Hmm. Are those arguments entirely incorrect? Yes, entirely. The first is a myth. In fact, the paper he cited did not commit the lump of labour fallacy."
Sandwichman cries "Foul!" on the Economist and its blogger, Charlemagne, for perpetrating a LUMP OF CRAP hoax on its readers.
Back then [the 1980s and 1990s] many politicians, unions and workers also fell for the "lump of labour" fallacy, which suggests that there is a fixed amount of work to be done at any given time, available for slicing up and sharing out according to policymakers’ will.As longtime Sandwichman followers know, the alleged fallacy is a canard, one that the Economist trotted out 17 times between 1993 and 2005, giving rise to the following satire, composed entirely from sentences from the magazine:
[UPDATE: Dean Baker agrees that The Economist Gets the Arithmetic of Shorter Work Time Wrong.]
"The idea that a fixed quantity of work exists, to be parcelled out among workers, is the so-called lump-of-labour fallacy. It is depressing that supposedly responsible governments continue to pretend to be unaware of the old 'lump of labour' fallacy: the illusion that the output of an economy and hence the total amount of work available are fixed.
"The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the 'lump of labour' fallacy. The idea of the 35-hour week, derided by many economists as the 'lump-of-labour fallacy', is that if employees work less, companies, spurred by tax concessions, will hire more. Although mocked by economists as a prime example of the 'lump-of-labour' fallacy – the idea that there is only so much work to go around – the government claims that it had created 240,000 jobs by the end of 2000. But to conclude from this that overall employment will decline is to succumb to the lump-of-labour fallacy: the long-disproved idea that there is only a fixed amount of output (and hence work) to go round.
"France's own Frédéric Bastiat had pointed out two centuries ago that there is no limit to the work that needs doing. Debunking the 'lump of labour fallacy' before it was even given that label, he suggested that to parcel out the limited amount of work available, people should be required to use only one hand, or even to have a hand chopped off. But -- the lump of labour fallacy strikes again -- the amount of work to be done is not fixed. The quantity of work is not fixed: such a notion is known to economists as the 'lump-of-labour' fallacy.
"The lump of labour fallacy also lies behind paranoia about jobs being 'stolen' by low-wage countries. The accusation that migrants steal jobs is a version of the 'lump of labour' fallacy -- that there is only so much work to go around. In effect, export pessimism involves a fallacy of its own -- a 'lump-of-trade' fallacy, akin to the idea of a 'lump of labour' (whereby a growing population is taken to imply an ever-rising rate of unemployment, there being only so many jobs to go round).
"This is a classic lump-of-labour fallacy (the idea that there is a fixed quantity of work and that if you take a job it is at my expense). Economists call this the 'lump-of-labour' fallacy. Economists call this the lump of labour (or sometimes the lump of output) fallacy.
"The lump of labour fallacy is often to blame for confusion about whether productivity growth (due to more efficient working practices or to new technology) is a good or bad thing. Luddism is also commonly linked to the lump-of-labour fallacy in economics, which first-year students are taught to refute and according to which, as the demand for labour is fixed in the short run, labour-saving machinery is bound to 'kill jobs'. But the assumption that this results in fewer jobs rather than more output (and hence more goods, and more job-stimulating demand, in a beautifully virtuous circle) is based on an economic fallacy known as the 'lump of labour': the notion that there is only a fixed amount of output (and hence work) to go round.
"If new technology or foreign competition do lead to net job losses it will not be because the lump of labour has become a fact rather than a fallacy, but because labour is not sufficiently mobile between sectors and regions, or because relative wages have failed to adjust. Nearly all of these mistakes boil down in the end to the most enduring of all economic fallacies: the idea that there is only so much output to be produced, or capital to be invested. (Europe is currently preoccupied with the 'lump of labour' version of this mistake, see page 18.)
"A recent piece accused conservatives of embracing the 'lump of labour fallacy', the mistaken claim that there is a fixed quantity of work which governments must strive to allocate equitably. Hmm. Are those arguments entirely incorrect? Yes, entirely. The first is a myth. In fact, the paper he cited did not commit the lump of labour fallacy."
Practice makes perfect
I believe the most egregious falsehood peddled by economics is the rational choice picture of human agency. I believe it is false not, like the behaviorists, because people make systematic mistakes in trying to be rational, but because we are not trying to be rational - in the sense the theory means, the belief-desire model, where desires are reasons - at all. Our lives are spent for the most part, and for the most meaningful part, as participants in a diverse set of "practices" (in the sense made famous by Alasdair McIntyre's After Virtue). Being a participant in a practice means, inter alia, governing one's desires in acccordance with norms, norms to which we grant authority. Practices are in many cases constituted by deontic constraints on participants. There is a wonderful new book by the philosopher James D. Wallace, Norms and Practices, which I strongly recommend to fans of the rational actor model. At one point he quotes John Dewey and I want to pass it along. Dewey was not known for his eloquence, but as Wallace notes, this passage is an astonishing exception:
"The eternal dignity of labor and art lies in their effecting that permanent reshaping of environment which is the substantial foundation of future security and progress. Individuals flourish and whither away like the grass of the fields. But the fruits of their work endure and make possible the development of further activities having fuller significance. It is of grace not of ourselves that we live civilized lives. There is sound sense in the old pagan notion that gratitude is the root of all virtue. Loyalty to whatever in the established environment makes a life of excellence possible is the beginning of all progress. The best we can accomplish for posterity is to transmit unimpaired and with some increment of meaning the environment that makes it possible to maintain the habits of decent and refined life. Our individual habits are links in forming the endless chain of humanity. Their significance depends on the environment inherited from our forerunners, and it is enhanced as we foresee the fruits of our labors in the world in which our successors live." (The source is Human Nature and Conduct (1922) a wonderful book altogether).
"The eternal dignity of labor and art lies in their effecting that permanent reshaping of environment which is the substantial foundation of future security and progress. Individuals flourish and whither away like the grass of the fields. But the fruits of their work endure and make possible the development of further activities having fuller significance. It is of grace not of ourselves that we live civilized lives. There is sound sense in the old pagan notion that gratitude is the root of all virtue. Loyalty to whatever in the established environment makes a life of excellence possible is the beginning of all progress. The best we can accomplish for posterity is to transmit unimpaired and with some increment of meaning the environment that makes it possible to maintain the habits of decent and refined life. Our individual habits are links in forming the endless chain of humanity. Their significance depends on the environment inherited from our forerunners, and it is enhanced as we foresee the fruits of our labors in the world in which our successors live." (The source is Human Nature and Conduct (1922) a wonderful book altogether).
Tuesday, June 16, 2009
Do Market Always Clear?
John Tamny must think so:
Yes – laissez-faire as markets always clear. Like Lord Keynes, Ezra Klein knows this is utter BS:
Question to the editors of Forbes – why did you even bother to publish Tamny’s musings?
the flipside of failure is opportunity ... the failure of certain chains and restaurants has created opportunities for other eating establishments to expand. Restaurant growth in any kind of economy is expensive, but it's cheaper for chains to convert existing restaurants than to build them from the ground up. Thanks to the closing of various eateries nationwide, expansion for rising chains has been less expensive … It would be impossible to calculate, but it's likely that the creation of the Hummer brand (and the factories necessary to build it) from scratch would have cost many multiples of the $500 million that Sichuan paid GM for Hummer. The Chinese company will now be able to grow on the relative cheap, and as GM announced at the time of the deal, its purchase means that 3,000 U.S.-based jobs will be saved. All of these stories are in no way meant to minimize the pain of losing one's house, job or business. Still, these stories do remind us that just as the human body frequently heals itself during times of illness, the economy is ultimately comprised of self-interested individuals who, if left alone, will work in order to improve their individual financial situations. In that sense, the answer to our sagging economy today is not more government intervention, but instead a humble federal government that will sit back and let the economy heal itself. The flipside of economic failure is economic opportunity, and it's time for Washington to get out of the way so that individuals can turn misfortune into opportunity.
Yes – laissez-faire as markets always clear. Like Lord Keynes, Ezra Klein knows this is utter BS:
That's quite a conclusion based off five anecdotal examples. Indeed, as a macroeconomic prediction, it's not even clear what it means. What would a "humble federal government" do, exactly? Shut down the stimulus projects so a couple million more people end up unemployed and a couple million other people can buy their possessions at fire sale prices? Shut down the system of financial supports which are currently sustaining a weakened lending market? Should they have held back from Detroit's collapse so that the assets of the various companies were simply liquidated, along with what was left of the Rust Belt's economy? Should they cut off economic aid to the states so infrastructure literally crumbles? I want specifics! The idea that government should get out of the way because Panera has taken over eight of Bennigan's former locations beggars belief. At the end of the day, it will be a resuscitation of household spending and business expansion that restarts our economic growth. But for now, both have fallen through the floor, with terrible consequences for both individuals and businesses. What little demand exists is being substantially kept afloat by the massive intervention of the federal government. At this moment, federal spending does not exist in competition with household spending. It's one of the last forces sustaining it. Indeed, the idea that the economy will heal itself if the government only steps out of the way is exactly the thinking that led to the deep recession of 1937. What a pity those lessons haven't been better learned.
Question to the editors of Forbes – why did you even bother to publish Tamny’s musings?
Friday, June 12, 2009
Borrow. Spend. Buy. Waste. Want... File. Part II
by the Sandwichman
Bowen, William. “Our New Awareness of the Great Web.” Fortune Feb. 1970: 198-99.
There is the dubious kind of "profit" that exports two-dollar wheat and gets in exchange a Dust Bowl.We may assume that most predictions put forward in 1937, like those of other years, would now be worth recalling only as examples of fallibility. But at least one prediction published in that year has since come to seem exceedingly perspicacious. It appeared in a book by Kenneth Burke, a literary critic:
Among the sciences, there is one little fellow named Ecology, and in time we shall pay him more attention. He teaches us that the total economy of this planet cannot be guided by an efficient rationale of exploitation alone, but that the exploiting part must itself eventually suffer if it too greatly disturbs the balance of the whole (as big beasts would starve, if they succeeded in catching all the little beasts that are their prey their very lack of efficiency in the exploitation of their ability as hunters thus acting as efficiency on a higher level, where considerations of balance count for more than consideration of one tracked purposiveness).In her article, "'One little fellow named Ecology': Ecological Rhetoric in Kenneth Burke's Attitudes toward History." [2004]), Marika Seigel points out that Burke's awareness of ecology in 1937 was by no means unique or idiosyncratic. There was, as Burke himself capitalized in his footnote, a Dust Bowl going on and being reported dramatically in the popular press. Consider, for instance, the following montage of images from The New Republic, The Nation, News-week and Paul B. Sears's Deserts on the March. This 'mere sequence' of images, cited in Seigel's article, composes a compelling narrative: scene, characters, back-story, moral.
A black or yellow copper-brown cloud pokes its ugly head over the horizon. It rises slowly at first, then swiftly. It marches angrily, blotting out the world as it comes. Children scurry like chickens to their mother's wing. With a howl the storm burst upon us. The impact is like a shovelful of fine sand flung against the face. People caught in their own yards grope for the doorstep. Cars come to a standstill, for no light in the world can penetrate that swirling murk.It takes grit to live in this country.
Three men and a woman are seated around a dust-caked lamp, on their faces grotesque masks of wet cloth. The children have been put to bed with towels tucked under their heads. My host greets us: "It takes grit to live in this country."
Two-dollar wheat during the war lured growers farther and farther into the West. The deeper they went, the dryer they found the country. Gang-plows ripped and chopped sage brush and the hardy native grasses. The roots of these plants had been the straw in the brick of the Great Plains' soil. When they were destroyed the soil crumbled. Each year's ploughing left a raw surface exposed to the winds.
No work of ignorance or malice is this but the inevitable result of a system which has ever encouraged immediate efficiency without regard to ultimate consequences.
Bowen, William. “Our New Awareness of the Great Web.” Fortune Feb. 1970: 198-99.
Thursday, June 11, 2009
Abducted by Aliens!!!
by the Sandwichman
We're conducting a little informal experiment here at EconoSpeak. Does controversial, sensationalist material that you can do nothing about attract more comment (whether pro or con) than substantive historical analysis that informs crucial policy decisions and could be the basis for building a progressive political bloc?
My bet is on the sensationalism.
We're conducting a little informal experiment here at EconoSpeak. Does controversial, sensationalist material that you can do nothing about attract more comment (whether pro or con) than substantive historical analysis that informs crucial policy decisions and could be the basis for building a progressive political bloc?
My bet is on the sensationalism.
Wednesday, June 10, 2009
Nonlinear Economic Dynamics in Sweden
So, I delivered a plenary address in Jonkoping, Sweden at the 6th International Conference on Nonlinear Economic Dynamics, with some semi-juicy stuff from it below the fold. However, for above the fold I shall comment on the general atmosphere. What is in is agent-based modeling of the nonlinear dynamics of financial markets, especially speculative bubbles and crashes. Other topics covered included oligopoly dynamics, macroeconomic fluctuations, ecologic-economic models, and regional models, as well as some pure math stuff.
Some of the people doing the financial markets modeling are those who have been way ahead of what has gone on, such as Frank Westerhoff who was in the NY Times last fall, or Serena Sordi and Alessandro Vercelli of Siena, who have been modeling Minsky dynamics for years and are now looking very prescient indeed. But now it is very faddish to do this stuff, although I think that it is indeed the way to go. So, one participant who is an industrial organization person was complaining about "there are too many financial models," and then he chaired a session on oligopoly dynamics. Much to his annoyance, one participant who was supposed to present a paper on Stackelberg entry, completely changed his topic to.... financial market dynamics. Oh well. Guess there will be an intellectual speculative bubble in this stuff for awhile, even if some of the folks at this are doing the real thing.
OK now for the juicy stuff from my talk, which was on "Nonlinear Economic Dynamics in Urban and Regional Economics." I covered a lot of stuff that will be in my forthcoming Vol. II of the second edition of my From Catastrophe to Chaos: A General Theory of Economic Discontinuities. However, along the way I documented how Paul Krugman failed to cite other peoples' work, especially that for which he received the Nobel Prize, and showed some figures he published that look like figures in other peoples' work appearing before his that he never cited, and so on and on. I figured I might be in trouble cricitizing the Swedish Royal Academy on Swedish soil, but discovered quite the contrary: the local economists knowledgeable about this material were in full agreement and even said that I had not gone far enough. Apparently the prize not shared with some others for Krugman has created a major "scandal" behind the scenes in Sweden, with phrases such as "committee not well read" "procedures for the committee need reforming" and so on being stated. I will not say all I heard, but I must say that none of it was at all flattering to Paul Krugman, some of it reflecting astoundingly petty conduct on his part. Anyway, they all are down on his case for not citing people who did work before him for which he got the prize.
After a particularly dramatic remark on my part, there was a loud crack of thunder, and one member of the audience declared, "I knew it!"
Oh, this is not juicy particularly, but I also chaired the final session, at which it was decided to found a Nonlinear Economic Dynamics Society on my motion, with me proposing an executive committee, without me on it, but which means the outfit will probably continue to exist.
Some of the people doing the financial markets modeling are those who have been way ahead of what has gone on, such as Frank Westerhoff who was in the NY Times last fall, or Serena Sordi and Alessandro Vercelli of Siena, who have been modeling Minsky dynamics for years and are now looking very prescient indeed. But now it is very faddish to do this stuff, although I think that it is indeed the way to go. So, one participant who is an industrial organization person was complaining about "there are too many financial models," and then he chaired a session on oligopoly dynamics. Much to his annoyance, one participant who was supposed to present a paper on Stackelberg entry, completely changed his topic to.... financial market dynamics. Oh well. Guess there will be an intellectual speculative bubble in this stuff for awhile, even if some of the folks at this are doing the real thing.
OK now for the juicy stuff from my talk, which was on "Nonlinear Economic Dynamics in Urban and Regional Economics." I covered a lot of stuff that will be in my forthcoming Vol. II of the second edition of my From Catastrophe to Chaos: A General Theory of Economic Discontinuities. However, along the way I documented how Paul Krugman failed to cite other peoples' work, especially that for which he received the Nobel Prize, and showed some figures he published that look like figures in other peoples' work appearing before his that he never cited, and so on and on. I figured I might be in trouble cricitizing the Swedish Royal Academy on Swedish soil, but discovered quite the contrary: the local economists knowledgeable about this material were in full agreement and even said that I had not gone far enough. Apparently the prize not shared with some others for Krugman has created a major "scandal" behind the scenes in Sweden, with phrases such as "committee not well read" "procedures for the committee need reforming" and so on being stated. I will not say all I heard, but I must say that none of it was at all flattering to Paul Krugman, some of it reflecting astoundingly petty conduct on his part. Anyway, they all are down on his case for not citing people who did work before him for which he got the prize.
After a particularly dramatic remark on my part, there was a loud crack of thunder, and one member of the audience declared, "I knew it!"
Oh, this is not juicy particularly, but I also chaired the final session, at which it was decided to found a Nonlinear Economic Dynamics Society on my motion, with me proposing an executive committee, without me on it, but which means the outfit will probably continue to exist.
Tuesday, June 9, 2009
Handbook of Research on Complexity
I am pleased to announce the publication of the Handbook on Research on Complexity, edited by me, which has just come out from Edward Elgar. As with all books from his shop, I fear it will be too expensive for most individual readers (get your libraries to order it), at US $ 230.00 (I do not control pricing). Among the authors, besides myself (three chapters), the others are in order of chapters, Brian Arthur, K. Vela Velupillai, Cars Hommes, Michael Kopel, Alan Kirman, Richard H. Day, Thomas Lux, Joseph McCauley with Kevin Bessler and Gemunu Gunaratne, Frank Westerhoff, Hans-Peter Brunner with Peter Allen, Herbert Gintis with Ross Cressman and Thijs Ruijgrok, Roger Koppl, and David Colander, dealing with a wide variety of topics covering many areas of economics.
Explosive Material
Based on these observations, we conclude that the red layer of the red/gray chips we have discovered in the WTC dust is active, unreacted thermitic material, incorporating nanotechnology, and is a highly energetic pyrotechnic or explosive material.[1]
[1] The Open Chemical Physics Journal, 2009, 2, 7-31 7
Open Access
Active Thermitic Material Discovered in Dust from the 9/11 World Trade
Center Catastrophe
http://www.bentham.org/open/tocpj/openaccess2.htm
Scientists:
Niels H. Harrit
1 Jeffrey Farrer
2 Steven E. Jones
3 Kevin R. Ryan4
Frank M. Legge
5 Daniel Farnsworth2
Gregg Roberts
6, James R. Gourley7
and Bradley R. Larsen3
1 Department of Chemistry, University of Copenhagen, Denmark
2 Department of Physics and Astronomy, Brigham Young University, Provo, UT 84602, USA
3 S&J Scientific Co., Provo, UT, 84606, USA
4 9/11 Working Group of Bloomington, Bloomington, IN 47401, USA
5 Logical Systems Consulting, Perth, Western Australia
6 Architects & Engineers for 9/11 Truth, Berkeley, CA 94704, USA
7 International Center for 9/11 Studies, Dallas, TX 75231, USA
http://www.bentham.org/open/tocpj/openaccess2.htm
Monday, June 8, 2009
Borrow. Spend. Buy. Waste. Want... File. Part I
by the Sandwichman
In May 1927, Henry Ford gave the order to shut down production of the Model T to retool for production of the Model A. According to a special report that appeared in the May 5, 1956 issue of Business Week, "Selling to an Age of Plenty," that action by Ford marked "a great divide in modern times... the transition from the Age of Production to the Age of Distribution."
Ford had been reluctant to implement a model change and had earlier declared he would not do so. But competitive pressure from the successful sales strategy of General Motors eventually forced his hand. Beginning in 1923, General Motors had introduced the annual model change for Chevrolet, a move that vaulted the Chevy from a mediocre second-string vehicle to a Brand. The Chevy was murdering the Flivver.
Three years after the Ford Motors shut down, a satirical essay by Kenneth Burke appeared in the New Republic magazine. Titling his essay "Waste -- The Future of Prosperity," Burke dedicated it to Henry Ford who Burke mistakenly credited with the model change and the "planned obsolescence" concept.
Burke's Veblen-inspired satire revolved around what he called the "Theory of the Economic Value of Waste," which may be stated as: "The more we learn to use what we do not need, the greater our consumption, the greater our consumption, the greater our production; and the greater our production, the greater our prosperity." "By this system," Burke explained, "business need never face a saturation point. For though there is a limit to what a man can use, there is no limit whatever to what he can waste." With the sole proviso that, "We have simply to make sure that the increase in the number of labor-saving devices does not shorten the hours of labor."
Besides annual model changes for automobiles, Burke ruminated on such advances as disposable razor blades, skyscrapers, beverages, advertising, prisons and war as vehicles for stimulating the economy and keeping people busy "for at least eighteen hours a day replacing the wasted commodities."
Twenty-six years later, writing in The Nation, Burke got the opportunity to retract his unjust indictment of Henry Ford when Business Week published the article mentioned in the first paragraph.
In May 1927, Henry Ford gave the order to shut down production of the Model T to retool for production of the Model A. According to a special report that appeared in the May 5, 1956 issue of Business Week, "Selling to an Age of Plenty," that action by Ford marked "a great divide in modern times... the transition from the Age of Production to the Age of Distribution."
Ford had been reluctant to implement a model change and had earlier declared he would not do so. But competitive pressure from the successful sales strategy of General Motors eventually forced his hand. Beginning in 1923, General Motors had introduced the annual model change for Chevrolet, a move that vaulted the Chevy from a mediocre second-string vehicle to a Brand. The Chevy was murdering the Flivver.
Three years after the Ford Motors shut down, a satirical essay by Kenneth Burke appeared in the New Republic magazine. Titling his essay "Waste -- The Future of Prosperity," Burke dedicated it to Henry Ford who Burke mistakenly credited with the model change and the "planned obsolescence" concept.
Burke's Veblen-inspired satire revolved around what he called the "Theory of the Economic Value of Waste," which may be stated as: "The more we learn to use what we do not need, the greater our consumption, the greater our consumption, the greater our production; and the greater our production, the greater our prosperity." "By this system," Burke explained, "business need never face a saturation point. For though there is a limit to what a man can use, there is no limit whatever to what he can waste." With the sole proviso that, "We have simply to make sure that the increase in the number of labor-saving devices does not shorten the hours of labor."
Besides annual model changes for automobiles, Burke ruminated on such advances as disposable razor blades, skyscrapers, beverages, advertising, prisons and war as vehicles for stimulating the economy and keeping people busy "for at least eighteen hours a day replacing the wasted commodities."
Twenty-six years later, writing in The Nation, Burke got the opportunity to retract his unjust indictment of Henry Ford when Business Week published the article mentioned in the first paragraph.
My article like all burlesques was based on what I thought was a grossly exaggerated statement of my case. But recently (in their May 5 and June 16 [1956] issues) Business Week published two articles that startled me, and even nonplussed me, by offering as simple gospel a line that, if I could have thought of it when I was writing my burlesque a bit more than a jubilee ago, I'd certainly have used as the perfect frisky summing-up of my thesis "Just past the midmark of the 20th Century," we read, "it looks as though all of our business forces are bent on getting every one . . ." (and here is the notable slogan) to "Borrow. Spend. Buy. Waste. Want."Part II
I would then have looked upon such a slogan as ideal material for a
farce. Now presumably it is to be taken in full earnest.
In my original article, also, I thought I was making much sport of the trick psychological devices whereby a customer with a perfectly serviceable car was persuaded that he should get rid of it because there was a newer model available. In particular, I guyed the doctrine of "obsolescence" that was implied in such high-pressure selling tactics. But now I find Business Week referring quite respectfully to the way in which General Motors "adopted the annual model change, helping to establish the auto industry's renowned principle of 'planned obsolescence.' " I had mistakenly thought that the principle was a joke; by now it has become "renowned."
A correction of another sort is in order, too. I had featured Henry Ford as the person most responsible for this type of economy. However, the articles in Business Week point out that, on the contrary, Henry Ford was an old-timer ("the archetype of the production man") with an antiquated Puritanical notion that, if you gave people a serviceable car at a price made progressively lower by increased sales, a car that the buyer might use for several or even many years before it needed replacement, you would have done enough. According to Business Week, it was General Motors that freed us of such old-fashioned nonsense, and started the rat-race of the annual change-over, plus the inducements of ever-lengthening time for payment on the instalment plan; and Ford was reluctantly driven to the same methods by the pressures of the situation, with its technologically and financially Darwinian competition for survival.
The articles help us see how, when other industries such as appliances and plastics developed by following the same marketing procedures as General Motors, we finally came to have, in all its perfection, "the Consumption Economy," the "age of distribution, of the consumer and his foibles," in brief the Grand Convergence or Fatal Confluence of the factors that make up what now usually goes by the honorific title (and perhaps partial misnomer) of "The Higher Standard of Living."
An Absurd Growing-Up
. . . our abundant society is at present simply deficient in many of the most elementary objective opportunities and worthwhile goals that could make growing up possible. It is lacking in enough man’s work. It is lacking in honest public speech, and people are not taken seriously. It thwarts aptitude and creates stupidity. It corrupts ingenuous patriotism. It corrupts the fine arts. It shackles science. It dampens animal ardour. It discourages the religious convictions of Justification and Vocation and it dims the sense that there is a Creation. It has no Honour. It has no Community. Just look at that list. [1]
Speech cannot be personal and poetic when there is embarrassment of self-revelation, including revelation to oneself, nor when there is animal diffidence and communal suspicion, shame of exhibition and eccentricity, clinging to social norms. Speech cannot be initiating when the chief social institutions are bureaucratized and predetermine all procedures and decisions, so that in fact individuals have no power anyway that is useful to express. Speech cannot be exploratory and heuristic when pervasive chronic anxiety keeps people from risking losing themselves in temporary confusion and from relying for help precisely on communicating, even if the communication is Babel.
[1] Paul Goodman. 1960, p. 12.
As quoted in:
PAUL GOODMAN (1911-1972)by Edgar Z. Friedenberg1
http://www.ibe.unesco.org/fileadmin/user_upload/archive/publications/ThinkersPdf/goodmane.PDF
[2] Paul Goodman 1964, p. 79
As quoted in:
PAUL GOODMAN (1911-1972)by Edgar Z. Friedenberg1
http://www.ibe.unesco.org/fileadmin/user_upload/archive/publications/ThinkersPdf/goodmane.PDF
A Society That Nobody Wants - edited version number 4
To the right is an image of protesters at the Vietnam moratorium march held in Melbourne on 8th May 1970. This event - the biggest the city had ever seen - was organised by Dr Jim Cairns [1] and held only a few days after 4 students were killed and 9 wounded by US National Guardsmen at Kent State University in America.[2] The Australian establishment was horrified, "predicting blood in the streets and the Minister for Labour and National Service said "it was an invitation to anarchy". Later he called the supporters of the Moratorium "political pack-raping bikies" while the Prime Minister of the day said they were storm troopers." [3]
A few years prior to this event the US State Department had opposed Dr Cairns' application for an entry visa to enable him to engage in a speaking tour against the continued US and Australian military involvement in Vietnam. However, the State Department capitulated when they were advised by Australia's Foreign Minister that such a refusal would be considered "against the interest of Australia if a member of the Australian Parliament was rejected entry into the US." [4]
I was 15 years old then and I didn't know why boys close to my age were being conscripted to fight in this Asian nation. Miseducation was (and remains) compulsory.
Jim Cairns' book entitled 'Silence Kills' has a description of the Vietnam War. On the first page of his book it says:
Vietnam is one-twenty-eight the size of the United States. Its total population is one-sixth that of America. The average Vietnamese lives for a year on less than the average American consumes in a week. Vietnam is a peasant country with little science and little industrial power. America, an industrial giant, is able to send men to the moon. Vietnam has no air force or navy. American aircraft bomb and strafe South Vietnam without fear of attack. Her powerful navy shells hamlets, villages and towns and sends out fighters and bombers while riding safely miles out to sea. The United States is a vast sanctuary where tens of thousands of men in industry turn out bombs, napalm, gases, aircraft, guns, mortars and all the weapons of war; and to this sanctuary America has added the airfields of Thailand and benefits from aid from a dozen 'free world' nations all of whom are safe from attack. Vietnam, in the south, has been bombed, shelled and burnt almost back to the stone age.
Wars and mainstream thought are wrong. Dead wrong. Many years and many books later the questions on the Vietnam War still keep coming.
People are uneasy about and ashamed of the world that they have given their children to grow up in. My parents were resigned about their own convenient adjustments, but they were, by no means willing to see their children robbed of a life of worth.
There is not one scintilla of evidence of Australian troops torturing prisoners of war in Vietnam.[5]
[Army chiefs admitted that water torture was used against captured Vietnamese.]
This is our great adventure, and a wonderful one it is. [6]
If we quit Vietnam, tomorrow we'll be fighting in Hawaii and next week we'll have to fight in San Francisco. [7]
There is little evidence that the Viet Cong have any significant following in South Vietnam. [8]
Oh, it's so hard to give expression to the process of the loss of ethical values that has gone on for so long. There are several edits to this post this morning. Many words are devoted to science, and invention and to practical organisation. It's expedient, but a language appears to have died in the process.
Now the killing fields extend to the world's oceans, forests and the global economy? Greed proves its exponential function.
An autopsy for national and global death needs to be carried out. Part of this process "must read Vietnam."[9]
[1] Doctor Jim Cairns was the former Deputy Prime Minister of Australia in the Whitlams Government. He was forced to resign as a result of what he claims were lies posted in the Melbourne Age (Fairfax) newspaper. (See 'Oil in Troubled Waters' by Jim Cairns. Page 92. Published by Widescope International Publishers Pty Ltd, 1976.)
[2] VCE Attitudes to the Vietnam War
http://www.shrine.org.au/files/documents/VCE-Vietnam.pdf
[3] A reminder of Vietnam by Pauline Mitchell*
http://www.cpa.org.au/garchve03/1161cairns.html
[4] 'Straight Left' by Tom Uren. Random House, 1995. page 188, 189.
[5] Australian Defence Minister Phillip Lynch, responding to Australian journalist John Sorell's claim in the Melbourne Herald, 1966.
[6] Hubert Humphrey, United States Vice President on Vietnam, 1967.
[7] Lyndon Johnson, United States President, 1967. He was elected as a peace candidate in 1964 but then his administration organised the 'Gulf of Tonkin' incident to encourage the American people to yet another war.
[8] Dean Rusk, United States Secretary of State, 1965.
[9] Beyond Vietnam: A Time to Break Silence
By Rev. Martin Luther King. 4 April 1967
Sunday, June 7, 2009
The Fragility of Economic Data
Measurement of profits always includes a certain degree of subjectivity as long as the operation involves durable physical assets or longer-term financial assets, the value of which will depend upon future economic conditions. The economist who concerns himself most deeply with this issue was J. R. Hicks, a younger contemporary of Keynes. Hicks recognized that accounting is backward looking, while economic values depend upon the unknowable future. I backward looking, Hicks meant that accountants use previous prices and extrapolations based upon historical experience. Economics looks at an investment in terms of how it is expected to perform in the future.
For example, when a business purchases a computer for $10,000, it does not write off the full cost in the year of purchase. Instead, it will follow an accounting convention, which will subtract a fixed amount of depreciation for each year of its expected life. Nobody knows whether the computer will be obsolete in two years instead of the expected five. If it has to be replaced sooner than expected, then the computer will have to be depreciated prematurely.
The degree of uncertainty becomes far greater with financial instruments. For this reason, accounting rules can become a matter of life and death for a corporation. To make matters worse, accounting tricks permit corporations to create an illusion of success. Such practices do not depend upon Enron-like fraud. Instead, skilled accountants can circumvent the law, making financial regulation into an oxymoron. At the same time, investors presumed to be making informed decisions, even though they have no way of penetrating the opacity of accounting that supposed to measure how well a firm is doing.
The FASB is supposed to be there to provide investors with reliable information, but when this information became inconvenient, Congress stepped in. Congress did not have to pass any laws; it merely had to threaten to do so.
So now the banks are healthy. The stock market is improving. When will the other shoe drop?
For example, when a business purchases a computer for $10,000, it does not write off the full cost in the year of purchase. Instead, it will follow an accounting convention, which will subtract a fixed amount of depreciation for each year of its expected life. Nobody knows whether the computer will be obsolete in two years instead of the expected five. If it has to be replaced sooner than expected, then the computer will have to be depreciated prematurely.
The degree of uncertainty becomes far greater with financial instruments. For this reason, accounting rules can become a matter of life and death for a corporation. To make matters worse, accounting tricks permit corporations to create an illusion of success. Such practices do not depend upon Enron-like fraud. Instead, skilled accountants can circumvent the law, making financial regulation into an oxymoron. At the same time, investors presumed to be making informed decisions, even though they have no way of penetrating the opacity of accounting that supposed to measure how well a firm is doing.
The FASB is supposed to be there to provide investors with reliable information, but when this information became inconvenient, Congress stepped in. Congress did not have to pass any laws; it merely had to threaten to do so.
So now the banks are healthy. The stock market is improving. When will the other shoe drop?
Coercing Regulators to Create Fictitious Profits
The previous post described how Congress coerced the FASB to change accounting methods to make banks look healther.
Floyd Norris at the NY Times gives an aggregate investment of the profits that Wall Street desired accounting changes made possible. The following Bloomberg article gives some estimates about the effects on Citi's and Wells Fargo's profits.
Norris concludes "Both the banks and their regulators see virtue in opacity."
Norris, Floyd. 2009. "Seeking Reality in Bank Balance Sheets." New York Times Blog (5 June).
http://norris.blogs.nytimes.com/2009/06/05/seeking-reality-in-bank-balance-sheets
"David Zion, the accounting analyst at Credit Suisse, is out with a report today on fair value accounting, in which he calculates how many billions of dollars were added to bank "values" by the changes that the Financial Accounting Standards Board (FASB) was forced to make: "We estimate first quarter pretax earnings improved by $4.9 billion as a result of the new other-than-temporary impairment (OTTI) rules for the 20 Financials sector companies that early adopted them, including eight companies where the new rules may have increased pretax earnings by more than 5%. In addition, the FASB's mark-to-market clarification resulted in five of the 20 companies marking assets up from $27 million to $4.5 billion"."
Onaran, Yalman. 2009. "Bank Profits From Accounting Rules Masking Looming Loan Losses." Bloomberg Markets (July).
http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8
"Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are."
"Citigroup's $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. "The big banks' profits were totally bogus," says Weiss, whose 38-year-old firm rates financial companies. "The new accounting rules, the stress tests: They're all part of a major effort to put lipstick on a pig." Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get."
"FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line. At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said."
"Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can't fund such a transaction, the gain is an accounting quirk, Weiss says."
"Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion."
"Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity .... The higher valuations Wells Fargo put on its securities probably won't last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern's Sherman says."
"The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts. At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says."
Floyd Norris at the NY Times gives an aggregate investment of the profits that Wall Street desired accounting changes made possible. The following Bloomberg article gives some estimates about the effects on Citi's and Wells Fargo's profits.
Norris concludes "Both the banks and their regulators see virtue in opacity."
Norris, Floyd. 2009. "Seeking Reality in Bank Balance Sheets." New York Times Blog (5 June).
http://norris.blogs.nytimes.com/2009/06/05/seeking-reality-in-bank-balance-sheets
"David Zion, the accounting analyst at Credit Suisse, is out with a report today on fair value accounting, in which he calculates how many billions of dollars were added to bank "values" by the changes that the Financial Accounting Standards Board (FASB) was forced to make: "We estimate first quarter pretax earnings improved by $4.9 billion as a result of the new other-than-temporary impairment (OTTI) rules for the 20 Financials sector companies that early adopted them, including eight companies where the new rules may have increased pretax earnings by more than 5%. In addition, the FASB's mark-to-market clarification resulted in five of the 20 companies marking assets up from $27 million to $4.5 billion"."
Onaran, Yalman. 2009. "Bank Profits From Accounting Rules Masking Looming Loan Losses." Bloomberg Markets (July).
http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8
"Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are."
"Citigroup's $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. "The big banks' profits were totally bogus," says Weiss, whose 38-year-old firm rates financial companies. "The new accounting rules, the stress tests: They're all part of a major effort to put lipstick on a pig." Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get."
"FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line. At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said."
"Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can't fund such a transaction, the gain is an accounting quirk, Weiss says."
"Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion."
"Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity .... The higher valuations Wells Fargo put on its securities probably won't last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern's Sherman says."
"The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts. At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says."
Mark-To-Market or Marching to Wall Street's Drummer?
Congress coerced financial regulators to let Wall Street redefine the way it measured profits -- allowing the big banks to show profits and pass the highly vaunted stress test. In the next post, I will indicate how effective this technique has been in creating an illusion of profitability. Then in a third post, I will offer some more comments.
Pulliam, Susan and Tom McGinty. 2009. "Congress Helped Banks Defang Key Rule." Wall Street Journal (3 June): p. A 1.
http://online.wsj.com/article/SB124396078596677535.html
"Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values?"
"The rule change angered some investor advocates. "This is political interference on a major issue, and it raises questions about whether accounting standards going forward will have the quality and integrity that the market needs," says Patrick Finnegan, director of financial-reporting policy for CFA Institute Centre for Financial Market Integrity, an investor trade group."
"The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don't trade on exchanges -- to "mark to market." But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."
"Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics."
"During a March 12 hearing before the House subcommittee, FASB came under intense pressure from committee members. "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself," Rep. Kanjorski said in his opening remarks. "We want you to act," Rep. Kanjorski told Robert Herz, FASB's chief. Mr. Herz waffled about how quickly the standards board could act. Rep. Kanjorski leaned over the dais. "You do understand the message that we're sending?" he said."
""Yes," Mr. Herz replied. "I absolutely do, sir." FASB made speedy revisions to its rules. In an interview, Mr. Herz said FASB merely accelerated the matter on its agenda, and tried to be responsive to input from investors and financial-services firms."
"The change helped turn around investor sentiment on banks. Financial firms had the option of reflecting the accounting change in their first-quarter results; they will be required to do so in the second quarter. Wells Fargo & Co. said the change increased its capital by $4.4 billion in the first quarter. Citigroup Inc. said the change added $413 million to first-quarter earnings. The Federal Home Loan Bank of Boston said the shift boosted its first-quarter earnings by $349 million. Robert Willens, a tax and accounting analyst, estimates that the changes will increase bank earnings in the second quarter by an average of 7%."
"Mark-to-market accounting has been around for decades. Many banks were content with the rules when the markets were going up. But the rules became a big problem in late 2007. As markets turned down, FASB clarified the rules and established how certain financial instruments, including mortgage securities, should be valued. The guidelines said valuations should reflect "observable" input such as market prices whenever possible. They required banks to disclose extensive information about assets they were unable to value based on market prices. Financial firms last year reported losses or write-downs totaling roughly $175 billion, according to Michael Mayo, an analyst at the CLSA unit of Credit Agricole SA."
"Rep. Gary Ackerman (D., N.Y.) and Rep. Kanjorski pushed Mr. Herz to agree to a speedier timetable. They repeatedly cited Rep. Perlmutter's legislation to broaden oversight of FASB. "It will be done in three weeks. Can and will," Rep. Ackerman instructed Mr. Herz. "Yes," Mr. Herz replied. "Can and will," Rep. Ackerman repeated. Rep. Ackerman declined to comment through a spokesman. A FASB director, Lawrence Smith, said at the time that FASB had little choice but to act. "We can't ignore what's going on around us," he said."
Pulliam, Susan and Tom McGinty. 2009. "Congress Helped Banks Defang Key Rule." Wall Street Journal (3 June): p. A 1.
http://online.wsj.com/article/SB124396078596677535.html
"Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values?"
"The rule change angered some investor advocates. "This is political interference on a major issue, and it raises questions about whether accounting standards going forward will have the quality and integrity that the market needs," says Patrick Finnegan, director of financial-reporting policy for CFA Institute Centre for Financial Market Integrity, an investor trade group."
"The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don't trade on exchanges -- to "mark to market." But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."
"Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics."
"During a March 12 hearing before the House subcommittee, FASB came under intense pressure from committee members. "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself," Rep. Kanjorski said in his opening remarks. "We want you to act," Rep. Kanjorski told Robert Herz, FASB's chief. Mr. Herz waffled about how quickly the standards board could act. Rep. Kanjorski leaned over the dais. "You do understand the message that we're sending?" he said."
""Yes," Mr. Herz replied. "I absolutely do, sir." FASB made speedy revisions to its rules. In an interview, Mr. Herz said FASB merely accelerated the matter on its agenda, and tried to be responsive to input from investors and financial-services firms."
"The change helped turn around investor sentiment on banks. Financial firms had the option of reflecting the accounting change in their first-quarter results; they will be required to do so in the second quarter. Wells Fargo & Co. said the change increased its capital by $4.4 billion in the first quarter. Citigroup Inc. said the change added $413 million to first-quarter earnings. The Federal Home Loan Bank of Boston said the shift boosted its first-quarter earnings by $349 million. Robert Willens, a tax and accounting analyst, estimates that the changes will increase bank earnings in the second quarter by an average of 7%."
"Mark-to-market accounting has been around for decades. Many banks were content with the rules when the markets were going up. But the rules became a big problem in late 2007. As markets turned down, FASB clarified the rules and established how certain financial instruments, including mortgage securities, should be valued. The guidelines said valuations should reflect "observable" input such as market prices whenever possible. They required banks to disclose extensive information about assets they were unable to value based on market prices. Financial firms last year reported losses or write-downs totaling roughly $175 billion, according to Michael Mayo, an analyst at the CLSA unit of Credit Agricole SA."
"Rep. Gary Ackerman (D., N.Y.) and Rep. Kanjorski pushed Mr. Herz to agree to a speedier timetable. They repeatedly cited Rep. Perlmutter's legislation to broaden oversight of FASB. "It will be done in three weeks. Can and will," Rep. Ackerman instructed Mr. Herz. "Yes," Mr. Herz replied. "Can and will," Rep. Ackerman repeated. Rep. Ackerman declined to comment through a spokesman. A FASB director, Lawrence Smith, said at the time that FASB had little choice but to act. "We can't ignore what's going on around us," he said."
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