Two trends have dominated financial markets in recent decades. First, there is an arms race going on in instruments and trading algorithms. Math jocks are going braino-a-braino to devise increasingly sophisticated strategies, to the point where even specialists are unsure how to value portfolios. At the same time, there has been an escalation of leverage; unregulated investment funds are lending to the tune of 30 or more times their equity base. Maybe these developments are related.
The current argument is that over-the-top leveraging is the consequence of a regulatory breakdown, and there is certainly truth to the extent that the failure of oversight has enabled investment banks and hedge funds to do whatever they want — but why did they want to extend themselves so far?
Here is one possibility: the new math-intensive strategies are chasing tiny margins. The trading programs are designed to perceive opportunities for arbitrage a nanosecond before anyone else, taking advantage of the slightest misalignment of related prices. We have also witnessed ever more elaborate strategies involving complex tradeoffs between risk and return to create composite positions whose alpha is perceived to be a shade higher in relation to its beta.
The profit margins on these strategies are minuscule, but if everything goes as programmed, predictable. This means that they can be turned into respectable earnings only through intense leverage. By investing in positions at the rate of 3000% of capital, you turn 1% annualized margins (which correspond to much smaller margins on any given trade) into 30%. And the geniuses who devise these opaque instruments tell you that the risk is small relative to the return.
What the risk jockeys always seem to miss is that estimates of portfolio risk depend on covariances among the individual elements, and these in turn are determined by the structural properties of the system in question. And no one can know what they are, because the system is too complex, there are too few data points, and the structure keeps changing. So the models work, trade after trade, until there is an unforeseen systemic event, after which all hell breaks loose.
Then the high degree of leverage, which was necessary to make the strategy pay sufficient dividends, magnifies the risk instead of the return.
If this analysis is correct, it suggests that putting a ceiling on leverage may also slow down the drive toward unfathomable financial complexity. That would be a good thing, and not just for us dummies.
Sunday, March 30, 2008
Friday, March 28, 2008
Bush says "Normalcy" Returns to Iraq
Using that famous neologism of Warren G. Harding, President Bush has declared that "normalcy" has returned to Iraq. Indeed, he is right. The recent period of low conflict and violence, claimed to be due to the surge by many, has now reverted to the more "normal" pattern of greater conflict and violence that we have seen over the last five years. The question arises: why on earth is the US supporting this attack by the al-Maliki government on the followers of Moqtada al-Sadr, whose long-in-place truce has been credited by most with being a major factor in the lowered level of violence?
Juan Cole claims it is that ragamuffin madman Cheney again, whispering in al-Maliki's ear that since the Iraqis have agreed to have serious provincial eletions this fall so that the Sunnis of violent Diyala Province can get rid of their Shi'i government, al-Maliki should take the Sadrists down in Basra so that they do not take over the government there, Iraq's second largest city, and its main export point for oil. Control of oil revenues are clearly a key in this. Of course the part of this that is a big lie has been the claim that the Sadrists are allies of Iran rather than al-Maliki and his ally, al-Hakim. In fact, it is al-Hakim, leader of Iraq's largest party, whose Badr Corps militia has reputedly been the largest recipient of Iranian military aid, and who spent most of the Saddam years in Tehran, whereas al-Sadr, the nationalist, never was in Tehran ever. But, he opposes US troops being in Iraq. So, the US must have lots of troops in Iraq so that we can help defeat those who do not want us to have troops in Iraq, and so that the truly close allies of Iran can remain in control, especially of all the oil revenues from the exports out of Basra.
Juan Cole claims it is that ragamuffin madman Cheney again, whispering in al-Maliki's ear that since the Iraqis have agreed to have serious provincial eletions this fall so that the Sunnis of violent Diyala Province can get rid of their Shi'i government, al-Maliki should take the Sadrists down in Basra so that they do not take over the government there, Iraq's second largest city, and its main export point for oil. Control of oil revenues are clearly a key in this. Of course the part of this that is a big lie has been the claim that the Sadrists are allies of Iran rather than al-Maliki and his ally, al-Hakim. In fact, it is al-Hakim, leader of Iraq's largest party, whose Badr Corps militia has reputedly been the largest recipient of Iranian military aid, and who spent most of the Saddam years in Tehran, whereas al-Sadr, the nationalist, never was in Tehran ever. But, he opposes US troops being in Iraq. So, the US must have lots of troops in Iraq so that we can help defeat those who do not want us to have troops in Iraq, and so that the truly close allies of Iran can remain in control, especially of all the oil revenues from the exports out of Basra.
Thursday, March 27, 2008
My New Ambition
I have been teaching for almost 40 years at a modest, but comfortable salary. I have been thinking that I should figure out a way to lose a few billion dollars so that I can get rewarded with a few million for my efforts.
If anybody wants to contribute to my new career, please send me your checks ASAP. Get in on the ground floor.
If anybody wants to contribute to my new career, please send me your checks ASAP. Get in on the ground floor.
Wednesday, March 26, 2008
I Was Right About Iraq
Given the flurry of commentary on the anniversary of our invasion of Iraq and the reaching of the 4000-dead-US-soldiers milestone by people who were wrong about Iraq, my egomania pushes me to point out how right I was. I was not blogging then, but on the day that Tikrit fell, the end of any semblance of the Saddam regime and just when the first looting began in Baghdad, a point more than any other when it looked like the US had "won," I wrote a column that was published about a week later in our very conservative local paper, the Harrisonburg Daily News-Record. I made six forecasts, three "positive," three "negative." All have proven to be correct. I did not forecast the nature of the future Iraqi government, nor did I forecast that there would be an insurgency nor how serious it would be. My forecasts, and brief commentary.
The "positives"
1) Saddam would no longer violate anybody's human rights (I did not foresee that US troops would be engaging in torture subsequently).
2) US troops in Saudi Arabia to oversee the no-fly zones could be removed, thereby removing one of Osama bin Laden's leading propaganda tools (more than offset by the length and severity of our occupation of Iraq).
3) That whatever regime would come to power in Iraq, the ending of economic sanctions would be a positive (more than offset by the negative impact of the insurgency on the Iraqi economy).
The "negatives:
1) Women's rights would be reduced (Laura Bush likes to say they are enhanced, but women must wear veils and stay at home in a majority of Iraq, although not in the Kurdish-ruled areas; there they may be better off, my only possible mistake here).
2) Christians would be persecuted (about half the Christian population of Iraq, some of which has been there for nearly 2000 years, has left the country).
3) The invasion would serve as a recruiting tool for al Qaeda, in my mind the most important and overwhelming of all these. Indeed, the fact that there was no al Qaeda in Iraq before the invasion but it is now the US's worst enemy there proves this. Indeed, the only reason they have for existing is our presence there. If we pulled our troops out, they would be reduced to near zero very soon thereafter, another forecast from me!
The "positives"
1) Saddam would no longer violate anybody's human rights (I did not foresee that US troops would be engaging in torture subsequently).
2) US troops in Saudi Arabia to oversee the no-fly zones could be removed, thereby removing one of Osama bin Laden's leading propaganda tools (more than offset by the length and severity of our occupation of Iraq).
3) That whatever regime would come to power in Iraq, the ending of economic sanctions would be a positive (more than offset by the negative impact of the insurgency on the Iraqi economy).
The "negatives:
1) Women's rights would be reduced (Laura Bush likes to say they are enhanced, but women must wear veils and stay at home in a majority of Iraq, although not in the Kurdish-ruled areas; there they may be better off, my only possible mistake here).
2) Christians would be persecuted (about half the Christian population of Iraq, some of which has been there for nearly 2000 years, has left the country).
3) The invasion would serve as a recruiting tool for al Qaeda, in my mind the most important and overwhelming of all these. Indeed, the fact that there was no al Qaeda in Iraq before the invasion but it is now the US's worst enemy there proves this. Indeed, the only reason they have for existing is our presence there. If we pulled our troops out, they would be reduced to near zero very soon thereafter, another forecast from me!
Tuesday, March 25, 2008
Social Security Looking in Better Shape
The Social Security Trustees released their annual report today. Even though Bush has appointed people like Andrew Biggs of Cato, a confirmed privatizer and hysterian, to be Deputy Director during a Congressional recess, the current report moves to a somewhat more reasonable and less hysterical position. It is available at
http://www.ssa.gov/OACT/TR/TR08/tr08.pdf.
The inimitable and careful Bruce Webb has pointed out to me personally that even though they are still projecting by their intermediate projections program exhaustion in 2041, the consequences and longer run gaps are now reduced. So, the projected 75-year deficit is now to be 1.70 percent of taxable payroll rather than 1.95%, a decline of 0.25% and total actuarial deficit over 75 years is now supposed to be $4.3 trillion rather than $4.7 trillion, down $400 billion. Also, if the system were to go "bankrupt" in 2041, the payments would be cut to 78% of then existing receipts rather than 75% (this number was 71% back when Bush gave his doom scenario in his SOTU speech in 2005 when he made his push to "reform" SS). So, bit by bit, the reality that social security is really not in such bad shape is creeping in.
http://www.ssa.gov/OACT/TR/TR08/tr08.pdf.
The inimitable and careful Bruce Webb has pointed out to me personally that even though they are still projecting by their intermediate projections program exhaustion in 2041, the consequences and longer run gaps are now reduced. So, the projected 75-year deficit is now to be 1.70 percent of taxable payroll rather than 1.95%, a decline of 0.25% and total actuarial deficit over 75 years is now supposed to be $4.3 trillion rather than $4.7 trillion, down $400 billion. Also, if the system were to go "bankrupt" in 2041, the payments would be cut to 78% of then existing receipts rather than 75% (this number was 71% back when Bush gave his doom scenario in his SOTU speech in 2005 when he made his push to "reform" SS). So, bit by bit, the reality that social security is really not in such bad shape is creeping in.
Monday, March 24, 2008
Capital on the Runway
Readers of the latest missive from Brad Setser may not realize the full implications of his numbers, so we will do the math here. Brad crunches the latest Treasury International Capital (TIC) survey from our friends at the US Treasury Department, adds some other sources, and comes up with the estimate that central banks and sovereign funds pumped over $100B back into the US financial system during the month of January. He worries about the apparent shift away from agencies — our public creditors are reluctant to prop up our crumbling housing sector — but I worry about the implication for private capital flows.
The most recent estimate for last year’s current account deficit is around $740B. To make things simple, assume it remains the same this year. (Recession at home will push it down; recession abroad, if it begins to happen, and oil prices, if they remain higher, will push it up.) If the January rate of official finance continues, it would stand at more than $1200B for the year. The difference, $460B would represent net private capital outflows from the US. If this isn’t capital flight, it’s at least a pretty substantial exodus. My instincts tell me that a full-bore capital flight is the big risk lurking in the shadows. What is the cutoff point between where we are today and a dollar crisis? The answer is, a rate of private outflow that central banks are unable or unwilling to offset. And how much is that?
We are conducting a global experiment right now to find out.
The most recent estimate for last year’s current account deficit is around $740B. To make things simple, assume it remains the same this year. (Recession at home will push it down; recession abroad, if it begins to happen, and oil prices, if they remain higher, will push it up.) If the January rate of official finance continues, it would stand at more than $1200B for the year. The difference, $460B would represent net private capital outflows from the US. If this isn’t capital flight, it’s at least a pretty substantial exodus. My instincts tell me that a full-bore capital flight is the big risk lurking in the shadows. What is the cutoff point between where we are today and a dollar crisis? The answer is, a rate of private outflow that central banks are unable or unwilling to offset. And how much is that?
We are conducting a global experiment right now to find out.
Sunday, March 23, 2008
DEPRESSION ,YOU SAY?
by the Sandwichman
Nothing restores a sandwichman's optimism like a pep talk from "economists" about how they've arranged things so there can't be "another depression like the 1930s"!
Case in point: an article by Charles Duhigg in the New York Times today assures readers that economists say "the odds of a full-blown depression are almost nonexistent."
Why? "incomes are more stable. Many more Americans hold jobs in service sectors, like medicine or education. And more Americans work for the government, which is less inclined to fire people just because the economy turns gloomy."
"Moreover, there are safety nets that can be traced to the Great Depression, like Social Security, unemployment benefits, food stamp programs..."
"Today, we have a lot more flexibility and we can prop up banks and the economy to give us enough time to let things stabilize..."
"... whatever name economists give the current downturn, we are unlikely to see the bread lines, shantytowns and dust bowl of the Great Depression. More likely, these economists say, would be a sudden increase in the number of people selling belongings on eBay."
For sure there won't be another depression like the 1930s. There also will not be another war like World War I or even World War II. But there already is the Iraq War and there already is homelessness, "foodbanks" and social economic exclusion. No breadlines? What about the ones that have been there throughout the boom years? Are they going to abolish those? How long those folks "selling their belongings on eBay" will have to wait for a free terminal at the public library is another question.
The public policy priority of the last 35 years has been to whittle away at the "safety nets", both regulatory and personal security. I see nothing in the NYT article about recent enthusiasm for "reforming" Social Security. Is that because those reform proposals relied on perpetually rising financial markets? Let me get this straight: Social Security, which a few years ago was headed for "bankruptcy", is the safety net that will spare the economy from the consequences of the credit crunch. Could you explain the logic again S L O W L Y, please, Mr. Duhigg?
In a word, ladies and gentlemen, BULLSHIT! Another thing that has changed since the 1930s is the carefully-orchestrated refusal to entertain progressive policy responses to emerging economic
difficulties. And economists have been at the forefront of the neoliberal gatekeeping. Policy ideas have to pass through the wringer of the market-friendly test. The result: wasteful bloat-is-growth policies that enrich the wealthiest and leave the rest to stagnate.
On cue, all the hacks and charlatans who have been clapping and chanting, "FREE MARKETS! FREE MARKETS!" will continue clapping and but begin chanting, "GOVERNMENT SAFETY NETS! GOVERNMENT REGULATIONS!" And all will be well, children.
Nothing restores a sandwichman's optimism like a pep talk from "economists" about how they've arranged things so there can't be "another depression like the 1930s"!
Case in point: an article by Charles Duhigg in the New York Times today assures readers that economists say "the odds of a full-blown depression are almost nonexistent."
Why? "incomes are more stable. Many more Americans hold jobs in service sectors, like medicine or education. And more Americans work for the government, which is less inclined to fire people just because the economy turns gloomy."
"Moreover, there are safety nets that can be traced to the Great Depression, like Social Security, unemployment benefits, food stamp programs..."
"Today, we have a lot more flexibility and we can prop up banks and the economy to give us enough time to let things stabilize..."
"... whatever name economists give the current downturn, we are unlikely to see the bread lines, shantytowns and dust bowl of the Great Depression. More likely, these economists say, would be a sudden increase in the number of people selling belongings on eBay."
For sure there won't be another depression like the 1930s. There also will not be another war like World War I or even World War II. But there already is the Iraq War and there already is homelessness, "foodbanks" and social economic exclusion. No breadlines? What about the ones that have been there throughout the boom years? Are they going to abolish those? How long those folks "selling their belongings on eBay" will have to wait for a free terminal at the public library is another question.
The public policy priority of the last 35 years has been to whittle away at the "safety nets", both regulatory and personal security. I see nothing in the NYT article about recent enthusiasm for "reforming" Social Security. Is that because those reform proposals relied on perpetually rising financial markets? Let me get this straight: Social Security, which a few years ago was headed for "bankruptcy", is the safety net that will spare the economy from the consequences of the credit crunch. Could you explain the logic again S L O W L Y, please, Mr. Duhigg?
In a word, ladies and gentlemen, BULLSHIT! Another thing that has changed since the 1930s is the carefully-orchestrated refusal to entertain progressive policy responses to emerging economic
difficulties. And economists have been at the forefront of the neoliberal gatekeeping. Policy ideas have to pass through the wringer of the market-friendly test. The result: wasteful bloat-is-growth policies that enrich the wealthiest and leave the rest to stagnate.
On cue, all the hacks and charlatans who have been clapping and chanting, "FREE MARKETS! FREE MARKETS!" will continue clapping and but begin chanting, "GOVERNMENT SAFETY NETS! GOVERNMENT REGULATIONS!" And all will be well, children.
Friday, March 21, 2008
Swift Boating Obama: Can Hillary Still Get the Nomination?
So, the Right Wing has decided to ignore the jab at them in his eloquent speech about endlessly showing clips of Rev. Wright's more egregious moments. Last night I saw Hannity complaining that efforts by Obama to talk about Iraq, the economy, health care, or how the State Department has illegally raided his passport file to be "efforts to distract us from his problems with Reverend Wright," accompanied of course by yet more playing of the obnoxious clips. They seem to have found that this is a chink in Obama's armor that is open and that they can use to swift boat him down to defeat by endless repetition, along with distorted interpretations of his speech.
As for Hillary, the key will not be how she does in upcoming primaries (although losing in PA would really shut her down immediately), but how she stacks up against Obama in the head-to-head polls of each against McCain. As of last weekend, for the first time ever, she was doing better than Obama against McCain. If that develops to be a consistent pattern, then those superdelegates, most of them Dem officeholders worrying about reelection, might well surge to Hillary, her only chance. However, as of yesterday, the most recent Rasmusen tracking poll had McCain slaughtering both of them, but Hillary a bit worse: McCain 51% Hillary 41%, McCain 49% Obama 42%. Ugh.
As for Hillary, the key will not be how she does in upcoming primaries (although losing in PA would really shut her down immediately), but how she stacks up against Obama in the head-to-head polls of each against McCain. As of last weekend, for the first time ever, she was doing better than Obama against McCain. If that develops to be a consistent pattern, then those superdelegates, most of them Dem officeholders worrying about reelection, might well surge to Hillary, her only chance. However, as of yesterday, the most recent Rasmusen tracking poll had McCain slaughtering both of them, but Hillary a bit worse: McCain 51% Hillary 41%, McCain 49% Obama 42%. Ugh.
Financial Markets Getting Really Weird: Negative Nominal Interest Rates
Textbooks and most theoretical papers tell us that zero is the floor on nominal interest rates. But news reports in the last few days, noted by both Paul Krugman and Brad DeLong, have announced that some repurchase agreements in New York have had negative nominal interest rates attached to them, parties paying to lend money to others. This seems to be tied to very low short term rates on US Treasury bills, barely above zero, pushed down by TED risk spread so that one month bill rates are about 2% below the 2.25 overnight federal funds rate, which is private interbank loans. Negative nominal rates were last seen in the US on repos when the ffr was at 1%, especially during August to November, 2003, as reported in a paper by Michael J. Fleming and Kenneth Garbade in the April, 2004 Current Issues in Economics and Finance, of the New York Federal Reserve Bank.
It is not just the occasional repos that have had negative nominal interest rates. Barrons in 2006 has reported on a curious financial instrument issued by Berkshire-Hathaway known as "squarz." These have had negative nominal rates on them. Also, in 1998 for a brief period very short term government securities in Japan had negative nominal interest rates, during the pit of their deflation, as reported in the Monetary Trends column of Daniel Thornton from the St. Louis Fed in January, 1999. And, finally, although this has never been reported in print, I was personally told by the individual who handled dealings between the Fed and Freddie Mac that on Dec. 31, 1986, the last day of the old tax code before the Reagan simplification, when many were trying to close a lot of deals, the federal funds rate itself briefly went into negative territory down to about - 1/2 percent, although it also soared as high as about 18% on that rather wild ride of a day. In any case, things are getting weirder and weirder in the current frenzy of the financial markets.
It is not just the occasional repos that have had negative nominal interest rates. Barrons in 2006 has reported on a curious financial instrument issued by Berkshire-Hathaway known as "squarz." These have had negative nominal rates on them. Also, in 1998 for a brief period very short term government securities in Japan had negative nominal interest rates, during the pit of their deflation, as reported in the Monetary Trends column of Daniel Thornton from the St. Louis Fed in January, 1999. And, finally, although this has never been reported in print, I was personally told by the individual who handled dealings between the Fed and Freddie Mac that on Dec. 31, 1986, the last day of the old tax code before the Reagan simplification, when many were trying to close a lot of deals, the federal funds rate itself briefly went into negative territory down to about - 1/2 percent, although it also soared as high as about 18% on that rather wild ride of a day. In any case, things are getting weirder and weirder in the current frenzy of the financial markets.
Tuesday, March 18, 2008
The Iranian Majlis election
Commentary has been muffled on the important Iranian parliamentary (Majlis) election. Most reports have said that Ahmadinejad's group, the Principalists, won and "reformers" lost, but with warnings of splits in the Principalists over economic issues. This is essentially correct, although things are more complicated. First, the pro-reform Khatami group appears to have gained seats from about 30 to about 50 (out of 290), despite being limited by the Council of Guardians to only running 120 total (and the Rafsanjani group did not run at all), see http://news.bbc.co.uk/2/middle_east/7299733.stm. The Principalists are reported to have gotten 71% of the seats, http://www2.irna.ir/en/news/view/line-24/0803166580104449.htm,
however a substantial block of these are "reformist" or "pragmatic" conservatives who are critical of Ahmadinejad on economic policy.
Most of the little commentary in the West has been scary, that Ahmadinejad has been backed. But the real subtext is the domination by Supreme Jurisprudent Ali Khamene'i, who encouraged the pragmatic conservatives while blocking the Khatami group, with the somewhat moderate former nuclear negotiator, Ali Larijani winning big in Qom, and poised to become Speaker of the Assembly. The key point is that Khamene'i has been very clear in supporting a civilian nuclear power program while opposing a military one, just what the US NIE reported this past fall. Thus, while many in the US do not like these guys, there is every reason to believe that they are not pursuing nuclear weapons, the underpinning of the Bush approach to Iran (and apparently that of McCain as well, who has just bizarrely announced that Iran has been training and supporting al Qaeda in Iraq, on which point Joe Lieberman had to correct him by whispering in his ear).
however a substantial block of these are "reformist" or "pragmatic" conservatives who are critical of Ahmadinejad on economic policy.
Most of the little commentary in the West has been scary, that Ahmadinejad has been backed. But the real subtext is the domination by Supreme Jurisprudent Ali Khamene'i, who encouraged the pragmatic conservatives while blocking the Khatami group, with the somewhat moderate former nuclear negotiator, Ali Larijani winning big in Qom, and poised to become Speaker of the Assembly. The key point is that Khamene'i has been very clear in supporting a civilian nuclear power program while opposing a military one, just what the US NIE reported this past fall. Thus, while many in the US do not like these guys, there is every reason to believe that they are not pursuing nuclear weapons, the underpinning of the Bush approach to Iran (and apparently that of McCain as well, who has just bizarrely announced that Iran has been training and supporting al Qaeda in Iraq, on which point Joe Lieberman had to correct him by whispering in his ear).
Another Hysterian on Social Security at WaPo: Allan Sloan
So, the drumbeat of hysteria about social security in the MSM continues today with Allan Sloan in the Washington Post. He has an egregious column repeating with no criticism the forecasts of the intermediate projection of SSA Trustees, and pronouncing that doom will arrive when the fund starts to supposedly run a deficit in 2017. This is supposedly because (gasp!) paying the cashed-in assets from the trust fund will require funds from the general fund.
So, I shall only not two things. One is that in the last ten years the economy has outperformed the low cost projection, and the low cost projection has a deficit never appearing, no 2017 at all. The second is that medicare is already running a deficit, which is rapidly rising, and the earth has not stood still (or, maybe that is why Bear Stearns failed?). The fiscal problem the US faces is medicare, and medical care more broadly, not social security.
So, I shall only not two things. One is that in the last ten years the economy has outperformed the low cost projection, and the low cost projection has a deficit never appearing, no 2017 at all. The second is that medicare is already running a deficit, which is rapidly rising, and the earth has not stood still (or, maybe that is why Bear Stearns failed?). The fiscal problem the US faces is medicare, and medical care more broadly, not social security.
Egalitarianism
Forbes counts 1062 billionaires. The number is increasing exponentially. Soon we will all be billionaires and the trickle down vindicated. Who cares about short run economic setbacks?
Monday, March 17, 2008
Confirmation of The Confiscation of American Prosperity
I cannot help but feel some satisfaction in watching recent event confirm the diagnosis found in my Confiscation of American Prosperity: From Right Wing Extremism and Economic Ideology to the Next Great Depression (Palgrave). The toxic combination of speculative excesses, financial deregulation, and unequal incomes, which make demand dependent on credit.
All the while, Panglossian economics insisted that this was the best of all possible worlds, except for some residues of the New Deal.
The book begins with the historical perspective that the earlier massive waves of inequality and free market dogmatism all led to disaster. This one may not become a renewal of the Great Depression. The Fed may succeed in reflating the bubble, but sooner or later the purge will occur.
UNEMPLOYMENT & KEYNES
by the Sandwichman
Forget about Bear Stearns. It's the long term fallout from the credit crisis that people should be worried about. In a word: unemployment. Somebody has to pay to clean up the mess the financial oligarchy has made.
You know who.
Ultimately, the only way to underwrite the Fed's bailout activity is through wage cuts for ordinary working people. Massive wage cuts. For structural and historical reasons, such cuts can't occur smoothly and easily. So the first round of real wage cuts takes the form of inflation combined with a freeze of nominal wages. We've already seen the beginning of steep increases in food and energy costs. The credit crisis will supply the motivation for capping employment earnings.
There's just one problem (or several): the erosion of dispoable income, combined with an end to easy credit will work its way through the system to depress effective demand for commodities. And don't look to Keynes for a solution. For one thing, it's the long run -- he's dead. For another, Keynes never offered a magic solution for indefinitely continuing to stimulate demand in an already credit and inflation bloated system.
Keynes's answer -- applicable long before we would have gotten to this point -- was essentially the same as Marx's: limit the hours of work.
In a letter to the poet, T.S. Eliot, dated April 5, 1945, Keynes identified shorter hours of work as one of three “ingredients of a cure” for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment." In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."
Forget about Bear Stearns. It's the long term fallout from the credit crisis that people should be worried about. In a word: unemployment. Somebody has to pay to clean up the mess the financial oligarchy has made.
You know who.
Ultimately, the only way to underwrite the Fed's bailout activity is through wage cuts for ordinary working people. Massive wage cuts. For structural and historical reasons, such cuts can't occur smoothly and easily. So the first round of real wage cuts takes the form of inflation combined with a freeze of nominal wages. We've already seen the beginning of steep increases in food and energy costs. The credit crisis will supply the motivation for capping employment earnings.
There's just one problem (or several): the erosion of dispoable income, combined with an end to easy credit will work its way through the system to depress effective demand for commodities. And don't look to Keynes for a solution. For one thing, it's the long run -- he's dead. For another, Keynes never offered a magic solution for indefinitely continuing to stimulate demand in an already credit and inflation bloated system.
Keynes's answer -- applicable long before we would have gotten to this point -- was essentially the same as Marx's: limit the hours of work.
In a letter to the poet, T.S. Eliot, dated April 5, 1945, Keynes identified shorter hours of work as one of three “ingredients of a cure” for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment." In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."
Duane Chapman
Somehow I missed the news that Duane Chapman died last summer — he was only 66 years old. Duane taught environmental economics at Cornell and did pioneering work on several fronts. It was from him that I first learned, back in the mid-1980s, about the importance of the environment-trade nexus; he was years ahead of that curve. He produced a powerful critique of a different sort of curve, Environmental Kuznets, showing that it is an artifact of looking at production rather than consumption footprints. His textbook, Environmental Economics: Theory, Application and Policy, failed to find its audience, but it was sprinkled with analytical gems found nowhere else. While his style could sometimes be a bit gruff, he was never less than warm and supportive to me. I’m grateful I had the opportunity to get to know him.
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