The Wall Street Journal assembled a panel of the worst offenders of the financial meltdown. A reasonable person might expect some contrition after all the damage that they did. Instead, they are asking for more deregulation and tax breaks. Read it and weep!
Berman, Dennis K. 2008. "Street's Demands May Stir Public Wrath." Wall Street Journal (14 October).
Goldman Sachs Group Inc.'s Lloyd Blankfein, J.P. Morgan Chase & Co.'s James Dimon, Blackstone Group LP's Stephen Schwarzman, BlackRock Inc.'s Larry Fink and Silver Lake's Glenn Hutchins assembled for a panel session at the New York Stock Exchange last week organized in part by The Wall Street Journal. "To the 75 Wall Street titans there nodding in agreement, the discussion must have seemed banal. But any outsider, from Washington or the dismissed realms of "flyover country," would have been amazed at the goings-on."
"While America buckles in for years of sacrifice, the five chiefs took a different approach. The group pulled straight from the what-government-can-do-for-you school of 2006, lobbying for Wall Street tax breaks, the repeal of Sarbanes-Oxley and against the distraction of class-action lawsuits."
"Consider Blackstone's Mr. Schwarzman, who took on a wounded look, saying that none of the people on the panel had done anything wrong. "I don't see corruption in this room. ... Every bad actor in this drama has washed away," he said. "There's no one left in place"."
"Mr. Blankfein, meanwhile, shrugged off the idea that Wall Street could do much. The political system has gotten so tainted that "people like us may not lift their heads above the parapet to give ideas for fear that their heads may be shot off," the Goldman CEO said."
Sunday, October 19, 2008
Bretton Woods 2 -- Brumaire 18
by the Sandwichman
"Hegel remarked somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce."
Do all great world-historic photos also appear twice?
The same Alfred Eisenstaedt portrait of Henry Morgenthau and John Maynard Keynes, seated in wicker chairs at Bretton Woods in 1944 appeared yesterday in the Globe and Mail and today in the New York Times. In it, Morganthau appears to be inspecting his fingernails. Keynes looks bored.
In the Globe and Mail, the photo accompanied a story about the call by France's Sarkozy, Germany's Merkel and the UK's Brown for a new international financial order. The Times story briefly mentioned Sarkozy's ambition to "rebuild the foundations of the financial system" but didn't elaborate.
My question, assuming that the "tradition of all dead generations weighs like a nightmare on the brains of the living," is: who gets to play Keynes in this particular sequel? Sarkozy?
The United Nations Monetary and Financial Conference, as the Bretton Woods confab was officially known, convened in June, 1944. In April 1945 JMK wrote to the poet, T.S. Eliot outlining three "ingredients of a cure" for unemployment. The first two were investment and expanded consumption. The third and "ultimate" solution, in Keynes's view was working less. Yes, that's right. Keynes saw the reduction of working time as a more enduring policy approach than either investment or consumption, which in his view had important short term impacts.
The 1945 letter wasn't a fluke or an aberration. In May 1943, Keynes prepared a memorandum on "The Long-Term Problem of Full Employment." In it he projected three phases of post-war economic performance. The first two phases involved investment for stabilization, reconstruction and expanded consumption. During the third phase (estimated to begin some 10 to 15 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."
So the June 1944 Bretton Woods Conference took place almost precisely mid-way between two declarations by Keynes -- in May 1943 and April 1945, respectively -- that reducing the hours of work should be a key policy element in a post-war, full-employment economy.
Get the picture?
"Hegel remarked somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce."
Do all great world-historic photos also appear twice?
The same Alfred Eisenstaedt portrait of Henry Morgenthau and John Maynard Keynes, seated in wicker chairs at Bretton Woods in 1944 appeared yesterday in the Globe and Mail and today in the New York Times. In it, Morganthau appears to be inspecting his fingernails. Keynes looks bored.
In the Globe and Mail, the photo accompanied a story about the call by France's Sarkozy, Germany's Merkel and the UK's Brown for a new international financial order. The Times story briefly mentioned Sarkozy's ambition to "rebuild the foundations of the financial system" but didn't elaborate.
My question, assuming that the "tradition of all dead generations weighs like a nightmare on the brains of the living," is: who gets to play Keynes in this particular sequel? Sarkozy?
The United Nations Monetary and Financial Conference, as the Bretton Woods confab was officially known, convened in June, 1944. In April 1945 JMK wrote to the poet, T.S. Eliot outlining three "ingredients of a cure" for unemployment. The first two were investment and expanded consumption. The third and "ultimate" solution, in Keynes's view was working less. Yes, that's right. Keynes saw the reduction of working time as a more enduring policy approach than either investment or consumption, which in his view had important short term impacts.
The 1945 letter wasn't a fluke or an aberration. In May 1943, Keynes prepared a memorandum on "The Long-Term Problem of Full Employment." In it he projected three phases of post-war economic performance. The first two phases involved investment for stabilization, reconstruction and expanded consumption. During the third phase (estimated to begin some 10 to 15 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."
So the June 1944 Bretton Woods Conference took place almost precisely mid-way between two declarations by Keynes -- in May 1943 and April 1945, respectively -- that reducing the hours of work should be a key policy element in a post-war, full-employment economy.
Get the picture?
Economic and Social Importance of the Eight-Hour Movement
The price of labor (wages), like that of everything else subject to the conditions of exchange, constantly tends toward the cost of its production.
First then, would a general reduction of the hours of labor tend to increase real wages? By real wages we mean the actual amount and social well-being obtainable for a day's labor. In order to answer this question it is necessary to understand how the general rate of real wages is determined. Here we come upon another of the popular fallacies which has done so much to prejudice the average employer against the labor movement. It has not only been taught and believed that high wages are injurious to the interests of the employing class, but it has also been generally accepted that wages are governed by the proportion between the demand and the supply of laborers. And that nothing Can increase the laborers' wages which does not diminish their numbers in proportion to the amount of capital. Consequently, wages can be increased only in One or two ways, either by increasing the employers' capital or reducing the number of laborers.
Happily, however, for the advancement of civilization, this doctrine, as elsewhere shown, instead of being the iron law of economic truth, is a monument of economic heresy. It is now susceptible of scientific demonstration that wages are not a badge of slavery, but a necessary and continual part of industrial progress. The economic law of wages, when properly understood, will be found to be as elastic as human wants' and desires, and capable of as much expansion as the social character of man. This law only needs to be understood by the laboring and employing classes in order to enable them to see that the laborers' income may be indefinitely if gradually increased, without impairing that of any other class, and the progress of society be continuously promoted without abolishing the wages system, or subverting existing social and industrial institutions. When the law of wages, which the limits of this paper prevent from more than briefly intimating, is understood, it will be seen to be the social quality instead of the mere numerical quantity of the laborers which determines their income. It will be found that the price of labor (wages), like that of everything else subject to the conditions of exchange, constantly tends toward the cost of its production. This does not mean that the prices of every particular thing are determined by the cost of producing that particular article, nor that the price is determined by the average cost of producing such articles, but that the general price of any given class of commodities is determined by the cost of producing or replacing that portion of the necessary supply which is produced under the greatest disadvantage. That portion of the general supply of a commodity which is produced at less than the maximum cost yields a profit proportionately to the difference.
Applied to labor, this law is that wages (the price of labor) constantly tend toward the cost of producing service (the cost of a thing being that which its owner gave for it, or would have to give to replace it). The cost of labor to its owner, the laborer, is obviously the cost of his living Upon the same principle then, that producers will not consent to continuously sell a commodity for less than it costs to produce or replace it, the laborer will not consent to sell his service for less than it cost him, i. e. for less than will furnish him a living.
Saturday, October 18, 2008
More Bailout Obscenity
As if the bailout were not were not bad enough, the Wall Street Journal reports that the Treasury Department is, in effect, rewriting the tax code to give away what will easily be tens of billions of dollars.
On the opposite page, the paper reports that the Fannie and Freddie bailout is likely to cost the government considerably more than expected because of court suits charging, probably correctly, that management misled investors.
One can safely as that more will be discovered later.
Drucker, Jesse. 2008. "Obscure Tax Breaks Increase Cost of Financial Rescue." Wall Street Journal (10 October).
http://online.wsj.com/article/SB122428410507346351.html?mod=todays_us_page_one
Saha-Bubna, Aparajita. 2008. "Fannie Suit Vexes Regulator, May Pay Shareholders." Wall Street Journal (10 October).
http://online.wsj.com/article/SB122428804156146581.html?mod=todays_us_page_one
The $700 billion financial rescue package approved by Congress to shore up banks also carries a parallel bailout of the financial sector and other industries through a series of obscure tax breaks.
Operating mostly under the radar screen, Congress, the Treasury Department and the Internal Revenue Service have been rolling back various provisions of the tax code to help out industries and investors caught up in the turmoil.
The most costly -- and most controversial -- of the moves provide billions in extra tax relief to big banks such as Wells Fargo & Co. and Spain's Banco Santander SA. Another change gives aid to investors stung by the auction-rate securities meltdown. Still another shift relaxes tax rules to help big multinationals bring back cash from overseas.
The total sums involved aren't clear, but the cost will easily amount to tens of billions of dollars, tax experts say.
The latest such move was unveiled on Tuesday, when the Treasury Department declared that the cash infusions for banks won't be considered "federal financial assistance." Normally, that type of funding would count as taxable income for the recipients, and could trigger other unfavorable tax consequences for banks receiving assistance that take part in mergers.
A Treasury Department spokesman said the agency is seeking to "provide clarity and certainty regarding tax issues that have come up during market turmoil."
Tax experts say some of the changes are justified, including a number of technical fixes to protect taxpayers from unintended consequences related to government actions, such as the takeovers of Fannie Mae and Freddie Mac, or the substantial investments in banks. Plus, the broader bailout legislation passed by Congress earlier this month shut some other tax loopholes, including one that permitted offshore hedge-fund managers to get favorable treatment for deferred compensation.
The most controversial move so far is an obscure IRS ruling that gives banks the unfettered ability to use the "tax losses" of banks they acquired.
Typically, companies are permitted to carry over tax benefits from years when they lose money to help offset taxes when they return to profitability. However, for decades, Congress has restricted the amount of those losses that can be used in a given year, to prevent companies from buying and selling other firms solely to benefit from the tax strategy.
In a one-sentence ruling issued on Sept. 30, the Treasury Department effectively lifted that restriction if the company being bought is a bank and the losses are attributable to a portfolio of loans.
Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, has complained about the sudden loosening of the rules. "Congress should have been informed and consulted before Treasury took such an extraordinary action that likely will add billions of dollars to the deficit," he said.
Some experts argue that the Treasury has effectively shifted from administering parts of the tax code to changing tax laws on its own. "It doesn't seem possible that they have this authority," said Robert Willens, an independent corporate tax analyst.
The biggest beneficiary so far is likely to be Wells Fargo. The big San Francisco-based bank recently agreed to buy Wachovia Corp. of Charlotte, N.C., which has been hammered by huge losses on mortgage-related securities and loans. Wells Fargo has said it expects to take $74 billion in write-downs on the Wachovia portfolio.
Under the old rules, Wells Fargo would have been limited to annual tax deductions stemming from the Wachovia losses of roughly $930 million over the next 20 years, or a total of $18.6 billion, estimates Mr. Willens. Wells Fargo will now be able to use all $74 billion in losses. That will likely mean additional tax savings to Wells Fargo of about $19.4 billion -- or more than the total purchase price for Wachovia's common stock, currently about $14.3 billion.
A Wells Fargo spokeswoman wouldn't comment on the role of the tax change in its decision to bid for Wachovia, which bested an earlier offer by Citigroup Inc. Wells Fargo's offer took place two days after Treasury's move.
The new tax benefit applies to already-completed bank deals done in the past three years, and possibly even older ones, according to the Treasury Department.
Another winner from the new rule is Banco Santander, which recently agreed to buy the rest of Sovereign Bancorp. The Spanish bank will be able to take advantage of Sovereign's $2 billion in tax losses more quickly than under the old regime, which would have required it to wait nearly two decades to use up the losses.
Because of the Sovereign purchase, Banco Santander also will be one of the many beneficiaries of a separate break, aimed at hundreds of banks that lost money on preferred stock in Fannie Mae and Freddie Mac. The shift allows the banks to count those losses as ordinary losses, rather than less-useful capital losses. The change is expected to cost the federal government $3 billion, according to the congressional Joint Committee on Taxation. [Bailout]
Many investors were caught by surprise when the auctions for auction-rate securites began to fail, leaving them holding notes for which there was no market. New York Attorney General Andrew Cuomo brokered settlements with investment banks and brokerage houses, in which the banks effectively agreed to cover any losses suffered by the investors.
A recent ruling by the Treasury protects the investors in those arrangements, in part by making clear that an agreement by a bank to cover the losses isn't akin to taxable income. Another ruling protects investors who loaned shares to Lehman Brothers Holdings Inc. from being taxed on the transactions. Ordinarily, they are required to get the shares back within a prescribed time frame to avoid owing taxes. That rule isn't normally waived, even if the borrower of the shares goes bankrupt. But the IRS made an exception that effectively applies to transactions with Lehman, which filed for bankruptcy protection last month.
And earlier this month, the IRS relaxed the rules covering how U.S. corporations can repatriate cash parked overseas. The ruling allows companies to bring back money for months at a time without incurring a 35% corporate income tax they normally would owe. It is intended to make it easier for companies to borrow money directly from their foreign subsidiaries, instead of in the uncertain short-term lending market. It is unclear how much this will cost the government.
On the opposite page, the paper reports that the Fannie and Freddie bailout is likely to cost the government considerably more than expected because of court suits charging, probably correctly, that management misled investors.
One can safely as that more will be discovered later.
Drucker, Jesse. 2008. "Obscure Tax Breaks Increase Cost of Financial Rescue." Wall Street Journal (10 October).
http://online.wsj.com/article/SB122428410507346351.html?mod=todays_us_page_one
Saha-Bubna, Aparajita. 2008. "Fannie Suit Vexes Regulator, May Pay Shareholders." Wall Street Journal (10 October).
http://online.wsj.com/article/SB122428804156146581.html?mod=todays_us_page_one
The $700 billion financial rescue package approved by Congress to shore up banks also carries a parallel bailout of the financial sector and other industries through a series of obscure tax breaks.
Operating mostly under the radar screen, Congress, the Treasury Department and the Internal Revenue Service have been rolling back various provisions of the tax code to help out industries and investors caught up in the turmoil.
The most costly -- and most controversial -- of the moves provide billions in extra tax relief to big banks such as Wells Fargo & Co. and Spain's Banco Santander SA. Another change gives aid to investors stung by the auction-rate securities meltdown. Still another shift relaxes tax rules to help big multinationals bring back cash from overseas.
The total sums involved aren't clear, but the cost will easily amount to tens of billions of dollars, tax experts say.
The latest such move was unveiled on Tuesday, when the Treasury Department declared that the cash infusions for banks won't be considered "federal financial assistance." Normally, that type of funding would count as taxable income for the recipients, and could trigger other unfavorable tax consequences for banks receiving assistance that take part in mergers.
A Treasury Department spokesman said the agency is seeking to "provide clarity and certainty regarding tax issues that have come up during market turmoil."
Tax experts say some of the changes are justified, including a number of technical fixes to protect taxpayers from unintended consequences related to government actions, such as the takeovers of Fannie Mae and Freddie Mac, or the substantial investments in banks. Plus, the broader bailout legislation passed by Congress earlier this month shut some other tax loopholes, including one that permitted offshore hedge-fund managers to get favorable treatment for deferred compensation.
The most controversial move so far is an obscure IRS ruling that gives banks the unfettered ability to use the "tax losses" of banks they acquired.
Typically, companies are permitted to carry over tax benefits from years when they lose money to help offset taxes when they return to profitability. However, for decades, Congress has restricted the amount of those losses that can be used in a given year, to prevent companies from buying and selling other firms solely to benefit from the tax strategy.
In a one-sentence ruling issued on Sept. 30, the Treasury Department effectively lifted that restriction if the company being bought is a bank and the losses are attributable to a portfolio of loans.
Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, has complained about the sudden loosening of the rules. "Congress should have been informed and consulted before Treasury took such an extraordinary action that likely will add billions of dollars to the deficit," he said.
Some experts argue that the Treasury has effectively shifted from administering parts of the tax code to changing tax laws on its own. "It doesn't seem possible that they have this authority," said Robert Willens, an independent corporate tax analyst.
The biggest beneficiary so far is likely to be Wells Fargo. The big San Francisco-based bank recently agreed to buy Wachovia Corp. of Charlotte, N.C., which has been hammered by huge losses on mortgage-related securities and loans. Wells Fargo has said it expects to take $74 billion in write-downs on the Wachovia portfolio.
Under the old rules, Wells Fargo would have been limited to annual tax deductions stemming from the Wachovia losses of roughly $930 million over the next 20 years, or a total of $18.6 billion, estimates Mr. Willens. Wells Fargo will now be able to use all $74 billion in losses. That will likely mean additional tax savings to Wells Fargo of about $19.4 billion -- or more than the total purchase price for Wachovia's common stock, currently about $14.3 billion.
A Wells Fargo spokeswoman wouldn't comment on the role of the tax change in its decision to bid for Wachovia, which bested an earlier offer by Citigroup Inc. Wells Fargo's offer took place two days after Treasury's move.
The new tax benefit applies to already-completed bank deals done in the past three years, and possibly even older ones, according to the Treasury Department.
Another winner from the new rule is Banco Santander, which recently agreed to buy the rest of Sovereign Bancorp. The Spanish bank will be able to take advantage of Sovereign's $2 billion in tax losses more quickly than under the old regime, which would have required it to wait nearly two decades to use up the losses.
Because of the Sovereign purchase, Banco Santander also will be one of the many beneficiaries of a separate break, aimed at hundreds of banks that lost money on preferred stock in Fannie Mae and Freddie Mac. The shift allows the banks to count those losses as ordinary losses, rather than less-useful capital losses. The change is expected to cost the federal government $3 billion, according to the congressional Joint Committee on Taxation. [Bailout]
Many investors were caught by surprise when the auctions for auction-rate securites began to fail, leaving them holding notes for which there was no market. New York Attorney General Andrew Cuomo brokered settlements with investment banks and brokerage houses, in which the banks effectively agreed to cover any losses suffered by the investors.
A recent ruling by the Treasury protects the investors in those arrangements, in part by making clear that an agreement by a bank to cover the losses isn't akin to taxable income. Another ruling protects investors who loaned shares to Lehman Brothers Holdings Inc. from being taxed on the transactions. Ordinarily, they are required to get the shares back within a prescribed time frame to avoid owing taxes. That rule isn't normally waived, even if the borrower of the shares goes bankrupt. But the IRS made an exception that effectively applies to transactions with Lehman, which filed for bankruptcy protection last month.
And earlier this month, the IRS relaxed the rules covering how U.S. corporations can repatriate cash parked overseas. The ruling allows companies to bring back money for months at a time without incurring a 35% corporate income tax they normally would owe. It is intended to make it easier for companies to borrow money directly from their foreign subsidiaries, instead of in the uncertain short-term lending market. It is unclear how much this will cost the government.
Economic and Social Importance of the Eight-Hour Movement
While no proposition for industrial reform can produce any real improvement in the laborer's condition which does not promote the advance of real wages, even that can only be economic and wise when it takes place without permanently increasing prices or reducing profits.
This measure is presented to the community for consideration and discussion, wholly as a practical economic proposition in the adoption of which all classes are mutually interested. It is just as irrational to expect the employing classes to favor a proposition which would destroy profits as it would be to expect the laborers to support the scheme for reducing wages. There is no good reason for asking any class to support a proposition which would be injurious to its own material and social well being. No measure for social reform is worth considering which contemplates improving the condition of one class by impairing that of another. Therefore, while no proposition for industrial reform can produce any real improvement in the laborer's condition which does not promote the advance of real wages, even that can only be economic and wise when it takes place without permanently increasing prices or reducing profits. Would a general reduction of the hours of labor tend to promote this result? We unhesitatingly answer yes!
We are entirely willing that the proposition for the general adoption of eight hours shall be accepted or rejected upon the scientific correctness of this reply. All we ask is that the subject shall receive the unbiased consideration to which it is entitled; and that its merits be determined by the widest induction and the closest deduction that accessible industrial data and economic science afford.
This proposition really involves three questions which we will briefly consider separately: First, would it tend to increase real wages? Second, would it tend to raise prices? Third, would it tend to reduce profits?
Friday, October 17, 2008
Praise the Lahde and pass the marijuana
by the Sandwichman
Joe, the [unlicensed] plumber, meet Andrew, the [former] hedge fund manager.
Amen.
Joe, the [unlicensed] plumber, meet Andrew, the [former] hedge fund manager.
Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out....
Capitalism worked for two hundred years, but times change, and systems become corrupt.
Amen.
Do you believe in the American Dream?
Me personally, my American Dream was to have a house, a dog, a couple rifles, a bass boat. I believe in living life easy and simple. I don’t have grand designs. I don’t want much. I just wanna be able to take care of my family and do things with them outdoors and that’s about it, really. I don’t have a “grand scheme” thing. My American Dream is just more personal to me as far as working, making a good living and being able to provide for my family, college for my son. Things like that – simple things in life, that’s really what it comes down to for me. That’s my dream.(1)
The American Dream is that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.(2)
The reform of consciousness consists only in making the world aware of its own consciousness, in awakening it out of its dream about itself, in explaining to it the meaning of its own actions.... Hence, our motto must be: reform of consciousness not through dogmas, but by analysing the mystical consciousness that is unintelligible to itself, whether it manifests itself in a religious or a political form. It will then become evident that the world has long dreamed of possessing something of which it has only to be conscious in order to possess it in reality.(3)
1. Samuel J. Wurzelbacher, Interview, Family Security Matters, October 15, 2008.
2. James Truslow Adams, The Epic of America, 1931.
3. Karl Marx, Letter to Arnold Ruge, September 1843.
The Economic Crisis: A Wal-Mart Economy Dimension
Wal-Mart offers a valuable window into the current economic crisis. Before addressing the current crisis, let's put Wal-Mart in perspective.
Wal-Mart is, at least in part, both a cause and a symptom of what went wrong in the economy, as well as a hint of what might be done to correct the problem.
Wal-Mart represented a logical business strategy to an economy in which real hourly wages have been stagnant for more than three decades. Wal-Mart presented the face of low prices (which were not in reality always lower than elsewhere). At the same time, Wal-Mart contributed to the low wage environment that made it such a successful business.
Besides paying low wages to its own workers (and sometimes not even paying all the wages that it owed), Wal-Mart helped to lower wages elsewhere. For example, grocery stores have put enormous pressure on their unionized workers because of competition from Wal-Mart's nonunion operation. Admittedly, Wal-Mart displaced some small retailers that may have paid lower wages.
As is well known, part of Wal-Mart's strategy was to rely on imports from countries that paid low wages. Competition from these imports both destroy jobs and limited wages from jobs that remained in the U.S.
According to a somewhat dated report, if Wal-Mart were a country, it would rank as China's fifth-largest export market, ahead of Germany and Britain.
Goodman, Peter S. and Philip P. Pan. 2004. "Chinese Workers Pay for Wal-Mart's Low Prices: Retailer Squeezes Its Asian Suppliers to Cut Costs." Washington Post (8 February): p. A 1.
Here is where we can begin thinking about the current crisis. Because of the lack of investment in production in the United States, the annual imbalance between its exports and imports is approximately equal to the $700 billion bailout. To pay for these imports, the country must borrow about $2 billion every day of the year.
China alone holds about $2 trillion in U.S. debt. Until recently, a substantial amount was held in paper from Fannie Mae and Freddie Mac.
Here is a report from the Wall Street Journal:
"It turns out the biggest supporter of the Fannie Mae and Freddie Mac bailouts has been the Chinese government. The Chinese own about half a trillion dollars in Fannie and Freddie securities and they've put the warning out to Treasury Secretary Hank Paulson they expect to be repaid in full. The fear among Mr. Paulson and other Treasury officials is that if Fannie and Freddie debt isn't repaid at 100% par, the Chinese may start dumping their hundreds of billions of dollars of Treasury securities, possibly causing a run on U.S. government debt and sharply raising Uncle Sam's borrowing costs."
Moore, Stephen. 2008. "Bailing Out the Bank of China." Wall Street Journal Political Diary (30 July). http://online.wsj.com/article/SB121734906485393697.html
The Chinese had already sold about a quarter of their holdings of Fannie and Freddie, by last summer. Earlier, Chinese officials had already said that they intended to diversify their holdings of foreign assets rather than committing is much to the United States.
Bloomberg later reported:
"A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. 'If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,' Yu said in e-mailed answers to questions yesterday. 'If it is not the end of the world, it is the end of the current international financial system'."
In the end, Fannie and Freddie were saved, along with the investment of China and other exporters, who will be expected to purchase more US debt to pay for the bailout.
Obviously, Wal-Mart is only a small part of the complex set of conditions that led to the recent crisis. Even so, we can tell a simplified Wal-Mart story to explain the linkages involved here:
Low wages helped to give Wal-Mart a competitive advantage in retailing, which, in turn, helped to spur off-shoring, leading to a serious balance of trade deficit. The low-wage exporters, especially China, attempted to keep their currency cheap, in order to prevent swelling unemployment at home.
To keep the value of its currency low, China and the other exporters sent much of their profits back to the US buying investments in Fannie, Freddie, and U.S. Treasury debt. These funds helped to keep interest rates low, which stimulated both consumption and speculation. In this environment, housing prices and financial assets increased in value, creating even more consumption and a greater knowledge of trade deficit.
Wal-Mart also offers a hopeful pointer. Here is a company whose sales may be greater than the GDP of half the members of the United Nations. Using modern technology, the company has been able to create magnificent efficiencies, along with its less-desirable exploitative consequences. Someday, maybe we can create an economy that can take advantage of the beneficent innovations of business and turn them to public advantage rather than private profit.
Wal-Mart is, at least in part, both a cause and a symptom of what went wrong in the economy, as well as a hint of what might be done to correct the problem.
Wal-Mart represented a logical business strategy to an economy in which real hourly wages have been stagnant for more than three decades. Wal-Mart presented the face of low prices (which were not in reality always lower than elsewhere). At the same time, Wal-Mart contributed to the low wage environment that made it such a successful business.
Besides paying low wages to its own workers (and sometimes not even paying all the wages that it owed), Wal-Mart helped to lower wages elsewhere. For example, grocery stores have put enormous pressure on their unionized workers because of competition from Wal-Mart's nonunion operation. Admittedly, Wal-Mart displaced some small retailers that may have paid lower wages.
As is well known, part of Wal-Mart's strategy was to rely on imports from countries that paid low wages. Competition from these imports both destroy jobs and limited wages from jobs that remained in the U.S.
According to a somewhat dated report, if Wal-Mart were a country, it would rank as China's fifth-largest export market, ahead of Germany and Britain.
Goodman, Peter S. and Philip P. Pan. 2004. "Chinese Workers Pay for Wal-Mart's Low Prices: Retailer Squeezes Its Asian Suppliers to Cut Costs." Washington Post (8 February): p. A 1.
Here is where we can begin thinking about the current crisis. Because of the lack of investment in production in the United States, the annual imbalance between its exports and imports is approximately equal to the $700 billion bailout. To pay for these imports, the country must borrow about $2 billion every day of the year.
China alone holds about $2 trillion in U.S. debt. Until recently, a substantial amount was held in paper from Fannie Mae and Freddie Mac.
Here is a report from the Wall Street Journal:
"It turns out the biggest supporter of the Fannie Mae and Freddie Mac bailouts has been the Chinese government. The Chinese own about half a trillion dollars in Fannie and Freddie securities and they've put the warning out to Treasury Secretary Hank Paulson they expect to be repaid in full. The fear among Mr. Paulson and other Treasury officials is that if Fannie and Freddie debt isn't repaid at 100% par, the Chinese may start dumping their hundreds of billions of dollars of Treasury securities, possibly causing a run on U.S. government debt and sharply raising Uncle Sam's borrowing costs."
Moore, Stephen. 2008. "Bailing Out the Bank of China." Wall Street Journal Political Diary (30 July). http://online.wsj.com/article/SB121734906485393697.html
The Chinese had already sold about a quarter of their holdings of Fannie and Freddie, by last summer. Earlier, Chinese officials had already said that they intended to diversify their holdings of foreign assets rather than committing is much to the United States.
Bloomberg later reported:
"A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. 'If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,' Yu said in e-mailed answers to questions yesterday. 'If it is not the end of the world, it is the end of the current international financial system'."
In the end, Fannie and Freddie were saved, along with the investment of China and other exporters, who will be expected to purchase more US debt to pay for the bailout.
Obviously, Wal-Mart is only a small part of the complex set of conditions that led to the recent crisis. Even so, we can tell a simplified Wal-Mart story to explain the linkages involved here:
Low wages helped to give Wal-Mart a competitive advantage in retailing, which, in turn, helped to spur off-shoring, leading to a serious balance of trade deficit. The low-wage exporters, especially China, attempted to keep their currency cheap, in order to prevent swelling unemployment at home.
To keep the value of its currency low, China and the other exporters sent much of their profits back to the US buying investments in Fannie, Freddie, and U.S. Treasury debt. These funds helped to keep interest rates low, which stimulated both consumption and speculation. In this environment, housing prices and financial assets increased in value, creating even more consumption and a greater knowledge of trade deficit.
Wal-Mart also offers a hopeful pointer. Here is a company whose sales may be greater than the GDP of half the members of the United Nations. Using modern technology, the company has been able to create magnificent efficiencies, along with its less-desirable exploitative consequences. Someday, maybe we can create an economy that can take advantage of the beneficent innovations of business and turn them to public advantage rather than private profit.
Is Keynes' Saving Function Wrong?
Keynes defined 'saving' as being equal to 'investment'. However he did not distinguish in his formula between the savings that were loaned out for investment that increased the productive capacity of the economy (such as being invested in the research and development of solar power, organic food production etc) and the savings that were loaned to financial institutions that were, in turn, loaned out again. This question is increasingly relevant today. After all, in the late 1960s there was a distinct break from traditional banking practice when "instead of waiting for new deposits the banks would go ahead and make new loans, then turn around and borrow huge sums themselves, in effect “buying” their deposit base in the money market to finance the expansion of credit."[1]
"Keynes anticipated that as economies grew and incomes rose, a rising proportion of S/Y would reduce consumption, leading to overproduction if employers did not cut back their own direct investment. This line of thought reflected British marginal utility analysis rather than a financial view of the dynamics that determined the build-up of savings."
Keynes’ savings function: s = S/Y
does not acknowledge that financial institutions tend to save all their income and that a rising proportion of that income is plowed back into new loans rather than invested in tangible capital formation…. "Savings not invested directly in new means of production were invested in more loans and indirectly in stocks, bonds and real estate". ["Nearly all new investment in capital goods and buildings comes from retained business earnings" wrote Dr Hudson.] However, "investment in securities and property already in existence had no positive employment effects. Rather the price of existing assets are pushed up (asset price inflation) and that, in turn, leads to a greater demand for loans from the general public.
At the time Keyne's wrote his General Theory of Employment Interest and Money "there was not much growth in either borrowing or this kind of indirect investment...The tendency was for savings to sit idle, as did much of the labor force."
Since the Second World War a rising proportion of savings find their counterpart more in other peoples’ debts. The net savings rate has fallen, even though debt ratios and gross savings have increased. [2]
Meanwhile the real economy continues to contract. Environmental exploitation is ramped up to service higher levels of debt. The consequent degradation of air, land and water reduces economic opportunities for other peoples and industries. Greater proportions of incomes are diverted from need fulfillment toward more debt servicing.
Money, as we can see, cannot be made with money. "The perception of classical economics that the property and financial system is different has been lost in today’s economic thought." [3]
[1] From: ‘Secrets of the Temple – How the Federal Reserve runs the country’ by William Greider. Pages 109 and 110.
Touchstone Simon & Schuster Building, Rockefeller Center New York. ISBN 0-671-67556-7 pbk. 1987. As quoted in my recent blog entry 'The Beginning of unmanageable liabilities'
'http://econospeak.blogspot.com/2008/10/beginning-of-unmanageable-liabilities.html
[2] Saving, Asset-Price Inflation, and Debt-Induced Deflation by Dr. Michael Hudson
http://www.itulip.com/forums/showthread.php?t=891
[3] Saving, Asset-Price Inflation, and Debt-Induced Deflation by Dr. Michael Hudson
http://www.itulip.com/forums/showthread.php?t=891
"Keynes anticipated that as economies grew and incomes rose, a rising proportion of S/Y would reduce consumption, leading to overproduction if employers did not cut back their own direct investment. This line of thought reflected British marginal utility analysis rather than a financial view of the dynamics that determined the build-up of savings."
Keynes’ savings function: s = S/Y
does not acknowledge that financial institutions tend to save all their income and that a rising proportion of that income is plowed back into new loans rather than invested in tangible capital formation…. "Savings not invested directly in new means of production were invested in more loans and indirectly in stocks, bonds and real estate". ["Nearly all new investment in capital goods and buildings comes from retained business earnings" wrote Dr Hudson.] However, "investment in securities and property already in existence had no positive employment effects. Rather the price of existing assets are pushed up (asset price inflation) and that, in turn, leads to a greater demand for loans from the general public.
At the time Keyne's wrote his General Theory of Employment Interest and Money "there was not much growth in either borrowing or this kind of indirect investment...The tendency was for savings to sit idle, as did much of the labor force."
Since the Second World War a rising proportion of savings find their counterpart more in other peoples’ debts. The net savings rate has fallen, even though debt ratios and gross savings have increased. [2]
Meanwhile the real economy continues to contract. Environmental exploitation is ramped up to service higher levels of debt. The consequent degradation of air, land and water reduces economic opportunities for other peoples and industries. Greater proportions of incomes are diverted from need fulfillment toward more debt servicing.
Money, as we can see, cannot be made with money. "The perception of classical economics that the property and financial system is different has been lost in today’s economic thought." [3]
[1] From: ‘Secrets of the Temple – How the Federal Reserve runs the country’ by William Greider. Pages 109 and 110.
Touchstone Simon & Schuster Building, Rockefeller Center New York. ISBN 0-671-67556-7 pbk. 1987. As quoted in my recent blog entry 'The Beginning of unmanageable liabilities'
'http://econospeak.blogspot.com/2008/10/beginning-of-unmanageable-liabilities.html
[2] Saving, Asset-Price Inflation, and Debt-Induced Deflation by Dr. Michael Hudson
http://www.itulip.com/forums/showthread.php?t=891
[3] Saving, Asset-Price Inflation, and Debt-Induced Deflation by Dr. Michael Hudson
http://www.itulip.com/forums/showthread.php?t=891
Thursday, October 16, 2008
Krugman Refuses to Post My Comment
Today on his blog Paul Krugman put up his own description of the work for which he received the Nobel Prize in economics. I sent him a comment some hours ago asking what he had to say about some of the literature that preceded his 1991 paper on economic geography that mathemetically shows how agglomeration and spatial differentiation proceed, given that he did not, and never has, cited or mentioned any of this. Again, in his paper and elsewhere he has claimed to have provided the first such mathematical model. He has not posted my comment, although perhaps he will after several more hours.
Just for the record, here are two, although they are not the only ones, papers that appeared prior to his that use highly rigorous mathematical models to study agglomeration in spatial location models. I note that one of these was in a prominent economics journal.
Y.Y. Papageorgiou and T.R. Smith, 1983. "Agglomeration as Local Instability of Spatially Uniform Steady-States." Econometrica, vol. 51, pp. 1109-1119.
Wolfgang Weidlich and Gunter Haag. 1987. "A Dynamic Phase Transition Model for Spatial Agglomeration Processes." Journal of Regional Science, vol. 27, pp. 529-569.
This last paper contains a figure that closely resembles one that Krugman publicly presented during a session on complexity at the ASSA/AEA in the early 1990s, not offering any source for it other than himself, although, of course, it remains possible that he never read the paper.
Nevertheless, I continue accept that he is deserving of receiving the prize and even all by himself. Even if there are some question marks about literature citation or complete accuracy of some of his statements, his models have been very well done, and he has done very innovative work in other areas as well, such as foreign exchange rate modeling.
Just for the record, here are two, although they are not the only ones, papers that appeared prior to his that use highly rigorous mathematical models to study agglomeration in spatial location models. I note that one of these was in a prominent economics journal.
Y.Y. Papageorgiou and T.R. Smith, 1983. "Agglomeration as Local Instability of Spatially Uniform Steady-States." Econometrica, vol. 51, pp. 1109-1119.
Wolfgang Weidlich and Gunter Haag. 1987. "A Dynamic Phase Transition Model for Spatial Agglomeration Processes." Journal of Regional Science, vol. 27, pp. 529-569.
This last paper contains a figure that closely resembles one that Krugman publicly presented during a session on complexity at the ASSA/AEA in the early 1990s, not offering any source for it other than himself, although, of course, it remains possible that he never read the paper.
Nevertheless, I continue accept that he is deserving of receiving the prize and even all by himself. Even if there are some question marks about literature citation or complete accuracy of some of his statements, his models have been very well done, and he has done very innovative work in other areas as well, such as foreign exchange rate modeling.
Joe the Plumber’s $275,000 – Is This Gross or Net?
Josh Marshall suggests that Joe the Plumber (real name – Joe Wurzelbacher) may be a rightwing Republican and not the average Joe some want us to believe. When I saw his question directed at Barack Obama, I had the same feeling. Joe told Obama that he was about to purchase a business that brings in $275,000. John McCain must have thought this was Joe’s net as in profit but what if Joe was referring to his gross income or revenue? But let’s suppose Joe has to hire five plumber friends at $42,000 per year to run his business. His net would be only $65,000 per year. While a 50 percent improvement over what his friends would be making, Joe would get a tax cut not a tax increase under Obama’s proposal. Steve Benen makes this same point:
For McCain to suggest otherwise is either dishonesty or sheer confusion. Now I would hope our next President understands the difference between revenue and profit. You may have also heard McCain’s claim that Joe’s business would pay a fine under the Obama health care plan. Watch and enjoy both Obama’s rebuttal and McCain’s confused stare when McCain was caught on one of his many false claims.
Based on the reports this morning, the profits of Wurzelbacher's small business are well under $250,000, so Obama's proposal wouldn't adversely affect him at all. He's apparently concerned that he may someday have those kinds of profits, though, which is obviously his prerogative. In the meantime, depending on some of the details, Wurzelbacher would probably get a tax break under Obama's plan, and if he's like most of the middle class, his break would be bigger under Obama than under McCain.
For McCain to suggest otherwise is either dishonesty or sheer confusion. Now I would hope our next President understands the difference between revenue and profit. You may have also heard McCain’s claim that Joe’s business would pay a fine under the Obama health care plan. Watch and enjoy both Obama’s rebuttal and McCain’s confused stare when McCain was caught on one of his many false claims.
The beginning of 'unmanageable liabilities'.
Coincidence? That when banks adopted 'managed liabilities', using the huge pool of Eurodollars and soon afterward the petrodollars, we experienced historically-unprecedented prolonged inflation. The pool of surplus 'savings' should surely have reduced interest rates but instead banks became a major customer for surplus funds. Their behaviour, as such, would have artificially pushed up the cost of capital (ie interest rates). In themselves the resulting higher charge on debt would have surely created a major source of inflation on its own. Then monetary policy would have created a vicious spiral in further raising inflation (that at least partially resulted from higher interest rates) by raising interest rates further?
"[In the 1960s] American banking had discovered a more aggressive approach to management that evaded the traditional inhibitions of deposit growth, a method for achieving faster growth that appealed especially to the largest and most ambitious banks. Instead of waiting for new deposits the banks would go ahead and make new loans, then turn around and borrow huge sums themselves, in effect “buying” their deposit base in the money market to finance the expansion of credit. The practice was known as “managed liabilities,” since both the regular deposits and the borrowing done by a bank constitute the liabilities on its balance sheet – money owed to someone else. Conversely, a bank’s outstanding loans were its assets – the money it will collect from someone else (exactly the reverse of how families or businesses would describe their balance sheets). Managed liabilities depended on banks issuing such large financial instruments as certificates of deposits and Eurodollar borrowings of $100,000 and in much greater sums. As long as the banks could count on borrowing new funds at a lower interest rate than they charged for lending them out, the interest rate spread assured their profits. [25]”
[25] (William Greider’s] "brief description of how the management strategies of commercial banks evolved into a more aggressive competition is a capsule summary of a rich and complex story. The development is traced in fascinating detail in two books by Martin Mayer, ‘The Bankers’, Random House, 1974, and ‘The Money Bazaars’, EP Dutton, 1984. The international implications are lucidly explained by Michael Moffit, ‘The World’s Money’, Simon and Schuster, 1983."
From: ‘Secrets of the Temple – How the Federal Reserve runs the country’ by William Greider. Pages 109 and 110.
Touchstone Simon & Schuster Building, Rockefeller Center New York. ISBN 0-671-67556-7 pbk. 1987.
"[In the 1960s] American banking had discovered a more aggressive approach to management that evaded the traditional inhibitions of deposit growth, a method for achieving faster growth that appealed especially to the largest and most ambitious banks. Instead of waiting for new deposits the banks would go ahead and make new loans, then turn around and borrow huge sums themselves, in effect “buying” their deposit base in the money market to finance the expansion of credit. The practice was known as “managed liabilities,” since both the regular deposits and the borrowing done by a bank constitute the liabilities on its balance sheet – money owed to someone else. Conversely, a bank’s outstanding loans were its assets – the money it will collect from someone else (exactly the reverse of how families or businesses would describe their balance sheets). Managed liabilities depended on banks issuing such large financial instruments as certificates of deposits and Eurodollar borrowings of $100,000 and in much greater sums. As long as the banks could count on borrowing new funds at a lower interest rate than they charged for lending them out, the interest rate spread assured their profits. [25]”
[25] (William Greider’s] "brief description of how the management strategies of commercial banks evolved into a more aggressive competition is a capsule summary of a rich and complex story. The development is traced in fascinating detail in two books by Martin Mayer, ‘The Bankers’, Random House, 1974, and ‘The Money Bazaars’, EP Dutton, 1984. The international implications are lucidly explained by Michael Moffit, ‘The World’s Money’, Simon and Schuster, 1983."
From: ‘Secrets of the Temple – How the Federal Reserve runs the country’ by William Greider. Pages 109 and 110.
Touchstone Simon & Schuster Building, Rockefeller Center New York. ISBN 0-671-67556-7 pbk. 1987.
Wednesday, October 15, 2008
Time to Reread Christina Stead
The roster of fiction dealing with the innards of the financial system during a time of crisis is slim, but it includes Stead’s House of All Nations. Consider this assessment of the state of paper wealth: “If all the rich people in the world divided up their money among themselves there wouldn't be enough to go around.”
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