Do Market Always Clear?

John Tamny must think so:

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?

Borrow. Spend. Buy. Waste. Want... File. Part II

by the Sandwichman

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.

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.

It takes grit to live in this country.

Bowen, William. “Our New Awareness of the Great Web.” Fortune Feb. 1970: 198-99.

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.

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.

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

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.

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."

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."

Part II

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

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?

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."

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."

The Waxman-Markey Disaster: Offsets for Every Purse and Purpose

Willem Buiter has noticed another flaw with Waxman-Markey: its carbon reduction targets are purely hypothetical, since virtually all of them, from now to 2050, can be “met” with offsets. Buiter mentions my favorite argument against the offset trade: it relies on an epistemological impossibility, comparing the emissions reductions purchased by offsets against a hypothetical universe in which no such purchases take place. He doesn’t bring up the incentive nightmare, on the other hand: the inducement for every party along the offset value chain to deceive the others and any agency set up to supervise the process. All in all, it seems beside the point to describe carbon offsets as a loophole; they exist precisely because they generate profits for a wide swath of businesses.

As horrible as the offset giveaway is, and the permit giveaway as well, they are not the worst. In theory, both could be fixed if the political system were suddenly to become more responsive to the public interest. Future amendments could require permit auctions and shut down the offsets. What can’t be fixed without overhauling the entire system is the absurdity of issuing permits on a sector-by-sector basis for actual carbon emitted, as if that could actually be monitored and enforced. Environmentalists may think this is a grand idea because, well, those who emit carbon into the atmosphere are bad people and must be kept on some sort of leash. Never mind that it will take an incorruptible army of inspectors to determine just who is behaving how badly, that most small emissions will have to be left outside of such a system altogether, and that parceling out emission budgets this way is an open invitation to rent-seeking.

The simple, effective, non-moralistic solution is to cap the extraction of fossil fuels from the earth, or their importation from other countries. That will make these fuels scarce and expensive, and we can all decide how much we are willing to pay for them according to any reason, noble or base, that moves us. Why is this not on the table?

European vs. U.S. Unemployment Explained

European vs. U.S. Unemployment Explained

When Jaimie Galbraith is good, he can be very good. Here is an example, explaining European unemployment as a result of inequality rather than social democracy. After explaining the close association between inequality and unemployment, he goes on:


97: "The European economy is no longer a collection of separated national systems. Spain, Germany, and France are not independent, mutually isolated national economies. There are no barriers to trade or capital flow, in fact, no formal barriers to the movement of labor throughout Europe. There is now a single currency unit across most of the region. The integration of the European economy in practice -- from the standpoint of a large multinational corporate employer, for instance -- is nearly complete. From every analytical point of view, it is necessary to start thinking of Europe as a single unit. It is therefore necessary, from a statistical and practical point of view, to measure inequality and employment at the European, and not the national, level."

97: "When this is done, the notion of Europe and the United States at the opposite ends of an employment-equality spectrum disappears. Pay inequality within countries of Europe is relatively low, but inequalities between them are very high: much higher than across comparable distances in the United States. Adding the two components, the inequality within and the inequality between countries, one finds that overall inequalities of pay are actually higher in Europe than in the United States. Thus, the standard perception of a European/American counterpoint is simply incorrect. So far as pay is concerned, Europe now is both more unequal and less fully employed than the United States. It is, by the same token, less efficient, but not for the reasons usually given. Rather, the United States wins the efficiency contest -- not because it is less egalitarian but because it is more so than the ungainly ensemble of countries that now make up the European Union."

Galbraith, James K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (New York: Free Press).

Entelechial Property

by the Sandwichman

Am I the only one who uses far-out puns as a research aid?

Before his famed career as moral philosopher and economist, Adam Smith (1723-1790) was well known for a series of public lectures on rhetoric that he gave in Edinburgh and Glasgow. In this volume, Stephen J. McKenna provides the first book-length treatment of Smith's rhetorical theory, focusing on his theory of rhetorical propriety-the means by which effective communication is adapted to the variables of subject, audience, speaker or writer, purpose, and moment-and the centrality of this concept to his thought.

The word 'entelechial' occurs frequently in Laurence Coupe's book, Kenneth Burke on Myth. I'll be saying more about Burke in subsequent posts, specifically with regard to the relationship between myth, rhetoric and economy. But I'm delighted that my punning Google search turned up the unexpected rhetorical connection between Burke and Smith.

Palin’s D in Macroeconomics: Grade Inflation

We have known for some time that Sarah Palin does not know very much with respect to public policy issues in general and even she admitted to having received a D in macroeconomics. But I bet her college instructor is wandering how he gave her such high marks after seeing this.

Alaska governor Sarah Palin let loose Wednesday on the Obama administration for enacting fiscal policies that "fly in the face of principles" and "defy Economics 101." … "Since when can you get out of huge national debt by creating trillions of dollars of new debt?" Palin asked. "It all really is so backwards and skewed as to sound like absolute nonsense when some of this economic policy is explained."

We are in the midst of the worse recession in our lifetime with the employment to population ratio dropping to 59.7% - and NOW this Republican wants fiscal restraint?

Fear of Inflation – Ferguson v. Krugman

Niall Ferguson notes:

On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months.

Ferguson goes onto argue that this settled a debate between him and Paul Krugman where Ferguson has been arguing that the Federal deficits will have to be monetarized and the reason that nominal rates have increased is that inflationary expectations have jumped. The Federal Reserve is reporting that the long-term real interest rate currently was 1.8% on June 1, which means the 3.7% nominal rate represents expected inflation near 1.9%. Back on December 18, 2008, nominal and real interest rates on 10-year government bonds were about around 1.8% - that is, zero expected inflation.

Daniel Gross agrees with Krugman who writes:

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices. But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all. Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell ... Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I’m sympathetic to these arguments and made a similar case for Japan in the 1990s. But the case for inflation never made headway with Japanese policy makers then, and there’s no sign it’s getting traction with U.S. policy makers now.

Ferguson is basically arguing that we have seen a modest increase in expected inflation. Maybe so – but as long as we have only modest inflation, that may be a very good thing for the economy. After all – today’s labor market news is that the employment-population ratio fell to 59.7 percent. So why this silly worry that aggregate demand may be too strong?

Employment Shocker

by the Sandwichman

May nonfarm employment fell by 345,000, much less than even the Sandwichman's revised prediction (between 570,000 and 635,000). Moreover, the April and March employment totals were both revised upward, resulting in reduced job losses for those months of -504,000 (-539,000 preliminary) and -652,000 (-699,000 first revision) respectively. Taking these revisions into account nonfarm employment now stands at 132,200,000, or 214,000 below the preliminary April number.

The BLS birth/death adjustment added in 220,000 jobs in May, compared to 176,000 for May 2008.

Meanwhile, the number of UNemployed persons increased by 787,000 in May, compared to 563,000 in April. And the unemployment rate increased to 9.4% from 8.9%

Stock Market Mirage

How can it be that a company that employs 250,000 filing for bankruptcy is actually good for the stock market and makes the DJIA rally so strongly? The easy answer is the stock market no longer reflects the economic reality on main street. [1]

Or is it that stock markets today are being used to hide the usury on Wall Street: hedge fund manipulation [2] the plunge protection team [3] tax haven secrecy [4] transfer pricing (organised balance sheet losses) [5] global monopoly capitalism, looting [6].

There's a good article by Dr Housing Bubble" on 'Stock Market Dissonance, though his national economy comparison with China is now alarmingly obsolete.


[1] Stock Market Dissonance: Why the Stock Market no Longer Reflects Main Street Economics. The Dow Jones Industrial Average. June 3rd, 2009

[2] Hedge Funds and Stock Market Manipulation. Friday, March 24, 2006

[3] Bush convenes Plunge Protection Team By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:05am GMT 08/01/2008

[4] British Tax Haven’s Safety, Secrecy Face Brown, Obama Challenge
By Simon Clark. 16th January 2009

[5] Transfer Pricing Tax System and Its Development in China
State Administration of Taxation (.pdf)
People’s Republic of China

[6]Looting and How It Came to Pass
Naked Capitalism. 4th June 2009

Revised Preliminary Updated Prediction!

by the Sandwichman

Sandwichman previously predicted a job loss of between 775,000 and 835,000 jobs in the May employment report. This morning, however, when parsing the CNN Money happy talk about signs of improvement, I realized a wrinkle I had overlooked. Ken Houghton also called attention to the wrinkle in a comment. Am I comparing a preliminary report for May to a revised one for April? That hadn't been my intention. But I did make a mistake. I was carelessly thinking of the April job report as if it was static and the May one as if it was the "final edition".

From last September to February, as the employment situation has hemorrhaged, the average adjustment from first preliminary to final revision has been 136,800 per month. Comparing this month's preliminary with last month's first revision could thus handicap the reported job loss by an average of 205,250 jobs. So I'm going to make a revised prediction of a NOMINAL job loss of between 570,000 and 635,000 jobs in May. Because the April job losses will likely be revised upward by, say, 60,000 to 70,000 (to 599,000 to 609,000), CNN Money can even report the preliminary May figure as an "improvement."

It may not be obvious that the 570,000 figure represents the SAME estimate of jobs lost as the original 775,000, the difference being that an estimated 205,000 of them are split between one upward revision of the April report and two future revisions of the May report. Phew!

Michael Perelman's Peace Plan For Iraq

I'm not much of a fan of Milton Friedman, but he once offered a very interesting suggestion to rid society of crime.

"The first and most obvious [way to reduce the amount of crime] is to reduce the range of activities that are designated as illegal. Surely, one reason for the growth in crime is that the number of activities that are classified as such, has multiplied in recent decades."

Friedman, Milton. 1997. "Economics of Crime." The Journal of Economic Perspectives , Vol. 11, No. 2 (Spring): p. 194.

Following Friedman's logic the Defense Department found a simple strategy for evacuating the cities.

"On a map of Baghdad, the US Army's Forward Operating Base Falcon is clearly within city limits. Except that Iraqi and American military officials have decided it's not. As the June 30 deadline for US soldiers to be out of Iraqi cities approaches, there are no plans to relocate the roughly 3,000 American troops who help maintain security in south Baghdad along what were the fault lines in the sectarian war. "We and the Iraqis decided it wasn't in the city," says a US military official. The base on the southern outskirts of Baghdad's Rasheed district is an example of the fluidity of the Status of Forces Agreement (SOFA) agreed to late last year, which orders all US combat forces out of Iraqi cities, towns, and villages by June 30."

Arraf, Jane. 2009. "To Meet June Deadline, US and Iraqis Redraw City Borders." Christian Science Monitor (19 May).

http://www.csmonitor.com/2009/0519/p06s05-wome.html

Here is my suggestion: just redefine Iraq to be the Green Zone. Declare victory now that U.S. government has conquered the country. The rest could be disputed territory, such as Israel defines the West Bank. The United Nations, Iraq's neighbors, or even the Iraqi people could sort out what to do with this disputed.

Republicans should be delighted to be able to claim that Bush's policy is vindicated. Democrats could crow about how they achieved peace. And the Defense Department could find a less dangerous land to bomb.

"Signs of Improvement"?

by the Sandwichman

Parse this:

NEW YORK (CNNMoney.com) -- The pace of U.S. job losses -- while still fairly strong -- may be abating, according to a couple of reports released Wednesday.

Automatic Data Processing, a payroll-processing firm, said private-sector employers cut 532,000 jobs in May, a 2.4% improvement from the revised 545,000 drop in April.

Economists surveyed by Briefing.com expected a more modest loss of 525,000 jobs last month. ADP originally reported a loss of 491,000 private-sector jobs in April.

First, a cut of 532,000 jobs is not an "improvement." Second, even the "abating pace" is based on comparing a revised April figure with a preliminary May one. The revised April figure was 11% lower than the preliminary figure, in itself not an improvement. The April revision was more than four times as large as the difference between the (revised) April result and the (preliminary) May result. And, of course, the May loss came out of an already reduced private employment total, so the percentage by which the "pace abated" (a derivative of a derivative of a derivative) was less than 2%, not the reported 2.4%.

Another consideration that the data don't show is that layoffs typically proceed in reverse order of seniority, competence, specialization and/or (more cynically) political favor. So a half a million workers let go in May can be assumed to be, on average, more entrenched and more vital to the operations of a firm than a half-million laid off in April. This is a qualitative difference that could easily swamp the (minuscule and questionably computed) reported quantitative change.

Ezra Klein on the Tyranny of Economists

Confession – I’m a big fan of the writings of young Ezra Klein and he has point here:

Matt Yglesias has an interesting post on "prestige cross-pollination," which he defines as "the habit of distinguished economists using prestige acquired within their field to pass off sloppy work in other fields." ... Peter Orszag is probably the most powerful voice on health-care policy. Larry Summers, by most accounts, has a hand in literally everything. Economists, in other words, are the prime movers on not only the economy, but health care, climate change, housing policy and much else. The argument for this, of course, is that these issues have heavy economic components. Cap and trade, for instance, is based around the construction of a new market for carbon. And it's not as if there aren't issue specialists -- think climate czar Carol Browner -- around the table. But these issues also have heavy political components, and there aren't mega-powerful political scientists in the White House. And these issues have heavy behavioral components, but though the economists often bring behavioral studies to bear, there aren't research psychologists wandering the West Wing. All these disciplines have skill sets that could be applied broadly, but only economists are given these massive portfolios.

But I have to differ with Ezra on this claim:

You don't see sociologists being asked to write op-eds on the Federal Reserve, or biologists being given a forum to talk about health-care policy.

I guess Ezra missed the CNN show where Sanjay Gupta tried to lecture Michael Moore on health-care policy. Or all the times some right-wing nutcase told us laissez-faire works perfectly or how tax cuts cure all evils. No, there are lots of non-economists who write all sorts of silly things about economic policy. By the way, sometimes non-economists say some perfectly reasonable things. Which reminds me – time to catch-up on some reading.

Let's Play Blame the Teacher

California keeps cutting billions of dollars from education. The real problem is the teacher's union, yeah? So the answer is a simple prescription of multiple doses of multiple choice tests. The rationale of these tests takes me back a few decades to the Cold War when proponents of the free market used to ridicule Soviet planning techniques. These same people sometimes referred to a cartoon from the Soviet humor magazine Krokodil showing a nail factory which had fulfilled its output plan by producing one single nail, the size of the plant. Screwing up nails is bad; screwing up kids is inexcusable. Blaming the teacher's union, while refusing to raise sufficient taxes to support the educational system and the educators -- that's easy.

Reality Check

by the Sandwichman

On May 10, Sandwichman predicted the May BLS Non-farm payroll employment would decline between -775,000 to -835,000 jobs lost.

In a Bloomberg News survey of 60 economists, the median estimate of decline in the May payroll report is -521,000, compared with -539,000 in April.

It's getting close to report card time. The ADP survey will come out Wednesday morning giving an early indication of the direction and magnitude of job losses in May. The BLS report comes out on Friday.

Can You Believe it? David Dollar Tapped to Instruct China

By BOB DAVIS

WASHINGTON -- The U.S. Treasury chose World Bank economist David Dollar as economic emissary to China despite sharp criticism of his economic research.

Mr. Dollar co-authored several influential studies that argued for the effectiveness of aid and the importance of tariff cuts in liberalizing economies and reducing poverty.

But in 2006, a detailed review of World Bank research led by Princeton economist Angus Deaton called the aid paper "unconvincing" because of methodological problems. The paper's results "provide only the weakest of evidence for their central contention, that aid is effective when policies are sound," the review said. The reviewers said the work on trade and growth raised "serious questions about whether the review is really supported by the evidence."

The Bank defended Mr. Dollar's work on trade and said that Mr. Dollar's work "stimulated a useful and ongoing debate."

Mr. Dollar is now the World Bank's country director for China. He will remain in Beijing for his Treasury job. Mr. Dollar didn't respond for comment.

Treasury Secretary Timothy Geithner called Mr. Dollar and David Loevinger, who was appointed as the Washington-based senior coordinator for China affairs, "uniquely qualified to serve in these roles because of their deep expertise and extended experience" in U.S.-China economic issues.

"David Dollar has been involved in some of the most important debates in economic policy for developing countries and the debates have been lively and important. And those at the center of this debate and whose views are taken seriously should expect to be criticized," a senior Treasury official said.

Write to Bob Davis at bob.davis@wsj.com

http://online.wsj.com/article/SB124389754251074257.html#mod=testMod

Jazz is Art and Art Was Jazz

A nice piece in the WSJ about my favorite jazz pianist, and one of the greatest musicians of all time, Art Tatum:

http://online.wsj.com/article/SB124286060905541009.html

North Korea's Real Crime

I don't like nuclear weapons, but for all the outrage regarding North Korea's nuclear explosion, nobody seems to have noticed that this week the U.S. celebrated the opening of the $3.5 billion National Ignition Facility. The New York Times described project without mentioning its military purpose, except quoting the project director who "compared the project to feats like going to the Moon, building the atom bomb and inventing the airplane."

http://www.nytimes.com/2009/05/26/science/26fusi.html?_r=1&ref=science

The NIF is supposed to simulate weapons tests without having to do anything as crude as exploding a bomb underground. Presumably North Korea should be condemned for being too poor to produce this cathedral of death near Berkeley, California.

p.s. I know that the authorities also wish NIF to create fusion power, but I doubt that it would have funding without its military "benefits."

My Therapeutic Rant on the Current Economic Madness

During the Vietnam War, a U.S. soldier seems to have anticipated the spirit of the current economic policy, explaining: "we had to destroy the village in order to save it." The difference today is that while the government destroys villages of the working classes, it is devoting enormous to improve the castles of the rich.

Anyone can see the care and feeding of bankers and financiers, while treating much of the rest of the economy with an iron fist.

The problem is compounded because alongside the federal stimulus, funding for state and local government is falling off the cliff, in effect, neutralizing much of the stimulus. This contradiction in economic policy is nothing new. A half century ago, E. Cary Brown showed him austerity in state and local governments undid much of the New Deal.

Brown, E. Cary. 1956. "Fiscal Policy in the 'Thirties: A Reappraisal." The American Economic Review, Vol. 46, no. 5 (December): pp. 863-66.

Nowhere is that policy divergence clearer than in California. A Republican minority blocks all tax increases. The budget deficit seems to increase by a few billions every few weeks. The answer is to eliminate welfare, slash payment to home healthcare workers, and decimate education.

I have been looking at papers by Greg Duncan showing the devastating effect of child poverty on children's productive capacity as they mature. In my forthcoming book, The Invisible Handcuffs, I discuss literature that compares the consequences of child poverty on brain development, an effect that resembles the impact of a stroke.

Conservatives worry about future tax costs, but what if the losses in the capacity to pay costs exceeds the presumed future burdens of public debt.

60% of Chinese exports to the US are from foreign-owned corporations

Foreign owned global corporations account for 60% of Chinese exports to the US.[1]

Did you know this? How many people understand that this means that non-Chinese corporations are responsible for the trade imbalance between the US and China.

Who does know this?

Not Bernanke and Greenspan who are reported to be blaming the "high-savings countries in East Asia" for "the immense pool of [global] liquidity" (particularly in the US). [2]

But who is creating this gigantic pool of liquidity? Economist Enzio von Pfeil has pointed to problems with the official [US] Treasury records that detail the owners of US 'foreign' debt - "there appear to be no data available on how much U.S. Treasury debt is held by U.S. MNCs". What, he says, do U.S. MNCs do with at least a portion of all of that money they are making in their fabulously successful overseas operations? [3]

Not Barry Eichengreen who holds the title of the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987.[2], [4]. He says that "Whether [or not] there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China." [2] Well, how can that be? If China, itself, is not responsible for the great outflow of goods to the US?

Not economist Mark Thoma at Economist's View. Nor any other people who have posted comments to the Eichengreen article he linked there.[5]

Which is all VERY strange because the folks at the US Federal Reserve, like Greenspan and Bernanke, have worked closely with former Kissinger Associate Timothy Geithner [6] as well Roger Corbett who is a director of Wal-Mart Stores Inc and who is also a board member of the Reserve Bank of Australia. [7] Kissinger Associates and Walmart folks know all about the true nature of US trade with China, after all. Walmart is China's fifth-largest export market, ahead of Germany and Britain. [8] and is responsible for approximately 10 percent of the United States' trade deficit with China.[9] And it was Kissinger's wheeler-dealing, backed up by US military aggression in Vietnam, Indonesia, Korea and elsewhere that led the Chinese Government to surrender its borders to western global corporations in 1971. [10]

As for the economists, how could they not know the pivotal role of western global corporations in world trade? What should the general public expect from this professional body?

Or is this just another exercise in 'preferred nomenclature' suited to U.S. interests? Much akin to the language used by the former Reagan administration.[11]
Terms were employed to create the reality which that aggessive administration wanted. The frightening thing is that all subsequent US administrations, including the present Obama-led one, are following this same atrocious template.

How important is it to get the facts of world trade right? Is trade between subsidiaries of the same transnational corporations trade at all? Think about it. Because the achievement of clarity on this topic may be, in my humble opinion, a key way to avoid a global nuclear conflict! (The current Chinese military build-up is another story).

"The contemplation of things as they are, without substitution or imposture, without error and confusion, is in itself a nobler thing than a whole harvest of invention."

Francis Bacon, 1620.



[1] Undue Influence: Corporations Gain Ground in Battle over China's New Labor Law
2008-11-03 01:33:53
http://blog.ifeng.com/article/1822505.html

[2] By Barry Eichengreen /Beijing
http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=292693&version=1&template_id=46&parent_id=26

[3] Is it true that foreigners finance American debt? - Update 2. Brenda Rosser. Monday, December 1, 2008
http://econospeak.blogspot.com/2008/12/is-it-true-that-foreigners-finance.html

[4] Barry Eichengreen
From Wikipedia, ON 30TH MAY 2009
http://en.wikipedia.org/wiki/Barry_Eichengreen

[5] Mark Thoma
http://economistsview.typepad.com/economistsview/2009/05/global-imbalances-and-future-crises.html

[6] http://www.dollarsandsense.org/blog/2008/11/geithner-and-kissinger-associates-pt-1.html

[7] Sowing the seeds of a northern farm stampede
Matthew Stevens | October 27, 2007
Article from: The Australian
http://www.theaustralian.news.com.au/story/0,25197,22655071-5001641,00.html

[8] The Economic Crisis: A Wal-Mart Economy Dimension. Michael Perelman. Econospeak 18th October 2008

[9] U.S.-China Trade, 1989-2003 - Impact on jobs and industries, nationally and state-by-state
A Research Report Prepared for the U.S.-China Economic and Security Review Commission
By Dr. Robert E. Scott, Director of International Programs, Economic Policy Institute. January 2005
EPI Working Paper #270
http://epi.3cdn.net/c523ff01bec5bc1c25_7nm6i278j.pdf
..\..\..\Economics\China\China-US\China-US-trade-1989-2003.PDF

[10] China's trade policy was not an economic one. Brenda Rosser. May 2009
http://econospeak.blogspot.com/2009/05/chinas-trade-policy-was-not-economic.html

[11] Under Reagan's 'governance' third world nations were to be rolled back (e.g., Nicaragua). Thus they were called 'terrorist' and the insurgents were labeled 'democratic'. The governments in countries to be supported by Reagan and Co, in turn, were called 'democratic' and the insurgents were labeled terrorists. From the book Rollback by Thomas Bodenheimer and Robert Gould

What does it mean to be 'slightly left of centre' today?

Today, I noticed that Angry Bear's website promises "slightly left of center economic commentary on news, politics, and the economy."

What does such a claim mean? Do the writers there aspire to only a slight tweaking of our economic system? Are their words a prayer for business as usual, but with social security payments and a public medical system thrown in?

Tell me how will 'slightly left' folks address a new world of dramatic and abrupt climate change? Will the 'slightly left' sit comfortably with the astounding rise of the planetary enterprise of giant corporate conglomerates? Mao’s dictum was that political power grows out of the barrel of a gun and the fact that corporate power and acquisition has done just that seems to shock no one.

C Wright Mills wrote that to be a member of the Right was to "celebrate society as it is, a going concern." [1] A going concern?? How many more moments will it be possible to pretend that our world can sustain uncontrolled exploitation?

Business people today are thriving in a legal framework that allows them to function without conscience. That means that they kill 600 year old giant rainforest trees on the North West Coast of Tasmania and they don’t care what happens. They change the course of a river, and they don’t care. It means large and small business are free to aerial spray the most dangerous chemicals over millions of people with decades of ongoing social protest still having no real effect.

To be Left, says Mills, is to provide "structural criticism and reportage and theories of society". But in this extraordinary time of history those small number of excessively rich and powerful people running the levers of our society are now presenting an apocalyptic near-future. How free should we be to tone down criticism today. How fair and reasonable is it to be "slightly Left"?

[1] C Wright Mills essay 'The New Left' Page 253 in 'Power Politics and People'.

Sotomayor’s Consumption as an Application of the Life-Cycle Model

I thought Greg Mankiw had a strong grasp of the life-cycle model of consumption:

Some save and intertemporally optimize their consumption plans, while others live paycheck to paycheck, spending their entire income as soon as it's received … Apparently, the new Supreme Court nominee Sonia Sotomayor is an example of the latter. The Washington Post reports that the 54-year-old Sotomayer has a $179,500 yearly salary but “On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined. During the previous four years, the money in the accounts at some points was listed as low as $30,000.” My grandmother would have been shocked and appalled to see someone who makes so much save so little.

That a 54 year woman with high income has only a modest amount in her bank accounts strikes Dr. Mankiw as strong evidence that she has consumed more of her past income than would be implied by the life-cycle model. But I can see at least two explanations for these facts that are entirely consistent with intertemporal optimization of one’s consumption plans. One has to do with the possibility that one’s expected future income can sustain high consumption in one’s later years, which conservative Tom Smith notes:

any day she wants to she could walk out of her current job and into a partnership at a law firm in Manhattan or DC and get paid (guessing again) maybe $2 million a year, with the potential for a lot more. In short, when you take Sotomayor's human capital and circumstances into account, there is nothing wrong with her balance sheet. Sure, she could have another $500,000 tucked away, and that would be nice. But why should she? She has no dependents, except maybe her mother, but her brother is a doctor who, let us assume, is doing well. She has a guaranteed job for life with very generous retirement and health benefits, and any day she decides she wants to be a millionaire, all she has to do is pick up the phone.

The other has to do with the possibility that her compensation includes more than simply this stated salary but also consists of deferred compensation in the form of contributions to a pension plan. Brad DeLong notes that Sotomayor’s wealth in the form of a defined pension plan may be $2.5 million:

Sonia Sotomayor has a large defined benefit pension with a current market value of roughly $2.5 million. Sonia Sotomayor has roughly $1 million in equity in her Greeenwich Village condo. Sonia Sotomayor has no descendents to bequeath wealth too.

How could someone as smart as Dr. Mankiw miss the obvious possibilities? Maybe he posted this very incomplete analysis as a test for his Harvard students to see if they could articulate the possible explanations of the facts presented in his post in a way that was consistent with the life-cycle model.

China's trade policy was not an economic one

Kissinger: Their interest is 100 percent political. There was no emphasis at all on the economic side. Even as we arrived at the airport, one of them commented to me, "We are being overwhelmed with your businessmen. In due time we'll do business, but in our own time."

Remember, these are men of ideological purity. Chou En-lai joined the Communist Party in France in 1920, long before there was a Chinese Communist Party. This generation didn't fight for 50 years and go on the Long March for trade.

Mr Shultz: In Marxist theory, economics is paramount and all else is superstructure.

Kissinger: In Marxist practice, politics is paramount.

Mr Shultz: Then this is ideological impurity.
.....
Kissinger: What I am saying is that they are not interested in trade for trade's sake. I am not saying they are not interested in getting things done.

Another thing struck me: When you have read the formalism of old China, it is remarkable to see the absence of hierarchy, for example, in the personal relationship between Chou and his interpreter. There was an easy personal relationship unlike what you would see in any Western official counterpart.
.....They are concerned with the Soviet military buildup on their border......

Whenever I mentioned chinese history to them, they emphasised what was new. But we were given a special tour of the Forbidden City by their chief archaeologist. Their grace and style did not give you a sense of an enormous break in continuity. At the same time, you get a mystical sense of their revolution as a tremendous emotional experience. Mao is right. It is hard to see how the next generation will feel and act the same way.
....

Mr Peterson: Well,Henry, it's good to have a reason to congratulate you for something other than your presumed sexual exploits.

Kissinger: You know I believe in the linkage theory!



White House Memorandum. 19th July 1971
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB66/ch-41.pdf

The scaffold of 1974

This week I found myself collecting together some memorabilia from 1974 to provide as a gift to a friend born in that year. I found evidence of the scaffold that swayed our future.

Wernher Von Braun (founder of modern rocket science and former vice president of Fairchild Industries) told Dr Carol Rosin (former corporate manager of Fairchild Industries 1974-1977) that the reasons for space-based weaponry were all based on a lie. He said that the strategy was to use scare tactics – that first the Russians, then the terrorists are going to be considered the enemy…. “I was at a meeting in Fairchild Industries in the War Room. The conversation [was] about how they were going to antagonize these enemies and at some point, there was going to be a Gulf War….” [1]

The ex-ambassador to Saudi Arabia, James E. Akins… argued [around 1980] that Kissinger acquiesced in the Shah-led oil price hikes beginning in 1974 to provide Iran with the finances to help out ailing Northrup, McDonnell Douglas, General Dynamics, Boeing, Grumman and Litton Industries. In 1974, as oil prices spiralled upward, the Shah launched what, if completed, would have been the most ambitious nuclear program in the Third World: 20 power plants to generate 23,000 megawatts of nuclear capacity by 1994. The Shah and his small industrial elite were in large part motivated by the huge kickbacks to be gained in the negotiations of each reactor contract. The, corporate vendors, on the other side, were reacting to dwindling sales at home and were often backed by substantial export credit offerings from the home governments.[2]

1974 - ‘The Khemlani Affair’ in Australia. Australian oligopoly media barons ran the most intensive campaign of attack against the Federal Labor (Whitlam) Government when it tried to borrow large sums of money directly from Middle East nations instead of through the (more expensive) US Morgan-Stanley Wall Street monopoly. [3]

The beginning of the ‘supply-side economics’. How a deranged cult hijacked economics. A meeting in Washington in 1974 between Arthur Laffer, an economist, Jude Wanniski, an editorial page writer for the Wall Street Journal and Dick Cheney, then deputy assistant to President Ford. “Notions that would have been laughed at a generation ago ... are now so pervasive, they barely attract any notice.” [4]

1974 –Prediction of the global consolidation of corporate giants. “Their bookkeeping will be the real story of international relations.”

“The world influence of the major corporations grows by the year as the multinational organizations overlaps political frontiers and undercuts the authority of nation states. Professor Howard Perlmutter has predicted a degree of global consolidation among the corporate giants that will, by 1985, place the bulk of the world’s economic power in the hands of two hundred multinational firms, possibly by then incorporated under the United Nations or World Bank. Many of these firms will be tied into “trans-ideological mergers” with socialist governments – like the recent agreement of the Soviet state insurance agency to underwrite American investments in the third world against the risk of expropriation or the much rumoured Russian-American-Japanese venture to exploit Siberian oil – and so will have more to do with the shape of world affairs than the official foreign ministries. Their bookkeeping will be the real story of international relations.” [5]

Who you think need war
Who own the oil
Who do no toil
Who own the soil
Who is not a nigger
Who is so great ain't nobody bigger
Who own this city
Who own the air
Who own the water [6]

[1] Testimony of Dr Carol Rosin
December 2000
From Duncan Roads
nexusmagazine@optusnet.com.au
http://www.mayanmajix.com/art742.html
and
Imagine
by Carol Sue Rosin
http://www.west.net/~crosin/imagine.html
and
Carol Rosin
http://en.wikipedia.org/wiki/Carol_Rosin

[2] The Multinational Monitor
DECEMBER 1980 - VOLUME 1 - NUMBER 11
I R A N
Business In the Shah's Iran
by John Cavanagh
http://multinationalmonitor.org/hyper/issues/1980/12/cavanagh.html

[3] 'Oil in troubled waters' by Jim Cairns (former Deputy Prime Minister in the Labor Whitlam Government in Australia)

[4] How a cult hijacked American politics. Flight of the Wingnuts
by Jonathan Chait. Post date: 09.03.07. Issue date: 09.10.07
http://www.tnr.com/docprint.mhtml?i=20070910&s=chait091007

[5] ‘Where the Wasteland Ends – Politics and Transcendence in Post Industrial Society’ by Theodore Roszak. ISBN 0571 10581 5. 1972. Faber and Faber Limited, London.

[6] Somebody blew up America. AMIRI B 10/01

The Decline and Fall of Work

The Latin word labor means 'suffering'. We are unwise to forget this origin of the words 'travail' and 'labour'. At least the nobility never forgot their own dignity and the indignity which marked their bondsmen. The aristocratic contempt for work reflected the master's contempt fo the dominated classes; work was the exploitation to which they were condemned for all eternity by the divine decree which had willed them, for impenetrable reasons, to be inferior. Work took its place among the sanctions of Providence as the punishment for poverty, and, because it was the means to a future salvation, such a punishment could take on the attributes of pleasure. Basically, though, work was less important than submission.

The bourgeoisie does not dominate, it exploits. It does not need to be master, it prefers to use. Why has nobody seen that the principle of productivity simply replaced the principle of feudal authority? Why has nobody wanted to understand this?

*



* 'The Revolution of Everyday Life' Chapter 5. 'The decline and fall of work'.
by Raoul Vaneigem. A translation from French of 'Traite de savoir-vivre a l'usage des jeunes generations' which was first published in 1967. Page 53

Democratic Masters of Ineptitude

California needs a two-thirds majority to pass the budget. The hard-line Republicans, who are already doing poorly with the public, looked bad. After long delays, six Republicans offered to support a vicious budget, with modest tax increases on matters that left business and the wealthy unaffected. Republicans required that the Legislature agreed to put a number of very restrictive budget referenda on a special election. This strategy was a brilliant success in tripping up the Democrats, who mostly supported the measure, while both anti-tax forces and most unions opposed it.

Besides, if Prop 1A had passed, the state would have to put funds into a rainy day fund, which would have provided a tempting target for future tax cutters.

All but one insignificant measure that affected legislators' salaries lost.

The media played the election is if it was a resounding victory for anti-tax forces. Even more cuts will hit education and the poor. And the Democrats will have no alternative to offer.

AIG: The Disaster of Regulator Shopping

The New York Times published a fascinating piece about how AIG managed to get itself regulated as a Savings and Loan by the Office of Thrift Supervision. Guess why? Light as bank regulation is, S&L regulation is even more lenient. And it paid off in the end, no?

Cyran, Robert. 2009. "Downfall of a Regulator." New York Times (9 April): p. B2.

US financial regulators have spent the last several years in a race to impotence. The clear winner of this chase to the bottom is the Office of Thrift Supervision (OTS), the agency that served as chief financial regulator to a motley crew of credit crunch losers, including Countrywide, Washington Mutual, IndyMac and American International Group. Shuttering OTS would be a good first prize.

Other regulators haven't exactly covered themselves with glory. In sheer numbers, more small state-chartered banks regulated by the Federal Deposit Insurance Corporation have failed. In size, only the government's determination that Citigroup was too big to fail and must be bailed out prevented the Comptroller of the Currency from winning the gold medal for incompetent regulation.

But the OTS exhibited the worst symptoms of regulatory capture -- that's to say taking the side of the industry it regulates instead of the public. Some signs are trivial but telling. It called institutions under its oversight "customers". Others are extraordinary. It allowed multiple thrifts, among them failed IndyMac, to backdate capital infusions so that earlier quarterly financial statements looked healthier than they would have done.

Without this action, IndyMac probably would have closed its doors sooner, possibly reducing associated losses to FDIC and depositors -- the bleeding usually increases as undercapitalised financial institutions stagger on. Scott Polakoff was replaced as acting head of OTS and put on leave at the end of March while the backdating matter is being investigated.

The reasons for this regulatory version of Stockholm Syndrome are multiple. The minimal number of bank failures in the middle of the decade bred widespread complacency among all financial regulators. The Bush administration tended to sympathise with the idea that markets regulate better than federal agencies. And the growth of unregulated mortgage brokers and other non-bank financial companies made even OTS oversight look stringent by comparison.

But OTS funding also probably played a key role in its failures. The agency's budget comes almost entirely from fees levied on the thrifts it regulates. Fees are based upon asset size. This structure gives OTS, or indeed any regulator, a potential incentive to first try and lure financial institutions into becoming thrifts and then look the other way if they enlarge their asset base through questionable lending.

These conflicts of interest were worsened by financial consolidation. A handful of institutions accounted for much of OTS's budget -- Washington Mutual, for example, provided about 12% of the agency's operating funds, according to Patricia McCoy, a professor at the University of Connecticut School of Law who has testified to the US Senate on the matter.

OTS rejects the notion that it encouraged or even temporarily benefited from regulatory arbitrage. But this is hard to square with history. Countrywide switched to the OTS in early 2007, a move that did consolidate the company's oversight but was also widely attributed to the attractions of the agency's perceived lighter touch.

That switch meant four of the five biggest issuers of option ARMs - a particularly virulent form of mortgage loan that former OTS head John Reich had praised in speeches - were under OTS supervision. The fallout from the housing downturn forced Countrywide into Bank of America's arms. The other three -- IndyMac, Downey Financial and Washington Mutual -- all failed.

So what can be done to prevent this happening again? Funding regulatory agencies at least partly through Congressional appropriations rather than user fees might help cut the ties between industry and regulators. It's no panacea, though. The predecessor to OTS was abolished precisely because lawmakers leaned on regulators -- and threatened to cut their budgets -- to stop an investigation into Lincoln Savings and Loan, the thrift controlled by Charles Keating which subsequently went bankrupt. But at least the distance between regulator and regulated is greater when funds come from Congress.

A better idea is regulatory consolidation on the federal level, with broad new statutes that apply to surviving regulators. For example, underwriting should be based on consumers' ability to repay. Common lending standards on sensible principles would limit the wiggle room in which toxic lending products thrive. And reducing the number of agencies should reduce regulatory arbitrage.

After all, Washington bureaucrats gain prestige and influence by winning turf wars, not unlike the private sector companies they oversee. Minimise the soil that can be fought over, and financial institutions have less ability to play one official off against another.

Saving ourselves in a new way

On the right see the satellite image of smoke from one of the many annual industrial forestry burns in Tasmania, Australia. This one is over North Eastern Tasmania where the pollution again caused people to evacuate their homes.

[We must] "stop seeking and celebrating dinky achievements" because "nothing that we are doing, nor even seriously contemplating, comes anywhere near such a massive transformation [as is necessary], yet every actor on the political stage ... downplays the terrible realities and trumpets small-scale solutions wrapped in upbeat rhetoric ... We are racing toward the end of the world and have no plan of escape, but it is considered impolite to acknowledge that fact in public."
----Ken Ward, the former deputy director of Greenpeace USA and an environmental strategist

The elephant in the room “is this: we only get one shot at this, and we don't have the luxury of a trial option that locks in a bad policy for decades…. At 1˚C the genie is out of the bottle, at 2˚C the bottle is broken.”
--- David Spratt, author of Climate Code Red.

"We are on our way to a destabilisation of the world climate that has advanced much further than most people or their governments realise", so "our survival would very much depend on how well we were able to draw down carbon dioxide to 280 parts per million", compared to the present level of close to 390ppm."
---Hans Joachim Schellnhuber, director of the Potsdam Institute and Europe's leading climate scientist

See here.

David Spratt informs the reader that Zero Carbon Britain released an alternative energy strategy in 2007 that found "in 20 years, the UK could produce 100 per cent of electricity without the use of fossil fuels or nuclear power, while also almost tripling electricity supply, and using it to power most heating and transport systems." [1] However, the report refers to carbon capture technology that is not yet proven. It also promotes the idea of a huge expansion of forestry and biomass crops over agricultural land. And here's another major cause for concern about this report. The science behind forests as carbon sinks is very dubious. See 'Pieces of Mind'.

[1] In the end, climate is not an economic question
By David Spratt - posted Tuesday, 8 July 2008
http://www.onlineopinion.com.au/view.asp?article=7602

Political Aspects of Full Employment V, 2.

by Michal Kalecki

'Full employment capitalism' will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.

But perhaps the fight for full employment may lead to fascism? Perhaps capitalism will adjust itself to full employment in this way? This seems extremely unlikely. Fascism sprang up in Germany against a background of tremendous unemployment, and maintained itself in power through securing full employment while capitalist democracy failed to do so. The fight of the progressive forces for all employment is at the same time a way of preventing the recurrence of fascism.

The Economics of Crisis and the Crisis of Economics

am preparing to give two lectures the economics of crisis and crisis of economics during my trip to China. I only have the introduction so far. I would much appreciate any comments.

The Economics of Crisis and the Crisis of Economics
The reputation of economics rises and falls with the business cycle. In the late 19th century, when capitalism faced what was then called the Great Depression, the world held economists in very low regard. For example, Walter Bagehot, longtime editor of London's The Economist, wrote:

Political Economy is not altogether satisfactory. It lies rather dead in the public mind. Not only does it not excite, the same interest as formerly, but there is not exactly the same confidence in it. Younger men either do not study it, or do not feel that it comes home to them, and that it matches with their most living ideas. New sciences have come up in the last few years with new modes of investigation, and they want to know what is the relation of economic science, as their fathers held it, to these new thoughts and these new instruments. They ask, often hardly knowing it, will this 'science' as it claims to be, harmonise with what, we now know to be sciences, or bear to be tried as we now try. [Bagehot 1885, p. 4]

http://michaelperelman.wordpress.com/2009/05/20/the-economics-of-crisis-and-the-crisis-of-economics/