The NYTimes has been running a series of articles (at least 2, counting today) about China's "invasion" of Afghanistan. Plundering its resources, while the USofA does the wet work. Here is today's piece. I was moved to write by the last one a few weeks ago, and I am so moved this time.
The money quote:
But the Aynak investment underscores how China's leaders, flush with money and in control of both the government and major industries, meld strategy, business and statecraft into a seamless whole.
This piece is about a copper mine; I believe the earlier one made mention of it. For comparison, here is Mussolini's definition of fascism. It is the canonical definition, since Mussolini invented both the term and structure.
The corporate State considers that private enterprise in the sphere of production is the most effective and useful instrument in the interest of the nation. In view of the fact that private organisation of production is a function of national concern, the organiser of the enterprise is responsible to the State for the direction given to production.
-- "The Doctrine of Fascism", 1932, Mussolini
The USofA is a cat's paw of blind stupidity, led on by our own tepid brand of fascism: the Right Wingnuts of the Republican party. That our President remains in thrall to them, unwilling as both Roosevelts were, to call a spade a spade and take out the evil doers. I fear we are headed to a state of perpetual decline of the common American, all to the betterment of Goldman Sachs and the like.
The problem, if one has a jaundiced view, is that democracy and the commonweal are not served by a process which moves income and wealth from the many to the few. We've seen in the years of Reagan and his playmates, that each year gets a little bit worse. Not enough any one year (well, except this, but I digress) to get the morons to take up arms. Just a slow, Chinese water torture of creeping poverty.
30 December 2009
25 December 2009
Happy Christmas????????
Here I sit on Christmas Day, wondering what to say. In spontaneously invented rhyming couplets. Perhaps not.
Is there reason for good cheer, I ask myself? Not so much, but some. There is a health care bill passed by both Houses. But Nelson, et al, being right wing Fascists in drag, successfully extracted their pound of silver. Some, and I truly hope they are correct, point out that Social Security was a half baked loaf in 1935, and we in 2009/2010 shouldn't be surprised. I remain skeptical. The Right Wingnuts have shown that they are better able to propagandize than the Left Wing Patriots. Reagan started it all with his lie, "I paid for this microphone". He hadn't, and was never pilloried for lying.
Real unemployment is in the neighborhood of 17%. That this fact is being mentioned in common media is a Good Thing. The administration has been remiss in not keeping the blame squarely on the Right Wing, who controlled 2/3 or 3/3 of federal government for all the years since Reagan, excepting Poppy Bush and 2 years of Clinton. That's 22 out of 28. Always keep that in mind. Keep in mind too, that it was those Right Wingnut stalwarts, Gramm-Leach-Bliley who finally dismantled Glass-Steagall.
What to be Merry about? Not on a personal level, of course, since each of us has at least one aspect of life which has improved during 2009 (no matter how teensy weensy). Rather, where is the Ship of State, this Experiment in Democracy (which is itself adept propaganda from the Right Wingnuts; the USofA is a Republic since the Right Wingnuts didn't want Democracy), this Beacon of Hope for the rest of the world (which seems not so impressed any longer) going? Are we headed to a place where most Americans have, and can expect to continue to have, a better life next year?
Or are we headed, as we have since Reagan, to a place where most Americans are just a little more destitute next year?
Is there reason for good cheer, I ask myself? Not so much, but some. There is a health care bill passed by both Houses. But Nelson, et al, being right wing Fascists in drag, successfully extracted their pound of silver. Some, and I truly hope they are correct, point out that Social Security was a half baked loaf in 1935, and we in 2009/2010 shouldn't be surprised. I remain skeptical. The Right Wingnuts have shown that they are better able to propagandize than the Left Wing Patriots. Reagan started it all with his lie, "I paid for this microphone". He hadn't, and was never pilloried for lying.
Real unemployment is in the neighborhood of 17%. That this fact is being mentioned in common media is a Good Thing. The administration has been remiss in not keeping the blame squarely on the Right Wing, who controlled 2/3 or 3/3 of federal government for all the years since Reagan, excepting Poppy Bush and 2 years of Clinton. That's 22 out of 28. Always keep that in mind. Keep in mind too, that it was those Right Wingnut stalwarts, Gramm-Leach-Bliley who finally dismantled Glass-Steagall.
What to be Merry about? Not on a personal level, of course, since each of us has at least one aspect of life which has improved during 2009 (no matter how teensy weensy). Rather, where is the Ship of State, this Experiment in Democracy (which is itself adept propaganda from the Right Wingnuts; the USofA is a Republic since the Right Wingnuts didn't want Democracy), this Beacon of Hope for the rest of the world (which seems not so impressed any longer) going? Are we headed to a place where most Americans have, and can expect to continue to have, a better life next year?
Or are we headed, as we have since Reagan, to a place where most Americans are just a little more destitute next year?
18 December 2009
Lord of the Flies
UPDATED, with a bit of news out of South Dakota. I love it when I predict the future.
In some measure, the greatest contemporary writing is William Golding's "Lord of the Flies". For those who weren't required to read it in high school, it tells the tale of some juvenile boys stranded on an island; in particular, their descent into Darwinism. I haven't re-read the book in decades, but I will be in the next few weeks. I recalled the book because I've been outside the country just twice: to Haiti in the 1980's and Bermuda two years ago.
Islands, especially isolated ones as Bermuda, offer up impromptu and mostly unwanted, human experiments. Petri dishes of corporeal conflicts for those outside to monitor for their own destinies. Or perhaps, object lessons in how not to devise a social contract. Or perhaps not; lessons ignored because those outside either are certain that they are the winners, or that what happens in the petri dish won't happen where they live. Fools.
Since my return from Bermuda, I've been a regular reader of the Royal Gazette, keeping an attachment which was instantaneous. The same didn't happen with Haiti, although the internet didn't exist (at least in a civilian context) in those years. The disturbing convergence of fiction and reality, for an unbridled liberal, can be read in its pages for the last few weeks; certainly today.
While Haiti has been an unapologetic apartheid society for centuries (did you know that Haiti supplied baseballs and gloves for decades?), Bermuda is less obviously so; in order to preserve its tourist industry. Haiti hasn't had one for decades, and it was marginal even in 1980's when I was there. Bermuda tries to put on a happy face, but the edges are visibly fraying.
Bermuda, among other things, ties its currency directly to the US dollar. It views itself as an extension of the Carolinas. In that spirit, it is run for the betterment of a handful of white folk, mostly not even of Bermuda. Other than tourists, most of the economic activity is insurance. Much like South Dakota re-wrote its credit card laws to attract a handful of jobs, Bermuda has done so for insurance. Most of the jobs are not even held by Bermudians, ironic, yes? Read the Gazette daily for a few weeks, and you will see where we are headed.
I suspect that, no matter how much more the Bermuda government bends over for these insurance companies, they will flee the "social unrest", oblivious and uncaring of the fact that their exploitation of the population is the direct cause of the unrest. It is an evil way to run a society.
In some measure, the greatest contemporary writing is William Golding's "Lord of the Flies". For those who weren't required to read it in high school, it tells the tale of some juvenile boys stranded on an island; in particular, their descent into Darwinism. I haven't re-read the book in decades, but I will be in the next few weeks. I recalled the book because I've been outside the country just twice: to Haiti in the 1980's and Bermuda two years ago.
Islands, especially isolated ones as Bermuda, offer up impromptu and mostly unwanted, human experiments. Petri dishes of corporeal conflicts for those outside to monitor for their own destinies. Or perhaps, object lessons in how not to devise a social contract. Or perhaps not; lessons ignored because those outside either are certain that they are the winners, or that what happens in the petri dish won't happen where they live. Fools.
Since my return from Bermuda, I've been a regular reader of the Royal Gazette, keeping an attachment which was instantaneous. The same didn't happen with Haiti, although the internet didn't exist (at least in a civilian context) in those years. The disturbing convergence of fiction and reality, for an unbridled liberal, can be read in its pages for the last few weeks; certainly today.
While Haiti has been an unapologetic apartheid society for centuries (did you know that Haiti supplied baseballs and gloves for decades?), Bermuda is less obviously so; in order to preserve its tourist industry. Haiti hasn't had one for decades, and it was marginal even in 1980's when I was there. Bermuda tries to put on a happy face, but the edges are visibly fraying.
Bermuda, among other things, ties its currency directly to the US dollar. It views itself as an extension of the Carolinas. In that spirit, it is run for the betterment of a handful of white folk, mostly not even of Bermuda. Other than tourists, most of the economic activity is insurance. Much like South Dakota re-wrote its credit card laws to attract a handful of jobs, Bermuda has done so for insurance. Most of the jobs are not even held by Bermudians, ironic, yes? Read the Gazette daily for a few weeks, and you will see where we are headed.
I suspect that, no matter how much more the Bermuda government bends over for these insurance companies, they will flee the "social unrest", oblivious and uncaring of the fact that their exploitation of the population is the direct cause of the unrest. It is an evil way to run a society.
14 December 2009
Capitalist Scumbags, One and All
Capitalists, in addition to being rather stupid and hypocritical (Gummint can't do anything right; but wait a minute, I really deserve a contract to do the function at twice what it would cost the Gummint to do itself), they are just liars. An acquaintance is managing one of those stimulus programs for a state.
The contractors (private sector capitalists, all) don't want to do any real work, so they sub-contract. Said sub-contractors are continually asking this manager a particular question: "do my workers have to have a real Social Security Number?". These scumbags have no intention of "creating jobs" for 'Muricans; just lining their pockets with taxpayer cash. They ought to be strung up by their gonags, sliced with a dull hatchet, then covered with fire ants.
The contractors (private sector capitalists, all) don't want to do any real work, so they sub-contract. Said sub-contractors are continually asking this manager a particular question: "do my workers have to have a real Social Security Number?". These scumbags have no intention of "creating jobs" for 'Muricans; just lining their pockets with taxpayer cash. They ought to be strung up by their gonags, sliced with a dull hatchet, then covered with fire ants.
09 December 2009
Little Orphan Druggy
Herewith the tale of Little Orphan Druggy. Last Saturday, the NYT ran an article about a new cancer drug, Folotyn, and once again committed the sin of omission. I sent along the following, but they demurred, once again, so I'm sharing it with you Dear Reader.
Once again, your reporter and his editors have committed the lie of omission. In this case, it is the status of Orphan Drug, which applies to Fotolyn and was approved by FDA. The Orphan Drug Act was passed by Congress (1983), with the intention of encouraging drug companies to support small population diseases. The Big Pharma largely have ignored these diseases, thus small bioPharma/bioTechs have taken up the risk. As the story says, Allos had not had an approved drug before Folotyn. There is a reason for that: finding new compounds which are therapeutic is expensive, and without the revenue from existing compounds means funding comes from debt and sequential public offerings. Recouping that investment from a small population inevitably leads to high unit cost. If this angers you, have Congress repeal the Orphan Drug Law. Simple as that.
This does raise a serious issue, which the Times chose to ignore, as it often does. The Orphan Drug Act was created for the express purpose to encourage research and development into compounds for diseases not in the mainstream. There have been a number of side effects. Most significantly, small drug development companies have been created, with the apparent motivation of doing orphan drugs. Whether this is a Good Thing, I don't know. I've not the time nor a paid researcher to know for certain that X% of orphan drugs are made by one trick pony companies. Some are, some aren't. It does seem to me that there are lots of small drug companies doing narrow scope cancer drugs. There are also a few looking to develop widely applicable platforms, but starting with orphan diseases as a way to get some compound into commercial status using the base technology.
It also appears that Big Pharma is both buying up these companies, and slurping at the Orphan Drug trough.
But is it a Good Thing to offer companies, essentially, monopoly power over a compound for an extended period of time? Reading the article (disclosure: I had Allos stock for a time months ago), $30,000/treatment is astounding. Allos hasn't had an approved drug until now. They've been around for years, with management getting nice salaries and bonuses. It could be that the scientists are better than average paid, but who knows? As one of the panel, who voted for approval, said, Folotyn is just a single in the War on Cancer. What has not been analyzed, and should be in any serious discussion, is the proportion of funds used for drug development versus salary and perks to managers in orphan drugs versus non-orphans. This overlaps, to some degree, with the proportions between Big Pharma and small pharma. I know of certain small pharma companies that are zombies; continuing to slurp of funds (generally from "new investors", not so much government) while producing nothing approved for decades. There exists the public policy question of whether the Orphan Drug Act, used by either Big or small Pharma, has proven worth the costs, both public and private. A decent master's thesis or even doctoral dissertation is for the doing.
Once again, your reporter and his editors have committed the lie of omission. In this case, it is the status of Orphan Drug, which applies to Fotolyn and was approved by FDA. The Orphan Drug Act was passed by Congress (1983), with the intention of encouraging drug companies to support small population diseases. The Big Pharma largely have ignored these diseases, thus small bioPharma/bioTechs have taken up the risk. As the story says, Allos had not had an approved drug before Folotyn. There is a reason for that: finding new compounds which are therapeutic is expensive, and without the revenue from existing compounds means funding comes from debt and sequential public offerings. Recouping that investment from a small population inevitably leads to high unit cost. If this angers you, have Congress repeal the Orphan Drug Law. Simple as that.
This does raise a serious issue, which the Times chose to ignore, as it often does. The Orphan Drug Act was created for the express purpose to encourage research and development into compounds for diseases not in the mainstream. There have been a number of side effects. Most significantly, small drug development companies have been created, with the apparent motivation of doing orphan drugs. Whether this is a Good Thing, I don't know. I've not the time nor a paid researcher to know for certain that X% of orphan drugs are made by one trick pony companies. Some are, some aren't. It does seem to me that there are lots of small drug companies doing narrow scope cancer drugs. There are also a few looking to develop widely applicable platforms, but starting with orphan diseases as a way to get some compound into commercial status using the base technology.
It also appears that Big Pharma is both buying up these companies, and slurping at the Orphan Drug trough.
But is it a Good Thing to offer companies, essentially, monopoly power over a compound for an extended period of time? Reading the article (disclosure: I had Allos stock for a time months ago), $30,000/treatment is astounding. Allos hasn't had an approved drug until now. They've been around for years, with management getting nice salaries and bonuses. It could be that the scientists are better than average paid, but who knows? As one of the panel, who voted for approval, said, Folotyn is just a single in the War on Cancer. What has not been analyzed, and should be in any serious discussion, is the proportion of funds used for drug development versus salary and perks to managers in orphan drugs versus non-orphans. This overlaps, to some degree, with the proportions between Big Pharma and small pharma. I know of certain small pharma companies that are zombies; continuing to slurp of funds (generally from "new investors", not so much government) while producing nothing approved for decades. There exists the public policy question of whether the Orphan Drug Act, used by either Big or small Pharma, has proven worth the costs, both public and private. A decent master's thesis or even doctoral dissertation is for the doing.
29 November 2009
Back to the Future: Uruguay
Those who have read this endeavor from the beginning will recall that I have referred a number of times to what started the "It's the Distribution, Stupid" meme: my thesis on Uruguay in the late 1960's. Well, they're baaaaaaack.
There is no NYT story yet, but there is an AP feed. I urge all to read it, and follow up with the Times in the morning. Deindustrializing is poisonous, and the nature of the poison has a history. We need to pay attention to such history, in order to avoid destroying ourselves. Rapacious capitalists don't care, of course; so we'll have to take matters into our hands.
There is no NYT story yet, but there is an AP feed. I urge all to read it, and follow up with the Times in the morning. Deindustrializing is poisonous, and the nature of the poison has a history. We need to pay attention to such history, in order to avoid destroying ourselves. Rapacious capitalists don't care, of course; so we'll have to take matters into our hands.
22 November 2009
Mincing Through the Tulips
I was dozing through This Week, when Robert Reich the token liberal, described China as "authoritarian capitalism". I stopped the doze to listen. It sound an awful lot like Yes Sir, I Understand and Will Comply from a month ago.
While it is gratifying to hear Reich dip a toe in the water of my argument (mixing of metaphors, but hey, it's my blog), the mincing of words is disturbing. "Communist" China is fascist, pure and simple. Fascism, invented in both word and deed by Mussolini, is government in league with capital for the comfort of capital. Reich went on to question that free market capitalism must necessarily be better at production than fascism, although he chose not to call the spade a spade.
Fascism never works in the long run, simply because it concentrates too much wealth in the hands of too few (and does that sound vaguely au courant?) to be self-sustaining. As I have written often during this endeavor, the BRIC are just the latest entities (our plantation South qualifies) to export poverty, in their case to the US and Europe. Such an effort is motivated by money illusion, and fails when the exporters wake up and realize that currency is not what matters in trade; what matters is goods (services never really matter in trade, despite what bankers will tell you). The Chinese hold US dollars, but what they really need are consumers and raw materials; the latter they are taking out of Afghanistan, for instance, on the lives and expenditures of America. We are such saps.
While it is gratifying to hear Reich dip a toe in the water of my argument (mixing of metaphors, but hey, it's my blog), the mincing of words is disturbing. "Communist" China is fascist, pure and simple. Fascism, invented in both word and deed by Mussolini, is government in league with capital for the comfort of capital. Reich went on to question that free market capitalism must necessarily be better at production than fascism, although he chose not to call the spade a spade.
Fascism never works in the long run, simply because it concentrates too much wealth in the hands of too few (and does that sound vaguely au courant?) to be self-sustaining. As I have written often during this endeavor, the BRIC are just the latest entities (our plantation South qualifies) to export poverty, in their case to the US and Europe. Such an effort is motivated by money illusion, and fails when the exporters wake up and realize that currency is not what matters in trade; what matters is goods (services never really matter in trade, despite what bankers will tell you). The Chinese hold US dollars, but what they really need are consumers and raw materials; the latter they are taking out of Afghanistan, for instance, on the lives and expenditures of America. We are such saps.
18 November 2009
I Told You So
Today the papers are all aglow with the bonuses about to be bestowed on the Wall Street Cretins (ooh, I mean Titans). As I said in the inaugural installment of this endeavor, recovery can't work just because recovery means to restore the status quo ante. And it was the status quo ante which caused the problem.
Welcome to the United States of Bananas.
Welcome to the United States of Bananas.
16 November 2009
The Yellow Peril Attacks
Beware the Yellow Peril!!!! That was the message of Hearst in the late 19th and early part of the 20th century, and the subject of a book, "The Yellow Peril; or, Orient vs. Occident" by G.G. Rupert in 1911. According to the Wikipedia article, the tale in the book has Jesus saving us from the Chinese, Japanese, etc. God Bless America. How will we triumph this time, when the war is real? Should we embrace the Christian Right, and simply wait for Jeeeesus???
Fact is, China is waging war against the US, and the West in general. I have been making the case for some time that the issue is the exchange rate manipulations done by China, but without the effort to track down the data. The deduction is just obvious. Today the Times has two op-ed pieces, one by Krugman and a longer, more data oriented one, by Ferguson. I'll skip loading up on quotes, and trust that those interested will go read. Both provide lots of data to make the case that China is engaging in economic terrorism. No question.
The point they both skip is one that I've been yakking about for quite a long time. US capitalists have divested so much of our manufacturing base, that recovery from this Great Recession is effectively impossible, since recovery, by definition, means to return to status quo and then to further growth along the same vector. And this is the problem: the economy running into the Great Recession has so disenfranchised so many, there is no mechanism in place to allow income growth outside that wonderful 1%. They've successfully wall off growth to themselves. There can be no recovery, since the runup was based upon the middle class burning unearned equity in housing, not rising incomes. Median income has fallen during the runup. These folks will not participate in the recovery. The new normal is 12% unemployment, along with charity food.
Which brings us back to the Yellow Peril. Make no mistake, China (as well as India) set out to export its poverty here. Why else choose a much smaller foreign market to exploit, rather than growing within your own much larger one? India has done the same. The only reasons are economic warfare and a disinterest in income equity; China and India are, after all, not especially democratic. As I mentioned a few days ago, the Times knuckleheads had the effrontery to proclaim that the problem is that American workers are just overpaid. Right, let's grow our way out of the Great Recession by making even more citizens poor and the 1% ever more rich.
Where this paradigm fails for the Chinese, Indians, and the rest is because trade is merely barter lubricated by coin. The Chinese are sitting on all those dollars, but what can they buy with them? From us, that is. Well, we make nukular bombs. We make stealth fighters. We make lots of war materiel. What do we make that the median income middle class Chinese wants? Right, nuthin'. This is the problem when a (command directed) economy sets out to pillage another, rather than growing domestically. The British Empire got away with it when the process was called Mercantilism, where the industrial economy gets raw materials from backward countries, and the industrial economy sends some finished goods to the backward countries. By that definition (you can check Wikipedia), the USofA is the backward country. Food exports are our number three export, right behind nukular stuff. Kind of like a banana republic.
How can we wage economic war? Well, without manufacturing, what do we have to sell? Exotic financial instruments? After WWII the US effectively controlled the international exchange rate regime, and we prospered. We no longer have that control, witness China (and India to a lesser extent) fiddling their rates to their advantage.
What kind of war can we wage? The fact is, all that we can do better than our enemies is nuke 'em. Will we? Eventually.
Fact is, China is waging war against the US, and the West in general. I have been making the case for some time that the issue is the exchange rate manipulations done by China, but without the effort to track down the data. The deduction is just obvious. Today the Times has two op-ed pieces, one by Krugman and a longer, more data oriented one, by Ferguson. I'll skip loading up on quotes, and trust that those interested will go read. Both provide lots of data to make the case that China is engaging in economic terrorism. No question.
The point they both skip is one that I've been yakking about for quite a long time. US capitalists have divested so much of our manufacturing base, that recovery from this Great Recession is effectively impossible, since recovery, by definition, means to return to status quo and then to further growth along the same vector. And this is the problem: the economy running into the Great Recession has so disenfranchised so many, there is no mechanism in place to allow income growth outside that wonderful 1%. They've successfully wall off growth to themselves. There can be no recovery, since the runup was based upon the middle class burning unearned equity in housing, not rising incomes. Median income has fallen during the runup. These folks will not participate in the recovery. The new normal is 12% unemployment, along with charity food.
Which brings us back to the Yellow Peril. Make no mistake, China (as well as India) set out to export its poverty here. Why else choose a much smaller foreign market to exploit, rather than growing within your own much larger one? India has done the same. The only reasons are economic warfare and a disinterest in income equity; China and India are, after all, not especially democratic. As I mentioned a few days ago, the Times knuckleheads had the effrontery to proclaim that the problem is that American workers are just overpaid. Right, let's grow our way out of the Great Recession by making even more citizens poor and the 1% ever more rich.
Where this paradigm fails for the Chinese, Indians, and the rest is because trade is merely barter lubricated by coin. The Chinese are sitting on all those dollars, but what can they buy with them? From us, that is. Well, we make nukular bombs. We make stealth fighters. We make lots of war materiel. What do we make that the median income middle class Chinese wants? Right, nuthin'. This is the problem when a (command directed) economy sets out to pillage another, rather than growing domestically. The British Empire got away with it when the process was called Mercantilism, where the industrial economy gets raw materials from backward countries, and the industrial economy sends some finished goods to the backward countries. By that definition (you can check Wikipedia), the USofA is the backward country. Food exports are our number three export, right behind nukular stuff. Kind of like a banana republic.
How can we wage economic war? Well, without manufacturing, what do we have to sell? Exotic financial instruments? After WWII the US effectively controlled the international exchange rate regime, and we prospered. We no longer have that control, witness China (and India to a lesser extent) fiddling their rates to their advantage.
What kind of war can we wage? The fact is, all that we can do better than our enemies is nuke 'em. Will we? Eventually.
14 November 2009
Blame the Victims
This past week, the Times, in one day, provided two really stupid stories. I wrote a screed, which they've not published (no surprise there), so here's the one for DrKeynes. The background: on the top of page 2 of the Business section is BreakingViews, which that day decided to blame the Great Recession of American wages being too large. What follows is my view of BreakingViews.
These guys spewed the sort of lies I expect from Fox and WSJ. Reading history, Depressions and our current Great Recession are caused by labor receiving ever *smaller* parts of national income. Before Reagan, the top 1% took 8%, just before our current collapse, 23%. Same numbers preceded the Great Depression, the 1907 Panic, and all other events from our Civil War on. Your reporters really shouldn't lie so much. It is also worth mentioning that all those low wage foreigners aren't consumers of the goods they make, just because their wages are too poor. Making American workers just as poor will only destroy capital, along with labor. Henry Ford, no bleeding heart liberal, raised his workers wages because he understood that was how he could sell more cars. I expect better of The Times, well other than Judy, Judy, Judy.
These guys spewed the sort of lies I expect from Fox and WSJ. Reading history, Depressions and our current Great Recession are caused by labor receiving ever *smaller* parts of national income. Before Reagan, the top 1% took 8%, just before our current collapse, 23%. Same numbers preceded the Great Depression, the 1907 Panic, and all other events from our Civil War on. Your reporters really shouldn't lie so much. It is also worth mentioning that all those low wage foreigners aren't consumers of the goods they make, just because their wages are too poor. Making American workers just as poor will only destroy capital, along with labor. Henry Ford, no bleeding heart liberal, raised his workers wages because he understood that was how he could sell more cars. I expect better of The Times, well other than Judy, Judy, Judy.
11 November 2009
Wich Fat Guy Stamps His Wittle Foot
Today's report that Benmosche, the current and third CEO of AIG in the past twelve months is having another hissy fit: he can't pay his star performers what he says they deserve. Boo Hoo.
Let's be straight about this situation; it was the so-called "innovation" of these knuckleheads that has put not only the US economy, but that of the entire planet in peril. It is a Good Thing if reducing, and dis-incentivizing, such behaviour becomes the order of the day. That Benmosche must be the implementer of this Tough Love is just too bad for him.
He's getting about $10 million for this, by the way. Making money manipulation less lucrative is a Good Thing. Doing so makes real, productive use of capital and labor more attractive, and that is a Good Thing. Recall the tale of the Yenta, recounted previously in this endeavor: financial services is a zero-sum game, with the companies that do this merely extracting their profit from the money stream betwixt Savers and Borrowers. That this activity should be low tech, low pay, low innovation is a Good Thing.
It ought not to be the case that merely moving money from one hand to the other be the highest paid labor in the economy. When that happens, as I have described from history in this endeavor, chaos ensues. We do not need that. Benmosche should either shut up, and do what he's told, or get the hell out. He does, after all, not provide much added value.
Let's be straight about this situation; it was the so-called "innovation" of these knuckleheads that has put not only the US economy, but that of the entire planet in peril. It is a Good Thing if reducing, and dis-incentivizing, such behaviour becomes the order of the day. That Benmosche must be the implementer of this Tough Love is just too bad for him.
He's getting about $10 million for this, by the way. Making money manipulation less lucrative is a Good Thing. Doing so makes real, productive use of capital and labor more attractive, and that is a Good Thing. Recall the tale of the Yenta, recounted previously in this endeavor: financial services is a zero-sum game, with the companies that do this merely extracting their profit from the money stream betwixt Savers and Borrowers. That this activity should be low tech, low pay, low innovation is a Good Thing.
It ought not to be the case that merely moving money from one hand to the other be the highest paid labor in the economy. When that happens, as I have described from history in this endeavor, chaos ensues. We do not need that. Benmosche should either shut up, and do what he's told, or get the hell out. He does, after all, not provide much added value.
06 November 2009
She Who Must Be Obeyed
She Who Must Be Obeyed got a wild hair up her butt. Said hair involves the Washington Post, which is running a Pundit for a Month contest (the name is something like that, anyway). One had to submit a 400 word piece and a 100 word bio. There was only one round, the 10 finalists get to write some number of pieces. The winner gets paid a few bucks to write a few pieces. The particulars are at the paper. The following is what I submitted, but didn't make the final 10. The reason it matters follows the text:
For want of a plague, the planet was lost. It is a much ignored factoid of history that the Black Death, Great Plague, Black Plague beginning in the 14th century, when it reached its height at inception, led to the middle class nirvana which we may well be exiting. Such exit will be whether we like it or not and whether we control it or not. The estimate of the number of people killed in the initial Great Plagues of the 1300's varies from 30% to 60% of Europeans. At the time, Europe was divided neatly between Haves and Havenots, with the Havenots doing the work of supporting the Haves.
With the plagues killing off so many Havenots, the wages of the survivors increased substantially. Not to Trumpian levels, of course. The result was also the beginning of guilding, which worked to regularize and protect the livelihoods of skilled peasants, who in a few generations progressed beyond peasantry. What we need today is a new plague. The nub however, is that OutSourcing was not an option in 14th century Europe. The internet hadn't been invented yet, and most work was physical by nature. The duke couldn't reasonably hire an Indian in Bangalore to birth a calf, much less do the fife's sums, you know.
Another couple of oft ignored factoids: in the year Before Reagan (BR) in the US, the top 1% took 8% of income, while now it is 23%; and the US, in toto, consumes about 24% of the world's resources.
Putting these three factoids together yields the following conclusion. If one were to nuke Africa, South America, and Asia, thereby eliminating about 4.5 billion humans only one of our predicaments (disappearing middle class) might be averted. With no more place to OutSource, the 1% would be forced to re-create a middle class and its current remnants wouldn't be forced to expire. That nasty part is done by others. The environmental catastrophe would be barely dented, since the per capita resource consumption of those 4.5 billion humans scarcely registers. There still isn't enough stuff on the planet to keep the US going for very long. A sub-Sharan village consumes less than an overweight, pre-diabetic, text addled teenager in Chantilly.
To save the planet, we must sacrifice upper middle class suburbs.
I submitted that around 18 October. I got my rejection about 1 November. A few days later, it was reported that world wide wages had declined. Where's a vigorous plague when you need it?
The reference to that teenager in Chantilly is an inside joke. Chantilly is/was a very affluent suburban area in Northern Virginia, which wouldn't vote for that downstate Cracker the Democrats nominated, a fact which was not yet revealed when I wrote.
For want of a plague, the planet was lost. It is a much ignored factoid of history that the Black Death, Great Plague, Black Plague beginning in the 14th century, when it reached its height at inception, led to the middle class nirvana which we may well be exiting. Such exit will be whether we like it or not and whether we control it or not. The estimate of the number of people killed in the initial Great Plagues of the 1300's varies from 30% to 60% of Europeans. At the time, Europe was divided neatly between Haves and Havenots, with the Havenots doing the work of supporting the Haves.
With the plagues killing off so many Havenots, the wages of the survivors increased substantially. Not to Trumpian levels, of course. The result was also the beginning of guilding, which worked to regularize and protect the livelihoods of skilled peasants, who in a few generations progressed beyond peasantry. What we need today is a new plague. The nub however, is that OutSourcing was not an option in 14th century Europe. The internet hadn't been invented yet, and most work was physical by nature. The duke couldn't reasonably hire an Indian in Bangalore to birth a calf, much less do the fife's sums, you know.
Another couple of oft ignored factoids: in the year Before Reagan (BR) in the US, the top 1% took 8% of income, while now it is 23%; and the US, in toto, consumes about 24% of the world's resources.
Putting these three factoids together yields the following conclusion. If one were to nuke Africa, South America, and Asia, thereby eliminating about 4.5 billion humans only one of our predicaments (disappearing middle class) might be averted. With no more place to OutSource, the 1% would be forced to re-create a middle class and its current remnants wouldn't be forced to expire. That nasty part is done by others. The environmental catastrophe would be barely dented, since the per capita resource consumption of those 4.5 billion humans scarcely registers. There still isn't enough stuff on the planet to keep the US going for very long. A sub-Sharan village consumes less than an overweight, pre-diabetic, text addled teenager in Chantilly.
To save the planet, we must sacrifice upper middle class suburbs.
I submitted that around 18 October. I got my rejection about 1 November. A few days later, it was reported that world wide wages had declined. Where's a vigorous plague when you need it?
The reference to that teenager in Chantilly is an inside joke. Chantilly is/was a very affluent suburban area in Northern Virginia, which wouldn't vote for that downstate Cracker the Democrats nominated, a fact which was not yet revealed when I wrote.
Economics: As Simple as Can Be
Economists, some anyway, love models (not the willowy kind in chiffon). Most of the Right Wingnuts always call up the US of 1776 as a model of how the contemporary economic world should be shaped. They also tend to want the laws of the land to revert to what existed then. That's not the sort of model that makes much sense in today's world; not the least because there isn't an endless supply of land a few miles away to be stolen from the indigenous peoples (if we can manage to kill enough of them).
No, the kinds of models that economists prefer are those which simplify the numbers: population, distances, dollar amounts, and the like.
So, here's a model which explains where the Right Wingnuts have taken us since Reagan.
The US is not 330,000,000 but a village of 100. Our millions of goods and services are just bread and water. In this village, each week, is produced 100 loaves of bread and 100 gallons of water. In this village, 1 person takes 23 loaves of bread and 23 gallons of water. The remaining 99 have to divide 77 loaves of bread and gallons of water amongst themselves. It doesn't take much consideration to see that such a village wouldn't last very long. That 1 person would be killed, and the bread and water distributed.
That is our present and our future.
No, the kinds of models that economists prefer are those which simplify the numbers: population, distances, dollar amounts, and the like.
So, here's a model which explains where the Right Wingnuts have taken us since Reagan.
The US is not 330,000,000 but a village of 100. Our millions of goods and services are just bread and water. In this village, each week, is produced 100 loaves of bread and 100 gallons of water. In this village, 1 person takes 23 loaves of bread and 23 gallons of water. The remaining 99 have to divide 77 loaves of bread and gallons of water amongst themselves. It doesn't take much consideration to see that such a village wouldn't last very long. That 1 person would be killed, and the bread and water distributed.
That is our present and our future.
24 October 2009
"Yes Sir, I Understand and Will Comply"
An essay has been festering in the bottom of my brain stem for some time now. I am finally compelled to put pen to paper by the first pages of Andrew Ross Sorkin's Too Big To Fail, in which he chronicles the Great Recession. Two points in these early pages are the motivation: he notes that by 2007 40% of corporate profits are due to financial activities (which I have written about earlier), and "...this book... is about real people, the reality behind the scenes,... and [the] minds of the handful of people who controlled the economy's fate".
This leads to my main thesis: one of the continuing antagonisms in economics is between command directed (asserted to be some authoritarian government) and laissez faire (private actors with little to no government intervention) structures. Other than died-in-the-wool Marxians, laissez faire only has proponents in the field; not many, mind you. For the last hundred years, the debate has been between moneterists (the mellowed progeny of laissez faire) and Keynesians (and the similarly emasculated Marxists). The current Great Recession brings the more extreme views back into discussions, thanks to the Russians and Chinese.
Both Russia and China, despite being embraced wholeheartedly by American capitalists seeking cowed labor, have been re-revealed to be command directed economies not capitalist dynamos of Wall Street propaganda, just as they were when they were explicitly Communist (capital C is no typo). The evidence can be seen in both country's economies far more rapid revival from the Great Recession. In the Russian case, Moscow has directed the oil industry (the principle source of foreign exchange) to increase production. In the Chinese case, Beijing has undertaken a widespread stimulus program to consume its manufacturing production domestically; in other words, unlike American capitalists who are eagerly destroying our middle class, the Chinese government is actively bolstering, and even extending the reach of, their middle class. The archetypical example is wide screen TeeVees. It happens that the display panels for virtually all LCD TeeVees are made in China; leveraging this production to TeeVees themselves is relatively simple and is happening. Widescreen LCD TeeVees here are a bit more expensive and scarcer here now that they're being sold by the truckload in China to Chinese.
Maybe command directed economies can do better, if those giving the commands have the whole country's welfare in mind, not just the oligarches. Russia's emergence from the Soviet Union was characterized by oligarch and corruption. It appears to have learned from that trauma; less so than the Chinese. The issue isn't the number or affiliation of these handfuls of decision makers. It really is only a handful, no matter what Adam Smith said, and no matter the titular description. What matters is the intent and intelligence of these decision makers. Smart, equitably minded, people make better decisions. Such people just tend to affiliate with government rather than private capital.
The argument by Right Wingnuts that only private capitalists make intelligent decisions, and that "government bureaucrats" always make stupid decisions is one of those Big Lies characteristic of a certain political movement of early 20th century Europe. I'll define Smart in this context to mean providing the greatest good to the greatest number of society. Laissez faire has a difficult time arriving at that definition; it requires a circuitous route through trickling down the waterfall and never actually arriving there. But I consider it the only definition which yields a stable long term socio-economic structure. Both the Katrina "Brownie Moment" and the actions which propelled us into the Great Recession are examples of government driven by those who's intent is make government fail the great majority of its citizens. Democratic governance, while not perfect (they are fallible humans), strives to expand the common good and often succeeds. Much to the annoyance of the Rand-ians.
Keynesians don't generally view themselves as command directed economists, but rather as interventionists in emergency, spewing by the Beck's of cable TeeVee notwithstanding. The sine qua non of stable industrial societies is a middle class that absorbs the vast majority of the national income. It is argued that democracy requires an overwhelming middle class; although which is precedent is hotly debated. One of FDR's advisors observed that with mass production, there must be mass consumption. In the years leading up to 1929, American consumer production supplied American consumption; exporting wasn't a major player. This was largely due to the fact that capital productivity had not yet been outstripped by population and capital was not yet as instantly mobile as it is now. Today, a manufacturing endeavor need not have a broad middle class supporting it, since population growth has outstripped productive capacity, while capital productivity has reduced the amount of labor needed to produce. If the only route to middle class is Wall Street, then it will be a small middle class, and equally obviously, not really a middle class.
The result is that the American (and European to a lesser extent) economy, at the hands of capitalists, has been transformed into one which is not self sufficient, production has been shifted out of country, leaving a population unable to earn and thus unable to consume the production. The shift in the top 1% taking 8% to taking 23% of national income was engineered by the financialization/deindustrialization of the economy by capitalists. The Great Recession was not the result of stupid lazy bureaucrats (carrying out directives from their government overseers), but by sly bankers. More than a few pundits have been screaming for Obama to take on the banks, much as Teddy Roosevelt did. I certainly agree. Turning the economy around without changing the structure will not be possible; the effort will only move yet more of national income back to that 1%. The recent Goldman Sachs reports only provide more proof of the proposition. Restoring to the status quo ante doesn't fix the problem.
The great mistake of trusting recovery to the likes of Geithner is that to them recovery means re-establishing the income stream which existed before the collapse, oblivious to the fact that the income stream caused the collapse. What is more difficult to do is admit that the structure of the economy has to change. Geithner, et al, have to admit that an economy which devolves 40% of profit to financial manipulation has to end, and be replaced with one which rewards real production, not legalized money laundering. It was not an anthropomorphic "oops", but a fully predictable (and so done by a few) event. In order to re-establish a stable economy, ways must be found to disperse funds such that the middle class once again receives the bulk of national output. Only then will there be a middle class in more than name only.
The final difficulty is derives from the "success" of capitalism. In the years since Reagan, growth in GDP has been so-so to great, depending. What has been constant over that period is that wages have seen little to none of that growth. The 1%-ers increase in share of national income and the pattern of growth are two sides to the single coin. Manufacturing has reached a point that it no longer needs local population growth (and thus demand for goods) to offset increasing productivity. Physical production growth need only supply a fraction of population growth in order to sustain itself. Henry Ford raised the wages of his laborers on the simple (and true at the time) proposition that if his workers could earn enough to buy a Model-T, then he would sell more Model-T's. Win-win. Now, we face a different reality: so few workers are needed to produce physical goods (and there are abundant Indians and Chinese to do so) and earn so little, that growth in production can be satisfied by an ever shrinking (in percentage terms) middle class. Consider that both India and China, separately, have four times the US population, yet each chose to market their production here rather than their own populations. Seems odd, doesn't it, to ignore 2.5 billion locals and target .3 billion 12,000 miles away.
What the Great Recession has made obvious to anyone who looks dispassionately at the events is this: the American economy in the wake of nearly 30 years of Right Wingnut control is a command directed one, but by a cadre of private actors who care nothing for the commonweal, but only for the best 1% of the 1%. This situation cannot sustain. There will be blood in the streets, just as there was in France in 1789.
This leads to my main thesis: one of the continuing antagonisms in economics is between command directed (asserted to be some authoritarian government) and laissez faire (private actors with little to no government intervention) structures. Other than died-in-the-wool Marxians, laissez faire only has proponents in the field; not many, mind you. For the last hundred years, the debate has been between moneterists (the mellowed progeny of laissez faire) and Keynesians (and the similarly emasculated Marxists). The current Great Recession brings the more extreme views back into discussions, thanks to the Russians and Chinese.
Both Russia and China, despite being embraced wholeheartedly by American capitalists seeking cowed labor, have been re-revealed to be command directed economies not capitalist dynamos of Wall Street propaganda, just as they were when they were explicitly Communist (capital C is no typo). The evidence can be seen in both country's economies far more rapid revival from the Great Recession. In the Russian case, Moscow has directed the oil industry (the principle source of foreign exchange) to increase production. In the Chinese case, Beijing has undertaken a widespread stimulus program to consume its manufacturing production domestically; in other words, unlike American capitalists who are eagerly destroying our middle class, the Chinese government is actively bolstering, and even extending the reach of, their middle class. The archetypical example is wide screen TeeVees. It happens that the display panels for virtually all LCD TeeVees are made in China; leveraging this production to TeeVees themselves is relatively simple and is happening. Widescreen LCD TeeVees here are a bit more expensive and scarcer here now that they're being sold by the truckload in China to Chinese.
Maybe command directed economies can do better, if those giving the commands have the whole country's welfare in mind, not just the oligarches. Russia's emergence from the Soviet Union was characterized by oligarch and corruption. It appears to have learned from that trauma; less so than the Chinese. The issue isn't the number or affiliation of these handfuls of decision makers. It really is only a handful, no matter what Adam Smith said, and no matter the titular description. What matters is the intent and intelligence of these decision makers. Smart, equitably minded, people make better decisions. Such people just tend to affiliate with government rather than private capital.
The argument by Right Wingnuts that only private capitalists make intelligent decisions, and that "government bureaucrats" always make stupid decisions is one of those Big Lies characteristic of a certain political movement of early 20th century Europe. I'll define Smart in this context to mean providing the greatest good to the greatest number of society. Laissez faire has a difficult time arriving at that definition; it requires a circuitous route through trickling down the waterfall and never actually arriving there. But I consider it the only definition which yields a stable long term socio-economic structure. Both the Katrina "Brownie Moment" and the actions which propelled us into the Great Recession are examples of government driven by those who's intent is make government fail the great majority of its citizens. Democratic governance, while not perfect (they are fallible humans), strives to expand the common good and often succeeds. Much to the annoyance of the Rand-ians.
Keynesians don't generally view themselves as command directed economists, but rather as interventionists in emergency, spewing by the Beck's of cable TeeVee notwithstanding. The sine qua non of stable industrial societies is a middle class that absorbs the vast majority of the national income. It is argued that democracy requires an overwhelming middle class; although which is precedent is hotly debated. One of FDR's advisors observed that with mass production, there must be mass consumption. In the years leading up to 1929, American consumer production supplied American consumption; exporting wasn't a major player. This was largely due to the fact that capital productivity had not yet been outstripped by population and capital was not yet as instantly mobile as it is now. Today, a manufacturing endeavor need not have a broad middle class supporting it, since population growth has outstripped productive capacity, while capital productivity has reduced the amount of labor needed to produce. If the only route to middle class is Wall Street, then it will be a small middle class, and equally obviously, not really a middle class.
The result is that the American (and European to a lesser extent) economy, at the hands of capitalists, has been transformed into one which is not self sufficient, production has been shifted out of country, leaving a population unable to earn and thus unable to consume the production. The shift in the top 1% taking 8% to taking 23% of national income was engineered by the financialization/deindustrialization of the economy by capitalists. The Great Recession was not the result of stupid lazy bureaucrats (carrying out directives from their government overseers), but by sly bankers. More than a few pundits have been screaming for Obama to take on the banks, much as Teddy Roosevelt did. I certainly agree. Turning the economy around without changing the structure will not be possible; the effort will only move yet more of national income back to that 1%. The recent Goldman Sachs reports only provide more proof of the proposition. Restoring to the status quo ante doesn't fix the problem.
The great mistake of trusting recovery to the likes of Geithner is that to them recovery means re-establishing the income stream which existed before the collapse, oblivious to the fact that the income stream caused the collapse. What is more difficult to do is admit that the structure of the economy has to change. Geithner, et al, have to admit that an economy which devolves 40% of profit to financial manipulation has to end, and be replaced with one which rewards real production, not legalized money laundering. It was not an anthropomorphic "oops", but a fully predictable (and so done by a few) event. In order to re-establish a stable economy, ways must be found to disperse funds such that the middle class once again receives the bulk of national output. Only then will there be a middle class in more than name only.
The final difficulty is derives from the "success" of capitalism. In the years since Reagan, growth in GDP has been so-so to great, depending. What has been constant over that period is that wages have seen little to none of that growth. The 1%-ers increase in share of national income and the pattern of growth are two sides to the single coin. Manufacturing has reached a point that it no longer needs local population growth (and thus demand for goods) to offset increasing productivity. Physical production growth need only supply a fraction of population growth in order to sustain itself. Henry Ford raised the wages of his laborers on the simple (and true at the time) proposition that if his workers could earn enough to buy a Model-T, then he would sell more Model-T's. Win-win. Now, we face a different reality: so few workers are needed to produce physical goods (and there are abundant Indians and Chinese to do so) and earn so little, that growth in production can be satisfied by an ever shrinking (in percentage terms) middle class. Consider that both India and China, separately, have four times the US population, yet each chose to market their production here rather than their own populations. Seems odd, doesn't it, to ignore 2.5 billion locals and target .3 billion 12,000 miles away.
What the Great Recession has made obvious to anyone who looks dispassionately at the events is this: the American economy in the wake of nearly 30 years of Right Wingnut control is a command directed one, but by a cadre of private actors who care nothing for the commonweal, but only for the best 1% of the 1%. This situation cannot sustain. There will be blood in the streets, just as there was in France in 1789.
25 September 2009
Banking as it Should Be: Cheap and Stupid
There was an article in yesterday's NYT talking about Adair Turner, who heads the Financial Services Authority (I've no idea what if anything that corresponds to here). Mr. Turner's thesis, which has crossed my mind on occasion and which I've also read elsewhere, boils down to this: the purpose of banks (defined as broadly or narrowly as you wish) is to be the Yenta.
The Yenta match makes. In the banking case, savers and spenders. That's it. That's all there is to it. And until the last decade or two, that was all there was to it. But then the banking industry, often called Financial Services, since it really encompasses lots of other actors, decided that just Yenta-ing was boring, and there could be ways to extract more funds from the match making exercise.
And thus was born the fiasco we are now living through. The only effect, and purpose, of LBOs and CDOs and MBSs ad nauseum is to increase the cost of matching savers with spenders. There is no more money available to spenders than savers can supply. The financial services players only extract greater amounts to gain all those profits.
Mr. Turner is only the latest, and I suppose most public and non academic, to broach the notion that banking functions should be cheap and stupid. Because they are. The so-called "innovations" perpetrated by the financial services industry serve only to line their pockets, not build a stronger more broad based economy and society. They serve only to narrow the base of growth recipients, and thus weaken the economy and society.
There is a reason that China has been able to come out of the dive better and faster than the USofA: since China makes stuff with their labor, it can consume its production in a broad swath of the economy and society. The USofA, on the other hand, has so narrowed the scope of its economy, that few gain anything from growth. That this was allowed, promoted even, by the Right Wingnuts should be used to string them up by a painful appendage.
For precedent, read up on Uruguay in the 1960's and 1970's. I've mentioned this before, but it remains a canary in the coal mine for the result of financialization/de-industrialization of an economy. Too bad that the Obamanauts won't listen to me.
The Yenta match makes. In the banking case, savers and spenders. That's it. That's all there is to it. And until the last decade or two, that was all there was to it. But then the banking industry, often called Financial Services, since it really encompasses lots of other actors, decided that just Yenta-ing was boring, and there could be ways to extract more funds from the match making exercise.
And thus was born the fiasco we are now living through. The only effect, and purpose, of LBOs and CDOs and MBSs ad nauseum is to increase the cost of matching savers with spenders. There is no more money available to spenders than savers can supply. The financial services players only extract greater amounts to gain all those profits.
Mr. Turner is only the latest, and I suppose most public and non academic, to broach the notion that banking functions should be cheap and stupid. Because they are. The so-called "innovations" perpetrated by the financial services industry serve only to line their pockets, not build a stronger more broad based economy and society. They serve only to narrow the base of growth recipients, and thus weaken the economy and society.
There is a reason that China has been able to come out of the dive better and faster than the USofA: since China makes stuff with their labor, it can consume its production in a broad swath of the economy and society. The USofA, on the other hand, has so narrowed the scope of its economy, that few gain anything from growth. That this was allowed, promoted even, by the Right Wingnuts should be used to string them up by a painful appendage.
For precedent, read up on Uruguay in the 1960's and 1970's. I've mentioned this before, but it remains a canary in the coal mine for the result of financialization/de-industrialization of an economy. Too bad that the Obamanauts won't listen to me.
13 September 2009
Steve Lohr Gets it Wrong
One of the good things about Sunday is the NYT, and the Sunday Business section. Lots of articles/columns/opinions, and not always a clear cut edge amongst them.
Today, I'll pick on Steve Lohr. Not because what he says is especially egregious, only because it is the latest in the continuing stream of words which miss the point. The avowed essence of the article lies in the title "Wall Street's Math Wizards Forgot a Few Variables", by which he means that the quants didn't get it right because they couldn't model the real world correctly, because the data weren't available.
Here is one quote:
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn't sufficiently take into account was human behavior, specifically the potential for widespread panic.
The point is wrong. The point is that the data were available to model the root cause of the meltdown; the housing bubble. That root cause was the ratio of monthly payment to median income, and monthly payment to sale price. I know this data is available, because it was available in 1971. Banks and builders *chose* to make available a housing stock which was not affordable by the resident population's median income, using accepted ratios. They knew what they were doing, and the data were available to prove that they were gaming the system and its rules. Both they, the quants, and the regulators *chose* to ignore the data which would expose their fiddling. It was clear to me by 2003. Alas, I had no blog back then.
In 1971, I was a college senior, and one of my professors ("Buffalo" Bob Smith) made some money on the side as an economic/business consultant. The place was Springfield, Massachusetts; not exactly Manhattan or Boston or LA, just a middling New England town. Dr. Smith had mined (back then it took a bit more work to do, naturally) public data to create what he called "Shift and Share Analysis". This analysis was sold to one of the local banks, for the purpose of locating branches. I know this, because we discussed the analysis. The root of the analysis was plat level income data. In other words, in 1971, there was sufficient public data available to know what household incomes were, and what they spent it on.
The bone I have to pick with Mr. Lohr is that his article, whose conclusions are driven by the persons he chose to interview/quote, focuses not on the cause of the meltdown, but on the reactions of the bad actors who caused it. Nothing useful will come of their efforts, since their efforts are aimed at further gaming, rather than systemic reform. It is worth noting that earlier in the week the Times ran a story about these same folks securitizing life insurance policies, for their profit, of course. Never mind that doing so distorts the markets.
Today, I'll pick on Steve Lohr. Not because what he says is especially egregious, only because it is the latest in the continuing stream of words which miss the point. The avowed essence of the article lies in the title "Wall Street's Math Wizards Forgot a Few Variables", by which he means that the quants didn't get it right because they couldn't model the real world correctly, because the data weren't available.
Here is one quote:
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn't sufficiently take into account was human behavior, specifically the potential for widespread panic.
The point is wrong. The point is that the data were available to model the root cause of the meltdown; the housing bubble. That root cause was the ratio of monthly payment to median income, and monthly payment to sale price. I know this data is available, because it was available in 1971. Banks and builders *chose* to make available a housing stock which was not affordable by the resident population's median income, using accepted ratios. They knew what they were doing, and the data were available to prove that they were gaming the system and its rules. Both they, the quants, and the regulators *chose* to ignore the data which would expose their fiddling. It was clear to me by 2003. Alas, I had no blog back then.
In 1971, I was a college senior, and one of my professors ("Buffalo" Bob Smith) made some money on the side as an economic/business consultant. The place was Springfield, Massachusetts; not exactly Manhattan or Boston or LA, just a middling New England town. Dr. Smith had mined (back then it took a bit more work to do, naturally) public data to create what he called "Shift and Share Analysis". This analysis was sold to one of the local banks, for the purpose of locating branches. I know this, because we discussed the analysis. The root of the analysis was plat level income data. In other words, in 1971, there was sufficient public data available to know what household incomes were, and what they spent it on.
The bone I have to pick with Mr. Lohr is that his article, whose conclusions are driven by the persons he chose to interview/quote, focuses not on the cause of the meltdown, but on the reactions of the bad actors who caused it. Nothing useful will come of their efforts, since their efforts are aimed at further gaming, rather than systemic reform. It is worth noting that earlier in the week the Times ran a story about these same folks securitizing life insurance policies, for their profit, of course. Never mind that doing so distorts the markets.
06 September 2009
Dr. Krugman Makes My Heart Go Pit-Pat
Paul Krugman does it again. His story in today's Times Magazine brings joy to my heart. Finally, a full-blown bullshit whistle against the Right Wingnut economists. But with all due respect, he does miss out on one point. And it's a very important point, why the behaviour of all those sub-prime and Alt-A home buyers was purely rational. It is the explanation of where the bubble came from. The bubble came from an increasingly unequal income distribution.
Here is the story.
The story begins with a basic question: why would a bus driver in Stockton, CA buy a $400,000 house? That was the assertion made on one of the talking head shows in the last few days. I'll take it as apocryphal that a bus driver could only afford a $100,000 (say) house at the market rate for 30 years fixed, and would only take on the $400,000 house if he were Totally Nuts. Said bus driver is rational for a number of reasons.
First, house buyers are not buying a house at a price they can afford. They are buying a house at the monthly payment they can afford. This basic distinction has been missed by all commentators I have so far heard. It is a fact which I recognized when I was a graduate student in economics in the early 1970's. At that time, interest rates were high, home prices were driven low to meet the constraint of monthly income/payment. And those who bought then made out like bandits as interest rates declined, and housing prices rose in concert.
The asking price of housing at a point in place and time is not determined by the bus drivers. It is determined by banks and builders acting in concert, even if they neither realize it or will admit it. Rationally, banks and builders would only produce $100,000 houses if the income data (yes, they have such) says that's what can be afforded. That they chose instead to produce $400,000 houses was not because the data told them to do so, but because they chose to ignore the data.
It is a fact that house prices and interest rates are inversely correlated, and the fulcrum is median income. From median income comes median house payment. From median house payment comes the division between bank and builder. The interest rate does the division. That interest rate is not necessarily the one you read in the newspaper. As the Alt-A growing fiasco makes clear, the actual interest rate is partly in the hands of the home buyer. That is not a good thing. With median incomes stagnant, to within a gnat's eyelash, during the Bush years (I and II) ameliorated only a bit during the Clinton interregnum, the only way for bankers and builders to inflate house prices was to fiddle the interest rate down. And the only way for the middle class to maintain their standard of living was to live off the rising equity from their houses courtesy of the fiddle house prices. Without the perceived need to maintain consumption, and thus burn off increasing equity, this crash wouldn't be as bad as it will be. Had home owners not burned off the equity then, it would be available now to maintain consumption. But that is not to be, and is another story.
Why contemporary economists and pundits can't connect those dots is beyond me. For most, who are employed directly or indirectly by the finance industry, it is in their income generating self interest to remain ignorant. Why Krugman remains ignorant, I can't figure.
Second, back to our bus driver. He is shown a calculation by a real estate agent, which fits his maximum monthly payment into the $400,000 home. So far as he is concerned, it's a house he can afford. The agent just proved it to him. So he signs. Even if he's sophisticated enough to realize that he won't be able to afford it once/if the monthly resets, it's still a rational decision. In 2005, 2006 that is. And that's the key to understanding that the house buyers up to 2006, approximately, were acting rationally.
And here's why. Let's assume that our bus driver is a complete imbecile, but does know how to read and do simple arithmetic. He reads that house prices have been increasing. He knows that in a year or two he will have accumulated $100,000 (say) of equity in the house due to inflation in house prices. At that point, he knows he can sell the $500,000 house, take out $80,000 (say) net proceeds, which amounts to a tidy downpayment on a $300,000 house. Said $300,000 house, with tidy downpayment, could be financed with a conventional 30 year fixed with a monthly payment he can afford.
Why not just buy the $300,000 house now? Because he doesn't have the tidy downpayment that the real estate industry expects. In his current situation, he has to game the real estate industry's gaming of him (and his ilk). As has been pointed out, but not by Krugman in the current essay, the demand for home mortgages was not driven by home buyers, but by the banks, hedge funds, and other investors. Recall that Greenspan had forced down interest rates, and declared that they would remain down.
How to get greater returns, at low risk, for these holders of large amounts of money? This was the patient zero of securitization "innovation". It was the demand for these tranched instruments that caused the residential real estate industry to lure home buyers into their net. In order to get all that money, they needed ever more house buyers. But with median income stagnant, thanks to the Bushes and the Republican Congress, they had to fiddle the interest rate down in order to fiddle house prices up. The game was started by, and run by, the financial "innovators" not by the bus driver in Stockton. Don't blame the cat's paws.
So, in sum, the housing bubble was a purely rational reaction by home buyers squeezed out of income by the freshwaterists (you need to read the article). For those who bought early in the pyramid building and didn't burn the equity, it was an intelligent decision.
Here is the story.
The story begins with a basic question: why would a bus driver in Stockton, CA buy a $400,000 house? That was the assertion made on one of the talking head shows in the last few days. I'll take it as apocryphal that a bus driver could only afford a $100,000 (say) house at the market rate for 30 years fixed, and would only take on the $400,000 house if he were Totally Nuts. Said bus driver is rational for a number of reasons.
First, house buyers are not buying a house at a price they can afford. They are buying a house at the monthly payment they can afford. This basic distinction has been missed by all commentators I have so far heard. It is a fact which I recognized when I was a graduate student in economics in the early 1970's. At that time, interest rates were high, home prices were driven low to meet the constraint of monthly income/payment. And those who bought then made out like bandits as interest rates declined, and housing prices rose in concert.
The asking price of housing at a point in place and time is not determined by the bus drivers. It is determined by banks and builders acting in concert, even if they neither realize it or will admit it. Rationally, banks and builders would only produce $100,000 houses if the income data (yes, they have such) says that's what can be afforded. That they chose instead to produce $400,000 houses was not because the data told them to do so, but because they chose to ignore the data.
It is a fact that house prices and interest rates are inversely correlated, and the fulcrum is median income. From median income comes median house payment. From median house payment comes the division between bank and builder. The interest rate does the division. That interest rate is not necessarily the one you read in the newspaper. As the Alt-A growing fiasco makes clear, the actual interest rate is partly in the hands of the home buyer. That is not a good thing. With median incomes stagnant, to within a gnat's eyelash, during the Bush years (I and II) ameliorated only a bit during the Clinton interregnum, the only way for bankers and builders to inflate house prices was to fiddle the interest rate down. And the only way for the middle class to maintain their standard of living was to live off the rising equity from their houses courtesy of the fiddle house prices. Without the perceived need to maintain consumption, and thus burn off increasing equity, this crash wouldn't be as bad as it will be. Had home owners not burned off the equity then, it would be available now to maintain consumption. But that is not to be, and is another story.
Why contemporary economists and pundits can't connect those dots is beyond me. For most, who are employed directly or indirectly by the finance industry, it is in their income generating self interest to remain ignorant. Why Krugman remains ignorant, I can't figure.
Second, back to our bus driver. He is shown a calculation by a real estate agent, which fits his maximum monthly payment into the $400,000 home. So far as he is concerned, it's a house he can afford. The agent just proved it to him. So he signs. Even if he's sophisticated enough to realize that he won't be able to afford it once/if the monthly resets, it's still a rational decision. In 2005, 2006 that is. And that's the key to understanding that the house buyers up to 2006, approximately, were acting rationally.
And here's why. Let's assume that our bus driver is a complete imbecile, but does know how to read and do simple arithmetic. He reads that house prices have been increasing. He knows that in a year or two he will have accumulated $100,000 (say) of equity in the house due to inflation in house prices. At that point, he knows he can sell the $500,000 house, take out $80,000 (say) net proceeds, which amounts to a tidy downpayment on a $300,000 house. Said $300,000 house, with tidy downpayment, could be financed with a conventional 30 year fixed with a monthly payment he can afford.
Why not just buy the $300,000 house now? Because he doesn't have the tidy downpayment that the real estate industry expects. In his current situation, he has to game the real estate industry's gaming of him (and his ilk). As has been pointed out, but not by Krugman in the current essay, the demand for home mortgages was not driven by home buyers, but by the banks, hedge funds, and other investors. Recall that Greenspan had forced down interest rates, and declared that they would remain down.
How to get greater returns, at low risk, for these holders of large amounts of money? This was the patient zero of securitization "innovation". It was the demand for these tranched instruments that caused the residential real estate industry to lure home buyers into their net. In order to get all that money, they needed ever more house buyers. But with median income stagnant, thanks to the Bushes and the Republican Congress, they had to fiddle the interest rate down in order to fiddle house prices up. The game was started by, and run by, the financial "innovators" not by the bus driver in Stockton. Don't blame the cat's paws.
So, in sum, the housing bubble was a purely rational reaction by home buyers squeezed out of income by the freshwaterists (you need to read the article). For those who bought early in the pyramid building and didn't burn the equity, it was an intelligent decision.
30 August 2009
What Japan Means
This is really simple. And a really short piece.
Japan means that the US of A is the *last* fascist modern industrialized country on the planet. We spiral further into the morass of India, China, and Russia. Don't bray that India is a democracy. I wasn't born yesterday.
Japan means that the US of A is the *last* fascist modern industrialized country on the planet. We spiral further into the morass of India, China, and Russia. Don't bray that India is a democracy. I wasn't born yesterday.
08 August 2009
Export Economies as Labor Exploitation
I cross post to Open Salon, but haven't gone the other way. I was asked the following over there:
>> can an economy survive with such minimal manufacturing in the portfolio?
And responded with what follows. I have had export economies as labor exploitation on the coming attractions list for far too long. This piece will do as an hor d'oeuvre.
Not in the manner of the middle class revolution, post World War II. I am a Keynesian, and the reason boils down to: the level of income inequality from previous types led to violence. The result of the Bushies (and Gingrich, and the rest) is to return to that level of inequality.
In the 1960's and 1970's, it was commonplace to read and hear from economists and their fellow travelers that the post-industrial service economy would be the land of milk and honey. The machines would do the work, and we would enjoy leisure.
The flaw in that vision is that it ignores the distribution problem of capitalism, which is that there is no distribution mechanism. The capitalist keeps it all. This is the root cause of the current recession/depression. The top 1% of US take 22% of income. It hasn't been higher since at least 1900 (data is flaky before then). There is no distribution mechanism. Capitalists refuse to acknowledge that there is a problem, since they seek to be the autocrats of the New Age. Bernie Madoff is just one symptom.
One factor is that services are cheaper, from a capital investment point of view, by far than manufacturing. This establishes a war between capitalists. Service capitalists establish a ~75% gross return on physical investment. Manufacturing capitalists then seek countries/economies which allow them to exploit labor to an extent which raises their gross return towards that level. The problem is that such economies are no longer self sufficient; labor earns so little that its production cannot be consumed. Thus, export is the solution.
But it isn't really. The export manufacturing economies must accept service importing economies' currency in payment for the goods. The export economies are held hostage to the import economies' currency. So, the Chinese must keep piling up US dollars. To pull the plug on the dollar leads to far worse than China faces now; if they should do so, the entire Chinese economy fails, since it is not self-sufficient.
Mainstream economists are being forced to face this fact by a handful of "radicals" (humble self included). The notion that free trade benefits all is being made mockery. The answer will be that stable economies are self-sufficient except for trade in raw materials.
I have a blog post for DrKeynes in mind which explains why export economies are fundamentally exploitative of labor (I generally copy them to here). For now, note that China has been playing the export game, and is facing the distribution problem as well. They have no domestic consumption to support industrial production since capital is free to pay starvation wages to labor. When the production was shipped out of the country, this was just fine. Without the export market, capital could no longer do its exploitation game. Chinese authorities have implicitly admited the problem by structuring their "stimulus" to channel funds to labor. One result (in a NYT story within the last week or so, I don't have a link, alas) is that flat screen TVs will cost more here, since they are made in China, and are now being consumed there. Good on them, say I.
>> can an economy survive with such minimal manufacturing in the portfolio?
And responded with what follows. I have had export economies as labor exploitation on the coming attractions list for far too long. This piece will do as an hor d'oeuvre.
Not in the manner of the middle class revolution, post World War II. I am a Keynesian, and the reason boils down to: the level of income inequality from previous types led to violence. The result of the Bushies (and Gingrich, and the rest) is to return to that level of inequality.
In the 1960's and 1970's, it was commonplace to read and hear from economists and their fellow travelers that the post-industrial service economy would be the land of milk and honey. The machines would do the work, and we would enjoy leisure.
The flaw in that vision is that it ignores the distribution problem of capitalism, which is that there is no distribution mechanism. The capitalist keeps it all. This is the root cause of the current recession/depression. The top 1% of US take 22% of income. It hasn't been higher since at least 1900 (data is flaky before then). There is no distribution mechanism. Capitalists refuse to acknowledge that there is a problem, since they seek to be the autocrats of the New Age. Bernie Madoff is just one symptom.
One factor is that services are cheaper, from a capital investment point of view, by far than manufacturing. This establishes a war between capitalists. Service capitalists establish a ~75% gross return on physical investment. Manufacturing capitalists then seek countries/economies which allow them to exploit labor to an extent which raises their gross return towards that level. The problem is that such economies are no longer self sufficient; labor earns so little that its production cannot be consumed. Thus, export is the solution.
But it isn't really. The export manufacturing economies must accept service importing economies' currency in payment for the goods. The export economies are held hostage to the import economies' currency. So, the Chinese must keep piling up US dollars. To pull the plug on the dollar leads to far worse than China faces now; if they should do so, the entire Chinese economy fails, since it is not self-sufficient.
Mainstream economists are being forced to face this fact by a handful of "radicals" (humble self included). The notion that free trade benefits all is being made mockery. The answer will be that stable economies are self-sufficient except for trade in raw materials.
I have a blog post for DrKeynes in mind which explains why export economies are fundamentally exploitative of labor (I generally copy them to here). For now, note that China has been playing the export game, and is facing the distribution problem as well. They have no domestic consumption to support industrial production since capital is free to pay starvation wages to labor. When the production was shipped out of the country, this was just fine. Without the export market, capital could no longer do its exploitation game. Chinese authorities have implicitly admited the problem by structuring their "stimulus" to channel funds to labor. One result (in a NYT story within the last week or so, I don't have a link, alas) is that flat screen TVs will cost more here, since they are made in China, and are now being consumed there. Good on them, say I.
The Ides of October
The next cliff is on or about the Ides of October. The 2nd quarter "beat expectations" reports that keep being printed are based on draconian firings, not improved revenues. The reduction in first time unemployment is the canary in the coal mine. It is not a bright omen, it is Regan's head spinning spewing all that green stuff.
Here's why (you read it here first): With no consumer demand, 2nd quarter earnings were propelled by firings. Now that there's few left to fire, first time unemployment is diminishing. This is not a good thing for the "calf market" we're in. It means that this quarter will be characterized by: falling revenue (since there is still no consumer) and no one left to lay off. Thus, diminishing revenue and no more costs to cut. 3rd quarter reports will be devastating. The Great Depression II starts then.
Roubini owes me.
Here's why (you read it here first): With no consumer demand, 2nd quarter earnings were propelled by firings. Now that there's few left to fire, first time unemployment is diminishing. This is not a good thing for the "calf market" we're in. It means that this quarter will be characterized by: falling revenue (since there is still no consumer) and no one left to lay off. Thus, diminishing revenue and no more costs to cut. 3rd quarter reports will be devastating. The Great Depression II starts then.
Roubini owes me.
23 July 2009
The HAL between you and your Doctor...Updated
There are many spewings from the Right WingNuts that are irritating. Among the most such is the claim that a Single Payer health system will "put the government between you and your doctor" or "some government accountant will decide what care you get". Neither is true, of course. What's more evil is that there is already someone between you and your doctor, and HMO/insurance bean counters already decide what care you will get.
I know. I wrote (not from the start or in its entirety) such software. There are a number of these packages; the one I worked on is called Optimed. The company's been sold a few times since I was there, and is now a part of MEDecision. These applications (others: Milliman, InterQual) seek to disallow services. Nothing more. They claim to improve health, but that's just not true.
So, the next Right WingNut who spews that nonsense; break his knee and tell him he won't qualify because he brought it on himself.
You can help by contacting your congress person and Obama. This is such a big lie that letting it continue is criminal.
Update:
A couple of days after I penned this, Krugman wrote on the subject, although there isn't a discussion of how insurance companies steal your coverage.
I know. I wrote (not from the start or in its entirety) such software. There are a number of these packages; the one I worked on is called Optimed. The company's been sold a few times since I was there, and is now a part of MEDecision. These applications (others: Milliman, InterQual) seek to disallow services. Nothing more. They claim to improve health, but that's just not true.
So, the next Right WingNut who spews that nonsense; break his knee and tell him he won't qualify because he brought it on himself.
You can help by contacting your congress person and Obama. This is such a big lie that letting it continue is criminal.
Update:
A couple of days after I penned this, Krugman wrote on the subject, although there isn't a discussion of how insurance companies steal your coverage.
01 July 2009
Dumb, Fat, Unhappy, Poor, Old .... and Sick
By now most folks should know that the Red/South states come in last in terms of education, jobs, income, and smarts by any measure. Now, we find out what that means.
It means that not only ain't they Dumb, Fat, and Happy, they are Dumb, Fat, Poor, Old..... and Sick. While being a Keynesian is orthogonal to Social Darwinism, this story inevitably leads to some pondering. How should we spend our health care dollars? If we spend like the Europeans do, we all live longer and healthier lives. If we continue the way we are, we end up funneling most of our health care dollars into the pockets of HMO's, Big Pharma, and BioTechs. I've been spending some time looking at BioTech/Pharma, and what I see is lots of money going into the pockets of Management in pursuit of multi-kilo buck life extending drugs (broadly defined).
What seems to be the norm is that some scientist or doctor does come up with a novel entity, but aimed at a really small segment of the unwell. The aim is to get as much money into the hands of management (million dollar payments are not uncommon), typically not the founders, scientists, or doctors. Then the FDA process goes on for some years. If the entity is blessed, then the kilo-buck payments begin. Whether any of that gets to the original investors...
The BioPharma traders are scared crapless of Obama. And well they should; the gravy train may well be over. What is not remembered is that, up until the 1970's (or thereabouts), most research was done on the public dime, and the compounds thus discovered were available to all. BigPharma didn't like that, so now we have massive expenditures on trivial (from a public health point of view) drugs in the hope of getting a massive payoff. From public funds, of course; MediCare and MediCaid. For-profit health insurers won't pay for this stuff.
So, we the intelligent and healthy will be stuck paying the bill to keep these self-abusing knuckleheads alive for a few more months. Is this anyway to run a railroad?
It means that not only ain't they Dumb, Fat, and Happy, they are Dumb, Fat, Poor, Old..... and Sick. While being a Keynesian is orthogonal to Social Darwinism, this story inevitably leads to some pondering. How should we spend our health care dollars? If we spend like the Europeans do, we all live longer and healthier lives. If we continue the way we are, we end up funneling most of our health care dollars into the pockets of HMO's, Big Pharma, and BioTechs. I've been spending some time looking at BioTech/Pharma, and what I see is lots of money going into the pockets of Management in pursuit of multi-kilo buck life extending drugs (broadly defined).
What seems to be the norm is that some scientist or doctor does come up with a novel entity, but aimed at a really small segment of the unwell. The aim is to get as much money into the hands of management (million dollar payments are not uncommon), typically not the founders, scientists, or doctors. Then the FDA process goes on for some years. If the entity is blessed, then the kilo-buck payments begin. Whether any of that gets to the original investors...
The BioPharma traders are scared crapless of Obama. And well they should; the gravy train may well be over. What is not remembered is that, up until the 1970's (or thereabouts), most research was done on the public dime, and the compounds thus discovered were available to all. BigPharma didn't like that, so now we have massive expenditures on trivial (from a public health point of view) drugs in the hope of getting a massive payoff. From public funds, of course; MediCare and MediCaid. For-profit health insurers won't pay for this stuff.
So, we the intelligent and healthy will be stuck paying the bill to keep these self-abusing knuckleheads alive for a few more months. Is this anyway to run a railroad?
29 June 2009
Now ya can keep them black folk out
5-4, of course, but the Supremes have just made de facto discrimination legal again.
What a country.
What a country.
19 June 2009
Lies, Damn Lies, and Statistics
That old saying, "figures don't lie, but liars figure" sound familiar?
When the news appeared that the number of people on unemployment had dropped, and that this was a sign of better things happening in the economy, I had to avoid an upchuck. Phooey, I told anybody who would listen. All that happened was that more folks got tossed off unemployment (ran out of weeks) than came on. You can expect that this will continue for years. The liars will say that things are getting better. Yeah, right. And the bankers still flit around in their taxpayer subsidized jets.
The NYT ran the story today. Yup. More folks got tossed off than came on. Green shoots my sphincter.
When the news appeared that the number of people on unemployment had dropped, and that this was a sign of better things happening in the economy, I had to avoid an upchuck. Phooey, I told anybody who would listen. All that happened was that more folks got tossed off unemployment (ran out of weeks) than came on. You can expect that this will continue for years. The liars will say that things are getting better. Yeah, right. And the bankers still flit around in their taxpayer subsidized jets.
The NYT ran the story today. Yup. More folks got tossed off than came on. Green shoots my sphincter.
15 June 2009
Tapas
A few small bites today.
Notice that China is feverishly stimulating its domestic consumption? They have admitted, albeit with loud rectitude, that export (read: labor exploitative) based economies quickly collapse. They are admitting the truth: capitalists and consumers are co-dependent. For some years now, the Chinese (and American by proxy and directly) capitalists wagered that they could take all the growth for themselves. So long as they had American chumps running the government (and I am not convinced that Geithner/Bernanke aren't), they could dump their production here. Capitalists, not being particularly forward thinking, were shocked to discover that the proceeds of this game were dollars; bits of psuedopaper embedded as bytes in various computers. There is no post-industrial (well, at least no post-physical production) economy. Surprise, surprise. So, now China is embarking on building, to a greater extent at least, a self sufficient (closed world, as the economists like to call it) economy. They have learned that the only international trade which should exist is in natural resources; these exist only in some countries and have to be traded for production (or other resources on occasion) goods.
Why trade a bird in the hand for a fart in a whirlwind? The Chinese ain't dummies.
Folks who follow Iran for more than a few seconds, and without the blinders of Right Wingnuts, have known for years that the President of Iran is kind of like the Queen of England, or governor of Texas: a ceremonial gasbag with no institutional power. For those with short memories, the Right Wingnuts chose to ignore Ahmadinejad's "moderate" predecessors with the charge that the President of Iran was merely a figurehead. Once they got a boogie man to their liking, well now the President of Iran is a really important guy who has to be taken seriously. He's a real meany. So, today the Supreme Leader of Iran (you knew there is one, yes?) says that the voting will be looked into. There is good reason to let the populace have whatever pointless, powerless figurehead they want. The pointless, powerless figurehead makes no difference to him. Right Wingnuts are just do stupid and evil. Banana Republic El Jefes.
Finally, the end of the Joe Sixpack Bull Market. I missed it, alas, being to concerned with other things, like this blog. Ironic, I suppose. It is no accident that oil, and other commodity, prices are rising. The "markets" are expressions of localized (local can be in particular places in the real world, real time, or manmade of either; stock markets are the latter) inflation and deflation. As I write, the Big Money is going back into commodities. It never made much headway into the regular stock market, which is why the Calf Market (calf, little bull?) is over. Oh well. Unearned income should be taxed at confiscatory rates, just to discourage such sloth and exploitation of power. Real work, real pay. Works for me.
Notice that China is feverishly stimulating its domestic consumption? They have admitted, albeit with loud rectitude, that export (read: labor exploitative) based economies quickly collapse. They are admitting the truth: capitalists and consumers are co-dependent. For some years now, the Chinese (and American by proxy and directly) capitalists wagered that they could take all the growth for themselves. So long as they had American chumps running the government (and I am not convinced that Geithner/Bernanke aren't), they could dump their production here. Capitalists, not being particularly forward thinking, were shocked to discover that the proceeds of this game were dollars; bits of psuedopaper embedded as bytes in various computers. There is no post-industrial (well, at least no post-physical production) economy. Surprise, surprise. So, now China is embarking on building, to a greater extent at least, a self sufficient (closed world, as the economists like to call it) economy. They have learned that the only international trade which should exist is in natural resources; these exist only in some countries and have to be traded for production (or other resources on occasion) goods.
Why trade a bird in the hand for a fart in a whirlwind? The Chinese ain't dummies.
Folks who follow Iran for more than a few seconds, and without the blinders of Right Wingnuts, have known for years that the President of Iran is kind of like the Queen of England, or governor of Texas: a ceremonial gasbag with no institutional power. For those with short memories, the Right Wingnuts chose to ignore Ahmadinejad's "moderate" predecessors with the charge that the President of Iran was merely a figurehead. Once they got a boogie man to their liking, well now the President of Iran is a really important guy who has to be taken seriously. He's a real meany. So, today the Supreme Leader of Iran (you knew there is one, yes?) says that the voting will be looked into. There is good reason to let the populace have whatever pointless, powerless figurehead they want. The pointless, powerless figurehead makes no difference to him. Right Wingnuts are just do stupid and evil. Banana Republic El Jefes.
Finally, the end of the Joe Sixpack Bull Market. I missed it, alas, being to concerned with other things, like this blog. Ironic, I suppose. It is no accident that oil, and other commodity, prices are rising. The "markets" are expressions of localized (local can be in particular places in the real world, real time, or manmade of either; stock markets are the latter) inflation and deflation. As I write, the Big Money is going back into commodities. It never made much headway into the regular stock market, which is why the Calf Market (calf, little bull?) is over. Oh well. Unearned income should be taxed at confiscatory rates, just to discourage such sloth and exploitation of power. Real work, real pay. Works for me.
23 May 2009
Tiny Tim's Two Month Millionaires: evil is as evil does
Guess what happened when none of us (humble self ignominiously included) weren't looking? Tiny Timmy Geithner took that TARP money and created some (I don't know how many, only that I am not among them) millionaires. I am pretty certain that there aren't many NEW millionaires in the flock, just ones with new millions.
How did this happen, you ask? Well, I have the answer.
To recap. The banks were outed as 2008 proceeded, some going under, others graced with billions in taxpayer dollars. As the banks sank, they took more and more of the rest of the economy with them. In the financial markets, billions of dollars were withdrawn from stocks, plunging the DOW from 14,000 to 6,500. March 9 was the bottom.
From then to May 9, if one had $100,000 lying around dormant, one could become a millionaire. Just two months. Numbers of stocks rose 10 times or more in those two months. The ones I've found were in the self same financial services industry; not all though, Palm (of the Pilot, etc.) went up 9 times. The reason, I am convinced, is that the plunge was not justified on real economic terms. That is the crime. Little of this had to happen. Had the MegaBanks been treated just as RegularBanks are by the FDIC, there would not likely have been any contagion into the real economy. And no opportunity for those savvy enough to realize that the plunge was only temporary and artificial to get 10 times their money in two months.
Here is one example. The insurance company Conseco was at $.26 in March (the graph isn't clear enough to see which day it hit bottom, but it was about the 9th). About 9 May, it was at $3.90. More than 10 times, and you had a couple of weeks either side of 9 March to have bought at $.39.
Only folks who could toss away $100,000, or knew that the plunge was fake, actually pulled it off. And, you would have to sell off the stock, which would be about 500,000 shares, without blowing out the price. It would require some sophistication in trading to do that.
Was this a direct gift from Tiny Tim? Basically, yes. While the insurance companies are culpable, to a lesser extent than the banks and we await the commercial real estate shoe to drop, it is true that the prices spiked right after it was announced that some would be getting TARP funds. Conseco wasn't one of them, in fact. It looks like their plunge was collateral damage; their rise inevitable, once TARP and such got rolling.
Thanks Tim, from all of us who aren't new millionaires.
How did this happen, you ask? Well, I have the answer.
To recap. The banks were outed as 2008 proceeded, some going under, others graced with billions in taxpayer dollars. As the banks sank, they took more and more of the rest of the economy with them. In the financial markets, billions of dollars were withdrawn from stocks, plunging the DOW from 14,000 to 6,500. March 9 was the bottom.
From then to May 9, if one had $100,000 lying around dormant, one could become a millionaire. Just two months. Numbers of stocks rose 10 times or more in those two months. The ones I've found were in the self same financial services industry; not all though, Palm (of the Pilot, etc.) went up 9 times. The reason, I am convinced, is that the plunge was not justified on real economic terms. That is the crime. Little of this had to happen. Had the MegaBanks been treated just as RegularBanks are by the FDIC, there would not likely have been any contagion into the real economy. And no opportunity for those savvy enough to realize that the plunge was only temporary and artificial to get 10 times their money in two months.
Here is one example. The insurance company Conseco was at $.26 in March (the graph isn't clear enough to see which day it hit bottom, but it was about the 9th). About 9 May, it was at $3.90. More than 10 times, and you had a couple of weeks either side of 9 March to have bought at $.39.
Only folks who could toss away $100,000, or knew that the plunge was fake, actually pulled it off. And, you would have to sell off the stock, which would be about 500,000 shares, without blowing out the price. It would require some sophistication in trading to do that.
Was this a direct gift from Tiny Tim? Basically, yes. While the insurance companies are culpable, to a lesser extent than the banks and we await the commercial real estate shoe to drop, it is true that the prices spiked right after it was announced that some would be getting TARP funds. Conseco wasn't one of them, in fact. It looks like their plunge was collateral damage; their rise inevitable, once TARP and such got rolling.
Thanks Tim, from all of us who aren't new millionaires.
06 May 2009
(Un)Intended Consequences
We all know about the phrase, unintended consequences, yes? Give a hand up to a struggling capitalist, and he lays off half of his employees in order to maximize profit. What, you didn't make him promise in writing that he would use the hand up to hire more employees and not just pocket the money? Oh, you believed him when he *said* that's what he'd do with the money. Silly you.
These last couple of weeks have been rather giddy for some parts of the stock market. The recession is over, some say. (Reminds me of "Top Gear": "Some say his testicles are case hardened ball bearings. All we know is, he's called The Stig!" OK, I made part of that up.) Recalling "The Giant Pool of Money", there was all those trillions pulled out of stocks, just looking for someplace to earn lots of capital gains. According to today's NYT, the 30%-ish rise in the Dow 30 since the (may be) bottom about a month ago brings it to its historical average with respect to earnings. In other words, if you missed the rise, your boat won't get floated any time soon.
So, what are all those capitalists saying now that they have their hand ups? Mostly, that "we" can't afford to take care of the tribe. The archetype is seen in the GM/Chrysler rescues. The evil lies in the retirees and union workers, who have bankrupted the companies. The constant refrain is that "we" can't afford to pay their pensions and health insurance.
This is particularly pernicious with regard to the retirees. There hundreds of thousands of them according to a recent article. Nearly a million. So what happens to the "recovery" if these million folks lose most, if not all, of their income? Can you say Mumbai?
The perpetual refrain from the wingnut capitalists is that "we" can't afford to pay middle class wages, anymore. What they won't admit, because making most everybody else poorer makes them richer, is that soon enough the society falls apart. I suppose they've decided that they'll hightail it to Lichtenstein when the rioting starts.
But, the destruction of the blue collar (and increasingly, white collar) middle class isn't a case of unintended consequence. It's the whole point; very much intended. Remember the wingnuts rallying cry: "starve the beast", when Reagan sent the deficit soaring? Didn't work out, of course. Clinton, Bill fixed things up rather nicely by taxing the rich, which caused the economy to grow rather well. That last bit is a fact the wingnuts don't like to roam around loose.
There is an unintended consequence of killing the middle class, which is easily observed in India and China today: since neither country is a self-sufficient economy, both depend on the US, and to a lesser extent Europe, to absorb their output. India, in particular, needs the US multi-nationals to absorb its excess labour. That is a tale for another post. With regard to output, the destruction of the American middle class will shortly cause the collapse not only of American capital (without consumers to buy widgets, capital is worthless), but Chinese and Indian as well.
No matter what the wingnuts say, it really is a zero-sum game without real wealth creation. Wealth creation doesn't happen in the stock or real estate markets, increases there are just sector specific inflation. Or bubbles, if you will. Wealth creation happens when raw materials are extracted, manipulated into shape, and sold for more than the value of the materials, labour, and capital used to create the widget. That's why Apple is profitable; it turns raw materials into iPods and iPhones. Not my cup of chai, those, but very much so to many. The wealth created is in that transformation process. All other value increases, financial sector shenanigans being a prime transgressor, are just as ephemeral as cotton candy. And just as empty calories as your Mama used to pester you about.
These last couple of weeks have been rather giddy for some parts of the stock market. The recession is over, some say. (Reminds me of "Top Gear": "Some say his testicles are case hardened ball bearings. All we know is, he's called The Stig!" OK, I made part of that up.) Recalling "The Giant Pool of Money", there was all those trillions pulled out of stocks, just looking for someplace to earn lots of capital gains. According to today's NYT, the 30%-ish rise in the Dow 30 since the (may be) bottom about a month ago brings it to its historical average with respect to earnings. In other words, if you missed the rise, your boat won't get floated any time soon.
So, what are all those capitalists saying now that they have their hand ups? Mostly, that "we" can't afford to take care of the tribe. The archetype is seen in the GM/Chrysler rescues. The evil lies in the retirees and union workers, who have bankrupted the companies. The constant refrain is that "we" can't afford to pay their pensions and health insurance.
This is particularly pernicious with regard to the retirees. There hundreds of thousands of them according to a recent article. Nearly a million. So what happens to the "recovery" if these million folks lose most, if not all, of their income? Can you say Mumbai?
The perpetual refrain from the wingnut capitalists is that "we" can't afford to pay middle class wages, anymore. What they won't admit, because making most everybody else poorer makes them richer, is that soon enough the society falls apart. I suppose they've decided that they'll hightail it to Lichtenstein when the rioting starts.
But, the destruction of the blue collar (and increasingly, white collar) middle class isn't a case of unintended consequence. It's the whole point; very much intended. Remember the wingnuts rallying cry: "starve the beast", when Reagan sent the deficit soaring? Didn't work out, of course. Clinton, Bill fixed things up rather nicely by taxing the rich, which caused the economy to grow rather well. That last bit is a fact the wingnuts don't like to roam around loose.
There is an unintended consequence of killing the middle class, which is easily observed in India and China today: since neither country is a self-sufficient economy, both depend on the US, and to a lesser extent Europe, to absorb their output. India, in particular, needs the US multi-nationals to absorb its excess labour. That is a tale for another post. With regard to output, the destruction of the American middle class will shortly cause the collapse not only of American capital (without consumers to buy widgets, capital is worthless), but Chinese and Indian as well.
No matter what the wingnuts say, it really is a zero-sum game without real wealth creation. Wealth creation doesn't happen in the stock or real estate markets, increases there are just sector specific inflation. Or bubbles, if you will. Wealth creation happens when raw materials are extracted, manipulated into shape, and sold for more than the value of the materials, labour, and capital used to create the widget. That's why Apple is profitable; it turns raw materials into iPods and iPhones. Not my cup of chai, those, but very much so to many. The wealth created is in that transformation process. All other value increases, financial sector shenanigans being a prime transgressor, are just as ephemeral as cotton candy. And just as empty calories as your Mama used to pester you about.
04 May 2009
Dueling Banjos
Today's Times has Paul Krugman, Nobelist and all around smart guy versus Allen Meltzer, capitalist toady dueling flation. Krugman looks at the data and concludes (and not the only economist or financial journalist) that deflation, motivated by falling wages, is clearly on the horizon.
Krugman's argument, and mine since I started this endeavor, is that without a return to a true middle class median income, depressed economic conditions have to prevail. There is no other way. One can redefine normal full employment as 10%, but that doesn't make it normal or full employment.
Meltzer goes on and on about the evils of inflation, motivated by the government intervention in the banking meltdown. Phooey.
I'll leave it to you to figure out which is the sophisticated city guy, and which the inbred hillbilly. Read for yourselves, and decide.
Krugman's argument, and mine since I started this endeavor, is that without a return to a true middle class median income, depressed economic conditions have to prevail. There is no other way. One can redefine normal full employment as 10%, but that doesn't make it normal or full employment.
Meltzer goes on and on about the evils of inflation, motivated by the government intervention in the banking meltdown. Phooey.
I'll leave it to you to figure out which is the sophisticated city guy, and which the inbred hillbilly. Read for yourselves, and decide.
30 April 2009
Modern Lovers
Modernity has been in the language for years, if not centuries. My earliest recollection, and continuing, is hearing George Will use it with dripping sarcasm, as if a swear word. Conservatives, virtually by definition, abhor anything modern. But what, exactly is modernity? And what parts of it, assuming that it is separable, are worth having, desirable, or necessary? Let's take a walk.
To a Muslim, modernity is music. Not to be tolerated. To the Amish, electricity. To a Roman Catholic, mass in native language (assuming that Latin is no longer spoken anywhere conversationally). To a Boomer's parents, coed dorms.
So, what is modernity, negatively, to a horde of George Wills? Racial equality, enforced by law. Economic equality, permitted by law (unionization made easy). Gender equality, enforced by law. Gender preference, enforced by law. Marriage preference, permitted by law (miscegenation being the initial example). Universal health care.
But, what parts of modernity would a rational person want, at minimum? For concreteness, I'll define modernity to mean artifacts of culture and society which came into existence post World War II. That leaves out electric lighting, radio, TV (strictly speaking), air travel, and a host of other endeavors which a Boomer's grandparents didn't have at birth.
It is self-evident that the answer has to be medicine, broadly defined. I have no use for the iPhone; so far as I am concerned building them and the AT&T 3G network for them is a terrible waste of our capital. We don't need multiple, incompatible cell phone networks. Pick a standard technology, let all the manufacturers and providers implement it as best they can, and build it once. Use all that capital for other completely different purposes; rural health clinics come to mind. I like digital watches. I own a bunch, and get another about once a year. Complete waste of money, of course. One wrist. One time zone. One time. Manufacturers manage to design ever more intriguing, if only for a little while, models. I am a sucker for yet another variation on the theme of digital time. But they're modern and I really want them. Up to a point.
When push comes to shove, any adult is willing to relinquish some gadget for living longer. We all want to witness tomorrow's chapter of human history, regardless of how little we have to do with it. This is the essence of consciousness. The religious debate boils down to: if you buy our story, we guarantee you'll see all the remaining chapters of human history, just from someplace else. Now, go kill all those non-believers.
The evil in the George Wills of the world is that they are social Darwinists decrying modernity as permitting the survival of those not quite the fittest, but will go to great lengths to obfuscate their true intent. They wrap it up in words like freedom and self-expression, et cetera. Reality is that they want the many to die early to the benefit of the few. This is implicit in their campaign against unions, Medicare, Social Security; any aspect of the social safety net (so called).
The pathetic irony of Will and company is this. We are rapidly depleting the stuff in the ground, natural resources, which is required to make the gadgets we all want. As a colleague of mine (a math stat) put it: "the world is not linear". He made the observation long before it became popular as "the tipping point" and other similar aphorisms. If one assumes that a gradual change is part of a straight line, then the amount of change is tolerable and can be adapted to with sufficient time to avert permanent disaster. Non-linear phenomena, when misapprehended, don't forgive. They just fail. Oh, yeah the Irony. There are about 6,000,000,000 of us on the planet. From a resource point of view, if we neutron bombed Asia, Africa, South America, and the Pacific Islands (those low class folks) we'd get down to about 1,000,000,000. And we'd be no better off; we'd stave off disaster for a few years. Those 5,000,000,000 folks consumed resources in the neighborhood of 1% of the remaining 1,000,000,000 measured per capita. In other words, enforcing Darwinism doesn't buy us much. In order to stave off disaster for a generation or two longer, we'd have to neutron bomb half of Europe and half of the US (I vote for Florida as the first one).
In this country, the argument is that we are all living longer, but "we" can't support all those old people who refuse to die at the same age as old people died before Social Security happened. If you look at the data and cherry pick, well lie, you can say that between 1900 and 2000 life expectancy at birth went up by more than 25 years. That same data also tells you that between the start of Social Security and today, life expectancy at 65 went up by 4 years. That's it.
So, are you a modern lover? If swine flu visits your neighborhood, I'm going to guess yes.
To a Muslim, modernity is music. Not to be tolerated. To the Amish, electricity. To a Roman Catholic, mass in native language (assuming that Latin is no longer spoken anywhere conversationally). To a Boomer's parents, coed dorms.
So, what is modernity, negatively, to a horde of George Wills? Racial equality, enforced by law. Economic equality, permitted by law (unionization made easy). Gender equality, enforced by law. Gender preference, enforced by law. Marriage preference, permitted by law (miscegenation being the initial example). Universal health care.
But, what parts of modernity would a rational person want, at minimum? For concreteness, I'll define modernity to mean artifacts of culture and society which came into existence post World War II. That leaves out electric lighting, radio, TV (strictly speaking), air travel, and a host of other endeavors which a Boomer's grandparents didn't have at birth.
It is self-evident that the answer has to be medicine, broadly defined. I have no use for the iPhone; so far as I am concerned building them and the AT&T 3G network for them is a terrible waste of our capital. We don't need multiple, incompatible cell phone networks. Pick a standard technology, let all the manufacturers and providers implement it as best they can, and build it once. Use all that capital for other completely different purposes; rural health clinics come to mind. I like digital watches. I own a bunch, and get another about once a year. Complete waste of money, of course. One wrist. One time zone. One time. Manufacturers manage to design ever more intriguing, if only for a little while, models. I am a sucker for yet another variation on the theme of digital time. But they're modern and I really want them. Up to a point.
When push comes to shove, any adult is willing to relinquish some gadget for living longer. We all want to witness tomorrow's chapter of human history, regardless of how little we have to do with it. This is the essence of consciousness. The religious debate boils down to: if you buy our story, we guarantee you'll see all the remaining chapters of human history, just from someplace else. Now, go kill all those non-believers.
The evil in the George Wills of the world is that they are social Darwinists decrying modernity as permitting the survival of those not quite the fittest, but will go to great lengths to obfuscate their true intent. They wrap it up in words like freedom and self-expression, et cetera. Reality is that they want the many to die early to the benefit of the few. This is implicit in their campaign against unions, Medicare, Social Security; any aspect of the social safety net (so called).
The pathetic irony of Will and company is this. We are rapidly depleting the stuff in the ground, natural resources, which is required to make the gadgets we all want. As a colleague of mine (a math stat) put it: "the world is not linear". He made the observation long before it became popular as "the tipping point" and other similar aphorisms. If one assumes that a gradual change is part of a straight line, then the amount of change is tolerable and can be adapted to with sufficient time to avert permanent disaster. Non-linear phenomena, when misapprehended, don't forgive. They just fail. Oh, yeah the Irony. There are about 6,000,000,000 of us on the planet. From a resource point of view, if we neutron bombed Asia, Africa, South America, and the Pacific Islands (those low class folks) we'd get down to about 1,000,000,000. And we'd be no better off; we'd stave off disaster for a few years. Those 5,000,000,000 folks consumed resources in the neighborhood of 1% of the remaining 1,000,000,000 measured per capita. In other words, enforcing Darwinism doesn't buy us much. In order to stave off disaster for a generation or two longer, we'd have to neutron bomb half of Europe and half of the US (I vote for Florida as the first one).
In this country, the argument is that we are all living longer, but "we" can't support all those old people who refuse to die at the same age as old people died before Social Security happened. If you look at the data and cherry pick, well lie, you can say that between 1900 and 2000 life expectancy at birth went up by more than 25 years. That same data also tells you that between the start of Social Security and today, life expectancy at 65 went up by 4 years. That's it.
So, are you a modern lover? If swine flu visits your neighborhood, I'm going to guess yes.
25 April 2009
Where's Joe?
Joe Nocera remains absent from the Times today. I spent a bit of time with Jack Anderson, and when Van Atta went quiet (he was the principle reporter then) it meant that a Big Story was in the works.
Here's hoping we'll read something Really Big next Saturday. Yummy.
Here's hoping we'll read something Really Big next Saturday. Yummy.
22 April 2009
You say Toe-may-toe, I say you lying bastard
Am I the only person on the planet sick and tired of hearing "innovation" as the reason for the meltdown? The Wall Street scum steal our money, then they steal the language outright.
Time was, innovation meant an improvement. A better way to make widgets. A new widget that didn't exist before, and which does something for society that is useful. The iPhone, which I won't buy for lots of reasons, is arguably an innovation. It is a new widget which some folks find more useful than other phones.
Somehow, I cannot accept that finding new and shady ways to game both law and regulation, for the sole purpose of taking money from society at large, can be termed "innovation". By that definition, Al Capone was a master of innovation. No thanks.
The most irritating use: some decide that creating new law or regulation is pointless because the Wall Street crowd will "innovate" to defeat said laws or regulations. I guess Orwell was right; Newspeak has arrived. A quote from the book: "It's a beautiful thing, the destruction of words."
And here is Orwell: "I said earlier that the decadence of our language is probably curable. Those who deny this would argue, if they produced an argument at all, that language merely reflects existing social conditions, and that we cannot influence its development by any direct tinkering with words or constructions."
Mayhaps a bit of rioting in the streets is in order.
Time was, innovation meant an improvement. A better way to make widgets. A new widget that didn't exist before, and which does something for society that is useful. The iPhone, which I won't buy for lots of reasons, is arguably an innovation. It is a new widget which some folks find more useful than other phones.
Somehow, I cannot accept that finding new and shady ways to game both law and regulation, for the sole purpose of taking money from society at large, can be termed "innovation". By that definition, Al Capone was a master of innovation. No thanks.
The most irritating use: some decide that creating new law or regulation is pointless because the Wall Street crowd will "innovate" to defeat said laws or regulations. I guess Orwell was right; Newspeak has arrived. A quote from the book: "It's a beautiful thing, the destruction of words."
And here is Orwell: "I said earlier that the decadence of our language is probably curable. Those who deny this would argue, if they produced an argument at all, that language merely reflects existing social conditions, and that we cannot influence its development by any direct tinkering with words or constructions."
Mayhaps a bit of rioting in the streets is in order.
19 April 2009
Let them eat cake, it's good for them
Whilst watching today's political chat shows, a couple of lies kept being repeated.
The first is that having a single payor health system would mean the government makes health care decisions. Well, they would likely make decisions more in line with patient needs than what goes on today. I wrote, and there are at least two other, "pre-certification" systems, used by HMO's to decide whether a patient is allowed to get certain kinds of procedures. The notion that our current private sector health delivery respects the decisions of doctor and patient is one of the Winguts Big Lies. The current system is designed to generate profits for HMO's, not doctors, nor to provide superior health care to patients.
The other Big Lie, voiced by the Wingnuts and Progressives alike, is that we have to save the banks before the economy can be back on its feet. The reason credit isn't flowing is that few Americans can qualify; most Americans don't have any income to speak of. Until the 1%/22% is turned around, the economy will continue on its Marie Antionette flop.
The first is that having a single payor health system would mean the government makes health care decisions. Well, they would likely make decisions more in line with patient needs than what goes on today. I wrote, and there are at least two other, "pre-certification" systems, used by HMO's to decide whether a patient is allowed to get certain kinds of procedures. The notion that our current private sector health delivery respects the decisions of doctor and patient is one of the Winguts Big Lies. The current system is designed to generate profits for HMO's, not doctors, nor to provide superior health care to patients.
The other Big Lie, voiced by the Wingnuts and Progressives alike, is that we have to save the banks before the economy can be back on its feet. The reason credit isn't flowing is that few Americans can qualify; most Americans don't have any income to speak of. Until the 1%/22% is turned around, the economy will continue on its Marie Antionette flop.
17 April 2009
You cursed brat! I'm melting!
As predicted in this blog, the monies dispensed by the government have not led to inflation. The just released consumer price index and producer price index both declined, again. That's deflation.
The reason is quite simple: none of these billions of dollars were sent into the consumer sector of the economy. The consumer sector, for purposes of this blog, means middle (and below) class households. It has long been known that savings (real savings) is limited to about the upper echelon of the middle class and higher. As a nation's median income doesn't grow, the saving cohort gets smaller, since incomes approach the minimum necessities. In the beginning of (political) economics, these were lumped into the phrase, "food, clothing, and shelter". We might include cable service today, although the principle remains; discretionary income is the source of savings and discretionary income is small to nonexistent near and certainly below median income.
The question to discuss is: who benefits from deflation, and why do even Wingnut economists consider it a worse fate than inflation?
The beneficiaries are debtors, since they get to repay debt with lower valued currency. Or so the theory goes. But this assumes that incomes are not decreasing. For wage earners, this is not likely to be the case. Current experience bears this out. In real currency terms, creditors are more than likely to be repaid on equivalent terms.
Deflation is a problem in the standard economic view because it is believed to lead to curtailment of investment and spending. Investment because of money illusion; the investment will yield not $10 worth of widgets next year, but $9 worth, so why invest the $100? This is money illusion because the widgets are the same next year as this (we'll assume that we haven't invented a new version of widget), so in context, the $100 has created 666 new widgets. Now, it is proposed that deflation leads to reduced spending because, it is assumed, the rational consumer will curtail purchasing a $10 widget today hoping that the widget will be $9 tomorrow. This, again, is due to money illusion. Only for those hoarding cash is the decision rational; and only then if the widget's purchase is truly postponable, is discretionary.
The real problem is that deflation is a symptom, or side effect, of the greater problem: wealth and income inequality. Periods of deflation have occurred during periods of large income/wealth shifts. Now, not all observers consider this condition to be a problem. Social Darwinists, in particular, are not bothered. However, in the context of maintaining a free and democratic nationhood, it is a problem.
Determining which is the chicken and which is the egg, from a policy point of view, matters. If deflation causes the shift, then one should attack deflation with monetary tools. If the shift causes the deflation, then one should attack with fiscal tools. My analysis leads me to believe that the shift is the cause, and fiscal tools the answer to the problem. That puts me in the Krugman camp(or he in mine, since I'm older and have been of this mind first), leaving the Wingnuts in the Friedman (Milton) camp.
Historically, autocracies, whether driven by hereditary aristocrats or economic plutocrats, are neither free nor pleasant to live in if one is not a member of the elite. History demonstrates that democracy and the presence of a broad middle class are found together, and neither prospers without the other. An economic elite finds repression necessary, as in present day India and China. A political elite does too, as did the Axis countries during the 1930's and 1940's or the British monarches when being a monarch meant something. In both cases it was necessary to use government repression to maintain the unlevel playing field.
In the USofA, the southern states have historically been politically and economically repressive. It should come as no surprise that these states have always scored at the bottom of measures of "goodness", whether income, education, intelligence, or job quality. The plantation mindset persists.
If the Obamanauts are really worried about a deflationary spiral, quit licking the boots of the Goldman Gang. That will not work. Only re-leveling the wealth playingfield will work, and that requires fiscal policy.
The reason is quite simple: none of these billions of dollars were sent into the consumer sector of the economy. The consumer sector, for purposes of this blog, means middle (and below) class households. It has long been known that savings (real savings) is limited to about the upper echelon of the middle class and higher. As a nation's median income doesn't grow, the saving cohort gets smaller, since incomes approach the minimum necessities. In the beginning of (political) economics, these were lumped into the phrase, "food, clothing, and shelter". We might include cable service today, although the principle remains; discretionary income is the source of savings and discretionary income is small to nonexistent near and certainly below median income.
The question to discuss is: who benefits from deflation, and why do even Wingnut economists consider it a worse fate than inflation?
The beneficiaries are debtors, since they get to repay debt with lower valued currency. Or so the theory goes. But this assumes that incomes are not decreasing. For wage earners, this is not likely to be the case. Current experience bears this out. In real currency terms, creditors are more than likely to be repaid on equivalent terms.
Deflation is a problem in the standard economic view because it is believed to lead to curtailment of investment and spending. Investment because of money illusion; the investment will yield not $10 worth of widgets next year, but $9 worth, so why invest the $100? This is money illusion because the widgets are the same next year as this (we'll assume that we haven't invented a new version of widget), so in context, the $100 has created 666 new widgets. Now, it is proposed that deflation leads to reduced spending because, it is assumed, the rational consumer will curtail purchasing a $10 widget today hoping that the widget will be $9 tomorrow. This, again, is due to money illusion. Only for those hoarding cash is the decision rational; and only then if the widget's purchase is truly postponable, is discretionary.
The real problem is that deflation is a symptom, or side effect, of the greater problem: wealth and income inequality. Periods of deflation have occurred during periods of large income/wealth shifts. Now, not all observers consider this condition to be a problem. Social Darwinists, in particular, are not bothered. However, in the context of maintaining a free and democratic nationhood, it is a problem.
Determining which is the chicken and which is the egg, from a policy point of view, matters. If deflation causes the shift, then one should attack deflation with monetary tools. If the shift causes the deflation, then one should attack with fiscal tools. My analysis leads me to believe that the shift is the cause, and fiscal tools the answer to the problem. That puts me in the Krugman camp(or he in mine, since I'm older and have been of this mind first), leaving the Wingnuts in the Friedman (Milton) camp.
Historically, autocracies, whether driven by hereditary aristocrats or economic plutocrats, are neither free nor pleasant to live in if one is not a member of the elite. History demonstrates that democracy and the presence of a broad middle class are found together, and neither prospers without the other. An economic elite finds repression necessary, as in present day India and China. A political elite does too, as did the Axis countries during the 1930's and 1940's or the British monarches when being a monarch meant something. In both cases it was necessary to use government repression to maintain the unlevel playing field.
In the USofA, the southern states have historically been politically and economically repressive. It should come as no surprise that these states have always scored at the bottom of measures of "goodness", whether income, education, intelligence, or job quality. The plantation mindset persists.
If the Obamanauts are really worried about a deflationary spiral, quit licking the boots of the Goldman Gang. That will not work. Only re-leveling the wealth playingfield will work, and that requires fiscal policy.
12 April 2009
Housing is Toxic
There are lies, then there are really big lies. The Obamanauts are off and running with one of those really big lies: home mortgages are a really Good Thing. Well, no. There is a story here, I sense.
When I was in econ grad school, it was common knowledge in the profession that USofA's worship of home ownership as "the family's major investment" was not just wrong but downright dangerous. The reasoning goes like this: there exist two types of investment, financial and real. Financial investment is stocks, insurance policies, and, well, residential housing. Real investment is things like a plant to build widgets or buy a widget forge. Real in this case meaning physical, of this corporeal world.
The Obamanauts were out encouraging folks to refinance, and "put money in their pockets". This is just the behavior, bait and switch, that caused the mess in the first place and was the mantra of the wingnuts. While reducing real median income/wages in the name of free market capitalism, the wingnuts encouraged a Ponzi scheme in the residential housing market. The price of housing will increase by double digits year after year, so live off this unearned equity. Neat trick, but it doesn't work. In due time, the house of cards collapses. The Obamanauts serving it up too is in line with their secrecy moves.
We were hosed. Obushama.
Now, as to why housing is toxic. Financial capital can be used to create real capital, plant and equipment. Or it can be used to bet on pyramid schemes, like the stock market. A topic for another essay, but the 401(k) bait and switch is from this same bolt of cloth used to sew the Emperor's new clothes. In can be argued that, from the point of view of the individual, it matters not whether $1,000 is put into XYZ, Inc. stock bought on the market or into a $1,000 widget forge for XYZ, Inc. The individual just wants to get back $1,100 at some point in the future. But from a macro-economic point of view, it makes a hell of a difference. A widget forge has real return: it allows XYZ, Inc. to make widgets more efficiently. So, society as a whole benefits when fiduciary (financial) capital is directed to real capital. There is no economic benefit to society from the trading in financial capital, this is just a zero sum game.
Residential housing as investment vehicle is the toxin. It was no coincidence that this scam finally collapsed during the Bush years. But it had its start in 1973, with the first oil embargo, and stagflation. It is a truth that housing prices and interest rates are inversely correlated. With the Volker disinflation in full force, interest rates soared. It is also a truth, recently revisited with the subprime and alt-A and similar scams, that the net cost of housing is fixed by median income. If you make $1,000/month, then $333 dollars/month is about the max you can pay for housing. The exact percentage waffles a bit, and was further fiddled a bit during the Bush years, but for the short and medium term in a location, the median mortgage payment is a fixed percentage of the median income in the location.
So, in the 1970's interest rates soared, median income didn't move much, so house prices declined to meet the arithmetic. People who bought then saw ridiculous unearned capital gains as time went on when interest rates declined. As interest rates decline, then house price rises to consume the median mortgage payment. The notion that housing prices always rise was born in the brains of the feeble minded and evil minded. The two groups overlapped a bit.
In the current drama, Greenspan aided and abetted the scam with his insistence that interest rates would be held low. When that stimulus began to wane (as it will when time moves from the short term to medium term), the mortgage companies invented new and interesting ways to inflate house prices with an essentially stagnant median mortgage payment. Make no mistake, it was not banks that originated the scams and the bulk of the mortgages; banks came to the game later and generally in an attempt to maintain market share. (The Fannie and Freddie messes were market share artefacts.) This is not an intelligent excuse for being stupid. But merely an explanation. It is also another reason why the micro-economic analysis fails when applied to macro-economic policy issues.
While the USofA has been dumping financial capital into McMansions for decades, other countries, notably China of course, have been putting their financial capital into real investment. Guess who is winning the game?
The USofA is among only a few countries that allows the deduction of mortgage interest from income taxes, and the one of two (the other is the Netherlands) that doesn't otherwise balance that benefit.
When I was in econ grad school, it was common knowledge in the profession that USofA's worship of home ownership as "the family's major investment" was not just wrong but downright dangerous. The reasoning goes like this: there exist two types of investment, financial and real. Financial investment is stocks, insurance policies, and, well, residential housing. Real investment is things like a plant to build widgets or buy a widget forge. Real in this case meaning physical, of this corporeal world.
The Obamanauts were out encouraging folks to refinance, and "put money in their pockets". This is just the behavior, bait and switch, that caused the mess in the first place and was the mantra of the wingnuts. While reducing real median income/wages in the name of free market capitalism, the wingnuts encouraged a Ponzi scheme in the residential housing market. The price of housing will increase by double digits year after year, so live off this unearned equity. Neat trick, but it doesn't work. In due time, the house of cards collapses. The Obamanauts serving it up too is in line with their secrecy moves.
We were hosed. Obushama.
Now, as to why housing is toxic. Financial capital can be used to create real capital, plant and equipment. Or it can be used to bet on pyramid schemes, like the stock market. A topic for another essay, but the 401(k) bait and switch is from this same bolt of cloth used to sew the Emperor's new clothes. In can be argued that, from the point of view of the individual, it matters not whether $1,000 is put into XYZ, Inc. stock bought on the market or into a $1,000 widget forge for XYZ, Inc. The individual just wants to get back $1,100 at some point in the future. But from a macro-economic point of view, it makes a hell of a difference. A widget forge has real return: it allows XYZ, Inc. to make widgets more efficiently. So, society as a whole benefits when fiduciary (financial) capital is directed to real capital. There is no economic benefit to society from the trading in financial capital, this is just a zero sum game.
Residential housing as investment vehicle is the toxin. It was no coincidence that this scam finally collapsed during the Bush years. But it had its start in 1973, with the first oil embargo, and stagflation. It is a truth that housing prices and interest rates are inversely correlated. With the Volker disinflation in full force, interest rates soared. It is also a truth, recently revisited with the subprime and alt-A and similar scams, that the net cost of housing is fixed by median income. If you make $1,000/month, then $333 dollars/month is about the max you can pay for housing. The exact percentage waffles a bit, and was further fiddled a bit during the Bush years, but for the short and medium term in a location, the median mortgage payment is a fixed percentage of the median income in the location.
So, in the 1970's interest rates soared, median income didn't move much, so house prices declined to meet the arithmetic. People who bought then saw ridiculous unearned capital gains as time went on when interest rates declined. As interest rates decline, then house price rises to consume the median mortgage payment. The notion that housing prices always rise was born in the brains of the feeble minded and evil minded. The two groups overlapped a bit.
In the current drama, Greenspan aided and abetted the scam with his insistence that interest rates would be held low. When that stimulus began to wane (as it will when time moves from the short term to medium term), the mortgage companies invented new and interesting ways to inflate house prices with an essentially stagnant median mortgage payment. Make no mistake, it was not banks that originated the scams and the bulk of the mortgages; banks came to the game later and generally in an attempt to maintain market share. (The Fannie and Freddie messes were market share artefacts.) This is not an intelligent excuse for being stupid. But merely an explanation. It is also another reason why the micro-economic analysis fails when applied to macro-economic policy issues.
While the USofA has been dumping financial capital into McMansions for decades, other countries, notably China of course, have been putting their financial capital into real investment. Guess who is winning the game?
The USofA is among only a few countries that allows the deduction of mortgage interest from income taxes, and the one of two (the other is the Netherlands) that doesn't otherwise balance that benefit.
09 April 2009
Oliver Twist, More Please
So, another (we've got beyond just two, so it's hardly the 'other') shoe has dropped. Certain of the less competent life insurance companies are bellying up to the trough of corporate welfare. They've earned both barrels, so here we go.
Their approach to the core of what they do, keeping track of money, is a function which many of them farmed out. In the business of business is the idea of core competency; what you do as a business, what you do to create a difference between yourself and all the other businesses in your market. This is what you do yourself, because you figured out a smarter way to run the business. You never buy it off the shelf from the Grace L. Ferguson Storm Door and Insurance Software Company. You never do this because you are supposed to KNOW a better way to do whatever this business does. But, not these chuckleheads. Like lemmings, they follow someone down a rabbit hole. Okay, mixing some metaphors, but you get the idea.
These dinosaurs are more bureaucratic than government. I know, having worked for both the Commonwealth of Massachusetts and the Federal government and one of those companies which sold them old fashioned software.
So, now they are begging to be bailed out. Pity. When I was in grad school studying economics, I heard an old saw, which was: if you want a little bit of money you go to a bank, if you want a LOT of money you go to an insurance company. There have been rumblings in the jungle that commercial real estate is headed for as big, if not bigger, fall as residential. The insurance industry, since it was where you went if you needed a LOT of money, finances a lot of commercial real estate. There is little evidence that insurance companies were knee deep in the subprime debacle, so what is it that has them begging for money? It has to be that their assets are decaying. It could also be some combination of the following:
- folks who bought insurance are redeeming policies in order to get the cash, or just avoid the payments. Either way, the way insurance works, from the company's point of view, is to assume X years of payments in order pay the agents, management, and shareholders. So far as I know, X is not published. Whatever the number, if policyholders are exiting early, this causes a number of problems. First problem is cash flow drops. Second problem is investment income drops. Third problem is that some percentage of policies need to be paid back some percentage of earned income, from all that real estate investment.
- Alan Greenspan continues to plague them. Remember when Greenspan said that interest rates would be held low for as long as necessary? Some, I would wager an increasing number, are figuring out that he is patient zero. Insurance companies, more so than banks, are sensitive to long term interest rates, since this is where they live. As inflation drops, or doesn't rise, and interest rates stay historically low, insurance companies can no longer depend on the US Treasury for useful return. That ouroborus again. Or, you can't have your cake and eat it too.
Here's the delicate question. AIG, and similar, got in trouble by leveraging out of their minds. The collapse of such a structure, while bad, is A) expected and B) not systemic. I know, the term used by Geithner and the rest is "systemic risk", but this monumental leveraging was not systemic, in fact it was flaunting of the age old rules of financial activity. On the other hand, what the life insurance industry has to be facing, if it truly is in need of a bailout, is a systemic problem: the system of life insurance whereby premium payments are, by design and intent, insufficient to fund payouts to policyholders, agents, management, and shareholders. The insufficiency, of whatever magnitude, is by design and intent to be provided by investment income. Should interest rates remain below the value assumed by the actuaries, the fallout is no different from what social security faces. No money.
The difference between social security and life insurance, particularly annuities, is profit and overhead. This looks like yet another case of capitalists socializing costs and privatizing profits. Such a deal.
Their approach to the core of what they do, keeping track of money, is a function which many of them farmed out. In the business of business is the idea of core competency; what you do as a business, what you do to create a difference between yourself and all the other businesses in your market. This is what you do yourself, because you figured out a smarter way to run the business. You never buy it off the shelf from the Grace L. Ferguson Storm Door and Insurance Software Company. You never do this because you are supposed to KNOW a better way to do whatever this business does. But, not these chuckleheads. Like lemmings, they follow someone down a rabbit hole. Okay, mixing some metaphors, but you get the idea.
These dinosaurs are more bureaucratic than government. I know, having worked for both the Commonwealth of Massachusetts and the Federal government and one of those companies which sold them old fashioned software.
So, now they are begging to be bailed out. Pity. When I was in grad school studying economics, I heard an old saw, which was: if you want a little bit of money you go to a bank, if you want a LOT of money you go to an insurance company. There have been rumblings in the jungle that commercial real estate is headed for as big, if not bigger, fall as residential. The insurance industry, since it was where you went if you needed a LOT of money, finances a lot of commercial real estate. There is little evidence that insurance companies were knee deep in the subprime debacle, so what is it that has them begging for money? It has to be that their assets are decaying. It could also be some combination of the following:
- folks who bought insurance are redeeming policies in order to get the cash, or just avoid the payments. Either way, the way insurance works, from the company's point of view, is to assume X years of payments in order pay the agents, management, and shareholders. So far as I know, X is not published. Whatever the number, if policyholders are exiting early, this causes a number of problems. First problem is cash flow drops. Second problem is investment income drops. Third problem is that some percentage of policies need to be paid back some percentage of earned income, from all that real estate investment.
- Alan Greenspan continues to plague them. Remember when Greenspan said that interest rates would be held low for as long as necessary? Some, I would wager an increasing number, are figuring out that he is patient zero. Insurance companies, more so than banks, are sensitive to long term interest rates, since this is where they live. As inflation drops, or doesn't rise, and interest rates stay historically low, insurance companies can no longer depend on the US Treasury for useful return. That ouroborus again. Or, you can't have your cake and eat it too.
Here's the delicate question. AIG, and similar, got in trouble by leveraging out of their minds. The collapse of such a structure, while bad, is A) expected and B) not systemic. I know, the term used by Geithner and the rest is "systemic risk", but this monumental leveraging was not systemic, in fact it was flaunting of the age old rules of financial activity. On the other hand, what the life insurance industry has to be facing, if it truly is in need of a bailout, is a systemic problem: the system of life insurance whereby premium payments are, by design and intent, insufficient to fund payouts to policyholders, agents, management, and shareholders. The insufficiency, of whatever magnitude, is by design and intent to be provided by investment income. Should interest rates remain below the value assumed by the actuaries, the fallout is no different from what social security faces. No money.
The difference between social security and life insurance, particularly annuities, is profit and overhead. This looks like yet another case of capitalists socializing costs and privatizing profits. Such a deal.
08 April 2009
Too Big to Fail?
Too big to fail is a phrase being tossed around quite a bit lately; AIG, Citi, and the like. Too big to fail has another meaning: when income/wealth get concentrated into too few hands, hiccups in the economy get magnified as well. All economic activity falters.One of the toxic side effects of income concentration is state governments, as New York and Connecticut particularly, find income tax receipts get badly hammered, since such taxes have come to be dependent on these fewer increasingly richer folks. Said fewer folks gulp ever larger proportions of the income stream, they represent more of the tax base. How then to preserve both services and incomes?
It has been argued that the last bastion of the economy will be state governments, to the extent that they provide both equity in services such as education (to offset disparity in property values) and employment when private sector employment tanks. Were it not for the drastic concentration of income, that 1% eating 22%, the loss of jobs from the corrupt financial services sector would be tolerable. The loss of taxes from these folks would not amount to such a large chunk of state revenue; the base would consist of larger numbers of the employed.
So this 1% complain that they shoulder too much of the tax burden, while quietly ignoring the fact that they have been the sole recipient of economic growth. They stole the money fair and square, so far as they are concerned.
Had median income kept pace with, and income distribution remained at, say, 1980 levels this depression would not likely have happened.
Here's why.
Just as Adam Smith (the original) fantasized an economy where no one (or few together) actor could influence the "market", we find ourselves now with a situation where wherever we look, there is an 800 pound gorilla controlling markets.
What gets ignored, both by the Angry and the Get-Over-It sets, is a fundamental understanding of the problem. To wit: recessions (and depressions, going back to at least 1873, in other words, the industrial era) are the result of runups of income/wealth inequality. Check the history books.
Same thing has happened here, and as happened in the past, the proximate trigger is banking failure. But, this trigger was pulled by the sudden disappearance of income. Since Reagan, median income has fallen; yet the data show growth. We now know that the top 1% suck up about 22% of income. The middle class, what there was left of it, got along through the Bush years by burning up all that pyramid scheme equity which miraculously (as manna from heaven; in keeping with right-wing neo-Christian ideology) appeared in housing. That in turn was fueled by the game playing of the mortgage industry.
It has been argued that the last bastion of the economy will be state governments, to the extent that they provide both equity in services such as education (to offset disparity in property values) and employment when private sector employment tanks. Were it not for the drastic concentration of income, that 1% eating 22%, the loss of jobs from the corrupt financial services sector would be tolerable. The loss of taxes from these folks would not amount to such a large chunk of state revenue; the base would consist of larger numbers of the employed.
So this 1% complain that they shoulder too much of the tax burden, while quietly ignoring the fact that they have been the sole recipient of economic growth. They stole the money fair and square, so far as they are concerned.
Had median income kept pace with, and income distribution remained at, say, 1980 levels this depression would not likely have happened.
Here's why.
Just as Adam Smith (the original) fantasized an economy where no one (or few together) actor could influence the "market", we find ourselves now with a situation where wherever we look, there is an 800 pound gorilla controlling markets.
What gets ignored, both by the Angry and the Get-Over-It sets, is a fundamental understanding of the problem. To wit: recessions (and depressions, going back to at least 1873, in other words, the industrial era) are the result of runups of income/wealth inequality. Check the history books.
Same thing has happened here, and as happened in the past, the proximate trigger is banking failure. But, this trigger was pulled by the sudden disappearance of income. Since Reagan, median income has fallen; yet the data show growth. We now know that the top 1% suck up about 22% of income. The middle class, what there was left of it, got along through the Bush years by burning up all that pyramid scheme equity which miraculously (as manna from heaven; in keeping with right-wing neo-Christian ideology) appeared in housing. That in turn was fueled by the game playing of the mortgage industry.
03 April 2009
Forgetting Simon Johnson
Simon Johnson's article in "The Atlantic" is being chatted up just about everywhere; David Brooks got into it today in the "Times" and was dismissive, so when Mr. Brooks takes umbrage I have to take a look. One thing to remember about the IMF/World Bank: some have had the temerity to point out that their strictures, in the past when dealing with other Third World Countries (we'll see how they treat the USofA), are to impose hyper-Capitalist requirements on those countries. In other words, rewarding the capitalists (foreign and domestic) and oligarchs, and not the society as a whole. The words tough love and strong medicine were often used to describe what the IMF imposed. The tough and strong were always leveled at the weak in the country.
As is my wont, I am writing out notes as I go along. I will assume that you are familiar with his article. Therefore, I will reach conclusions which Mr. Johnson may or may not later in his text. You'll just have to trust me that I haven't peeked. I find this approach more useful: does a text under review display logical and thoughtful coherence? Does it motivate truth, as understood by this endeavor?
Off we go.
He says of Russia: "all other things being equal, [foreign investors] prefer to lend money to people who have the implicit backing of their national governments", but what really happens is that capitalists prefer to send the cash to societies where only capital (one leg of the three legged stool of basic production; land, labor, capital) is protected. That has been happening in this country since the shoe and textile industries left liberal New England for the "capital friendly" or dare I say, fascist, South in the 19th century. He is holding back.
So now we have: "Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk - at least until the riots grow too large." I give Mr. Johnson his due, I wasn't expecting such clarity and honesty from an IMF person. On the other hand, some have questioned why the riots haven't started here. The speculation is that the venting available in cyber-blogo-twitter spheres has kept the lid on. As someone who was adolescent in the 1960's, the passivity in the face of American oligarches now can be rather depressing. We'll see how it works out. Obama's caving to Wall Street, so far, is not a good sign.
He goes on: "the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people." But this misses the point. Our crisis wasn't caused by the banking system, per se. The cause is the culmination of nearly 3 decades of income and wealth transfer from the many to the few. And this is always the cause of economic collapse. The specific trigger may be often be in the banking system, but it is not the banks which cause the problem. They profit from it along the way, certainly. It needs reiterating: the figures I have seen is that 70% to 80% of 'toxic' mortgages came from mortgage companies, not banks.
Then: "financiers, in the case of the U.S. - played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse." But there is nothing new or unique in this time or this place. Historically, capitalists do only two things: socialize cost and privatize profits. This was going on here in the 19th century. It is not news, unfortunately. And, I have always argued that there was no gambling here. There was no assumption of risk; the certainty was that they knew they were too big to fail. There would be no downside, at least until after the performance and retention bonuses were paid.
He gets credit, so far as am I concerned, in going back to Reagan to spot when the changes in our economy which precipitated the mess began. He misses a couple of key points: the IRA/401(k) and ascendency of financial services were both the results of capitalists seeking their normal levels. The IRA/401(k) move was to socialize costs through the removal of defined benefit retirement plans. The general ascendency of finance is a side effect of deindustrialization. Jack Welch was the master of this at GE. Replace (real) capital intensive manufacturing with, effectively, non capital services. He was worshipped for his genius. Less so today. He also misses out the comparison to pre-1929 and pre-1907 with regard to finance as proportion of economic activity. He also has nothing to say about how and why this process shipped production to China, India, and other less than middle-class and democratic countries. He is boxing with kid gloves.
Well, the text gets better: "The great wealth that the financial sector created and concentrated gave bankers enormous political weight - weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers". Unfortunately, he continues with the right-leaning shibboleth of "wealth creation". No wealth is created by financial manipulation. Never has been, and never will be. Real wealth is created by the application of Real Capital (economists, when they pay attention, make a distinction between fiduciary capital, money, and real capital, plant and equipment). What 1907, 1929, and 2007 are all about is wealth transfer. I takey, you losey. There is a too large faction in the economics profession which clings to the notion that economic growth is always a non-zero sum game. It's about time we all grew up.
Alright, I cannot let it pass that Mr. Johnson Quayle-d Snow. A manifestation of irony, pehaps subtle, from a banker. Hoziah.
But then he quavers: "Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn't". It is quite clear that Cassano and the others understood what they were doing: reaping cash for trash. I recall reading an article in the news back in the early 2000's, unfortunately, I didn't clip it. In the report, a person involved in the sale of a house says to the broker that the buyer couldn't possibly afford the mortgage when it reset. The reply from the broker: "I don't care". The broker, and all those up the chain had gotten their profits, nothing else mattered. They all knew it was gossamer, and they didn't care. They all knew that gummint would clean it up. The real problem here is that those who can lade away the cash upfront, and never have it "clawed back", are simply criminals who go unpunished. And they knew this from the getgo.
And a sentence later: "AIG's Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities." He gets it fundamentally wrong here. He doesn't tell the reader what actually AIG did. AIG did not sell insurance. Cassano and the rest were explicitly clever about this aspect of the con. If they had sold CDS as *insurance* product, they would have been subject to capital and actuarial requirements of insurance. AIG sold nothing at all. They never had any intention, nor funds, to pay off any CDS.
Ah, to be a prophet before his time. "As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. ...This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance." As I have written in earlier posts in this nascent blog, one of my long held gripes with the economics profession is its willingness to grovel for dollars. Mr. Johnson now points to the symbiotic relationship between the quants, who could have figured out the problem with the mortgage business just by tracking the ratio of median income and median house price and the bankers who needed cover. By 2003, this measure was already heading into the weeds. But that was the point. Had I a blog back then, and spoken up, I might be famous now. Oh well.
"In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty -- in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities." He still gets it wrong. The problem isn't with credit or the banks, per se. The problem is that, since 1980, the real median income in this country has fallen. What kept consumption afloat during the Bush/Gingrich/Bush years was burning of unearned appreciation of housing. It was pure ideological bait and switch perpetrated on the Republican base and Reagan Democrats. They bought it hook line and s(t)inker. With that source of consumable income gone, demand for goods and services vanishes. Collapse results.
In his response to the anonymous banker he says: "But there's the rub: the economy can't recover until the banks are healthy and willing to lend." He's wrong. He too is groveling to the bankers, though he seems not to know it. As Dr. Keynes made clear: there cannot be a stable, growing industrialized economy without equivalent consumption. And you cannot have that consumption without a broad and deep middle class. The banking problem we are in is an effect, not a cause. China would be shrugging off this situation if it were a stable country with a broad and deep middle class. It is industrialized, but doesn't consume what it produces; it cannot since there is virtually no economic equity (in any sense of the word). It has vast capital. But it is not self sufficient. Neither is the US.
There is a small, and I hope growing, body of literature delving into the concept of absolute advantage. Ricardo was fundamentally wrong. Comparative advantage is grounded in the assumption of immobile assets. Land is. Labor is, to a significant extent. Capital never is. History has proven that capital flows to the most repressive regimes. Mercantilism may well be the most advanced form of economic structure. If so, then the middle class of the post World War II era was an aberration, not progress. Malthus was likely right. Since capital is nearly instantaneously mobile, recession is too.
He goes on to talk about nationalization and, in particular, recognizing true value of assets. That is now less likely, given that FASB has just caved, too. One cannot blame Mr. Johnson for not being a seer.
Finally, he says what I have been saying for some time: yes, unless we do the right thing, this will be worse than the Great Depression. Those who have been saying that this is just a really bad recession give no concrete evidence why things should stop with that. They talk of the safety net which exists now but didn't in the 1930's. The failure in that argument, as I have made in earlier entries to this endeavor, is that recovery in the 1930's was possible because physical capital remained to employ labor to make real goods for war. Where will the currently unemployed go to work? Because this situation is not just a banking problem, but a consumption problem, those who assert that there is a good end need to justify.
There is continued evidence that the job growth that had been occurring in the Bush years was disproportionately in low skill, low wage occupations. The tech sectors not just manufacturing, including financial services, have been replacing American techs with foreigners unabated. IBM just announced thousands more. A recovery of demand cannot occur without a recovery of incomes. That is not in the cards. Again, self sufficient economies will prosper in a world that, while not flat, is marked by fleet capital. The reason is simple (as China is finding out): supply side economics is fantasy. While IBM believes, as a microeconomic actor, that it can either sell more services and/or make more profits from said services by employing Indians at starvation (by US needs) wages; it is a pyrrhic victory. Microeconomics is beloved by the quants, but fails just because the whole is not merely sum of the parts. As any good mother said to the brat, "what would the world be like if everybody behaved like you?" Given the rapidity of the wired world, soon enough, IBM and its brethren will have impoverished so many citizens, that there will be none left to buy their services. Certainly not all those Indians. Ouroborus.
Prosperity in this future will be in those countries which have trade only in those resources not native to their soil, and which have broad and deep middle classes. The other countries will be autocracies. Which will be the majority? I fear the latter. I cannot see any motivation for the former to propagate. Kim Song-Il said of starvation in North Korea, it is fine if the masses live well, but they are better behaved if they don't. There are more Kim's in this world than is obvious. As Mr. Johnson implies this, while not invoking Kim; that is my insight.
This blog started because I recalled my senior thesis, whose theme was deindustrialization in Uruguay in the 1960's, and the results. Today, that process is called financialization and is the subject of research exploring the negative implications. I was nearly 40 years ahead of the rest of you in figuring out the problem. My conclusion, from memory since the paper is long since disappeared, was that Uruguay would be in trouble until it balanced income and wealth to levels consistent with economic self sufficiency.
On the whole, "The Quiet Coup" is a paper with which I can agree about 90%. It is worthwhile that one with his credentials is finally telling the truth. Stiglitz and Krugman are not alone. Nor am I, to a marginally greater extent than yesterday. That helps.
As is my wont, I am writing out notes as I go along. I will assume that you are familiar with his article. Therefore, I will reach conclusions which Mr. Johnson may or may not later in his text. You'll just have to trust me that I haven't peeked. I find this approach more useful: does a text under review display logical and thoughtful coherence? Does it motivate truth, as understood by this endeavor?
Off we go.
He says of Russia: "all other things being equal, [foreign investors] prefer to lend money to people who have the implicit backing of their national governments", but what really happens is that capitalists prefer to send the cash to societies where only capital (one leg of the three legged stool of basic production; land, labor, capital) is protected. That has been happening in this country since the shoe and textile industries left liberal New England for the "capital friendly" or dare I say, fascist, South in the 19th century. He is holding back.
So now we have: "Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk - at least until the riots grow too large." I give Mr. Johnson his due, I wasn't expecting such clarity and honesty from an IMF person. On the other hand, some have questioned why the riots haven't started here. The speculation is that the venting available in cyber-blogo-twitter spheres has kept the lid on. As someone who was adolescent in the 1960's, the passivity in the face of American oligarches now can be rather depressing. We'll see how it works out. Obama's caving to Wall Street, so far, is not a good sign.
He goes on: "the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people." But this misses the point. Our crisis wasn't caused by the banking system, per se. The cause is the culmination of nearly 3 decades of income and wealth transfer from the many to the few. And this is always the cause of economic collapse. The specific trigger may be often be in the banking system, but it is not the banks which cause the problem. They profit from it along the way, certainly. It needs reiterating: the figures I have seen is that 70% to 80% of 'toxic' mortgages came from mortgage companies, not banks.
Then: "financiers, in the case of the U.S. - played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse." But there is nothing new or unique in this time or this place. Historically, capitalists do only two things: socialize cost and privatize profits. This was going on here in the 19th century. It is not news, unfortunately. And, I have always argued that there was no gambling here. There was no assumption of risk; the certainty was that they knew they were too big to fail. There would be no downside, at least until after the performance and retention bonuses were paid.
He gets credit, so far as am I concerned, in going back to Reagan to spot when the changes in our economy which precipitated the mess began. He misses a couple of key points: the IRA/401(k) and ascendency of financial services were both the results of capitalists seeking their normal levels. The IRA/401(k) move was to socialize costs through the removal of defined benefit retirement plans. The general ascendency of finance is a side effect of deindustrialization. Jack Welch was the master of this at GE. Replace (real) capital intensive manufacturing with, effectively, non capital services. He was worshipped for his genius. Less so today. He also misses out the comparison to pre-1929 and pre-1907 with regard to finance as proportion of economic activity. He also has nothing to say about how and why this process shipped production to China, India, and other less than middle-class and democratic countries. He is boxing with kid gloves.
Well, the text gets better: "The great wealth that the financial sector created and concentrated gave bankers enormous political weight - weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers". Unfortunately, he continues with the right-leaning shibboleth of "wealth creation". No wealth is created by financial manipulation. Never has been, and never will be. Real wealth is created by the application of Real Capital (economists, when they pay attention, make a distinction between fiduciary capital, money, and real capital, plant and equipment). What 1907, 1929, and 2007 are all about is wealth transfer. I takey, you losey. There is a too large faction in the economics profession which clings to the notion that economic growth is always a non-zero sum game. It's about time we all grew up.
Alright, I cannot let it pass that Mr. Johnson Quayle-d Snow. A manifestation of irony, pehaps subtle, from a banker. Hoziah.
But then he quavers: "Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn't". It is quite clear that Cassano and the others understood what they were doing: reaping cash for trash. I recall reading an article in the news back in the early 2000's, unfortunately, I didn't clip it. In the report, a person involved in the sale of a house says to the broker that the buyer couldn't possibly afford the mortgage when it reset. The reply from the broker: "I don't care". The broker, and all those up the chain had gotten their profits, nothing else mattered. They all knew it was gossamer, and they didn't care. They all knew that gummint would clean it up. The real problem here is that those who can lade away the cash upfront, and never have it "clawed back", are simply criminals who go unpunished. And they knew this from the getgo.
And a sentence later: "AIG's Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities." He gets it fundamentally wrong here. He doesn't tell the reader what actually AIG did. AIG did not sell insurance. Cassano and the rest were explicitly clever about this aspect of the con. If they had sold CDS as *insurance* product, they would have been subject to capital and actuarial requirements of insurance. AIG sold nothing at all. They never had any intention, nor funds, to pay off any CDS.
Ah, to be a prophet before his time. "As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. ...This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance." As I have written in earlier posts in this nascent blog, one of my long held gripes with the economics profession is its willingness to grovel for dollars. Mr. Johnson now points to the symbiotic relationship between the quants, who could have figured out the problem with the mortgage business just by tracking the ratio of median income and median house price and the bankers who needed cover. By 2003, this measure was already heading into the weeds. But that was the point. Had I a blog back then, and spoken up, I might be famous now. Oh well.
"In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty -- in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities." He still gets it wrong. The problem isn't with credit or the banks, per se. The problem is that, since 1980, the real median income in this country has fallen. What kept consumption afloat during the Bush/Gingrich/Bush years was burning of unearned appreciation of housing. It was pure ideological bait and switch perpetrated on the Republican base and Reagan Democrats. They bought it hook line and s(t)inker. With that source of consumable income gone, demand for goods and services vanishes. Collapse results.
In his response to the anonymous banker he says: "But there's the rub: the economy can't recover until the banks are healthy and willing to lend." He's wrong. He too is groveling to the bankers, though he seems not to know it. As Dr. Keynes made clear: there cannot be a stable, growing industrialized economy without equivalent consumption. And you cannot have that consumption without a broad and deep middle class. The banking problem we are in is an effect, not a cause. China would be shrugging off this situation if it were a stable country with a broad and deep middle class. It is industrialized, but doesn't consume what it produces; it cannot since there is virtually no economic equity (in any sense of the word). It has vast capital. But it is not self sufficient. Neither is the US.
There is a small, and I hope growing, body of literature delving into the concept of absolute advantage. Ricardo was fundamentally wrong. Comparative advantage is grounded in the assumption of immobile assets. Land is. Labor is, to a significant extent. Capital never is. History has proven that capital flows to the most repressive regimes. Mercantilism may well be the most advanced form of economic structure. If so, then the middle class of the post World War II era was an aberration, not progress. Malthus was likely right. Since capital is nearly instantaneously mobile, recession is too.
He goes on to talk about nationalization and, in particular, recognizing true value of assets. That is now less likely, given that FASB has just caved, too. One cannot blame Mr. Johnson for not being a seer.
Finally, he says what I have been saying for some time: yes, unless we do the right thing, this will be worse than the Great Depression. Those who have been saying that this is just a really bad recession give no concrete evidence why things should stop with that. They talk of the safety net which exists now but didn't in the 1930's. The failure in that argument, as I have made in earlier entries to this endeavor, is that recovery in the 1930's was possible because physical capital remained to employ labor to make real goods for war. Where will the currently unemployed go to work? Because this situation is not just a banking problem, but a consumption problem, those who assert that there is a good end need to justify.
There is continued evidence that the job growth that had been occurring in the Bush years was disproportionately in low skill, low wage occupations. The tech sectors not just manufacturing, including financial services, have been replacing American techs with foreigners unabated. IBM just announced thousands more. A recovery of demand cannot occur without a recovery of incomes. That is not in the cards. Again, self sufficient economies will prosper in a world that, while not flat, is marked by fleet capital. The reason is simple (as China is finding out): supply side economics is fantasy. While IBM believes, as a microeconomic actor, that it can either sell more services and/or make more profits from said services by employing Indians at starvation (by US needs) wages; it is a pyrrhic victory. Microeconomics is beloved by the quants, but fails just because the whole is not merely sum of the parts. As any good mother said to the brat, "what would the world be like if everybody behaved like you?" Given the rapidity of the wired world, soon enough, IBM and its brethren will have impoverished so many citizens, that there will be none left to buy their services. Certainly not all those Indians. Ouroborus.
Prosperity in this future will be in those countries which have trade only in those resources not native to their soil, and which have broad and deep middle classes. The other countries will be autocracies. Which will be the majority? I fear the latter. I cannot see any motivation for the former to propagate. Kim Song-Il said of starvation in North Korea, it is fine if the masses live well, but they are better behaved if they don't. There are more Kim's in this world than is obvious. As Mr. Johnson implies this, while not invoking Kim; that is my insight.
This blog started because I recalled my senior thesis, whose theme was deindustrialization in Uruguay in the 1960's, and the results. Today, that process is called financialization and is the subject of research exploring the negative implications. I was nearly 40 years ahead of the rest of you in figuring out the problem. My conclusion, from memory since the paper is long since disappeared, was that Uruguay would be in trouble until it balanced income and wealth to levels consistent with economic self sufficiency.
On the whole, "The Quiet Coup" is a paper with which I can agree about 90%. It is worthwhile that one with his credentials is finally telling the truth. Stiglitz and Krugman are not alone. Nor am I, to a marginally greater extent than yesterday. That helps.
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