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.

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.

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.

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.

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.

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.

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.

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.

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.

02 April 2009

Barack Obama, Social Darwinist

Who would have believed this, back in November? But the sad fact is that Obama has, by his disparate treatment of Wall Street and Michigan Avenue, demonstrated that he is just George III. Wasn't George III the mad one? Yes, yes he was.

It was Henry Ford in 1914, who ticked off the rest of his fellow capitalists by increasing, nay doubling, wages of his hourly workers. The quote: raising their wages "has the same effect as throwing a stone in a still pond," which would lead to an "ever-widening circle of buying". In other words, he understood the need to spread the wealth around, a little bit. More to the point, he set in motion the creation of a blue collar middle class. Gompers had a say in things too, but Ford's act got people's attention.

The argument that today it's fine to destroy the blue collar middle class because Obama's plan will replace it tomorrow with a new middle class based on a Green Economy is all well and good for tomorrow, if it is possible to live long enough. The Bushies took the attitude that the USofA would be fine if all those old union workers would just shut up and die. Obama is implementing their plan. This is a betrayal of what he said while he campaigned. The notion that this country can't afford health care for all citizens is bogus. We can afford it, if only we had the will.

On the other hand, Obama, Geithner, Summers, and Bernanke take a kid gloves approach to Wall Street malfeasance, and nonfeasance. Social Darwinism is generally understood to mean that the rich are so because they are better, in whatever sense one needs to believe. The problem with Social Darwinism is that it really doesn't work. Mad George III was the product of Social Darwinism. Aristocracy is a form of Social Darwinism. Inbreeding for rich people. All of those cracies are modes of Social Darwinism; with the possible exception of meritocracy. If there ever is one.

Yet, those that caused this collapse are paid off, while those that actually make real goods are punished. It violates what Obama said he stood for. It also is stupid. There cannot be a United States of America which matters more than Nova Scotia if it doesn't even make its own automobiles. The assertion that the US automakers pay more than the foreign automakers in our South has been disproved. The "Times" has been taken to task for repeating that nonsense. It just isn't true.

Barack Obama lied to us. His solution is no different from Bush II.