28 April 2010

Life is a Cabaret

The senators, and the public from what one reads, are ticked off at Goldman Sachs and its brethren over the Great Recession. All of us are suspicious that Goldman had a more direct effect on the crash than just being a victim, as they claim.

The synthetic CDO named in the SEC action, and the subsequent revelation of the "shitty" Timberwolf CDO, led the senators to condemn Goldman as just gambling and running a casino. Well, that's all the stock market EVER is. Neither the senators nor most civilians get it. When you buy or sell a stock, if it isn't a Public Offering from the company, you're just gambling. You're gambling, if you bought, that the guy you bought the stock from was an idiot to part with the stock at such a low price. Conversely, if you sold the stock, you have a similar opinion of the buyer. You're gamblers.

If stocks were direct analogs to the companies named on the certificates, the Great Recession would never have happened. The housing market would still have imploded, but the rest of the world's companies would have been largely unaffected. They weren't housing market companies. The holders of the stock would "own" these companies, and would understand the responsibilities of ownership. And so forth.

But, of course, that's not true. Most buy stocks for the share price appreciation, not dividends paid from earnings, or even for the earnings alone. MicroSoft went decades without distributing earnings, and didn't do so until the IRS began to figure out that this was simple tax evasion; converting dividends (by not paying any) into capital gains through the appreciation of the share. Clearly, the share will appreciate if earnings increase (or costs decline, or revenues increase, or some other Good Thing Happens); however, the current holders of the shares have largely not contributed any cash to the company.

And that's the rub. What makes synthetic CDOs any more of a lottery ticket? Nothing at all. Credit default swaps, which were bundled into the "shitty" Timberwolf are another matter. CDSs are inherently evil, and should be banned. If a stock/bond purchase is too risky, then it won't be made, that's all and as the world should be.

Some have said that the problem was/is a global savings glut, and they're correct. The funds to fuel the housing bubble were not manufactured by the Fed. The Fed didn't print the money involved. The Right Wingnuts are conspicuously silent on this. The Hound of the Baskervilles: the dog that didn't bark in the night. The money largely came from Asia, where labour receives vastly less than what Adam Smith says it would earn; and this money piles up in the hands of capitalists, unused. Enter American mortgage companies, not banks. It was mortgage companies that created the sleazy mortgages, not banks. They provided a place to put all that cash "to work". And we know how well that worked out.

In sum: Goldman is far more evil than their stonewalling innocence. But stocks are all about gambling. What Goldman did was to rig the game by creating pigs ears and selling them as silk purses. They say that the law allows them to lie, in fact. They don't have to be honest about the nature of the item. The buyer is required to figure it out. Goldman is allowed to make figuring it out as difficult as possible, and they did. They were doing God's work; not the Christian God, of course.

18 April 2010

Operator! Operator! I've Been Disconnected

There's been a theme running through the press, both news and pundit, the last while. That theme: disconnection.

The longest running has been stories that Wall Street has become disconnected from Main Street, as if this were a Bad Thing. It isn't, it's a Good Thing. Consider this, both the Great Depression and the Great Recession happened because Main Street waded into Wall Street (or perhaps the other way 'round, either way, they danced together) when it shouldn't have. There is no structural reason for Wall Street to be connected to Main Street. They should be separate, since the stock market is just a gambling den among rich guys, and some poor guys who mostly end up poorer. Buying stocks is NOT investing in company XYZ; it is a bet with some other guy who bets it's smarter to unload the stock in XYZ. Your money goes to him, not company XYZ. People need to understand that buying stocks and bonds in the market is NOT aiding the corporations whose names are on the instruments.

John Paulson, of his self named hedge fund, wasn't named in the Goldman Sachs motion. Why might that be? How could he be disconnected from the matter? After all, the instrument was tailored for his short by him. You heard it here first: SEC will nail him with the criminal charge.

Finally, what of Goldman Sachs, and the rest of the Banksters? They are being roasted for being disconnected from Main Street, yet the Dow and NASDAQ have recovered/risen nicely for a bit more than a year. And the Right Wingnuts fear (since they don't actually produce anything in the economy) of inflation hasn't appeared. How is this possible? Well, inflation is rampant in the stock market, all that bailout and much of the stimulus money, chasing after the (pretty much) fixed amount of stock. If one has kept track of the Banksters' reports, one sees that they're profits are disconnected from their pledge, and the Gummint's assertion, that the bailout and stimulus would be used to support lending to jump start the economy. They haven't done that. They've traded with the money. The self-same money which has boosted the market indexes.

So, GS will do its evilest best to crash the market by curtailing its trading, along with the other Banksters, to punish the SEC and Obama for having the temerity to hold them to the law. Nuke 'em all and start over.

16 April 2010

Stimulate Me, Big Guy, I Like It

There's a report from the AP (here through Yahoo! news) today on South Carolina's boon from the stimulus money, which all those crackers denounced. That part is not so surprising. What is noteworthy is that the crackers themselves, without knowing it of course, explained the functioning of the demand multiplier, a notion I've recently discussed. Here's the quote from the article (it's towards the end):

Meanwhile, at Jess Walker's Carolina Bar-B-Que, as many as 800 people line up every day for pulled pork, hash and rice at his family owned restaurant just miles from Savannah River's gates.

Business here has always been brisk since Walker opened in 1969. But Walker said his stream of customers has managed to stay steady even during the darkest of economic times, an even keel he attributes to the employees doing stimulus-funded work at Savannah River.

"Without the plant, we wouldn't be here," he said, as customers began to fill his restaurant. "It's the reason we even exist."

Remember that in November, you dummy.

14 April 2010

Lies, Damn Lies, and Statistics, again

There is that old phrase, there are lies damn lies and statistics. Today AP released this story which contains a very bad lie. To wit:

The worry is that the Fed will repeat a mistake many economists believe the central bank made following the 2001 recession when it left interest rates too low for too long, fueling an asset bubble in housing that pushed home prices to record levels only to end with a disastrous crash that pulled the entire economy into a recession.

Earlier in the article, Volker is mentioned, since he wrung out inflation with extraordinary interest rates. I didn't keep the link, dang it, because I felt just so good, but Volker in the last few days was quoted as saying what I've been saying for years: the "asset bubble" wasn't that at all, but rather a futile attempt by the middle class to keep consumption levels steady in the face of falling median income by consuming housing appreciation. What's galling about this quote is that earlier in the article, the author does tell the reader about the income issue. Then blows it here. Ah well.

04 April 2010

Christine is Laffing at Us

When sailing through an ocean of troubles, one needs, at least, a map and compass. When that ocean is a nation's public policy, the compass is the ethos of the administration and the map is its knowledge of history.

I have restricted myself to one Sunday morning political chat show, most often "Meet the Press", which I watched today. The administration visitor was Christine Romer, Chair of the Council of Economic Advisors. For most of her disquisition, she said the expected things. Then, toward the end she channeled Arthur Laffer. To put it mildly, We are not amused.

For a longer explanation, follow the link above. In simple terms, Laffer conjured a reasoning for Reagan to set in motion the decisions which have led us to our Great Recession. Again, in simple terms, supply side economics, Laffer's conjuring, posits that when in recession, public policy should be to pass funds to business on the assertion that business will use such funds to produce more product (supply) which will then be bought (demand). What Laffer, and apparently Romer, ignore is that this approach (otherwise known as trickle down economics as described by Galbraith as dating back to at least 1890) has never worked. Nor can it. If there were such a thing as supply side, recession would never occur.

The essence of supply side is that producers will always produce if costs are low enough. But costs are never "low enough", and the outsourcing mania of recent years has shown what is obvious, shifting funds to producers in the face of lagging demand only puts the funds into the pockets of producers in the form of overhead costs or outright profits. If supply side were viable, the shift of national income to the top 1% from Reagan to Bush II would not have been 8% to 24%.

But Laffer's Curve was just a stalking horse for income re-distribution. And it worked like a charm. If Romer gets away with this rhetoric, and convinces Obama that it's correct, heaven help us. Obama's compass, to the extent that one feels it has held consistent, points toward populism; Romer shifts its direction toward the very pirates' lair that sent us into the Dead Latitudes. The map tells us that we will be back in the Dead Latitudes if we follow her altered compass. Do not do that.