Fiddle While Burning

There was good news in the failure of a SINGLE REPUBLICAN to support the new president's stimulus package, which won in the House 244-188 (11 Dims also voted against it): Obama learns early that compromising with the Republicans is a waste of time. Congressional Repubs are going to go down for the ideas that brought us the crisis in the first place. They will try to take us down with them.

The core Republican idea is that tax cuts are good and government spending is bad. There are two grounds for them saying this. One is "it's your money": is, you earned your salary yourself, supposedly without any help from government or society, so any taxation is either theft or charity. The premise is absurd, since every salary and fortune depends on a whole range of infrastructures, services, and work from other people. Still, it's a philosophical anchor for one of our somewhat backward country's two major parties.

The second ground is that private spending through tax cuts is more efficient than public spending. Various academic studies suggest that this is technically false: higher returns to the economy come from infrastructural investment than from tax cuts that are either saved or spent on consumer items, most of which are made outside the US and will thus export the stimulus. The record of private business is no better, as the bank record with their new government $350 billion shows: they didn't increase leading, but hoarded, merged, bought bonds, all of which were in their self-interest as they define it and not in that of the economy's.

The core fact that thirty years of Reaganism has tried to erase is that firms invest for themselves and not for society. They are legally and financially required to do this. Reaganism asserts that an invisible hand takes investment for one's firm (e.g. in telephone call centers in India or shoe factories in Malaysia) and translates it into maximum wealth for society. There was never any evidence for this, Adam Smith the supposed author didn't say it, and it has now in the real world come completely unglued.

Dims need to be militant on the higher values created by social investment or the Republicans will sink us all as surely as their forefathers did in 1930 and 1931.

Bore Me with Some Accounting

It is amazing to see Obama actually being president. It is amazing to have a black President of The United States. I still get a huge kick out of thinking that sentence.

Plus this week he did all sorts of direct and immediate things, including his orders ending at least some kinds of torture and ending the "global gag rule" on abortions.

One order Obama hasn't signed yet is the one that makes the bank bailout transparent. We're still where we were in November. No accounting, reckoning, explaining, or minimal tracing of the TARP funds expenditures.

There's also no repentance, conversion, rethinking - except for the moment of weakness from Greenspan. No one is sorry. The people who lost a ton of money got a whole lot more. Their Republican advocates are out there whaling away on the Obama plan as though their ideas and policies hadn't created the biggest financial disaster since, well, the last time they screwed up and created the Great Depression.

What will make them stop? What will get a plan in place that will help the non-rich? We need Watergate hearings or worse on why the system went so bad, where the money went, and how to get the money back into public systems.

Martin Now

It's hard to believe listening to him again on the radio how precise Martin Luther King was about the problems of his day - and, sad to say, our day as well.

Problems like: "war preventing programs" - programs for every kind of social progress. At one point he quoted a US Senator's estimate that the US was spending $500,000 to kill every Vietnamese solider, but only $53 per person to end poverty in the US.

The US story then, and the US story now, is the centrality of war, the weight of war spending, and more generally the irrationally of misspending in grotesque overproportion to suppress threats when their root causes should be fixed instead.

In the 1980s and 1990s it was "wealth preventing programs" - the piling up of huge fortunes in tech and finance that avoided the root causes once again.

What is it about us that makes us unable to stop?

King was great about the psychological underpinnings of the compulsive American errors - the helpless, defiant, and yet shame-filled, and reality-denying thread of uncontrollable feeling that backed it all. He once summarized the foundations of US foreign policy, with its world-alienating use of force to back oppressors, as "this melancholy body of obsessions."

Washington won't ever stop its backward choices unless the US population makes them stop.

Thank you for the reminders, MLK. And Happy Birthday.

I'm Talking the Spanish Inquisition

Fr. Frank leads nicely today with the failure of account- ability, the failure of outrage for widespread federal mismanagement, and the absence of signs that the Bush nexus will be brought to justice. Since regular folks have only the law - no power, that is - this suggests that Obaman government will not be more responsive to the majority.

We need more than a figurehead. We need the bourgeois virtues of accounting and accountability.

We need a process, and mass support for investigation, explication, storytelling, and convicting - the great procedures of democratic process and crime fiction alike. As people like Joseph Stiglitz add up the Bush bill, the numbers are big enough to crush all recovery activities - if payback and just sourcing of funds doesn't start happening fast. We need inquests and investigations. We need the Spanish Inquisition.

One of Fr. Frank's links pointed me belatedly to the work of Eric Janszen, who has a good piece in this month's Harpers on the "next bubble," which includes a lot about our recent bubbles. Even more importantly, Janszen was as ahead of the curve on toxic assets and hedge-fund problems as Dean Baker was about the housing bubble. See his "Myth of the Slow Crash" from June 2006, which has some tasty charts about the Great Depression. It's true that the professional discussions are not as far behind as the public debate - see then Fed governor Ben Bernanke - now Federal Reserve chair - talking in 2002 about deflation after the housing bubble, as Greenspan was still priming it. But that's the point. The public is cut out until everything is decided.

Nothing will change until the investigation creates both answerability and a full tilt public debate.

Employment Unraveling, Bushes Not Yet Burning

The US unemployment rate hit 7.2% in November, which the excellent labor journalist Louis Uchitelle notes is "the highest unemployment rate since January 1993, when the country was still shaking off a jobless recovery from the 1990-91 recession. The loss in total jobs for 2008 was the largest since 1945."

This brings Bush II's unemployment legacy exactly back to the percentage level of his father Bush I's. See the photos of the presidential gathering in which Barak Obama is flanked by the Bushes, both looking as doltish and mediocre as they are. The Bushes were arguably the worst political dynasty in US history, and should never be heard from again, except if dragged to the dock in chains for any of a range of lethal stupidities.

Most sectors are struggling, and people trying to work on their own are getting hammered. The LAT has a good piece on trucking. This used to be an industry where someone without a college degree could a) make a more or less middle class living and b) be their own boss. This workplace combination of financial stability and self-direction was supposedly the cornerstone of political democracy. It's vanishing for college folks, and even more quickly for most non-college people as well.

Nest Egg news is staying dismal. Since the residence is the main form of working class and middle class wealth, the fall is crushing the main source of psychological and actual economic advancement for the majority in our long and continuing period of stagnant majority incomes. This has been especially hard on the Black middle class. Doug Henwood of the New Left Observer (#118) points out that houses are still overpriced when expresses in relation to incomes.

Through the 1980s and 1990s, the average existing house cost 3.25 times the average household's income; it got to 4.7 times at the end of 2005. Prices would have to decline another 4% to get to their long-term average. we're getting close,though after a boom like we had, some overshoot seems likely.

Here's one of Henwood's charts, which paints a nice picture of the temporary 2000s m-c wealth effect.


Krugman is stuck in "size matters" mode for the stimulus. He's getting a bad feeling that Obama is turning Republican deficit hawk at exactly the wrong moment. It's hard to blame him.

The depth of investor sorrows is shocking. Money Morning is, like it sounds, run by pro-capitalist investment advisers. One of their main writers started the year by noting that Finance is a "bearish sector," and then saying, "The entire industry appears to be scaling down to a fraction of its 2007 size, as many of the innovations of the last 20 years turn out to have been spurious."

Well Wow! How do we bury their toxic waste without blowing ourselves up with it?

Facing Up to Trickle Up

I was reminded of another Principle for making anything better economically by this good discussion between Dean Baker and Arun Gupta about the Obama - really the Summers - Stimulus. They were pointing out that it's too small, and too skewed towards tax cuts instead of direct spending, and too skewed towards business and not enough towards poor people. There's continuous enormous need among leaders to give money to the top, e.g. the biggest banks. It doesn't matter how incompetent they are, as long as they're at the top. But money to middling and poor people? Much less likely. And it doesn't matter how much more likely they are to spend it.

Gupta estimated that "Business tax cuts give about twenty-five to thirty cents on the dollar." And he went on to point on that a lot of tax-cut-driven consumption goes to buying foreign-made products. Yesterday Obama promised $1000 per household. Gupta noted like many others that the best way to stimulate the economy is infrastructure spending.

Can the US, after decades of tireless slamming of the entire government sector - from unemployment offices to urban bus systems - spend real money on public services? That's where the real rebuilding will be. But it will mean spending big money on public services that are woven into the lives of the non-wealthy. Think the hybrid city bus, new job training centers with Google-quality equipment and solar capacity built into the materials. US leaders have lived for 40 years by nickle-and-diming the public sector, taxing the middle (with social security taxes on top of income), and moving money up to the top.

Does Washington know how not to give and give to the rich?

I don't think so, and hence half the current stimulus is going to be for business, who will hoard a lot of it, give the rest to shareholders and senior executives, and use another piece to increase their market dominance by buying weaker rivals.

4. Face up to our 19th century social Darwinism. And purge it.

Principles for Dummies

Some basic stuff:

1. Stimuli should develop society, not just support consumption. Obama's Big Whopper is likely to have much infrastructural stuff that's good, and good reimbursements to states for the unemployment, health and education costs that support and develop the workforce, not to mention the population as a whole. It's also getting bloated with tax cuts for business to try to buy Republican support. And you - you get five hundred dollars! Krugman reminds us of how beleaguered development policies are in US politics:

The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

2. Economics depends on social systems and not just markets.

For example. China is wondering whether export-driven growth is a form of sustainable development. Measured in yuan, and corrected for inflation, China's export revenue fell over 11% in the month of November.

Barak Obama called on China to shift its economy from foreign to domestic demand. But the piece explains why this is unlikely:

Shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world’s highest savings rates because the country’s social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement; the average hospital stay costs the equivalent of two years’ wages for the average Chinese worker.

On the same poing, NYT writer Joe Nocera offers a comprehensive piece on risk models and tells the story of the "Value at Risk" model. It failed to be predictive for at least 4 reasons: it generally used only two years of data - artificially peaceful up-years as it turned out. It also fails to account for the rare or exceptional events that change everything - the "black swans" that appear after thousands of white ones make you assume all swans are white. It can be gamed by traders who load up on low-risk positions with huge downsides in the "less than 1%" tail of the curve, and finally, it hides huge losses in that statistically ignorable tail.

The moral of the story is that markets are far less regular and predictable than is often assumed - that is, many many regularities can be overturned by one big irregularity, as when the Dow of 2008 undid the gains of the six previous years in a few weeks.

Nocera also makes clear how intellectually conflicted the trading community is right now: views of VaR aren't just diverse; they are deeply unresolved. For example:

One risk-model critic, Richard Bookstaber, a hedge-fund risk manager and author of “A Demon of Our Own Design,” ranted about VaR for a half-hour over dinner one night. Then he finally said, “If you put a gun to my head and asked me what my firm’s risk was, I would use VaR.” VaR may have been a flawed number, but it was the best number anyone had come up with.

The risk models need lots of interpretation, which mixes market math with people and institutions, which also destroys the ideal of the self-regulating market and brings society and the state back in.

That's where we are now. Unresolved. With little progress in 2008 toward real financial redesign. Which leads to

3. Investment decisions have to be made by society, not by investors and bankers alone.

Does this mean I want NASCAR Bob to have a vote on what Goldman Sachs does with its / our money? YES. But not in the sense that Bob overrides or wrecks decisions made with professional expertise. I mean in the sense of

• accountability. How about basic accounting? We don't yet have this with bailout money, and even finance professionals are alarmed.
  
• explicit public goals. Finance doesn't do anything for 80-90% people. Yet another summary of the stats: "As of 2004, the wealthiest 10 percent owned about 78 percent of all equity in businesses, 75 percent of all equity in individually-held stocks, and 65 percent of mutual funds." Only the top of the middle-class has much money tied up in any investment outside of the house they actually live in:
  

Why were the trillions spent on credit default swaps not on bridges and post-silicon photovoltaic research?

We have to talk.

Happy New Year!

Something funny about money for a change.

While you're still laughing, read this wrap-up of Wall Street 2008 - good riddance!