Saturday, February 28, 2009

Anger at Bankers

I've been working in Britain this week, and the tabloid press has awakened to the scandal of the Royal Bank of Scotland's dependence on the British government for its survival, which required an additional L 325 billion in insurance and L 25.5 billion in directly injected government capital in a week in which it announced a L 24.1 billion loss for 2008 (L 40 billion absent some technical issues). The tabs analyzed the absurd, make-up securities on which RBS made billions before it lost billions, and proposed the de-securitization of the transactional banking system while slamming the phony "value" created by bankers who got rich on commissions - that is, not by creating anything valuable but by charging a toll like the troll who lives under the bridge. "Fred the Shred Revealed as Biggest Troll of All" screamed the respectable center-left paper The Guardian, in a story that carefully exposed Fred's personal net worth, and likened his position in the bank to a mosquito with a hundred beaks for sipping the blood of depositors and taxpayers.


None of that reporting happened, although the events did. That'll be the day.

Well the tabs did perk up a bit at RBS's former head Sir Fred Goodwin's pension, at L 693,000 per year unto death, and headlined "Fred the Shred"'s refusal to give it up. PIGGY BANKER shouted the giveaway paper The Metro, and provided this helpful illustration:
Shades of that great 1970s slam of British capitalism O Lucky Man, in which eager-beaver salesman Malcolm McDowell stumbles onto a military-industrial experiment that consists of fusing humans and pigs - perhaps to create the perfect consumer we need to get us out of our new depression.

There are two statements that Fred the Shred's pension prompts.
  1. leaders of failed enterprises shouldn't be rewarded for a bad market performance.
  2. leaders of successful enterprises shouldn't be given the rewards bankers were getting in the first place.
But actually only #1 has been spoken. # 2 is lurking around the edges, as when the Guardian's print version of this story on Obama's budget was actually headlined "Republican anger as Obama plans to tax the rich in L3.5 trillion budget." (The Guardian also carried a story titled "Rich seek tax breaks to fund UN development donations." - well that speaks for itself.) The idea that the billionaire men's clubs were not making "market" salaries has appeared in veiled form from establishment centers, as in this comment on Sir Fred's pension:
Bank of England governor Mervyn King condemned executive pay and the City culture of bonuses and pensions.

He said: 'It was a form of compensation that rewarded gamblers if they won the gamble but there was no loss if you lost it. It's obvious that if you do that you will give people incentives to gamble."
This is at least right in assuming that Sir Fred's toxic security marketing wasn't creating value, and the rewards for that were not tied to value creation. But we need to go farther (without sinking into the deep philosophical questions like "is value in the eye of the beholder"?)

Farther can be simple. Picture the proverbial market in which people step up one by one and sell their type of labor to an assembly of buyers. The plumber comes forward, the wheat farmer, the winemaker, the neurosurgeon, the divorce lawyer, the farmworker, the high school teacher, everybody is there. Let's say most of these folks get market bids - it is open bidding, so its actually a broad social conversation - that are close to the current average of their salary category. The neurosurgeon makes $600,000, or 10x the high school teacher and 20x the farmworker. We can debate how right this is, but say you have a 20:1 spread for whatever reason.

Then the Fortune 500 executive steps up, and is followed by a hedge fund manager.

What possible argument could show that in our primal auction the assembly that represents the market would pay the CEO $14 million a year (233x the teacher) and the manager of a top-20 hedge fund $657.5 million a year? (10,958x the teacher?) To earn what the hedge-fund manager earned in 2007, the teacher would have had to start working 9,000 years before Christ was born, in the middle of the last Ice Age. What actual living "market" of real bids would ever bid within a factor of 1000 of those numbers? Why would such a group give a banker even a dollar more than a neurosurgeon? or a farmworker . . . but well we are talking about current society.

It's pretty easy to show that the idea that $14 million is a market salary is ludicrous. It's less easy to have a general discussion about this.

The issue has as special urgency this week, as we learned the economy went off the cliff. Housing prices continue to plummet, and the Center for Economic and Policy Research projects that
the median household in the 45 to 54 age cohort saw its net worth drop by more than 45 percent since 2004, to just over $80,000 (including home equity). For early baby boomers, those between the ages of 55 and 64, the losses were not quite as steep but still came to 38 percent of net wealth, with the median wealth falling to $140,000, approximately 80 percent of the price of the median home. Nearly 30 percent of late baby boomers will need to bring cash to a closing to cover their outstanding mortgage and transactions costs.
In CEPR's scenarios, the American Dream home destroyed most f the wealth of its owners between 2004-2009. In two of the report's three scenarios, renters have more wealth than homeowners when they try to retire.

The US press is showing its mental blinders by casting Obama's first budget entirely in political terms: is this the end of Reaganism? Well yes, but actually Reaganism ended itself by blowing up with no help from the Democrats or Obama. The real issue is: WHERE IS THE MONEY?

We'll need to work on the following things:
  1. attacks on and full discrediting of market culture: the rampant, delirious anti-egalitarianism that make this fragile, collapsed banker capitalism possible and, more importantly, immune from criticism. These spreads will need to be denounced as widely as Fred the Shred's pension before we can exit the Age of Inequality that undermined our societies and our economies at the same time. (See Reich's liberal pragmatic explanation that inequality hurt the economy, and Wolff's left-theoretical one).
  2. forced repatriation of US wealth hidden offshore (there was a start on this last week).
  3. taxing the rich.
It's either that or the steady downgrading of the poor and the evaporation of the US middle-class at the same rate as the fall of housing prices and the disappearance of large-company jobs.

PS. Aficianados of the bankers' phony markets will enjoy this story about the non-value of collateralized debt obligations (CDOs, of which securitized subprime mortgages were a subset): different classes of AAA-rated CDOs are seeing recovery rates of from 32 to 5 cents on the dollar.

Monday, February 23, 2009

The Coming Middle Class Revolution

Hey, I'm only quoting the British police:

"Britain faces summer of rage - police: Middle-class anger at economic crisis could erupt into violence on streets"

Suburban revolutionaries prepared for summer smashing of finance capital with a little Gaza invasion street fighting last month:

Well you just never know.

Sunday, February 22, 2009

Let's Go Crazy

You'll be sad to hear that Bush's Attorney General Alberto Gonzalez is having a hard time finding a new job, and is (still) blaming the bad economy.

Le Monde 2, a weekend magazine, ran a fairly amazing story about one of America's "working poor" saving for years for a trip to Spain that was to end with a few days in Paris, having her flight cancelled, running out of money and speaking no French, being turned away by the American embassy, and then living on the streets for almost 2 months. She finally gets a place to stay, and Le Monde contacts the American embassy to find out why they refused to help her, they said she got in the wrong line (the one for French seekers of travel visas to the US) and that they would be happy to send her home ASAP . But this woman, Ann Webb, refuses. My low-wage job as a nursing aide will be gone, my room will be gone, my car will be repossessed. Homeless at home or homeless in France? - I'd rather be homeless in France, she says - there's so much less violence.

This is completely crazy - and yet she's right. You can judge societies by life at the bottom. France wins by a lot.

Other symptoms this weekend:
  • "With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills)."
  • The NYT discovers that "Job Losses Pose a Threat to Stability Worldwide."
  • Fr. Frank points out that the US has a Big Denial Problem - which he proves by promising at the end that it will make no difference to point it out.
  • The President points out that America is much bigger than Sweden. Ergo, the banker foxes should keep guarding the financial henhouse, even though they already ate all the hens - or something.
  • Communist China will continue to buy American - T-bills, that is. Why? Because America is "safe as bankers"? No. Because "we hate you guys."
Crazy. Not really. Communist China knows that American leaders are so fanatically capitalist that there won't be any real giveaways to actual people of either political power over finance or of money (see this analysis of the limits of Obama's housing assistance plan), meaning there will be no "capital strike" in which big worldwide investors decide that the US isn't a "safe haven" for their money and pull it out.

And yet creativity comes back when you least expect it. Holland Cotter sums it up in his nice piece "The Boom is Over! Long Live the Art." Read the short history of NYC post-war art waves in blasted spaces that capital had abandoned before the artists reinvented them. The end is the best:
I’m not talking about creating ’60s-style utopias; all those notions are dead and gone and weren’t so great to begin with. I’m talking about carving out a place in the larger culture where a condition of abnormality can be sustained, where imagining the unknown and the unknowable — impossible to buy or sell — is the primary enterprise. Crazy! says anyone with an ounce of business sense.

Right. Exactly. Crazy.
That's the crazy we actually need.

Wednesday, February 18, 2009

Greenspan the Situationist

More in Aventures in Flipfloping from the head ideologue of antistatism came today in Alan Greenspan's call for selective bank nationalization. We are all socialists now.

Actually Reaganomics always involved state support for the massive accumulation strategies of individual firms, so this is more a shift in tactics than in means.

Robert Scheer has a nice short blast at the towering hypocrisy of the current Republican position. A couple of B-school profs have a good short piece about a major technical glitch in the bank bailout that sends the money to holding companies rather than to actual banks.

Sarkozy's offer to the social partners is almost invisible and will change nothing.

And here's a good conservative critique of the bank bailout: "Credit - securitized or not - cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption." The writer's concern is that new supports for consumer credit will "crowd out" needed credit expansion for business growth. He's wrong about the need for a short-term stabilization, but right about the longer-term questions about how to use money for investment is things we actually need.

Tuesday, February 17, 2009

We Were Cooking This Over a Long Time

Another great short overview of the crisis comes from Martin Wolf, chief economic correspondent of the Financial Times. He is an excellent teacher, and is absolutely furious.

Compare it to Rick Wolff's. M Wolf stresses the interconnected mechanics. R Wolff stresses the motives behind the financial engineering that M Wolf also laments. R Wolff claims that household indebtedness was a deliberate attempt to maximize short-term profits (including the profits of non-financial companies) by replacing salary increases with debt - we won't pay you more, but we'll let you borrow more to maintain your middle-class life. This goes to far for a mainstream analysis like M Wolf's, no matter how critical M Wolf is, for R. Wolff is suggesting that capitalism was failing and toxic finance was dirty chemotherapy that extended its life, and for M Wolf capitalism was succeeding until it was hijacked by bad actors and lazy, stupid, complicit governments.

The difference between them is important. If M Wolf is right, we should spend our trillions on a repair job. If R Wolff is right, we need to invent a new economic system, starting with the financial sector.

In my reading M Wolf's interconnected case supports R. Wolff's thesis.

Statehouse Clown Show

I've been avoiding comment on the California budget situation, which has gone from bad to ridiculous. But my native state is an object lesson in our topic of the last few days - well of this whole blog, really: replace social with market economics, watch everything fall apart. It's an object lesson in this blog's other topic: the failure of the political class worldwide.

The LA Times story today is "Legislature adjourns with no budget; governor prepares to lay off 10,000." The large Dim majority needs more or less one Republican to vote with them to beat the 2/3 limit for tax increases. The Republicans, unable to face the reality that on economics they are ALWAYS WRONG, have taken a no-tax pledge. The result will be the shutdown of every single public project in the state, and mass layoffs to add to the furlong.

Schwarzenegger now gets to star as Herbert Hoover in his own movie called "I, Arnold - Depression Governor." He was cast in the role by his own party, whose rank-and-file is also ignoring their own party leadership.

Here's the circle of geniuses that are holding 40 million people hostage with their ideological narcissism and general lack of a grip on reality.

That's GOP Sens. George Runner, Sam Aanestad, John Benoit and Bob Dutton, from left, and Dave Cox, seated.

Genius, you ask. Is my sarcasm a little harsh? Well here's swing vote holdout Abel Maldonado (R-Central Coast) in his own genius words:
Last week, I sent a letter to the Big 5 demanding that the funding be removed from the budget and allocated to other programs. But instead, the Big 5 ignored my request. If they were truly making a good-faith effort to show the people of California that they were serious about fixing this budget problem, the million dollars would have been re-appropriated to a vital program.
Etc. Seems that Genius Maldonado, self-described son of farmworkers, ran for the Republican nomination for Controller, was shut out by his own party for voting for a budget compromise in 2006, and is mad that the current Controller has $1 million for "office furniture," or whatever. Ergo, no state budget. Ergo, tens of thousands are out of work.

Maldonado to current farm workers (and every other kind): let them eat office furniture! Pure genius!

Sunday, February 15, 2009

Everything You Need to Know in 3 min 50

The best three sentence description of the global crisis is in U Mass economist Rick Wolff's movie, Capitalism Hits the Fan. Actually its one of the best explanations of any length, complete with nice charts like this one. Don't miss it - so much better than the usual Sunday thumbsuckers.

My capitalist pals are hearing the whirring blades as well.

Saturday, February 14, 2009

Nationalizers Inside the House

One of my favorite horror movies is When A Stranger Calls. The line that made my stand up and shriek in a New Jersey theater full of strangers in 1980 comes when a cop calls back the babysitter who's been getting crank calls ("have you checked the children?"). He tells her, "we've traced the call. It's coming from inside the house." Shrieeeek.

Progressive and left economists have been doing this. It's worth reading the whole transcript of Michael Hudson and Robert Kuttner on Democracy Now yesterday. Here's Kuttner:
if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week.
But here's self-described "free market economists" Matthew Richardson and Nouriel Roubini of NYU's Stern school saying "We're All Swedes Now." Why? Because they have traced the call and it's coming from inside the house:
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
In other words, they are scared out of their minds.

Same goes for the experienced but polite-society NYT business journalist Joe Nocera, who finds members of his corporate "kitchen cabinet" saying "Nationalize It!" The process all begin with a real stress test, which I prefer to call the Banking Inquisition.

It's interesting to watch a certain kind of capitalist rationality pushing on its long-time advocates. The first element is correct accounting, the second is actual market value, and the third is rights of ownership. The first shows up when a former IMF official tells Nocera that governments must take over insolvent banks: "This is exactly what the I.M.F. tells an emerging market country to do when it is facing a crisis — like Thailand in 1997, or Russia in 1998."

The third shows up in Nocera's final salvo:
Whatever solution winds up working, it is going to cost the taxpayers billions. That’s a given. The S.& L. crisis — which was a piffle compared to what we face now — cost well over $100 billion by the time it was over. In return, shouldn’t the taxpayer be the one to hold the majority ownership stake in the banks? And shouldn’t the government have the right to decide that perhaps Ken Lewis should no longer be running Bank of America? And isn’t the best way to protect taxpayers — the mantra we heard all week long — to take control of what they are financing? It can be done right. It has been before.
We're seeing a convergence of left solutions to the crisis and moderate insider solutions. This is the inside call that is frightening Republicans.

But only the left will follow through with what we really need: a democratized banking system that is much cheaper for the overall economy than the current one. Democratization requires a distribution of knowledge about the financial system that is beyond anything seen so far in modern history.

The reorganized "sustainable economy" party will need the political organization to fend off attacks, but also a vast intellectual base. In addition to the folks mentioned above, there is William Greider on the ongoing banker squeeze on Social Security, and Dean Baker's weekly critiques of the Washington Post's relentless campaign against the big "entitlements." There are excellent longer analyzes like Peter Gowan's in the New Left Review.

Can we have some Principles from all this?
  • a end to the financial double standard: a bank may be borrowing at 4% and charging you 21% on your credit card. This has to stop. End it through
  • anti-usury laws. these are a subset of
  • regulatory equity. Investment firms need to be part of general legal frameworks just like everybody else. And this would lead to:
  • tax equity. Financial transactions are largely untaxed. The "Tobin Tax" of even 0.25% on currency trading was one example, has been completely blocked by the financial industry.
For any of this to happen, we need massively more consistent popular attention to the financial details coming from the 80-90% of the population that will otherwise be paying the bill. That's where the next call needs to come from.

Friday, February 13, 2009

Good Cop Bad Cop

You know something is happening when an NYU economist writes a credit report that says, "The United States banking system is effectively insolvent."

If you add up the numbers in Krugman's good column today you get this:

Bush's tax cuts: $2 trillion
Bush's Iraq war: $1 trillion (Joseph Stiglitz's estimate is closer to $3 trillion, most still ahead)
Bank bailout: $2 trillion (dismal but plausible estimate)

Lost GDP 08-11:$4 trillion

That's $9 trillion down (on a 14.5 trillion annual gross domestic product). This is a crude way of explaining why many economists think a stimulus of 1/10th of "lost" public revenues is too small.

Then we have the shrunken stimulus plan. What does it mean?

Here is Scenario 1: Obama is Good Cop. Republicans are Bad Cop. Obama wanted more for the people. He mostly won, but had to give up a few suckers to Bad Cop.

No one is better on Scenario 1 than Krugman. He couldn't help mention the utterly unrepentant Republicans: "In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts."

Krugman traced this boneheaded intransigence to the GOP's enforcers, ready to shoot their heretics. These are the same folks that would rather the party lose with a hardcore right-winger like Sarah Palin than lose the party to a moderate who could have won. The zero Republican votes for the stimulus in the House was in part a sign of the ongoing frantic activism of the party's right wing, which is still in charge. These are the people whose power both ideologically and economically has rested on anti-egalitarian Reaganomics, so they will die hard.

But there's Scenario 2. The Republicans are Bad Cop. Obama is Bad Cop. There is no Good Cop.

This scenario takes off from the observation that Obama was Wall Street's candidate. Politico's summary is that "The list of top donors to the trio’s campaigns includes many firms at the heart of the financial meltdown — including taxpayer-funded bailout beneficiaries Citigroup, JPMorgan Chase and Bank of America — and a host of other troubled investment houses that may find themselves seeking money from the new Obama administration, which has also pledged tougher regulations." There's also this nice list of "Obama's Sub-Prime Buddies."

The scenario continues with the failure to refund failed mortgages directly, the woeful shortfall of money to the states (Bob Kuttner says they got $140 billion of the $500 billion of estimated need -the "Stabilization Fund" for states is $54 billion). It winds through the odd vagueness of Treasury's new bank plan (when bankers start pondering history, we are screwed). It continues with the reporters at the NYT politely hinting that the needs of the banks may have no end. It gets truly noir with Michael Hudson's argument that the government will have taken $12 trillion of public money and given it to banks. As he puts it, "the debt is going to continue to grow exponentially, and it’s way beyond the ability of the economy to pay. If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize." The scenario culminates with Hudson's claim that the bad debts are concentrated in a handful of gigantic banks, who are using the bailout money to buy and thereby "infec[t] the small healthy banks."

What if we are saving the banks by killing the economy?

It's zombie perfection. What if the whole plan is to take general wealth and move even more of it up to the very top of the financial pyramid? What better way than to have cut bank and corporate tax rates for decades, let them sell houses to people via unafforable mortgages that allow them to take the houses back, turn mortgages into toxic securities that blow the legs off pension funds, and then go so bust that they need all of the country's money for their bailout. The banks get the houses, the mortgages, the securities, and the tax dollars, which they use to launder the securities and sell them back later to the crippled pension funds.

What if Obama is Reagan come back to life?

Now that's noir.

After all this, there's always a little comic relief. David "Schoolboy" Brooks has always been silly, but now he literally makes no sense. He throws some numbers out, quotes Tocqueville, mentions cognitive scientists and says we've lost our high-trust society, has no ending at all, and writes as though he were living in 2017. If W was our worse president, Schoolboy is our dumbest scholar. He should be on the list of People that Won't Be Having Sex in 2009.

Wednesday, February 11, 2009

House-Senate: Zero-Zero

The middle-class won in the House-Senate conference on the stimulus by keeping the suspension of the Alternative Minimum Tax that had been hitting it - its upper reaches for years. It lost by seeing huge cuts in education, construction, and health care.

Medical research won because Arlen Specter the cancer survivor was a key Republican vote. In fact, the NYT reporters imply the whole thing was decided by the three "centrist" Republicans and their personal opinions. "it was clear that the three Republicans who agreed to support the bill in the Senate wielded extraordinary power, and along with conservative Democrats in their coalition, had put a firm stamp on the stimulus package."

It's a great way to run a country with 300 million people.

The whole package is 1/3 the size of the bailout for the banks.

The proportion between the deal for finance and the deal for the other 300,000,000 is the exact continuation of Reaganism through its Bushian decadence: public resources must go to the top. The true sign of efficiency is gross inequality.

The British political scientist Ross McKibbin summed up the Reagan-Thatcher model in the London Review of Books:
What is the function of the Conservative Party? It is to defend inequality: to make acceptable the social and economic unfairness inherent in a predominantly capitalist economy; to preserve the interests and privileges of social elites. But historically it has not been committed to a particular strategy to fulfil these aims.
In other words, because of its powerful electoral and financial advantages for the Republicans, inequality must continue by any means necessary. That is the underlying message of the House-Senate vote.

Tuesday, February 10, 2009

Why There is No Bottom

It's because there is no financial truth. James Galbraith said it very well today:
Well, the crucial question is, on what terms does the Treasury plan to guarantee or to repurchase or to otherwise deal with the bad assets that the banks have? These assets are mortgage-backed securities. They are securities derived from subprime loans that were made in an atmosphere of regulatory laxness and complicity and fraud, basically, during the Bush administration, which came to take over the system of housing finance and to infect it with assets which nobody trusts, which nobody can value. And nobody really knows what’s in the files, what’s on the loan tapes of those—that underlie those securities. So the question that I think we need to ask is, before we issue a public guarantee, does the Treasury of the United States plan to conduct a meticulous audit of the assets that underlie the securities that they’re expecting to take off the banks’ books, so that we, the taxpayer, can have an idea of what, if anything, these securities are worth?
And the problem is that when you—the little bit of checking that has been done appears to reveal that a very large fraction of these securities contain, on the face of it, misrepresentation or fraud in the files. And so, we are looking at an asset which nobody, no outside investor doing due diligence on behalf of a client for whom they have some responsibility, would touch. And that is the issue. That’s the problem.

If that is indeed the case, then I think it’s fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent, and that the proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the steps that the FDIC normally takes when dealing with insolvent banks.
Business Week is on the same beat. So is the NYT, with a very good piece about Geithner who seems to be Trojan horsing for the big dying banks. "But as intended largely by Mr. Geithner, the plan stops short of intruding too significantly into bankers’ affairs even as they come onto the public dole."

Geithner belly-flopped today. Out of the sky, straight into the seal

Monday, February 09, 2009

You Try to Live on 500K in This Town

haw - pretty damn funny.

Why We Need the Corporate Inquisition

The 9/11 attacks got an investigation, as did various major assassinations, so why not investigate a global crash with deep roots in deliberate, systematic financial engineering built with American financial theory? The theory was built on a right-wing version of neoclassical economics - private decisions always good, public decisions always bad, inequality of wealth and income always good (expressing a natural order), equality always bad (restricting liberty and entrepreneurship). It failed in practice, so let's sort and analyze the wreckage like we do with plane crashes that kill many fewer people than this crash is killing.

Paul Krugman today combines critique of the compromise Senate bailout with an accurate attack on bipartisanship. The key passage:
Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate, waiting until late last week before finally saying what needed to be said — that increasing spending is the whole point of the plan.

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan, which was, by the way, better focused than the original administration proposal.
I'm having Clinton flashbacks.

The basics behind Krugman's assessment can be found in a Financial Times summary (my archive version). By their count, 40% of the Senate stimulus is tax cuts.

The God That Failed will keep issuing orders unless He is taken out by the Inquisition. The paradigm has to change, and change very quickly.

Sunday, February 08, 2009

Sunday Talking in France

On France 5's Sunday show "Riposte," Maryse Dumas, one of the leaders of the major union CGT pointed out that over the past 10 years, dividends to shareholders in French public companies have grown 7 times faster than salaries. She asked why the representative of a business organization, Jerome Bedier, had just said France's problem vis-a-vis Germany was that employees just cost too much in France.

Well, because it's a traditional corporate smokescreen that distracts folks from the reality of decades of flat or falling wages for 80% of the population. Black is white, day is night, the sun rises in the west. And "we need to revalorize work" because the financial crisis came about when teachers and train conductors decided they didn't value work anymore.

If the French didn't have 4 weeks of vacation none of this crisis shit would have happened. Now give me a PhD in Econ.

The fired head of Merrill Lynch will work, as long as you give him a $40 million bonus afterwards. In the case of his demand of 0.4 of a Texas Unit for selling Merrill to Bank of America, he wanted it for dumping the company that he had helped sink as its CEO.

The article on the subject, by Louise Story and Julie Crewell, is a really nice piece of reporting on the delusional world of Wall Street America, a parallel universe in which chief executives become Sun Kings by acting like this:
[Thain] surrounded himself with former colleagues. In addition to luring his N.Y.S.E. deputies, he showered cash on former Goldman executives to bring them to Merrill. He paid $25 million to Peter S. Kraus, who ran Goldman’s investment management unit, to oversee business strategy at Merrill. He shelled out $39 million to Thomas K. Montag, who was co-head of Goldman’s global securities unit, to run Merrill’s trading operations.
What can anyone say? These executives will enter history along with Gen. Custer and Charles Ponzi, and other epic blowhards who took down legions of people with them. Back on Riposte, Maurice Szafran, from the relentlessly critical weekly Marianne, asked when Nicholas le Jogger Sarkoky would admit that his own policies had helped contribute to the crisis. Answer, in America, is never. Fr Frank preaches it right again this morning, noting the stacking of the Obama deck with foxes who ate the hens and then charged us $750 billion to scare up some new ones.

And on Riposte, Valerie Pecresse, Sarko le J's minister of higher education whose "reform" of universities has lead to nationwide university strikes, said things will be much better if university presidents have the power to "manage" the careers of the professors on their staffs.

Don't close Gitmo. As long as America still tortures a little bit, lets use Gitmo for the Corporate Inquisition.

Saturday, February 07, 2009

Why are They in Charge??? A Real Question

I analyze "Senate to Universities: Drop Dead" on a related blog. But on the question of infrastructure, the investment guys at Money Morning stop whaling on dumb and crooked bank execs long enough to raise the question of $35 trillion in infrastructure needs coming up in the next twenty years. See the links in "drop dead" for the opposite work being done in our alleged knowledge economy. CBIC World Markets, who wrote the report, thinks correctly that part of the problem is fake budget balancing that led to skimping on existing needs. Nice backlog for the kids and greatgrandkids to work on, if they aren't sweating too much in the new lizard-skins that protect them from the warmed-up planet.

The Business Genius of the Week story award goes to an NYT piece about Sam Zell. Actually Sam Zell looks like he dumped all 573 of his business properties just in time. But the buyers - classic suckers with very big paychecks and the very best credentials. Crucial moments:
  • the middleman who bought the buildings from Zell and then flipped most of them to the suckers was hedge fund Blackstone and its King Genius Steven Schwarzman (who still has his money btw).
  • "Buyers purchased buildings at what, in retrospect, were vastly inflated prices."
  • "Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents."
  • "And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy."
The last three are all one paragraph. But they get at the essential mechanics. These guys were being paid astronomically to not be as stupid as this.

But the gods were stupid:
  • "The list of Equity Office buyers reads like a Who’s Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages."
Turns out it didn't matter whether they were stupid or not. They got paid either way.

  • "The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors."
Remember that the next time you get a lecture from a trader about how big risk-taking deserves the big bucks.

Plus, they were collecting big fees by not using any of their own money.

  • "In New York, Mr. Macklowe made a characteristically aggressive gamble when he bought seven Midtown buildings from Blackstone for more than $6 billion, doubling the size of his real estate empire. He put down a mere $50 million, while lining up $7 billion in short-term financing from Deutsche Bank and the Fortress Investment Group for the acquisition."

And then, enter the rest of us:
  • "If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages."
  • "In Austin, when the Thomas Properties Group formed a partnership with the California teachers’ pension fund and Lehman Brothers, which was also a lender in the deal, to buy 10 Equity Office buildings downtown and in the surrounding suburbs for $1.15 billion, it instantly became the biggest commercial landlord in town. Like many of the other deals, it was highly leveraged and dependent on rising rents. The problem is that rents are now declining in Austin, particularly in suburban areas, where vacancy rates have climbed to 14.4 percent as several new buildings are coming on line without tenants."

Monday, February 02, 2009

Power Struggles

By the way, the "unaffordable" $800 billion stimulus package? It's almost exactly the same as one year of the US military budget. And the stimulus won't all be spent in one year. So no big deal. We need it and we need it now. And then we're going to need another one later this year. That's OK - we can always break the DOD piggybank and get the whole sum right there!

The limits of Obaman economics is perfectly anatomized by Krugman today. "Bailouts for Bunglers?" Yes. Because even in the new administration private-sector executives must be in charge of the economy - no matter how terrible they are, how completely their ideas have failed, or how many GDPs of whole countries they manage to lose.
Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
The job cut bloodbath continues - 7000 down at Macy's. One story begins, "Macy’s Inc. plans to cut 7,000 jobs in a corporatewide restructuring that will centralize its operations and reduce expenses in one of the most difficult economic environments the retailer has faced." What is equally true is that they and thousands of other companies are creating the environment to which they "react." Every section of crew tossed over the side makes the ship sink that much more.

Same for Disney's announcement that it would lay off 5% of its workforce. ""Change is never easy and becomes even harder to embrace during times of turbulence and uncertainty," Anne Sweeney, president of the Disney/ABC Television Group, said in an e-mail to staff members." This is completely wrong. Bad change is never easy. Good change is a lot of fun. Firing, dissolution, forced resuffling, and a speed-up - why should anybody like that?

One classical issue here involves the mythical invisible hand. Since it does not exist, itcannot magically coordinate millions of private agents trying to save their skins with the traditional self-interested management reflex of firing 5-10% of the staff. The government tries to stimulate spending. Each business tries to decrease its spending. The government needs to win this battle, and needs to take power away from the private sector in order to do it.

Sunday, February 01, 2009

Give it Back!

Two of the major themes of the week are the continuation of mass layoffs as business's main stabilization strategy, and intellectual disarray in the economic and political leadership. Fr. Frank hits both notes today.

"What are Americans still buying," he asks. "Big Macs, Campbell’s soup, Hershey’s chocolate and Spam — the four food groups of the apocalypse."

Fr Frank does some nice bashing of Republican infantility, but we didn't expect them to be the source of ideas. The mass layoffs are more important, both for what they are doing to people's careeers and lives and for the unmet intellectual challenge they pose. In the decades that they were raising their salaries, as a multiple of the average line-worker's wage in their company, by more than a factor of ten, they came to define mass layoffs as part of the nature of things - and as their most brillant strategy for profit and share-price increases. This strategy damages individuals and society. It does nothing for economic development. Mass layoffs have to be criticized in they way that have been in places like France,

There is some emotional progress at least. Maureen Dowd outdoes herself in the NYT today - and not only because she chews the ass off the geniuses who sank the global economy but will pay themselves $18 billion in bonuses for 2008.

This in itself isn't actually news: Forbes guessed back in October that that the 2008 bonus pool would be between $19.9 and 23 billion, so the Masters of Disaster are a couple of billion below what they'd expected in the midst of the October crash.

Also last fall, Time estimated "rank-and-file investment banker" bonuses to average $625,000 for 2008, a bit more than half what they got the year before. This is a fraction of the rate for the top people - investment banking is the same feudal hierarchy of great-lord incomes as in the rest of the economy, only more so.

More to the point, the Masters have run the US economy with almost zero official criticism since, well, the death of Franklin Delano Roosevelt in 1945. The Depression was the last time the Captains of Industry sustained major damage from insiders.

Criticism of the way executives run the US economy has thus always had to come from outsiders. Ralph Nader's classic Unsafe at Any Speed (1965), revealed deliberate gross negligence of safety for the sake of maximized profits at General Motors set the tone for the 1960s - yes, they've been blowing off the constructive criticism that would have actually helped their company for 50 years. But it did not lead to a career as a legislator or respected expert who was regularly consulted in Washington, but to a career as an irritant and gadfly, influencing liberals and progressives from great distance from direct power or even expert commissions. The same has been true of civil rights leaders with critiques of the economy starting with Martin Luther King, whose Washington star was tarnished by the Poor People's March.

Washington has never listened to critics of capitalism or even to critics of the capitalists we actually suffer at any given time. Dowd is also pissed at official Washington. She wasn't impressed by Obama's comment that paying bonuses with taxpayer's money was the "height of irresponsibility," and cites Barney Frank, Congressional leader of the charge against the Bush solutions last fall, mumbling things like "“We got some preferred shares but I don’t think we could sue on that basis.”

The real question is why? Why is it that "Some Obama policy makers still buy into the notion that if they’re too strict, these economic royalists, to use F.D.R.’s epithet, might balk at the bailout, preferring perks over the prospect of their banks going belly-up"? Why do the Obamans care? If the banks go down so their execs can collect, the lawsuits will come from the shareholders. Meanwhile, economic royalism, which says that the people at the top should make all the important economic policy decisions by themselves, would be even more disgraced than it already is.

Obaman caution can only be explained by their desire to preserve the current system - royalist though it is. Obama's key financial advisors - Treasury Secretary, etc. - come from that system, e.g. the New York Fed - and were hired because of their record of seeking to fix and protect it. In his remarks Obama said that the government needs to "regulate Wall Street" so it starts doing things like lending money again. But if you need to regulate a system not just to keep it on the rails, but to force it to do its basic job, why are you hanging on to that system?

In contrast, Obama's actual and perhaps partially extemporized remarks were quite strong. The bonuses are the "height of irresponsibility. It is shameful." When he called on Wall Street to "show some restraint and show some discipline and show some sense of responsibility" he was accusing them of disloyalty to the overall economy. When he said that "taxpayers find themselves in the difficult position, that if they don't provide help, the system could come down on top of our heads," he was accusing them of extortion. When he repeatedly described Wall Street as consisting of people asking for help from the taxpayer, he reminded everyone of their combined weakness and hypocrisy. When he said the American people "don't like the idea that people are digging a bigger hole when they [the American people] are being asked to fill it up," he defined Wall Street's interests in direct opposition to the public's. When he pointed out that Treasury Secretay Geithner had had to "hold back" one firm that just received TARP money from buying a new jet, he implied an irresponsible selfishness was ingrained in Wall Street culture. "We shouldn't have to do that," he noted, "cause they should know better." But they didn't - and don't. He said that the American people are serious about moving forward. "I am serious," he added But Wall Street is the weakest link that is still feeding itself at the buffet table while the Titantic goes down.

Specialists know what occasionally leaks out to the press: investors often run strategies that help them while systematically damaging the economy. Reuters turned up one recently: a UK hedge fund earned nearly $400 million by massively shorting the stock of the Royal Bank of Scotland, which has been the recipient of 20 billion pounds in UK bailout money, and is now likely to be nationalized. (Enjoy the conservative Daily Telegraph likening the fired acquisitions maven, RBS's CEO Sir Fred "Fred the Shred" Goodwin to an "amateur property speculator," and calling him "a cipher for Brown's Britain – borrowing his and the bank's way to glory and riches.")

Another Principle for our list: Finance is as likely to undermine the real economy as to support it.

Is Obama's "new regulatory framework" really enough? A year ago I fantasized about "a day without a banker." The fantasy was prompted by research by Doug Henwood and others that suggests that the financial sector does not raise money for manufacturers and other operating companies, but extracts capital from them. If Wall Street in essence extracts a capital tax on the real economy, and uses it to pay its rank-and-file millions a year, and its executives tens or hundreds of millions, we can't afford it. We should get rid of it.

Dowd goes part of the way in translating "disgorgement." "Disgorgement," she writes, "is when courts force wrongdoers to repay ill-gotten gains. And I’m ill at the gains gotten by scummy executives acting all Gordon Gekko while they’re getting bailed out by us."

Amen, Ms Maureen! But we also need a Congressional investigation, Watergate-style, to find out who got what, how they got it, and whether cutting the Wall Street financing system is the tax cut the American people really need.