Sunday, June 28, 2009

Innovation Crosses the Spectrum?

My Capitalist Pals at Money Morning remind me once again about what I used to like about conservatism. In a piece by Shah Gilani, the big worry is that Obama is a state capitalist, which is often used as a technical synonym for Soviet communist. What gives, I asked myself - these guys aren't Cheneyites. Here's a key passage.

Regulatory reforms must ensure that free markets remain free. Part of what’s necessary is to reform the tendencies of firms to overdo the concept of economies of scale. Bigger isn’t always better if it crowds out the processes of creative destruction, the drain in the tub that can overflow and undermine the floor and foundation of democratic capitalism.
It was big banks, big super-regional banks, big investment banks and big mortgage originators that deposited us into the economic sinkhole in which we’re presently mired. Community banks and small loan originators didn’t conceive of the weapons of mass destruction, but they were forced to compete with the big brothers of business by engaging in many of the same practices and investments as a way to remain competitive or be destroyed by the sprawl of bigger, bolder, and badder brethren. Why not disallow firms to get so big they swallow or destroy all competition?

For this kind of conservatism, markets were about supporting the small innovator who would be otherwise crushed by the rich, the Ivy-League well-connected, the lackeys of the presidential palace. Gilani correctly sees Obama financial policy as protecting the bigs at any cost, which he (also correctly) sees as not only rewarding failure, but rewarding mediocrity.

This is the pro-market liberalism of the late 18th and early 19th-century. It produces hostility to government that modern liberals, socialists, and marxists cannot accept. But this classical liberalism is completely right about threat posed to innovation and equity by huge size and state nepotism. Obama's big bank bailouts look as nepotistic as humanly possible given popular anger about the obvious problems - in terms of both justice and efficiency - with giving so much to the top (AIG, AIG's counterparties, bank holding companies, et.c) and almost nothing to the public (very limited mortgage help, etc.)

Local, small, networked, innovative - these should be terms that classical liberals (market "conservatives") and various kinds of socialists should come together around. State capitalism was an authoritiarian corruption of socialism that was neither an egalitarian worker's state nor an efficient corporatism. Most of the left hated the latter almost as much as the right did, so why not start doing more with this?

One historical note: the state's favoritism toward gigantic, nepotistically well-connected monopolies got the early middle-class to side with workers during the French Revolution, and for a while in 1848. Gilani's kind of outcry might signal the start of a political realignment of the middle-classes, one which in the past has been revolutionary.

Wednesday, June 24, 2009

Things That Blew Up

The best history so far of the development of some fatal financial instruments is Donald MacKensie's review of Gillian Tett's book on JP Morgan's role in inventing a new kind of collatoralized debt obligations. The piece makes the technicalities clearer than any other - read it! the key passage:
As the historian of economics Perry Mehrling has pointed out, events in financial markets cast shadows ahead, not behind. What has loomed over the banking system for the last two years is the shadow of the gigantic, system-wide default of the super-senior tranches of all the CDOs based on the US mortgage-backed securities issued towards the end of the bubble.
If you don't know what that means - read the article! It's help on the shape of thing to come.

Tuesday, June 23, 2009

Thanks for Noticing

Today's No Shit, Sherlock Award goes to the Financial Times for noting that the "green shoots" recovery ain't all its cracked up to be. Did somebody go outside and talk to someone in a pub?

To be fair, what they're noticing is that other people are noticing the recovery isn't really happening. Arbitrage strategies are shifting, and meanwhile nobody's doing much of anything for the economy where the rest of us live and work - except cut stuff insanely. Yes, Steroid Boy, I'm talking about you.

The people who really Hate America are currency traders, who take every possible opportunity to sell the dollar. I have an archive of 350 Bloomberg currency reports, and someday I will count all the reasons traders have to sell the dollar. Today it's "speculation the Federal Reserve will temper expectations for an interest-rate increase this year in an attempt to lower borrowing costs" - dollar goes down against the euro about 3%. Whatever - the explanation doesn't really matter, and they just make them up. The only time they buy dollars is when some bit of news makes everything else in the world look worse. The default is, in the immortal words of Steven Butler, director of foreign exchange trading at Scotia Capital Inc. in Toronto, on September 11, 2007: "Everybody hates the dollar."

Last week's news this week: Naomi Prins does at least as well as Joe Nocera at explaining why Obama's new regs won't make any difference.

And thanks to Gerry for sending me a like to a Business Week piece on one of the major stakes of all this playboying with billions in real and fake money - declining innovation in the US and the dead end road we're looking down.

Sunday, June 21, 2009

The People NEED the Spanish Inquisition

Not that I love polls but well I do love them. They are such good political enter- tainment. Obama's approval rating on the economy is down to 51%, though it's still higher than my approval rating of Obama on the economy. But then pollsters never call me.

Obama's disapproval ratings on the economy have recently tripled. There's a real split on whether Obama has the "right set of goals and policies to improve the economy" (question 12 of the full poll). 87% are somewhat or very dissatisfied with the state of the economy (question 19). Interestingly, this is double the percentage that are somewhat or very dissatisfied with their own financial situation (question 20), suggesting independent concern with the big picture.

So people get that Obama's plans aren't very impressive. On the other hand, they have even less of a clue. 69% are concerned "a great deal" or "quite a bit" about an increased role for the federal government even in a disaster like US health care (question 14). A majority opposes the GM bailout even when it is correctly described as federal stock ownership and increased management control. And 58% think controlling the deficit is more important than a quick recovery (question 24). Too bad Herbert Hoover isn't around so Americans could vote the Great Depression back in 2010.

Part of the explanation for this massive dumbness in the midst of crisis is that no mass education has taken place. There's been no general investigation of who and what caused the banking crisis, even though there is historical precedent for this (the Pecora Commission that began in 1932) and even though 70% or so want some kind of investigation. Father Frank preaches brimestone is his sermon today on Obama's weak financial reforms, pointing out that " "the old Wall Street order remains intact." Worse, so does its knowledge institutions like Moody's and other rating agencies, who were so busy investing in the bubble they were refusing to analyze correctly that they were unable to warn anyone until it was too late. What's just is bad is that none of the financial professions have come forward with apologies or reform proposals or self-critiques that could make anyone believe that this all won't happen again. No investigation, no knowledge reforms, no recreation of professional independence. Ethics, knowledge, humanity, and progress aside, this will delay for economic recovery.

Other victories for dumbness: an interesting tidbit appears in question 39, about affirmative action. When affirmative action is described correctly, as "countering the effects of discrimination" without "rigid quotas," 2/3rds favor it - in contrast to Supreme Court case law and most media coverage, which at best treats AA as highly controversial.

The only overexposed minority I know is the Republican right, symbolized by Rush Limbaugh. Limbaugh has never had more than 13% of the public express "very positive" feelings for him, and that was in 1993. This is about the same number of people that call themselves "strong Republicans" in this June 2009 poll (question F4), which should remind everyone of the anti-democdratic implications of the fact that strong Republicans have been running the U.S. since 1980.

Add "very" and "somewhat" positive for Limbaugh and you get between 20 and 25% of the public, fairly steadily over the past 15 years. This guy has always spoken for a fringe, and his mainstreaming can only be explained as the selective celebrity attention through which the media systematically overstates the impact of a tiny magic circle with powerful political friends. This star system is not that great for the quality of Hollywood movies, and it's incredibly terrible for politics.

Friday, June 19, 2009

The Reagan-Obama Continuum

The French economist Gilles Leblanc reminds France Culture listeners that the crisis remains brutal, that it has transmitted itself into every sector of the economy, and that the decline in industrial output has been faster and larger (e.g. in automobiles, down 30%) than during the Great depression.

The US President Barak Obama has performed a "balancing act" with his financial reforms, most pundits agree. Even Krugman does good-news-bad-news on this front. A clearer vision of the smallness of the reforms is Joe Nocera's.

The banking world fought like mad dogs to avoid limits on executive comp and won that battle. There IS new regulation of the "shadow banking" sector - one that includes huge lending and securitizing entities whether it be GMAC, GM's loan service or the Blackstone group. But it's all weak.

Why is the Democrat Obama administration softer on finance capital in the wake of its enormous disgrace than are My Capitalist Pals, e.g. Shah Gilani at Money Morning. Here's Galani's summary:

But sadly, true to the inviolate nature of politics and the power of entrenched and vested money interests, this once-in-a-lifetime opportunity to actually tear down the failed structures that guarantee another economic collapse and to replace them once and for all with a substantive regulatory structure that can stave off future financial tsunamis isn’t likely to happen.

It seems that the Obama administration’s sensitivity to potentially jeopardizing what some are pointing to as signs of recovery by not calling for radical regulatory surgery has resulted in signals that the approach will instead be to empower existing regulators with more patches and some needles and thread.

See Gilani's list of everything that is NOT being done that needs doing.

The key problem is that Obama is operating with a Clinton-Republican vision of economics - as what someone called a "Chicago School Democrat." In his speech, Obama claimed, "We're called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our action." The same statement was made many times by Ronald Reagan. On the key matter of the economy, the shift from Republican to Democrat paradigms has not taken place - or rather, they are proving to be exactly the same.

In the wake of the actual failure of the model of self-regulating markets, Obama is maintaining the primacy of these markets, but with a bit more government regulation. Reaganism persists in the total refusal to submit this regulation to any kind of democratic process, in which for example recipients of TARP money are clearly identified, principles are discussed and weighed, the Main Street economy is clearly factored in, and, worst of all, financial discretion is curtailed - it remains maximized in the form of the tiny 5% requirement for assets held against money lent or invested. In this model, the market remains the Lord and master of wealth creation.
Government is the spoiler not the builder.

Recent weeks of “green shoots” rhetoric played an important role. Banks paid back some of their TARP money because they prefer to avoid caps on executive compensation to increasing their lending - money they would have lent has instead gone back to the feds.

Green shoots defined the crisis as a mood swing, a quick and drastic business cycle that is leaving like an unusually serious summer storm. This says that the system is sound, banking and political leaders made no serious mistakes and the ideas of their bubble years remain valid – with a little surgical elimination of some soft spots.

Regulation will remain crippled under Obama because private is still good while public is mostly bad. New private instruments will be invented to stay in the shadows as side deals between private parties. No change in the relation between financial and industrial economies is imagined – there is no Tobin tax, no responsibalisation of finance as one can say in French but not in English.

Meanwhile California is going up in flames - like Main Street pretty much everywhere.

Thursday, June 18, 2009

Unhappy Furloughs

I'll soon discuss the Obama reforms, but meanwhile blood flows in the trenches. The NYT had a good piece on furloughs, the new work-for-nothing strategy (as it turns out in practice). But the most telling moment in the piece was about fear and secrecy at work:

Ms. Roberson and Mr. Becht were among the few people interviewed for this article who were willing to allow their names to be published. Others asked to have their names and workplaces withheld out of fear of retribution from bosses or colleagues. And some were hesitant to complain openly about their employment situation, given how many of their friends and family members had lost jobs.

“You’re not sure what they’re watching,” one furloughed man, an online salesman in Chicago, said about his bosses. “Do some people feel that they have to work those hours? Yes.”

The US workplace has gotten so despotic that it flatly contradicts the US conception of itself as democratic. Employers are displaying almost no interest either in the welfare of their employees or even in the reduced effectiveness of workers who skulk like punished dogs.

One of my colleagues in Grenoble remarked today that people are being asked to fit the work rather than the work fitting the people. It's true, and this self-imposed darwinism is so advanced in the US that it has become almost invisible.

More examples:
23% wages cuts at the Globe = survival.
firing 400 people = creating an innovation culture.

They should just say we have no ideas, but this way we spend less of our money.

Wednesday, June 17, 2009

Meanwhile back in the economy

I just got back from a great trip to Rome, full of new friends, constant beauty, thoughts of decline via stupid leaders - centuries full of them - and thoughts of endurance and triumph. But I'll write about Rome somewhere other than here.

Back in my office at U Lyon 2 there's a mountain of household goods left by our students gone back to California. Anyone need a rose-colored yoga mat? Who had the pillowcovers that are the same as mine at Place Bellecour? Where have all of you gone?

There's so much financial crapola to catch up with. I'm going to have to switch to the University budget side for a while, which is pure Hoover-time. But I ran into this piece about layoffs in Bahrain. People there seem to think that there are issues beside saving employers money.
"For four years I worked honestly for the bank and I considered it my second home", says Narjis Ahmed al Haddad, a former call centre administrator at Gulf International, who was attending a trade union meeting about the lay-offs a week ago. "But they terminated our jobs in one moment, so of course, you'll be angry".

"I still cannot comprehend that I don't have a job any more," says Mona al Kooheji, who worked as a secretary in the structured finance division.

"We have a lot of things set up for our futures, for our children, which is completely finished."
Wow. Your plans - you the employee's - are a factor! Why didn't we think of that in the USA?

The main factor is cultural: we got retrained by Pol Pot to see ourselves as "disposable Americans." Or maybe it was Rush Limbaugh and Phil Gramm, I can't remember. Give up your plans for the good of the firm. . .

All we need is the total reconstruction of economics so that it is measured by social and individual goals. The good news is that other cultures never stopped doing this - or at least knowing how.

Sunday, June 07, 2009

Double Standards and Michigan, 1968

General Motors went bankrupt this week, but it's already disappeared from the media radar. GM was the flagship of the American economy during the "American Century," and its stock went from the mid $30s to a bit over a dollar in about 18 months. Oh well - we still have Google.

My noir instinct is that American business doesn't care that GM is bankrupt, because the "new GM" will have shed most of its workers and its obligations to the ones that are left, including its retirees. Somehow, a union trust fund tied to a company that couldn't pay retiree health care is supposed to pay retiree health care. The deal has been changed for hundreds of thousands of former GM employees who were told everything would be fine if they shut up and did their job. No workplace democracy, but a very nice retirement package . . And now look. That's what you get for playing by the rules. Bailouts for bondholders, but no bailouts for retired lineworkers.

The only interesting moment in the GM coverage was when auto analyst Maryann Keller, speaking on To the Point, said that GM had been going out of business for 40 years, and LA Times auto columnist Dan Niel dated GM's decline to 1980s CEO Roger Smith - gosh he was bad. It reminded me of Michael Moore's first feature film "Roger and Me," in which the target of the exposé was the same Roger Smith. The destruction of Michigan through delocalization of facotries was clearly documented in that film, as was the whole executive class's incapacity to grasp reality and do something intelligent.

The film came out in 1989. Here we are exactly 20 years later. What if economists had actually taken Michael Moore seriously? Well, never mind - they might have started their calls to strip pensioners of their health coverage that much earlier.

In the NYT Magazine today, Roger Lowenstein makes the radical proposal to democratize corporate boards. He offers a nice short description of how completely self-dealing and insulated boards often are, with the crap results that are all to obvious.

It's a good reminder at least that there's little democratic about American business, and that democracy and American business are not friends.

The field of economics has long avoided all such considerations, but in the wake of its embarrassment during the current crisis - which it both failed to predict and actively created - is trying some internal self-reform. Thus NYT business columnist Joe Nocera has dug up a guy - a business "columnist" for "Time," and writes,
As Mr. Grantham sees it, if professional investors had been willing to acknowledge these aberrations — and trade on the fact that the market was out of whack — they should have been able to beat the market. But thanks to the efficient market hypothesis, no one was willing to call a bubble a bubble — because, after all, stock prices were rational.
Gong. Way too little, way too late. LOTS of people saying this when it mattered - everyone from the mainstream Dean Baker to analysts of the deep historical cycles of capitalism like Giovanni Arrighi. And it doesn't seem to be making much difference in Econland, where Nocera concludes that the bubble really came from people wanting to believe it was different this time, and Burton Malkiel, the popularizer of the Efficient Market Hypothesis, announces the necessity of his own blindness towards bubbles.

There's a double standard at work here. Prominent economists who were dead wrong on their economics and cost ordinary people much or most of their retirements, for example, are still prominent, and allowed to excuse themselves in the pages of the NYT. Obscure economists, sociologists, professors of ethnic and womens' and American studies who were right remain, well, obscure. Dean Baker is a partial exception, and that's about it. Obama is insuring that the mainstream of the past stays mainstream in the present, but this will insure that a familiar dumbness stays front and center in setting the limits of economic policy.

Writing from Beirut, Rami Khouri has a good op-ed in the NYT that compliments Obama's mountaintop speech in Cairo on how there are so many good Muslims in America and the world, but points out that "An absolute commitment to equal rights and justice as the No. 1 issue would have been smoother." Smoother, only if Obama's goal were to replace force with negotiation and US preeminence with egalitarian multilateralism. But Obama does not favor international equality in nuclear programs or anything else. The main effect will be the continuation of double standards (to say nothing of inequality): nukes for us but not for you, massive bailouts for us but not for you, occupation by us but not by you . . .

Khouri is very generous and says, "He sought a new beginning, though, which we all badly need." I don't agree that this is what Obama seeks. It's more likely that he seeks a more balanced and therefore more effective extension of American power. Khouri gets this right in the first part of a sentence that winds up in the place of friendly diplomacy: "The fact that almost every fine principle articulated by Mr. Obama was contradicted by harsh U.S. policies throughout the region should not detract from the potential power of the ideas in his speech."

The continuing effect of that inequality -- the inequality enforced by US preeminence -- will be double standards, and double standards are a form of elementary injustice that drives everyone nuts and makes peace impossible.

Which reminds me of the summer of 68. Some people were protesting in Paris, Prague, New York, San Francisco, or leading lives of drug-enhanced artistic expression. My brother and I were packed off by our parents to our aunt and uncle's house outside of Plymouth, Michigan.
They showed us a great time, piling us into their 1967 Buick Electra 225 and bouncing up and down over the expansion joints of most of Michigan's highways to the lakes, the sand dunes, the cities and towns, and Niagara Falls. To me, growing up in Los Angeles, the woods looked like a jungle, and the leaves were so luminously green they looked like they were made out of stained glass. My cousin Harry - then in his 20s - worked as a mechanic at the local Buick dealership, and there were always 2 Buicks in the yard, always two years apart in age, the 1965 being set to get replaced in the fall. My aunt and uncle were retired apple farmers, and lived in the 2 story farmhouse that was surrounded by brick subdivisions of the houses of people that had moved to work there for jobs. There was a lot of election news - Bobby Kennedy had been killed, and Martin had been killed, and George Wallace was doing well, and Nixon and Humphrey were holding their conventions. Aunt Margaret found me in front of the TV one day watching Wallace give a speech, slapped the TV off and shoved me out the front screen door - I stayed outside the rest of the summer. Aunt Pat and Uncle Russ came through on their way to Botswana for the Peace Corps -- Plymouth Michigan was kind of a hub. There were the suburbs, but also the green flames of the trees, and the empty roads where the Electra rolled like a magic carpet.

That world is gone. Not so much improved - as it needed to be - as just gone.