Fret Index Climbs

More of my capitalist pals are really starting to worry about Great Recession 2 - and I mean the investment advisors that have optimism thrust upon them by the need to find good new deals for their clients.  John Hussmann is predicting that equity markets will fall below their March 2009 lows, and Markos Kaminis is now a believer in the often-heralded double-dip recession. 

Among folks not selling products, Simon Johnson points out that the banks' push into emerging markets repeats past mistakes of the 1970s and 1990s, making me wonder how we can get out of this with such a complete lack of new ideas at the top.  He also notes yet again how impossible it is to imagine Goldman Sachs et al. supporting reforms of their own system, as opposed to supporting their own maximum freedom of movement.  I still don't know why there isn't a massive middle class outcry about this.

The New York Times had a good piece on Ireland sinking under the weight of its austerity regime, with premonitions of long-term decline.  “Ireland isn’t going to spend on infrastructure probably for another 10 to 15 years,” said one observer. Another, her business caught in the middle of a new yet dying housing development, said, “It’s so destroying.  We all live day by day, and we don’t know when it will ever pick up.”

The Crash Was the Best Thing for Finance Ever

Simon Johnson quantifies the benefit of the crash to the ones who caused it:

the purely fiscal damage wrecked by big banks – apparent in 2008 but building for longer – will end up increasing our net government debt held by the private sector by around 40 percentage points of GDP.  . . . Around half of our existing government debt burden and much of our continuing fiscal vulnerability is due to the dangers posed by unreformed big banks.

There's the direct benefit to private financial interest of the bailout with public money.  There's the indirect benefit of crippling the public sector and lowering its tax costs to corporations and wealthy individuals.  This is the only agenda of the California Republican party, whose social vision consists in its entirety of blocking tax increases on large incomes, this year by gutting the pensions of public employees.

This has already happened in Illinois, and click here to hear Arnold Schwarzenegger's spokesperson repeatedly saying that the state budget deficit makes public pensions unaffordable. In America, saying something again and again makes it true.  Another guest pointed out that state employees get 2% of their salary as a pension for every year worked, so after 30 years they get 60% of their final few years averaged salary, and the average is $24,000 a year.  Apparently this is too much money for someone who worked for the public for 30 years, compared to the enormous piles both needed and deserved by wealthy investors.

The banks are continuing on much as they were: too big to fail will survive the reforms,  along with the banks' first lien on all national wealth.  Derivatives trading will carry on with small changes.  The only tools at ordinary folks' disposal - disclosure, data, discussion- will remain unavailable (see Morgenson's summary).   The economic leadership's silent passion for impoverishment means that people are still losing their houses even with loan modification programs. In the California counties of the new middle class of the 2000s -- around 1 in 100 houses received a forelosure notice just in the month of May 2010.

This system is grossly unjust and inefficient - inefficient like baronial 18th century French agriculture. Inefficient like Greece agreeing to austerity and paying even more for credit than before. Inefficient like families having no place to live. Inefficient like a third depression.   Inefficient like today's college-age adults being less well educated than their parents.

What amount of decline is going to upset the middle classes enough to fight for their jobs and their homes?

Sometimes Goliath Loses Even Today

California had its primary elections this week, and the Republicans nominated a billionaire and a megamillionare to be their candidates against Jerry Brown for governor (yes, as is typical of our sclerotic political system, 1970s Jerry Brown is California's only hope for avoiding another four years of oligarchic politics by giving us four years of paralytic centrist politics). In the midst of this was a nice story of Pacific Gas & Electric getting beaten in its attempt to require a 2/3rd vote before a municipality could offer its residents a public alternative to the existing power monopoly - even though PG&E outspent its opponents 1000-1.

Perfect Storm

Here's interesting death-trip summary of Friday's economic activity by Bo Peng

Friday's US equities market strikes me as being highly unusual.

1. S&P 500 followed a perfect straight channel down through out the day.
2. VIX only touched 36.

In other words, there's never any sign of panic or crash, which is quite remarkable when the broad market is down 3-4% across the board; the Dow broke the symbolic 10,000 level, EURUSD broke the symbolic 1.2 level, interbank funding and corporate/muni bond markets have all but dried up, next housing sales are bound to be bad as predicted by the latest mortgage application number, a number of government bond auctions (Brazil, Hungary, Romania, Spain -- almost) have failed, CDS on French sovereign shot up. For the weekend: US bank seizures and Spanish bank mergers/failures, Bilderberg Club to decide on dismantling the Euro, BP (BP) oil washing up Florida beaches, etc

I doubt there's ever been a day like Friday before.

Panic is usually followed by quick reversals. But calculated, organized retreat means gone for good. This is well-controlled retreat. The calm is scary. A perfect storm is brewing.

Global Hoovermania 2

Scarecrow adds fuel to yesterday's post, starting his comment on the G20 by saying, "Unless I misunderstand these stories, it appears the world’s biggest economies just decided, over US objections, to resurrect Herbert Hoover, rebury Keynes and pursue another Great Recession, tanking their economies and putting millions more out of work."

Democracy vs. Finance, Governments vs. Progress

Markets are supposed to create rigor and discipline, to reflect economic reality.  In this standard view,  the public is seen as self-serving and self-deluded about economic reality.  Governments that reflect the wishes of their majorities are almost by definition going to impose inefficient, nostalgic policies suited to a bygone age that discourage their population from adapting to the economic needs of today.  Democratic governments are seen as dangerous for the economy.  This is why "central bank independence," which is seen as the prerequisite to central bank reliability, means independence from both popular desires and from democratic representatives like the U.S. Congress.

Is this how things really work?  The economist Mark Weisbrot has a nice summary of the European crisis that suggests not.  First on markets:

"the markets" can't seem to decide what they want from these governments in order to love them again. Two weeks ago the euro was plummeting because the financial markets wanted more blood: they wanted Greece, Spain, Portugal, and the other currently victimised countries of Europe (Italy and Ireland) to commit to more spending cuts and tax increases. Then they got what they wanted, and within a day or two, the euro started crashing again because "the markets" discovered that these pro-cyclical policies would actually make things worse in the countries that adopted them, and reduce growth in the whole eurozone.

Markets are pushed by investing institutions, which are fairly close to a global monoculture of neoclassical economic orthodoxy.  So austerity is always job 1.  But orthodoxy recognizes contraction and that austerity policies can make contraction worse.  Markets are ruled by an economic orthodoxy that is contradictory and pushes investors in different directions.

Similarly, here's Weisbrot on governments:

Unfortunately the European authorities – especially the European Central Bank – are even worse than the markets. They are less ambivalent and more committed to punishing the weaker economies by having them cut spending even if it causes or deepens recession and mass unemployment (over 20% in Spain).  . . .

There is a class dimension to all of this, with the EU authorities and the bankers united in wanting to balance the books on the backs of the workers – and adopt "labour market reforms" that will weaken labour and redistribute income upward for generations to come. The EU authorities and financiers believe that real wages must fall quite sharply in these countries in order to make them internationally competitive – but the protesters are responding with a fiscal version of "No justice, no peace".

In short, "markets"  change their minds every few days about the necessary medicine because they really have no idea how to develop economies.  Governments are now devoted to de-developing their populations: lower wages is a euphemism for increased poverty.

Economists aren't doing much better, for the most part.  Writing in the Financial Times on June 1, the prescient critic of finance Nouriel Roubini contradictorily calls  for "radical reform of finance" and for Europe to "deregulate" and "liberalise."  And Weisbrot calls for an end to the Euro so that countries like Greece can rebalance by deflating a national currency, rather than calling for EU-based economic re-development.

The only way out is to start by recognizing that markets seek to make money for the people who invest in markets, and do not seek to develop economies. This will help keep governments from catering to them, and impoverishing their populations in the process.  It will also relegitimize popular economic demands, which are in fact closer to developmental wisdom than are the self-serving calculations of investors and the central banks who set things up for them.

Democratic theory presumes the long-term wisdom of the deliberative majority. Finance -- via its economic theorists -- has declared itself to be the great exception to democracy, and remains the area in public life where frankly anti-democratic, elitist  theory flourishes.  It drags public policy in its wake, and in spite of lucid mass hostility to banks, has intimidated and paralyzed the popular reimagination of economics.  This has set up a kind of ancien regime within democracy as such. In the arena of financial capitalism, democracy has been effectively canceled.

Either we democratize finance with a basis in a coordinated retheorization of it or Europe and the US will keeping heading straight the poorhouse.