Wednesday, November 02, 2011

Democracy vs. Finance Capitalism: Greece and Solar

Hat tip to Brad for the headline that summarizes the whole "problem" created by the Greek government putting the Poverty Now plan-of-the-week to save-punish Greece to an actual vote:  "Democracy Wipes Out Gains for Stocks."

A nice analysis comes from Yves Smith on the "debtor that roared."  The rescue was only going to accomplish the continuing impoverishment of the Greek population without actually stabilizing the banking system, and forget about inspiring investment and recovery.

Thinking about the examples of recoveries in places as different as Argentina (early 2000s) and Signapore (late 1990s), it would be interesting to imagine an actually democratic alternative to the financial system we have now. The minimum elements would be much smaller banks and regulation around lending that would push them close enough to local needs for investment capital that it would be more straightforward to nationalize them.

Wednesday, October 12, 2011

Wall Street Dissidents Backstop the Occupation

A crucial development in 2011 has been the way the Wall Street has managed to alienate so many of its natural supporters among economists, top economic journalists, and financial professionals.

Lots of mainstream finance commentators finally went ballistic over the state of financial policy.  The most interesting group are the professional investors who have turned on their masters. I get to them at the end of the list of dissidents.

The Angry KeynesiansPaul Krugman is Exhibit A, a 1990s liberal free-trader where strong state intervention was the exception more than the rule, but who opposed the Bush tax cuts and for the ten years since has railed tirelessly about every replay of deregulatory trickle-down business-led plutonomics. He summarized the Bush Years as "The Big Zero,"   denounces  "The Austerity Delusion,"  "The Urge to Purge,"   "Cockroach Ideas," among many others.   The "Economic Bleeding Cure" is a classic of this genre.
Fortunately, physicians no longer believe that bleeding the sick will make them healthy. Unfortunately, many of the makers of economic policy still do. And economic bloodletting isn’t just inflicting vast pain; it’s starting to undermine our long-run growth prospects.
Keynesians care about the development of society, and are confused and enraged by the casual blowing off of these concerns by policymakers in the US and the EU alike.  "Well, this is a miserable step in the wrong direction" says  Jeffrey Sachs, starting a denunciation of both parties in the US.  "From a self-preservation angle, this is lunacy," notes David Dayen.  

Nicholas Kristof alienated some Occupier supporters with a somewhat patronizing attempt to suggest demands, but he is also the author of the excellent summation "Our Banana Republic," voicing anger at policy suports for social devolution.  But you know these people.


Prophetic Re-regulators This group consists of high-end experts in technical domains -- mortgage industry regulation, complex credit instruments, international banking relationshiops -- who have become relentless and sometimes furious bloggers. They focus on the non-improvement of the financial system itself -- not so much on its social effects as its continuing rottenness, now propped by massive government subsidies (a 0.16% interbank funds rate for example) and complicity in the perpetuation of the shadow banking system that caused the problem in the first place.  You know most of these folks too:  the sober Simon Johnson and James Kwak at the Baseline Scenario, Dayen on housing, and Yves Smith at the remarkable Naked Capitalism on housing, banking as a criminal enterprise, and idiotic political dynamics that are forcing a choice between shooting the economy (Republicans) or bleeding it to death (Dems).  

Cassandras of Systemic Failure.  The lead people here are in Europe, with Martin Wolf at the front of the pack. These are a mixture of journalists and economists who accept the need for "adjustment" of the most crisis-ridden economies -- read drastically lowered living standards for the 99 percent -- but think politicians aren't being smart or independent enough to manage even that.  Wolf recently predicted a lost decade unless governments simply cranked up the printing press and created money, denouncing sadism towards populations along the way. He often points out that economic failure was not caused by bad behavior but by not very enlightened market judgements, e.g. public debt burdens that were lower in Ireland and Spain than in France and Germany.  This is the Japan Syndrome writ large by pro-capitalists who see that financial corruption and momentum have undermined the systems that made capitalism stable for a while.

Raging Traders. These are working investors, many of whom write blogs to attract customers to their investment business, which often consists of selling their trading advice.  Post-facto posts are the sign over the entrance meant to encourage signing up for the live action inside the tent.   These people trade every day,  feel shafted and betrayed, and are absolutely furious.

Here's the boss of Phil's Stock World on the horn last December talking about Obama's capitulation on the tax cut extensions.  Remember, Phil likes numbers.


Good job Congress!
Way to take it from your new Republican Masters! Not since Jack sold his cow for some magic beans has a deal like this been made by our "leadership" where families earning between $35,000 and $64,000 go $7,800 further into debt to get a $613 tax break while families earning between $5M and $10M get $38,590 and families earning $50M to $100M get $380,590 and families (or Corporations, of course) earning $500M to $1Bn get $3,859,000 or about 12,590 times more than the average middle class family but, then again, they deserve it because – they are that much better than you are!

Face it, unless you are in an income category where your tax benefit has 5 digits, you are what George Orwell (who worked in England’s Ministry of Propaganda) called a "Prole." In 1984 the Proles (proletariat) were the vast majority of the populace, the working class of Oceana. Though the proles are the majority, they are unimportant. The Party explicitly teaches that the Proles are "natural inferiors who must be kept in subjection, like animals". As one of the Party Leaders observes: "the relative freedom of working-class people is merely a symptom of the contempt in which they are held". . . .

You’re not going to be any trouble are you? Enjoy your $613, little people. That’s what, about a month’s worth of gasoline and cable TV? Congratulations on your voting acumen – you certainly have gotten the Government that you deserve! . .. . 

Congressman Ryan Paul . . .  points out: "Whose money is this after all?" It’s not your money that your family is going $7,800 further into debt to protect – it’s THEIR money. THEY earned it and THEY are darned well going to keep it. "Hey," you might say, "I work for THEM – didn’t I make that money and isn’t this OUR country that’s in debt and needs responsible fiscal policy?" Well, that’s just Commie talk and you’d better watch yourself – we’ve already sent your name of to HomeSec so consider yourself on notice…
The Proles in this country are dumb enough but what amazes me is the people who support the tax cuts thinking you are "one of THEM" when "they" look at you the same way you step over a homeless man in the streets. $858Bn is the NATIONAL Debt that we are taking on to fund these cuts. The cuts work out to about 0.75% of your income and your family share of the additional debt burden is $7,800 so, unless you are making AT LEAST $1M PER YEAR as a corporation or individual, this tax cut is a net loss for you. Once you clear that $1M hurdle, it’s all gravy flowing uphill to your plate! Even better if you are a "Corporate Citizen" – you have no real debt obligation to this nation because, like Haliburton and many, many others – you can simply move whenever you want – to avoid taxation AND prosecution!

As Bloomberg proclaims today "It’s a Great Time to Be Rich,"

You can often read this kind fury on Phil's blog. The "Long Con" is a fascinating example for its somewhat Marx-like systematicity.  Phil makes his money every day by betting on the blindly destructive greed and cowardice of financial and political leaders, which he describes as such.

Here's another professional financial advisor, Adam Lass, the editor of Wealth Daily, writing about Wealth Preservation During Depression

The central bankers want us to think their fountains of unlimited imaginary money are our sole hope of escaping yawning pits of economic hell. For these apparatchiks, it's all about hanging on to the levers of power any way they can.

The private bankers claim that if we just turn them loose from the stranglehold of post-crash regulation — and allow them to tangle the world in a impenetrable web of insanely profitable derivatives and bonds again — they will plant our feet firmly on the road to financial nirvana.

To these guys, you and I are just foot soldiers and cannon fodder. Our jobs, homes, wealth, and health? Collateral damage.
 Here its class war on Wall Street, not just between Wall Street and Main Street.

My final example is from the Wall Street Examiner, where Lee Adler states, "I Stand with the Protestors."  It is a howl of rage that starts like this:
We as a society must stop pretending. Most of us think that we still have money in the bank to protect, so we go along with the game of extend and pretend. For some of us, the game has already ended. The rapacious zero interest rate policy that I call Bernankecide has already robbed millions of savers of their life savings. This is the reality that has yet to hit home for many Americans who are content to wallow in the status quo. Unfortunately, the longer it takes for them to wake up, the worse their, and our, fate will be.

My mother and millions of other senior citizens are among the victims of the game that policy makers and those who empower them are playing. Their life savings are gone because Bernankecide, the financial genocide of the elderly, forced them to spend their principal. Now the government is indirectly confiscating 8% of my income because I must support my mother. That percentage is likely to grow as her health deteriorates.
Millions of other boomers are in the same boat. They are forced to pay this immoral hidden tax because Ben Bernanke decided that the innocent must pay for the sins of the guilty. While Bernanke’s ZIRP goes on allowing the banksters to continue to collect their fat bonuses, it steals the savings of millions of Americans, eliminates their disposable income, and cuts the spending power of millions of others who must now support those rendered destitute. The guilty benefit, and the innocent are punished.
Bernanke knows that, yet he continues to side with the criminal bankers in support of the financial genocide of the super elderly, and their children, the baby boomers who must increasingly support them.

Adler identifies himself in effect as Wall Street's 99 percent - screwed by the investment Bigs and with no end in sight.

In the late 1990s I wrote an article called "Business Civil Wars."  It was clearly premature.  Occupy Wall Street has brought this last group to the surface, and they are providing endless detail about the contradictory social relations within finance capitalism itself.

Thursday, September 29, 2011

Feeding the Financial Crisis

The situation is easily summarized.

In August 2007, the first clear signs surfaced that the financial sector had been piling up profits and individual payouts by greatly increasing the risk of their investments.  They did this while convincing themselves and nearly everyone else that risk had not really increased.  They used very high leverage, invented new instruments backed with dubious collatoral, etc - all this has been well analyzed in books like Econned.  When many people began to notice the AAA collatoralized debt obligations were junk, their value crashed, along with market averages overall, while highly exposed firms either went out of business (Lehman) or were bailed out by the government -- to the tune of $10-11 trillion (or maybe $29 trillion).

Government debts increased rapidly in Europe and the US.  While some government stimulus for the real economy was provided, it was not enough.  The financial crisis became an economic crisis, and there has been no real recovery -- only 16 of 100 American cities in one survey have recovered even 1/2 of the jobs lost during the initial downturn.  

Four years after the 2007 beginning, the financial sector is again (or still) in systemic trouble.

Hence austerity: austerity, laced with free-market ideology now functioning less as thought than as a paralyzing hangover, is in effect forcing governments to keep all possible government resources liquid for the next bank bailout.

In addition, most observers are convinced that the real problem is not private but public debt.  There is enormous discussion of the bad behavior of Greece, which has to scrape for every ten billion euros while private bank exposures are at least an order of magnitude larger.  Ireland is also going through a finance-created depression but it is rarely mentioned, perhaps because the bad actors there cannot be said to be tax-avoiding shopkeepers but the country's entire banking sector.

Meanwhile, bank reform has been paltry and pushed back through the concentrated efforts of the financial sector.  Regulators can't even see the majority of financial transactions, much less regulate or tax them. The head of the French banking authority recently estimated that opaque transactions form somewhere between 50% and 75% of the total.

There will be no recovery for economies, only for banks.  That is the post-feudal tradeoff that rules policy. 

Thus banks continue to make grotesque fortunes on a scale condemned by all known religions and ethical traditions in the same pre-2007 way, through junk and leverage (pious Deutsche Bank has "assets" (positions) 35x equity), added to which for several years has been essentially zero-interest public money on which they can make an automatic spread, meaning even more free money.  The banks' position seems to be that:
  • the government should buy everything forever, meaning unlimited bailouts at a moment's notice
  • but the financial sector should pay no tax for govermments
  • hundreds of millions of ordinary people should just lower their standard of living accordingly.
There are deep cultural questions lying behind what is obviously a disgusting ethical situation: 
  • where did the banks get their sense of entitlement, particularly to salaries in the tens or hundreds of millions of dollars annually for individuals?  Someone who gets mad at the idea of being taxed at more than 15% a year on $300 million, as Steven Schwarzman did, might be described as  insane.
  • Why does it seem like the people protesting (e.g les "indign├ęs" of Greece, Spain, Israel, Wall Street) are a tiny minority?  Is it only media (non)coverage or bad coverage?
  • Relatedly, why is there no public or popular critique of the entire theory of economies and societies that underlay a banking system that had failed and had to be rescued?
  • It is said that (most) "people don't see any alternative," but WHY NOT? There are lots of ideas out there, and even more suffering and depression, so how long will the gelling take?  Sure, the US Democrats and the French Socialists proposed nothing of any importance, but why are people waiting for them? 
The "decline of the West" is being executed from within and from the top.  It's not a conspiracy, it's just how the system's logic is now working.  Governments are protecting extraction at the expense of production.  However, had I been Chairman Mao, believing that heightening the contradictions of capitalism would hasten the system's demise, I couldn't have done better than to gut manufacturing while feeling finance.  Were I to rewrite the Terminator series, I couldn't do better than to replace the military net that generates the Schwarzenegger character with the bots behind program trading (though the pros won't help me with the script).

    Wednesday, March 23, 2011

    The Pervasive Stupidity

    Decisions are being made that are wrecking US infrastructure.  Expert warnings are everywhere.  Decisionmakers remain oblivious.  People are drawing the obvious conclusions, and are hearing the voice of doom.  Charles Simic starts a recent essay by saying, "I can’t remember when I last heard someone genuinely optimistic about the future of this country."

    A large number of financial experts are beside themselves.  There's Charles Johnson, former IMF official, professor of finance, co-author of 13 Bankers, in congressional testimony on TARP a couple of weeks ago:
    the financial crisis produced a pattern of rapid economic decline and slow employment recovery quite unlike any post-war recession – it looks much more like a mini-depression of the kind the US economy used to experience in the 19th century.  In addition, the fiscal costs of the disaster in our banking system so far amount to roughly a 40 percentage point increase in net federal government debt held by the private sector, i.e., roughly a doubling of outstanding debt.
     Adjustments to our regulatory framework, including the Dodd-Frank financial reform legislation, have not fixed the core problems that brought us to bring of complete catastrophe in fall 2008.  Powerful people at the heart of our financial system still have the incentive and ability to take on large amounts of reckless risk – through borrowing large amounts relative to their equity.  When things go well, a few CEOs and a small number of others get huge upside.

    Saturday, February 26, 2011

    Shattered Pillars of the Middle Class

    Two and a half years into the biggest financial crisis since the Great Depression, we have gone backward instead of ahead. The pillars of the middle class aren't just crumbling. They're being eroded by systematic policy and failures to react.
    • Pillar 1 of the mass middle class was regular wage increases reflecting regular increases in labor productivity. Productvity has continued to increase, but wages have not.
    The wealth produced by labor is not getting plowed back into the wages of labor. This was the core problem that Karl Marx addressed in his analysis of capital: exploitation consists of owners' taking the surplus-value produced by labor, or what we now call value-added, rather than splitting it fairly according to the actual contributions of capital and labor.  This critique is more relevant than ever in advanced economies, given data like this.

    For more charts straight from ye olde class struggle, see the Bureau of Labor Statistics report - no doubt slated for defunding by the Republican House as a fountainhead of Socialist propaganda.   I can't resist this one:

    Labor Share of nonfarm business sector output, first quarter 1947–third quarter 2010



    While the causes aren't entirely clear, the result is: a smaller piece of value added for employees.

    • Pillar 2 of the middle class: home ownership, now eroded by the steady increase of the home's value, which became a necessity in recent decades because wages were not increasing.  These days, 1,000,000 families have their homes forclosed each year, with 2011's rate due to be higher than 2010s.  And you know all about the crash in prices (Case-Schiller index interactive is here, and Dean Baker's February Housing Market Monitor is here).  There is no housing price bottom yet.
    • PIllar 3 was stable pension and benefits.  Defined benefit pensions, based on a service formula that guarnateed a payout, have been destroyed by the private sector. The huge part of the middle and working classes who now depend on "defined contribution" pensions - 401(k) plans and so on, lost a huge piece of their retirement in the 2008 crash, and may or may not have gotten that back. That low private sector standard is now being touted as a benchmark by people wanting to get rid of public sector pensions. The Wisconsin protests are one example.  In the medical benefits arena, HMOs have responded to the coming of Obamacare with the highest price increases since 2006,  Aetna had proposed increases of 25% for 2011, and then withdrew them. Middle class poverty is set to increase even for the older workers who have for a few decades been well off.
    • Pillar 4 was public investment - infrastructure, low-cost, high-quality schools and universities, among many other things. These are getting cut everywhere. Higher education is being withdrawn right and left, if not in quantity then in quality. Students are paying more to get less, as public funding continues to plunge below historical norms. One cause is the Great Tax Shift from corporations and the wealthy to ordinary workers:

    • Pillar 5 was the proverbial rule of law.  The most powerful members of society don't need rules or justice to protect them, since they have power. In contrast, the middle class doesn't, and in the long run there is no middle class without accountability, due process, and equality before the law.  These are the only mechanisms that keep the middle class from getting crushed.  And yet, although the banking and mortgage industries destroyed trillions of dollars of wealth, much of it of ordinary investors, only one banker, Bernie Madoff, has gone to jail.  
    Sorry, that's not quite true.  The UBS banker who blew the whistle on an international tax fraud conspiracy at UBS, Bradley Birkenfeld: He's in jail.

    The protests in Wisconsin are a good start on a reaction to the attacks on all the pillars at the same time.  But they are only a start.

    Friday, January 14, 2011

    Krugman's False Options

    I am SO behind on this blog.  the University version has taken over. As a down payment: Hunter Richards has a nice, digestible set of charts on the decline of what is sometimes called brain work in America...
    on the decline of what is sometimes called brain work in America - and on the state of the labor market in general. They are worth going through one at a time.

    They helped me think about what didn't like Krugman's Tale of Two Moralities column today. He describes the opposition to the Right's darwinism as this:
    One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.
    Mais non!  A major project for progressives is fix Krugman's incorrect alternative to the Right: it's not that the left wants safety nets, it's that the current accounting for value creation is completely distorted, leading to misappropriation of income in the first place.  Krugman's formulation guarantees that liberals / leftists will lose, since it grants the genesis claims of the Right and wants to weaken them.  It also guarantees the great divide he laments, not because the two sides have incommensurable premises, but because they have the same premise. No conservative has a reason to think of the left as having an alternative philosophy of labor and value that would actually change the position of regular people in society.  The alternative just seems like the "bleeding heart:" version of conservatives.

    The year 2010 brought better alternatives for thinking about how to stabilize and grow the actual US workforce and I will get to these.