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 "indignés" 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).

Another Dismal Overview

This one pulls together a lot of stats around employment.  Brace yourself.

Or just read this  summary:

Let's recap. Unemployment is high and is in reality going higher if you count those who would take a job if they could get one. Incomes are weak. Plans to purchase discretionary items are falling. Housing is likely in for a further drop in prices. The stock market is not exactly booming. Treasury yields are falling, not from a credit crisis or a flight to quality, but because of economic conditions (deflation). Money supply is flat or falling. Prices are under pressure. The list goes on, and all factors are indicative of deflation.

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.”

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.

Decline And Fall - For No Reason at All

Pretty much the whole sad story of Obama, War President of the Nobel Peace Prize is wrapped up by Glenn Greenwald, so no need to expend extra thought there.  This Greenwald is required reading on the foreign policy portion of the current rapid Democrat slide into Republican policy hell - all for basically no political reason, since the Repubs are widely despised. (See also David Cortright here.)

Same goes for Obama's Republican economic policy - Matt Taibbi this time on the" economic team made up exclusively of callous millionaire-assholes an economic team made up exclusively of callous millionaire-assholes [that] has absolutely zero interest in reforming the gamed system that made them rich in the first place."  Thank you.  Taibbi links the names, a simple way of showing the painful marginalization of any critical thought - finally as insidious and life-sapping a trend in modern America as the pervasive, half-veiled faith in violence. The sorry outcome is that all those Dems from Obama to Frank et al can't move ahead unless, as they were in Fall 2008, they are prodded by simple fear.  With the visible threat past for the immediate Finance Family, it's back to their laissez-faire.

The result with the Obama admin is, as one person puts it, ""Rather than having a team of rivals, they've got a team of Rubins."  How much clearer could it be that Obama is finished as an indepenedent force in US politics?  Rolled like that, you never recover.  At least he won't.

Amidst all the enforcing of progressive timidity by Rahm Emmanuel et al is the sheer timidity of the conventional wisdom here.

Why would leading congressional Democrats, working closely with the Obama administration, agree to leave one of the riskiest of all financial instruments unregulated, even before the issue could be debated by the House? "There was concern that a broad grant to ban abusive swaps would be unsettling," Frank explained.

On this point, Obama foreign policy is even worse than Obamanomics.  Greenwald wraps up the Nobel speech like this:

Indeed, Obama insisted upon what he called the "right" to wage wars "unilaterally"; articulated a wide array of circumstances in which war is supposedly "just" far beyond being attacked or facing imminent attack by another country; explicitly rejected the non-violence espoused by King and Gandhi as too narrow and insufficiently pragmatic for a Commander-in-Chief like Obama to embrace; endowed us with the mission to use war as a means of combating "evil"; and hailed the U.S. for underwriting global security for the last six decades (without mentioning how our heroic efforts affected, say, the people of Vietnam, or Iraq, or Central America, or Gaza, and so many other places where "security" is not exactly what our wars "underwrote").  So it's not difficult to see why Rovian conservatives are embracing his speech; so much of it was devoted to an affirmation of their core beliefs.

The more difficult question to answer is why -- given what Drum described -- so many liberals found the speech so inspiring and agreeable?

 And then the 64 dollar observation: "Yesterday's speech and the odd, extremely bipartisan reaction to it underscored one of the real dangers of the Obama presidency:  taking what had been ideas previously discredited as Republican or right-wing dogma and transforming them into bipartisan consensus."

Dissociation, fear, mindless nationalism, avoidance of solutions to economic problems that would require change, mindless nostalgia, cultural stupidity so deep that it endangers the country: what is it ?

Fr. Frank's Sunday sermon points out that our "particular darkness" is "the disconnect between the corporate culture that is dictating the firing and the rest of us."  And there is the total immunity from the "consequences of their actions."

There's some kind of death knell here for even the illusion of the Dims as a second and oppositional party. There's the Dead Zone politics to come, followed inevitably by far more unrest than we've seen in the US in quite some time.  See the U blog for the local versions unrest - or this poll report for majority desire for the New Deal now abandoned -  as the pseudo-recovery continues to squash the little people and their chldren.

With this in mind, we have to start facing the fact that Obama, who rapidly moved from "change we can believe in" to disappointment to sell-out (to Wall Street), may be entering the territory of "worst thing to happen to the Democrats in decades."

Disaster in Plain Sight

It's interesting to see the category "financial elites" used as a natural object by the New York Times. On top of that, Bob Herbert nicely summarizes the clearly visible problem with the current "recovery":

It was the financial elites who took the economy down, and it was ordinary working people, the longtime natural constituents of the Democratic Party, who were buried in the rubble. Mr. Obama and the Democrats have been unconscionably slow in riding to the rescue of those millions of Americans struggling with the curse of joblessness.

Amidst an underemployment rate of about 25% for Blacks and Latinos, and a poverty rate of 35% for Black children, "Wall Street can boast about recovery all it wants, [but] much of America remains trapped in economic hell."

I think it's worse than that, actually.  The "investment" and "employment" economies have been divided for some time: attempts to save the company by firing workers, the national stroke of managerial genius of the 1970s, became attempts to loft the stock price by firing workers.  The markets divorced the industrial employment base a long time ago,and they have long gone in opposite directions.  The crisis has given the financial sector the chance to perform the most complete dumping of the employment economy in modern history.  It's not sustainable, but finance doesn't care.  Without some kind of upheaval, by the time the political sector shifts a little emphasis back to the employment economy,  all of the political sector's money will be gone.

Banker Noir

First it's Dean Baker (see his good links), and now the mainstream press is going noir on this banker business.  "Bailout Helps Fuel a New Era of Wall Street Wealth" says on NYT headline, which makes for a decent summary of where we are right now.

• The banks' new big money comes from Washington - the taxpayers, in the form of direct cash, loans, loan guarantees, and zero-percent interest that they can loan back at 5% or so. 
• They are making money now doing exactly what they were doing before the crash 14 months ago - "making fortunes . . .  trading stocks and bonds, rather than in the ho-hum business of lending people money."  That is putting speed-trading, currency speculation, commodities arbitrage, and a bunch of much more clever stuff euphemistically.
• No new regulation has taken place: "So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza." or: “'They are able to charge more for all kinds of services because companies need banks and investment banks more now, and there are fewer strong ones to help them,'” said Douglas J. Elliott of the Brookings Institution."
• Surviving banks are making monster profits on monster spreads: "Banks that have waded back into the markets have been able to exploit large gaps in the prices of various investments, a feature of the postcrisis financial markets. The so-called bid-ask spreads — the difference between the price at which banks are willing to buy things like bonds, and the price at which they are willing to sell — are roughly twice what they were two years ago.
  

The noir reading is this: 9/08 was banker 9/11.  They didn't do it on purpose, but they used it to increase financial power over the economy.  US economic leaders, having stopped being able to generate 1950s-1960s profit margins by making better products and beating the global competition head-to-head, squeezed wages, benefits, and social investments of every kind. These elites made up for the damage done to the general incomes of their own customers with a combo of lootings and bubbles - S&L pillaging in the 1980s, dot-com bubble of the 1990s, real estate bubble of the 2000s, that maintained consumption and middle-class living through easy borrowing against inflated assets.  Now there are no more bubbles. The "green economy" of Van Jones and others would help the environment but also raise wages by rebuilding industries that pay decent wages, and that cost finance money!  If there's no bubble for Main Street, cut Main Street loose. That's what we have now: the barnacled ship has been cut loose from the government tugboat, and is sinking steadily, while the finance sector is being towed ahead even faster than before.

The new cover story is the V-shaped recovery.

Finance is supposedly helping the gigantic resilient rebound.  But in fact it is not putting money into the economy with lending and is taking money out with enormous trading profits for which some losing party pays.   All the faltering Vs are aspiring to ideal V-ness. The ones who will succeed - like China - are the ones whose banks are most completely under political control.
 The government money not being spent on banks is being spent on our two unwinnable wars, which are also financed by banks.  Depressing dumbness floods in from everywhere, as in the McChrystal folly in Afghanistan, which assumes the power of a rich kid country that has in spite of its self-image failed repeatedly at military control, and will spend whatever we have left failing again.
That's noir. It signals the moment where the rotten foundations of the most powerful forms of success become visible to pretty much everybody.

Addendum: noir also assumes the permanent ignorance of the little people. Fr. Frank hits this note on Goldman Sachs in his Sunday sermon

there is one other significant way that our 21st-century vampire squid differs from Rockefeller’s 20th-century octopus. Americans knew what oil was, and they understood how Standard Oil’s manipulations directly affected their pocketbooks. Even now many Americans don’t know what Goldman’s products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism’s casino, and for Washington to look the other way as a new financial bubble inflates.

Another one of my Capitalist Pals has a good piece on the new order's new big winners ("three sets of players look positioned to do the same in the US today, mostly based on the amazing set of “carry trades” available if you have access to large amounts of cheap short-term funding").  The piece starts by describing US equities as an "emerging market":

The US increasingly displays characteristics that we have seen many times in middle-income “emerging markets” – new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged. But this raises the question: who exactly is going to dominate our economic and political landscape moving forward?

Noir as a genre flourished historically as the U.S. transited from a banana republic to a more routinized industrial one, while keeping many of the banana features.  Now Simon Johnson concludes, "Many states have been taken over by bankers; there is no shame in fighting and losing against what Jefferson called the “monied aristocracy. But few governments, even the weakest, have handed over the keys as quietly as we did. "

The noir conditions flourish again.

We are still so screwed

Thus spaketh the Congressional Budget Office's projections, in which ballooning deficits don't buy us lower unemployment.   When are policymakers going to get really upset about this and actually do some New Deal public works and general rebuilding of the kind our decrepit public infrastrucure actually needs?

Republicans have absolutely nothing to offer on the economy, health care, education, you name it, as Arnold proves every day in California.  Their operatives are making Americans insane. The president of the US wants to give a speech to children about how school is important.  In the Insane Country, saying school is good becomes controversial. Hundreds or thousands of people spend their working day considering what to do about this.

In Florida's Indian River County, the superintendent met with local officials up to the 11th hour to determine how to treat the broadcast. According to the Press Journal, school officials last week decided that the speech had to be taped and reviewed before showing students, meaning it would not be shown live.

And these people are allowed to run schools for children?  They are completely dumb.

Obama rose to the occasion with this crescendo:  "I expect great things from each of you," he said. "So don't let us down -- don't let your family or your country or yourself down. Make us all proud. I know you can do it."

"we" can. they can't.

Bombing the Black 'Burbs

Credit itself is valuable and not parasitic, but huge returns in banking service areas like mortgage lending ARE parasitic. Obviously fat profit margins raise the cost of any product to consumers, though this basic idea seems to be lost on the dumb bunnies that line the streets throwing confetti on the CEOs that pocket tens of millions a year in personal income to run the U.S economy into the ground. The human toll is huge (see this New Haven story as one small example, or today's LA Times on California state workers pushed out of their houses by furloughs), U.S. bank's subprime policies have done all the marxist work any critic could ever want, and Friday's Democracy Now had several particularly good segments on their greedy dumbass antics that have pushed big chunks of the black and brown middle classes back into poverty.

The short version is that folks got tired of waiting around for the raises they hadn't had since 1973, jumped into miracle loan products that were invented so they could be packaged and sold to pension funds and other huge buyers as mortgage-based securities, and were assured that their house value could only go up so that they could always refinance before their balloon payment or interest rate reset bankrupted them. And here we are with housing prices down over 50% in centers of black home buying like Las Vegas, and the bottom 1/3 of the market still falling at about a 25% annual rate.

DN has one segment on how the feds' Making Home Affordable program is giving $21 billion to 25 banks to get them to restructure troubled mortgages - 21 of which were major subprime lenders to begin with. See the report by John Dunbar of the Center for Public Integrity - the biggest chunk, over $5 B, going to B of A's infamous, recently-purchased unit Countrywide.

There's a segment with Wells Fargo subprime whistleblower Elizabeth Jacobson. Some highlights:

• Wells Fargo had a separate subprime loan division. Commissions there were 3-4 times higher than in the prime loan division. Interest rates could go from 6% to 12% in two years, had extra origination points, etc. raising customer cost along with commission. Additional revenues were built in by structuring the product to induce a new loan every two years.
  
• "As a company, Wells Fargo pushed the subprime loans, because it was their goal to have the subprime division pay for the fixed costs of the whole company. So there were [subprime] quotas to be met."
  
• deception at the top: "I happened to see a news report with the CFO of Wells Fargo, and he was questioned about the subprime division and denied at that point that Wells Fargo even had a subprime division. So here he is, the chief financial officer, where the subprime loans were supposed to be paying for the fixed costs of the company, and he’s denying that Wells Fargo even did subprime loans."
• targeting minority communities: bank management "would encourage the loan officers, the subprime loan officers, to go into Baltimore city and target the churches, the African American churches, to get a relationship going with the minister or the reverend at the church and try to get that person to schedule some sort of meeting. They would call it a “wealth-building seminar” to get the parishioners of the church to attend. And any loan that was funded by Wells Fargo, whether a purchase or a refinance, $350 would then be donated to the church. And so, that was the incentive for the church to want to have these seminars there."
  

One small silver lining is that Elizabeth Jacobson is now defending victims of foreclosures in Maryland state proceedings. But meanwhile, watching the big dogs that are still in charge, the little dogs keep feeding - on themselves.

Banking or Universities?

Bloomberg reports that the defunct bank Lehman Bros paid its bankruptcy advisers - a restructuring advisor, a big law firm, a few others - $262 million over the past nine months. And this is a bank in bankruptcy.

To be tendentious - what else could we have bought for $262 million? A buyout of the 8% paycut for the entire workforce of the University of California's 10 campuses, and $70 million left over to patch all the other holes.

Fictions of Inequality

I replaced Fr. Frank with Père Alain this afternoon - Alain Badiou, the French philosopher, who did a public interview today (page 18) with a Le Monde guy in a big art complex on the banks of the Saône river here in Lyon. The topic was philosophy and the novel, and at one point Badiou said this in my paraphrase translation:

the novel is rooted in equality. All great novels have an equal regard for all their characters, in the sense that they all are subjects of understanding. The novel grants everyone an existence that is prior to social sorting and economic hierarchies. This is a special form of knowledge, because it is fundamentally egalitarian.

Bien sur, Père Alain: this is completely true. I would go further and say that the absence of equality eats the soul. There are many forms of this, like slavery as what Orlando Patterson called "social death," and other forms of domination from torture to incarceration that destroy the dominated's identity and kill the ability of society to grasp their existence.

Badiou said at another point that the novel and politics are different forms of knowing. And on top of this, there is no master discourse above them that translates one into the other: they are just different. And "novel" knowledge is desperately in need of expansion and distribution everywhere, especially where politics and economics now are.

I've said before that this thing called the "middle class" in the US - the annoying term for the vast multi-racial economic majority that does the vast majority of the work - doesn't exist without equality, and is crushed by it's absence. The crushing has been happening visibly for well over a year, witnessed in stupefying crash figures from Dean Baker last week, and neighborhood stories all over the place, and in charts like the one below, that show the crashing value of the only meaningful asset owned by most US families:

Part of the point is the familiar but always important one that the munchkins are getting screwed while the wicked witches of east and west are protected by the federal government.

But the deeper point is that the victims of this bust would never have been so vulnerable had they been able to stick with equality as a principle. They weren't. Their pensions were converted to mutual funds that rose and fell with the market, their unions were gutted and then humiliated, their industries deindustrialized -- the fall of GM and Chrysler has been going on behind a few years of great SUV sales and zero-percent financing profits - their government services cast by Reaganism as a slave addiction, and their skills disparaged as old-economy while their jobs were outsourced and shipped abroad. Their public universities were cut in real dollar year after year, ending up in 2005 per capita below where they had been 25 years before. To top it off, their real wages haven't gone up for 30 years.

So they trusted to one boom-bubble after another. They put their funds in dot-com and telecom stocks in the 1990s, which blew up in 2000. They put their money in real estate, which melted in 2007 and exploded in 2008. They might have put their trust in their jobs and maybe their savings in their companies, but what would they have gotten back from that?

None of this would ever have happened if US society valued equality of outcome, period. It would have been intolerable, violated the basic standards of society, and been stopped.

The crash is the real-economy effect of two things. The first is capitalism's structural problems that lead to what Giovanni Arrighi called the financialization that signals the beginning of the end for a hegemonic power like the U.S. The second is a deep cultural illiteracy at the top of the economy, which accelerates and brutalizes the crisis itself.

The good news, if you can call it that, is that the bubble solutions to painful inequality have run out. They only place for the working/middle-classes to go for help is back to wages, which need to increase, their jobs, which need stabilzation, and public services, which are the only thing that ever head their lives together.

The Word Worry

Glad the G20 leaders are feeling good. What, We Worry?

"Worry" appears in the majority of the daily musings of my capitalist pals, in this case of Wolfgang Munchau of the Financial Times. He's not worried that the bankers are getting too much. He's worried they're getting too little: "By the end of December, global banks had written off about $1,000bn (€752bn, £699bn) in bad assets, approximately half of that in the US. Since the onset of the crisis, the writedown of assets in the US has exceeded the provision of new capital."
The EU is not much better off. The Geithner plan is way too small for Munchau, and he adds, "Europe, too, will have to start to address the problem, by forcing banks to write down their assets in exchange for new capital." The same concern about inadequate size applies to the G20 pledges of new stimulus money.

But the question at this point is what has the public gotten from the money we've spent so far? Bloomberg estimates that government commitments just in the US are nearing $13 trillion. So the "worry" that appears everywhere in financial commentary is, well, worrying. Has as this just gone into the big back-yard hole for toxic waste the banks can't fill up even with $26 trillion, or $39 trillion?

How much are you going to want? And why should we pay another dollar before Geithner et al can offer a plausible answer to that question?

A much better big picture comes from the geographer and famed analyst of capitalism David Harvey, both on Grit TV (with Alexander Cockburn) and on Democracy Now. Among other good moments he:

• clearly defines neoliberalism as the reconstruction of class power
• says at one point "Last January 2008, the Wall Street bonuses collectively came in at $32 billion. OK. And at that time, two million people had already lost their houses. Figure, two million people have lost their houses; Wall Street rewards itself $32 billion. Nobody got angry about that. And I was extremely angry about that. It seemed to me this was class robbery."
• describes the Right to the City movement in terms that should lead people to look here.
• suggest the need to theorize zero-growth economics, which he points out will not be capitalist

Among other things, the interview is a relatively short refutation of the familar claim that socialist or marxist economics have no practical solutions. Harvey is good at answering Amy Goodman-style questions like "What does this current crisis mean for the future of capitalism, David Harvey?" But at the point where she asks him "were you for no bank bailouts," he replied, " Well, I was in favor of solving the foreclosure crisis. You see, if you’ve solved the housing crisis, the banks wouldn’t be holding any toxic assets. If you had gone in and bailed out all of the people, there would be no problem on Wall Street."

For the interesting overlap between Harvey's marxism and the analysis of a former IMF banker, see the Atlantic Monthly article by Simon Johnson on how the US became a banana republic of bankers.

It Takes a Mogul to Sink a Business

Forget Detroit for five minutes (after you've watched Jon Stewart on Obama the car salesman). Newspapers are in huge trouble, and here's an entertaining yet tragic tale of the Chicago Sun-Times getting dragged down by imbecile leaders and their infinite needs. In this case, it was a bill for $117 million from former mogul Conrad Black and his circle's legal fees that threw them into bankruptcy.

You'll be glad to know that Conrad "said he was adapting well to life in a Florida jail, where he is teaching inmates history and learning to play the piano: 1In some respects, there is less intrusion here of the irritations of daily life than on the outside.'"

Death-Spiral II

Warren Olney had another classic episode of To The Point last week, which I listened too while walking around Lyon's Fourviere hill on a sunny windy day, looking at the Saone far below, the orange, peach, pale pink buildings of Croix Rousse, the kids climbing nets in the the trees, and noticing how peacefully normal everything was and could underneath still actually be.

But Banker's normal. This Olney show is a must-listen. Each of the four guests is brutally frank, and the upshot is a portrait of a credit card industry

1. whose profits rest on a portfolio of nasty tricks built into their relations with customers;
   
2. that isn't actually profitable enough to have saved their underlying banks from massive government bailouts;
3. that is cutting off the public even as it accepts public bailout money
4. that is sending the economy into what guest Robert Manning calls a death-spiral - an 2000s boom that was floated on expanding credit and not higher wages loses its credit, forcing consumers to cut back, forcing production cuts, forcing layoffs, forcing further consumption cuts.

Death-trips. New equation for your T-shirt: Bankers = Death

And no that is not a call to do violence to bankers. That is a description of what bankers are doing to the economy and hence to us.

It would be nice if economists had some ideas about what to do. They are starting finally to admit that certain kinds of solidarity, sharing, and cooperation are normal - not all economic choice is maximization in the context of a prisoner's dilemma. But it would be good if their attempts to acknowledge injustice didn't end with chimpanzees throwing cucumbers.

At least we have Fr. Frank preaching hellfire. Same for Maureed Dowd, who's column today has an excellent Readers' Digest version of the banker's network inside the Obama administration - it explains a lot about the O-limits. Given how things are, hellfire is little more than financial knowledge itself. See Jon Stewart confronting Mad Money's Jim Cramer with Cramer's dishonest peddling of a fake ever-rising market that took Flat-Wage America on a ride the infamous CNBC's Santelli blamed FWA for. And note Stewart's theory of the Two Markets, which is his polite way of describing class war.

Deeper and Dumber

The theme of the week was down, down, down, down.

Industrial production in the Euro-zone feel over 17% on an annualized basis in the month of January. In the U.S., mass layoffs continued to accelerate, and in California the unemployment rate hit 10.5% (12.5% for African Americans), up from 10.1% last month and 6.2% a year ago. The LA Times had a photo series on a Tent City under the powerlines outside of Sacramento that looked like a warm-up for the return of Dorothea Lange to the Depression camps of 1936. The number of unemployed in the UK hit the symbolically important 2 million level (6.5%), with predictions that it would soon be 3 million.

Down down we go, no end in fact in sight.

Then there were A.I.G's zombie hungers. These appear to have no end. The "insurance company" has an insatiable appetite for public bailout funds - at least $160 billion to date.

How much is $160 billion? It's enough to educate 18.4 million US children for one year, or about 1/3 of all schoolchildren in the United States.

AIG's Financial Products personnel, who bankrupted their company and everything else in sight, want their full bonuses ($165 million in the March round). How much is $165 million? It's enough to reverse this year's budget cut and enrollment freeze for the California State University, which has 450,000 students.

Congress was shocked, shocked, to hear that the bonuses would be paid and voted to tax them at bailed-out companies at 90%, even as Sen. Christopher Dodd of Connecticut, the state that had more hedge fund managers than it had dogs, said he inserted the bonus-protection clause at the request of the Obama administration.

Rembrandt came back to life for the occasion and painted this picture, entitled "House Finance Committee Covering its Meaty Behinds."


The economist Dean Baker wrote the best short overview of the AIG Saga. Everyone got mad as hell this week about at least one part of it- 85% in one poll were either "outraged" or "bothered" by the bonuses. Even some business journalists are mad as hell. Joe Nocera should be madder at A.I.G. than at Congress, but he gets at the main issue anyway:

There is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

But there's also a fair amount of mental paralysis. NYT "Dealbook" columnist Andrew Ross Sorkin offered the most pathetic defense of paying the AIG bonuses. He wrote:

If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

Gosh, I CAN imagine what it would be like. The business community would follow the rules established by the government as the duly-elected representatives of the public. The business "community" wouldn't be still trying to extort the public with money on the grounds that if we don't pay up everything will get worse.

The business community might, well, go back into BUSINESS. You know, go back to work, start making things again, designing and selling new goods and services, lending money, making old goods and services better. All the stuff that BUSINESS is supposed to do.

And the public wouldn't be standing around with its pants down watching Geithner et al. make payoffs with the Giant Government MasterCard.

Why isn't any of this happening? Why is Sorkin among others so dumb - by which I mean, unable to call for putting money to constructive uses rather than giving more away to the loons in finance?

A clue comes from what the pro-bonus people are actually defending. They are defending the entitlements of the financial community - the privileges of sheer position.

I say this because they are defending guaranteed bonuses - bonuses that used 2007 payouts to set a floor beneath 2008's (see Section 3.01(a) of the AIG contract). There wasn't actually a relation between the AIG bonus amount and actual financial results. Their was only the protection of a preestablished superior income position. This is feudalism, not "performance."

The same goes for the much bigger issue of the tens of billions for a 100% bailout of AIG's clients, as Nocera points out. Dean Baker's analysis (linked above) is particularly helpful and should be read by all. He asks:

1) Did the banks hold the underlying assets, or just the CDS?
2) Did the government have to buy back the underlying assets from the banks, or could it have waited to see what happened?
3) Could the support for the banks have been done directly, including some quid pro quo, without having AIG as an intermediary?

Baker's answers are no, no, and yes. These answers (you have to read the piece) lead Baker to observe this:

When the government lent hundreds of billions of dollars to the banks through TARP, it got preferred shares of stock in return, in addition to placing conditions on the banks’ conduct. By contrast, the government received absolutely nothing for the tens of billions of dollars that it passed on to the banks through AIG. It may have been desirable to ensure that AIG’s defaults did not lead to the collapse of the major banks that were its counterparties, but this could have been accomplished by directly giving these banks capital through TARP or some equivalent mechanism. . . .

Baker suggests that the government did not do this because it wanted "to preserve the international reputation of the U.S. financial industry."

This is probably right, but I would put it slightly differently: what Bernake, Geithner, et al. want to do is to preserve the international position of the U.S. financial industry. Their actions make sense (the 100% restoration prior to contract maturation dates, the propping up of AIG as the most expensive intermediary in world history, etc.) only as an attempt to keep the institutions in charge of the international finance system. That means in charge of their international relationships. It also means in charge of all economic decision-making in the U.S. This is a complete shut-out for the public - for public education about finance (see Nocera), and for a shift in the balance of decision rights from the financial industry to the public.

Obama-Geithner mean for the public to be shut out. Geithner himself told the NYT that "“It’s very important that we don’t look like there’s any intent of taking over or managing banks." Banks have to stay entirely in charge.

I'm afraid that the sovereignty of finance over the economy is more important to the Fed and Treasury than is the recovery of the economy itself.

Generation of Swine

In case you forgot what Hunter S. Thompson meant by swine back in the day, check out A.I.G. taking $180 billion of public money and then insisting it must pay $165 million in NEW bonuses (on top of $121 million already paid out this year), and pay them to the SAME GUYS that blew AIG up with credit default swaps among other things.

This is not zero accountability, it's inverse accountability: the worse we do to you, the more you pay to us.

It's gangsterism, on top of the extortion AIG has already exterted in saying if you don't give us 180 billion while letting us still run ourselves, we'll blow up the entire world financial system.

Bonus contracts that are still enforceable today must have said - you pay us even if our current gains create losses later, even if they put the whole company in the red, even if hell freezes over and the government gives us $180 billion, even if the US taxpayers gives us all the money in the United States. You still pay us.

Plague of locusts, rain of frogs. And Swine.

Supposedly the AIG CEO has pledged to reduce these "retention payments" by 30%.

The only option of course is to publish AIG's client list and then let it die.

Burning Down the House

So so glad big pharma isn't hurting for money. Merck can spend $41.1 bil to buy other people's research rather than doing some themselves. Patents expiring - it's ok, we're rich, go buy some more. After all, we're funded by the US health care system!

Gerry pointed me to a contrasting document about Boeing's layoffs. Boeing's CEO wrote his employees as follows:

More than a few of you have written to me asking whether we could avoid layoffs altogether by not paying incentive awards this year or by freezing wages across the board," McNerney noted.

He said such actions would preserve some cash during the year and lessen the immediate impact on people, but "our judgment (and one shared by most major companies) is that they would put us at a competitive disadvantage."

Meaning in short that the layoffs are not forced by the downturn, but are an executive choice.

EVERYBODY should listen to this episode of Warren Olney's KCRW show "To the Point." "Could AIG Wreck the Economy?" Well yes, it already has. In this show you will hear:

• Detroit News columnist Daniel Howes say the world auto industry is about to line up for government money.
• A WSJ reporter (Michael Crittenden) say that in Senate hearings the Fed representative say that the identity of the companies getting tens of billions of public dollars must remain secret, to preserve the world banking system.
• A former bank examiner, Mark Williams, agree that secrecy is essential because the public loans are actually permanently gone, and learning their destinations will destroy confidence.
• A Venture Capitalist, Peter Cohan, attack the secrecy position in the name of democracy and market confidence.
  
• Felix Salmon, a financial blogger, say the secrecy is protecting the fact that so much money went to AIG's clients in a) Europe and at b) Goldman Sachs, whose personnel were directly involved in designing the bailouts.
• Everyone agree that we don't really know anything about where the money is or how much it's going to take or why it's costing so much.

It's three-hund-red-sixty-five-degrees.

In other words,

Culture of Dive Bombing

Job losses in the graph look like the World War II movie where the Zero dives full-speed straight into the sea. This time, Zeros-R-Us.

There have been four major modern explanations for mass layoffs, and the accompanying article mixes together the last two. Mass layoffs:

1. result from acts of God or nature. There is nothing to do but wait and pray.

2. express the superior power of the capitalist class, which benefits itself by liquidating labor when it feels the need.

3. results from natural obscelencence, capitalism's creative destruction, and markets' natural genius for outing the old and lofting the new.

4. are an optional piece of business strategy. Business for Dummies.

(4) is a nice version of Marx's class struggle (2). This piece says, for example, "Layoffs are multiplying because of dysfunction in the financial system, which is prompting even healthy companies to shed workers and shut down operations out of concern they may soon lose access to credit."

In other words, even while they are still making money, companies choose to protect their credit rather than their workers.

The idea that this is just fine, that it is legal, ethical, and logical to fire employees can be fired as a precautionary measure, was carefully developed by decades of conservative activism and argument.

A preferred argument is (3), which says firing is simply an expression of natural transitioning to a higher order. A typical manifestation, again from this article:

“The decimation of employment in legacy American brands such as General Motors is a trend that’s likely to continue,” said Robert E. Hall, an economist at Stanford University’s Hoover Institution. “We have to stimulate the economy to create jobs in other areas.”

Oh, so the US isn't going to do transportation anymore?

(3) is the sum of all wisdom of the field we know as economics. This field has been a disaster, and someday there will be . . . the Corporate Inquisition.

In the meantime, journalists need to hear that (4) is not actually justitifed by (3) - there's nothing natural about mass layoffs as your one solution to economic problems, and to your own deep fears.