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.

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.

Kid Gloves for Banks: the Opposite of a Stimulus

A central issue of the current financial period is whether the financial sector will manage to transfer all of its liabilities to the public sector and keep them there.  Many people have tied this issue to the Ireland crisis.  The Irish public sector is getting slashed not because it ran deficits before the crash, and then saw them become unsustainable, but because the Irish government became the guarantor of 100% of the liabilities of Irish banks. These liabilities far exceeded Irish gross domestic product, and they still do.

The Financial Times ran a good overview on November 17th about the growing isolation of Angela Merkel among European leaders on the debt question. Most commentary presents the German position as hostile austerity: force the Greek public to pay for their debt crimes with austerity and poverty for years to come. There's something to that - much of the German public seems to feel that they sacrificed themselves (with few if any wage increases and service cuts throughout the past ten years) while other countries like Greece did not.  But in fact the current German government is also trying to force private investors to share some of the cost.  This has been an enormous problem for Western societies, as the financial sector gets governments to pass on the cost of their mistakes to citizens, who pay several times over - actual money and guarantees, zero-cost access to funds for banks that prop restored profits, public service cuts, austerity-induced low growth, and reduced investment in innovation for the future.

Brooks Upset By How Wrong He is, Blames Krugman

As if. You won't want to read the excruciating full-length version of David Schoolboy Brooks complaining about how the pro-stimulus prog economists are wrong even though they are turning out to be right as the recovery dies on the vine.  So cut to the commentary and various retorts. 

The only interesting thing about this is the development of the term "demand-siders" to describe Krugman, Dean Baker, and other neo-Keynesians who think that people's incomes are an important part of economies and that they should be higher rather than lower.  (This is in contrast to the "supply-siders" who came to power with Ronald Reagan, and who used the needs of suppliers, i.e. company owners and investors, as a reason to cut taxes for the high brackets.)  It suggests that the Right is no longer able to pretend that the center-left in the US has no coherent economic strategy.  This was the core of their "one church" approach to capitalism -they pretended there were no actual arguments against small government, no taxes, no public investment, etc. that needed a fair hearing. They taught a couple of generations of conservatives that all the "liberal" arguments had already been refuted, and they could be safely ignored.

That defense line has crumbled, and the next round of arguments is going to be quite different.

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."

Obama Heart Banks

When Obama praises the spirit of piling money higher and deeper as the great Spirit of America, and absolves the bank bonusers of any wrongdoing, he makes no sense ethically or economically - finance and its grotesque incomes is grossly inefficient, really unaffordable in our struggling world. But on the level of simple tactics he makes his alleged crackdown on the banks into a joke.  Henceforth all of his stern fingerwaggings will be greeted with a wink and a nod - except in middle America, where the pitchfork crowd signs up for Tea Party populism and waits for the chance to run Obama out of town.

I never thought I'd be seeing him as simply dumb but I am starting to.

Global Hoovermania

The national debt crisis in Greece is an example of a case where a combination of Eurozone rules and financial market pressure will force huge cuts in public spending, damaging both living standards and delaying economic recovery.  On Sunday, the New York Times reported that some of Greece's hidden debt was concealed courtesy of instruments sold to it by Goldman Sachs in 2001.  In November 2009, Goldman Sachs tried to do it again. The Financial Times reported today that EU authorities have requested information about the swaps.

Greece's national debt is over 100% of its annual GDP.  But this is not so horribly out of line with other countries, as can be seen at left and here.

"High" debt is a matter of interpretation, and 40 years of attacks on the existence of government, the public sector, and public debt as a source of public investments has greatly reduced the markets' tolerance for debt levels that are still well below what seemed normal in times of crisis like World War II. Markets put up with high debt levels during war.  If we were serious about, say, decarbonization, we would run 200-300% deficits in gigantic crash programs in solar power, total transportation system reengineering, weatherproofing every building on the planet, you name it, so that there will be great-great grandchilren around to pay the debt we left them.

The interpretation of debt levels as too high is threatening the recovery, since it will force governments to cut spending when they should be increasing it.  This is the plan for Greece, the famous land of Generation 800 Euros (youth salaries per month) and meager economic development outside of coastal estates built on land removed from government protection by arson-set forest fires.

Government employment is a pillar of the middle class everywhere in the world.  It is also being squeezed everywhere: in Sacramento, California, a moron's consensus reigns on the virtues of cutting state employee salaries 5%.  In all countries, public service employment is the crucial gateway to the middle class -- as it was in the United States from the 1940s to the 1960s, for African Americans in particular who faced ongoing discrimination in the private sector. Countries like Argentina that were forced into IMF-style austerity programs that slashed the public sector have one common feature: an incredible shrinking middle class.

Most pundits seem to have learned nothing in all these years. Thomas Friedman recently contrasted two years in the Middle East. 1977 was good -- neoliberal policies implemented in Egypt by Sadat.  1979 was bad -- the Iranian revolution, Whahabi-reaction in Saudi Arabian Islam, etc.  But "liberalization" and "modernization" were themselves the source of the radicalization of mass Islam that Friedman deplores.  They impoverished the great majority in Egypt, ruined Cairo's public systems for starters (on my recent trip there an archictectural institute informed me that 60% of Cairo's housing is "informal" - built by occupants because the private and public sectors both refuse.) 


Krugman points out that the bigger debt problem in the Eurozone is Spain. But for some reason he spends his column attacking the very idea of a single currency in a variable region rather than attacking austerity politics, though he knows in the U.S. case that the focus on debt will kill the recovery.

Since the world needs both recovery and stable currency and debt arrangements across diverse national economies - both of which the financial system has not delivered - Krugman et al. need to figure out how to avoid screwing the populations of countries like Greece.  The world has to learn how Greece can have a modern, efficient, green infrastructure with its current economy, and then discover how to provide the same to about 130 other countries that are in even greater need.

If the EU can't fix Greece, it can't fix anything that needs fixing.

Ticking Time Bomb for 2010

There isn't enough commentary out there about how the "recovered" sector of the American economy - the banks - are recovering through continued and massive taxpayer subsidies.  One of my Capitalist Pals had a good piece on it earlier this week. Healthy balance sheets are coming from (1) free money guvmint money (effectively zero interest) for which the banks can charge 5% or whatever; (2) the use of higher-yield Fannie Mae and Freddie Mac securities, although these agencies are floated by bailout funds; and (3) the declaration of actual losses as income:

many of the same banks that received TARP funds were deliberately allowed to mask big losses in the 1980s after their loans to Latin American countries went bust.

Today, banks are doing the same thing by underreporting losses and delinquencies. This means that, even if banks aren't collecting, they can keep counting interest they're owed as if they are getting paid. This allows them to delay the write-down process, and casts doubts on their financial statements.

 The fact that the author of this piece depicts his view as controversial suggests we're living again in Kool-aid World, and that unpleasant surprises await.

Be sure to read the even scarier Part II.

HNY quandmême!

Ye Olde Split Between Top and MIddle

"Top" here means the White House and the Congressional leadership, whom Krugman describes as being pulled away from job creation and other recovery politics by the banks, who in a growing number of accounts have conquered the U.S. Government.   Max Keiser's "Goldman Sachs are scum . .. they've basically coopted the US Government, the US Treasury Department, the US Federal Reserve functionality, they've coopted Barack Obama" -the second part, about banker cooptation, apprears on the pages of many daily newspapers.

The middle - here rank-and-file Congressional Dems - rebelled a bit.  They passed a measure in the House Finance Committee requiring an audit of the Fed's many enormous bailouts of insolvent banks, whose sums and recipients remain undisclosed. They passed the measure over the opposition of House Finance Committee Chair Barney Frank.

There are lots of good ideas around about how to fix things.  One of many examples is Dean Baker's idea of how to actually go about revaluing the Chinese yuan. The problem isn't that nobody knows what to do, that it's all so complicated. The problem is that the top doesn't want to do the things that could be done to fix things.  These things would cost them money.  

The outcome is the sort of phony helplessness that now pervades US policy in finance, job creation, higher education - take your pick.  It only works on the assumption that most of us are pretty dumb.

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.

Dismal Dems

Driving the point home about the failing Democrats, John Nichols blogs in the Nation that Obama and the Congressional Dims "continue to make the mistake of treating unemployment as an afterthought rather than the most serious issue facing the nation."  Writing about last week's Republican victories, he points out that " in New Jersey and especially in Virginia, where Republican candidates in high-profile races focused tightly on economic issues and job creation, they won." And Fr. Frank's Sunday sermon notes,

The system is going back to the way it was with a vengeance, against a backdrop of despair. As the unemployment rate crossed the 10 percent threshold at week’s end, we learned that bankers were helping themselves not just to bonuses as large as those at the bubble’s peak but to early allotments of H1N1 vaccine.  . . . both parties have their own delusions, not the least of which is the Republicans’ conviction that Tuesday was a referendum on what Obama has done so far. If anything, it was a judgment on just how much he has not.

Bubble Brains

Robert Schiller has some interesting evidence that people haven't given up on huge coming profits on buying and selling houses. It confirms that pathetic story about Arizonans bankrupted by house flipping  trying to make it back by buying foreclosed houses in the hope of future flips.  As Schiller says in his understated way, "At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game," still hoping they can win by timing the market.

I would only add that people is dumb because a) dumbness used to pay, but also b) they don't have anywhere else to turn. Are they supposed to invest in the green economy?  Look for solid annual pay increases by reskilling for a job in the big new American industries that are coming on line? Take heart in the solid new economic strategies pondered in Washington? Trust their retirement to Wal-Mart?  

People don't in reality have any of these things to turn to, especially not new economic policy.  Bank regulation hasn't happened, and won't, as the foxes still manage the chicken coop, and policymakers, timidly caught by conventiontional deficit worries, are going to tighten money rather than dynamite their way to recovery with a stimulus so big it will actually allow the paying down of the future deficit.

People rely on bubbles because the American economy and its backward leaders still, over 2 years into the surfacing of the crisis in August of 2007, have nothing else to offer them.

Inequality Takes Another Bow

forever on the rise, now fueled by the recession near you, and with predictable effects on the middle: 

Household income declined across all groups, but at sharper percentage levels for middle-income and poor Americans. Median income fell last year from $52,163 to $50,303, wiping out a decade's worth of gains to hit the lowest level since 1997.

Why Must We Relearn the Obvious?

Fr. Frank's piece today on Obama's Afghanistan-Vietnam made me sad.  It's a typically learned and perceptive reflection on the historical parallels for Obama's increasingly obvious quagmire in foreign policy.  By why does he have to work so hard to lay out what any 8-year old outside the beltway can see? The US in Afghanistan is a way to kill innocent people, piss off absolutely everyone, block economic recovery, throw away whatever money the public has left, destroy his own presidency, and revert the Dims to an imitation of Republican hawkishness that will lose in 2012. 

I felt compelled to write a whole book about failing cultural capacity in the US - the reduced ability to learn quickly, retain what we learn, and apply knowledge when it is actually relevant.  Afghanistan.  Just say the word.  How stupid can we really be?  Where's the bottom of our stupidity?

"White House Near Chosing U.S. Location to Hold Gitmo Detainees" Am I really reading this headline today, and not three years ago when Cheney was Prez and we were winning the war for hearts and minds in Iraq?

I heard multiple interviews this week in English and French from leaders trumpeting the G20 reforms.  But the best analyses were first, from Lori Wallach of Global Trade Watch, who pointed out the contradictions between reigning in finance and letting do whatever the hell it wants, i.e. more of what we have; and then a citation in a  John Authers column in the Financial Times, this of one David Bowers of Absolute Strategy Research in London, describing the equity markets right now:

It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future.

That's where we are now, with no plan from the top, except for pointless military interventions and additional threats, which utterly undermine Obama One's promises of an era of rebuilding. 

We are going to have to start that work by ourselves.

Reforms that Weren't, Reforms to Come

President Obama's speech about reforms in the financial sector was disappointing, to put it mildly.  There were no plans for implementation and no ongoing developments that might actually change the system that blew things up. The consumer agency has nothing to do with stopping problems with overleveraging, opacity, internal fragility, and the unbelievable social costs of the extreme profits involved in financial speculation. Obama appears to be assuming a trickle-down recovery, although evidence at the state level is very much to the contrary. See California's tax revenue stream, for example:

I assume folks who track spreads in lending rates, loan volume and the like could clarify the "two economies" divergence that is crushing a lot of regular folks. You'd think Obama would at least have figured out that the backlash against his health care reforms are fueled by very reasonable economic fear and panic enabled by his non-existent financial reforms.

There's more hope in the report of the Stiglitz commission to the French government on moving from narrowly economic to broader measures of social progress.   See also the interesting papers on the commission's website.

It would be nice to be able to say at some point in my lifetime that the US was back on the front lines of economic thinking. That time still looks a long way off.

Krugman Softpedals the Woes of Economics

Paul Krugman has a lot of good moments in his big think piece on the many failures of the field of economics.  He sums up his thesis early on:

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

The blindness of a whole field was possible because of a wholesale "retreat from Keynesianism and a return to neoclassicism."  

There's some handy simplified intellectual history here, but the best feature of the piece is Krugman's linking of even those liberal economists who rejected hard core neoclassicism (and its key mathematical axiom, the efficient market hypothesis) to a debilitating consensus.

But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.

The lesson here is that moderation is blindness.  Moderation enforces the intellectual limits of the consensus.  In this case, "the New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed."

Then there's the not so good. The first weakness is the total lack of novelty in the critique of economics as delusionally neoclassical.  People outside economics have been saying this for years or decades.  They are often called sociologists or anthropologists, and have always thought that the models had lost touch with institutions, people, and also of course power and coercion, which played huge roles in setting up actual economies.  In addition to the recent book by Curious Capitalist Justin Fox, there is also Doug Henwood, longtime editor of Left Business Observer, whose classic 1996 book Wall Street offered a much more thorough intellectual history and critique than Krugman even hints at here. 

More importantly, Krugman blames "beauty" for leading economics astray.  He offers the philistine tag line, "As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."  In reality, economists mistook money for truth.   Models that made important people lots of money had to be true.  Krugman only superficially considers the possibility that financial incentives corrupted the heart and soul of the economics profession.  Some of this corruption was personal and some was collective - it's hard to argue with what seems to be success.  But economists are like all scholars in being paid to look past the surface of things to the real forces at work. They have flopped big time, and they

Finally, Krugman's cure is little more than a weaker form of the disease:

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

These are three ways of saying that economists have to admit that markets aren't perfect. This may well get them into a freshman sociology or culture or history course, but it won't get them to the point of explaining how our economies actually work or how to keep them from being giant factories of social inequality and environmental destruction.  Moderation is blindness, even when it comes from Krugman.

What if We Don't Shop?

The NYT published this piece about fundamental changes in US consumption.

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

I've wondered for years what  most Americans like to do besides shop their way up the commodity ladder to bigger or more expensive. I don't know that many people who did this full time, but the ones who do seem to make the rules for everyone else.

We're seeing a forced slowdown, but no real shift in desires - are we?  Are consumers as totally inflexible as bankers, who a year after the big meltdown have taken all the government's money, maintained all the rules, and blocked all reform?

The main difference seems to be that bankers have more money - including more public money than the public has.

Even Economists Wonder: Is this NOT a Recovery?

Here's a doubting Stiglitz.  W-shapes, anyone?

There's some good stuff in this June piece by Marshall Auerback on why our bank bonanza isn't an economic bonanza, and will never be.

And here's a piece by one of my Supply Sider Pals on the "Non-Stimulating Stimulus." He, being a supply sider and a Poverty Denier, thinks the non-stimulus is good, because all government spending is by definition bad.  But his data is interesting - only 12% of the stimulus is going into new purchases of goods and services.  This helps explain the non-stimulus.

Costs of the Current Stuckness

The New York Times notes with surprise the end of the time "when a company reporting a few billion in earnings could count its money while basking in polite, reverent applause." It announces "a widespread sense that winners in this economy are produced by a game that’s rigged."

If these companies can return to the festivities so quickly, were they really having the near-death experience they and the government claimed? And if taxpayers risked their money when they backstopped Wall Street’s misadventures, why aren’t they sharing in the upside now that the party has started again?

The best explanation of where GS got its new money is Matt Taibbi's spectacularly clear explication on Democracy Now, a summary of his "Inside the Great American Bubble Machine." My Capitalist Pals aren't happy either. One discovered a new kinship with Central Los Angeles Democrat Maxine Waters in agreeing that Collatoralized Debt Obligations should be outlawed (for five years). He goes on to note that

U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making.

There's also a good critique in this piece of CDOs' very existence. The basic point is that CDO holders have a structural interest in sinking companies and gaming markets. In other words, they push against constructive economic activity, and add nothing to it. It's amazing that while the US's industrial capacity is melting away, and crucial technologies like solar photovoltaics are starved for capital, the banks can carry on producing little more than massive economic inequality. In the case of Goldman's bonuses, they come to $700,000 per employee, or 14 times the average US household income.

Jon Stewart offered his less technical critique of Goldman Sachs, from which the graphic is taken. The point is simple: "I guess the bailouts are working . . for Goldman Sachs!"

How do we know rich bankers mean a worse society? There are lots of studies of inequality and how and why it has gotten worse over the past twenty years of financialization. But the evidence I've been experiencing is the meltdown of higher education in California. Here's one link, again made by Amy Goodman at Democracy Now:

While Goldman Sachs is making billions, the state of public higher education in California is in a state of crisis. The University of California Board of Regents is preparing to meet this week to discuss plans to implement widespread budget cuts after the state cut about 20 percent of its support for the university system, amounting to a $813 million deficit. On Friday, University of California President Mark Yudof proposed system-wide employee furloughs for most faculty and staff. Under the plan, workers would be forced to take as many as twenty-six unpaid days off or the equivalent of a ten percent salary reduction. Yudof has also proposed deferred hiring and cuts in academic programs. University of California, Davis, has already shut down its liver transplant program, and UC Santa Cruz has axed some science and music classes.

In the US we assume we could never turn into Russia, and that California will never be Mississippi or Brazil. But in fact our educational stats are Mississippian, or bond rating is worse than Mississippi, and our governments are still run by people who think markets make better decisions than governments except in some special cases. More to the point, Russia's social fabric was destroyed by deliberate shock therapy, and California's governer is administering the same shock treatment to California today, while Goldman Sachs and banking policy in general floats self-contentedly above the mess they have helped to make.

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.