The Death Trip Continues

The Marshall Plan that rebuilt Europe cost $115 billion in today's dollars.

The New Deal cost $500 billion, and it rebuilt the United States - actually built the place for the first time in its country-ass, lonesome-mile, wagon-train across the burning prairie history.

The War in Iraq cost about $600 billion in these terms - or $3 trillion according to Joseph Stiglitz.

See the great slideshow at CNBC. Then shed a few tears.

The Great Bank Bailout - 4 trillion dollars. Cry yourself a river. Then get pissed and do something for a change.

Today in Place Bellecour here in Lyon the cops didn't police a big protest - they led it. They dressed up a mannequin in a Police Nationale uniform and full headgear and hung it by the neck from a giant crane. The strangulation of public services by a blind unseeing grasping state shovelling money to the top of the ladder - or some such symbolism. Their speaker said "the great eye of Mordor sees all, and means evil to us." Well actually, he said, "reductions, limitations, privatizations, destructions of public services, we accept none of this, and we will fight it.

Meanwhile, Sun Microsystems laid off about 6000 people, bringing the number of layoffs in the tech sector to nearly 60,000 in the last 2 1/2 months. Startups - the "jobs of the future" - are cutting deeper. The auto industry, which still accounts for about 2.5% of the US economy, has laid off 100,000 people since January. And fricking Citigroup is laying off 50,000 in one swoop.

This is of course the middle-class past present future, getting whacked. Where's the peep?

Bailout leader Henry Paulson objected to the idea that bank bailout money be used to help ease home foreclosures. This prompted Rep. Barney Frank to say "The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction," Frank said."

Naomi Klein has been doing a great job of explaining how the crisis is being used as "shock therapy" to force changes that before would have been unacceptable. I was struck yesterday by how she clearly feels the window on reform is closing, and that the crisis caused by the wealth-making practices of banks is being used to make even more money for the same banks.

The process is staying crooked, as Klein pointed out:

really what [Washington is] saying is, we can’t afford to enforce the law, because there is an economic crisis, that somehow, because there’s an economic [crisis], legality is a luxury that Congress can’t afford. That is a very scary statement. But this . . . bear market, has the temperament of an ill-tempered two-year-old. I mean, it throws temper tantrums whenever it doesn’t get what it wants, whenever it is frightened.

That's pretty much how it will be run until the loyal henchmen derail it.

Who the Hell Knows?

Finance has screwed up on a colossal scale. The salesmen on the left have no idea what to do. The man on the right, Treasury Secretary Henry Paulson, said today that the U.S. is on track for growth in 2008. Nobody's buying. Nobody bought the Bush "stiumulus" either. Partly it was because it was more self-serving shoveling of tax money to the wealthy. But really because nobody thinks it will work. That is because nobody has any idea what will work.

Headlines say things like "Fed Watchers at a Loss . . . : Rare uncertainty." Financial journalists scratched their head all weekend all over the world. Le Monde offered a compendium of non-knowledge about how Societe Generale could have lost $7.2 billion because of the bad bets of a single 31-year-old low-level trader - they don't even try to figure it out. The Yale economist and famous bubble-pricker Robert Schiller goes back to the New Deal and offers a vague meditation on the possible value of regulation.

At the weekend edition of the UK's Financial Times, the interesting "Short View" columnist John Authers wrote a classic thumb-sucker called "I've got a funny feeling about negative sentiment," in which he says that tracking the frequency of the use of the word "recession" often indicates the approach of a recession. He then describes the opposite view - that when editors figure out something like a recession is coming, it may already have happened. I call this piece "classic" because it makes visible the logic of most popular financial discussion: how markets work is completely clear - until the opposite becomes clear.

Trapped people are stupid. That's a lot of the recent story, in which the middle-classes of the US and UK respond to decades of stagnating wages with the hope for investment income - stocks in the 1990s, real estate in the 2000s. In their time, each would obviously go up and each was obviously a good investment. If you didn't buy Internet stocks in 1998 and real estate in 2003 you were an idiot - you had hurt your family, your kids' education, your retirement security. The crucial point is that at the time the delusion was totally rational, indeed mandatory. Skepticism was a huge mistake. It cost you big money. In real terms, it actually did.

Also in the FT, Sharlene Goff noted in passing that “A year ago, some 30 lenders were offering mortgaes of at least 100 per cent of the value of the property. A number were regularly handout out up to 125 per cent. This market has substantially dried up. Almost a third of lenders have withdrawn, and those left in the market are charing eye-popping interest rates." Who would ever lend 125 percent of the value of the collatoral? Well, anybody in 2004 who could count, since the property would escalate by that much in a year in much of the US and UK.
The veteran financial jounralist Joe Nocera describes what he sees as the middle-class problem.

Starting with the crash of 1987, every time there has been a market break, it always snapped back, usually sooner rather than later. Every time housing prices faltered — as they did in the early 1990s — they quickly snapped back as well. As a result, those twin engines, stocks and homes, became the assets we absolutely came to depend on to live the life we wanted. Our employers made the broad transition from pension plans — where the risk was spread broadly and the companies were responsible for their employees’ retirement — to 401(k) plans, where the risk was shifted entirely to the employees. But we were O.K. with that, weren’t we? We were happy to assume that risk because the market’s inevitable rise would secure for us a decent retirement.

Similarly, our home offered us the ability to buy things we wanted — vacations, for instance, or second homes — because we learned that we could borrow against the equity. The rise in the value of that asset made the prospect of repayment relatively painless. It also allowed us to avoid facing the fact that our incomes weren’t keeping pace with our desires.

All this is true. It is all regrettable - a series of bad decisions based on biased information and dumbness about how markets don't actually love the little people. But in real time, and not in hindsight, what was the middle-class supposed to do? To demand that corporations stick with defined-benefit pensions? That was pointless since even Democrats rushed to embrace the wealth-machine of market-dependent pension investments. When that went bad, was the middle class supposed to stick it out and NOT revert to the asset it actually understood, housing? All of its intellectuals, like Joe Nocera, were describing the trends as inevitable. To be intellectually independent, and to buck trends, is the single best way in markets to get royally screwed.

The real point is that people's financial security and quality of life should NOT be dependent on their powers of financial prophecy. They're supposed to do their jobs, spend time with family and friends, see and do and think new things, and have their lives, not spend 40-60 hours at work and another 20 on stock and real estate analysis - which even then means nothing about the outcome.

The financial markets are having the same problem. It's not just sub-prime loans. It's not only a liquidity crisis. It's not just temporary mutual suspicion. It's a crisis of knowledge. People don't know how to value credit and risk anymore. They don't believe in the math in the same way.

What should we do? It's actually not that complicated. We should bring finance into the socially-responsible economy by taxing it like everything else. That means

1. Pass Tobin taxes on financial transactions, which are untaxed, in contrast to your purchase of food (in most states) or movie tickets.
2. Return capital gains taxes to the same level as taxes on wages.

Both of these would generate a lot of income for social development all over the world. They would raise the cost of incessant betting and random arbitrage, lowering its unbelievable rate. And they might get a lot of people focused on inventing things and making stuff that we need all over again. All this money is a huge distraction from actually saving our asses from global warming and world poverty and other fairly pressing things.

Financial "Freefall"

There's a big stock selloff going on all over Asia and Europe today, and it will start up in the US in a few minutes. Steve Goldstein at Marketwatch traces it to paragraph nine of an article published in the International Herald-Tribune, which he correctly describes as mostly an NYT reprint paper for Americans abroad who can't read the local language.

That paragraph reads: "I'm reasonably confident that French banks will weather this turmoil without major trouble even though they are clearly, like all banks, in the world still in the process of marking down assets," said Christian Noyer, governor of the Bank of France and a member of the European Central Bank's governing council."

Apparently the fuss came from the statement that French banks were still "marking down assets."

Was there a single finance professional on earth who thought otherwise? Presumably not, so they are just "selling the news" - selling on the theory that stocks will go down because now the herd knows that French banks are still marking down assets.

But of course the herd also knew this, since it does know how to turn on a TV. So it's a case of "I (now) know that you know that I know that French banks are still marking down assets."

It's a great way to run a world economy.

On the Chopping Block

I spent nearly all of the weekend doing the spreadsheets and then writing a report on how the latest casual attack on California state government - Arnold Schwarzenegger, Director - will end the University of California as a public university, converting it to a public-private partnership at the mercy of private donors and interests. Fun stuff - trying to issue a wake-up call to folks who can seem to quite believe that their well-educated and docile heads are getting lopped off.

On some gut level I am furious with myself for having not only stayed in but spent much time trying to save what looks like a loser institution, when I should have just said bye-bye about ten years ago.

The middle-class has slept through the demise of the institutions that built it - as I say often enough on these pages. This is no longer the case at the Los Angeles Times, one of the country's
best newspapers, where yet another chief editor has just been fired for not cutting fast enough. The piece notes that this is "the fourth time in less than three years that the highest-ranking editor or the publisher has left for that reason."

The latest ex-editor, James O'Shea, was apparently resisting cuts on top of a long series of previous cuts. It is in the nature of modern managers and investors not to care - Arnold-style - about your previous sacrifices. The people who do the actual work know about the steady deterioration of both job and product. They already know that "The Times had a newsroom staff of more than 1,100 people at the start of this decade, but the number has declined to below 900, officials say. Its weekday circulation has dropped to about 800,000, from 1.1 million."

The owners look at the circulation and revenue numbers and demand even more cuts. The cuts are apparently completely unreasonable, given the fact that this fired editor started out as a hired gun for management.

The removal of the editor, James E. O’Shea, by the publisher, David D. Hiller, mirrors the odd spectacle of a little more than a year ago, when the previous publisher, Jeffrey M. Johnson, was fired for refusing to eliminate newsroom jobs as directed by the paper’s owner, the Tribune Company. In each case, a longtime Tribune executive was expected to rein in costs at the paper, but instead sided with the newsroom and lost his job for it.

Will the newsroom folks actually do anything? Who knows: with the Writers Guild Strike going on like the Justice For Janitors strikes used to, L.A. is again becoming a labor town. Maybe it's really dawning on people that they've been screwed.

Krugman had a good piece today about the failure of Reaganomics and the need to get this story out. Amen Mr. Krugman. Middle-classes I hope you're listening for a change.