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January 03, 2012

How the oligarchy avoids taxes

Many big corporations avoid paying US taxes by creating offshore subsidiaries and putting their profits into those companies. That money is often stored in banks in the US but are technically considered outside of the country. Of course, these companies and their executives would like to be able to use the money (which is currently running at more than $1.375 trillion) in the US to pay for their bonuses and the like but if they 'bring it back' (i.e., put it in their US books) they would have to pay the 35% tax that they avoided by using their foreign subsidiaries. So now an army of 160 lobbyists is pushing to allow a 'temporary' tax holiday under which the money can be repatriated to the US at a rate of only 5.25%, which would be a massive windfall to these companies and impoverish the government. This was also done back in 2004, creating a windfall then.

The lobbying effort is headed by Jeffrey Forbes, the former chief of staff of Democratic Senator Max Baucus, head of the Finance Committee, and many of the other lobbyists are former congressional members or their staffers, another example of how the revolving door works to benefit the oligarchy. NPR had a good interview with Jesse Drucker, author of the above-linked Bloomberg Businessweek article on this topic, in which he says that at least 60 former Congressional staffers are involved in the lobbying effort though the rules for identifying lobbyists are so vague that the true number is definitely much larger. Matt Taibbi wrote about the possibility tax repatriation holiday scam in July, wondering where the outrage was.

Taibbi also writes in depth about another big swindle that the banks perpetrated to avoid paying taxes to local communities when they transferred properties. They are now being sued but the oligarchy (including the Congressional and White House leadership) is pushing for a deal that seeks to bail out the big banks at taxpayers' expense.

Another way that taxes are avoided depends on how income is classified. The highest marginal tax rate is 35% but that only kicks in on 'ordinary' income (i.e., the kind that almost all of us earn as salaries and wages) earned in excess of $380,000. NPR's All Things Considered had a good piece on how much of the income of very wealthy people is in a form that is not subject to income taxes. Multimillionaire Nick Hanauer says that he pays just 11% of his income on taxes. As he says, "Most Americans think that the tax rate on the wealthy is 35 percent. But this is absolutely not true. If you're a small business person earning $350,000 a year, your tax rate is 35 percent… But if you're a hedge fund guy or an incredibly rich person like me, all of your income is from capital gains or dividends or tax-free municipal bonds or what have you. And these things are taxed at much lower rates."

How can that be? Because of various tricks. The official salary for very rich people is often just the nominal one of a dollar a year. They get almost all their remuneration from stocks and investments that are taxed at the long-term capital gains rate of just 15%. For ordinary taxpayers, the 15% rate kicks in at incomes above $8,375. For incomes over $34,000, the marginal rate is 25% so people who are below the median income levels are already paying at a higher rate than the wealthiest people. Furthermore, the compensation of private equity or venture or hedge fund managers is often in the form of a share of the profits called 'carried interest' which is subject to a maximum tax rate of 15%. Mitt Romney has been coy about releasing his tax returns and there are suspicions that this is because as a former venture capitalist, almost all his income is of this kind and thus, although a multimillionaire, he pays taxes at a much lower rate than a schoolteacher or fireman or secretary.

And this is even before the wealthy people bring in their high-priced tax accountants who are skilled in finding other ways to further shield their incomes, such as the device known as the 'variable prepaid forward contract', in which people can avoid paying even the low 15% rate by making it seem as if they had not actually sold their stock even though they got money for it, often in the hundreds of millions of dollars. This income does not even show up on their tax returns. It is essentially invisible.

The oligarchy has set up a tax structure that is so complicated that it conceals the fact that they are intent on making as much money as possible and impoverishing everyone else in the process. Nick Hanauer says that that is an incredibly short-sighted policy, and the reason is simple.

If Jeff Bezos and I had started Amazon.com in a poverty-stricken corner of Africa, there would have been no job creation because there would be no people to buy the stuff from Amazon.com. The difference here is the American middle class, which is by every measure the most extraordinary economic achievement in the history of the world. And there is only one of those, and it is the font of both innovation and of demand, not just for the American economy, but for the world's economy. And in that sense, it's incredibly precious.

This insight is not new. It was the existence of a large middle class with considerable disposable income that partly made the US economy so powerful. What is new is that the current oligarchy, in its drive to impoverish the very base that gives it its riches, is ignoring history and, in the process, killing the goose that gives them their golden eggs.

December 29, 2011

European Central Bank also giving big banks free money

It looks like Europe is following the lead of the US, with its equivalent of the Federal Reserve giving money to big banks at low interest rates and allowing them to buy government bonds at higher interest rates. So the European central bank is essentially borrowing back its own money, just like the Fed did here, the banks essentially risk-free easy profits.

If one wanted even more evidence of the power of the global financial oligarchy over governments, look at how they managed to oust the elected leaders of the government in Greece and Italy and replace them with unelected 'technocrats', i.e., people who would implement harsh austerity policies that squeeze the general public in order to pay back to the banks the risky loans that they gave out. Even Silvio Berlusconi, one of the most tenacious of politicians whose ability to cling on to the prime ministership was legendary, had to bow down to this superior power and resign.

December 17, 2011

Extending the payroll tax cut

Currently there is a congressional debate on whether to extend the payroll tax cut on Social Security. The Republican party, which wants to extend the Bush era tax cuts on the rich, ridiculously argues that those cuts would pay for themselves and do not require expenditure offsets. But it argues the reverse in the case of payroll tax cuts, requiring that the cuts, which benefit largely the middle class, be paid for by cuts in expenditure elsewhere. Their devotion to serving the interests of only the rich has never been so glaringly exposed.

I initially opposed the cuts in the payroll tax for three reasons. 1) If the economy needed to be stimulated, I preferred the government sending everyone earning below a fixed amount a check for the average amount of the cut, similar to what George W. Bush did. I felt that the effects of a payroll tax cut would be too subtle. 2) Because the tax is a fixed fraction of income up to a certain limit, the cut gives more back to higher income earners than lower ones. 3) It would cause a deficit in the Social Security trust fund that would be used by opponents to undermine the Social Security program.

It turns out that I was wrong on the third point. The legislation that cut the Social Security tax also required the government to make up the losses to the trust fund from general tax revenues. This is still problematic because it further breaks down the wall between the trust fund and general revenues and drags Social Security into budget debates by enabling opponents to claim that it is adding to the budget deficit. But at least on paper, the trust fund revenues are not affected.

December 14, 2011

The size of the bailout keeps growing

Last week, I wrote about the revelation that the size of the bailout was $7.77 trillion, much larger than publicly revealed during the time. Via reader Mark, I read this article by former congressman Alan Grayson that says that the audit that was enabled by legislation that he and Ron Paul initiated reveals that the size of the Federal Reserve bailout of the big banks all over the world is now even greater than that, to the tune of $26 trillion, which is almost twice the size of the entire GDP of the US, which is a little over $14 trillion. Grayson explains the key numbers that the audit revealed:

Page 131 - The total lending for the Fed's "broad-based emergency programs" was $16,115,000,000,000. That's right, more than $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received more than a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Page 205 - Separate and apart from these "broad-based emergency program" loans were another $10,057,000,000,000 in "currency swaps." In the "currency swaps," the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed's only "collateral" was a corresponding amount of foreign currency, which never left the Fed's books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the "broad-based emergency program" loans, together, totaled more than $26 trillion. That's almost $100,000 for every man, woman, and child in America. That's an amount equal to more than seven years of federal spending -- on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American's total GNP.

These are staggering amounts. And it was all done under the radar, using the secrecy with which the Federal Reserve and the government use when it comes to serving the oligarchy.

December 08, 2011

Billionaire Nick Hanauer on why rich people need to pay more taxes

Four years ago, I made the obvious point of why spreading the wealth was much better for everyone than great inequality. (I wrote a whole series of posts on this but this particular one is the most relevant here.)

The oligarchy and its allies, especially those in the Republican party and Fox News, have fought against this, saying that rich people are 'job creators' and taxing them more means that they will invest less and hire less people. A billionaire venture capitalist named Nick Hanauer wrote an op-ed in which he debunks this idea and pretty much makes the same point that people like me have made.

I'm a very rich person… Even so, I've never been a "job creator." I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

That's why I can say with confidence that rich people don't create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

It is unquestionably true that without entrepreneurs and investors, you can't have a dynamic and growing capitalist economy. But it's equally true that without consumers, you can't have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.

That's why our current policies are so upside down. When the American middle class defends a tax system in which the lion's share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that's what has been happening in the U.S. for the last 30 years.

One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

I can't buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can't buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It's worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend. [My italics]

We've had it backward for the last 30 years. Rich businesspeople like me don't create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That's why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let's give a break to the true job creators. Let's tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let's remember that capitalists without customers are out of business.

What Hanauer is saying is (or should) blindingly obvious to anyone who gives the topic a moment's thought. Henry Ford said pretty much the same thing a century ago. But our oligarchy has gotten so out of control and so avaricious that they have to counter this renegade from their ranks and so naturally there has been pushback. In this interview Neil Cavuto of Fox News tries to faithfully serve his masters by challenging Hanauer.

Cavuto raises the idiotic argument that I have heard so often, that if Hanauer feels he should pay more taxes why does he not voluntarily send in a check instead of changing the tax rates for everyone?

That is the kind of argument that labels you as being either incredibly stupid or willfully obtuse. It is on a par with those anti-evolutionists who think that the question "If we descended from monkeys, how come there are still monkeys?" is a devastating argument against evolution. Those who are tempted to make such an argument should really think twice, unless they don't mind people laughing at them.

December 04, 2011

More on that $7.77 trillion Federal Reserve deal with the banks

Last Thursday, I wrote about how the Federal Reserve, in secret, committed itself to $7.77 trillion in support to the big banks. The Daily Show gives more details of the how the rip-off worked. It turns out that the Fed gave the banks money at interest rates of 0.01% (essentially free money) that the banks then used to buy US Treasury bonds. In essence the Fed was borrowing its own money back from the banks at much higher rates than it lent it out to the same banks. Any idiot could make money on such a deal and it should be no surprise that the banks made a quick $13 billion in profits, which they then doled out to their executives as huge bonuses as a reward for their business acumen.

The fact that there has been no outcry against Federal Reserve head Ben Bernanke shows how the entire government and the major media is in the tank for the banks. The secrecy under which the Federal Reserve acts must end. It is a public body that is supposed to work for the public interest. It should not be allowed to become the private slush fund of the oligarchy.

December 01, 2011

How the government colludes with the rich

News reports are emerging that when the financial collapse was about to happen in the summer of 2008, Treasury Secretary Henry Paulson gave inside information on what the government was planning to do to a small group of insider investors who were in a position to take advantage of the news. Even they were shocked that he was telling them this.

He delivered that information to a group of men capable of profiting from any disclosure.

Around the conference room table were a dozen or so hedge-fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

Thanks to the Freedom of Information Act, we are now learning how the Federal Reserve secretly committed even more money to the big banks (to the tune of $7.77 trillion!) than was publicly reported, all while hiding it from the public and Congress. (To get a sense of how large this is, remember that the entire GDP of the US is about $14 trillion.) This enabled the banks to make $13 billion in profits all the while successfully lobbying against government regulations to control the reckless behavior that resulted in the crash in the first place. "The six biggest U.S. banks [JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley], which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank."

Glenn Greenwald writes about how the Fed refused to reveal the names of the banks even when it was thought that the amount loaned was 'only' $1.2 trillion.

In particular, watch this 5-minute video of Alan Grayson from early 2009 grilling the Vice Chair of the Federal Reserve, Donald Kohn, as Grayson demanded to know how much the Fed loaned and to which institutions, while Kohn refused to provide that information (absurdly claiming that such transparency would prevent banks from wanting to borrow in the future: in light of the disclosures today, does anyone believe banks will no longer borrow from the Fed?).

I have the feeling that the true amount the Fed committed may be even greater than the $7.77 trillion. The veil of secrecy under which the Fed has been allowed to act needs to be stripped away.

Meanwhile Matt Taibbi reports on how US District Court Judge Jed Rakoff has finally put a stop to the long-standing practice of the Securities and Exchange Commission (SEC), which is the government agency that is supposed to monitor and regulate the financial industry, arranging sweetheart deals with the institutions that it is supposedly overseeing. How it works is that when a firm is found to have committed some violation of the law, the SEC and the firm arrange a plea deal in which the company does not accept wrongdoing, pays a fine that is often much less than the amount of fraud they committed, and the information of what they did is not revealed. The SEC and the firm then get the deal approved by a judge. As Taibbi says:

Imagine if normal criminal defendants were treated this way. Say a prosecutor and street criminal come into a judge's chamber and explain they've cooked up a deal, that the criminal doesn't have to admit to anything or plead to any crime, but has to spend 18 months in house arrest nonetheless.

What sane judge would sign off on a deal like that without knowing exactly what the facts are? Did the criminal shoot up a nightclub and paralyze someone, or did he just sell a dimebag on the street? Is 18 months a tough sentence or a slap on the wrist? And how is it legally possible for someone to deserve an 18-month sentence without being guilty of anything?

Such deals are logical and legal absurdities, but judges have been signing off on settlements like this with Wall Street defendants for years.

But Judge Rakoff has said that this kind of thing must stop.

Rakoff's 15-page final ruling read like a political document, serving not just as a rejection of this one deal but as a broad and unequivocal indictment of the regulatory system as a whole. He particularly targeted the SEC's longstanding practice of greenlighting relatively minor fines and financial settlements alongside de facto waivers of civil liability for the guilty – banks commit fraud and pay small fines, but in the end the SEC allows them to walk away without admitting to criminal wrongdoing.

This practice is a legal absurdity for several reasons. By accepting hundred-million-dollar fines without a full public venting of the facts, the SEC is leveling seemingly significant punishments without telling the public what the defendant is being punished for. This has essentially created a parallel or secret criminal justice system, in which both crime and punishment are adjudicated behind closed doors.

But this is just one judge. The SEC and the crooked firms have the option of 'judge shopping', taking their case before judges whom they think will be sympathetic to such deals. Until more judges take this stand, the government and Wall Street's collusion in ripping off the public will continue.

November 30, 2011

60 Minutes story on homeless families

One in four American children now live in poverty. This report follows some who have been forced to live in cars and trucks. While the story is sad, what it reveals about the resilience of children, their ability to think positively and find ways to overcome their adversity, is heartening.

November 28, 2011

Shopping as a reality TV-based competitive sport

Well, another Thanksgiving holiday has come and gone and we get the usual reports of the shopping madness that has become customary. This year thankfully there do not seem to have been any actual deaths caused by crowds stampeding to get items, though shoppers at one place did ignore or step over a dying elderly man on the floor. (Incidentally, Kevin Drum says that 'Black Friday' got its name for darker reasons than the one that business public relations flacks have managed to foist on the public.)

But there have been shootings as people tried to rob shoppers of their purchases. There were also reports of riots in which police were called to quell unruly crowds and used the now-ubiquitous pepper sprays to disperse them. The report below also said that police picked up and slammed a grandfather to the ground in a store, thinking that he was a shoplifter. Why is such force necessary, even if their suspicions turned out to be correct?

Black Friday Brawl at Buckeye Walmart: MyFoxPHOENIX.com

A disturbing escalation was that of a shopper who, probably inspired by recent police actions, brought her own pepper spray and used it to disable her competitors for Xboxes and other high-demand items. She apparently escaped with her spoils but later turned herself in. Given the mentality of such shoppers, I worry that next year more people will copy her example or even escalate it, maybe bringing truncheons to fend off rivals or use tear gas and even tasers.

I have been trying to understand the mentality of these shopping melees. I can understand people in war-ravaged or famine-stricken areas rioting to get at meager relief supplies of food and water. But an Xbox is without doubt a luxury item, not a necessity, however much people may desire one. I have no idea how much an Xbox costs or what the sale price was but I find it hard to imagine that it was the size of the savings that drove someone to actually pepper spray her fellow human beings. After all, look at the scene below where people fought each other to get waffle irons that were on sale for $2. It is bizarre to think that people are willing to forego elementary courtesy and consideration towards others for waffle irons.

I blame reality TV for this development. I think what we are seeing is people shopping as if it were some kind of reality show of the kind seen on TV with themselves as contestants and in which the prizes are the goods on sale. The winners are those who snag the best deals and can then boast to their friends about it. And just like the shows, people are encouraged to do whatever it takes to 'win'. One person reinforced this view by going so far as to describe the pepper-spraying woman as a 'competitive shopper', a benign euphemism for a person with a mean attitude to life.

The stores and the media feed this mentality, relentlessly hyping their sales with their publicity about the limited numbers at low prices and midnight store openings and the like, all contributing to a race-like mentality. Apparently after Walmart opened its stores at 10 pm on Thanksgiving, the sales in various sectors of the store begin at different times, with the items kept in pallets covered in plastic that are then removed at the sale time. It does not take a genius to predict that this will cause trouble as crowds of shoppers cluster around the pallets, salivating as they wait for the bell or whistle or whatever that signals that the race has begun.

On the one hand, one can dismiss this as the aberrations of a few people who have lost their sense of proportion. And as long as the numbers remain small, we can perhaps ignore it. But I worry about what the increasing numbers of people who are willing to shove aside, trample, and pepper spray their fellows in order to get at merchandise that they could well do without tells us about ourselves. It is not a good sign when the social fabric of concern for their fellow beings is torn apart in the desire to get some bauble.

I have little sympathy for those people who are choosing to subject themselves to bodily harm and insults to their dignity in this way. The people I feel sorry for are the low-level store workers who have no choice but to be there and risk getting hurt in the scrums. Because the stores are opening at midnight on Thanksgiving or, in the case of Walmart, even earlier, these workers do not get to enjoy the holiday. In these hard times, some may welcome the opportunity to get extra hours of work at overtime rates (at least I hope they get that) but I am sure there are many who would much rather forego that to spend a quiet holiday with their loved ones. There is even a petition to the Target department store company to 'save Thanksgiving' by not having these midnight openings.

I hope it catches on.

November 17, 2011

American banks' involvement in the Eurozone crisis

Last week in a post on the Greek crisis, I said that the extent of US banks' liability for risky debt (either in the form of loans that may go bad or credit default swaps that may turn out to be bad bets) was not clear. Recall that banks give out loans to governments and then take 'insurance' on those loans in the form of credit default swaps (CDS) in case the governments cannot pay back the loans. But if the loans go bad and the banks that issued the CDS cannot pay up on the insurance claims, these banks could face huge losses.

Now a news report says that Goldman Sachs and JP Morgan Chase have involvements totaling more than $5 trillion of debt globally but they are not divulging how much if that is in the troubled PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Bank of America, Citigroup, and Morgan Stanley also have taken similar risks.

November 14, 2011

The problem with the 'too big to fail' concept

I wrote earlier with respect to the Greek debt crisis that the banks that were described by the phrase 'too big to fail' were not a loose and undefined category but that there is an actual list of 29 banks that governments feel obliged to bail out if they get in trouble. Of these 17 are based in Europe, eight in the US, and four in Asia. Of course, knowing that they are too big to fail only encourages these banks to thumb their noses at the normal rules of the marketplace and take excessive risks with other people's money for their own benefit, which is what has caused all these problems in the first place.

The big US banks are doing extremely well because, after their risky investments imploded, the US government and the Federal Reserve essentially gave them free money to make new risky investments. They then made huge profits but if they had failed then the taxpayers would have been on the hook for the losses once again.

Wall Street firms — either independent companies or the high-flying trading arms of banks — are doing even better. They've made more profit in the first 2 1/2 years of the Obama administration than they did during the entire Bush administration, industry data show. (See data in an Excel file here.)

Behind this turnaround are government policies that saved the financial sector from collapse and then gave banks and other financial firms huge advantages on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks, money that the firms used for risky investments on which they made huge profits.

Neither Bush nor Obama, for instance, compelled banks to increase lending to ordinary businesses or consumers, known as "prime borrowers."

A recent study by two professors at the University of Michigan found that banks, instead of significantly increasing lending after being bailed out, used taxpayer money to invest in risky securities to profit from short-term price movements. The study found that bailed-out banks increased their returns by nearly 10 percent as a result.

No bank should be too big to fail because then they can extort us. If a bank is too big to fail, then it should belong to the people, i.e., be nationalized, because the taxpayers are essentially paying the bills. Otherwise, the US government should do to the big banks what they do to smaller banks when they fail. They are taken over by the appropriate regulatory agency, reorganized, top management replaced, new policies put into place to make sure that the banks are following sound business practices, and then returned to the private sector. Even better would be to break up the big banks into smaller banks.

Instead of that the US government gives free money to the very institutions and people who create these crises. They then make risky investments. If the investments work, they make huge profits that they keep for themselves. If the investments turn sour, taxpayers bail them out. This situation has arisen because of the fact that there is an incestuous relationship between the big financial firms and the US government with top officials moving back and forth between the two. The US Department of the Treasury is essentially a subsidiary of Goldman Sachs.

What we now have is not capitalism but exactly what the oligarchs want: the privatization of profit and the socialization of risk.

November 12, 2011

Wealth gap between old and young increases

It is interesting how the Occupy Wall Street movement has triggered so much interest and discussion about wealth and income inequalities in the nation. Now comes a study that shows that the wealth of households headed by people over 65 has increased to 47 times that of households headed by people 35 and younger, compared to a ratio of just 10 in 1984.

It is natural for older people to have more wealth since they have had more time to earn and save. But this rapid rise in inequality is not healthy. What is even more disturbing is that the median net wealth of the younger group has actually declined dramatically in this period. A society that has a minority of old and very rich people and a large number of young and poor people is not a healthy or stable society.

young-old-wealth-gap.gif

November 09, 2011

Behind the scenes of the 'Greek crisis'

The financial news of recent weeks has been consumed with the so-called Greek debt crisis. Whenever there is news that a deal has been reached to bail out that government, stock markets rise. When the deal seems to have collapsed, the markets fall. Although the reports act as if the Greek government or people are being bailed out, it is actually international banks that are the benficiaries. What I find extraordinary is that news reporters and commentators talk as if 'calming the markets' is the most important thing in the world and thus governments must do everything they can to make stock markets go up, even if those moves have devastating effects on ordinary people. This is why we need massive protests against the financial oligarchy, to show governments that there are other important elements of society whose interests need to be considered.

While I am by no means an expert on international finance, I have tried to get a rudimentary understanding of what is going on and here is what I have learned.

How it started was that big European banks loaned the Greek government huge amounts, while partly insuring themselves against potential losses by purchasing 'collateral debt swaps', a form of insurance offered by other banks. The Greek government is finding it hard to repay the loans. One option for them is to declare bankruptcy, which would mean that the banks will have to absorb huge losses. The deal that the markets favor involves major European economies such as France and Germany essentially agreeing to find the money to loan Greece enough to pay off the debts it owes to the banks. How this is done is to buy bonds issued by the Greek government, which will then use that money to repay its loans. Because the Greek government is in danger of bankruptcy, it has to offer high interest rates in order to tempt buyers and this places a big repayment debt burden on its budget. To deal with that, the Greek government would increase even further the austerity measures it has imposed on its people and cut back on services in order to find the money to service its bonds. This is what the French and German governments are insisting that the Greeks do if they want the money.

So it is the usual story of squeezing ordinary people of their pensions and services to pay off wealthy banks that loaned money recklessly, a story that should sound drearily familiar to people in the US. Following that pattern, we can expect that once the deal is done, the banks will celebrate their salvation by giving huge bonuses to their top executives.

We are told that the banks will not get off scot free but will take a 50% 'haircut'. i.e., they will be reimbursed for only half their loans and so that they will share in the suffering. But in actual fact as Tyler Durden points out in a succinct analysis that does the math, the haircut will only be 28% but thanks to creative bookkeeping has been made to look larger than it really is. And being the cynic that I am, I suspect that once all the dust settles, we will find that it is even smaller than 28%. The big banks never lose.

The Greek case illustrates what has become all too obvious, that the world is being run for the benefit of the financial oligarchy. We often hear the phrase 'too big to fail' to describe some banks and it is thought that this is an undefined category but it turns out that there is an actual list of 29 banks that governments feel obliged to bail out if they get in trouble. Of these 17 are based in Europe, eight in the U.S., and four in Asia. Of course, knowing that they are too big to fail only encourages these banks to thumb their noses at the normal rules of the marketplace and take excessive risks with other people's money for their own benefit, which is what has caused all these problems in the first place.

We now see more clearly why the leaders of France and Germany are twisting the arms of the Greeks. Some of the banks that are most vulnerable to losing money if the Greeks default on repaying loans are Dexia, Societe Generale, Deutsche, BNP Paribas, and Commerzbank, all of which are on the list. If the Greeks don't pay them back, the French and German governments will feel obliged to do so, and their own public may revolt.

So is the US off the hook since none of those banks is based here? No. The fact is that in the worldwide casino that the financial world has become, other major banks have invested in those infamous 'credit default swaps' (CDS) which are essentially bets that have been taken on the loans. They are a form of insurance that the banks that made the loans have made against default and if the Greeks don't pay up, then the banks will ask their 'insurers' to pay. Who are these insurers and what is the extent of their potential liability? In the secretive world of CDS it is hard to know who is on the hook for how much but given their history, one can safely conclude that Goldman Sachs, JP Morgan Chase, and Bank of America are likely to be major players. This is why the issue is more than just Europe and why US banks and the US government are also so keen on Greece accepting the deal.

This article provides a sequence of the worst case fall of dominos that could be triggered by a Greek default. I am a little skeptical of these doomsday scenarios, since they are often just propaganda to rush people into signing on to a bad deal. After all, Iceland decided to default and the world did not end and they are doing quite nicely now. The fact that Iceland was not part of the Eurozone gave it more independence of action.

One interesting fact is that the deal that the French and German governments are offering the Greeks only say that they will find the money to buy Greek bonds, not necessarily that they will provide all that money themselves out of their own treasuries, something that is not at all popular with their own people. What those governments are doing now is shopping around trying to find other countries to provide the money. i.e., buy the risky Greek bonds. China is their main target since they seem to have the money. Why would China want to wade into this mess? The argument being used is that if the Greek government defaults, followed by the other countries that make up the so-called PIIGS group (Portugal, Italy, Ireland, and Spain), then Europe will go into a deep recession and China's export markets will shrink.

So that's where things seem to stand. It is no wonder that the Greek people are demonstrating in large numbers against their government's subservience to international financial interests.

October 29, 2011

Boycott Bank of America

Matt Taibbi makes the case that removing our money from Bank of America is one concrete action that we can take to show our disgust with the banking industry. Targeting one of the worst culprits is a better strategy because we cannot boycott the entire industry. If we can shake one of the main institutions, it will cause other banks to fear if they will be the next to have a bull's-eye painted on them

I used to feel the same way about earlier boycotts of gas companies to protest gouging practices. General boycotts will fail because people eventually need gas. It would be better to pick a particular gas company and boycott only them because such an action can be continued indefinitely. After the BP oil spill, if people stopped buying only BP gas, that would have forced them to take the public outcry more seriously.

October 28, 2011

Rising income inequality

The Congressional Budget Office released a report yesterday looking at the changes in the distribution of household income from 1979 to 2007. The graph on the very first page tells the whole story: The top 20% has increased its share of the national income at the expense of the other 80%, whose shares have all gone down.

Jared Bernstein of the Center for Budget and Policy Priorities digs deeper into the report:

Between 1979 and 2007, incomes grew by 275 percent for the wealthiest 1 percent of households, 37 percent for the middle 60 percent of households, and 18 percent for the poorest 20 percent of households. These figures adjust for inflation and account for the impact of taxes and government transfer payments such as Social Security and unemployment benefits.

inequality.jpg

In media coverage of this report, I have heard phrases like incomes of the top 1% have 'doubled' or 'almost tripled'. This is wrong. A 275% increase means that they increased by a factor of 3.75, i.e., almost quadrupled!

Kevin Drum comments that what has happened is that "For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich."

blog_loss_gain_1_vs_80.jpg

October 26, 2011

"Wall Street Isn't Winning – It's Cheating"

Matt Taibbi, in a must-read article with the above title says that what drives the Occupy Wall Street protests is not envy of the rich but the fact that the system is corrupt and unfair.

Americans for the most part love the rich, even the obnoxious rich. And in recent years, the harder things got, the more we've obsessed over the wealth dream. As unemployment skyrocketed, people tuned in in droves to gawk at Evrémonde-heiresses like Paris Hilton, or watch bullies like Donald Trump fire people on TV.

Success is the national religion, and almost everyone is a believer. Americans love winners. But that's just the problem. These guys on Wall Street are not winning – they're cheating. And as much as we love the self-made success story, we hate the cheater that much more.

In this country, we cheer for people who hit their own home runs – not shortcut-chasing juicers like Bonds and McGwire, Blankfein and Dimon.

That's why it's so obnoxious when people say the protesters are just sore losers who are jealous of these smart guys in suits who beat them at the game of life. This isn't disappointment at having lost. It's anger because those other guys didn't really win. And people now want the score overturned.

He lists all the swindles that are currently going on in favor of the rich banks and against ordinary banking customers, and ends, "These inequities are what drive the OWS protests. People don't want handouts. It's not a class uprising and they don't want civil war -- they want just the opposite. They want everyone to live in the same country, and live by the same rules. It's amazing that some people think that that's asking a lot."

October 24, 2011

How the Fed secretly bailed out American and foreign banks

Thanks to reader Mark, I came across this report by US Senator Bernie Sanders about a GAO audit of the Federal Reserve that reveals that it secretly loaned out over $16 trillion dollars to American banks and businesses all over the world. The audit also revealed that there were people on the board of the Fed who seemed to be benefiting from the Fed's actions.

Such audits of the Fed are a new thing this year, thanks to legislation sponsored by Sanders. It is ridiculous that such secrecy has been allowed for so long to institutions that are publicly funded and use public money.

October 22, 2011

What's the one after 9-0-9?

Herman Cain took a beating for the fact that his 9-9-9 tax plan would raise taxes on low and middle income people while giving rich people a huge tax break.

So he has tweaked it and now says that for the poor it will be a 9-0-9 plan. You can be sure that such ad-hoc lurches due to pressure has produced another half-baked plan that will also be roundly attacked. So what's next?

This gives me an excuse to cue up the Beatles.

October 21, 2011

Five bank behemoths that hold the political system hostage

Sarah Jaffe and Joshua Holland list them (Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and Goldman Sachs) and explain why they are so bad and how they get their way.

Currently, Bank of America is engaged in yet another effort to swindle the taxpayers. When it took over Merrill Lynch it also acquired all the toxic derivatives the latter owned. Bank of America is an FDIC-insured institution, which means that its deposits are taxpayer-insured, while Merrill Lynch is not. Now Bank of America is apparently trying to quietly shift the Merrill Lynch liabilities over to Bank of America so that the taxpayers will bear whatever loss occurs,

Of course the Federal Reserve, which has already used enormous amounts of taxpayer funds to bail out the banks, supports the move but the FDIC is balking, fearing getting stuck with a huge bill.

October 20, 2011

How the oligarchy looted people's pensions

Jon Stewart interviews Ellen Schultz, an editor at the Wall Street Journal and author of Retirement Heist, who explains how corporations, with the connivance of the government that was willing to provide them with the necessary loopholes, looted the pension funds of 44 million of its workers to enrich their top executives, thus transforming pension fund surpluses of $250 billion into deficits.

The behavior of the oligarchy and their total lack of scruples in destroying the lives of ordinary hard-working people go well beyond greed. They are sociopaths.

October 19, 2011

What percent are you?

The Wall Street Journal has a handy calculator that lets you know.

The median household income is $43,000 while the top 1% consists of those earning over $506,600.

October 16, 2011

Herman Cain's 9-9-9 tax plan

Herman Cain has been getting a lot of mileage about his 'simple' 9-9-9 tax plan. Jared Bernstein says that it will result in a big tax increase on the middle class and a huge tax cut for the very wealthy. I have seen similar conclusions reached by other analysts.

While this is a goal of the oligarchy, they would like to achieve their goal in more subtle ways. The very transparency of Cain's scheme is likely to be the thing that pricks his bubble and sends him back into the ranks of the stragglers for the Republican nomination.

October 13, 2011

Bipartisanship in the service of the oligarchy

If you were paying close attention, you may have noticed that yesterday Congress, which is supposed to be locked in partisan gridlock that has paralyzed it, managed in a bipartisan manner to pass quite easily and with little fanfare major free-trade agreements with Panama, Colombia, and South Korea. The House passed the South Korea agreement by a vote of 278 to 151, Panama by 300 to 129 and Colombia by 262-167. In the Senate, the South Korean plan passed by a vote of 83 to 15, Panama by 77 to 22 and Colombia by 66 to 33.

Whether one thinks such agreements are good for everyone or not, the oligarchy definitely favors them because anything that enables them to move goods, money, and manufacturing capacity more easily and cheaply across borders enables them to make more money.

These agreements had been negotiated by George W. Bush but had stalled in Congress because of opposition from the labor movement that they would cost jobs here. This time they passed easily, thanks to the support of president Obama, which illustrates once again that the oligarchy can sometimes get more of what it wants under a Democratic administration than under a Republican one. It also illustrates once again how noisy partisan gridlock only comes into play when it comes to doing things that benefit ordinary people, and miraculously melts away when the oligarchy's interests are involved.

October 08, 2011

Too big to fail

This timeline shows how we arrived at the situation where we now have just a few big banks controlling almost the entire financial sector.

balloonjuice2.jpg

(Via Balloon Juice.)

September 01, 2011

Food stamps

From political cartoonist Ted Rall, I learn that 15% of Americans are on food stamps and of those, 40% are employed.

It is interesting how people react to such statistics. My reaction was that it showed that there are a large number of poor people in the US (about 45 million) and that employers are paying a lot of workers (about 18 million) far too little.

But I am well aware that there will be others for whom this same statistics will send the message that the government is far too generous with food stamps and should cut back.

August 30, 2011

And the financial skullduggery continues…

Matt Taibbi describes how the Obama administration and the Fed are part of the group trying to put the screws on New York's attorney general Eric Schneiderman to get him to agree to a sweetheart deal that will let the banksters escape with a slap on the wrist for all their mortgage-backed fraud.

David Atkins explains how the Obama administration and others had Schneiderman removed from a group of state attorneys general that were investigating mortgage abuses because he was not satisfied with the deal being offered. (Thanks to Peter G.)

I wrote about this before here.

August 27, 2011

The obsession with gas prices

I have always been a little puzzled by the obsession in the US with the price of gas. From as long as I can remember, the price of gas has been reported regularly in the news, even when the prices were not fluctuating. NPR news reports on the national average of gas prices on a regular basis. Michele Bachmann has even vowed that she will bring gas prices down to $2 if she is elected president though she does not say how. (Plunge the country into a deep recession? Invade all the oil producing countries?)

Why, among all the commodities, is the price of gas singled out for special mention and monitoring?

I understand that the price of gas influences the price of other things and so is perhaps a proxy for inflation but surely the cost of living index would be a better gauge? I also understand that this is a car culture. When my mother used to write letters (remember those?) to me from Sri Lanka, she would always quote the price of bread and coconuts as indicators of the cost of living. Maybe because it was because she did not own a car and besides, gas prices in Sri Lanka were controlled by the state.

Perhaps gas is focused on here because it is perhaps the only thing that we buy regularly in isolation. When it comes to other staples like bread or milk, which would serve equally well as rough indicators of the cost of living, they are usually bought in conjunction with other groceries and so their price variations do not stand out. Also, gas stations are everywhere and they post their prices in huge signs so you cannot avoid being aware of them.

If you were ask me the price of bread or milk, I probably could not tell you even though I buy them every week. This is because I have no choice but to buy these staples and can afford to, so there seems to be no point in agonizing over their prices. But I do know the price of gas, even though the same conditions apply.

August 25, 2011

France taxes the rich

What is looked upon with horror in some circles in the US is viewed as perfectly reasonable in France.

The French government is to impose an extra tax of 3% on annual income above 500,000 euros (£440,000; $721,000).

It is part of a package of measures to try to cut the country's deficit by 12bn euros over two years.

The tax increase came after some of France's wealthiest people had called on the government to tackle its deficit by raising taxes on the rich.

See, that wasn't so hard was it?

August 23, 2011

Greedy geezer

Harvey Golub, former CEO of American Express, takes to the opinion pages of the August 22, 2011 issue of the Wall Street Journal to whine about how unfair the current tax system is to rich people like him and that it would be an outrage if his taxes are raised. But he has solutions to the budget deficit! He feels that eliminating the departments of education and energy is better than him paying more taxes.

There is one statement that is flat-out incredible, where he says: "Of my current income this year, I expect to pay 80%-90% in federal income taxes, state income taxes, Social Security and Medicare taxes, and federal and state estate taxes."

80-90% of his current income goes in taxes? To the calculators, Batman!

I have no idea what Golub's income is this year is but let's say it is one million dollars. Let's be most generous in our calculations in his favor and assume that it is all from salary and that he is a single person and claims no deductions at all.

First off, federal and state estate taxes are not based on income at all, so it is deceitful for him to include that in the list of taxes that are set off against income. Furthermore, aren't those taxes a one-time thing imposed at death? Does he die at the end of every year, pay the tax, and come back to life the following year? If so, he should really write about that, rather than this bilge.

As for the rest, he would pay federal income tax $327,643, social security tax $11,106 (assuming that he generously pays the employer's contribution as well), Medicare $29,000 (again picking up the employer's tab), and state income tax (if he lived in Ohio) $56,464, for a grand total of $424,213, or 42% of his income.

In reality, people like him claim a lot of deductions, have tax shelters, and get a lot of their income from investments that are taxed at a lower rate. I would be surprised if he pays even half that amount.

August 22, 2011

Partners in crime

Back in May, I wrote about the hopeful sign that the New York Attorney General Eric Schneiderman was investigating the role of the big banks in the housing bubble, but cautioned that "The oligarchy is going to close ranks and pull out all the stops to defend itself and preserve its privileges and get away with a plea deal that involves just a slap on the wrist and fine."

Well, the oligarchy seems to be doing just that. And who are their friends who are going to bat on their behalf to get the New York AG to accept a plea deal that is highly favorable to them? Why, the Obama administration. What a surprise!

Yves Smith explains what is going on in great detail and says:

It is high time to describe the Obama Administration by its proper name: corrupt… Team Obama bears all the hallmarks of being so close to banks and big corporations that it has lost all contact with and understanding of mainstream America… As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.

August 20, 2011

The protectors of Wall Street criminality

Matt Taibbi has a new article in the latest issue of Rolling Stone whose title Is the SEC Covering Up Wall Street Crimes? pretty much says it all.

It recounts the story of Darcy Flynn, a staff attorney at the SEC (the Securities and Exchange Commission that is supposed to regulate Wall Street) who blew the whistle about how the SEC has been systematically destroying documents about matters that it had investigated, thus destroying the chances of seeing patterns of criminal behavior.

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back.

The article also relates how the SEC is particularly prone to the revolving door, where SEC regulators get lucrative jobs at the very firms that they are supposed to be regulating, and then come back and lobby their colleagues to drop investigations.

Cenk Uygur talks with Matt Taibbi about the revolving door following an earlier article by Taibbi.

August 19, 2011

Welcome to World War III

How bad is the economic warfare being waged by the oligarchy on the rest of us? Bad enough that David DeGraw calls it World War III. He has published a book The Road Through 2012: Revolution or World War III (to be released on September 28, 2011).

Here is the abstract of a long paper based on the book that lays out the gruesome details.

Despite increasing personal financial hardship, most Americans remain unaware of the economic world war currently unfolding. An all-pervasive corporate and government propaganda campaign has effectively obscured this blatant reality. After extensive analysis, it is evident that World War III is a war between the richest one-tenth of one percentof the global population and 99.9 percent of humanity. Or, as I have called it, The Economic Elite Vs. The People. This war has been a one-sided attack thus far. However, as we have seen throughout the world in recent months, the people are beginning to fight back.

You can read a condensed version here.

August 18, 2011

Last place aversion

One of the enduring mysteries is why so many struggling poor people in the US are opposed to government programs that would assist people just like them. The Economist reports on recent studies that shed new light on this odd phenomenon. (via Boing Boing)

Economists have usually explained poor peoples counter-intuitive disdain for something that might make them better off by invoking income mobility. Joe the Plumber might not be making enough to be affected by proposed hikes in tax rates on those making more than $250,000 a year, they argue, but he hopes some day to be one of them. This theory explains some cross-country differences, but it would also predict increased support for redistribution as income inequality widens. Yet the opposite has happened in America, Britain and other rich countries where inequality has risen over the past 30 years.

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don't like to be at the bottom. One paradoxical consequence of this "last-place aversion" is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the "income distribution" that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of "last-place aversion", the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the "rich" but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

August 16, 2011

Marginal tax rates

I came across this interesting chart from Visualizing Economics that shows how marginal tax rates have varied over the last 100 years or so.

marginaltaxrates.png

August 10, 2011

Al Jazeera on income disparity in the US

A nice summary of the current state of affairs.

(Via reader Richard)

August 09, 2011

A new budget kabuki begins

The actual law that was passed in the wake of the debt ceiling deal is a very detailed and complicated 28-page document. Given that the deal was supposedly agreed upon on Sunday, July 31 and was passed by both chambers and signed into law just two days later, I am amazed at how such a complex legal document could have been prepared in such a short time, even allowing for the massive resources the government has at its disposal. Now that the dust seems to have settled on the debt ceiling deal, let's see what it says and what is likely to happen. As I said, it is quite complicated and I am not certain that I have all the details right.

It calls for immediate spending caps to be shared equally between defense and non-defense spending to reduce the deficit by $1 trillion over a ten-year period. The novel feature is that a new 12-person Joint Select Committee (popularly referred to as a 'Super Committee') has been charged with creating a plan to reduce the deficit by an additional $1.5 trillion over the decade covering fiscal years 2012 through 2021. The new committee will be made up of three Republican senators (appointed by the Senate Minority leader), three Democratic senators (appointed by the Senate Majority leader), three Republican members of the House of Representatives (appointed by the Speaker) and three Democratic House members (appointed by the House minority leader).

These 12 members are expected by November 23 to approve a plan by a simple majority vote. The two chambers of Congress and their committees can then debate this plan but cannot amend it or delay it. All they can do is vote to approve or reject the entire package, which they must do by December 23, just in time for Christmas, because nothing creates an air of holiday cheer more than enacting hardship on poor people. If a plan that cuts at least $1.2 trillion is not signed into law by the deadline, automatic cuts ('sequestration') of whatever amount is needed to reach $1.2 trillion goes into effect. According to the White House, the cuts would be such that "the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side."

This report by the Center for Budget and Policy Priorities explains in some detail what is involved in sequestration. The Center's head Robert Greenstein warns of the serious implications of this deal.

This plan sets up an interesting dynamic, so let's see how this might play out. I will follow my usual practice of predicting that the most cynical option, the one that benefits the oligarchy the most, will end up as the winner.

I think it is highly unlikely that the trigger of automatic spending cuts of $1.2 trillion will be allowed to go into effect, simply because the defense industry, an integral part of the oligarchy, will not allow cuts in those areas that can really save money, which are the enormously expensive weapons programs that are essentially a government subsidy to the defense industry. Defense Secretary Leon Panetta has already gone on board against any suggestion of this sort, calling it a 'doomsday mechanism' and he will fight it tooth and nail. When the time comes near, if the many wars that the US is involved in are going well (whatever that means), he will argue that it would be madness to cut military spending when we are so close to winning. If the wars are stalemated or going badly, he will argue that he needs more resources to turn things around. So I predict that the automatic cuts will not occur.

This means that the Super Committee has to come up with a plan that will reduce the deficit. They can do this by a mixture of raising revenues (mostly taxing the rich) or cutting expenses. Since the oligarchy wants their taxes further reduced, you can be sure that the Republicans will oppose any tax increases on the rich so that means that the $1.2 trillion deficit reduction will have to be reached using spending cuts, and this is where the assault on Social Security, Medicare, and Medicaid and other programs to protect the elderly and the poor will occur. All it takes is for one Democratic member out of the six to vote with the Republicans for the plan to get out of committee, and it is not hard to see that happening, with that person saying it was for the sake of 'bipartisanship' and to 'save the country'.

The rest of Congress with then be placed in the position of having to approve the entire plan or rejecting it and seeing the automatic cuts go into effect. Since cutting defense spending would go against the interests of the oligarchy, the Democratic party leadership will say they have no choice but to vote in favor of the plan, even though they dislike it. (In fact, this is why I think that the automatic cuts plan called for half to come from defense. It is there as a poison pill, so that it will never happen.) At the moment Nancy Pelosi says that her party will fight all cuts to entitlement benefits but her promises mean nothing. She and Harry Reid will agree to go along with the plan.

And while the White House says that the president "will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks", we already know what Obama's promises are worth on this score. After all, Panetta has already said that instead of defense, the cuts should come from Medicare and Social Security. He has made it clear that he is speaking not just on his own behalf but that Obama supports his views.

When it comes time to sign the final bill, Obama will once again do his patented regretful sighing act and say that while he would have liked to see taxes raised on the rich, for the sake of the country he will sign the bill.

So that is my prediction for the script for the latest kabuki drama that will unfold in the next six months. Of course, there are many other scenarios that can play out. I have picked the most cynical because that is usually the most accurate predictor of events.

As always, I would be delighted to be wrong.

July 28, 2011

How the US government's finances work

I have been on a crash course to try and understand the arcane details of what options are available if the current debt ceiling is reached with no action taken to raise it and the balance in the government's account actually becomes zero. I thought I would share what I have learned so far.

We tend to think of the US government as having a checking account, just like many of us, and of the debt ceiling like a loan given to us by a bank. This is mostly true, except in one significant way that I will get to below. This informative article by John Carney says that the government does have something that looks like a checking account in which all the money it receives continuously (tax receipts, air transport security fees, the postal service, Medicare premiums, etc.) is deposited and from which all its payments (federal employee salaries, income tax refunds, NASA, interest on our debt, unemployment insurance benefits and paying defense contracts) goes out. To get an idea of the scale of transactions in that account, at the beginning of last Friday, the account had $83 billion and during the day it received $7 billion in deposits and paid out $13 billion in withdrawals, leaving it at the end of the day with $77 billion. When the debt ceiling is raised, the balance of money available for use in that account is effectively increased by that amount.

Will not raising the debt ceiling actually result in the US government not being able to meet its obligations? If the US government's finances are really like our own checking accounts, it would seem that once the balance in the account reaches zero, we run out of money to spend and cannot write any more checks. If we do, they will bounce. That means that the government will have to make hard decisions about what obligations to meet and what to ignore, limiting its outlays only to the amount of money that comes in. And if it cannot meet all its obligations this way, it goes into bankruptcy.

But this is where the government differs from you and me, because the government has a really, really special relationship with its bank. The Federal Reserve Bank of New York is the place where the government's checking account resides. It appears that the government is not forced to stop paying any of its obligations even if the amount in that account becomes zero because when the government (i.e., the US Treasury Department) writes a check payable to someone who then deposits it in their own bank, the check works its way through the system and ultimately goes back to the Federal Reserve (the government's bank) for cashing and it is next to impossible that they will not honor a US government check and thus cause it to bounce. As Carney says:

It’s not clear that the Federal Reserve would be required to clear a check that exceeded the amount on deposit. It may be within its authority to reject the check.

But rejecting a check written by the government of the United States would probably violate the dual mandate of the Fed to pursue maximum employment and price stability. A U.S. government that bounced checks would just introduce so much chaos the Fed would likely be obligated by its core mandates to credit the check.

To restate it in personal finance terms, by honoring the check even if the balance in the account is zero, the Federal Reserve would be giving the US Treasury the equivalent of free overdraft privileges. This is similar to the way that some regular banks treat their best customers, confident that the money will be paid back in the future. Of course, banks can sometimes get nervous about the financial state of even the most seemingly sterling customers and shut down this overdraft privilege but it seems unlikely that the Federal Reserve would do that to the US Treasury except under the most catastrophic circumstances, such as the US government running completely amuck.

Notice that this would do something very odd. It would give the U.S. Treasury Department control of the money supply—something usually credited to the Fed. But by writing checks on an empty bank account, the Treasury would be inflating the money supply. It would be printing money to pay its bills, more or less.

So the Treasury cannot actually run out of money. It can only run out if it decides—that is, if Secretary Geithner and President Barack Obama choose—to stop writing checks sufficient to pay all of our obligations.

By a curious coincidence, the person who would write the checks (current US Treasury Secretary Timothy Geithner) was, before he took his current job, the head of the Federal Reserve Bank of New York, which is the US government's banker and would be the body that decides whether to honor the checks or not.

So how will the Federal Reserve honor the checks of the US Treasury if there is no money in that account? Ordinary banks, faced with such a situation where a valued customer writes a check that exceeds the money on deposit, can honor the check using the money it holds of other depositors or borrow money from other banks or the Federal Reserve. The Federal Reserve system also has deposits of other banks that it can use to honor the US Treasury checks but has an additional way of producing money that ordinary banks do no have. It can order the printing of money.

So default seems to not be the inevitable consequence of not raising the debt ceiling, which may explain why governments around the globe are not (as yet) panicking and stock markets are not (as yet) tumbling at the prospect of a US default. Maybe they understand these things better than we do or they don't understand but think that Congress will ultimately raise the ceiling before the deadline.

The legislation governing the US debt is called the Public Debt Act and was passed in 1941. As I understand it (and I may well be wrong), it forbids the US Treasury from going into debt higher than a limit set by Congress. i.e., the US Treasury is forbidden from selling (through the Federal Reserve) Treasury bills, notes, and bonds that would bring money into its checking account but increase its indebtedness above the debt limit, and from writing checks that would cause it to exceed the amount available to it in its account.

But what happens if the administration ignores the law and writes the checks anyway? It is not clear to me what recourse anyone would have to stop the Federal Reserve Bank of New York from granting the overdraft. Congress could go to court to try and stop it but the judiciary is generally reluctant to intervene in such disputes between the other two branches of government, seeing them as political matters to be resolved in the political arena. After all, Congress always has the power to impeach an administration that defies the laws it passes. But successive administrations have ignored Congressional laws in the past with no repercussions. Right now, the war being waged against Libya seems to be a clear violation of the War Powers Act and yet Congress is mute. It is not clear that violating the Public Debt Act law will cause Congress to do anything other than make a big noise.

Of course, what happens to the US's credit rating, interest rates, and the value of the dollar if this happens is something else altogether.

July 24, 2011

Jeffrey Sachs has become 'shrill'

I read the book The End of Poverty: Economic Possibilities for Our Time (2006) by Jeffrey Sachs, a professor of economics and director of the Earth Institute at Columbia, some time ago and much of it consisted of him jetting around the globe meeting with heads of state and helping them solve their economic problems. He put out the hopeful message that global poverty could be eradicated and as an establishment liberal working within the system, he was high profile and you would find articles by him and about him all over the place. Then a couple of years ago, he seemed to suddenly disappear from the op-ed pages of the major newspapers.

I think I now know why. Yesterday an opinion piece written by him appeared in the Huffington Post and reveals that he has come to the conclusion that the political system is inherently corrupt, with both parties serving the oligarchy (though he does not use that term) and guilty of swindling the public.

Here's a sample:

The Democrats of the White House and much of Congress have been less crude, but no less insidious, in their duplicity. Obama's campaign promise to "change Washington" looks like pure bait and switch. There has been no change, but rather more of the same: the Wall-Street-owned Democratic Party as we have come to know it. The idea that the Republicans are for the billionaires and the Democrats are for the common man is quaint but outdated. It's more accurate to say that the Republicans are for Big Oil while the Democrats are for Big Banks. That has been the case since the modern Democratic Party was re-created by Bill Clinton and Robert Rubin.

Thus, at every crucial opportunity, Obama has failed to stand up for the poor and middle class. He refused to tax the banks and hedge funds properly on their outlandish profits; he refused to limit in a serious way the bankers' mega-bonuses even when the bonuses were financed by taxpayer bailouts; and he even refused to stand up against extending the Bush tax cuts for the rich last December, though 60 percent of the electorate repeatedly and consistently demanded that the Bush tax cuts at the top should be ended. It's not hard to understand why. Obama and Democratic Party politicians rely on Wall Street and the super-rich for campaign contributions the same way that the Republicans rely on oil and coal. In America today, only the rich have political power.

Who runs America today? The rich and the multinational corporations. Who runs the White House? David Plouffe, whose job it is to make sure that ever word, every action of the president is calculated for electoral gain rather than the country's needs. Who runs the Congress, on both sides of the aisle? The lobbyists, who win in every negotiation. And who loses? The American people, who have said repeatedly that they want a budget that sharply cuts the military, ends the wars, raises taxes on the rich, protects the poor and the middle class, and invests in America's future not just in Obama's speeches but in fact.

That kind of view quickly gets you booted out of the mainstream media and government circles. Sachs now joins a growing number of former establishment intellectuals who are increasingly being described as 'shrill' because they express views outside that narrow slice of so-called respectable opinion that requires you to pretend as if the two parties represent widely divergent interests. They have seen through the charade of politics in the US and talk about where power really lies and that is simply not allowed.

July 21, 2011

The deficit reduction plan of the so-called 'Gang of Six'

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), issued a statement on the latest budget plan that Obama seems to be enthused about, although there is still some confusion about what the plan calls for since it is still in outline form. Baker's statement is worth reading in full but here is his conclusion:

The budget plan produced by the Senate's "Gang of Six" offers the promise of huge tax breaks for some of the wealthiest people in the country, while lowering Social Security benefits for retirees and the disabled.

It is striking that the Gang of Six chose to respond to the crisis created by the collapse of the housing bubble by developing a plan that will give even more money to top Wall Street executives and traders.

Obama seems to be actually proud that he is going along with the long-sought-after dream of the oligarchy to cut the safety net of older and poor people, saying that the plan is 'broadly consistent' with what he has been advocating, adding that "We have a Democratic President and administration that is prepared to sign a tough package that includes both spending cuts, modifications to Social Security, Medicaid and Medicare that would strengthen those systems and allow them to move forward, and would include a revenue component."

The wingnuts seem to be mobilizing against the plan too so it may not go anywhere.

July 20, 2011

The American family budget model

During any budget debate, politicians who want to cut spending on salaries and benefits for the middle classes and on public services never fail to invoke the family budget as a model for how the government should deal with its own finances. We are repeatedly told that just as families have to make hard choices about what to spend their money on in order to stay within their income, so should the government. This comparison invokes the cozy image of thrifty families getting together around the kitchen table and making decisions about what they can afford based on their income, and making painful cuts when necessary.

This is a fantasy, especially in America, a country in which the general public has a notoriously low savings rate and exists on credit card debt and has nowhere near enough money saved to meet their retirement needs. In fact, living beyond their income seems to be the norm in families, not the exception.

Actually there are good reasons for not trying to balance the budget right now. High unemployment is a huge problem right now. The devastating effects it could be ameliorated by government spending a lot of money on projects that put people back to work. While increasing the debt is not good as a permanent policy, there are times when it makes the most sense in the short term and this is one of them. Even families realize that going into debt to purchase a home or paying for college can be a good thing.

So in reality, the federal government's budgeting process is already like that of the average family. Just not in the way the moralizing speakers intend.

July 07, 2011

The facts about Social Security

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), exposes all the myths and lies about Social Security being in crisis and requiring a radical overhaul.

Fortunately, the program is fundamentally solid. While you can sound really smart in Washington by saying that Social Security is going bankrupt, the facts say the opposite. According to the Social Security trustees' report, if we did absolutely nothing the program could pay every penny of scheduled benefits through the year 2036.

Even if we never did anything, Social Security could always pay near 80 percent of scheduled benefits.

Social Security is a great program that does exactly what it was supposed to do. It provides a core retirement income as well as insurance against disability and support for survivors. It has extremely low administrative costs and little fraud. The only problem is the politicians who say they want to save it.

June 21, 2011

Robert Reich explains the current problems with the economy...

… in two minutes, 15 seconds. He does a nice job. His cartooning skills are pretty good, too.

June 20, 2011

Michael Lewis on The Colbert Report

Michael Lewis appeared on Stephen Colbert's show recently to discuss the financial crisis. I realize that this is a comedy show and that the humor is provided by Colbert using his guests as foils, but on occasion Colbert gets carried away and talks far too much. This was one of those episodes where he kept on interrupting Lewis and became really annoying. Lewis as a guest was interesting and amusing in his own right and Colbert was a nuisance and a distraction.

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The collapse of the Irish economy

Those following business news will have read that many European countries (Greece, Ireland, Portugal, Spain, and Italy) are facing financial crises and are looking for help from external sources. The causes of their predicament are drearily familiar: a banking sector that lent money recklessly on the basis of endless growth in real estate prices and now that that market collapsed, the big banks are demanding that governments must bail them out or that the entire financial system will collapse. It is exactly the kind of extortion that happens in the US. This is why the terms 'banksters', which was coined as an amalgam of bankers and gangsters during the time of the Great Depression, is so apropos in describing them.

Currently all eyes are on Greece but in an article for Vanity Fair titled When Irish Eyes Are Crying, Michael Lewis describes the spectacular rise, and even more spectacular fall, of the Irish economy. "What has occurred in Ireland since then is without precedent in economic history. By the start of the new millennium, the Irish poverty rate was under 6 percent and by 2006 Ireland was one of the richest countries in the world." And yet, within a few years, it had completely tanked.

An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.

In late 2006, the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent and climbing toward rates not experienced since the mid-1980s. Just a few years ago, Ireland was able to borrow money more cheaply than Germany; now, if it can borrow at all, it will be charged interest rates nearly 6 percent higher than Germany, another echo of a distant past. The Irish budget deficit—which three years ago was a surplus—is now 32 percent of its G.D.P., the highest by far in the history of the Eurozone. One credit-analysis firm has judged Ireland the third-most-likely country to default. Not quite as risky for the global investor as Venezuela, but riskier than Iraq. Distinctly Third World, in any case.

Ireland managed to collapse its banking sector without all the new fangled gimmickry of Wall Street with its derivatives and Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs). They lost money the old-fashioned way, with a classic bubble where they kept buying and selling each other real estate at escalating prices using easily available mortgages on the assumption that prices would continue to rise.

But unlike in the US where a homeowner is only liable for the value of the mortgage and thus can walk away from their home if its market value drops below the mortgage amount (a state known as being 'underwater' or 'upside down'), leaving the bank to get what it can from the foreclosed property, in Ireland you are forced to pay back to the bank what you owe. This means that the average person faces unavoidable large and inescapable debts.

Ireland’s 87 percent rate of home-ownership is among the highest in the world. There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it.

There is one major difference in what happened in Ireland and in the US. As Lewis says, "In America the banks went down, but the big shots in them still got rich; in Ireland the big shots went down with the banks."

But despite that one slightly positive aspect, the Irish banks are still draining the economy. In March, the Irish government said that they need another 24 billion euros to 'save' the banks, whose ratings have been reduced to junk status and the total cost of the bailouts keeps continually rising.

Currently Greece is in the headlines because of fears that it will default on its debts. I do not think this will happen because the banksters will demand that money be loaned to the Greek government so that it can then give it to the banks. Since these banks have global reach, they can exert pressure on the French and German governments to lend the Greek government the money. Of course, those governments will tell their people that this 'aid' is in order to save the European Union when it is really driven by the banksters' extortion.

June 14, 2011

Informative budget chart

cbppdeficit.jpgWith all the talk of the deficit and national debt, it is illustrative to see the chart that the Center for Budget and Policy Priorities has published that shows the source of the projected budget deficits.

The main sources are the Bush-Obama wars and the Bush-Obama tax cuts for the rich, not 'big government', as is claimed by those who want to use the deficit as an excuse to further reduce government services and, more importantly, reduce government oversight over business.

This should come as no surprise to those who follow the numbers but it is worth periodically reiterating.

June 12, 2011

Undermining Social Security

The oligarchy has had its greedy eyes on the Social Security trust fund for a long time, seeking to divert all those funds to Wall Street to goose up the stock market and enrich themselves with it. The problem is that people are rightly suspicious of efforts to tamper with their one secure source of retirement funds.

Since the Republicans have traditionally been seen as the servants of the oligarchy, people have quickly reacted when they make any moves to undermine Social Security, as George W. Bush painfully discovered in his second term. The oligarchy knows that they have a better chance when Democrats are in power, which is why we need to be especially vigilant and oppose the current moves by the Obama administration. The reduction in payroll tax contributions by employees that was part of Obama's budget deal at the end of 2010 was for me a sign that he was seeking to undermine Social Security by reducing its revenue stream, thus artificially creating a crisis where none should exist.

His latest proposal to give employers a similar reduction in their contribution to payroll taxes, thus further exacerbating the problem, is confirmation of the fact that he wants to set in motion the wheels to privatize Social Security.

We need to realize that Obama, although he may make some positive moves on some social issues dear to liberals, is barely distinguishable from the Republicans when it comes to being a servant of the oligarchy.

June 10, 2011

God and the stock market

In this article in the New York Times, one paragraph jumped out at me because it touched a nerve.

"On the one hand the markets want a deal," said Howard Gleckman, an editor and analyst at the Tax Policy Center, a joint effort of two centrist research organizations, the Urban Institute and the Brookings Institution. "On the other they don't want a deal that's going to send the economy back into recession."

I find it really annoying when people speak so glibly about what 'the markets' want and don't want. How could they possibly know? The stock markets involve millions of people trading billions of shares each day for all manner of reasons. The idea that one can look at the behavior of stock market indices and deduce what is causing it to behave in a particular way is ludicrous except in the case of major events (like the financial collapse) in which case almost anyone can assign cause without being a Wall Street market 'expert'. And yet these people do it on a daily, or even hourly, basis.

Bob Garfield of the radio show On The Media had a droll piece on this glib single factor analysis. (Note: The audio is wrong and different from the transcript. To hear the seven minutes audio report, click on the link below, and begin at the 24:50 minute mark.)

The way these analysts speak so confidently about something they cannot possibly know reminds me strongly of theologians who also speak confidently about the properties of god and what he wants, even though they have no idea either. The way that politicians try so hard to propitiate 'the market' by doing things that will raise the stock indices also reminds me of the way that religious people try to do things to please their inscrutable gods.

China treats Greece as a cheap labor market

I wrote earlier about how European companies now feel free to abuse US workers the way that US companies abuse workers in the less developed world. Now come reports that China has also turned the tables and Chinese companies are abusing European workers, as described in this story about the giant Chinese shipping company Cosco.

Cosco doesn't allow unions or collective bargaining among its 500-plus Greek workers. The unions report that Cosco workers are largely unskilled and working on a temporary basis, with no benefits. Despite persistent rumors about their labor conditions, until now no Cosco workers have spoken out to the media.

But a former Cosco worker, who had just been sacked, spoke to NPR about work conditions on the Chinese-run pier, on the condition that his name not be used. The worker says he regularly worked eight hours a day with no meal breaks and no toilet breaks.

"I think their actions are breaking the law," the worker said. "The rights are to have something to eat around 12 o'clock [and] to have our breaks, and not work like a dog straight [through] from morning till afternoon."

He says workers were told by supervisors to urinate into the sea, rather than taking toilet breaks. Those operating straddle carriers had to take cups up into their cabins to urinate into, and he says they were not given breaks, either, despite the clear dangers of operating at such a height for so long.

The worker says he was paid 600 euros a month — about 50 euros each shift — around half the salary at the neighboring Greek-operated pier, with no extra money for working night shifts or weekends. There was no set schedule; he was kept on 24-hour call for nine months.

The Greek government seems unwilling or unable to protest because it desperately needs Chinese investments. Greece is vulnerable because of its deep economic crisis caused by the same banking interests that caused the debacle in the US.

When you read of the moves to 'bail out' Greece by the European Union, keep in mind that what is being advocated is a bail out of the banks, since the bail out money will pass through the Greek government to the banks to make up for their losses.

The bankers rule the world and are driving a race to the bottom for the world's workers.

May 25, 2011

The US as Europe's slum

Last month I wrote about how the Swedish corporation IKEA became transformed from a model employer in Sweden to an abusive one in the US and that this was because the US does not provide the same level of protections for workers that Sweden does.

Harold Meyerson writes that IKEA is just one example of a trend in which foreign companies see the US as the new home for sweatshops. Deutsche Bank, for example, has been accused of becoming the largest slumlord in Los Angeles, doing things it could never have done in its home country of Germany.

But slumming in America is fast becoming a business model for some of Europe's leading companies, and they often do things here they would never think of doing at home. These companies — not banks, primarily, but such gold-plated European manufacturers as BMW, Daimler, Volkswagen and Siemens, and retailers such as IKEA — increasingly come to America (the South particularly) because labor is cheap and workers have no rights.

In their eyes, we're becoming the new China. Our labor costs may be a little higher, but we offer stronger intellectual property protections and far fewer strikes than our unruly Chinese comrades.

As a report released by Human Rights Watch late last year documents, companies that routinely welcome unions, pay middle-class wages and have workers' representatives on their corporate boards in Germany and Scandinavia have threatened their U.S.-based employees with permanent replacement by other workers as the penalty for protesting wage cuts (that was the German manufacturer Robert Bosch), ordered workers to report on fellow workers' pro-union activities (that was T-Mobile, a subsidiary of Deutsche Telekom) and disciplined workers who couldn't show up for unscheduled weekend shifts announced on Friday night (that was IKEA, according to a Los Angeles Times story).

In Germany, Robert Bosch, according to Human Rights Watch, has never threatened a single worker with losing his job for protesting wage cuts, and Deutsche Telekom repeatedly touts its “social partnership” with its union. In Sweden, IKEA, like the vast majority of Swedish companies, is unionized and affords its workers a range of rights and benefits that are all but unimaginable to American retail workers.

The advantage of the US over Asian countries as the site for sweatshops is the high levels of worker education and productivity here, coupled with the removal of worker protections and elimination of unions. So expect to see a rise in the future in low-level jobs with appalling conditions.

Meanwhile, this article lists 36 statistics that illustrate the steady decline of the American middle class. One telling indicator is the fierce competition for low-level jobs that were once considered temporary fall back positions, to fill time until something better came along. For example, when McDonalds ran its "National Hiring Day" on April 19, nearly one million people applied for 50,000 jobs.

May 24, 2011

Bitcoins

One of the dangers of the global financial system is that it gives far too much power to a few giants corporations which can choke off access to entities they do not like or which they think threaten oligarchic interests. For example, a few credit card companies now dominate and they can and will use their power to serve the coercive needs of governments. Recall how Visa and MasterCard banned transfer of contributions to WikiLeaks to serve US government interests, even though WikiLeaks has not been accused of any crime.

Enter bitcoins, a new peer-to-peer decentralized digital currency that seeks to bypass this system. Here's a brief video that explains how it works.

This Wikipedia page explains more about how it works. I can't say that I fully understand it yet. But it looks promising as a way of undermining financial monopoly power.

May 20, 2011

Probe into banks by New York Attorney General

The Attorney General of New York state has opened an investigation into the practice of mortgage loan packaging by the big banks and investment firms like Bank of America, Morgan Stanley, and Goldman Sachs. It was these practices that led to the real estate bubble and subsequent collapse.

This is a hopeful sign since we cannot expect the Obama administration's justice department to take any serious action since the White House has long been a wholly owned subsidiary of Wall Street.

Matt Taibbi, who has been relentless in driving this story forward, is cautiously hopeful that something meaningful might come out of this.

This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons. For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era.

The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free. There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done.

Such a desire to get some kind of deal done and sweep the mortgage mess under the rug once and for all seems almost universal among high-ranking politicians, and particularly in the Obama administration, which has acted throughout like it wants more than anything to simply get all of this over with and put in the past.

I am going to wait and see how this turns out. The oligarchy is going to close ranks and pull out all the stops to defend itself and preserve its privileges and get away with a plea deal that involves just a slap on the wrist and fine.

May 16, 2011

Matt Taibbi vs. Goldman Sachs

In an article in the May 26, 2011 issue Rolling Stone titled The People vs. Goldman Sachs, Matt Taibbi says that in a just world, a new Senate report should trigger a massive Justice Department investigation and criminal charges against the people in charge of the big financial companies, especially Goldman Sachs.

The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.

But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences.

Taibbi is, as always, able to make reporting about dry financial matters come alive and it is interesting to see how he does that. I think he succeeds because he couples knowledge of arcane details with not holding back when it comes to conjuring up vivid imagery and metaphors (and even profanity when warranted) to describe what is going on.

For example, to those who try to excuse the evidence of the bankers' greed as the kind of small missteps that anyone can make, he says:

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes.

On Goldman's strenuous efforts, once it realized that it was holding huge amounts of worthless assets, to find suckers to sell it off to and what they did after they forced the sale, he writes:

Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.

In describing the multiple ways that Goldman defrauded its own clients, the very people who were paying for its services, he says:

This is a little like getting an invoice from an interior decorator who, in addition to his fee for services, charges you $170 a roll for brand-name wallpaper he's actually buying off the back of a truck for $63.

To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it's betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.

Taibbi describes the tricks used by Goldman to get the highest AAA ratings for the junk securities on its hands that enabled them to be sold off to their dupes. They did this by taking the low-rated bonds from each pool and then ranking them again within that pool and giving the best the highest rating. And then repeating the process.

This is kind of like taking all the kids who were picked last to play volleyball in every gym class of every public school in the state, throwing them in a new gym, and pretending that the first 10 kids picked are varsity-level players. Then you take all the unpicked kids left over from that process, throw them in a gym with similar kids from all 50 states, and call the first 10 kids picked All-Americans.

Taibbi's article is well worth reading in full.

Will the Justice Department prosecute? Don't hold your breath. Starting with Bill Clinton, there has been a continuous bipartisan sellout to Wall Street and I don't expect anything more from Obama. What I predict will happen is that if the rest of the major media raise a fuss about this report (which itself has a low probability given the media's alliance with the oligarchy), then the Justice Department might be forced to look as if it is doing something. They will open a highly publicized investigation, then strike a deal with Goldman Sachs to have them pay a fine which will seem like a lot to us (say a few hundred million dollars) but will be peanuts to Goldman which will look on it as just the cost of doing business.

But no one will go to jail and there the matter will end.

The Lewin subcommittee's hearings figured prominently in the wonderful documentary Inside Job that I reviewed two weeks ago. The producers of that documentary received Academy Awards for it in February and what they said on that occasion pretty much sums up the corrupt nature of US politics.

May 15, 2011

Forcing foster children to shop at only second hand stores

The attempts to stigmatize the poor continue apace. I wrote earlier about the move to give welfare recipients their allocation via orange debit cards so that everyone would know they were on welfare. Now a Michigan legislator wants to ban foster children from using that state's $80 per year clothing allowance to buy any new clothing item. Instead the clothing vouchers could only be redeemed at second hand stores.

There is nothing intrinsically bad about buying used clothes or any other item. I would guess that almost all people have done so. It is the idea of forcing poor people to have only that option, that new things are too good for them and they do not deserve them, that makes me find such stories revolting. What kinds of people spend their time thinking up such things? Maybe they will next give poor people permits that allow them to get their food from dumpsters.

Everyone thinks they are in the middle class

One of the enduring puzzles is why so many poor and middle class people are so supportive of policies that benefit only the rich. The often cited reasons are that these people are either stupid or that they have a fantasy that they will be very rich someday and are protecting their future interests.

But via Kevin Drum, I heard about a new study that suggests another reason, which is that people have a highly distorted idea about where they themselves stand in the economic pecking order. The study asked people in Argentina in the ten income deciles to rank themselves as to which decile they thought they were in. "They found that everyone thought they were basically middle class. Poor people consistently overestimated their rank, and rich people consistently underestimated their rank."

Why is this? "The authors suggest that this misperception may be related to the types of people respondents interact with, and therefore use as a reference point. If you're mostly exposed to people earning about as much as you, you're likely to think your earnings are average."

The solution? Make people better aware of their true position. "In the Argentina study, for example, respondents were eventually informed about whether their own rankings estimates were too high or too low. This news changed people's policy attitudes. People who thought they were relatively richer than they actually were started to demand higher levels of income redistribution when told they were actually relatively poor."

These results are consistent with a study done in the US that I wrote about late last year which showed that people here think that wealth is more equitably distributed than it really is.

May 03, 2011

William Cohan on The Daily Show

He discusses his new book Money and Power: How Goldman Sachs Came to Rule the World. The title pretty much says it all.

Part 1 of the interview:

Part 2, where he really dishes the dirt:

Film review: Inside Job

I just watched the above documentary that was released in October 2010 and won the Academy Award for Best Documentary. Narrated by Matt Damon, it lays bare the story of the 2008 financial crisis. It shows clearly the way the financial oligarchy has taken control of the government irrespective of which party is in office and is using its power to greatly enrich itself.

Here's the film's trailer:

Most of the film focuses on the way that the crash went down, the whole sordid story in which big investment banks (which have done more to harm to the US and the world than any terrorist organization and of whom Goldman Sachs is the worst) used government deregulation, predatory mortgage lending, lax ratings agencies, practically nonexistent government oversight, and complex new financial instruments to create a Ponzi scheme in which a very few got rich and then when trouble hit were bailed out by the government.

(Almost all of this was covered in my 2008 multi-part series titled Brave New World of Finance, but the film provides a lot more details and tells the story with much greater power and clarity and impact.)

Towards the end, the film highlights something I did not dwell on and that is the cozy relationship between academic economists in elite universities (such as Glenn Hubbard, Laura Tyson, Martin Feldstein, Lawrence Summers, Frederic Mishkin, and others) and the government and giant Wall Street firms, with the former providing the high-toned rationales that influenced government policies that enabled the latter to fleece the country. While we rightly deplore those people in the medical profession who act as flacks for the health industry without disclosing their conflicts of interest, it is a scandal that strict ethical guidelines seem to not exist among university academics who can take huge fees from the financial giants to produce 'studies' and 'reports' that benefitted those who paid them, justified the measures that led to the disaster, and then walked away unscathed. Watch the chair of the Harvard economics department struggle and fail to explain why they do not have similar guidelines.

Some of those academic economists agreed to appear in the film, no doubt expecting to be given the usual softball treatment they receive from financial journalists and they become visibly uncomfortable and hostile as they get questioned on their own ethics. Glenn Hubbard, now dean of the Columbia Business School, is a case in point. As Charles Ferguson, the film's writer, director, and producer says in an NPR interview, "Well, the entire interview was fairly contentious, as you can imagine. It surprised me somewhat to realize that these people were not used to being challenged, that they'd never been questioned about this issue before. They clearly expected to be deferred to by me and I think by everybody." Watch the clip:

In an article, Ferguson writes:

Indeed, one of the most disturbing things I learned in making Inside Job, an issue discussed in the film, is that US universities do not require disclosure of financial conflicts of interest by faculty members, place no limits on the sources and size of professors’ outside income, and do not collect information on the size of this income.

Over the past 30 years, the economics discipline has been systematically subverted, in much the same way as American politics – by money, especially from the financial services industry. Many of the most prominent economists in America are now paid to testify in Congress, to serve on boards of directors, testify in antitrust cases and regulatory proceedings, and to give speeches to the companies and industries they study and write about with supposed objectivity. This is not a marginal activity; it is now an industry, run by a half dozen large companies.

Some prominent academics have close ties to financial services yet neither their university employers nor the journals in which they publish require them to disclose their conflicts of interest, their financial positions, or the relationship between their financial interests and the policy positions they take.

You can listen to an NPR interview with Ferguson about the making of the film, where he elaborates on how the system is corrupted.

What you find is that very prominent professors of economics, often people who have also held high government posts, are paid to testify in Congress. They are paid to be expert witnesses in both civil and criminal trials. They're often paid to write papers that praise the financial services industry and argue on behalf of deregulation of the industry. They make millions, in some cases tens of millions, of dollars doing this. And this is usually not disclosed. And in fact, university regulations do not require disclosure of these payments.

The film is well worth seeing. But be warned that it made me very angry and may make you too. And what will make you most angry is that none of these people in academia, government, and Wall Street are even being investigated for their actions, let alone in jail where they deserve to be. And if what they did was not technically illegal under current law, the law should be changed to make it illegal.

May 01, 2011

China to become the world's largest economy in 2016?

Reader Mark sent me this article that says that an IMF report predicts that in 2016, China will overtake the US as the world's largest economy. There is some dispute about this because economic measures are hard to quantify, especially when purchasing power is factored in, as is done here. But the disagreements center on the date of overtaking. There seems to be a consensus that China will overtake the US at some point in the fairly near future.

As one analyst explains, "What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That's very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages."

The article speculates on the psychological effects on the US public of losing its place as the worlds biggest economy, a position it has held for over a century. My feeling is that the people in the US already have the sense that they are rapidly losing ground economically and so this will not come as a shock. What will come as a shock is when the US is no longer the world's greatest military power. That will take longer to arrive since military power lags behind economic power.

April 30, 2011

Elizabeth Warren on The Daily Show

This fierce advocate for those of us who are not part of the oligarchy reveals the fights that are taking place behind the scenes to prevent the oligarchy from gutting the measures she has proposed to give ordinary people the tools to avoid being suckered by the big financial interests.

She points out how the system really works. When debates are held in the open, ordinary people tend to win because their case is so obviously just. So what the oligarchy and its allies in government do is utter bland generalities in public and move the actual policy making into the back alleys where they can stick the knife in unseen and then pretend that they did not know what was going on. The metaphor is apt because the oligarchy are truly gangsters just with better clothes and manners.

The interview is in three parts and well worth watching in full. The latter parts are prompted after the first one.

April 21, 2011

Shaming people for being poor

Sometime ago, in my series on how poor people have dignity too, I praised the recent adoption of debit cards instead of food coupons as a good way for them to purchase food without others knowing that they were down on their luck.

But some people want to deny even that minimal level of dignity and label the poor with a scarlet, or rather orange, letter. An Arizona Republican legislator wants the debit cards to be a bright orange color. Of course, his stated reason is to prevent 'fraud', that useful word that disguises hateful motives as noble ones.

April 17, 2011

Signs of things to come

Anyone who drives in Cleveland knows that the roads are in terrible shape, with potholes everywhere. One study says that forty-one percent of Cleveland-area highways and major roads are in poor or mediocre condition. It is estimated that "the nation's roads and bridges suffer from a funding shortfall of $134 billion to $194 billion annually, just to maintain present conditions."

It has become so bad that on my way to and from work, I have memorized which lane I should be in to for each stretch of road in order to minimize the severity of the bumps, though they cannot be entirely avoided. I see other cars, perhaps not as familiar as I am, suddenly swerving as they try to avoid holes.

Poorly maintained roads are just one sign of a community and nation that is running out of money to maintain basic services. It will be followed by less street lightning, dirtier streets, unkempt parks, and so on.

Soon all the people who demanded that their taxes be lowered will begin to complain about the terrible state things are in and demand that something be done. Without raising their taxes, of course.

April 14, 2011

Happy days are here again!

The Plain Dealer business section yesterday had two news items right next to each other. One was that luxury car sales in the region were up by more than 50% during the first quarter of 2011 and the other was that a local business that provides private jets to wealthy travelers quadrupled its first quarter sales when compared to last year.

It's nice to know that the tax cuts for the rich are paying off. All the people in the region who lost their jobs and homes due to the recession should be able to find plenty of jobs washing and cleaning the luxury cars and jets. That's how trickle-down economic theory works, no?

April 03, 2011

The 1% problem

Nobel prize-winning economist Joseph Stiglitz writes about the fact that the top 1% of wealthy people in the US now rule the country and are ruining it.

It's no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.

Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion's share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn't seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

Note that he does not ask if this state of affairs will cause riots in the streets in America like those occurring elsewhere in the world but when.

It is worth reading the whole thing.

March 20, 2011

How the rich avoid taxes

Brad Reed describes one of the means by which the the rich pay absurdly low taxes.

But of course, these things are of no concern to the people with the serf-like mentality who think that the rich should be able to game the system to pay as little taxes as possible. These people will probably argue that these poor rich people are forced to adopt such stratagems because their taxes are too high so the solution is to reduce their taxes even more.

March 13, 2011

Computers more likely to replace white collar workers

We tend to think that computers and automation will threaten only low-skilled workers. Paul Krugman argues that the opposite may be true, that the low-skill jobs that could be replaced have already been replaced, and that it is the high-skilled ones that are now at risk of elimination. It is actually harder to design computers to clean your house or take care of your garden than it is to do legal analysis.

Those middle-class people who have been misled into working against their own interests and supporting the oligarchy's assault on the social safety net and public services because they think it affects only other people may want to think carefully about that.

March 07, 2011

"America is not broke"

The message that is being drummed into our ears every day is that America is broke and that the middle class and the poor are the ones who must bear the pain of solving the problem, because we must never, ever, raise taxes, even on the very rich.

In a speech in Wisconsin in support of the unions, Michael Moore says what I have been saying for sometime, that the problem is not that America is broke but that a greedy oligarchy is looting the country's wealth.

"Let me say that again, and please someone in the mainstream media, just repeat this fact once. We're not greedy. We'll be happy to hear it just once. 400 obscenely wealthy individuals, 400 little Mubaraks, most of whom benefited in some way from the multi-trillion dollar taxpayer bailout of 2008 now have more cash, stock, and property than the assets of 155 million Americans combined.

The nation is not broke, my friends. There's lots of money to go around, lots, lots. It's just that those in charge have diverted that wealth into a deep well that sits in their well-guarded estates. They know. They know. They have committed crimes to make this happen."

As Jason Easley and Sarah Jones comment:

Moore did something brilliant. He shifted the narrative. Republicans want the Wisconsin story to be about the budget. Early on Democrats were focused on the issues of liberty and collective bargaining. Moore broadened the message and created a third narrative about how decades of pro-corporate and pro-wealthy economic policies have redistributed the nation’s wealth from the people to a small group of super-rich haves. This is the story that terrifies both conservative politicians and the network of billionaire wealth that owns them.

I am glad that someone of Moore's prominence is getting that message out. We cannot expect the Democratic Party leadership to do so since they are part of the oligarchy.

The truth about public sector pensions

Like most people, I had assumed that the shortfall in state public sector pension funds that is causing budget problems was because the states had not made sufficient contributions to the fund to met their promises. Paul Krugman says that he too bought that argument.

But a new study (pdf) by Dean Baker of the Center for Economic and Policy Research shows that the shortfall emerged only in 2007 and is largely due to the financial crisis. As Baker says:

Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been under-funded even before the market plunge, prior years of under-funding is not the main reason that pensions face difficulties now. Another $80 billion of the shortfall is the result of the fact that states have cutback their contributions as a result of the downturn.

In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal. The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.

So the idea that the problem is caused by generous retirement giveaways by state governments to greedy unions is simply false. This serves to remind me that I should not trust any conventional wisdom that aligns itself conveniently with oligarchic interests that control the propaganda apparatus but should always ask for the data.

March 04, 2011

And the government lurches on…

So Congress has passed and Obama has signed yet another continuing resolution to extend funding to keep the government running for another two weeks, until March 18, 2011. This is the fifth such extension. The previous ones provided stop-gap funding until December 3, then December 18, then December 21, and then March 4.

These ad-hoc actions are because Congress has still, six months into the fiscal year that began n October 1, 2010, not only not passed a budget but not passed even one of the twelve appropriation bills.

We will now be subjected to another tedious spectacle of wrangling as the March 18 deadline looms, which will likely result in another temporary extension.

How long will they keep kicking this can down the road? It is quite incredible that the world's biggest economy is being run like a struggling mom-and-pop store, not knowing whether it can pays its bills from week to week.

Complicating things is the fact that this not the only contentious budgetary issue. There is also the debt ceiling of $14.294 trillion which is now predicted to be reached some time in April or May. Expect to see another circus around that issue. There is no doubt that it will be raised (because the oligarchy will demand it) but it is an issue that allows for a lot of demagoguery and who can resist that?

March 01, 2011

The myth of the parasitic union

There is this odd notion that the public sector employees are living off the largesse of the rest of us, i.e., the taxpayers, and that they have used their union power to somehow pull a fast one. This is false. As David Cay Johnston points out, the pension benefits that unionized workers get is not something that is a gift to them from us. It is essentially deferred compensation that was negotiated with employers. In other words, part of the wages they were entitled to was deferred until their retirement.

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: "The Employer shall contribute on behalf of the employee." This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.

The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact.

NPR's All Things Considered had an interesting interview with Philip Dray, author of There is Power in a Union: The Epic Story of Labor in America in which he too debunks the idea of parasitic unions and points out that pension benefits were given to teachers to in lieu of immediate salary benefits or improvements in working conditions.

The workers are entirely funding their own pensions, health, and other benefits. It is the employers who reneged on the deal by not paying sufficiently into the retirement funds. That is like an employer arbitrarily holding back some of your salary and using it for other things.

Paul Krugman says that the focus is being placed on contributions to retirement plans to mislead people that public sector workers are a pampered lot compared to the private sector because the truth does not serve the desired ideological ends:

Why, then, are we hearing so much about the meaningless contribution comparison?

The answer is simple: it’s because doing the comparison right doesn’t yield the desired answer. The new report by the Times gets the same answer as other studies: low-paid government workers do a bit better than their private-sector counterparts, but others if anything do worse.

Luo and Cooper report this as a “mixed answer” — but in terms of the political debate, it’s a body blow to the union-bashers, whose whole position is that public-sector workers are welfare queens in Cadillacs. They need to show outrageous overpayment, not rough equivalence at best.

And so they turn to a meaningless comparison that, to the unwary, sounds as if it supports their case.

Yes, some public-sector workers are overpaid. So are some private-sector workers. Doesn’t anyone read Dilbert? But the whole idea that union excesses are at the core of state and local fiscal problems is false, and only deliberate obfuscation keeps that from being obvious.

Thomas Kochan, a professor of management at MIT's Sloan School says that when we take an evidence-based approach to such comparisons, we can arrive at solutions that are fair to every one.

The unions negotiated for their benefits fair and square. If not for the unions, all of us, unionized or not, would be far worse off.

February 28, 2011

How the big corporations avoid paying any taxes

Susie Madrak points out how the biggest corporations are avoiding paying any taxes while the federal and state governments are demanding that ordinary people pay more. She also highlights the movement USUncut that highlights the tax inequities and is based on a successful UK model.

A race of crocodiles

In Alexandre Dumas's novel The Count of Monte Cristo there is a scene were two men are being taken out for a public execution for crimes committed independently of each other. At the last minute, a pardon is received for one of the men. The other man, who had been resigned to his fate, becomes outraged and angrily demands to know why the other had been pardoned and not him, and insists that the other man must be executed as well and fights with his guards until he is killed.

On observing this scene, the Count notes the curious and deplorable psychology at work in humans where we seem to delight in dragging others down to our level, even if we do not benefit in any way by doing so. He tells his companions "Do you not see? that this human creature who is about to die is furious that his fellow-sufferer does not perish with him? and, were he able, he would rather tear him to pieces with his teeth and nails than let him enjoy the life he himself is about to be deprived of. Oh, man, man - race of crocodiles, how well do I recognize you there, and that at all times you are worthy of yourselves!"

I see something similar going on in the curious arguments that are being made against unions: they have greater job security, wages, and benefits than corresponding private sector employees and so they must be stripped of them. I will look at the evidence for this claim in a subsequent post and show that it is mixed and far from conclusive. For the moment I want to look at the psychology of people who would make such an argument. Rather than saying to themselves that they too should organize into unions so that they can receive comparable benefits, they seem to want to drag the unionized workers down to their level. Rather than seeing the union effort as a model for them to emulate to gain better conditions for themselves and their fellow workers, they seem to want to foist their own poor conditions on others. They are truly like crocodiles, dragging their prey under water with them.

Of course, no one actually says this because naked envy is an ugly and repulsive thing to behold. It is usually couched in high-minded language that unions are harming the country or the economy or a particular industry or that unions are somehow undermining the very moral fiber of the nation by enabling slackers to continue to be employed, thus setting a bad example. Phrased this way, the oligarchy and its lackeys in the media can seduce otherwise reasonable people into supporting the attack on unions, rather than taking their pitchforks to Wall Street at the very real swindles that are going on there and are impoverishing us all.

What makes this even more curious is that people are obsessed with the alleged slight benefits of those just like themselves. After all, people who work in unionized jobs are never rich or even upper middle class. Often they are members of the working poor and most are middle class. (And by middle class I really mean middle class, with family incomes around the median value of around $50,000, not the absurd definitions being tossed around nowadays that encompass even those earning around $200,000.) Why would anyone begrudge people at that income level their job security or heath or retirement benefits? If they have desirable conditions why aren't people seeking to expand those to everyone, instead of bringing them down?

The arguments that I hear against unions are very similar to the ones I hear in education. The performance of the US education system is mixed. It has some excellent features and some serious weaknesses. It is also a highly variable system, depending strongly on local factors. But whenever the US economy gets into trouble or the stock market tanks, the cry goes up amongst those opposed to the public school system that the fault lies with our awful public education system and that it needs to be revamped or even eliminated. But when the economy is doing well and the stock market is surging, does one hear praise for that same educational system? Of course not.

The same thing happens with unions. People are quick to blame them when things are bad but never praise them when things are good. Take the US auto industry, which has been going through some turmoil. The causes for the rise and fall (and now rise again?) of the US auto industry are many and intertwined. There are many reasons that can be listed as to why they have lost their dominance: bad management, poor planning and R&D, inadequate attention to consumer trends, poor quality control, protectionism by other nations, adverse international currency rates and tariffs, labor costs, and so on.

But people who are anti-union are quick to focus on labor costs and benefits as if they are the sole problem. But US wages in the auto sector are not that out of line with other countries with strong unions like Germany, and workers in Germany get far better benefits. One big difference is that every other industrialized nation has a national single-payer health care system, while in the US health care costs are borne by the company and contribute directly to the cost of each car produced. This is a major cost. As Robert J. Carbaugh writes in his book International Economics, this adds as much as $1,500 to the costs of a car made here.

When people focus on labor costs as the cause for an industry's decline and call for the elimination of unions they are, wittingly or unwittingly, enlisting as foot soldiers in the oligarchy's war to squeeze as much money as they can out of the government and the people for their own benefit.

Next: The myth of the parasitic union

February 24, 2011

Destroying the middle class by killing the unions

What is currently taking place in the US is a ruthless class war perpetrated by the oligarchy on everyone else. The pattern should be clear to anyone because the plan is being done at the federal level and repeated all across the nation at the state level: Cut taxes on the rich to create a budget 'crisis' and then use that to eliminate programs that benefit the poor and middle class. As a result we have cuts in wages and benefits, social services, education, regulatory agencies, and an all out war against labor unions, while the rich get richer.

One of the extraordinary features of contemporary American life is the willingness of so many people in the middle class to turn against their own class (and the poor) in the service of the oligarchy. The upper middle classes and many in the middle class support this assault because they do not realize that what the oligarchy is demanding of those below them in the socio-economic ladder is eventually going to destroy them too. Those professionals who smugly see themselves as people whose skills are so valuable that they can succeed on their own in the marketplace without the protection of collective bargaining and thus sneer at unionized workers as pampered and privileged and lazy, do not seem to realize that the reason they enjoy their privileged life and seeming autonomy is precisely because unionized workers laid down the foundation on which they could build their own careers.

Labor unions are what gave us so many of the basic rights we take for granted. Sam Smith lists some of the things that the labor movement in the United States led the struggles for and are significantly the result of labor union organizing and action:

  • The end of child labor
  • The right of workers to negotiate with their employers over wages, benefits and working conditions
  • The 8 hour work day and paid overtime
  • Compensation for workers injured on the job.
  • Unemployment insurance.
  • A minimum wage
  • Pensions
  • Healthcare insurance
  • Paid sick leave, vacations and holidays
  • Elimination of job discrimination by ethnicity, color, religion, sex or national origin
  • Family medical leave

People who have forgotten the long and often deadly struggle by unions for these things may think of the benefits we now have as somehow 'natural' that will remain even after unions are destroyed. But they are wrong. The oligarchy would like to return us to the days when management could demand any amount of work hours, eliminate workplace safety rules, cut salaries and benefits at will, and fire people for no cause.

Thus it has been heartening to see the solidarity amongst so many people in Wisconsin and Ohio who are demonstrating and occupying statehouses to show their opposition to these policies. We have seen some unions see through the divide-and-conquer strategy of the Wisconsin governor who sought to exempt the police and firefighters from his union-busting strategies. Those groups have joined the protestors, rightly recognizing that if the present assault on some unions succeeds, their unions might well be next.

In a weird way, the uprisings in the Middle East have helped their cause. Of course, we should not in any way compare the two kinds of protests since the people in the Middle East are actually risking their lives to overthrow decades-long repressive regimes. But what those other protests have done is make mass demonstrations seem heroic. If not for them, the American mainstream media, which is an arm of the oligarchy, would have been able to portray the labor protests in the US as 'lawless' and 'undemocratic'.

It is extraordinary that the political and media class acts as if there is no choice to solve the budget problems other than to cut wages and services that benefit the poor and middle class. There is an obvious alternative: Raise taxes, with the amount of the hike rising rapidly with income. Yes, tax the rich.

The tax giveaways for the rich in the latest tax deal that Obama and his congressional pals agreed to in December are truly obscene. They have snuck in goodies to benefit the very rich in all kinds of places. As just one example, it is only rich people for whom it is worthwhile to itemize their deductions in Schedule A. Most people claim the standard deduction of $5,700 while the rich can claim very much more. But at least in the past, some limits on Schedule A deductions started to get phased in for those people with incomes over a high amount ($166,800 for married couples filing jointly in 2009). But this year even those limitations have been removed, even though the only people who benefit are those who do not need more money in the first place. No wonder we have budget deficits. If one needed to point to one symbol that clearly demonstrates that the rich are determined to contribute as little as possible to the government while squeezing as much as they can out of it, the elimination of the Schedule A limits is it.

What is extraordinary is that there will be some people (even those who are nowhere close to being wealthy) who protest my post, saying that the rich have 'earned' every cent they get and are thus 'entitled' to keep as much as they want and that the government is essentially 'robbing' them of the fruits of their labor by taxing them at all. They do not see that the entire system is rigged to create a self-perpetuating oligarchy.

Such people have essentially a feudal mentality, a serf-like admiration of the wealthy, and contempt for people in their own class. All that is missing is their willingness to bow down and touch their forelocks as the wealthy drive by in their limousines.

February 23, 2011

Matt Taibbi on financial corruption

Matt Taibbi makes a point in an article in the latest issue of Rolling Stone whose title says it all: Why Isn't Wall Street in Jail?. The article says that, "financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them." One of the sources for Taibbi's story sum up the situation succinctly:

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's f----- up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's f----- up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail.

This immunity shows how deeply the White House and Congress are in cahoots with the financial sector to steal from all the rest of us.

Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

When a society creates a class of people who think they are above the law and immune from any consequences for their actions, that society is doomed. We already have the spectacle of people in the US who are not prosecuted for crimes committed in the so-called 'war on terror', even gross violations such as torture. As a result, its political leaders risk becoming international fugitives.

The immunity that major financial firms and individuals now feel they have as a result of the power they have over political leaders is going to result in further financial crises.

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-a-- prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is f----- up.

The Taibbi piece is long but well worth reading for those interested in the state of the world economy. He describes how the financial sector is supposed to work to benefit the overall economy and how all the checks and balances have been grossly subverted to enable the looting.

In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street A---hole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the A--hole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.

That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power.

Unless Americans become more aware of this and demand punishment for corporate crimes instead of obsessing about political trivialities, we are doomed.

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

The story Taibbi tells is an absorbing yet sickening one. He names names. If you had any doubts at all that the US is run by a corrupt oligarchy of financial and political insiders who have nothing but contempt for laws and the ordinary people who are ruined by their actions, this article should dispel them.

February 19, 2011

Why means testing of Social Security benefits is a bad idea

One of the ideas being floated around is to 'means test' Social Security benefits. i.e., to base benefits on income and wealth. Kevin Drum explains why this is already being done at some level by the way benefits are calculated and why it would be a pointless exercise to pursue any further.

Paul Krugman also makes an important point about keeping our language on benefits clear. Using the umbrella term 'entitlements' in budget debates is meaningless because the economics of Social Security is quite different from Medicaid and Medicare.

February 17, 2011

Who holds the national debt?

As discussions about the budget and the national debt take center stage, it is interesting to see to whom the US government actually owes money.

Contrary to popular belief, China is not our biggest creditor. 53% of the US debt is owed to Americans and American institutions, with China coming second with just 9.8%, Japan a close third with 9.6%, and the UK next with 5.1%. All the oil-exporting countries hold just 2.6% of the national debt.

February 15, 2011

The latest budget

The White House has released the president's proposed budget for 2011-2012. Given that we still don't have a budget for the 2010-2011 fiscal year that began on October 1, 2010 and are operating on continuing resolutions, it is not clear that this budget should be taken seriously.

But the New York Times has put together a very nice interactive graphic that breaks down the president's proposals.

February 08, 2011

The need for oversight of the Fed

In yesterday's post, I discussed the origins of the Federal Reserve System. In an interview, Jane D'Arista, who served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives and as a principal analyst in the international division of the Congressional Budget Office, explains what is wrong with the current Fed system and how it came to be dominated by private banking interests.

Congressman Ron Paul and Senator Bernie Sanders (I-Vermont) have been pushing for the Fed be 'audited', i.e., that the books of the Federal Reserve be opened for public scrutiny, and as a result of their efforts the recent Wall Street reform bill has provisions that open a window into how the Fed operates. It has forced the Fed to reveal, for the first time, its own role in the emergency bailout of 2008.

Matt Taibbi discusses what has been revealed. It is the usual story of the oligarchy looting the public treasury.

The audit of the Fed was undertaken because Bernie and a few other members of congress fought very hard during the Dodd-Frank regulatory reform debate to force open Ben Bernanke’s books, and as a result we now know the staggering details of the secret bailout era. We know that Citigroup received $1.6 trillion in loans, and Morgan Stanley $2 trillion, and Goldman Sachs – the same Goldman Sachs that bragged about how quickly it paid back its $10 billion TARP bailout – over $600 billion. We know that hedge fund billionaires who moved their corporate addresses to the Cayman Islands to avoid U.S. taxes were rewarded by their buddies in government with huge Fed loans; we know that the U.S. government likewise has been extending massive loans to a variety of Japanese car companies at a time when many American auto workers in Detroit have seen their wages cut in half, to $14 an hour. There’s that and there’s more on the outrage front, and we know it all because Sanders kicked and screamed and stamped his feet about Fed secrecy until just enough other members of the Senate decided to go along with him.

Financial analyst Pam Martens points out what a major role the Fed played in bailing out the big financial institutions, showing the power of the oligarchy. Behind closed doors, the Fed shoveled out $ 9 trillion of taxpayer money to private financial institution, far exceeding the publicly revealed amounts. She warns us to expect more revelations in the coming months.

A careful review of these data makes it highly likely the GAO will be releasing some startling findings come next July 2011. That’s when the American people will have a much clearer picture of how the Federal Reserve shoveled taxpayer money to Wall Street by the trillions. As a result of Senator Sanders’ legislative efforts, the Government Accountability Office (GAO) is to complete an audit by next summer of the Fed’s lending programs during the financial crisis.

The data starkly show a comatose Wall Street being resuscitated with whatever financial might the Federal Reserve could pump into its tangled web of funding vehicles. It also points to how the Fed was dispersing sums which dwarfed the U.S. Treasury’s $700 billion TARP (Troubled Asset Relief Program) bailout program while allowing the TARP to take the media heat for obscene funding of Wall Street.

Martens describes the incestuous relationships between the White House, the Fed and the financial sector, all working behind the scenes and using taxpayer money to benefit themselves. All the financial shenanigans that caused the crisis were due to these financial institutions finagling their assets to get record profits on paper that in turn resulted in their top executives getting huge remunerations and bonus packages. And when the system crashed, the Fed and the government bailed them out so that now they are still paying themselves huge bonuses while unemployment seems to be at 10% (officially) and 20% (unofficially) for the indefinite future.

The Fed was not bailing out not just US banks but banks worldwide, leading Sanders to ask, "Has the Federal Reserve Become the Central Bank of the world?"

When AIG was bailed out out in Sept. 2008 and immediately passed on huge sums to overseas counterparties, including Société Générale (France) and Deutsche Bank (Germany), there was a public uproar. The Fed data out today confirms what many suspected. This back-door bailout of foreign banks was just the tip of the iceberg. The Fed data covers 13 programs amounting to some $3.3 trillion in loans. We could only look at a few, but in every program examined, foreign banks were huge beneficiaries of a taxpayer-funded lifeline.

To see how far things are out of whack, if you ask anyone on the street how the economy is they will likely say it is terrible. Almost all of us are aware of people who are out of work and see little hope of finding anything soon. The rate of new job creation is terrible. Houses are being foreclosed and food banks are finding it hard to meet the demand. And yet, the stock market has soared since the 2008 crisis. All these are signs of an economy that is careering out of control.

February 07, 2011

The secretive fourth branch of government

As every child learns in their social studies class, there are three branches of the US government, the executive, legislative, and the judiciary. But there is another quasi-government agency that operates behind a veil of secrecy and yet wields enormous influence over the US economy (and thus indirectly the world economy) and deserves to be considered as a fourth branch. This is the Federal Reserve system of the US, commonly referred to as the Fed.

The way the Fed works is by controlling the money supply and setting interest rates. It currently does so independently of the executive and legislative branches of the government.

Before the Fed came into being in 1913, each bank printed its own money and the system was unstable with crash after crash. Legislation was passed to create the Federal Reserve Board of Governors and twelve regional Federal Reserve Banks. The Fed was created to function fairly autonomously so that monetary policy would not be dictated by political whims. After all, when political leaders have the power to print money, we have seen in history how that has been abused to cover reckless expenditures resulting in runaway inflation and the eventual downfall of governments, not to mention immense hardship for people as the value of their savings disappear.

Although the US president appoints (subject to Congressional approval) the seven members of the Federal Reserve Board and also who serve as chair and vice-chair, they are usually people from or friendly to the commercial banking sector. Ben Bernanke is the current chair. The twelve regional Federal Reserve Banks across the country have nine-member boards and a president appointed by the banking sector, which results in the current quasi-public, quasi-private system. The body that sets monetary policy is the Federal Open Markets Committee that consists of the full seven members of the Federal Reserve Board of Governors and the twelve regional bank presidents, although only five of the latter twelve are voting members of this committee at any given time.

While an argument can be made for insulating the Fed at least partially from political pressure, there is little reason for allowing its workings to be secret. There is no reason why the Fed, an agency that is ultimately responsible to the people, should be allowed to do what it wants without public scrutiny. In fact, the Fed was created by an act of Congress and Congress only delegated to it the right to make these kinds of financial decisions. The Fed is an agency of Congress and thus subject to oversight but over time, Congress has abdicated that oversight role and left the Fed to pretty much serve the interests of the financial sector. This should not be surprising considering that the financial sector pours money into the coffers of congressional members to make sure they are friendly to it.

Congressman Ron Paul (R-Texas) has long been a critic of the Fed and would like to see it eliminated. He believes that despite its relative autonomy, the Fed's ability to print money still leads to reckless spending. As part of his efforts at fiscal reform, he wants to return the US to a time when its currency was based on the gold and silver standard, where those precious metals would be the ultimate currency and the US dollar would have a fixed value with respect to an ounce of those metals. This would restrict the amount of dollars in circulation to the amount of gold and silver that the US government owns, since anyone would have the right to demand that the government exchange their dollars for gold or silver at that fixed rate.

The US, as part of the Bretton Woods international system of currency rates created after World War II, used to have such a system where gold had the fixed value of $35 per ounce, but in 1971 President Nixon abandoned the system. At that time, the Vietnam war was creating huge budget deficits that were financed by government borrowing substantially funded by foreign governments, which meant that the US no longer had enough gold to cover its obligations. As other countries sensed this deficiency, they demanded gold for their dollars and US gold reserves dropped to dangerously low levels so Nixon abruptly announced that the US was leaving the gold standard. (The plot of the 1964 James Bond film Goldfinger, based on Ian Fleming's 1959 novel, centered on the villain trying to irradiate the US gold reserves in Fort Knox thus making them useless as currency.)

Ever since the de-linking of the US dollar to the gold standard, the price of gold has fluctuated with the current price being around $1350 per ounce.

Ron Paul thinks that the Fed should be abolished and Stephen Colbert comments on this idea.

The Colbert ReportMon - Thurs 11:30pm / 10:30c
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Colbert Report Full EpisodesPolitical Humor & Satire Blog</a>March to Keep Fear Alive

Stephen Colbert also has Ron Paul debate Davis Leonhardt on whether going back to the gold standard iis a good idea. The 'debate' is not very informative, though.

The Colbert ReportMon - Thurs 11:30pm / 10:30c
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The idea of whether the US should go back to the gold standard is a little too much into the economic weeds for me. My initial reaction is to be skeptical of it although I really do not have the expertise to judge. The idea of a monetary system being based on the supply of mineral ores that are scattered unevenly across the globe and unrelated to any economic system seems a bit weird to me.

Next: Efforts to increase oversight of the Fed.

January 09, 2011

Our banking overlords get a rare setback

Recall all the speculation in housing that resulted in the crash that is currently causing large numbers of people to be foreclosed upon? That was due to mortgages being bundled together into huge slabs, sliced into small packages that were called SIVs (Structured or Special Investment Vehicles) and then traded like stock. (I did a series of posts explaining this debacle back in 2008 and the specific ones that dealt with this topic are #7 and #8.)

The result of this practice was that ownership of mortgages was diversified and it became unclear as to who the actual owner of any given property was, which enabled them to deny any responsibility for the upkeep of abandoned property as required by local ordinances. The blight on neighborhoods caused by this evasiveness was so bad that a Cleveland housing court judge got fed up and started levying penalties on whichever entity he could hold responsible.

But when it comes to selling off properties, the banks are not shy of claiming ownership. It turns out that banks, the very organizations that were instrumental in the crash, are now foreclosing on, and selling off, people's property without proper documentation showing that they own the property. They decided they could just manufacture documents to show ownership.

Last fall, the banking industry's foreclosure machine came under intense scrutiny with revelations that low-level employees called "robo signers" powered through hundreds of foreclosure affidavits a day without verifying a single sentence. At the time, analysts warned that the banks' allegedly fraudulent document procedures could imperil their ability to prove that they owned the mortgages.

The Massachusetts State Supreme Court on Friday upheld a housing court judge's ruling in that state that ordered a halt to two foreclosures unless the banks can properly documented their ownership. The history of that case can be read here.

To you and me, this would seem a perfectly reasonable requirement: you should not be able to sell something that you cannot prove that you own. But we live in a country in which banks have got used to thinking that normal rules don't apply to them and these perfectly reasonable court rulings are being greeted with shock by the banking sector.

If this ruling is repeated in other states I wonder how long will it be before the banks demand of the Congressional and presidential clients that they pass special measures exempting them from the tedious business of carefully maintaining records that prove ownership?

November 30, 2010

The history of 200 countries over 200 years in just four minutes

Hans Rosling has a knack for making statistics come alive. (via Pharyngula)

November 02, 2010

Foolish spending as a survival strategy

In The Road to Wigan Pier, George Orwell argues that it would actually not be a good idea for the poor to budget carefully to eat healthily because if they did and actually started to look healthy, the government would think they were getting too much aid and would reduce it. He writes:

I doubt, however, whether the unemployed would ultimately benefit if they learned to spend their money more economically. For it is only the fact that they are not economical that keeps their allowances so high. An Englishman on the P.A.C. gets fifteen shillings a week because fifteen shillings is the smallest sum on which he can conceivably keep alive. If he were, say, an Indian or Japanese coolie, who can live on rice and onions, he wouldn't get fifteen shillings a week--he would be lucky if he got fifteen shillings a month. Our unemployment allowances, miserable though they are, are framed to suit a population with very high standards and not much notion of economy. If the unemployed learned to be better managers they would be visibly better off, and I fancy it would not be long before the dole was docked correspondingly.

It is not always simply the case that lazy people become poor but that poor people need to be 'lazy' in order to survive. Examples of this abound. We all know that despite his idealistic rhetoric, Thomas Jefferson owned slaves. He was also a scientific thinker and innovator and constantly devising ways to do things better. Some time ago I read (though I cannot track down the source now) that he once devised a scheme by which his slaves on his estate could more efficiently harvest his crops. But he was frustrated by the seeming inability of his slaves to understand and implement his new system and abandoned it in frustration, blaming it on the incapacity of the slaves to understand his modern methods or to change their ways of doing things. But in actual fact, the slaves quickly realized that if the male slaves adopted his new methods, the female slaves (often their wives) would have to haul much more stuff each day, making them more exhausted. So the slaves essentially sabotaged the project by acting dumb and uncomprehending. It does not surprise me in the least to find that people in mindless, low-paying, dead-end, physically exhausting jobs find ways to make sure that less is expected of them, even if it means that their bosses think they are stupid.

Some readers may think that Orwell is being somewhat too cynical here in thinking that if the poor did take the lectures about their allegedly thriftless behavior seriously and acted strictly according to those prescriptions and lived better lives, this would be used to cut their benefits. If you think that the desire to cut the benefits of the poor in this way existed only in the past, think again. Unlike in the case of wars or tax cuts or corporate bailouts, when it comes to providing benefits to ordinary people, the administration and Congress become very frugal about spending, demanding that spending increases in one area be balanced by cuts ("offsets") in others.

In a recent interview, retiring congressman David Obey, one of the few decent people in that institution, had this revelation about how the Obama administration doesn't really give a damn about poor people:

We were told we have to offset every damn dime of [new teacher spending]. Well, it ain’t easy to find offsets, and with all due respect to the administration their first suggestion for offsets was to cut food stamps. Now they were careful not to make an official budget request, because they didn’t want to take the political heat for it, but that was the first trial balloon they sent down here… Their line of argument was, well, the cost of food relative to what we thought it would be has come down, so people on food stamps are getting a pretty good deal in comparison to what we thought they were going to get. Well isn’t that nice. Some poor bastard is going to get a break for a change. (My emphasis)

In the end, $12 billion was cut from the food stamps allocation, now known as SNAP (Supplemental Nutrition Assistance Program), to fund teacher jobs and Medicaid, and more cuts in SNAP are being demanded to offset funding Michelle Obama's child nutrition proposal. As I have written before, it is when the Democrats are in power that the oligarchy can cut holes in the safety nets for the poor.

It is a curious fact that the government and well-to-do people seem to want the poor to be visibly poor and miserable. Even now, observe the annoyance with which some people criticize poor people for owning 'luxuries'. In days gone by, people would point to the ownership of color TVs to argue that the poor were not really poor. Since you can only get color TVs now, cell-phones have become the new symbol of profligacy. In actual fact, cell phones make much more sense for people who are constantly at risk of being evicted from their homes or have to move regularly in search of scarce jobs. In Sri Lanka, for example, cell phones have been a boon to the poor. It is the working poor, the street vendors and shade-tree mechanics and handymen and taxi drivers who all own cell phones because it provides them the means to better conduct their businesses. Landlines are luxury items, reserved for people who have stable places of work and residence. This recent Associated Press article says that in the slums of Mumbai, India, people have more access to cell phones than to toilets. While there is not a single toilet or latrine for 10,000 people, each household has at least one cell phone.

It is truly disgusting when rich people resent any small benefit that poor people get. It is bad enough to be poor. Why do we demand that they must also be permanently miserable? Why do we resent poor people getting whatever small pleasures that life affords them? There is a nice quote in James Boswell's Life of Samuel Johnson about Johnson's attitude towards the poor:

Dr. Johnson… was not contented with giving them relief, he wished to add also indulgence. He loved the poor… as I never yet saw any one else do, with an earnest desire to make them happy. What signifies, says some one, giving halfpence to common beggars? they only lay it out in gin and tobacco. "And why should they be denied such sweeteners of their existence (says Johnson)? it is surely very savage to refuse them every possible avenue to pleasure, reckoned too coarse for our own acceptance. Life is a pill which none of us can bear to swallow without gilding; yet for the poor we delight in stripping it still barer, and are not ashamed to show even visible displeasure, if ever the bitter taste is taken from their mouths." (My italics)

The philosopher Thomas Hobbes in his book Leviathan (1651) spoke of the life of humans as being "solitary, poor, nasty, brutish, and short." This is why religion, with its fiction of a happy afterlife, has such a seductive appeal for those who live miserable lives here. But those of us who realize that there is no afterlife to redress the balance need to pursue policies that ensure that the lives of people in this world, the only life they have, affords them at least some pleasures, not just survival.

My late mother was an inveterate do-gooder. At Christmas time she would organize a party for the poor children from the neighborhood, with gifts of toys and nice clothes and cake and other fancy foods. It could be argued that the same money could have been better spent providing the malnourished children with more nutritious meals for a longer time. But my mother had a good instinct for what people needed and, like Samuel Johnson, realized that we all benefit from some luxuries as we go through life.

November 01, 2010

Understanding the 'bad' choices of poor people

In The Road to Wigan Pier, George Orwell writes in chapter 6 about how government and social service agencies calculate carefully how much money should be given as public assistance to be sufficient, with careful budgeting, to purchase enough wholesome food to meet their nutritional needs. However, the actual choices of the poor, with its outlays on alcohol, tobacco and sweets, would appall social workers. These better-off people would scold the miners and their families for wasting their money on what should be considered luxuries, when their basic nutritional needs were not being taken care of first.

Orwell writes that there is something unseemly about well-fed, well-to-do people calculating with such zeal so precisely the absolute minimum amount that people need to eat to stay alive.

When the dispute over the Means Test was in progress there was a disgusting public wrangle about the minimum weekly sum on which a human being could keep alive. So far as I remember, one school of dietitians worked it out at five [shillings] and ninepence, while another school, more generous, put it at five and ninepence halfpenny. After this there were letters to the papers from a number of people who claimed to be feeding themselves on four shillings a week.

Orwell examined the food budget of one exemplar of frugality who claimed that he could eat nutritiously on just four shillings, even less that the public assistance allowance.

Please notice that this budget contains nothing for fuel. In fact, the writer explicitly stated that he could not afford to buy fuel and ate all his food raw. Whether the letter was genuine or a hoax does not matter at the moment. What I think will be admitted is that this list represents about as wise an expenditure as could be contrived; if you had to live on three and elevenpence halfpenny a week, you could hardly extract more food-value from it than that. So perhaps it is possible to feed yourself adequately on the P.A.C. allowance if you concentrate on essential foodstuffs; but not otherwise.

Orwell points out that how the poor people that he lived with actually spend their money bears little resemblance to this budget.

Now compare this list with the unemployed miner's budget that I gave earlier. The miner's family spend only tenpence a week on green vegetables and tenpence half-penny on milk (remember that one of them is a child less than three years old), and nothing on fruit; but they spend one and nine on sugar (about eight pounds of sugar, that is) and a shilling on tea. The half-crown spent on meat might represent a small joint and the materials for a stew; probably as often as not it would represent four or five tins of bully beef. The basis of their diet, therefore, is white bread and margarine, corned beef, sugared tea, and potatoes--an appalling diet.

Orwell then gets to the crux of the matter of why people behave like this and it is not because they are stupid or ignorant or lack character, which are the usual reasons that well-to-do people assign to this seemingly inexplicable self-destructive behavior.

Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread or if they even, like the writer of the letter to the New Statesman, saved on fuel and ate their carrots raw? Yes, it would, but the point is that no ordinary human being is ever going to do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots. And the peculiar evil is this, that the less money you have, the less inclined you feel to spend it on wholesome food. A millionaire may enjoy breakfasting off orange juice and Ryvita biscuits; an unemployed man doesn't. Here the tendency of which I spoke at the end of the last chapter comes into play. When you are unemployed, which is to say when you are underfed, harassed, bored, and miserable, you don't want to eat dull wholesome food. You want something a little bit 'tasty'. There is always some cheaply pleasant thing to tempt you. Let's have threepennorth of chips! Run out and buy us a twopenny ice-cream! Put the kettle on and we'll all have a nice cup of tea! That is how your mind works when you are at the P.A.C. level. White bread-and-marg and sugared tea don't nourish you to any extent, but they are nicer (at least most people think so) than brown bread-and-dripping and cold water. Unemployment is an endless misery that has got to be constantly palliated, and especially with tea, the Englishman's opium. A cup of tea or even an aspirin is much better as a temporary stimulant than a crust of brown bread. (my italics)

But there are yet more factors at play that push poor people into making 'bad' choices. In the next (and last) post in this series, Orwell argues that the very act of calculating how much people need to live on in order to give them the minimum required to subsist, actually makes it a good strategy for the poor to be somewhat thriftless in the behavior.

October 29, 2010

Counting calories for the poor

Because people have such negative prejudices about the poor and unemployed as being lazy good-for-nothings who are trying to live off the fruits of other people's hard work, they pay unusually close attention to prevent cheating and fraud by the poor. This explains why some people get more worked up by stories of petty fraud by poor people than by huge corporations and rich people carrying out massive swindles that have a far greater negative impact on almost all of us. People will rail about welfare cheats or workers in the cash economy not reporting all their incomes and thus paying less tax, while ignoring the tax sheltering schemes of the rich.

This is because well-to-do people are making a moral judgment, not an economic one. They think that poor people are somehow inferior in character and their misdeeds are thus seen as springing from character weaknesses, not economic calculation. It is the same mentality that results in society punishing the crimes of poor people proportionately more harshly than those of rich people.

There is also a whole industry devoted to the enterprise of determining exactly how much money people need to live on to meet their most basic needs. This is not an unreasonable exercise for governments to carry out in order to determine the size of the welfare benefits it should provide to make sure that people can survive ill health or the loss of jobs or other personal misfortunes that prevent them from earning a living. But what irks me is that the same government that is so careful with tax money when it comes to allocating resources to the poor spends like a drunken sailor when it comes to the needs of Wall Street or the military or tax cuts for the rich. If they paid as much attention to prevent waste and tax fraud and other forms of cheating in the defense budgets and in corporate sector, they would likely save a lot more money.

What is objectionable is the way people pass moral judgments and lecture poor people on what they should do with their welfare benefits. Some people seem to feel that just because our tax dollars are going to pay for poor people's food stamps, we have earned the right to criticize other their food choices in ways that we would not dream of doing for anyone else. For example, welfare recipients are often at the receiving end of openly disapproving looks, comments, and other negative judgments about their purchases if they happen to use food stamps to buy foods (like cakes and doughnuts or soda) that are eligible but are perceived as luxuries and not wholesome. New York City mayor Michael Bloomberg is even proposing a ban on the use of food stamps to purchase soft drinks.

One of the good changes that happened recently is that food stamps are no longer in coupon form but are now debit cards that can be swiped in cash registers. While this makes for more efficiency in the system, what I like most about it is that it makes it hard for anyone other than the cashier to know if people are purchasing items using food stamps, and thus restores a small measure of dignity to people who might be embarrassed to reveal that they are down on their luck.

Being poor leads to behavior that can seem irrational and inexplicable to the casual observer who is not poor. In The Road to Wigan Pier, his masterful examination of the lives of poor mining families in the north of England written after living with those families, George Orwell described how despite having incomes or unemployment benefits so low that they could barely subsist, the families would still 'waste' their money on frivolities like beer and cigarettes and sweets, leaving them with less money for more wholesome fresh fruits and vegetables. These choices led to them being malnourished.

But such poor choices are not caused exclusively by stupidity or failures of character. In chapter 5, Orwell explains how market pricing systems drive people towards making bad nutritional decisions.

Trade since the war has had to adjust itself to meet the demands of underpaid, underfed people, with the result that a luxury is nowadays almost always cheaper than a necessity. One pair of plain solid shoes costs as much as two ultra-smart pairs. For the price of one square meal you can get two pounds of cheap sweets. You can't get much meat for threepence, but you can get a lot of fish-and-chips. Milk costs threepence a pint and even 'mild' beer costs fourpence, but aspirins are seven a penny and you can wring forty cups of tea out of a quarter-pound packet. And above all there is gambling, the cheapest of all luxuries. Even people on the verge of starvation can buy a few days' hope ('Something to live for', as they call it) by having a penny on a sweepstake. Organized gambling has now risen almost to the status of a major industry.

Orwell wrote this in 1937 but it rings true even now. The cheapest source of calories and the most economical way to satiate your hunger and get your daily caloric needs is to eat a meal of hamburger and fries and wash it down with a soda. Whole wheat bread, fresh fruits, vegetables, and fruit juices may be much better for you but they are more expensive to live on.

But it is not merely economics that drives poor people into making bad food choices. Orwell points out that there are important psychological factors at work too, as I will discuss in the next post in this series.

October 28, 2010

George Orwell on the poor and unemployed

My ideas about what being poor and unemployed must be like were shaped by two books by George Orwell that I read at an impressionable age in my late teens that eloquently recounted his own direct experiences of that condition. One is Down and Out in Paris and London (1933), a semi-autobiographical account of a period in his life when he was really poor and at times homeless. The other is The Road to Wigan Pier (1937), where he recounts his experiences after he was sent on assignment to the north of England for an extended period, and lived in the homes of coal mining families at a time when there was widespread unemployment.

Both books can be read online for free by clicking on the links and hold up remarkably well with time. Orwell's obvious sympathy with the people he was writing about, coupled with his ability to write eloquently but honestly, brings the experience of the people he lived and moved with to vivid life.

What those books taught me is to be much more conscious of my own deeply ingrained class prejudices and not be too quick to judge what poor and unemployed people are like, and that many of my middle-class assumptions about them are not to be trusted. I learned that it was not a case of how different they were from people like me but how similar. I know that I still have plenty of class prejudices but at least I am aware that I have them, which makes me much more careful about making generalizations about the poor. Very few things infuriate me more than to hear well-to-do people (like Ben Stein in the previous post) smugly speak of the working poor and unemployed as if they are somehow and in some mysterious way inferior human beings lacking in the basic virtues.

Orwell writes in chapter 5 of The Road to Wigan Pier about how his own prejudices were confounded by the actual experience of getting to know people up close:

When I first saw unemployed men at close quarters, the thing that horrified and amazed me was to find that many of them were ashamed of being unemployed. I was very ignorant, but not so ignorant as to imagine that when the loss of foreign markets pushes two million men out of work, those two million are any more to blame than the people who draw blanks in the Calcutta Sweep. But at that time nobody cared to admit that unemployment was inevitable, because this meant admitting that it would probably continue. The middle classes were still talking about 'lazy idle loafers on the dole' and saying that 'these men could all find work if they wanted to', and naturally these opinions percolated to the working class themselves. I remember the shock of astonishment it gave me, when I first mingled with tramps and beggars, to find that a fair proportion, perhaps a quarter, of these beings whom I had been taught to regard as cynical parasites, were decent young miners and cotton-workers gazing at their destiny with the same sort of dumb amazement as an animal in a trap. They simply could not understand what was happening to them.

What Orwell's books also taught me is to appreciate the great desire of people to maintain their dignity and self-respect even under conditions of extreme poverty and hardship, and that this feeling becomes even stronger as they slide down the socioeconomic ladder. This is why poor people often dress and otherwise behave in seemingly more extravagant ways than those who are much better off. They feel a greater need to hide their poverty. The fashion industry's success depends on making people desire to distinguish themselves from the less well-off by showing that they can afford to buy new and expensive clothes even when they don't need to. And poor people who want to keep up appearances of gentility get caught in this consumption trap.

For example, I myself am frugal and wear clothes until they are so worn that they become frayed, and sometimes have actual holes in them. I wear shoes until they are so scuffed and beaten up that my feet get wet even in slight rain. My shabby appearance does not bother me. No one has as yet mistaken me for a panhandler and offered me money but if it happened I would not be offended. It would be merely an amusing anecdote that I could share with friends.

So one might wonder why poor people take so much care to look good and even spend money on clothes that they really cannot afford. The difference is that I know that I am not poor and if people think that I am, it is their error and does not impinge on my self-image. But poor people often desperately want to hide the fact of their poverty because they are not sure if they will ever stop being poor and they feel that looking obviously so by not taking care of their appearance is the first step to acknowledging permanent poverty, that they actually belong in the despised underclass and are not merely temporary sojourners there. In Down and Out in Paris and London, Orwell describes the highly complicated extremes he went through to maintain a genteel façade while being homeless, just so that no one would suspect the truth.

In purely practical terms, it is obviously not a good idea to spend money one cannot afford to buy nice clothes or make-up or get one's hair done, and whoever does that is being objectively foolish. But spending money in order to disguise one's poverty springs from a different motivation from that due to vanity or self-indulgence, which is why we should not be so quick to judge the character of people simply by their visible state and actions. People who try to maintain a good appearance, even if they cannot afford it, are more likely to seek work to improve their situation than those who become resigned to their poverty and give up trying, sinking further into apathy and despair.

October 27, 2010

Denigrating the poor and unemployed

The current high levels of unemployment in the US, hovering around 10% officially and likely around 20% really, seems to be on its way to becoming perceived as 'structural', an euphemism among policymakers for 'permanent' or close to it. Along with it, the poverty rate has risen to the point where one in seven people are now below the poverty line.

Unemployed people are dangerous to the oligarchy since they are the ones who are most likely to demand changes in the way things are done. What governments try to do to pacify people is make the unemployed feel as if their situation is due to their own fault, that they have no one to blame for their predicament but themselves. One way is to cook the unemployment numbers so as to make the figures seem lower than they really are. Low unemployment rates makes the unemployed feel that they are alone and isolated, and thus make them less likely to organize and protest.

Furthermore, if people think that only a few people are unemployed, they are more likely to blame themselves for their plight, to wonder what is wrong about themselves that prevents them from getting a job. This sense of self-doubt is compounded by the pervasive feeling among the middle and upper classes that their own comfortable situation in life is due to being smarter and harder workers. This results in the corresponding message being sent to the unemployed that their lot is bleak because they are lazy, lack skills and education, and have poor attitudes and work habits.

People who belong to the middle and upper classes can sometimes have extraordinarily patronizing attitudes towards the poor and unemployed. This smug attitude is manifested in people like Ben Stein who says:

The people who have been laid off and cannot find work are generally people with poor work habits and poor personalities. I say "generally" because there are exceptions. But in general, as I survey the ranks of those who are unemployed, I see people who have overbearing and unpleasant personalities and/or who do not know how to do a day’s work. They are people who create either little utility or negative utility on the job.

People like Stein also think nothing of lecturing the unemployed on what their faults are and how they should shape up. Such sentiments are usually precursors to handing out prescriptive solutions, of which one is invariably that giving unemployment benefits merely encourages such laziness by enabling people to not seek work.

Simple habits of prudence will almost save the day, even in a bad recession. People who have meaningful savings, insured retirement plans, diversification of assets, people who do not buy what they cannot afford, people who do not simply assume the money will materialize out of thin air for their next purchase, people who add and subtract and see life plain, these people rarely get in desperate trouble. It is amazing how old-fashioned habits of buying modestly and living within one’s means, and planning for bad times as well as good times, can get one through earth shaking events.

So there's some good advice for you waiters and dishwashers and shop clerks. Stop busting your money on frivolities like food and rent and clothes. Instead save up those pennies and buy rental properties and stocks and bonds, all the while making sure you diversify your portfolio of assets.

Just ponder Stein's words for a minute and the mindset that underlies them. How many unemployed people do you think Stein knows intimately enough to make such sweeping judgments about their personalities or work habits? Despite his grand claim that "as I survey the ranks of those who are unemployed", with its implication that he knows a vast number, I suspect that Stein cannot even name more than a handful of working class poor, let alone have much familiarity with them. Such statements are usually the product of unexamined class prejudices, pure and simple, made with the confident assumption that those prejudices are shared by his readers and will not be challenged.

It turns out that his judgments are arrived at on the basis of knowing people just like him: "I get letters and e-mails from friends of decades standing asking for money every single day. Their common denominator is that they lacked prudence and lived in a dream world." Silly people, thinking that a decades-long friendship with Stein might count for something when they were down on their luck. I am sure that they were pleased to get a lecture from him on their lack of prudence and thrift.

Stein writes as if he himself is an up-by-my-own-bootstraps type but Paul Krugman points out that he must have actually inherited a huge amount of wealth from his parents. What is also interesting is that Stein himself, going by his performance as the narrator in the documentary Expelled: No Intelligence Allowed, has an extremely irritating personality, pompous, dour, humorless, and with a grating voice. If I were a boss who fired people according to Stein's criteria, he would be the first to go. If I had to share a cubicle with him, I'd shoot myself. (See Bill Maher on Stein and other rich whiners.)

I have been extremely fortunate in my life in never having been really poor, to the extent of having to worry where my next meal is going to come from or fear that I cannot pay the rent and may become homeless, even during the couple of years when I was underemployed and doing part-time teaching and consulting. As a result, I can never really understand what it feels like to be in such a situation. Even though I grew up in a developing country that had a lot of poor people, and also have poor relatives and friends who have been through hard times, just seeing poor people by the roadside or on an occasional basis isn't sufficient to know what such a life is really like.

One usually learns about people different from you (in say ethnicity or culture) by reading books written by such people who can eloquently convey the experience from the inside. But it takes an improbable combination of means, energy, time, education, and writing skills to convey the full range of their experience, and the somewhat clinical reports about the lives of the working poor and unemployed provided by academics and journalists, however sympathetic (of which David Shipler's book The Working Poor: Invisible in America is a good example), cannot do it full justice. There is always a temptation to make assumptions about what makes people poor and what poor people must be like and think that these unsupported beliefs constitute real knowledge.

Fortunately there are writers who can break through that barrier and provide a more visceral sense of the experience and in future posts I will discuss one who had a profound influence on me.

October 11, 2010

Is the US a nation of secret socialists?

Dan Ariely of Duke Business School is quite ingenious when it comes to devising experiments to determine how people think and what drives their decision making when it comes to economic matters. In his entertaining book Predictably Irrational, he challenged the traditional notion of economists that people are rational actors on the economic stage, making decisions in their own best interest. Instead he argues that people are irrational (i.e., not really thinking things through to get the best result for themselves) but irrational in a predictable way.

Now in a new paper co-authored with Michael Norton of Harvard Business School titled Building a Better America – One Wealth Quintile at a Time, they demonstrate that people in the US have a wildly inaccurate understanding of how wealth is distributed in the US. (I have already discussed studies (see here and here) showing the rapidly rising inequality in incomes in the US.)

In 2005, they asked a representative sample of 5,522 people from 47 states with median income, age, gender, and voting patterns that were matched to the population to identify which of three wealth distribution models they would prefer their societies to have. All the respondents were given this definition of wealth: "Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person's net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages."

What they did was show people three pie charts representing different distributions of wealth by quintiles and ask them which society they would like to join, given that they would be assigned to a quintile in that society according to the 'veil of ignorance' model used by John Rawls to determine how to construct a just society. In this case, the 'veil of ignorance' took the form of telling the respondents, "In considering this question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in this distribution, from the very richest to the very poorest."

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The three pie charts (as presented to the respondents) were unlabeled. The top right one was constructed using perfectly equal distributions. The top left one was constructed using the actual income distribution in Sweden. The bottom chart was obtained using the actual wealth distribution in the US (with the top quintile having 84% of the wealth, the second 11%, the third 4%, the fourth 0.2% and the bottom 0.1%).

The respondents overwhelmingly (92% vs. 8%) preferred the Swedish distribution to the US and by a considerable margin (77% vs. 23%) for the equal distribution over the US. There was also a slight preference for the Swedish distribution over the perfectly equal one. Who knew that Americans had such an egalitarian mindset?

For the second part of their study, the researchers asked respondents to estimate what they thought the actual wealth distribution in the US is and also what they thought it should be. The results are shown in this chart that again splits the distribution by quintiles. The actual distribution is given the top line and is the same as the pie chart above for the US. The second line is the response when asked what they think the current distribution is. The third line represents what they would like it to be. The results are interesting.

us-wealth-distribution.png

As the study authors say,

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth. These desires for more equal distributions of wealth took the form of moving money from the top quintile to the bottom three quintiles, while leaving the second quintile unchanged, evidencing a greater concern for the less fortunate than the more fortunate.

In other words, not only do people think that wealth is more equitably distributed in the US than it actually is, their ideal of what the distribution should be would require a considerable redistribution of wealth from the richer to the poorer. Americans are socialists at heart, though they may not realize it.

What was also interesting is that there were not marked differences by age or gender or political party affiliation or income and wealth. As the authors say, "we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo."

What has happened in the US is that the ruling wealthy oligarchy that controls the government and the media keeps repeating the message that the current distribution of wealth is not only good but that there should be even more inequality by giving tax breaks and other benefits to the rich. Given the almost total disconnect between reality and what people think is the reality, it should not be surprising that it is almost impossible to have a reasonable discussion in the US about income and wealth and taxes.

September 24, 2010

Dean Baker on solving the budget deficit problem

I just returned from a talk by Dean Baker, co-director of the Center for Economic and Policy Research, and he said that there is no crisis in social security and the real crisis is the rapid rise in health care costs that, if unchecked, could raise the budget deficits from their current value of around 10% of GDP to disastrous levels of 30%, 40%, and even 50% in the next few decades. But our policy makers, instead of addressing this issue head-on, are instead deflecting attention to other things.

If our per capita health care costs could be made the same as Canada and the UK, the current budget deficits would become surpluses even if we did absolutely nothing else, such as raising taxes or cutting costs in other areas. It is that simple.

This is pretty much what I have been saying for some time, but Baker has studied this issue in great depth for many years and so has way more facts at his fingertips. He is one of the foremost authorities on social security, Medicare, and the budget. You can follow him on his blog.

September 20, 2010

The unbearable whininess of rich people

This amazing blog post by a University of Chicago law professor complains how unfair it is to characterize people like him as rich and how his family will be badly hurt by letting the Bush tax cuts expire for those earning over $250,000. Michael O'Hare and Brad De Long deduce that the complaining professor earns around $450,000 and deliver much needed rebukes.

[Update: The law professor Todd Henderson has since deleted his post and given up blogging as a result of the response to his post, and also because he says his wife strongly disagreed with him and did not consent to him posting in the first place.]

As the effort to make the rich even richer gets under full swing this fall, we are going to hear a lot of whining like this as the December 31st expiry deadline draws near. A lot of smoke is going to be blown about what constitutes being rich and so it is good to bear in mind the facts of income distribution in the US.

20% of households earn less than $19,178
20% of households earn between $19,178 and $36,000
20% of households earn between $36,000 and $57,568
20% of households earn between $57,568 and $91,705
20% of households earn over $91,705

The median household income is around $50,000. ('Median' means that half earn below and half above that figure). If we break down even further the people in the very top brackets:

10% of households earn between $100,349 and $138.254
5% of households earn between $138,254 and $329,070
1% of households earn between $329,070 and $482,129
0.5% of households earn between $482,129 and $1,401,635
0.1% of households earn between $1,401,635 and $6,473,710
0.01% of households earn over $6,473,710

So the Chicago law professor's family earns about nine times the median income, is in the top 1% or so of income earners in the country, and yet whines about how tough it is for him to get by. This curious combination of greed and entitlement of the rich seems to be getting worse. In a previous post, I showed how the income share of the top 10% has increased greatly since 1979, a period that is referred to as 'The Great Divergence'. Kevin Drum provides a chart that breaks it down even more.

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It is clear that the rich have been making out like bandits and they still want more. Anyone still doubt that we have an oligarchy? How bad must it get before people like the anti-tax zealots among the tea partiers realize that they are being played for suckers by the oligarchy?

September 16, 2010

Another sign that we have an oligarchy

Over at Slate Timothy Noah writes about the growing income inequality and the reduced social mobility that now characterize the United States.

In 1915, the richest 1% of the population obtained about 15% of the nation's income. "This was the era in which the accumulated wealth of America's richest families—the Rockefellers, the Vanderbilts, the Carnegies—helped prompt creation of the modern income tax, lest disparities in wealth turn the United States into a European-style aristocracy."

But now the top 1% gets 24% of the income. The rising share of the oligarchy can be seen in this graph of the income share of the top 10% over the last 100 years.

incomeinequality.gif

As Noah says:

When it comes to real as opposed to imagined social mobility, surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain—not to mention some newer nations like Canada and Australia—are all places where your chances of rising from the bottom are better than they are in the land of Horatio Alger’s Ragged Dick…

According to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States.

August 05, 2010

What is gained by cooking the books?

In the previous two posts (here and here) I discussed how the government cooks the books, particularly with regard to unemployment, inflation, economic growth, and budget deficits, to give people a much rosier picture of the state of the economy than is the case. What is to be gained by this and who benefits?

In his article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper's magazine, Kevin Phillips says:

[S]ince the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed… the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

What is the reality? Phillips says that "Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession." (Note that Phillips was writing this in early 2008 just at the onset of the current recession when the 'official' unemployment rate was around 5% or half the current value. The real unemployment rate now is probably around 20%.)

Cooking the books to make things appear rosier is not done just for psychological reasons, to make people feel good about the state of the economy. While it does help the government politically if the public thinks that the economy is growing, inflation is low, and the government is living within its means, the main reason for cooking the books is that these numbers carry with them serious financial and budgetary implications.

Of them, the most important is the inflation rate. For one thing, social security benefits increases are tied to inflation rates. By making CPI rates seem low, the government can pay seniors less. Philips quotes economic analyst John Williams who says that "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher"- meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are." So by keeping CPI numbers artificially low, the government saves money (which it then spends on wars and tax cuts for the rich) at the expense of poor seniors who are being gradually squeezed into greater poverty but may not understand why that is happening since their benefit payouts are supposed to be rising along with with the cost of living.

But in addition to that, inflation rates are closely tied to interest rates. By keeping interest rates low, the government and business can borrow money cheaply. Borrowing is the only way that American government can finance its operating deficits, continue to fund its endless expensive wars, and maintain the oligarchic looting that has enriched a few while impoverishing the many. Low interest rates were also the basis of the housing bubble. If official inflation rates rise to their real value, the edifice comes crashing down. The collapse of the subprime market was an indicator of the underlying fear that the inflation rate, and along with it interest rates, was going to rise. As Phillips says:

Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, barrowing, and interest payments-all indexed or related to inflation-could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering. Arguably, the unraveling has already begun.

As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI… With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates."

The only way that the US government can continue on its reckless path is if other entities are willing to loan it money by buying its securities. While it can use the social security trust fund to do so (because it controls it), it needs other nations and their sovereign funds to also buy them. In this, the US currently benefits from the dollar still being the world's reserve currency. If other countries start to hold back from buying US treasury bonds, the government might have to lure them with higher interest rates. That would make budget deficits even worse and rapidly create problems with the ability to repay.

So where are we headed? Paul Craig Roberts, a former editor of the Wall Street Journal and an assistant secretary of the U.S. Treasury during the Reagan administration, says that the outlook is gloomy.

With the US bankrupting itself in wars, America's largest creditor, China, has taken issue with America's credit rating. The head of China's largest credit rating agency declared: "The US is insolvent and faces bankruptcy as a pure debtor nation."

On July 12, Niall Ferguson, an historian of empire, warned that the American empire could collapse suddenly from weakness brought on by its massive debts and that such a collapse could be closer than we think.

The sense of foreboding is widespread, spanning the ideological spectrum. David Stockman, budget director during the time that Ronald Reagan was indulging his supply-side fantasies, thinks the day of reckoning is nigh and that the present Republican leadership is captive to "the delusion that the economy will outgrow the deficit if plied with enough tax cuts… It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent."

Paul Krugman also sees disaster looming, saying, "I’m starting to have a sick feeling about prospects for American workers — but not, or not entirely, for the reasons you might think. Yes, growth is slowing, and the odds are that unemployment will rise, not fall, in the months ahead. That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal." (my italics)

With the oligarchy having its hands in the national till and looting it for their own benefit, I think collapse is inevitable. You can postpone the say of reckoning by cooking the books, but reality will eventually catch up with you. It is for all these reasons that I think the US is in serious trouble unless it changes course.

POST SCRIPT: The oligarchy's solution to every problem

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August 04, 2010

Yet more fiddling of economic numbers

While the unemployment and CPI figures have been fiddled with to make them appear smaller (as I discussed in yesterday's post), the number that measures the size of the economy called the Gross Domestic Product (GDP) has also been fiddled with to make it appear larger than it is and thus appearing to show robust growth.

Kevin Philips, in an article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper's magazine describes the fiddles done with the GDP, which itself was adopted in 1991 when the previous measure of the economy the Gross National Product (GNP) became unpalatable due to rising international debt costs. One of the changes that made the GDP larger consisted of adding to it what is known as 'imputed' income to people's actual income. Imputed income is what one is perceived to get because one is not directly paying for something. This includes "the imputed income from living in one's own home, or the benefit one receives from a free checking account, or the value of employer-paid health- and life-insurance premiums." In 2007, this phantom income added as much as 15% to the GDP.

One other major finagle occurred with Lyndon Johnson who was the first to create the 'unified budget' that added the surpluses in the social security account to the deficits in the government's operating budget to make the latter seem smaller than they really were. That practice continues today. It was this disguise that enabled Ronald Reagan and George W. Bush and the Congresses of their time, aided and abetted by then Federal Reserve chair Alan Greenspan, to enact huge tax cuts for the rich.

The scam went like this. By creating a phony scare in the early 1980s (similar to the one we are seeing again now) that social security was going broke, they raised payroll taxes. Since there is a cap on the income that is subject to these taxes (in 2009 the cap was $106,800) most of the money in this trust fund comes from the poor and middle class, making it a regressive tax. This increase in payroll taxes resulted in huge surpluses in the social security current account that, because of the 'unified' budget, gave people the impression that there was plenty of money in the public treasury and hid the fact that the country was actually operating in the red. The government then rammed through tax cuts for the rich that used up this bogus 'surplus'. So basically, the money that middle class and poor people were putting into their social security retirement trust fund was being used to provide huge tax cuts for the rich. This has to be one of the biggest swindles in American history. (See David Cay Johnson, Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003), p. 123 for an excellent analysis on how this racket was perpetrated.)

This was a clear swindle knowingly perpetrated by the oligarchy. When it comes to fiddling the numbers on unemployment, CPI, and GDP, Phillips says, "Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan-both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector." I am not as charitable as he in dismissing knowing cynical motives.

Phillips makes the correct point that the people who prepare government statistics are professionals who are careful, in their actual reports, to accurately explain what they are doing, at least in the footnotes, so that the reality is there for anyone willing to read carefully. But governments have realized that most reporters in the mainstream media are too lazy or stupid or ignorant or stressed for time to do this kind of careful reading and analysis and instead simply swallow the summaries, abstracts, and press releases put out by high-level government officials, thus allowing themselves to be manipulated. Reporters would do a much better job if they stopped trying to curry favor with high-level people and instead focused their efforts on reading official documents carefully and cultivating low and mid-level officials and whistle-blowers who can tell them exactly what is going on. The latter have less of an ideological or political ax to grind and thus are more likely to tell the unvarnished truth.

Public ignorance of the true state of the economy benefits the government. Phillips adds:

Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent) and average annual growth in the I percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markers, and tamp down expensive cost-of-living increases for wages and pensions?

Phillips has to be given credit for warning us in early 2008, before the total collapse of the housing market, of the danger of mortgage debt. He was, however, wrong in predicting that official unemployment figures of 8 percent might make the electorate angry. We are now close to 10 percent with little signs of widespread outrage. This might change with time because the current recession has resulted in unemployment staying high for much longer than previous recessions. I am sure that all of us personally know people who have been laid off and are finding it hard to get work comparable to what they did before.

Next: What is gained by cooking the books?

POST SCRIPT: The Big Brother state

A truly disturbing post from Glenn Greenwald on the assault on our privacy by a government-private sector collaboration, done in order to circumvent laws. I will not excerpt it because you should really read the whole thing.

[UPDATE: Glenn Greenwald has posted an update that the claims of Project Vigilant are highly exaggerated and they may just be publicity seekers.]

August 03, 2010

Cooking the economic books

In yesterday's post I discussed the different measures labeled U-1 through U-6 that are used to measure the rate of unemployment. Kevin Philips, in an interesting article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper's magazine, points out how the 'official' unemployment rate U-3 masks the true state of affairs.

In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the "official" number [U-3]. The series nearest to real world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the "marginally attached," a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

If you want a rule of thumb, the 'real' rate of unemployment (i.e., U-6), which would (and should) include so-called 'discouraged' workers, 'marginally attached' workers, and workers who are forced to work part-time for economic reasons, would be roughly twice the officially reported unemployment rate (U-3). So currently the figure would be close to 20%.

Phillips says that these multiple measures of unemployment were introduced over time, giving the public the impression that the number of unemployed is smaller than it really is, a phenomenon that has been labeled as 'Pollyanna Creep' in unemployment. The process began in the early 60s in the Kennedy administration, which decided to take the out-of-work people who had stopped looking for jobs for whatever reason (even if it was for relevant reasons like no jobs were there to be found) out of the unemployed category and put them in the category of 'discouraged workers', thus lowering the unemployment figures. Reagan inflated the size of the labor force by including the military in it, again effectively reducing the unemployment rate without any substantive gains. Bill Clinton added to the manipulation by making the unemployment sampling size smaller by dropping a disproportionate number of inner city households and changing the formulas to produce lower black unemployment.

But it was not only unemployment figures that have been manipulated to provide a rosier picture of the nation's economic health. Successive governments have also manipulated other key economic indicators such as the Consumer Price Index (CPI) (that measures the rate of inflation) and the Gross Domestic Product (GDP) (which should reflect the size of the economy).

You would think that measuring the CPI would be simple and straightforward. You take some year as the baseline for calculating the cost of a basic basket of goods and services that people need to live (rent/mortgage, food, energy, clothing, etc.) and then calculate how the total cost of that basket changes over time. Basically the same idea as goes into stock market indices like the Dow Jones or S&P. But what governments do when the CPI number comes out too high is change the formula to make it smaller.

One method of lowering the CPI is by product substitution. If the price of an item in the original basket of goods (say a particular cut of meat) gets more expensive, it is assumed that people shift to a lower cost item (say ground beef). So by changing an item in the basket to a cheaper one, the CPI is lowered. Another finagle is changing the product weighting. If one item gets too high it is assumed that people buy less of that and more of the cheaper items in the basket, again reducing the CPI. There is also something called the hedonistic adjustment which assumes that improvements in the quality of products and services reduces the effective cost of goods.

In other words, the basket of goods and the way of measuring its cost is not kept constant but keeps changing. One might be able to make the case that such changes are meaningful since they reflect reality (after all people do change their buying habits based on cost) except that Phillips says that the changes are always in the direction of lowering costs, thus reducing the CPI, and never the other way around, which is what makes it a boondoggle. When conditions get better and people feel flush, ground beef is not replaced with steak in the CPI basket, though that too reflects reality.

There are other methods of disguising the CPI. Richard Nixon created a new category called the 'core' inflation rate that was arrived at by excluding things like food and energy that were creating high inflation rates in his time. In other words, he removed from the inflation index those things that were the main causes of inflation, a neat trick. This figure is still reported. Ronald Reagan finagled the housing rent component in the CPI to reduce its impact on inflation. The administrations of George H. W. Bush and Bill Clinton continued this practice.

Next: Other fiddles

POST SCRIPT: Boom times for the oligarchy

Because of loss of employment and income, increasing numbers of people are using up the money they had set aside for retirement to stay afloat now, which makes the idea of raising the retirement age even more pernicious. Meanwhile, employers have been taking advantage of the recession to squeeze workers even more to increase their profits. As Bob Herbert says, "The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent. In many cases, bosses told panicked workers who were still on the job that they had to take pay cuts or cuts in hours, or both. And raises were out of the question… the carnage that occurred in the workplace was out of proportion to the economic hit that corporations were taking." He quotes professor Andrew Sum who studies labor issues saying that what is unprecedented now is that "At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion."

So times are booming for the oligarchy who not only are doing well while most of the country isn't, they also delight in flaunting their wealth, as epitomized by the Clintons reportedly spending anywhere in the range of one to five million dollars on their daughter's wedding. Paul Craig Roberts points out that the Clintons did not start out in life rich and spent most of their lives in government jobs. He asks us to ponder whose interests they were serving while in government that has enabled them to reap such rich rewards now. He raises a similar question about England's Tony Blair's newly acquired wealth.

August 02, 2010

Calculating unemployment levels

In a previous post, I said that "One of the things that seems obvious to me but most people seem unaware of is that the US is a country in deep decline and if no corrective action is taken soon it will end up just like many other failed empire in history, collapsing from within due to a combination of hubris, arrogance, and greed." Readers might have been excused for being somewhat skeptical since things don't seem so dire and we hear upbeat reports about how things are getting better. In the next series of posts I will show how the real state of the economy is being kept hidden to make things look good, or at least not terrible.

In any democratic society, the most sensitive number politically is the level of unemployment. If it is high, then one has public unrest and strong dissatisfaction with the government. If it is low, then workers can bargain for better wages and benefits and so the business sector's profits get reduced, which makes corporate CEOs and their shareholders unhappy. In oligarchic societies like the US, the needs of the corporate sector always win out so governments tend to pursue policies that prevent full employment while simultaneously taking steps to curb public unhappiness by either giving them some benefits temporarily to help them get used to the idea of not working or hiding from them how bad the situation is.

In the US it is the Bureau of Labor Statistics that keeps track of unemployment numbers. In the current recession, the 'official' unemployment level has reached close to 10% and is staying there despite stimulus packages and the like. This is high by historic US standards and it is surprising that it has not created as much unrest as one might expect. But what people may not know is that the 'real' rate of unemployment is much higher, maybe twice as much, and that the lower official figure is the result of a steady process of cooking the books over the past few decades.

The unemployment rate is calculated as the number of unemployed workers divided by the total labor force, and the resulting number is multiplied by 100 to get a percentage. (The definitions of employed, unemployed, and total labor force is given here.) By finding ways to make the numerator smaller and/or the denominator larger, one can make the rate smaller. To be counted among the unemployed, one has to meet fairly strict criteria:

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

  • Contacting: an employer directly or having a job interview; public or private employment agency; friends or relatives; a school or university employment center
  • Sending out resumes or filling out applications
  • Placing or answering advertisements
  • Checking union or professional registers
  • Some other means of active job search

Passive methods of job search do not have the potential to result in a job offer and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.

There are categories other than employed and unemployed. 'Marginally attached' workers are "persons without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as "marginally attached to the labor force," individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work."

'Discouraged workers' are "a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of four reasons:

  1. They believe no job is available to them in their line of work or area.
  2. They had previously been unable to find work.
  3. They lack the necessary schooling, training, skills, or experience.
  4. Employers think they are too young or too old, or they face some other type of discrimination.

Depending on which categories of workers you count as unemployed, there are six measures of unemployment:

  • U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
  • U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
  • U-3: Total unemployed persons, as a percent of the civilian labor force (this is the 'official' unemployment rate that the government and media publicize)
  • U-4: Total unemployed persons (i.e., U-3) plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
  • U-5: Total unemployed persons, plus discouraged workers (i.e., U-4) plus all other "marginally attached" workers, as a percent of the civilian labor force plus all "marginally attached" workers
  • U-6: Total unemployed persons, plus all "marginally attached" workers (i.e., U-5) plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all "marginally attached" workers

So if a member of the 'officially' unemployed gets so discouraged that he/she stops even looking for work (which is a bad thing), U-4 remains unchanged but the official unemployment rate U-3 actually goes down, which looks like a good thing. Similarly, if you are forced to work part-time as a greeter at Wal-Mart because you cannot get a full time job, you drop out of the U-3 category (again reducing the official unemployment rate) but the U-6 figure remains unchanged.

Looking only at the U-3 number makes things seem rosier than they really are.

Next: Cooking the books on the unemployed.

POST SCRIPT: Film review: Up in the Air

This film is really good. It stars George Clooney as someone whom companies hire to perform the distasteful task of firing their employees and getting them to accept the severance package. The film shows the varied reactions of people upon learning that despite having put in many years of faithful service, they are now being unceremoniously dumped by a total stranger. Their emotions range over sad and angry and humiliated and despair, the last one especially common among older workers who know that their chances of ever getting another job are slim to none.

Clooney is this generation's Cary Grant, a good-looking charmer with a roguish twinkle in his eye who can make even an unsavory character appealing. In this film he plays someone who is really good at doing what should be a truly nasty soul-killing job and even takes pride in doing it well. Like a lot of us guys, he has set his heart on achieving some quite pointless goal in life, in his case to rack up 10 million frequent flyer miles, which he pursues with great dedication. And yet he manages to make this shallow person come off as sympathetic and even likable. Writer-director Jason Reitman seems to have a knack for pulling off this trick, having done it before with Thank You For Smoking, in which the main character is a shill for the tobacco industry.

The film's examination of the essential rootlessness of Clooney's character and the contrast with the strong ties in which the people he fires are enmeshed, is excellent. Although it is a serious film, it is also a funny one with great writing. It is well-worth seeing. Here's the trailer:

November 27, 2009

The evil of the consumer economy

(My latest book God vs. Darwin: The War Between Evolution and Creationism in the Classroom has just been released and is now available through the usual outlets. You can order it from Amazon, Barnes and Noble, the publishers Rowman & Littlefield, and also through your local bookstores. For more on the book, see here. You can also listen to the podcast of the interview on WCPN 90.3 about the book.)

(Due to the holiday, this is a repost from Thanksgiving of last year, edited and updated.)

Each year, the Thanksgiving holiday is ruined by the revolting attention that the media pays to the retail industry in the days immediately following Thanksgiving. They wallow in stories of sales, of early-bird shoppers on Friday lining up in the cold at 4:00 am to get bargains, fighting with other shoppers to grab sale items, people getting trampled in the crush, the long lines at cash registers, the year's "hot" gift items, and the breathless reports of how much was spent and what it predicts for the future of the economy.

The media eggs on this process by giving enormous amounts of coverage to people going shopping, a non-news event if there ever was one, adding cute names like "Black Friday" and more recently "Cyber Monday." 2008 saw the tragic story of a Wal-Mart worker killed in Black Friday rush of shoppers who callously trampled over him in order to get to the bargains quickly

Frankly, I find this obsessive focus on consumption disgusting. In fact, I would gladly skip directly from Thanksgiving to Christmas, because the intervening period seems to me to be just one long orgy of consumerism in which spending money is the goal. The whole point of the Christmas holiday seems to have become one in which people are made to feel guilty if they are not spending vast amounts of time and money in finding gifts for others. There is an air of forced jollity that is jarring, quite in contrast to the genuine warmth of Thanksgiving. And it just seems to stress people out.

Since I grew up in a country where people were encouraged to be frugal, often out of necessity, I still find it disquieting to be urged to spend as if it were somehow my duty to go broke in order to shore up the retail industry and help "grow the economy." I still don't understand that concept. An economy that is based on people buying what they do not need or can even afford seems to me to be inherently unsustainable, if not downright morally offensive.

There is a curious schizophrenic attitude one finds in the media to this consumption. On the one hand people bemoan the fact that the savings rate in the US is so low that the country has to borrow from overseas to meet its investment needs, that individual Americans are not saving enough for retirement, that they are living beyond their means because of easy access to credit, and that personal bankruptcies are on the rise. The current sub-prime mortgage debacle has been caused by people being urged to pay more for houses than they could afford, and now many face foreclosure and homelessness.

On the other hand, the media gleefully cheerleads when it is reported that people are going shopping, since this is supposed to be a 'consumer economy', and the stock market goes up when retail sales are high.

I don't get it. Apart from the fact that buying stuff other than to meet a direct need is simply wasteful, surely people must realize that we live in a world of finite resources, not just of fossilized energy but of minerals and other raw materials and even fresh water? Surely we should be cutting back on consumption so that we can leave something for future generations?

We are using up resources like there is no tomorrow and I am amazed that people don't see the disastrous consequences of this. It is not even a long-term issue since the resources crunch will start to manifest itself in around thirty years or so. I know that the 'end-timers', the rapturists and the like who think that the world is on the verge of coming to an end see this problem (and that of global warming) as nothing to worry about since Jesus will return very soon. But what about the others? Is it that religious people think that since we are special in the eyes of god, he will somehow pull a miracle out of his hat and save us from our profligate selves?

To me the long-term problem faced by the Earth having finite resources is so obvious that I am amazed that we are not doing anything drastic about it. Here is a suggestion to start. We begin by boycotting Black Friday, staying at home and enjoying a quiet day. We should also decide that we will only buy Christmas gifts for children under twelve years of age, and then too just a few simple things, rather than the expensive "must have" items that advertisers thrust on us. We must force a shift from a consumer economy to a sustainable economy

And we should use the holidays mainly to spend time with people, enjoying the old-fashioned art of socializing.

POST SCRIPT: The weird speech of film supervillains

That Mitchell and Webb Look addresses something that always puzzled me, which is the oblique way that film supervillains speak.

July 17, 2009

The pernicious anti-tax attitude

The news is full of stories about the budget problems faced by the federal and state governments. But unlike the federal government which has ways to pay its bills without raising taxes, state governments have to balance their books the old fashioned way, by either reducing expenses or raising revenue or both.

But thanks to the anti-tax sentiment unleashed in 1978 by California's passage of Proposition 13, we are now witnessing the fruits of the relentless propaganda over the past three decades that said that taxes are intrinsically evil and that lower taxes are always better.

When times are good and tax revenues are high, people demand that taxes be cut because it is 'their' money. When things turn sour, as they now have, people argue that to raise taxes would be to deepen the recession and that taxes should be cut even more to 'stimulate the economy', a phrase I have come to detest since it usually precedes some scam to siphon off wealth even more to the rich and to destroy the common good. So we have reached the stage when it has become an act of faith that it is always good to lower taxes and it is never good to raise them.

As a result, politicians refuse to consider the option of raising taxes because this is considered political suicide. Since raising taxes is ruled out, is it any surprise that states and the nation are in such a fiscal mess? The only options being considered are to drastically cut services like education, libraries, aid to the poor, lay off state workers like firefighters and police, and so on. But as time has gone by making relatively painless cuts has become harder and harder.

As a result we now see that California cannot balance its budget and is reduced to paying people with IOUs that banks may or may not honor. Ohio too should have had a two-year budget approved by July 1, but since the governor and the legislature could not agree on how to close a $3 billion dollar gap (out of a total budget of about $100 billion), they were forced to pass three one-week interim budgets to tide them over until an agreement was reached.

The Ohio case is illustrative. In 2005, the Ohio General Assembly voted a 21% across the board tax cut. The public interest group Policy Matters Ohio has a table showing by how much the marginal tax rates have been cut since 2004. Of course, now that the state is deep in the red, will the state roll taxes back to their original level in 2004, at least for those in the upper income brackets? Of course not.

As I look over my own state taxes, I notice that over the last few years the amount I paid as taxes dropped from 3.5% of my gross income to just 3.0% (a 14% reduction), even though my income has gone up. But I take no pleasure in the fact that I have more spending money. What good is that to me if valuable services are being cut and the general quality of life is going down? Am I supposed to ignore the deterioration in services and ignore the decay by eating out more and going on vacations?

It seems like people cannot think beyond their immediate interest. Last month, my community recently received its new home valuations and because of the real estate slump, our home and all the others in our area had dropped by about 7%. This means that there will be a reduction in property taxes, thus giving me even more disposable income. When I was at our street block party last week, I approached my neighbor (who is a real estate agent) and said that I wanted to ask her a favor. What I wanted to ask her was to use her access to the real estate database to check on who was the person on our street who had lived there the longest. It was rumored that an ailing housebound 97-year old neighbor was the original inhabitant of her 70-year old house. I thought that if that were true, it would be nice for her neighbors to commemorate it in some way, since she is a very sweet lady.

Before I could even make my request, the real estate agent neighbor said she already knew what I wanted, because so many at the block party had asked her the same question. But what they had all been asking her was to give them sale prices of comparable homes in the neighborhood so that they could request that their home valuation be reduced even more, so that they could pay even less taxes.

Not only was this not at all what I had planned to ask her, the thought had never even crossed my mind to seek a greater reduction that what had already been given to me. I had instead been wondering how the city and state would deal with the reduced revenues.

But it depressed me that what seemed to be on every one's mind was how to exploit the real estate downturn to try to pay even less taxes in addition to the cut they had already received, even if their own income has not declined and it means that city and school employees will not get pay raises or might even be fired, services cut, and the general quality of community life go down. Already the fire department has had to make severe cuts. Of course, these same people will then complain loudly if they are personally affected by those cuts in some way, such as if police and firefighters take longer to arrive in an emergency or class sizes get larger. And when it comes time to sell their house, they will put as high a price on its value as they can.

People seem to think they can have quality of life without paying for it. They do not seem to care about the long-term consequences of the never-raise-taxes policy. They seem think that what is really important is to have more money in their own pockets right now. But my attitude is that because I am not poor, if I have a little less money due to paying higher taxes, I can cut back here and there without feeling any pain. But I benefit a lot more from having safe streets, prompt emergency assistance, better schools, parks, libraries, roads, public transport, and having fewer homeless and hungry people.

Surely cutting back on a few personal frills here and there for those who can afford to is worth it? Are we just going to greedily grab every cent of our money that we can until the social decay is so obvious that it may be too late to do anything about it? Is this how our civilization will collapse, just like former collapsed civilizations, by people sacrificing major long-term common good for trivial short-term personal gain?

There are a few hopeful signs that attitudes are changing. A few local politicians are saying that the tax cuts of 2005 should be rolled back, at least for those in the upper income brackets. The Plain Dealer published an op-ed by Zach Schiller on June 26, 2009 arguing for it, pointing out that lowering taxes had not provided the growth that was promised and that it would be bad to continue with that failed economic model.

I hope this movement catches on.

POST SCRIPT: United breaks guitars

I never fly United Airlines unless I have no choice. In my opinion, it is the worst of all the airlines. So I was not surprised when I heard the story of musician Dave Carroll who was appalled to hear that baggage handlers were throwing his guitar around on the tarmac and had damaged it severely. Of course, when he tried to get United to provide restitution they, following the lead of the health insurance industry on how to deny claims, gave him the classic run-around-followed-by-brush-off routine. As he said:

So after nine months… it occurred to me that I had been fighting a losing battle all this time and that fighting over this at all was a waste of time. The system is designed to frustrate affected customers into giving up their claims and United is very good at it.

But Carroll was not taking it lying down. He decided to compose three music videos about his experience and put it on YouTube. The first became a big hit, generating nearly 500,000 hits within the first couple of weeks and getting the airline to make amends.

It is actually a catchy song and a pretty good video.

People should take this kind of action with their health insurance companies too.

June 26, 2009

On wealth-2

(Part 1 can be seen here.)

One of the odd things that I have found about America is how many people are willing to fight to protect the interests of the very wealthy, even though they themselves are nowhere close to attaining that level of income, and where the efforts by a few to acquires such wealth adversely affects them. Some are willing to defend the rampant greed that resulted in practices the led to the recent financial collapse. "Joe the Plumber", "Tito the Builder" and others like them were notable figures during the last election campign that belonged to this category. During the recent tea parties protesting Obama's tax policies, a demonstrator was asked whether he earned more than $250,000. When he said that he earned much, much less, he was asked why he was protesting since his taxes would be lowered. He said that he hoped to become wealthy some day and thus was looking out for his future interests, however unlikely that may be.

I find it curious that so many people seem to want to be actually wealthy and not merely comfortably middle class, that becoming so is the goal of their lives. Some time ago, a commenter suggested that my occasional rants against the way that the very rich oligarchy in this country exploits the poor were due to me being envious of them. The commenter seemed to think that it was a given that I too desired to be wealthy and that my political views would change dramatically if I ever became so.

But anyone who chooses to go into academia knows they are never going to be wealthy. Although the life can be good for those who enjoy the intellectual life, you will never rise above a comfortable middle class life as a teacher. Because it is quite hard to become an academic (one has to study for many, many years and the competition for jobs is fierce), it should be obvious that for this class of people becoming wealthy is not a high priority.

A student once asked me if I am paid what I think I am worth. It is an interesting question but one which I could not answer because I don't know how to measure what I am worth. What people usually mean by this question is whether I am paid more or less than other people doing comparable work in a comparable institution in a comparable location.

Apart from idle curiosity, I have never had much interest in the question of how much other people make but it is clear that many do care. The Parade magazine insert in my Sunday paper has as a recurring feature a listing of people in various occupations and their income, feeding what seems to be an insatiable curiosity about how much other people earn. Making such comparisons will always make some people unhappy since there will always be someone making more than you whom you think is undeserving. H. L Mencken said that, "The man's satisfaction with his salary depends on whether he makes more than his wife's sister's husband."

Some people want such comparisons in order to use them as a salary negotiation ploy. In Dan Ariely's book Predictably Irrational, he talks about how until 1992 compensation packages for top executives used to be kept confidential. But the ratio of the average CEO pay to that of the average worker rose from 36 in 1976 to 131 by 1993. Congress thought that this rise was made possible because of the secrecy about compensation and that by passing a law making this information public, top executives would be shamed into accepting more modest salaries.

The exact opposite happened. Chief executives started comparing their salaries, not with that of average workers, but with other CEOs and demanding to their own boards that they match their competitors. Salaries started leapfrogging until they reached the obscene levels that have been revealed during the recent financial scandals. Right now the ratio is 369.

While I have no idea what I am worth, I do know how to measure what I need, and what I need to have what I consider to be a great life is not much. I like to spend my time reading and writing, for which all I need is proximity and access to a good library, and both my university and community libraries more than meet that need. I need to have a modest home that I can maintain without too much trouble or expense. I need a reliable car, a computer, and internet access. I like to be able to buy books occasionally without worrying about whether I can afford them. I like to live debt-free and not worry about whether I will have a roof over my head or whether I can afford food, heat, and the other basic necessities of life. But that is about it.

What is troubling is that such is the inequitable way that wealth is distributed in the world that what I have described for me as a 'simple' life represents an almost unimaginable level of luxury for almost all the people on the planet, for whom having even a single water faucet in the neighborhood with drinkable water or enough electricity to light a single bulb or a sanitary toilet would result in a huge improvement in their living standards.

So even though I am not wealthy and will never be wealthy by the inflated standards of the US, I am extremely well off by any reasonable measure. To ask for more would just be greedy.

POST SCRIPT: Utica? They've heard of Utica?

It is a staple of comedy shows to interview the "person in the street" in America and reveal their appalling ignorance about world affairs ompared to people in other countries. Here Jason Jones compares the 'average' Iranian's knowledge of America with the 'average' American's knowledge of Iran.

One should, of course, never take these things seriously as a measure of general knowledge. Selective editing is a powerful weapon. It can make any person or group look good or ignorant. Done well, though, it can be funny.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Jason Jones: Behind the Veil - Ayatollah You So
www.thedailyshow.com
Daily Show
Full Episodes
Political HumorJason Jones in Iran

June 25, 2009

On wealth-1

In writing the series of posts on spreading the wealth and on financial frauds, I started musing on what wealth is and what it means to different people. For many people, becoming wealthy is seen as a desirable goal, an end in itself. Our media is soaked in wealth-porn, the endless regaling of how much wealthy people earn and the details of their lifestyles.

It seems to me that there are three pathways to becoming wealthy: inheriting wealth, acquiring wealth as a byproduct of trying to reach some other goal, and actively seeking it for its own sake because it is important to you.

There is not much one can say about the first category. One either has rich relatives who die leaving you their money, or one hasn't.

The second type of person is like that of some artists, like J. K. Rowling the creator of the phenomenally successful Harry Potter books, who achieve massive and unexpected success. My guess is that what drives such people is similar to what drives academics, they want to do something for its own sake and seek above all to produce a successful work of art that is recognized as such. Commercial success is very welcome but is not the primary goal. Evidence for this lies in the fact that such people usually do not stop creating new works even when they have no financial reason to continue working. It is the very rare author or actor or painter or musician who stops producing new work simply because they have made lots of money. For such people their primary goal is to produce something they are proud of and is valued by their knowledgeable peers.

There is a subset of this second category that consists of inventors. Such people like Thomas Edison, Henry Ford, Bill Gates, and Steve Jobs are similar to artists in that they are trying to create something new. But at the same time, they necessarily must have a business orientation since their idea is to produce something useful and valuable, not a work of art, and the main yardstick by which that is measured is by selling a lot of it. So making a lot of money is an important measure of whether they have produced something of value. This is different from an academic or artist or poet who can be considered a success while still not being rich.

The third type of person is one for whom making a lot of money is the primary goal in life and it does not matter to them how they achieve it. Such people are willing to spend their entire lives doing something they dislike as long as it enables them to become rich. They tend to view life as a competition and the winner is the person who dies with the most money. They may, in the course of making money, produce something of value and merit, but their primary goal is to be rich. So for them, it does not really matter if they became so by producing a better widget or creating a chain of stores or winning the lottery. Those are just the means to the end of becoming wealthy.

This is why I will never be wealthy. I do not have rich relatives and can expect no inheritance. I do not do the kind of work that is likely to make a lot of money as a side effect. But most crucially, I simply have no desire to be wealthy. While I will of course work to make a living and to "put food on my family" (in George W. Bush's memorable words), I simply cannot see myself doing something just for the sake of making a lot of money.

There are a very few occasions when I think it would be nice to have a lot of money. When I travel on long airline flights, I sometimes have to get to my coach seat by passing through the first and business class sections. When I see the comfortable and spacious seats they have compared to my cramped one, I think how nice it must be to be able to easily afford to pay the extra thousands of dollars for that luxury. But then I realize that in order to be able to be able to splurge for those few hours of comfort on a plane, I would have to work at a job I dislike on a daily basis all my life. That would not be a good trade-off.

In order to become rich for its own sake, you must be willing to spend a lot of time at it. If you want to become a successful investor in the stock market (say) you have to study the market and company reports and the business world and so on. The catch is that you would have to devote a lot of time towards this and that is something I have no wish to do.

What would be the point? My preferred lifestyle is one that is very simple. I don't much like to travel to exotic places or stay at fancy hotels or resorts, eat at expensive restaurants (or eat out at all for that matter), go to shows and concerts, etc. I like to live what others might consider a really boring life: reading, writing, thinking, and spending time with friends. My idea of a great weekend or holiday is when I have no place that I must go to and nothing that I must do. If I were to sacrifice my time and other interests to make a lot of money, I would have lost more than I gained.

POST SCRIPT: Signs of the times

Kodak announces that after 74 years it is is discontinuing production of Kodachrome film due to the public shift to digital photography.

Don't tell Paul Simon, he's going to be really upset.

March 20, 2009

The real AIG fraud

There is one thing that I have learned about politics: when the political ruling class is in a big lather about something and screaming loudly for retribution and action, that means the real action is taking place elsewhere, in secret, and that all the fuss is to distract attention from the real scandal. This rule of thumb has never failed me, although sometimes it takes a while to find out what the true story is.

This instinct immediately kicked in when all the ballyhoo began about the $165 million in bonuses being paid to some AIG executives. This is just 0.1% of the money paid out (so far) to AIG and when I saw all the politicians getting into fits of righteous indignation, holding Congressional hearings, calling these executives all kinds of names, demanding the bonus money back, and threatening to use subpoenas and punitive laws to do so, I felt at once that it was all a smokescreen although I did not know what the smoke was covering. But I knew that soon enough, more knowledgeable people would reveal the truth, even though it would not get major coverage in the mainstream media, because the latter is a necessary part of the smoke-generating machine, and dutifully play their role by giving extensive coverage to all the grandstanding, while not investigating the real news.

Some new articles reveal what is actually going on. To understand what they say, you need to know that the term 'counterparties' refers to those firms that owned assets of dubious value that AIG had 'insured' against loss from their face value. (Note: I have explained before that this was not technically insurance, which is a highly regulated industry, but was essentially an unregulated scheme of private bets.) The taxpayer bailout money to AIG was used to pay off those obligations. But despite using public money and despite the government now owning nearly 80% of its shares, AIG had the nerve to refuse to reveal to the public the names of the companies that it had paid out money to and for what, leading to suspicions that, rather than protecting taxpayer interests, they had deliberately overvalued those assets in order to bail those companies out from their bad decisions. They finally revealed at least the names on Sunday night, a time when companies and governments release bad news hoping the public is not paying attention.

After months of stonewalling, government-controlled American International Group (AIG) finally revealed the names of the counterparties that were funneled $108 billion in taxpayer funds. The largest recipients of AIG bailout funds were European banks, Wall Street firms and, to a lesser degree, municipal governments.

The fundamental concern is that favored firms may have been overpaid for assets using a large chunk of AIG's $170 billion bailout package. Though it is now known who the counterparties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it's impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.

Eliot Spitzer explains in Slate what is going on:

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already. (my italics)

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Spitzer then goes on to ask some very pertinent questions about all the cozy insider dealing between AIG, Goldman Sachs, Paulson, Geithner (who has replaced Paulson as Treasury Secretary), and Benanke. He says that those questions should be asked under oath.

Economist Michael Hudson sheds more light on the deal:

Here's the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a "pass-through" to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Until finally, on Sunday night, March 15, the government finally released the details. They were indeed highly embarrassing. The largest recipient turned out to be just what earlier financial reports had rumored: Paulson's own firm, Goldman Sachs, headed the list. It was owed $13 billion in counterparty claims. Here's the picture that's emerging. Last September, Treasury Secretary Paulson, from Goldman Sachs, drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted. This condition enraged Congress, which rejected the bailout in its first incarnation.

It now looks as if Paulson had good reason to put in a fatal legal clause blocking any clawback of funds given by the Treasury to AIG's counterparties. This is where public outrage should be focused.

Instead, the leading Congressional shepherds of the bailout legislation – along with Obama, who came out in his final, Friday night presidential debate with McCain strongly in favor of the bailout in Paulson's awful "short" version – have been highlighting the AIG executives receiving bonuses, not the company's counterparties.

[What do] Sen. Schumer, Rep. Frank, Pres. Obama and other Wall Street sponsors gain from this public outcry? For starters, it depicts them as hard taskmasters of the banking and financial sector, not its lobbyists scurrying to execute one giveaway after another. So the AIG kerfuffle has muddied the water about where their political loyalties really lie. It enables them to strike a misleading pose – and hence to pose as "honest brokers" next time they dishonestly give away the next few trillion dollars to their major sponsors and campaign contributors.

The uproar about AIG bonuses has effectively distracted attention from the AIG counterparties who received the $183 billion in Treasury giveaways. The "final" sum to be given to its counterparties has been rumored to be $250 billion, do Sen. Schumer, Rep. Frank and Pres. Obama still have a lot more work to do for Wall Street in the coming year or so.

To succeed in this work – while mitigating the public outrage already rising against the bad bailouts – they need to strike precisely the pose that they're striking now. It is an exercise in deception.

The moral should be: The larger the crocodile tears shed over giving bonuses to AIG individuals (who seem to be largely on the healthy, bona fide insurance side of AIG's business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.

The money can be recovered. And that's just what Mr. Schumer, Mr. Frank and others don't want to see the public discussing. That's why they've diverted attention onto this trivia. It's the time-honored way to get people not to talk about the big picture and what's really important.

Barack Obama, Barney Frank, Charles Schumer, and other leaders of both parties are busy grandstanding about the bonuses to hide the fact that they are complete shills for the finance industry and that they have colluded in the outrageous giveaway of huge sums of taxpayer money to the big financial firms, using AIG as the conduit. It is basically a money laundering scheme, to hide the real beneficiaries, the big financial interests that both parties serve.

Our pro-business, one-party government at work, serving the needs of the people they really care about.

POST SCRIPT: Monkey business

Researchers find that some monkeys seem to teach their young children how to floss their teeth. This is remarkable because the ability to consciously teach others how to use tools properly is thought to be a capability that only the human species possesses.

March 19, 2009

In the name of Galt, go!

Yesterday, I wrote about the predictable opposition of the low-tax/no-tax zealots to the implementation of the sunset clause that will at the end of 2010 revert the tax rates to its 2000 values.

The most bizarre feature of this opposition has been those who are threatening to 'go Galt'. Apparently they are taking their cue from John Galt, the hero of the Ayn Rand 1957 novel Atlas Shrugged, who inspired all the allegedly talented people, the leaders of business and arts and inventors and scientists, to show their disgust with the government burdening them with regulations and 'taking' their money in taxes for society's benefit, by abandoning their prosperous careers and going on strike, even withdrawing to a remote enclave in Colorado called Galt's Gulch. By withholding their talents from society, they caused society to crumble, teaching it the harsh lesson that the very gifted and talented must be left unfettered and tax-free so that their ambition is not shackled and their genius can flourish and thus society as a whole benefits.

(Note: I have not read Atlas Shrugged so am dependent on others as to the plot and what 'going Galt' involves. I did read Rand's The Fountainhead but after a promising start, it rapidly degenerated into a dreary polemic, with two-dimensional stereotypical characters behaving in utterly predictable ways, the whole thing written in melodramatic prose. There is no way that I am going to read 1000 more pages of Rand, though Atlas Shrugged sounds like a real hoot, even if unintentionally so. But Rand has a cult-like following for her philosophy of what she called objectivism, including even people like former Federal Reserve chairman Alan Greenspan.)

It seems like the current admirers of Rand's hero John Galt share the quaint delusion that they too are indispensable elements of society and that if they stop (or even reduce) working in protest at the sunset provisions of the tax code going into effect, society will be so devastated that we will beg them to come back, even if it means eliminating their taxes entirely and letting them do whatever they want.

Because rich people are surrounded by people who want or need to please them (relatives who want favors or money, employees who want to advance their careers, politicians and business people seeking to benefit from them, waiters and other staff who fear losing their jobs if they are not appropriately servile, etc.), they are prone to falling into the trap of thinking they possess some special knowledge or intangible quality that others lack and is the source of their success. They do not realize that they got where they are largely due to luck, inheritance, or privilege, and that they are easily replaceable.

During the current uproar over the bonuses paid to AIG executives, one defense of the payments has been that the people receiving the bonuses are the only ones who understand the complex structures that were created, and thus must be placated and retained if we are to ever unravel the mess.

Oh, please. Put in a new team of honest and hard working people with fairly sophisticated mathematics, computing, and accounting knowledge and skills and I would expect them to figure out the whole thing very quickly. Let's face it, even if truly great minds like Newton, Darwin, and Einstein had never existed, the great discoveries now associated with them would still have been made. What makes these financiers think that they are so necessary, so irreplaceably clever? It is only math-phobic people who think that derivatives, credit default swaps, and the like are deeply mysterious.

I myself think that we would all be a lot better off if all those threatening to 'go Galt' actually carried out their threat. Society will do well to have these egomaniacs voluntarily go off into some remote location and remain there, telling each other how essential they are, even as the rest of us soon forget they ever even existed.

So to all those threatening to 'go Galt', I can do no better than echo the words of Oliver Cromwell who 350 years ago, when faced with an obstructionist parliament, said:

"It is high time for me to put an end to your sitting in this place, which you have dishonoured by your contempt of all virtue, and defiled by your practice of every vice; ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money; is there a single virtue now remaining amongst you? is there one vice you do not possess? ye have no more religion than my horse; gold is your God; which of you have not barter'd your conscience for bribes? is there a man amongst you that has the least care for the good of the Commonwealth? ye sordid prostitutes have you not defil'd this sacred place, and turn'd the Lord's temple into a den of thieves, by your immoral principles and wicked practices? Ye are grown intolerably odious to the whole nation; you were deputed here by the people to get grievances redress'd, are yourselves become the greatest grievance.

Your country therefore calls upon me to cleanse this Augean stable, by putting a final period to your iniquitous proceedings in this House; and which by God's help, and the strength he has given me, I am now come to do; I command ye therefore, upon the peril of your lives, to depart immediately out of this place; go, get you out! Make haste! Ye venal slaves be gone! So! Take away that shining bauble there, and lock up the doors.

In the name of God, go!"

Unfortunately, I don't think the Galtists are likely to carry out their plan as their hero envisaged, which was a full-bore withdrawal from society. While I like to fantasize about all the Wall Street financiers and business and political leaders who caused this mess huddling under blankets in the Rockies, complaining about how badly they've suffered as a result of the repeal of the tax cuts, and eating beans cooked over an open fire like olden day cowboys, I suspect that they will not leave the comforts of life and will instead remain and just whine annoyingly about how no one really appreciates them and why they deserve to be paid more and taxed less.

Sadly, these 'mercenary wretches' who are 'odious to the whole nation' will continue to be a pestilence amongst us.

POST SCRIPT: Sesame Street

I love the music and the muppets and humor on Sesame Street. They all come together well in this segment with Forgetful Jones starring in Oklahoma!


March 18, 2009

Phony tax arguments

I do my own taxes. They are not that complicated and the tax forms and instructions provided by the IRS are pretty clear and straightforward.

Basically, the system for most individuals is that you add up all your income to get your gross income, then subtract all the allowable deductions (personal and dependent deductions, state and local taxes, home mortgage interest, IRA and charitable contributions, etc.) and you are left with what is known as your taxable income. At the very least, a single person in 2008 would be able to claim the standard deduction of $5,450 and one personal exemption of $3,500, meaning that their taxable income would be $8,950 less than their gross income. If they put away another $5,000 in an IRA savings account, their taxable income gets further lowered by that amount and they pay even less in taxes.

In 2008, for a single person, the tax is computed as follows (see page 80):

On the amount of your taxable income that is $8,025 or less, you pay 10% of the amount.
On the amount over $8,025 and less than or equal to $32,550, you pay 15%
On the amount over $32,550 and less than or equal to $78,850, you pay 25%
On the amount over $78,850 and less than or equal to $164,550, you pay 28%
On the amount over $164,550 and less than or equal to $357,700, you pay 33%
On the amount over $357,700, you pay 35%

The size of each income tax bracket is adjusted each year for inflation.

This is what is meant by a progressive tax code, that the percentage of income that is taxed goes up the higher the bracket in which your top income level is. Your marginal tax rate is the percentage that is taxed on that portion of your income in the highest bracket. So the marginal rate for someone earning $50,000 is 25% (meaning that the portion of income over $32,550 is taxed at 25%), while for someone earning $250,000 it is 33%.

Because of this progressive structure, the actual percentage of your gross income that goes as taxes is much less than your marginal rate. For example, a single person who earns a gross income of $50,000 pays less than 11% of their gross income in taxes, even though their marginal rate is 25%, while a single person who earns a gross income $100,000 pays only about 18% of their gross income in taxes (assuming they take the standard and personal and IRA deductions) although their marginal rate is 28%. So when people say that they are 'in the 25% tax bracket', they are merely talking about their marginal tax rate, not the effective rate at which their entire income is taxed.

This is an important distinction between marginal and effective rates that some anti-tax advocates like to blur, by suggesting that small increases in marginal rates are a disincentive to earning, and that it makes good economic sense to limit your earnings so that you stay at a lower marginal rate. It is never the case that, by raising your taxable income so that you move into the next higher marginal tax rate, you will lower your after-tax income.

If you were earning $78,850 dollars (and thus your marginal rate was 25%), and by doing a little extra work you earned $1 more and that pushed you into the 28% marginal rate, only that last dollar would be taxed at the 28% rate, with all the other income unaffected. Your take home income would still increase by 72 cents. If you earn more, you get to keep more.

So-called 'flat tax' proposals, in which all income is taxed at the same rate, is regressive. The so-called 'payroll taxes' such as Social Security and Medicare are regressive taxes since they are flat taxes of 6.2% and 1.45% respectively on all income. In fact, the former is extremely regressive since that tax is not levied on income over an upper limit that is adjusted for inflation (and is $102,000 for 2008), which means that the more you earn over that limit, the lower the percentage of your income that you pay as tax.

The reason that a progressive tax structure is fairer is that poorer people pay a far greater proportion of their total income for basic necessities like food, clothing, shelter, and health care while the rich have far more disposable income to spend on luxuries. You do not want to heavily tax that portion of the income that goes to meet basic needs, hence the lower rate on the lower brackets.

When George W. Bush came into office in 2000, there were five income tax brackets:

On the amount of your taxable income that was $26,250 or less, you paid 15% of the amount.
On the amount over $26,250 and less than or equal to $63,550, you paid 28%
On the amount over $63,550 and less than or equal to $132,600, you paid 31%
On the amount over $132,600and less than or equal to $288,350, you paid 36%
On the amount over $288,350, you paid 39.6%

Even though these taxes were much lower than most years since 1933 (In 1945, the top marginal rate reached a peak of 94%), Bush and the Republicans pushed relentlessly for even lower tax rates, especially the top marginal rates that affected the very wealthy. By 2003, there were six income tax brackets (as now) but the rates for each bracket were reduced to 10%, 15%, 27%, 30%, 35%, and 38%.

Bush and the Republicans pushed for the even lower rates, which resulted in the current situation. All of these cuts largely benefited the wealthy since it lowered their top rates by more. In other words, they made the tax code more regressive. As a result of these tax cuts, a single person in 2008 earning a gross income of $50,000 saw a drop in their taxes of about $1,300 (compared with the 2000 rates) while someone earning $500,000 saw a drop of about $21,000. The loss in revenue due to the tax cuts that largely benefited the rich, coupled with the huge costs of the war in Iraq and Afghanistan, has resulted in the budget surpluses of 1998-2001 becoming deficits from 2002 onwards.

These tax cuts were sold as a temporary measure, and to help passage a sunset provision was added that was due to go into effect at the end of 2010, causing the rates to revert to their 2000 values. But it was entirely predictable that when the time came for the sunset provision to kick in, the tax cut zealots would start misleadingly squealing that we were getting a tax hike, rather than the truth that we were ending something that was meant to be a temporary measure. And we see this happening now.

While I expected this kind of opposition to reverting to the 2000 rates, what took me by surprise was the sudden channeling by some people of their inner Ayn Rand and their plan to oppose the sunset provisions using a bizarre strategy based on, of all things, the plot of her novel Atlas Shrugged.

Next: Ayn Rand and 'going Galt'.

POST SCRIPT: Civil liberties and internet censorship

Chris Hansen, senior national staff counsel for the ACLU, will be speaking at the Case Western Reserve University Law School Moot Court Room on Thursday, March 19th from 4:30-5:30 on the topic of "Civil Liberties and Internet Censorship."

The event is free and open to the public. Call 216-472-2220 or go here for more details.

October 14, 2008

Solving the mortgage mess

Now that we have the subprime mortgage mess, solving it is inevitably going to create a sense of injustice in some quarters. During the second Obama-McCain debate, I was startled by McCain's sudden revelation of a new plan to address the mortgage crisis:

"As president of the United States…I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes -- at the diminished value of those homes and let people be able to make those -- be able to make those payments and stay in their homes.

"Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy."

He emphasized that this was his very own plan, not Obama's or Bush's. But it turns out that Obama had said something seemingly similar in a speech given on September 23, saying:

"For example, we should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities. In the past, such an approach has allowed taxpayers to profit as the housing market recovered."

But while the broad details of the McCain and Obama plans appear similar, apparently the details McCain's plan, released later, are different enough from his own that the of Obama camp is now criticizing the McCain plan as mainly benefiting the financial institutions that caused this mess.

What McCain seems to be suggesting is this. Suppose someone has a $200,000 mortgage on a home that is now worth only $100,000. McCain's plan would purchase the mortgage from the banks at the full value ($200,000), and then renegotiate the mortgage with homeowner for $100,000. This enables the banks to be fully bailed out of the consequences of their reckless lending, and also bails out the homeowners. It is the taxpayers who foot the bill for the remaining $100,000.

Critics have argued that there is no reason that the banks should be bailed out this way by buying the mortgages at face value. Instead they should pay them the 'real' value of the mortgages. But determining the ownership and real value of individual mortgages is not going to be easy since they have been bundled and sliced and diced on their way to being transformed into easily marketable securities.

Clearly the banks want to get as high a price as they can. But they have no real leverage in this situation except for what they have by virtue of their influence with the government partly purchased through their lobbyists' contributions to politicians.

The government should use its leverage to say that they will not bail out the banks but will instead take them over (partially or wholly) by purchasing their stock and thus gaining control. Then they will be able to benefit when home values eventually rise and the banks become more stable and their stock values go up. The government can then sell its stock and get out of the retail banking business. But in the interim, they will have effectively nationalized these institutions, the way they have already nationalized Fannie Mae, Freddie Mac, and AIG.

This is the model being practiced by the European countries led by England and is based on the Swedish solution to their 1992 crisis.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

It now seems that the US government is adopting this very solution. Of course, this move smacks of socialism and adopting it will be a tacit concession that capitalism has at least partly failed. It will thus be anathema to those ideologues who do not see problems as requiring pragmatic solutions based on whatever realistic options are available but as requiring actions based on an ideological template. The true free-market believers will say that the government should do absolutely nothing and let the chips fall where they may, irrespective of however many banks go under.

But the people who run the US are neither socialists nor free-market capitalists. What the current crisis reveals only too plainly is that they are 'state capitalists', who think that the government should serve the interests of the big corporations and financial institutions.

But facing a real chance of public revolt over a blatant giveaway to the very financial institutions and people who created this mess, the government seems to be reconciling itself to the fact that it must adopt some variant of the Swedish/English model, and Paulson's revised plan seems to reflect that.

However, the way the US government has been itself lurching from one plan to another does not inspire much confidence. As Josh Marshall points out: "[T]he fact that [Paulson] rammed through his bailout bill as absolutely essential to saving the economy, only to decide a few days later that we need something dramatically different, does not inspire me with great confidence in his grasp of the nature of the crisis."

POST SCRIPT: Tone deafness by the McCain camp

McCain has been getting hammered by Obama for advocating policies that seem to ignore the middle class and cater to the rich. Presumably feeling the need to respond to this charge, the McCain campaign has produced a new tax proposal they say is aimed at the middle class.

What is it? They are proposing a capital gains tax cut!

What are they thinking? It is mostly the rich who worry about capital gains taxes or even know what it is. They are the ones who are constantly asking for cuts in the capital gains tax and even its elimination.

Second, with the current stock market and housing market downturns, people are facing huge capital losses, not gains, so they are unlikely to be paying any such taxes soon.

While this may be just another effort to use the crisis to ram through a policy that will eventually favor the rich when the economy recovers, it is another sign that the McCain has no sensitivity to what concerns ordinary people.

October 13, 2008

Retirement savings losses

Like most people who have retirement accounts, the beginning of October saw the arrival of my quarterly statements and they did not make for pleasant reading. Mine showed a drop of 12% since the beginning of the year.

I have heard many people express dismay over similar losses. It is, of course, not pleasant to see ones savings drop so sharply. But at the same time, we have to realize that what we may be seeing is a drop from an artificially high and inflated value. Over the past few years, those same retirement accounts have grown at a rapid clip due to the galloping stock market prices.

While reading the quarterly statements back in the good old days (i.e., last year) were fun, I never thought of that as 'real' money or wealth, the way I view the money in my bank account. It is like the value of my home. It may go up or down but as long as I am not selling it or trying to borrow against it, it has no effect on my life except psychologically.

Talking of the good old days, wasn't it was just this summer that $150 billion was given away as $600 to each taxpayer and that this 'stimulus package' was supposed to solve all our financial problems by the simple expedient of having people go shopping? Ah, those were the good times.

As I have mentioned before, if we think of the virtual economy of the stock market as being a measure of the real economy, then the Dow Jones Index should only be about 5,500, still below its current value. So, except for people who are forced to convert their stock assets into actual cash, there has been no tangible loss.

What is extraordinary is the effort by some to blame the whole subprime mess on what they claim is the effort by the government to provide loans to poor and minority communities to encourage them to buy homes. They say that this is what encouraged risky lending practices. This is flat-out false.

There were of course many people who did buy homes and made other major purchases based on a false sense of wealth and it is they who are now really feeling the pain. There are those people who bought homes they could not really afford before the real estate market went sour, for which they now owe more money than the house is worth and hence have now defaulted. It is uncertainty both about the scope and extent of this default problem and the worth of the securitized investments made out of bundled mortgages that seems to fueling the loss of confidence in banks and the stock market.

To be sure, many individuals were greedy and took advantage of the chance to buy expensive homes at inflated values based on artificially low introductory rates. Many of them also spent way more than they should have on credit, maxing out their cards. Have we forgotten that people have long been strongly urged to shop, and that it was almost their patriotic duty to do so in order to keep the economy going? Credit card offers were plentiful and so easy to obtain that we were regaled with stories of even cats and dogs obtaining them. Now it seems that credit card debt was also 'securitized' like home mortgages were and those debts are also in danger of default, and suddenly people are being lectured to sternly for their thriftless ways.

People seemed to have had an unrealistic sense of what they could and could not afford. Such people are by no means blameless. But what they are guilty of is greed. They cannot be blamed for the mess because they are not the ones who were in control of the situation.

It should also not be forgotten that not all home mortgage or credit card defaults are due to greed. Some people default because of factors outside their control, like loss of their job or a major illness. In fact, the largest factor in personal bankruptcies is due to the cost of medical care.

It is the banks that we expect to be the grown ups in this situation, who should understand what risks are reasonable. They are the professionals. They are not obliged to give loans to whoever asks for them. It is they who are supposed to check on the value of the homes that are being bought and the ability of the purchaser to pay back the loans before they lend money.

But the banks did not practice the kind of due diligence that was called for. So while they, like the homeowners, are also guilty of greed, they definitely bear the major responsibility for the mess.

POST SCRIPT: Crazy prayers

The idiocy of some religious believers never ceases to amaze me. Take this invocation given by Rev. Arnold Conrad, past pastor of the Grace Evangelical Free Church at a McCain rally in Davenport, Iowa.

"I would also pray, Lord, that your reputation is involved in all that happens between now and November, because there are millions of people around this world praying to their god — whether it's Hindu, Buddha, Allah — that his opponent wins, for a variety of reasons," Conrad said.

"And Lord, I pray that you would guard your own reputation, because they're going to think that their god is bigger than you, if that happens. So I pray that you will step forward and honor your own name with all that happens between now and Election Day," he said.

Apart from the pastor's ignorance (he mixes up the names of gods with the names of the religions) he is warning his Christian god that this election is being seen as a grudge match between him and his competitor gods and that if he doesn't act to make McCain win, he wont be able to show his face in the neighborhood again. Unbelievable.

October 06, 2008

Government of the Dow, by the Dow, for the Dow

The recent financial crisis and the frantic (and finally successful) attempt by the government and Wall Street to strong-arm the public to provide immediate relief to the very institutions that caused the crisis is striking evidence, if anyone needed it, of exactly for whose benefit the government is run: Wall Street. You can ignore all the blather about how this bailout was needed to prevent ordinary people from financial ruin. That may or may not be true. What is indubitable is that if Wall Street interests were not at stake, nothing would have been done.

As was clearly evident in the past week, while the government can drag its feet for decades, say it is too expensive, and take no action to solve urgent problems like health care, when it comes to giving away nearly a trillion dollars to the financial industry, it can act with lightning speed. And you can be sure that when this money runs out (as it surely will as Wall Street institutions get their greedy hands on it) and next financial 'crisis' appears, we will be asked to cough up even more, and told that otherwise the sacrifices we have already made will be 'wasted'. This is the same argument given for continuing the war in Iraq.

Although I have written quite a bit in recent days about the crisis and the economy and think I have at least some understanding of how things work, one thing I don't understand is how the stock market works. I understand the mechanics of it, of course, but have long given up trying to understand what makes it go up or down on any given day.

It seems to me that stock prices are only loosely based on the actual health and performance of companies and the general economy, and more on expectations of what will happen in the future. It is not based on current data but on predictions of future data. It is closer to astrology or soothsaying than science.

I can pinpoint the very event that made me give up on the whole business as being hopelessly irrational.

Emperor Hirohito of Japan (1901-1989) was the symbolic head of Japan from 1926 until his death. He was revered by his people and considered by many to be a god-king. He was quite ill during the last decade of his life and close to death on many occasions.

I was intrigued and amused by the fact that the Japanese stock market would go up and down quite dramatically based on rumors about his health, and the news organizations would solemnly report with a straight face things like, "The Japanese stock market dropped sharply today on news that Emperor Hirohito's health had taken a turn for the worse."

This was, of course, absurd. The emperor was very old, had been ill for a long time, and was a purely symbolic head of state and had no say whatsoever on how the government or the economy was run. It would be like the British stock indices fluctuating on rumors about the Queen of England. The reaction of the stock market seemed to me then, and still seems now, to be hopelessly irrational.

Although I do not invest directly in the stock market (although my retirement funds are presumably invested in it), I do an experiment on days when there is some fairly big news event, either political or financial. After I listen to the news, I try to predict what that news will do to the stock market that day. I find that there is little or no correlation. If anything, I am more often wrong than right, that what I see as bad news for the economy sends the stock market up, and vice versa. It is clear that I will never get rich speculating as a day trader.

A couple of years ago, Bob Garfield on the show On the Media had a droll report on how the media and financial analysts try to come up with simple explanations to explain the day-to-day gyrations of the stock market, usually based on nothing more than sheer guesswork or story-telling.

This is why I never take seriously those people who urge policies based on the stock market fluctuations. They are usually self-serving rationalizations for what they want to do.

For example, on Monday, September 29, the House of Representatives surprisingly defeated the Paulson bailout plan on a close vote. As you can see from the graph, the Dow Jones index immediately headed down, plunging 777 points, and that drop was blamed directly on the vote.

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People were issuing dire warnings that it would continue that deep decline and we would all have our retirement funds disappear if Congress did not reverse itself and pass the Paulson plan immediately.

The next day the House was not in session due to a religious holiday and the Dow went up nearly 500 points. Did people conclude that sending Congress on vacation was good for the market? Of course not. They found some other fatuous reason.

Then the Senate passed a revised plan late on Wednesday evening and the market should have been happy on Thursday but it wasn't. (It feels so absurd to ascribe human emotions to the stock market, an institution that deals impersonally with billions of transactions daily but we now take such absurdities for granted.) The stock market declined steeply all through the day, losing about 350 points, for no reason that I could see.

Tension then mounted as the House came back in session on Friday to vote on this new package. The market started the day up and kept rising, gaining about 300 points by 1:00 pm, reaching a peak of 10,766. The House voted at that time and passed the measure quite easily.

Since we were told that the House failing to pass a bailout plan on Monday was the cause of the steep decline that day, you would expect that passing it now would be an occasion for joy. What actually happened was that right after the vote, the market immediately went into a steep decline, losing 450 points to end the day with a net loss.

To me this makes no sense at all. Maybe, to use the phrase coined by MIT professor of business Dan Ariely and which is the title of his book, the market is 'predictably irrational', meaning that there is some method in its seeming madness and I am not expert enough to see it.

As long as the stock market was tethered to the underlying real economy, that may have been true. But I think that the present out-of-control virtual economy, generated by financial institutions that have been allowed to speculate wildly using debt-based securities that were free from regulations and oversight, has resulted in the stock market being connected to the real economy by the slenderest of threads, making rational decision-making impossible.

Maybe it is truly rational and there are people who actually understand it. I know I don't.

POST SCRIPT: Paulson's history

This article points out the little publicized fact that Treasury Secretary Paulson, while head of Goldman Sachs, advocated the very policies that led to the current crisis. And now he has been given a huge check from the taxpayers to 'solve' the very problem he helped create. Nice work if you can get away with it.

Paulson, according to a celebratory 2006 BusinessWeek article entitled "Mr. Risk Goes to Washington," was "one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits." Under Paulson's watch, that meant "taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities."

According to the International Herald Tribune, Paulson "was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries." Paulson "stubbornly assert[ed] Goldman's right to invest in, advise on and finance deals, regardless of potential conflicts."

In testimony in 2000 before the Securities and Exchanges Commission, Paulson as head of Goldman Sachs, argued that Wall Street should be allowed to regulate itself.

Meanwhile, Rep. Brad Sherman of California describes the horror scenarios painted for lawmakers in private sessions before the Monday vote to try and scare them into voting for the bill.


October 03, 2008

Crisis? What crisis? Which crisis? Whose crisis?

In the midst of all this panic about a financial meltdown, it is hard to get a sense of how to actually measure if there is a crisis or not. Clearly there are various measures that can be used: the number of houses foreclosed, the number of personal bankruptcies, the number of banks going under, the amount of credit available, the state of the stock market, and so on. While they are all connected in some way, which ones should we be paying most attention to?

Deciding which measures are being used to say there is a crisis is important because that will drive the efforts to resolve it. Clearly what is concerning the political leadership is the state of the financial market, and the current bailout efforts seemed to be aimed at reassuring the banking, insurance, and other financial sectors and propping up the stock market. People are being scared and told that if the stock market declines their retirement savings will go down the tubes.

It is true that there have been fluctuations in the stock market and some recent declines. But whether this is a problem or not depends on whether we know what the "true" level of the stock market should be. If it is declining from an artificially high value to a more realistic one, then there is no crisis, just a return to normalcy.

To get a rough idea of how to see this, you can look at this graph that shows the Gross Domestic Product (GDP), the Consumer Price Index (CPI), and the S&P 500 stock market index since 1970. The GDP is a rough measure of the size of the 'real' economy, while the CPI is a rough measure of the rate of inflation.

We see that from around 1970 onwards until now, both the GDP and CPI growth rates have fluctuated around an average annual value of roughly 3.5%. But beginning around 1980, the S&P index started taking off like a rocket, meaning that the size of the 'virtual' economy that is measured purely by stock market prices was outstripping the growth of the 'real' economy.

This raises the interesting question of what happened after 1980. That was the year that began the great deregulation era, where the corporations and financial institutions markets were steadily freed of the constraints and regulations imposed on them following the Great Depression of 1929. The drive for deregulation started towards the end of the Carter administration, kicked into high gear with Ronald Reagan, and has been on full throttle ever since.

Government regulation was portrayed as this bureaucratic burden that was stifling innovation, so those regulations were removed. The banking and financial sector was delighted because now they could do more things, borrow and lend more money, and take much greater risks than ever before. This was the beginning of the creation of exotic new financial instruments like derivatives, credit default swaps, collateral debt obligations, and securitized mortgages that led to huge debt-based transactions that enabled trillions of dollars to swirl around in an opaque and unregulated manner. All this freely flowing capital drove up stock prices.

There was increased innovation all right, but not all in a good way. The downside of all the dismantling of oversight was not long coming. The massive federal bailout of the savings and loan industry in the late 1980s and the growth and collapse of companies like Enron and WorldCom can be traced to the removal of those regulations that required at least minimally prudent and honest and transparent business practices.

While all those debacles should have been warning signs of underlying problems, the continued rise in the stock market allowed people to ignore the storm clouds. After all, wasn't the rise in the stock market telling us that we were all getting wealthier, except for those poor saps who lost their jobs in the wake of the collapse of those giant companies?

Below is a graph of the Dow Jones index since its beginning.

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Its value on January 2, 1980 was just 786. Like the S&P index, it too started rising rapidly after 1980, reaching a peak of 11,497 on October 1, 1999. It then dropped to 7,592 on July 1, 2002, rose to an even higher peak of 13,896 on July 2, 2007, and ended at 10,831 on October 1 of this year.

The alarmists are pointing to the 3,000 point drop in the last year as a sign of the financial collapse. But if we think the stock market should reflect the value of the 'real' economy as measured by the GDP, then it is possible to do a very rough calculation and see what the stock index values should be today based on the growth of the GDP.

If we take the average annual GDP growth rate of 3.5% and add to that the average inflation rate of 3.5% as measured by the CPI, then we can calculate what a 7% growth rate in the Dow, starting with its value in 1980, should give us today. That turns out to be about 5,500, about half today's value.

If I am more generous and assign a total growth rate of 8%, I still only get a current index value of about 7,200. I need to postulate an astounding rate of 9.5% over the last three decades to get the current value of the Dow index, and would have to ramp it up to 10.5% to get the July 2007 peak value. Such huge growth rates in the real economy over such a long time are, of course, unrealistic.

So is it the case than rather than us currently having "lost" a lot of money, we never should have taken seriously the idea that we had so much money to begin with? Were we living in a dream world of imaginary wealth and living high on borrowed money? Is this financial crisis just telling us that by pumping another trillion dollars we don't really have into the stock market we are simply postponing the day of reckoning since we are striving to maintain an artificial level of virtual wealth?

Michael Lewitt of Hegemony Capital Management (a hedge fund) gives his perspective. Given his position as a market insider, trading in the very kinds of things that are at the heart of the current mess, his critiques carry particular weight. He concludes that:

There is a point when free enterprise tips over into a degree of economic and social inequality that is politically unacceptable, and the United States has reached that point. HCM is well aware that its views on this topic genuinely anger many of its readers, but this is an issue that must be addressed as an essential component of any program that will return confidence to the financial system. Free market economic policies, in particular tax policies, have led to the creation of an American oligarchy whose wealth and power is excessive. While not as pernicious as the oligarchy that rose from the ruins of the Soviet Union and now lords over Russia and spends its money garishly over the world, an American oligarchy has unduly benefitted from ill-advised tax and economic policies and must be reigned in as a sign to Main Street that the game will no longer be rigged against it. (my italics)

His analysis of the causes of the current situation is similar to what I have been saying:

Financial busts are preceded by financial bubbles. The current bust was preceded by a debt bubble whose unique manifestations were debt securitization and credit derivatives. Underlying these novel debt structures were the human emotions of greed and fear that led to abuses by even the most sophisticated individuals and most highly respected institutions in the market. While these human attributes are the most difficult to legislate, their ability to wreak havoc is clear evidence that they must be regulated in a thoughtful way.
. . .
The profits that Wall Street generated over the past few years were not the result of some new-found genius in the executive suites, but were merely the product of adding unprecedented amounts of leverage to balance sheets.

He points out that all the current panic talk is being driven by short-term thinking.

It is a certainty that America, and then the rest of the world behind it, is going to experience a severe recession the likes of which it hasn't seen for decades. . . One of the problems plaguing America is that we have become so frightened of short-term pain that we are willing to risk incalculable long-term suffering. Any plan that treats the symptom (the loss of confidence) and not the disease (the underlying problems that caused the loss of confidence) will not solve the real problem.
. . .
Despite the cries of pain from the credit markets, HCM has never believed that the world would spin off its axis if a deal is not rushed to completion in the next few days. A bad deal would be worse than no deal at all. (my italics)
. . .
In order to be successful, the Paulson Plan needs to be followed up by comprehensive regulatory reform that accomplishes the goals of convincing the public that the financial system will be fairer in the future than it has been in the past (i.e. that the gains will be spread more equitably and that failure will not be rewarded) and that strong steps will be taken to prevent the oversights that led to the current instability from being repeated.

He also points out that the heads of these financial institutions, while asking for the taxpayers to bail them out, are brazen in their demands, acting like they are doing us a favor by taking our money! And Paulson and Bernanke go along with that.

While trying to help rebuild confidence in American capitalism, Mssrs. Paulson and Bernanke tried to convince Congress that bank executives would prevent their institutions from participating in the bailout if it meant that their compensation would be capped. One would think, as the financial system teeters on the brink of collapse, that the Secretary of the Treasury and the Chairman of the Federal Reserve could make a more persuasive argument than one that poses the likelihood that corporate executives would knowingly violate their fiduciary duty and refuse to participate in a plan to rescue the financial system because it might limit their compensation.

Meanwhile, Pam Martens, who worked on Wall Street for 21 years, reads the fine print in the bailout plan and discovers what Wall Street hopes to win from it. It is an inside job in which the Treasury, the Fed, and Wall Street are using their agents in Congress to pick our pockets.

The more I think about it, the more this bailout plan looks like a swindle. I hope the members of the House of Representatives defeat it in its current form and instead demand a full and careful examination of the problem and what is needed to solve it.

POST SCRIPT: The Vice-Presidential debate

Well, the debate went pretty much as I expected. Sarah Palin was fairly coherent in her answers most of the time though I thought she overdid the folksy, down-home manner. By the way, did you know that she and John McCain are mavericks? And that Palin likes to talk about energy issues whatever the question?

Those who are not political junkies may have been surprised by the solid performance by Joe Biden, who has been pretty much ignored so far in the media coverage, overshadowed by the other three candidates. This may explain why early polls suggest that he 'won' the debate, though declaring winners and losers for such events is a largely meaningless exercise.

What was really surprising was the way Palin was flirting with me.

Sarah, give me a call and let's get together for coffee sometime.

September 19, 2008

The current financial mess

In a past series of posts, I looked at the financial crisis created by the collapse of the subprime housing crisis.

In the wake this week of the massive federal bailouts of Fannie Mae and Freddie Mac and AIG (American International Group), the collapse of the venerable Lehman Brothers investment bank, and the sale of another giant Merrill Lynch to Bank of America that staved off its own bankruptcy, it may be good to see how all these are linked.

This crisis is the inevitable result that follows 'bubble' economics', the runaway (and unrealistic) growth in the price of a commodity due to the belief of investors that the price of that commodity will either always increase or that they can sell out before it drops. In this case, the commodity is real estate. At every stage of the process, the firm belief that the value of homes would increase, coupled with little or no oversight to ensure that minimum caution was exercised in lending money, resulted in this runaway train that is now crashing and causing massive damage.

The foundations of this bubble lies with the providing of mortgages to large numbers of people who simply could not afford the homes they sought to buy. How was this done? One culprit was the creation of mortgages that had very low introductory rates that enabled people to pay the mortgage premiums, at least initially. Of course, such an artificially low rate could not be sustained so the premiums would suddenly rise after a few years, to a level the buyer could not afford. This seems like an unbelievably stupid plan for both the home buyer and the people providing the mortgage. And it is, unless you believe that the price of the home would increase in value, because then the homebuyer could sell the home before the mortgage went up, repay the money to the mortgage lender, and still make a profit. Everyone wins. There seemed to be a free lunch, just for the taking.

As a result, all kinds of shady practices arose. Mortgage brokers working on commission actively sought out even ineligible buyers for properties, inflated their income to meet the minimal requirements for eligibility, and sold them properties. The banks providing the money did not bother to really check on the credit worthiness of the buyers because they immediately sold off most of their mortgages to investment banks. These investment banks then 'securitized' their collections of mortgages, bundling them into huge packages of thousands of mortgages, then dividing them up into smaller pieces, and selling the pieces like other securities such as bonds.

Since investors believed that home prices would always go up, there seemed to be little or no risk. But as a result of this bundling and slicing and dicing and no strict accounting or transparency requirements, no one knows exactly which mortgage is in which bundle, even now. But who cares? The idea was that by this bundling, even if a mortgage here or there went into default, it would be a small part of the whole package, hardly noticeable. Wholesale defaults would not happen since home prices always go up, don't they?

The investment banks then bought and sold these securities, their huge commissions adding to the price. They were aided in this by the credit ratings agencies (like Moody's) that gave these securities the highest ratings of AAA, which made them seem to be very safe investments. Why would the credit rating agencies give high ratings to securities whose origins were so murky and about which they seemed to know so little? Because it is a little known fact that these rating agencies are paid by the very companies they rate and so have a vested interest in pleasing their clients. Of course, they also felt there was little risk in giving these high ratings because, as we all know, home prices always go up, don't they?

What about those cautious investors who were still a little nervous about buying these securities despite their high ratings? No problem. Along comes AIG, a huge insurance conglomerate. They created a new division that sold things called Credit Default Swaps (CDS). These things act like insurance in that they guarantee to reimburse the investor if their securities should lose value, thus reassuring them that these mortgage-based securitized investments were a safe bet. Although the CDS were sold like insurance, they are not actually called insurance because insurance is a regulated industry monitored by the states and as soon as something is called insurance it comes under that regulatory umbrella. But no one really paid much attention to such petty details since home prices are sure to go up, aren't they? Thus no one was likely to lose money. So AIG was raking in huge amounts as 'insurance' premiums, while feeling it ran little or no risk of having to pay out any money.

And as long as home prices went up, they were all making money and no one was paying close attention, except for a few worrywarts who didn't like to see trillions of dollars moving around in an unregulated and opaque manner. And for awhile home prices did go up, as was inevitable as more and more people were being encouraged and enabled to buy homes they really could not afford on the expectation that prices would go up yet higher. Thus were created the classic bubble conditions.

But all bubbles are inherently unstable and eventually collapse. And when it does, who gets hurt the most depends on who ends up holding the worthless investments. In this case, it is the US taxpayer.

Home prices started to drop. As homebuyers realized they could not pay the suddenly increased mortgage payments and could not sell the houses for a price that covered the amount they owed, they defaulted. As those defaults spread rapidly and became well known, investors started getting nervous about the value of the mortgage-based securities they were holding and started to sell them, rapidly lowering their value. This meant that banks and other investment houses that had these things as assets suddenly found their value drop precipitously and had to announce huge write-offs. Furthermore, those companies could no longer use those worthless securities as collateral to raise money and thus could not pay their own debts, making them risks for default and bankruptcy. This decreased investor confidence in those institutions and their share prices dropped dramatically.

This is what happened to Bear Stearns, Lehman Brothers, and Merrill Lynch. But they are just the most highly visible institutions. Huge numbers of banks are owners of similar mortgage-based assets and are nervously trying to figure out how much (or little) they are worth and what impact the revelations of their true value will do to their viability to survive. Eyes are now looking nervously at other banks like Washington Mutual and Wachovia and the two remaining large investment banks Goldman Sachs and Morgan Stanley.

British comedians John Bird and John Fortune back in August 2007 explained how subprime mortgage crisis came about. I have shown this before but it remains one of the clearest explanations.

Fannie Mae and Freddie Mac got hammered because they were the ultimate purchaser, the backstop if you will, of these mortgage-based securities. By buying them from the investment banks, they pumped money back into the mortgage system, enabling further cycles of dubious homes sales. As a result, these two giants ended up holding trillions of dollars of such worthless assets. They were able to buy these securities because they were easily able to borrow money since, although they were private companies, their incorporation charter gave them a quasi-government status, encouraging investors (especially foreign governments like China and oil-rich states with a lot of money to invest) to loan them money, since it was widely believed that the US government would not let these two institutions collapse. This is what the government did last weekend, essentially nationalizing those companies.

The US government desperately needs these foreign governments to invest in the US because that is the chief way they finance the deficits caused by the tax cuts for the rich and the two wars that are currently being fought. So essentially the US cannot do anything that will discourage future investments by these foreign governments. By taking over Fannie Mae and Freddie Mac, the US government is reassuring the foreign governments that they will get their money back since now the US government is directly responsible for paying back the money.

Meanwhile AIG, which had been eager to 'insure' these securities because of their safety (since home prices always go up, don't they?) had to pay out huge amounts of money when the value of the securities collapsed and was on the verge of financial collapse itself. Although their regular insurance business was sound, the action of its little known CDS division was threatening to bring down the entire company. Since many other large institutions (mutual funds, pensions funds etc.) had large investments in AIG, the collapse of AIG was believed to be potentially disastrous over the entire financial sector. So on Wednesday the government essentially nationalized that too.

But as a result, the taxpayers are now suddenly the owners of these three shaky companies with all their dubious assets. Furthermore, the trillions of dollars in debt owned by these companies now become part of the national debt, effectively doubling it. So while these companies made a lot of money for their executives and investors while the going was good, the taxpayers are now stuck with the bill for their recklessness. This is what capitalism has become, privatizing profits while socializing losses. Capitalism in the US has become socialism for the rich.

John Bird and John Fortune discuss how the belief in markets always going up usually end up as government bailouts.

How will the US government (i.e., us) pay back all the money it now suddenly owes as a result of the unregulated greed that ran rampant over the last decade and that enriched a few at the expense of the many? How much bad debt still lurks in the financial sector and how many firms are still hiding the true extent of their liabilities?

I would hope that all those people who were gung-ho for privatizing social security, like George Bush and John McCain, would now realize what a bad idea that is.

The next president is going to have a lot to deal with.

POST SCRIPT: Explaining the current crisis

On April 3, 2008, Michael Greenberger, in an interview with Terry Gross on Fresh Air provided a very lucid explanation of what was roiling the financial markets.

He paid a return visit two days ago (September 17, 2008) to explain what was behind the most recent developments.

Both interviews are well worth listening to.

March 18, 2008

Yet another federal bailout for the rich

Last Tuesday, the Federal Reserve Board said that it would guarantee up to $300 billion worth of the highly devalued assets held by those banks that had been speculating in the subprime real estate market, thus enabling those banks to borrow money because of the federal guarantee. Nobody else would accept the subprime mortgage portfolios as collateral for loans. So in effect the taxpayers were being put on the hook if the loans could not be repaid. The stock market that day reacted with glee, skyrocketing upwards. (I explained what was going on here.)

That party ended on Friday. The big investment bank Bear Stearns said that it could not meet its obligations and requested a loan from another big investment bank JPMorgan Chase. The latter, unlike the general public, was aware of the nature of the assets held by Bear Stearns and said nothing doing, unless the Federal Reserve was willing to guarantee that loan too. The Fed, always eager to please the big financial interests on Wall Street, readily agreed and in a single day the whole transaction was approved. This is pretty amazing speed when you consider that $30 billion of taxpayer money was involved.

But the news of Bear Stearns' troubles, which came just two days after a cheery message of confidence by its head just two days earlier that everything was just fine and dandy, sent jitters down the spine of investors who wondered how bad the situation really was and what dark secrets existed in the vaults of other big financial institutions.

They found out on Sunday when it was announced that JPMorgan Chase was actually buying Bear Stearns for the astoundingly low price of $2 per share, with the Fed once again guaranteeing the transaction. Just last year that stock had been trading at $172 per share. In just one year, the bank had lost almost 99% of its value, a collapse of Enron-sized proportions, but this time affecting one of the oldest and largest investment banks in the country. The total cost to JPMorgan Chase to buy this former financial powerhouse was only $236 million. Given that the Bear Stearns' fancy headquarters building alone was estimated to be worth about a billion dollars, this fire sale price indicates that Bear Stearns was in even more terrible shape than previously thought.

To understand what is going on here, we need to know that banks invest the money deposited in them to make money for themselves and their depositors. They do this by buying and selling securities of various types. But they are expected to keep a certain percentage of that money in cash to meet the routine demands of depositors who need to withdraw money for whatever reason. As long as not too many people want too much money at once, the banks are said to have sufficient 'liquidity' and the system works well. Even if the banks run out of cash, they can get short-term loans from the Fed or other banks using their securities as collateral. The interest on these loans is what is called the 'discount rate' and it is much less than the interest that we pay on loans. These kinds of loans are routinely done and are meant to ease any short-term liquidity problems.

But if there are suspicions that a bank is in trouble, that can lead to a stampede of depositors all demanding their money at the same time and we have a 'run' on the bank. If the banks cannot convert enough of their securities to cash or raise large enough loans, it can go bankrupt. This can happen even if a bank is perfectly sound. All it requires is a rumor of trouble to cause a run.

It was to prevent such problems that the FDIC system was set up. This said that whatever happened to a bank, the government would guarantee to reimburse depositors up $100,000 each. This was meant to reassure depositors so that they need not panic and withdraw their money suddenly. This is what possibly saved Countrywide Bank last year when it was discovered to have had huge losses by investing in subprime portfolios. I, for example, have an account at Countrywide but did not panic and ask for my money back when I heard the news of its troubles, precisely because of the guarantee.

In return for this government guarantee, the commercial banks have to submit to supervision by the government to make sure that they are not making too many risky investments, though we see in the case of Countrywide that the system is not foolproof.

But investment banks like Bear Stearns are not like the commercial banks ordinary people deal with. There are two kinds of investors in banks like Bear Stearns, those who buy shares in the bank and those who give the bank their money to manage. These banks are outside the FDIC system and the federal government has not previously assumed any responsibility for them or their depositors. Those banks are not like the ones where most ordinary people have accounts. These are meant for very wealthy investors for whom $100,000 is just pocket money. It is presumed that these wealthy depositors and investors are financially savvy people who are capable of evaluating for themselves the risks involved and do not need the government to protect their interests.

These investment banks can and do take much greater risks with their investments in return for much higher rates of return than we get on our checking and savings account. This is capitalism in theory, where there is supposed to be a correlation between risk and reward.

But the trouble was that Bear Stearns was one of the worst culprits causing the subprime mortgage debacle, underwriting many of the transactions and causing the inflation in values of those securities that had little relationship to the actual value of the properties. So when the party ended, they got stuck holding a lot of securities which they had paid high prices for and which were now worthless. When investors started suspecting that things were not going well and started trying to take out their money, Bear Stearns did not have the money and could not sell its securities to raise anywhere near enough money, and nobody would lend them money using those worthless securities as collateral.

Except the government. In an unprecedented move, the Federal Reserve decided that they would intervene to try and prop up, at least partially, Bear Stearns so that it did not go bankrupt by offering guarantees for loans given to it, essentially putting an artificial value on its securities. In essence, the government is using taxpayers' money to try and protect the wealthy financial interests associated with these investment banks. It is true that the people who held shares in Bear Stearns have lost money due to declining share prices but there is little the government can do about that. But by guaranteeing the value of the mortgage collateral, it bought those investors some time

So rather than seeing capitalism in practice what we have is capitalism in theory but a perverse socialism in practice, where the risk is borne by all taxpayers but the benefits in the form of profits accrue to just a few. All those people in government and business who preach financial discipline to the poor and say that people should be held accountable for their decisions, tend to conveniently change their tune when it is themselves or their friends who are affected.

I have shown this clip by British comedians John Bird and John Fortune before but I am showing it again because they describe precisely how we got into this mess and mention by name Bear Stearns and discuss the two funds owned by them that lie at the heart of their problems.

It is unnerving that two comedians in another country in October 2007 could finger the problem that is just now rocking the financial markets in the US.

Once again, I am not an economist so people who are more knowledgeable can chime in with corrections.

March 13, 2008

More on bubble economics

Dean Baker (co-director of the Center for Economic and Policy Research in Washington, DC) argues that the US is heading towards a recession, if not already in one, and he says that the main cause is the collapse of the housing bubble and not the spending on the Iraq war, though that is not helping either.

The villains in this story are the economists who somehow couldn't see an $8 trillion housing bubble, the banks that fueled the bubble with bad and often predatory loans, the regulatory institutions that did nothing to prevent the growth of the bubble and the spread of predatory loans, and most of all, Alan Greenspan and the Fed who blessed the whole thing.

We have to hold these folks responsible for their bubble economics. The best place to start would be to remove them from positions where they are still making economic policy.

On Tuesday, we saw the Federal Reserve decide to pump $200 billion into the financial system to try and alleviate the crisis and it sent stock prices soaring that day.

I didn't understand exactly what they did or how it was supposed to work because the news was reported in a very obscure way. Fortunately for people like me, in another article Baker explains clearly what is going on here and argues that the media is not characterizing this action for what it really is: a federal bailout of the banks that were partly responsible for this mess.

Can’t the media find any economists who don’t think that handing hundreds of billions of taxpayer dollars to the big banks and the incredibly rich people who own and manage them is a good idea? Apparently not, given the coverage so far to the Fed’s proposal to lend $200 billion to the banks using mortgage backed securities as collateral.

The workings of the Fed and the financial markets can appear complicated, so let’s simplify matters a bit to make it more clear what is going on here. Suppose that it was suddenly discovered that much of the wealth held by the country’s leading financial institutions was in fact counterfeit. Instead of having hundreds of billions of dollars of real currency in their vaults, institutions like Citigroup, Merrill Lynch, and Bears Stearns actually had hundreds of billions of dollars of counterfeit currency. Suppose further that the public did not know exactly who held what in terms of counterfeit currency, only that all of them had a lot of it. (The point here is that these banks hold mortgage backed securities, many of which are only worth a fraction of their face value, and therefore can be viewed as the equivalent of counterfeit currency.)

In such circumstances, investors would be very reluctant to accept the credit of any of the major financial institutions. They couldn’t know whether most of their assets were in fact counterfeit, and they were dealing with a bankrupt institution, or whether the counterfeit currency was only a limited share of the wealth, which would not jeopardize the institution’s ability to meet its obligations.

This is in fact the credit squeeze that we’ve have recently witnessed. The spread between the interest rates on a wide variety of assets and the interest rate on safe assets (U.S. government debt) has soared. As a result, the Fed’s effort to stimulate the economy, by lowering the federal funds rate, has been largely unsuccessful because other interest rates have remained high.

In response to this situation the Fed today announced that it would lend $200 billion to banks and other financial firms, accepting mortgage backed securities as collateral. This is effectively the same as saying that the Fed is going to lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money.

The intended effect of this policy is to convince other investors that the counterfeit currency is in fact real currency, or at the very least that there is a really huge sucker out there (the Fed) which is prepared to treat the counterfeit currency as real currency.

So how does this story play out? Well, insofar as the Fed is successful, the counterfeit currency retains its value for a while longer. This allows Citigroup, Merrill Lynch, Bears Stearns and the rest of the big boys more time to dump their counterfeit currency on suckers who haven’t figured out how the game is played.

It is possible that they won’t be able to find enough suckers, in which case these banks will end up defaulting on their loans and the Fed (i.e. the government) has lost tens or hundreds of billions dollars paying good money for counterfeit currency. Alternatively, perhaps the big boys are successful and can offload enough of their counterfeit money to restore themselves to solvency before the music stops. Then the Fed is repaid, but the counterfeit money now sits in the hands of other, less informed, or less inside, investors.

You should really read the whole of this excellent article.

Baker shows how once again, we have the Federal Reserve colluding with the government to use taxpayer money to protect and enrich the wealthiest people in the country.

POST SCRIPT: The work of Satan

Almost everyone has had encounters with those annoying little plastic containers of milk that always seem to squirt onto your clothes when you try to open them. Stephen Fry and Hugh Laurie deal with this menace appropriately.