Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Class Warfare Page 33 of 36

Krugman is trivially right and essentially wrong

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On April 15, 2010

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When he says:

In fact, we know what a system in which banks are allowed to fail looks like: that’s how the US banking system worked before the creation of the Fed. And you know what? It wasn’t a smoothly functioning system, with sound banking enforced by market discipline; it was a system periodically wracked by “panics” that destroyed peoples’ savings and plunged the economy into recession.

Finally, because that’s what really happens when banks are allowed to fail freely, promises not to bail out banks in the future aren’t credible. Fail to reform finance now, and there will be two, three, many TARPs in our future.

Again, small banks have been allowed to fail.  Today.  In large numbers.  So it is credible that small banks will be allowed to fail in the future.  It’s not the only thing which has to be done, but it is a necessary step.

The idea is that if every bank is small, no bank knows it specifically is “too big to fail”, and no bank thinks that it might not be one of the banks allowed to fail.

Finance is not going to be reformed enough, in any case. You know it, I know it, Krugman knows it.

TARP is a distraction.  It wasn’t necessary.  What happened, that mattered, was done mostly by the Fed with Treasury’s collusion, but that 700 billion was never needed, since the Fed can pull money out of its bum (and did.)

This is misleading:

Now, in 2008-2009 the shareholders were not cleaned out, and the bondholders left untouched; in part this was a policy decision, but it was also influenced by the lack of “resolution authority”: there was no clean, well-established route for seizing complex financial institutions. We can fix that, and deal with future Citigroups (one of which, given history, is likely to be … Citigroup) the way the FDIC deals with smaller banks: protect the depositors, clean out the shareholders.

This was entirely a policy decision.  While, no, the FDIC hadn’t closed down anything as big as Citigroup before (because before Glass-Steagall was repealed it was illegal to be as large as Citigroup), it had all the authority it needed and could have taken over Citigroup any time it wanted to.

This is a Bush response.  “I fucked up and didn’t do the right thing, so I need more authority, even though I had all the necessary authority.”

Granted, better regulation is needed, but the parts of regulation which failed were prior to the financial collapse.  The necessary authority to wipe out shareholders was in place.  That was a policy decisions—a political decision.  Neither Bush nor Obama was willing to greenlight the FDIC to do its damn job.

This is perhaps the stupidest disagreement I’ve seen in some time: no one who thinks breaking up banks is necessary thinks it is sufficient.  Why is Krugman acting as if they do?  Why does he want to protect large banks from breakup?  Why are we even talking about this?

Taxing the Poor to Bail out the Rich

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On April 13, 2010

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Value Added Tax (VAT) version:

When House Speaker Nancy Pelosi told Charlie Rose last October that a value-added tax was “on the table” as a possible way to solve the nation’s fiscal woes, the remark didn’t generate much interest. But as recent budget figures have put the depth of America’s problem into black and white, and with former Federal Reserve Chairman and White House adviser Paul Volcker nearly seconding Pelosi’s view recently, the idea of a VAT — already in use in nearly 160 countries — is gaining traction.

Trillions were spent bailout bankers, and every dollar spent fixing the mess since then is also effectively caused by the failure’s of the rich.

A VAT isn’t necessarily evil, but until progressive taxation is restored, capital gains are taxed at the same level as ordinary income, corporations are forced to pay taxes on their actual profits (rather than making billions and paying no taxes) and a financial transactions tax is implemented, why is another regressive tax (one that hits the poor instead of the rich) even being considered?

Oh, yeah, because this government exists to do unpopular things Republicans want to do while allowing Republicans to vote against them, as with HCR, essentially a 1994 Republican plan.

With Democrats like these, who needs Republicans?

Insanity is Doing the Same Thing and Expecting Different Results: Real Reform Means Reinstituting Glass-Steagall at Full Strength and Breaking Up Financial Conglomerates

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On April 10, 2010

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Ok, enough already. I’m sick of people talking about modern markets as if they are something wonderful. No, they aren’t. Obama was absolutely right during the election, they completely fell down on their job, not just for the last 8 years, but for most of the last 28 —whenever Republicans were in charge, and a fair bit when Dems were in charge. Ordinary people haven’t had a raise in damn near 30 years. This is success?

I simply, completely, and utterly fail to see what is so wonderful about the process of securitization. Sure, it allows you to create more financial products. Sure, it reduces the cost of capital somewhat. But are we really better off because of securitization? Of course we aren’t. Without securitization this current market meltdown would have been a hell of a lot milder. What securitization does is take the risk and spread it from the people who might be able to understand it and control it (the people actually issuing the mortgages, for example) to a ton of people who could not possibly know the risk even if they wanted to.

Ratings agency reform is not the solution, they completely fell down on the job and even if incentives were changed they are still not in a position to know whether a mortgage from Mr. Smith is legitimate. Are they going to visit the property? Talk to Mr. Smith? Call his employer? Of course not, they can’t. The only people who can are the people who issued the original mortgage.

Nor should risk be transfered much if at all. Risk must stay with the people who issue the mortgage. If they know it’ll be off their books they won’t do proper due diligence, and no one else can do it. At most, risk should be transfered once and must be transfered in whole and understandable form, rather than taking 20 different incomes steams (or more), melding them together, chopping them into tranches and selling them to people who really have no idea what they’re buying, while you’ve booked your profit and washed your hand, so even if you sold them crap, hahahah, it’s their crap now (or so you think.) Risk must be assumed only by people who can understand it and manage it and who are exposed to the consequences of their decisions. (Ability to manage risk, but knowledge that if they don’t they will get hurt.)

Now let’s talk about this idea that the Fed should basically regulate everyone, with the SEC occasionally peeping over it’s shoulder to see whether market manipulation is ocurring. This is necessary because there are, as Obama points out, no longer clear cut differences between banks, insurance companies, investment banks, brokerages and so on. The repeal of Glass-Steagall put an end to those differences. Glass-Steagall, remember was put in place during the Great Depression to stop another Great Depression from occuring. One of the things that people who lived through the 20s believed caused the Great Depression was not having clear cut boundaries between the businesses, again so that risk was divided appropriately and so that fewer companies became “too large to fail”.

But somehow we think we know better than the people who lived through the last Great Depression; the people who lived through the 20’s and the last great market crackup. So we’ve repealed most of Glass-Steagall and allowed everyone to be in everyone else’s pockets, huge financial conglomerates to mushroom into monstrosities, and allowed unregulated “innovative” financial “products” like collateralized debt obligation (CDOs) to grow into such monstrosites that financial markets were huge multiples of the entire real world economy.

Then it all comes crashing down and people claim to be surprised.

Enough, already. Yes, the world is not exactly the same as it was in the 20’s and 30’s, but we didn’t start having these disasters till after Glass-Steagall and other Depression era securities laws started getting repealed. First set in the 80’s, followed by most of the remainder in 99.

It’s time to break up the great financial conglomerates. Force them to cut themselves up and divide back into brokerage houses, investment banks, retail banks, insurance companies and so on. Put them all under the clear control of regulaters. Reinstitute Glass-Steagall, with very mild modernization, and get rid of most complex derivatives, excessive leverage, the carry trade and so on.

Obama was right during the primaries, the philosophy of the past 28 years has been a failure. Why don’t we, why doesn’t he, treat it as so, and re-institute what worked, re-regulate, then slowly modify from there, with complete transparency and strong regulation.

Financial markets exist to serve ordinary Americans and non-financial American businesses. They haven’t been doing that properly. Time to make sure they do.

This is a repost from September 16th 2008.  Very minor changes made to indicate when Obama said it, otherwise it stands the test of time remarkably well—which should tell you that nothing has been done since then.  The greatest economic disaster since the Great Depression, and a year and half later nobody has tried to fix what caused it to happen.  Priorities, priorities…

The American Death Wish

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On April 4, 2010

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(Kicking this back to the top, it’s eternal, particularly in light of the continued efforts to spin health care reform.)

I’ve been struggling with how to write this post for quite some time. It’s the conversation you have to have with a friend where you have to say “it’s nice that you’re trying as hard as you can George. I even believe you are, but it doesn’t matter. Because George, your best just isn’t good enough.”

Or, as Captain Jack Sparrow would put it, all that matters is what a man can do and what a man can’t do.

Sometimes the world doesn’t grade us on a curve. You need to jump a fence, and you can’t. You need to climb a rock face, and you aren’t good enough. You’re running away from a bear, and you don’t run fast enough. And now you’re dead. You wanted to get into a good grad school, but you don’t have the grades or test scores. You’re in a fight, and the other guy wins, and you wind up on the ground and he puts the boots to you and you’re crippled for life. You tried “your best”, but you lost and you’re going to pay the price for losing for the rest of your life. Maybe you lost because he fought dirty, and you’d rather take a chance of being crippled for life than kick someone in the balls. Maybe you lost because he trained harder than you, and you’d rather go have a drink with your friends.

Or maybe you needed to pay for health care, and you didn’t have the money, and someone you loved died. And they died because you didn’t have the money, and because your country didn’t have universal health care. And maybe you always worked as hard as you could, and you campaigned for health care with all your heart. It doesn’t matter, your child, your wife, your husband—they’re still dead. Your best wasn’t good enough.

Now this is where America is. This is the real world. The United States in aggregate has been living beyond its means for over 30 years now. You have been shipping the real economy overseas. Ordinary families have been going in debt. The government has been going in debt. You’ve been voting yourself lower taxes and not paying for infrastructure reinvestment, or education, or anything else that matters, really. You’ve been spending too much money on guns, not enough on butter. You’ve been pushing the bill off into the future.

And whenever I write about what needs to be done to fix this—simple things like universal healthcare, which we know for a fact reduces health care costs by 1/3, because it has worked for every single other country that’s ever done it, people come out of the woodwork and they tell me “that’s not politically feasible.” Or perhaps I suggest a 55 mile an hour speed limit “that’s not feasible”. Or spending significantly less on the military since half the world’s military spending is a bit overboard. “That’s not politically feasible.” Or raising taxes, “that’s not feasible”. Or… but why go on, the list is endless.

Then Obama comes out with a Stimulus bill which simply will not do the job.  It is not big enough.  It is not well constructed enough.  It has no vision.  It won’t work.  This isn’t really in question, even their own report(pdf), which has the thumb heavily on the scale, shows it won’t work if you take the time to look at the job charts.

A lot of people think this is some academic debate that doesn’t matter in the real word, like “how many angels can dance on the head of a pin”. It’s not, it’s deadly practical. The US is in severe decline, it is past the point where any other country would have flamed out and had an economic collapse (Argentina collapsed with better numbers than the US has now, for example). Because of America’s privileged position in the world, it’s been able to stagger on.

Now folks can say “Ian those things aren’t necessary, I think the following steps will fix it” and that’s fine. Could be I’m wrong. Obviously I don’t think so, or I wouldn’t write what I write, but hey, plenty of people have been dead certain they were right, and dead wrong.

But what gets me is that so often what I hear is “that isn’t politically feasible. We can’t do that”. Now, by can’t they don’t mean “those things are impossible” or “we don’t have the means”, what they really mean is “we won’t do them, because they would be hard or they’re outside our ideological comfort zone.”

Fair enough. But if those things are necessary, and if you don’t do them, then the consequence is going to be catastrophe. I don’t mean disaster. New Orleans was a disaster, and it wasn’t enough to wake America up. The current financial crisis was a disaster, and so far it’s looking like it wasn’t enough to convince people that real fundamental changes are needed.

So because no one will do what is necessary, catastrophe will happen. What I mean by this is a severe decline in the US standard of living, probably between 20% to 40%, starting in 4 to 6 years and taking place for a decade. Might happen sooner if folks keep refusing to do what needs to be done to fix the financial crisis and stop it from turning into a worldwide Great Depression.  Even before it happens, you’re going to see real wages declining for Americans while their assets collapse in price.

To see what a precipitous decline in standard of living is like, read up on Russia’s history in the 90’s. A lot of people will die of starvation, of cold, of heat, of lack of medical help and from violence.

That’s just the way it’s going to be. Because while there are no problems that America has that America can’t fix, there also appear to be no problems America has that America is willing to fix properly. And it doesn’t matter why. It just doesn’t matter. The bear doesn’t care why you couldn’t run fast enough when it mauls you to death. When the economy finally goes into full bore collapse, when all the bills come due and everyone decides to stop paying Americans to consume, it won’t matter why Americans thought they could suspend the economic laws of gravity forever and live beyond their means for decades.

It just won’t matter. You can either do what it takes to fix the problems or you can’t. If it’s true that you can’t, then I quite seriously, sadly, and with utmost sincerity suggest that you either start learning how to survive in a societal meltdown, or you get out, or you hope that your number comes up in the next few years so you don’t have to pay the bill that comes due when people think they can live in fantasy land, on credit, forever.

America elected Barack Obama. He’ll have, essentially, two chances to fix things. He’s failing the first one already, with his botched stimulus bill and that’s going to be disastrous. If he fails the second one, that’ll be catastrophe.

So I sure hope that, yes America can.

(Originally posted January 18, 2009 at FDL.  It’s pretty clear now that, no, America can’t.)

Lowest Bank Lending since

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On February 25, 2010

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Whoever would have expected? (h/t Agonist)

U.S. banks posted last year their sharpest decline in lending since 1942

Of course, this is exactly what we warned would happen.

Can you say Japanification?  Sure you can.  Banks are impaired.  Badly.  So they don’t want to lend.  To get lending going again it was necessary to take over bankrupt banks, to siphon off bad loans, to force both bondholders and stockholders to take their losses.

Larger banks are doing better than smaller banks, which should be no surprise as they’re the ones the Feds concentrated on bailing out because if you bailed out small banks they couldn’t be bought up for cents on the dollar by Geithner and Bernanke’s friends in the financial industry.

Refusing to do the right thing has consequences.  This is one of them.

What Dave Said

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On January 23, 2010

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Actually, this is already the primary strategy of a huge part of US industry (telecom, IP, insurance, pharma, among others), but it’s about to get worse:

The Supreme Court ruling allowing corporations to use their vast resources to directly influence the political process shifts the business playing field away from competing in the marketplace with products and services, to purchasing government/legal/reguatory advantages, subsidies and monopolies.

The marketplace is now irrelevant – only company size matters. It is just more efficient to beat your competitors by buying legislation than it is by competing in the marketplace. When you can purchase $1 billion in tax breaks, subsidies, mandates, contracts, whatever by spending a few million on candidates/influence, etc. it just makes more sense to do so. The return on investment is just so much higher than building factories, spending on research, paying employees, and other tedious, time-consuming, capital-intensive work.

For some time companies have recognized that the rewards from lobbying outperform the rewards from competing in the marketplace, and this ruling just amplifies that. This 2006 New York Times article, Google Joins the Lobbying Herd, discussed how Google felt it had “no choice but to get into the arena” to start “spreading its lobbying dollars” around to politicians and quotes Lauren Maddox, a lobbyist for Google, saying the “policy process is an extension of the market battlefield.” This supreme court ruling just clinches this shift away from markets.

This has been part of my fundamental critique of the US economy for years. This is why the US is losing its technological lead in area after area, because innovating is less certain than buying government.

Thing is, foreign companies don’t have this “advantage” so have to compete the old fashioned way.  And they will continue to eat American companies lunch.  As the US gets weaker, and becomes less able to force foreign companies to obey American laws, this strategy will become less and less viable, especially as American citizens will also be losing buying power.

This sort of thing is why I now see the odds of the US turning itself around in the next generation as being miniscule.

The Unvarnished Truth About the US

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On January 22, 2010

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I’ve been meaning to write this post for some time and in light of yesterday’s Supreme Court decision allowing unlimited corporate money into the political system, I think it’s time.

Yesterday’s decision makes the US a soft fascist state.  Roosevelt’s definition of fascism was control of government by corporate interests.  Unlimited money means that private interests can dump billions into elections if they choose.  Given that the government can, will, and has rewarded them with trillions, as in the bailouts, or is thinking about doing so in HCR, by forcing millions of Americans to buy their products the return on investment is so good that I would argue that corporations have a fiduciary duty to their shareholders to buy out government – after all if you pay a million to get a billion, or a billion to get a trillion, that’s far far better returns than are avaiable anywhere else.

And no politician, no political party, can reasonably expect to win when billions are arrayed against it.

The one faint hope is that politicians in the Senate will panic, know they have 10 months to do something and ram something through.  Of course, that will only be a stopgap measure, until the Supremes overthrow it, but in the meantime, maybe Dems will get serious about the Supreme Court and not rubber-stamp radical right-wingers like Alito and Roberts.

That is, however, a faint hope.

Add to this the US’s complete inability to manage its economic affairs, and its refusal to fix its profound structural problems, whether in the financial system, the education system, the military, concrete infrastructure, technology or anything else and I cannot see a likely scenario where the US turns things around.  The US’s problems in almost every area amount to “monied interests are making a killing on business as usual, and ologopolistic markets and will do anything they can to make sure the problem isn’t fixed”.

Even before they had the ability to dump unlimited money into the political system, they virtually controlled Washington.  This will put their influence on steroids.  Any congressperson who goes against their interests can be threatened by what amounts to unlimited money.  And any one who does their bidding can be rewarded with so much money their reelection is virtually secure.

This decision makes the US’s recovery from its decline even more unlikely than before—and before it was still very unlikely.  Absolute catastrophe will have to occur before people are angry enough and corporations weak enough for there to even be a chance.

So, my advice to my readers is this.

If you can leave the US, do.  Most of the world is going to suffer over the next decades, but there are places which will suffer less than the US: places that have not settled for soft fascism and a refusal to fix their economic problems.  Fighting to the very end is very romantic, and all, but when you’re outnumbered, outgunned, and your odds of winning are miniscule, sometimes the smartest thing to do is book out.  Those who came to America understood this, they left countries which were less free or had less economic hope than America, and they came to a place where freedom and opportunity reigned.

That place, that time, is coming to an end.  For your own sake, and especially for the sake of your children, I tell you now—it is time to get out.

I am not the only person thinking this.  Even before the decisions, two of my savviest American friends, people with impeccable records at predicting the US meltdown, told me that within the next few years they would be leaving.

There’s always hope, and those who choose to stay might stop this terminal decline.

But you need to ask yourself, seriously, if you are willing to pay the price of failure: if you are willing to have your children pay the price of failure.  Because it will be very, very steep.

Coakley Is A National Election

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On January 19, 2010

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And yes, it is a referendum on Obama, and health care.  The more Coakley said she was the 60th vote for healthcare “reform”, the worse her numbers became.  The more she said “I’m Obama’s 60th vote” the worse her numbers became.  Yes, she took the election for granted at the beginning, but let’s be honest: who the hell thought the Democrats could lose Ted Kennedy’s seat?

What people are hearing; what they believe, is that the money for HCR is coming from cuts to Medicare, and not from cuts to the insurance industry, pharma or taxes on rich people.  And, actually, they’re right about this.  One might argue that the Medicare cuts are “fat” and “justified”  but people aren’t buying it.

Win or lose, if Democrats are in trouble even in Kennedy’s seat, then 2010 is looking grim indeed.  And while I have been surprised by how close this election has become, I am not surprised by the fact that 2010 is looking grim.  I have been warning since the stimulus bill (a horrible mess) that bad policy leads to bad outcomes which leads to voters hating the party in power.  I have been warning since Obama pushed through TARP that if Democrats refused to be populist, right wing populism would surge.

No matter the outcome, Obama needs to try fake populism (because we all know he won’t do the real thing) and needs to pray that his economic program, such as it is, produces better economic results than even his own economic advisers think likely.  This will be done by faux populist measures such as the bank levy, and on the economic front, by both using the unlimited guarantees given to Freddie and Fannie to reinflate the propery market and through military Keynesian stimulus from the Afghan escalation.

I suspect it’s going to be better than people think, but it’s still not going to be enough.  The 2010 elections are going to be ugly for Democrats.

Which, sadly, is exactly what they deserve.

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