Ian Welsh

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

Category: Class Warfare Page 35 of 36

JPMorgan Illustrates What Banks Do When They Have Money

By

On November 19, 2009

Comments

And it isn’t lending it out cheap:

JPMorgan will on Thursday unveil a £1bn deal to buy Cazenove, the UK broker with which it has had a joint venture for the past five years.

The bank is to pay about 535p a share in a deal in which David Mayhew, widely recognised as one of the City’s best-connected corporate advisers, will retain the title of chairman of the Cazenove brand.

Last year myself and Stirling both noted that what would be done by banks if they were bailed out is to horde their money, not lend it out cheap, and save it to buy up competitors, make leveraged plays and so on.  That is EXACTLY what has happened.  Exactly.

During a downturn, if you have money, you don’t want to lend it out for low gains when you can buy up competitors, cheap.  You don’t want to lend it out cheap, when you can make leveraged plays off the bottom of a stock and commodity market which is bound to go up because trillions are being poured into it by central banks.  You want to take that money, and buy things while they are cheap, not lend it out for 4 or 5% returns, when you can make many many times that.

Why, exactly, governments expect banks who have better ways to make money to act like retail banks who don’t have any other way to make money but lend out at prime +3 or 4 percent is beyond me.  They think they’ll do it out of gratitude for being bailed out, or some sort of sense of civic duty?  Most politicians may be stupid, venal and corrupt—but it’s that very greed and venality which means they should understand that banks will do no such thing.

Banks will do it only if they are forced to do it.  Remove retail banking from investment banking, insurance and brokerage services, and disallow any risky games on the markets for retail banks.  Remove all special facilities from non retail banks because Goldman Sachs should not be doing highly leveraged plays with free money from the Federal Reserve.  And reinstitute serious leverage limits, not just for retail banks but for everyone.

As for retail banks, if they don’t lend to the public at rates approved of by the Federal Reserve and Congress, they too should lose their access to special facilities.  Banks are given the valuable right to borrow money for almost nothing, and to, in effect, print money by lending out money they don’t have.  Those are privileges which are given to them in the expectation that they will use them to benefit the economy.  If they refuse to do so, they should lose the privileges.

None of this is rocket science.  Those of us who predicted both the crisis and what the bungling of the crisis would cause, however, are precisely the people who are not listened to by those in power.  Obama is having his jobs summit, and forget nobodies like me, he isn’t even inviting somebodies like Stiglitz and Krugman.

If you’ve been right down the line, then you are precisely the sort of person who isn’t “serious” and shouldn’t be listened to when it comes to what it takes to fix the problem.

Why?  Because everyone knows that fixing the problem will end the gravy train for a lot of very rich people.  A lot of very rich people who give a great deal of money to Democrats in general, and gave a lot of money to Obama in particular.  If the cost of keeping that gravy train and the donations it enables going is tens of millions of unemployed people, well, so be it. Because serious people know that real change isn’t going to happen under Obama or under this Democratic Congress, so there’s no point in even talking to people who might suggest it.

Plus ca change. Plus c’est la même chose.

Consumers Can’t Choose Not to Do Business

By

On October 28, 2009

Comments

One argument free market fundamentalists use often is that if you don’t like how a company does business, just don’t do business with them, go to a better company, and the market will get rid of bad companies.  So, for example, if you don’t like the way your credit card company is raising arbitrary fees and interest rates, well, find another credit card company.

A good idea.  If, of course, there was a free market.  With credit cards, the terms tend to be pretty universal.  If your credit rating is X, and you have Y assets, credit card companies will generally all treat you the same way.  One may be marginally better than another, but it is marginal.  They make more money by all engaging in the same practices which increase fees and interest than by engaging in price wars, and they understand that

Same thing with telecom service.  If there are 3 providers, and they all provide about equivalent services, then there isn’t a free market.

In many rural markets for health insurance, one provider may control 90% of the market, and in many others two or three controlling the majority is very common.  Nor is their much difference between their offerings at any given price point (or their customer service/denial rates, etc…) even when you have multiple “options”.

And since doing without a credit card is actually very difficult (I did it for years, I know what I’m speaking of—I invite you to travel without one one day to see what I mean) and so is doing with phone or internet service, well, you’ve got little choice.

In fact, what the US has in many industries are largely unregulated oligopolies, because the regulators mostly don’t bother.

I’m a big believer in free markets, myself.  I’d love for more of them to exist.  But it is basic economic theory (and something Adam Smith understood very well) that the first thing people do when they win the market is try and make sure there isn’t a market.   The best profits are monopoly or oligopoly profits.

Free market mechanisms by themselves cannot ensure the continued existence of free markets.  Government is needed, but so are the proper mores.  When John Kenneth Galbraith, in the post war period, looked into why executives didn’t pay themselves a lot more (they could have) he came to the conclusion that it was essentially a cultural thing—managers wouldn’t tolerate it, it was against what they believed in.

Their ethics.

Likewise in 19th century America belonging to certain religious groups was a big plus for a merchant.  People would go out of their way to do business with you, because they knew it was much more likely you wouldn’t cheat them or price gouge them, that you believed in a fair profit, but only a fair profit.  Ethics.

Free market fundamentalisms in the US has done a great deal of damage by claiming the only ethic that matters is greed.  The free market is not self regulating, the invisible hand does not always work to the benefit of society as a whole (as Adam Smith well knew), greed is not always good, and free markets naturally tend towards unfree markets in which the choice for consumers is to take what is offered or go without.  (If you don’t believe me, take one of the “contracts” given to you by a big firm, and cross out the parts you disagree with, and write in your own wording.  “Negotiate” with them.  Let me know how it works out.)

Free markets are grand things.  Every once in a while they even exist.

Actually 1930s solutions stopped financial crises for decades and would work now

By

On October 22, 2009

Comments

Mervyn King, the Governor of the Bank of England had the temerity to suggest that banks be broken up into retail banks and investment banks, thus reducing risk and making them smaller so they aren’t “too big to fail”.

Today the Labor government shot back that such a solution is a 1930s solution, but these days it wouldn’t work. The conservatives suggested that they would only follow King’s suggestion if every other country did too. Which is to say, they wouldn’t.

There’s a strange idea in Britain that the financial sector, which is to say “the City”, represents a comparative advantage for them. This idea mirrors the American belief. Both countries are wrong. What has happened instead is that over-sized fraudulent leveraged returns in the financial sector have driven out investment in the real economy. And since those returns were and are fraudulent, when the collapse came the real economy, aka: taxpayers, had to bail them out.

Over-sized, over-powerful financial sectors are parasitical on the real economy, and actually damage it. This is a clear lesson historically, where economic financialization of any country larger than a city state is almost inevitably disastrous.

What is occurring right now in England is a huge amount of slashing of basic services, as both Labor and Conservatives compete to cut, cut, cut. Huge amounts were spent on bailing out the banks, and now it will be paid for by ordinary people. This is a direct transfer of wealth from the real economy, to the financial economy.

England would be better off with a much smaller, weaker financial sector composed of banks small enough to be allowed to fail. If the possibility of them being taken over is Brown’s real fear (and it may well be) then simply create some ownership restrictions to keep them in British hands.

Splitting banks into retail and investment banks, keeping brokerages and insurance companies separate as well is part of a solution set which kept major financial crises like the recent one from happening for most of the second half of the 20th century. It was put in place by people who were experiencing the Great Depression and had learned the lessons of the roaring 20s.

The inability of our decision makers, whether British, American, Canadian or otherwise to understand those lessons and take action is why it is inevitable at this point that we will have an economic collapse. It is, at this point, all but inevitable, not because nothing could be done to stop it, but because no one will do what it takes.

Such a collapse may be as far as two economic cycles out, or it may be sooner, but it will happen. And the sort of non-argument made by Brown “not a 21st century solution”, which is content empty, is why. The real reason is cupidity. Both the British and American governments are completely captured by monied interests and will do nothing significant to reign in those interests, no matter what the costs or consequences for the majority of the population.

And so those consequences will ensure. By not making another financial crisis impossible, they are making another financial crisis inevitable, and next time it will be even worse.

Corrected: Support for Public Option (Does Not) Collapse If Real Public Option Polled

By

On October 21, 2009

Comments

winged_caduceus

Edit: oops.  I’m full of it.  Misread the poll.  In fact it indicates the opposite of my title.  Ignore the below.  Perhaps the public option will be fantastically popular.

The problem with public option polling is that the questions imply strongly that everyone has access to it.  In fact, most people don’t have access to it (if, for example, your employer offers insurance you can’t opt out and go to the public option.)  Kip Sullivan did a bit of investigating and found a poll which actually did inform Americans of this fact (h/t Corrente):

“Would you support or oppose having the government create a new health insurance plan to compete with private health insurance plans?”
Support: 55%
Oppose:42%
Unsure: 3%

If oppose/unsure: “What if this government-sponsored plan was available only to people who cannot get health insurance from a private insurer? In that case, would you support or oppose it?”
Support: 21%
Oppose: 24%

That’s quite the difference, don’t you think?  As I noted in my last post, voters are going to be furious with Democrats if they pass any of the current proposed health care “reform” bills. The public option in all of them is crippled and the subsidies are low, such that they will eat as much as 1/3 to a half of many people’s disposable income.

Because the public option proposed in any of these bills is not robust, since they won’t have enough enrollment to have market pricing power, and thus won’t be able to force down costs, there is no reason to believe that health care reform will actually contain health cost increases below inflation, let alone below wage increases.

Since the bills also force people to buy insurance, that means voters will be forced to buy insurance whose cost will rise faster than their wages.  This is particular pernicious when it comes to 20 and 30-somethings, fresh out of College, with huge student loans already, and few good job prospects.

This is horrible policy. It is also political suicide.  The people in the progressive blogosphere who are pushing for a “public option” without insisting on an actual robust option (again, none of the options being considered are robust and even if linked to Medicare rates none of them will be because they are not large enough) are pushing for a law which is a massive giveaway to insurance companies—a regressive tax on the middle class.  It is worse than immoral, though it’s terribly immoral, it is a horrible mistake the price for which will be paid at the ballot box.

I have warned on this repeatedly, as have others.  We have not been listened to.  I am not looking forward to having the last laugh on this, because it is a laugh which will be purchased in the suffering of Americans, but I will have the last, bitter, laugh.

Progressives need to learn how to analyze policy.  The reason you elect a particular party, Senator, President or Representative, let alone a Congress, is to implement good policies, not to pass something bad for the sake of saying they passed something.

When you pass good policy (say a stimulus bill which actually improves the job situation, instead of a stimulus bill to weak to do more than slow the bleeding) the population, aka: voters, receive good results. That makes voters happy. When they’re happy, they vote for you again.  When they aren’t happy, they don’t.  This is how LIBERAL government works.  Do good things, reap the benefits.

Reactionary government figures that if you give enough money to private interests and throw a few scraps to the population, you can buy the election.  But it doesn’t work.  Democrats received more money from special interests last election not because special interests decided they loved Democrats, but because the Republican brand was so sullied they knew the Republicans were toast.  So they gave money to the Democrats to protect their interests.  They bought in.

But the second Democrats are weakened, and Republicans look like they can win, they’ll go back to giving Republicans most of their money.

The right thing to do, passing good policy, isn’t just the right thing to do morally, it’s the right thing to do pragmatically.  It is clearly pointless to expect most Democratic legislators to do the right thing for moral reasons, but it would be nice if they understood they are cutting their own throats by continuously passing bad policy.

That Horrible Canadian Health Insurance System

By

On October 5, 2009

Comments

Went and renewed my Ontario Health Insurance Plan (OHIP) card today. Stepped into the OHIP office at 8:30, an office close enough to where I live that I could walk to it . A receptionist looked at my forms and documentation (a phone bill to show my address, my passport to show a signature with a picture, my old health card and a one page form.) She gave me a number, I sat down and was called less than 5 minutes later. The agent looked over my papers, chided me for not renewing it sooner, took a new picture of me, and gave me a letter to use along with my old health card so I can get care till I receive my new card in the mail.

Total elapsed time? Less than 15 minutes.

Now, to be fair, this is a lot better than my experience with OHIP in the early 2000’s when I was upgraded from a non-picture card to a picture card. That experience was a nightmare—long waits, an office almost 45 minutes from where I lived, unclear instructions so that I had to come back a second time, and a hostile and overworked agent. But in general my experiences with the OHIP bureaucracy, including the time I moved provinces twice in less than six months, theoretically making me covered by neither province, have been nothing but positive. In the case where I was covered by no one, a manager quickly made the right decision, on the spot: I had to be covered by someone, I was now living in Ontario, and therefore Ontario would cover me.

Simplicity is next to Godliness when it comes to bureaucracy, and from a patient’s perspective, the Canadian health care system tends to be simplicity itself.

Bank Profits And the The Choice America Has Made

By

On April 13, 2009

Comments

Peter Morici points out something which should be obvious:

Monday afternoon, Goldman Sachs reported much larger than expected first quarter profits, and this comes on the heels of Wells Fargo’s strong earnings reported last week.

No one should be surprised.

The Federal Reserve has provided the banks with lots of cheap funds through its various emergency lending facilities and quantitative easing.

The Federal Reserve has permitted the banks and financial houses to park vast sums of unmarketable paper on its books—securities made nearly worthless by the misjudgment and avarice of bankers. In return, the Fed has provided these scions of finance with fresh funds, cheaply, that they may lend at healthy rates on credit cards, auto loans and even mortgages.

While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal of the Roman army sacking Palestine.

Yes, well, there you go.  Morici goes on to point out that low interest rates screw over old people who have certificates of deposit, and that the banks now want to “repay” the loans because when you’re being given money for nothing, and allowed to keep bad assets on your books at whatever price you feel is ok (since mark to market is gone), well, everything is wonderful in banker land.

(Well, unless you’re so far gone, like Citi, or Bank of America, that even in fantasy land you can’t make it work.)

As Stirling Newberry has pointed out, the economy has become clearly divided into two different economies.  One for the people who have access to money cheap and whose job is to take care of foreigners, and the other one, where credit is dear and you’re losing your job.

Guess which economy you live in?

This isn’t just going to be about employment, though that is going to suck for the forseeable future, and will, in effect, never recover.  It is also going to be about real income.  Forget the headline CPI, the costs you pay are going to go up faster than your wages (which are probably going to deflate), and your assets are going to deflate.  Riptide inflation, which catches you on both the up and downsides.

Real standards of living for median Americans are going to drop.  It’s just that simple.

In 4 to 8 years, the Republicans will probably get back in again.  They will do stupd things again.  By the end of their orgy of looting and warring (which will be even worse than Obama’s) the country is going to be extremely damaged.  Right now things could be fixed.  They probably won’t be, because Barack Obama has no intention of fixing main street, but they could be.  By the time the US gets its next real chance, well, this hole is going to be mighty mighty deep.

The US has made the choice of continuing to put its primary efforts into pursuing a chimerical paper economy which promises easy alchemical gold, rather than fixing the real economy.

But there’s no such thing as free money, not on aggregate over the long run.

And the long run is here, and by “aggregate” I mean “you aren’t an executive with the power to pay yourself millions in bonuses for destroying the US’s economy.  But you will have less money because of them.”

(Note: quote from an email from Morici, article does not appear to be online)

Just the Facts, Ma’am

By

On April 13, 2009

Comments

Dave Johnson’s got an excellent piece up in which he points out that laughing at the right is stupid. They’re doing now exactly what they did to Clinton in the 90’s, and it worked then.

In fact they’re back to being as crazy and paranoid as they were when Clinton was President. Remember the accusations that Clinton and Hillary were murderers, that Hillary personally killed Vince Foster, that Clinton ran a drug-smuggling operation out of an airstrip, that he was looking through FBI files, that he fired the travel office to put a cousin in, that he “sold” plots in Arlington cemetery, that he held up runway traffic to get a $500 haircut, that he used cocaine in the White House, that he hung obscene ornaments on the White House Christmas tree and the other fabrications that came daily?

We laughed then, too, and how did that work out? They took over the Presidency, the House and the Senate. Then they started wars. They tortured people. They appointed corporate lobbyists to run every agency. They filled the courts with Federalist Society judges that rule for the corporations and religious right every time. They stole billions…

Let me add two more facts:

  1. For ordinary people, the economy is never going to fully recover, ever (well, not in the next 4 years anyway). The administration’s own numbers show this, with an overoptimistic model that assumes tax cuts will have the average effect of the last thirty years, rather than the effect they had when Bush did them (a big fat flop). But even if you don’t think they’re overoptimistic, it doesn’t matter. Again, their own numbers show employment will not recover before the next recession.
  2. Obama and co. are doing a huge giveaway to the richest people in America.  By the time they’re done it will probably be as large or larger  than anything Bush did. Since it will not work in the sense of helping ordinary people enough, it will be used by Republicans to fuel populist rage. Sure, that’s hypocritical, but does that matter? We all know it doesn’t.

So I’m with Dave.  Enjoy mocking Republicans all you want, but in your cold hard calculating heart, take them very very seriously.

WTF!? Stress Tests Prove that Banks Fine, Just Need More Bailouts

By

On April 9, 2009

Comments

You can’t make up stupidity like this.  The Onion must be in despair, because there’s no way to satirize something so mind-numbingly moronic.  In reference to the “stress tests” of the banks:

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

So, to summarize. The banks are fine, but they still need to be bailed out?  IE., they’re effectively bankrupt, but it’s not as bad as we think?

Did I wander into the twilight zone?  Just how stupid do they think we are?

(Answer: it doesn’t matter, because they’ll give the banks as much money as they feel like, whether we like it or not, because that’s job 1 for the Obama administration—to bail out the masters of the universe at taxpayer expense).

In the immortal words of George H. Bush “Who cares what you think?”  Who cares what any of us think?

Page 35 of 36

Previous

Next

Powered by WordPress & Theme by Anders Norén