Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Failed Stress Tests...in 2004From the Financial Times:Northern Rock risk revealed in 2004 By Norma Cohen and Chris Giles Published: May 30 2009 00:03 | Last updated: May 30 2009 00:03 Banking regulators identified Northern Rock as the weak link in Britain's banking system during secret "war games" held as long ago as 2004, the Financial Times has learned. The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock's business model, and its domino effect on HBOS, then the UK's largest mortgage lender. The revelation is at odds with the notion that no one could have foreseen the September 2007 collapse of Northern Rock or the subsequent rescue of HBOS, which was sold to Lloyds Bank. The FT has found the troubled lender and HBOS were at the centre of a 2004 war game that regulators held to test how banks would cope with sudden turmoil in mortgage markets and the withdrawal of the money from foreign banks on which Northern Rock's business model relied. Regulators chose that scenario because they were worried about the growing dependency of banks such as Northern Rock and HBOS on such funds rather than on stable retail deposits. Even though the exercise revealed the banks' vulnerability, the regulators concluded they could not force the lenders to change their practices, according to several people familiar with the matter. It was felt that it was too hard to say Northern Rock's business model was excessively risky, and in any case banks following that strategy were profitable and growing, though the Bank did warn of the growth in wholesale deposits repeatedly in its financial stability reports. However, as wholesale lending markets dried up in mid-2007, the war game's findings proved eerily prescient. Both banks sustained irreparable damage beginning in 2007 as wholesale lending markets seized up and mortgage-backed securities became unsaleable. Regulators on Friday confirmed that Northern Rock and HBOS were central to the war game. But spokespeople for the FSA and the Bank of England said the exercise was focused on uncovering weak regulatory practices rather than predicting individual bank failure. Mervyn King, Bank governor, alluded to the war games in a 2005 interview with the FT, saying the Bank had looked at a situation in which "there could be a problem in a particular institution which isn't terribly big, which may for completely unpredictable reasons turn out to pose a liquidity problem to a very big institution". But until now no one has known the name of any banks used in the exercise. The Financial Times sought details in early April under the Freedom of Information Act from the Bank and the Treasury, but those requests have so far been unsuccessful. Copyright The Financial Times Limited 2009 Labels: baillout, Bank of England, financial crisis, HBOS, Lloyd's TSB, Mervyn King, Northern Rock Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Job Fair Canceled Because of CrowdsNext up, bread lines?From the Boston Globe: A weekend job fair at a Dedham shopping center was postponed today after organizers became concerned that a flood of job seekers would snarl traffic and create safety problems. Labels: jobs, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Rallies for Single-Payer in 50+ Cities 5/30From Healthcare Now!—important rallies this weekend, in a city near you (visit the website for a long list of cities and events--most are on Saturday):May 30th: National Day of Action Nationwide Rallies for Improved Medicare for All Join thousands of single-payer supporters in a nationwide week of action to support improved Medicare for all (HR 676). Single-payer activists will be gathering all over the country to say, "Healthcare, yes; Insurance companies, no," and to show solidarity with demonstrations at the AHIP (American Health Insurance Plans, a private health insurance lobby) conference in San Diego. If an action isn't already in your city, plan your own day of action! It can be a town hall meeting, demonstration in front of a local insurance company, film showing, vigil, or your own unique idea. Let us know what you'd like to start planning by contacting info@healthcare-now.org. 47 million Americans are uninsured. Private insurance rates are rising faster than inflation and our incomes. By 2025 the cost of private health insurance will exceed our projected income. Click here for more info including a list of cities and events. Labels: health care, Healthcare NOW, HR676, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Peruvian Workers Protest for Higher PayFrom the Latin American Herald Tribune:LIMA – Thousands of workers demonstrated in different Peruvian cities to demand improvements in their economic situation and support the demands of Amazon Indians, who have been conducting protests for 48 hours against land and resource laws they say threaten their way of life. In Lima, the march organized by the CGTP labor federation attracted about 5,000 participants and transpired peacefully. Demonstrators marched to Congress chanting slogans such as "Let the rich pay for the crisis, not the people." CGTP general secretary Mario Huaman said that the main objective of the mobilization is to demand that the government provide “the solution to the Amazon strike and the repeal of the decrees” that the Indians feel hurt their rights to the land. "If the government does not solve the different conflicts that exist on the national level, we’re going to radicalize the measures of struggle," he warned. Other aims of the protesters included asking for salary and pension hikes to compensate them for the rise in the cost of living, as well as the nullification of several measures that criminalize protests, the union leader said. With regard to the timing of the general strike announced in March by the CGTP to protest the government's policy, Huaman said that the federation will announce the date in two weeks, but it will most probably be held in July. In the southern city of Cuzco, Canal N television said that the city was practically paralyzed by Wednesday’s demonstrations, which affected schools, public transport and the transportation of tourists to the Inca citadel of Machu Picchu, Peru's premier tourist attraction. The most serious demonstrations occurred in the northeastern Amazon city of Iquitos, where 11 people were injured on Thursday and 20 were arrested in confrontations with police. Labels: financial crisis, general strike, Peru, protest Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hedge Fund Manager 'Less of a Capitalist'One of our interns, Chris H., found this nugget at footnoted.org, about a talk that veteran hedge fund manager Michael Steinhardt made at a Brandeis University event at the Harmonie Club in New York City recently. His admission that the financial crisis and its aftermath had made him "less of a capitalist" is interesting. I wonder what exactly he means by that? The idea that the aftermath of the crisis is a "punishment-free period" gives a clue: capitalism should punish failures, and the gov't has not allowed that to happen, or has failed to play its assigned role of making sure that it happens. His allusion to Joseph Schumpeter, via the notion of "creative destruction" is also interesting, as is the overheard comment mentioned in the last paragraph. —csOf particular interest to footnoted readers were Steinhardt's comments on the SEC losing its way (he also said the Department of Justice had too). He also said that the current period has "made me less of a capitalist" because so far at least, it has been a "punishment-free period." That's particularly interesting given Steinhardt's personal history with regulators. Some might remember that back in the early 1990s, Steinhardt settled with the SEC and DOJ over an investigation over T-bills, personally paying over $50 million in fines. He said the money management industry had "failed miserably" and that hedge funds were "no longer a place for the best and the brightest". Read the whole post. Labels: capitalism, hedge funds, Joseph Schumpeter, Michael Steinhardt, punishment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Min. wage increases boost consumer spendingThe most recent economic snapshot from the Economic Policy Institute fits nicely with an article from our March/April issue, Should We Be Talking About Living Wages Now?, in which Jeannette Wicks-Lim of the Political Economy Research Institute argues that a recession and financial crisis is not a time to abandon living wage campaigns and policies. We'll have another article by Wicks-Lim in our July/August issue, as part of our continuing series of articles from PERI researchers. —csIncreases in minimum wage boost consumer spending Economic Snapshot for May 27, 2009 By Kai Filion The recently enacted American Recovery and Reinvestment Act included policies to help struggling families and create jobs. But an extremely effective and simple policy that achieves both of these goals is often overlooked: increases in the minimum wage. Each increase provides financial relief directly to minimum wage workers and their families and helps stimulate the economy. By increasing families' take-home pay, workers gain both financial security and an increased ability to purchase goods and services, thus creating jobs for other Americans.  A three-step federal minimum wage increase was passed by Congress in 2007. The first step took place in July of 2007, with a year between each step. In a forthcoming paper, we estimate the total impact of each increase using results from a study by economists at the Federal Reserve Bank of Chicago (Aaronson et al. 2008) that measures the effect of minimum wage increases on spending. The first two increases in July 2007 and July 2008 will have generated an estimated $4.9 billion of spending by July 2009, precisely when our economy needs it the most (see Figure). Furthermore, the final increase in July 2009 is expected to generate another $5.5 billion over the following year. The paper also shows that if the minimum wage were increased to $9.50 in 2011, as President Obama promised during the election, an estimated $60 billion of additional spending would be generated over two years. (This assumes a two-step increase, first to $8.25, then to $9.50 a year later.) These results demonstrate that an increase in the minimum wage would not only benefit low-income working families, but it would also provide a boost to consumer spending and the broader economy. Reference: Aaronson, Daniel, Sumit Agarwal, and Eric French. 2008. The Spending and Debt Response to Minimum Wage Hikes. Working Paper. Chicago, Ill: Federal Reserve of Chicago. Read the original snapshot. Labels: Economic Policy Institute, living wage, minimum wage Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fed In the HeadlightsDisturbing C-Span footage of Rep. Alan Grayson questioning Elizabeth A. Coleman, Inspector General of the Federal Reserve, about whether her office has conducted any investigations of the Fed's decision not to save Lehmann Brothers or about the $1tn+ increase in the Fed's balance-sheet since last September. The website of the Fed's Inspector General describes the office's duties thus:The Office of Inspector General (OIG) conducts independent and objective audits, inspections, evaluations, investigations, and other reviews related to programs and operations of the Board of Governors of the Federal Reserve System (Board). OIG efforts promote integrity, economy, efficiency, and effectiveness; help prevent and detect fraud, waste, and abuse; and strengthen accountability to the Congress and the public. The OIG's work assists the Board in managing risk and in achieving its overall mission to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance. Her testimony doesn't really reassure us that her office is living up to its mission. Maybe Elizabeth Coleman needs to be replaced with Elizabeth Warren? The Bloomberg article Grayson refers to is this one. Hat-tip to Doug Henwood on lbo-talk for the YouTube link. Labels: Alan Grayson, Elizabeth A. Coleman, fed balance sheet, Federal Reserve Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Job and No Mortgage for All in a Spanish TownNice piece in today's NYTimes about communists in Spain weathering the financial crisis.By VICTORIA BURNETT Published: May 25, 2009 MARINALEDA, Spain—The people of this small Andalusian town have never been shy about their political convictions. Since they occupied the estate of a local aristocrat in the 1980s, they and their fiery mayor, Juan Manuel Sánchez Gordillo, have been synonymous in Spain with a dogged struggle for the rural poor. Now that Spain's real estate bust is fueling rampant unemployment, this Communist enclave, surrounded by sloping olive groves, is thumbing its nose at its countrymen's capitalist folly. Attracted by its municipal housing program and bustling farming cooperative, people from neighboring villages and beyond have come here seeking jobs or homes, villagers and officials say. Mr. Sánchez, a bearded 53-year-old who this month celebrated three decades as mayor of the town of 2,700, says the economic crisis proves the wisdom of his socialist vision. "They all thought that the market was God, who made everything work with his invisible hand," Mr. Sánchez said on a recent morning, seated in his office below a portrait of Che Guevara. "Before, it was a mortal sin to talk about the government having a role in the economy. Now, we see we have to put the economy at the service of man." While the rest of Spain gorged on cheap credit to buy overpriced houses, the people of Marinaleda were building their own, mortgage-free, under a municipal program, he said. If a resident loses his job, the cooperative hires him, he said, so nobody wants for work—a bold claim in a region with 21 percent unemployment. Vanessa Romero, who moved here with her family from Barcelona in January after she and her husband lost their jobs, said she was drawn by the prospect of work and facilities like the nursery school, which costs about $17 a month. The couple make about $1,500 a month each working for the cooperative. Read the rest of the article. Labels: communism, cooperatives, Marinaleda, solidarity economics, Spain, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Sinking Dollar (Wallerstein)Very clear and interesting commentary by Immanuel Wallerstein; hat-tip to Bob F. Also check out the cover story from our Jan/Feb issue.May 15, 2009, Commentary No. 257 When Premier Wen Jiabao of China said in March of 2009 that he was "a little bit worried" about the state of the U.S. dollar, he echoed the feelings of states, enterprises, and individuals across the world. He called upon the United States "to maintain its good credit, to honor its promises and to guarantee the safety of China's assets." Even five years ago, this would have seemed a very presumptuous request. Now it seems "understandable" even to Janet Yellen, the President of the San Francisco Federal Reserve Bank, although she considers China's proposals concerning the world's reserve currency "far from being a practical alternative." There are only two ways to store wealth: in actual physical structures and in some form of money (currency, bonds, gold). They both entail risks for the holder. Physical structures deteriorate unless used and using them involves costs. To utilize such structures to obtain income and therefore profits depends on the "market" - that is, on the availability of buyers willing to purchase what the physical structures can produce. Physical structures are at least tangible. Money (which is denominated in nominal figures) is merely a potential claim on physical structures. The value of that claim depends on its exchange relation with physical structures. And this relation can and does vary constantly. If it varies a small amount, hardly anyone notices. But if it varies considerably and frequently, its holders either gain or lose a lot of wealth, often quite rapidly. A reserve currency in economic terms is really nothing but the most reliable form of money, the one that varies least. It is therefore the safest place to store whatever wealth one has that is not in the form of physical structures. Since at least 1945, the world's reserve currency has been the U.S. dollar. It still is the U.S. dollar. The country that issues the reserve currency has one singular advantage over all other countries. It is the only country that can legally print the currency, whenever it thinks it is in its interest to do so. Currencies all have exchange rates with other currencies. Since the United States ended its fixed rate of exchange with gold in 1973, the dollar has fluctuated against other currencies, up and down. When its currency went down against another currency, it made selling its exports easier because the buyer of the exports required less of its own currency. But it also made importing more expensive, since it required more dollars to pay for the imported item. In the short run, a weakened currency may increase employment at home. But this is at best a short-run advantage. In the middle run, there are greater advantages to having a so-called strong currency. It means that the holder of such currency has a greater command on world wealth as measured in physical structures and products. Over the middle run, reserve currencies are strong currencies and want to remain strong. The strength of a reserve currency derives not only from its command over world wealth but from the political power it offers in the world-system. This is why the world's reserve currency tends to be the currency of the world's hegemonic power, even if it is a declining hegemonic power. This is why the U.S. dollar is the world's reserve currency. Read the rest of the commentary. Labels: China, dollar, Immanuel Wallerstein, reserve currency Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The SEC and Investor SuffrageFloyd Norris has an article in today's New York Times about a proposed rule-making that the SEC just opened up comment on that "would make it easier for institutional shareholders to propose board candidates to be listed on the proxies that every public company sends to its shareholders." Norris worries about potential mischief that shareholders with ulterior motives could create if the rule-making goes through. But the lack of shareholder democracy is pretty egregious; some kind of reform allowing shareholders to have a say in board elections seems in order.Below is a message we got a couple of days ago (after the SEC hearing on proxy access) from shareholder democracy proponent Jim McRitchie of CorpGov.net. We've been in touch with one of the other co-filers of the brief mentioned below, Glyn Holton of the Investor Suffrage Movement, and we hope to be covering this issue in the pages of Dollars & Sense very soon. —cs [From James McRitchie:] This morning, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners. Labels: Chris Sturr, Glyn Holton, investor suffrage, James McRitchie, SEC, shareholder democracy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wells Fargo's Counter-Stimulus StrategyRoger Bybee's feature in our current issue shows how big corporations are taking the financial crisis and recession/depression as an opportunity to eliminate jobs in the United States. ArcelorMittal, the world's largest steel company, is trying to shut down two steel mills, one in Hennepin, Ill., and one in Lackawanna, N.Y., despite the fact that the mills are profitable and have willing buyers.Today's New York Times includes an article indicating that at least one corporation—Wells Fargo—is willing to follow this sort of strategy, even though it was the recipient of tens of billions of dollars of government bailout money. Wells Fargo, the main creditor for the clothing manufacturing company Hartmarx, which is in bankruptcy, is trying to prevent the company's board from selling the company to Emerisque, a London-based private investment firm specializing in "reviving heritage brands," according to its website. According to the Times article (see part of it below), Unite Here ("the union that represented Hartmarx's workers"—do the not represent them anymore, now that the company is in bankruptcy?—the article doesn't tell us) is threatening to kick up a fuss if Wells Fargo succeeds in blocking the sale. The article quotes Unite Here president Bruce Raynor as saying: "The surest route for the bank to recover its money is to make a deal with a well-respected private equity firm that owns and runs several successful brands," Mr. Raynor said. "Emerisque is not only offering substantial recovery for the bank, but to protect the jobs of workers." It seems a little odd for the union to be finding common cause with private equity, given the track-record of private equity firms of stripping companies of assets and downsizing workforces, as we reported in a feature article in our July/August 2008 issue. Should the Hartmarx workers trust Emerisque's promises? Pres. Obama's statements in support of the Republic Windows and Doors workers' sit-in in December was encouraging, if only because it indicated a strategy that workers can take in confronting banks and companies that are trying to screw them, and can bring public opinion to bear on the occasional politician. Given that workers at the Hart Schaffner Marx plant (owned by Hartmarx) outside of Chicago made the tuxedo that Obama wore on his inauguration day, can those workers count on him to stand by them, too? —cs Wells Fargo Said to Be Squeezing Clothier Hartmarx, Raising Liquidation Fears Read the rest of the article. Labels: Barack Obama, counterstimulus, Hartmarx, labor, Roger Bybee, unions, Unite Here, Wells Fargo Chris Sturr Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Card-Check Is Dead (Liza Featherstone)From Slate's The Big Money blog:Card-Check Is Dead Unions are surprisingly bad at politics. By Liza Featherstone | Posted Thursday, May 21, 2009 - 11:18am Last Thursday, President Obama pronounced "card check" dead, saying that the current Employee Free Choice Act didn't have the votes to pass but that a "compromise" could work. By compromise, the president meant a version of the bill without card check, the provision obliging employers to recognize unions after a majority of workers have signed cards, rather than after an election. On the same day, Sen. Arlen Specter, newly "D"-Pa., a key swing vote, said that he, too, would support a "compromise" on EFCA: card-check-free, of course. These twin announcements sealed what most observers had understood for a while: Card check isn't happening. The provision has always been imperfect, but its death is a sure sign that the labor movement needs a more effective approach to politics. Card check was devised as a solution to a simple yet intractable problem: Workers who want to join unions do not get a fair shake. Elections take too long, giving employers plenty of time to hire high-priced union-busting law firms, fire union sympathizers, intimidate and spy upon workers, and do whatever they can do, legally or illegally, to keep the union out. Many people now work for companies like Home Depot (HD), Rite Aid (RAD), or Wal-Mart (WMT) that have plenty of resources to wear unions down and every incentive to do so since their business models depend on underpaid, short-term labor. Specter opposes card check but does support speeding up elections, allowing workers to campaign at their work sites without retaliation, and imposing stiffer penalties for violations of organizing rights. Click Here! Not everyone committed to labor-law reform is mourning card check. Columbia economist Jagdish Bhagwati, one of EFCA's most prominent sympathizers, told TBM earlier this spring that he regretted the card-check provision of the bill: "I think that it was a mistake for us who are supporters of unions and unionization to go for card check. I agree that some employers intimidate workers who wish to unionize, but those who do not wish to unionize can also be intimidated by union organizers." Bhagwati strongly supports secret ballots and thinks it would have been better to try to reform enforcement mechanisms to ensure that illegal intimidation by employers would be punished. Bhagwati also points out that U.S. labor law makes it cripplingly difficult for unions to strike: "If unions cannot strike effectively they become paper tigers, more or less. I would have concentrated on this rather than get diverted into the card-check provision." He adds, "The card-check provision has unnecessarily cost us some credibility and also some votes, I fear." Sandy Pope, president of Teamsters Local 805, which is headquartered in Long Island City, Queens, thinks labor law reform is needed but says she's "not sad about card check going away." Pope explains: "I would prefer an expedited election to card check. It's important for workers to do something as a group. In order to go into bargaining in the strongest possible way, you have to campaign. You have to really want" the union. Pope argues that if unions "treat people like babies" by bypassing the election process, workers won't build effective organizations that can stand up to the employers' aggressive behavior at the bargaining table. A shorter election would bypass much of the employers' current strategy of intimidation and firings, Pope thinks, while preserving the possibility of debate in the workplace and allowing employees to organize, if they choose to do so, rather than passively assent to a visiting bureaucrat. Read the rest of the article. Labels: card check, Employee Free Choice Act, Liza Featherstone, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). U.S. May Add New Financial WatchdogFrom today's Washington Post; hat-tip to LF:Consumer Agency Under Consideration By Zachary A. Goldfarb, Binyamin Appelbaum and David Cho Washington Post Staff Writers Wednesday, May 20, 2009 The Obama administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds, according to several sources familiar with the matter. The proposed commission would be one of the administration's most significant steps yet to overhaul the financial regulatory system. It would also be one of its first proposals to address causes of the financial crisis such as predatory mortgage lending. Plans for a new body remain fluid, but it could be granted broad powers to make sure the terms and marketing of a wide range of loans and other financial products are in the interests of ordinary consumers, sources said. Sources, who spoke on condition of anonymity because discussions are ongoing, said talks have begun with industry officials, lawmakers and other financial experts about the proposal, which would require legislation. Last night, senior policymakers, including Treasury Secretary Timothy F. Geithner and National Economic Council Director Lawrence H. Summers, were to discuss the idea at a dinner held at the Treasury Department. Responsibility for regulation of consumer financial products is currently distributed among a patchwork of federal agencies. Some of these regulators regard consumer protection as a low priority. And some financial products are not regulated at all. The proposal could centralize enforcement of existing laws and create a vehicle for imposing tougher rules. The idea is likely to face significant opposition from industry groups, which argue that stricter regulation limits the availability of financial products to consumers. It could also trigger a massive regulatory turf war. Banking regulators and agencies such as the Securities and Exchange Commission, which regulates mutual funds, could stand to lose powers, personnel and funding. Those agencies are likely to argue they are positioned to protect consumers because they oversee the financial firms directly and have experience writing and enforcing rules governing financial products. The proposal is part of the administration's broader plan to improve financial regulation. Officials have proposed the creation of a systemic risk regulator whose job would be to spot threats to the health of the overall financial system. Officials also have called for tighter regulation of individual financial firms and markets, including new rules governing hedge funds and derivatives. While those proposals focus on the guts of the financial system, this new plan would concentrate on the front end -- consumers who borrow money to buy homes and products and who invest their money for retirement, college education and savings. The leading proponent of such a commission is Elizabeth Warren, a Harvard University law professor who now chairs the Congressional Oversight Panel for the government's financial rescue initiative. Her plan is the kernel of the idea the White House is now considering, sources said. Warren wrote in a 2007 article in the journal Democracy that the government had failed to protect American consumers in their relationships with financial companies. "It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street," Warren wrote. "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?" Warren proposed creating a new commission modeled on the Consumer Product Safety Commission, which protects buyers of products such as bicycles and baby cribs. Such a commission could be very powerful. A number of sweeping federal laws already offer broad protection to consumers of financial products, but those laws have been lightly enforced in recent years. The Department of Housing and Urban Development, for example, has clear authority to crack down on companies that charge excessive closing costs on mortgage loans, but repeatedly postponed planned reforms in the face of industry opposition. Warren's proposal initially found little support in Washington, but the mood has shifted dramatically with the onset of the financial crisis and the election of a Democratic administration. In March, Sen. Richard J. Durbin (D-Ill.) introduced legislation to create a commission like the one that Warren had described. The legislation is co-sponsored by Sen. Charles E. Schumer (D-N.Y.) and Sen. Edward M. Kennedy (D-Mass.). The White House's support would greatly improve its chances of passing. In proposing the legislation, the senators said that the commission would be responsible for identifying emerging problems and for educating consumers. They were also critical of the existing process. "The Federal Reserve was supposed to do this, but they were asleep at the switch," Schumer said at the time. Staff writer Neil Irwin contributed to this report. Read the original article t. Labels: banking regulation, Elizabeth Warren, financial crisis, financial regulation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). All That Glitters Is Goldman SachsRobert Zevin, president of Robert Brooke Zevin Associates and the founder of the socially responsible investment movement in the United States, wrote this talk for a recent event celebrating the 35th anniversary of Dollars & Sense. Bronchitis kept Robert from presenting the talk himself, but he sent the following message via his associate, Dan Thorn, who presented the talk instead: "First, I apologize for not being there and to all of you for the resulting discomfort of having to listen to Dan read my words and to Dan for having to read them even though he could have written better himself. I understand there is a good turnout. Thank you for your show of support for Dollars & Sense, which has earned that support over 35 years by patiently teaching the truth to those deprived of power. If you came undecided, I hope you will give generously, and if you gave before you came, I hope you will give more." Here's the beginning of the talk, plus a link to the whole thing. (We second Robert's call for donations in support of D&S; you can donate online here.)All That Glitters Is Goldman Sachs Read the rest of the talk. Labels: financial crisis, Gettysburg Address, Goldman Sachs, Jeff Matthews, Robert Zevin, skullduggery Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Science Fiction From BelowOn Saturday I got to see a terrific new movie, Sleep Dealer, written and directed by Alex Rivera. It's lefty science fiction, and deals with immigration, global sweatshops, militarism, and the corporatization/privatization of water resources, among other topics. The degree to which it is only barely fiction is a little scary. I recommend it highly.Mark Engler (author of this article for us, among others), has just posted an interview with Alex Rivera over at Foreign Policy in Focus. He's also posted a clip from the movie on his website. Here is part of the interview: Science Fiction From Below Read the rest of the interview; see the clip. Labels: Alex Rivera, immigration, Mark Engler, Sleep Dealer, sweatshops, water rights Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Monetary Reformer in Kindergarten I stumbled on this nice piece over at Global Research: A Monetary Reformer in Kindergarten —cs Labels: Hansel and Gretel, kindergarten, monetary reform, Richard Cook Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Greenberger on DerivativesC-Span had a nice segment on Friday with Michael Greenberger, a law professor at the University of Maryland, on derivatives. He characterizes derivatives as like bets, and many of them as essentially bets on other people's misfortune. The callers' questions are great too. His answer to the last question, in which the caller raises the notion that it was regulators that caused all the trouble by requiring banks to make risky loans, is nice and concise—a good response without being overheated. I wish he'd added that far from making loans because the gov't required them to, banks were falling all over themselves to make such loans once it was clear how much money was to be made by packaging the loans and selling derivatives based on them.I would embed the video here, but C-Span doesn't appear to provide a mechanism for doing so. Hat-tip to LF. Labels: Barack Obama, derivatives, Michael Greenberger, mortgage backed securities Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Ethanol Snake OilBusinessWeek has an exposé on the pitfalls of ethanol.*It isn't better for the environment than oil; *It saves little energy if any; *It decreases fuel efficiency; *It increases the cost of food around the globe. And now, as the EPA is mulling rule changes that would mandate an increase in the percentage of ethanol in fuel (as the ethanol industry is in the midst of its own financial crisis), the article explains that there is a growing consensus that ethanol destroys car engines and fuel systems. Read the full article here. --d.f. Labels: EPA, ethanol, oil and gas industry Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Sham' Bailouts Help SpeculatorsNaked Capitalism has a couple of nice posts about comments made by Michael Patterson, head of a private equity firm, to the Telegraph that reflect very poorly on TARP. Here is the story from the Telegraph (which has since been yanked from their site, apparently because Patterson objected to it; it is preserved at zerohedge.blogspot.com):US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson Here's what Yves Smith at Naked Capitalism had to say about the piece: The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into "too big to fail" Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, "it's flawed, but still better than doing nothing." And this more recent post (from a larger project she has of showing how the business press airbrushes negative economic news): We posted last night on a Telegraph story, in which one Michael Patterson, head of a private equity firm that used TARP funds to buy a Michigan bank, said some less than positive things about it at an conference. —cs Labels: Naked Capitalism, private equity, TARP program, Telegraph, Timothy Geithner, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Steelworkers Attack ArcelorMittalFrom yesterday's WSJ; find background on the situation in this feature article in our current issue. The CEO of ArcelorMittal—the largest steel firm in the world—is Lakshmi Mittal, who is one of the richest people in the world. He is so rich that, as Roger Bybee reported in his feature article for us, he spent $55 million on his daughter's wedding. If you're wondering how even the super-rich could spend that much money on a wedding, it helps to know that they rented out Versailles for the reception. —csSteelworkers Attack ArcelorMittal Fed Up With Plant Shutdowns, Protesters Smash Windows at Annual Shareholder Meeting in Luxembourg By ROBERT GUY MATTHEWS ArcelorMittal is facing increasing worker protests around the world, including a violent confrontation during an annual shareholder meeting Tuesday in Luxembourg, as frustration mounts over plant shutdowns and the reluctance of the world's biggest steelmaker to commit to reopening idled facilities. Although ArcelorMittal has already cut production in half and shut down plants and blast furnaces around the world—including some iron ore operations idled Tuesday in Indiana—it still makes more steel than customers need and expects global steel demand to sink by up to 20% this year. On Tuesday, an estimated 1,000 steelworkers from the company's plants in France and Belgium attacked its headquarters in Luxembourg, setting off smoke bombs and smashing windows in an effort to disrupt an annual shareholder meeting. The meeting went on despite the protests. Lakshmi Mittal, chief executive officer of ArcelorMittal, told shareholders that customers are buying less steel and using their current inventory. Producing steel that could not be sold, he said, was pointless. Mr. Mittal said that he would shift steel production from higher cost plants to more efficient steelmaking plants, but declined to say where or when. Many of the companies higher cost plants are located in Europe and the U.S., where labor costs are higher. Raw material costs in those countries also tend to be higher because those plants tend to be further from mines that produce the raw materials. In addition, plants in those regions are tied to certain markets, particularly automotive, that have seen a steep drop off in demand. In the U.S., the local steel union mounted a nonviolent protest at the company's Chicago headquarters two weeks ago, over the anticipated permanent closure of ArcelorMittal's Hennepin, Ill., plant. Duane Calbow, vice president of the local 7367 United Steelworkers, said that Chicago workers are frustrated because the company doesn't seem interested in running the plant or trying to sell the existing operations or find other uses for the facility. Read the rest of the article; read Roger Bybee's feature article on ArcelorMittal (the sidebar on Marie Antoinette is particularly juicy). Labels: ArcelorMittal, Lakshmi Mittal, Roger Bybee, Steel industry Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The IMF as Big Banks' Debt-CollectorOn the topic of the IMF and the "global financial community," here is a nice piece from Michael Hudson; hat-tip, again to LF.The IMF Collects Debts on Behalf of the World's Largest Banks Read the rest of the article. Labels: banking crisis, Britain, Iceland, IMF, Michael Hudson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Global Financial CommunityAn excellent article by Prabhat Patnaik on networkideas.org, the website of International Development Economics Associates, starts off with Lenin and goes on to talk about the role that the IMF and the World Bank play to create a "group of core ideologues" to exert "peer pressure" on elites to adopt a belief system that is friendly to global finance capital. This helps to explain why Obama picked the economic advisers he did:How people like Summers, Geithner and Rubin come to occupy such important political positions within the U.S. system is pretty obvious. American Presidential elections require massive amounts of money, a good chunk of which invariably comes from Wall Street. The story doing the rounds for a while was that Obama had got most of his funds from small donations of $100 each garnered through the internet; but this was complete nonsense. Obama like others before him had also tapped Wall Street and the appointment of the trio, who had organized Wall Street finance for him, was a quid pro quo. The elevation of members of the global financial community to run the American economy therefore should cause no surprise. I love the light tough of his title. Anyhow, here's the beginning of the article, which is well worth reading. Hat-tip to LF.
Read the rest of the article. Labels: IMF, imperialism, larry Summers, Lenin, Prabhat Patnaik, Timothy Geithner, World Bank Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Changing the Auto Industry from the Wheels UpWe just posted a new web-only article on the auto industry, by Alejandro Reuss of the D&S collective. Here is the introduction to the article:Changing the Auto Industry from the Wheels Up The problems of the U.S. auto industry call for radical solutions. By Alejandro Reuss | Dollars & Sense | May 13, 2009 The "Big Three" U.S. auto companies are not facing a crisis – they are facing multiple interrelated crises at once. Chrysler, General Motors, and Ford have posted tens of billions in losses over the last few years. They suffer from chronic overcapacity, producing more cars than they can sell, and have ended up selling cars at a loss. Their cars are widely viewed as lagging behind those of international competitors in quality, styling, and reliability. They have focused on fighting fuel-efficiency standards rather than developing new, fuel-efficient vehicles. They have bet heavily on large, gas-guzzling models and are playing catch-up Toyota and Honda in the development of hybrid cars. They face significant cost disadvantages compared to their main competitors, mainly due to retiree health and pension "legacy costs." And, on top of all this, a deep recession has hammered car sales. Already operating in the red before last year, the Big Three have been burning through billions in cash reserves during the current recession. General Motors, having posted losses every year since 2005, lost over $30 billion in 2008. It has reported that, in the first quarter of 2009, it lost another $6 billion (and depleted its cash reserves by over $10 billion). Ford has posted losses since 2006, including about $15 billion in 2008. Chrysler lost $8 billion last year. With their companies teetering on the edge of bankruptcy, GM and Chrysler executives appeared before Congress last November asking for a government bailout. In December, the Bush administration announced $13.4 billion in loans for GM and $4 billion for Chrysler. (Since then, both companies have asked for billions more.) In April, the Obama administration offered additional loans of one-half billion to Chrysler and up to $5 billion to GM. Lacking private sources of financing, the two companies have managed to stay in business this long thanks only to the government loans. The government has required both companies to submit restructuring plans, including concessions from workers and creditors, as a condition of the bailouts. At the end of March, the Obama administration rejected the submitted plans as inadequate. It gave Chrysler 30 days more to conclude a takeover deal with Italian auto giant Fiat, while GM got 60 days to submit a new restructuring plan. In late April, Chrysler appeared to have a deal with Fiat, with the Italian automaker set to take over operations and receive 20% of the company's stock (with a possible future increase to 35%). A United Auto Workers (UAW) retiree health-care trust would own 55% of the stock. The UAW accepted new concessions on wages and benefits, while the company's major creditors agreed to cancel billions in debt for about a third of its face value (plus less than 10% of the company's stock). When some creditors balked at the plan, however, the company filed for bankruptcy. Meanwhile, GM proposed a restructuring plan in which the federal government would own 50% of the stock (in exchange for the cancellation of about $10 billion in company debt), and the UAW retiree health-care trust nearly 40%, leaving the company's unsecured bondholders with just 10%. The plan included the shutdown of the company's Pontiac division and over 20,000 layoffs. Bondholders could still balk, however, in which case GM would go into bankruptcy as well. No matter what the outcome of the current crisis, the "Big Three" are not likely to return to the heights of their post-World War II heyday. In the 1950s and 1960s, the Big Three dominated the U.S. auto market. As recently as the late 1990s, they accounted for over 70% of total U.S. sales of new cars and light trucks. Now, they account for less than 50%. In the mid 1950s, General Motors alone accounted for over 50% of U.S. new-car sales. Today, the company's market share is about 20%. Under the company's proposed restructuring plan, it would employ less than 40,000 union auto workers, less than one tenth the number the company employed at its peak in 1970. There is no way to put Humpty-Dumpty together again, and it does not seem that any of the major players in this drama—the companies' managements, the leadership of the UAW, or the government—really believe that there is. The real question is whether something new and better will be built from the wreckage of this industry. Read the rest of the article. Labels: auto industry, Chrysler, ford, General Motors, UAW, VEBA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Sen. Byron Dorgan: the Good and the BadSen. Byron Dorgan (Dem.-N.D.) got some good press from Huffington Post a couple of days ago; turns out back in 1999 Dorgan was one of the only senators to vote against repeal of the Glass-Steagall Act (the Depression-era law that established a firewall between commercial banks, investment banks, and insurance companies):The footage of him speaking on the Senate floor has become something of a cult flick for the particularly wonky progressive. The date was November 4, 1999. Senator Byron Dorgan, in a patterned red tie, sharp dark suit and hair with slightly more color than it has today, was captured only by the cameras of CSPAN2. Other senators to vote against the repeal: Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold, and the late Paul Wellstone. HuffPo also cites a few other people who got it right, including Edward Kane, a finance professor at Boston College, Jeffrey Garten, a Clinton Commerce undersecretary, and Ralph Nader. (No mention of D&S, which opposed the repeal consistently (e.g. here, where Jim Campen said "dominant effect is likely to be a further concentration of economic and political power, and the use of this power to benefit the new financial giants at the expense of the rest of us."). Read the full HuffPo article here. It seems Sen. Dorgan is an inconsistent watchdog, however. Firedoglake recently reported that Dorgan voted against the "cramdown" legislation that would have allowed bankruptcy judges to write down the value of first mortgages (we reported on this here and here). Turns out Dorgan's wife lobbied against the cramdown legislation on behalf of the American Council of Life Insurers: One of the key votes against "cramdown" in the Senate came, surprisingly, from Byron Dorgan of North Dakota. According to an FEC lobbying report filed by the American Council of Life Insurers, Dorgan's wife Kimberly worked for them as a lobbyist to defeat the measure during the first quarter of 2009 (PDF). Read the full article. Labels: Byron Dorgan, cram down, Glass-Steagall, Gramm-Leach-Bliley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dean Baker on Economists' 'Malpractice'Interesting piece in the Boston Review by Dean Baker about how other countries operating their health care systems far more efficiently than the United States does. Removing protectionism in the US health care sector could unlock enormous potential gains to the U.S. economy. Baker notes that U.S. health care could be opened to global competition in three obvious ways: (1) increasing opportunities for foreign–born medical personnel to work in the United States (2) facilitating "medical tourism," so that Americans can more easily have major medical procedures performed in other countries; and (3) allowing Medicare beneficiaries to buy into the lower–cost health care systems of other wealthy countries. Hat-tip to LF.Malpractice Read the rest of the article. Labels: Boston Review, Dean Baker, health care, medical tourism Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Geithner' on SNLNice critique of the stress tests, and of both Geithner and the 19 banks that took it, in this past Saturday's SNL opener; recounted by Sudeep Reddy at the WSJ's Real Time Economics blog:Saturday Night Live opened with Geithner (played by Will Forte) sitting behind his desk reviewing banks' submissions for "Part 2″ of the stress tests—a written exam taken by all 19 bank CEOs. He explains that Treasury initially planned to give each bank a grade of 1 to 100. "But then we decided that that might unfairly stigmatize banks who scored low on the tests because they followed reckless lending practices, or were otherwise not good at banking.' They changed to a simple pass/fail system, then to a pass/pass*—"this seemed less judgmental and more inclusive.' "Eventually, at the banks' suggestion, we dropped the asterisk and went with a pass/pass system. Tonight, I am proud to say that after the written tests were examined, every one of the 19 banks scored a pass. Congratulations, banks.' He explains that none of the banks answered all 50 questions correctly, and most got less than half right. "One bank in particular—Citigroup—seemed to think the whole thing was just a big joke.' On screen we see its answers to questions 13 through 15: "Geithner Sucks!' "I was deeply disappointed with Citigroup's attitude towards this entire project,' the Treasury secretary explains. "Frankly, if Citigroup weren't too big to fail, I would've failed them. That's how disgusted I was.' Among the other questions and answers: * Number 11: For every 10 million in commercial loans outstanding, a bank should have … "The answer we were looking for was 10% cash on hand.' J.P. Morgan Chase wrote: Knicks Tickets Wells Fargo wrote: Gulfstream jet Citigroup wrote: Geithner Sucks! * Number 23: If federal bank examiners determine your bank to be under-capitalized, the bank's board of directors should … Goldman Sachs wrote: Flee the Country State Street of Boston said: Shred documents Capital One said: Eliminate eyewitnesses The Geithner stand-in explains, "GMAC apparently answered ‘taxpayer bailout' to every one of the 50 questions. Although that did turn out to be the right answer to 30 of them.' Labels: bank stress testing, Citigroup, SNL, stress tests, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Goldman Sachs Pays For Predatory WaysInvestment firm and recipient of government largess Goldman Sachs has just settled an investigation by the Attorney General of Massachusetts for $60 million that it engaged in predatory lending during the housing boom.From the NY Times:
According to the Attorney General's office:
--d.f. Labels: Goldman Sachs, mortgage backed securities, predatory lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). All-Out Effort to Put Single-Payer 'On the Table'From AfterDowningStreet and elswehere. They also had a great letter from Dr. Margaret Flowers of Physicians for a National Health Plan (reposted at Consortium News); Flowers was one of the activists who disrupted Sen. Baucus' roundtable on May 5th to ask why single-payer proponents weren't part of the discussion. The activists were hauled away by the Capital cops, while Baucus quipped about the need for more police. Hat-tip to LF.All Out Effort: Put Single-payer Healthcare "On the Table" Submitted by Chip on Mon, 2009-05-11 02:48. Activism Healthcare All Out Effort: Put Single-payer Healthcare "On the Table" It's National Nurses Week, and we're joining the California Nurses Association in Washington, D.C. to promote single-payer healthcare. We need your help! Please make 2 calls TODAY to get single-payer experts into the Senate Finance Committee Roundtable discussion! This Tuesday, May 12, the Senate Finance Subcommittee is holding its final roundtable on healthcare reform. The California Nurses Association/National Nurses Organizing Committee has issued a request to include Roseann Demoro, Executive Director of CNA/NNOC and longtime leader in the single-payer movement. PNHP has formally submitted the names of two outstanding physicians, Drs. Marcia Angell and Steffie Woolhandler, to testify as expert witnesses. Please call Sen. Baucus' office in Washington at 202-224-2651, or fax him at (202) 224-9412, and urge him to extend the invitations. Call your Senator, too! Members of Single-Payer New York met with Sen. Charles Schumer (NY), Senate Finance Committee member, on Friday evening. He agreed to ask Chairman Baucus to include a single-payer expert--if we can get another Senator on the committee to join him. Please call and ask your Senator to join Sen. Schumer in asking Chairman Baucus to include a single-payer expert in Tuesday's hearing.
At the last Senate Finance Committee hearing, physicians and single-payer advocates stood one-by-one to ask to for a seat at the table. The Senators laughed and had each one arrested. Watch the video here or at: Health Care Now. We need to end the exclusion of the only plan that will be truly universal and contain costs. Our health depends on it. Your action today is critical to the health of this nation. Labels: health care, Max Baucus, Physicians for a National Health Program, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Unjust Deserts by Gar Alperovitz and Lew DalyREVIEW Unjust Deserts : How the Rich Are Taking Our Common Inheritance and Why We Should Take It Back by Gar Alperovitz and Lew Daly 5/11/2009 Isaac Newton and Gottfried Wilhelm von Leibniz simultaneously invented calculus in the 1670's. As Isaac Newton wrote, "If I have seen far, it is because I have stood on the shoulders of giants." Charles Darwin mulled over the origin of species for 20 years until jolted into publication by the arrival of a manuscript from Alfred Russel Wallace. Great geniuses and great entrepreneurs make the strongest possible case for outsize rewards based on merit. Yet as Alperovitz and Daly argue, these giants drew their ideas from society around them. And they were often very lucky. For almost any modern invention, there are several potential claimants -- even if only one actually got the patents. The authors review the writing of a long line of the economists and philosophers, starting with John Locke, Adam Smith, David Ricardo, John Stuart Mill and Henry George, through Thorstein Veblen, Edwin Cannan and Frank Knight to modern economists and philosophers including Robert Solow, John Rawls and Amartya Sen, as well as economic journalist David Warsh. From these, they develop three basic propositions: First, from Locke: that an individual has a right to that which he actually creates by his own unique efforts. Second, from Ricardo: the demonstration that unearned income--economic rent--is created not by individuals but by external forces. Third, from Mill and others: the judgment that such income should belong to society as a whole. Alperovitz and Daly add their own original fourth proposition: the more advanced a society becomes, the more each of us depends not only on those around us but also on those who came before--and bequeathed to us their knowledge. Moreover, "this past buildup of knowledge should be treated as a common inheritance." The wealthier our society becomes, the less any individual can rightfully claim a large share of the wealth. That makes our present growing inequality profoundly unjust. Georgists will find this book a treasure trove of arguments and quotations from scholars, obscure and famous, expressing views similar to those of George. For example, in 1854, Scottish philosopher Patrick Edward Dove wrote that the "principle of allocating the rent to the community, instead of to individuals" would "secure to every laborer his share of the previous labors of the community." And from George's contemporary, Edward Bellamy, "All that a man produces today more than his cave dwelling ancestor he produces by virtue of the accumulated achievements inventions and improvements of the intervening generations together with the social and industrial machinery which is their legacy." According to George, wages depend upon the margin of cultivation, "the highest natural opportunities" open to labor. Drawing from George, John Bates Clark created his theory that factors of production receive their marginal product, wages for workers and interest for capital. (Clark merged land with capital.) But Clark turned the marginal product argument against George, claiming that workers in fact deserved what they were paid. Of course Clark ignored George's central theme: that the margin in turn depends upon the distribution of land ownership. Alperovitz and Daly add a further rebuttal to Clark, citing a 1914 article by Walter Adriance, that Clark's error lies in "not attributing to the cooperation of the rest of the group any part of the so-called 'marginal product.'" Alperovitz and Daly offer the usual liberal proposals for income and inheritance tax reforms, with which I don't disagree. But although they identify economic rent as rightly belonging to society, and cite George several times, they suggest no direct strategies for collecting rent for public purposes. In fact, they even claim "skyrocketing" property taxes burden the middle class! If we really hope to take back our common inheritance, we must strengthen the property tax, which is our original wealth tax. And we must go after rent wherever it pops up--not just land titles, but oil leases, broadcast licenses, patents, bank charters, pollution "rights", fishing quotas, even taxi medallions! Reviewed by Polly Cleveland, Association for Georgist Studies Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). TDCotE (x): 'Life Is Beautiful' EconomicsThe Dull Compulsion of the Economic (x)A series of blog postings by D&S collective member Larry Peterson 'Life Is Beautiful' Economics and the Strange Co-option of Behavioral Economics They're at it again: encouraged by the huge rally in equities globally (especially in emerging markets, some of which were considered doomed just a few weeks ago), more and more financial commentators are referring to behavioral economics in an attempt to indicate that the rally may portend a vigorous economic recovery. The latest instance came in Friday's Financial Times, in which US editor Chrystia Freeland joined the chorus with an article entitled "What a Feeling: How Emotions May Yet Drive the Recovery." I've never been a fan of Freeland's: I think she's easily the most mediocre of the FT's senior staff, and I usually just ignore her usual bland regurgitation of cliches and conventional wisdom. But seeing her refer to behavioral economics really gets me hot and bothered. When I was an undergraduate, I successfully studied graduate-level neuroscience, and have followed developments in what is called behavioral economics (which relies on studies from cognitive psychology and, to a lesser degree, neuroscience) almost since its inception in the 1980s. Accordingly, I think I have a sensibility for both the power and deficiencies of the findings that have been taken up by the new field of behavioral economics which Freeland and a lot of other erstwhile enthusiasts almost certainly don't have. And that's just the start of it. Even recognizing the potential of behavioral economics, I would argue that its use in coming to terms with things like the financial crisis is misguided at best, and ideologically dangerous at worst. Dangerous because I believe a case can be made that it is being used by a discredited profession not only to rehabilitate itself,but to smuggle some of its old, worn-out assumptions in via the back door, dressed up in the garb of cutting-edge science. Let me try to explain. Behavioral economics is a movement that relies on controlled studies to test the validity of economic assumptions that had been--and still are, to some degree--considered axiomatic by conventional practitioners. Usually the experiments take the form of the playing of games: voluntary participants trade tokens or even, in certain cases, real money in simulated exchanges and so on. So, in a celebrated case, experimenters found that subjects overwhelmingly punish free-riders in such exchanges, even when they stand to gain from cooperating. The upshot of such experiments has been the promotion of a new idea of economic rationality, "bounded rationality", which views rationality operating within limits set by norms and other "non-economic" criteria to a significant extent; accordingly, behavioral economists say that the traditional notion of rationality employed by the economics profession must be changed to reflect this, if only because such recognition will allow for greater predictive power in both experiments and even in the construction of economic models. This is important because the most recent paradigm that employed widespread popularity in the profession has clearly fallen out of favor. That paradigm, called "rational expectations", was popular with conventional economists precisely because it seemed to solve what they considered to be a major problem implicit within Keynesianism: the fact that Keynesianism didn't have an underlying microeconomics to support its macroeconomic superstructure. And for economists of this sort, who largely continued to accept some version of Say's law (which Keynes rejected, and stated basically that all production is ultimately undertaken to support consumption, rather than, say, profit-taking, hoarding, or accumulation), Keynes' focus on insufficient aggregate demand was a heresy--it couldn't, to them, sufficiently (i.e. in a way that foregrounded the practitioners' very specific notion of rationality) explain the motives of the individual actors whose choices led to outcomes in which full employment could only be considered a special case; and inasmuch as it did, by referring to liquidity preference and speculation, that could only be reconciled with a vigorous notion of rational self-interest with some difficulty. But it wasn't until the failure of what were considered Keynesian policies in the 'seventies that they found an opening to plug this gap. So, first they criticized the failure of Keynesian macroeconomics, and then proposed a new microeconomics that, it was claimed, could restore the link between good, old-fashioned self-interested rationality and the wonderful workings of a whole market system that equilibrated to full employment after all. This paradigm, which, as many know, was employed originally by members of the Thatcher and Reagan administrations, became renowned for its intransigence: its practitioners stubbornly resisted contributions from economists professing other views, and purged many academic departments, think-tanks and so on of holdouts. And as Thatcherism and Reaganism morphed into Clintonism and Blairism, the situation only got worse. Except on one front: behavioral economics. Why was this? I think the original encounter with it came because economics, which was being aggressively promoted as a science especially by neoliberal technocrats, but also by financiers, academics and journalists, was considered by the dominant practitioners to have to be as open to what, after all, appeared to be the incontrovertible findings of science--especially sciences of the "harder" variety, like neuroscience--as possible. So, economics slowly, kicking and screaming, opened the door to practitioners of behavioral economics just a crack. Also, as the millennium approached, the collapse of Long Term Capital Management, the Asian crisis, and, eventually, the dot.com meltdown finally revealed all too clearly that the predictive power of monetarist models was not all that it was cracked up to be; and this had a lot to do with the vast, global expansion of the financial sector, a sector which, in part, and to a limited degree, could be examined by experiments devised by practitioners of behavioral economics in ways that the notions of rational expectations couldn't. Regardless of the cogency of my interpretation, there is no doubt now that behavioral economics is on the ascent. Practitioners like Cass Sunstein occupy high places in the Obama administration, and the current financial crisis (along with its hyper-aggressive monetary and fiscal interventions) has turned the retreat of the rational expectations school into something of a rout. Meanwhile, Keynesian ideas are resurfacing all over the place. And many behavioral economists are beginning to see their own discipline as the one that may provide that elixir of a slightly different sort than that sought after by the rational expectations school: of a "grand theory" that might unify a brand of Keynesianism, complete with an implicit acceptance of the generality of sub-optimality, with a new notion of bounded rationality--but a rationality all the same, one that can, however provide material for falsifiable experimentation, predictive modeling, and, potentially, optimal policymaking potential. So what's wrong with that? Well, my criticism of behavioral economics focuses on the fact that its predominant use of controlled experiments has, by far, simulated the form of consumer exchanges. For ethical and practical reasons, experimental subjects simply cannot be monitored to the same extent in their capacities as workers, employers, union members or scabs, monitors or even slackers, as they can as simple consumers or even investors. Particularly in cases in which economic behavior is characterized by an asymmetry of real--not simulated--power, it would potentially compromise willing subjects to agree to experimentation, and it's difficult to see how experiments could be devised that controlled adequately for that asymmetry inn the first place. This is all the more the case where the accounting for the impact of underlying initial endowments of capital--of social or monetary variety--or knowledge are concerned. The types of games and experiments so far devised by behavioral economists--even those that employ the most advanced brain scans and so on--simply are least qualified to illustrate anything but the most limited forms of economic behavior. That being the case, to view the findings of behavioral economics as somehow paradigmatic, never mind ultimately fundamental in a microeconomic sense, constitutes to me an extremely dangerous and misleading position. And it is this position that is increasingly being taken up to "explain" the financial crisis, even by people like Freeland, who probably don't know very much about the science in the first place (never mind luminaries like George Akerlof and Robert Shiller, who Freeland refers to in her article). The big problem with all this is that, in the attempt to explain the financial crisis, commentators, following the implicit example set by behavioral economists themselves in many cases, seem quite content to focus on the most limited kind of economic behavior, and thereby bracket out the most important stuff. There is much talk of the transformative power of sentiment, as if the crash itself was an overreaction that could, potentially, be overcome if only government and business are allowed to "nudge", to use Sunstein's term (developed with the aid of one of the founders of behavioral economics, Richard Thaler), investors and consumers out of their excessively pessimistic box. This completely ignores the very real weaknesses in the economy that will almost certainly continue to plague working people and pensioners all over the world, even if surviving corporations, due to drastic, or even unprecedented shakeouts (not to mention government support) in their industries, attain some level of profitability acceptable to the ruling and accumulating classes. In fact, these weaknesses are so great that it's hard to see how they won't adversely affect large swathes of the latter, and reconfigure that stratum in fundamental ways in the next few years. And economists who privilege explanations based on sentiment over the underlying economic situation, far from elucidating the crisis, may be unwitting tools in shaping it--to the detriment of many people; just as methodological individualism (the idea that economics must focus on individual decision making to attain coherence as a science) was smuggled in via the back door, and even after behavioral economics had played a major role in tearing it down in its fundamentalist form, by the experimental bias of behavioral economics, its practitioners seem all too comfortable with the misuse of limited purview of their findings by politicians and commentators banking on a swift, but highly unlikely recovery. A couple of years ago a film came out called "Life is Beautiful", in which, preposterously, perhaps to an offensive degree, an inmate in a concentration camp during the second world war attempted to make the life of a child also interred in the camp bearable by getting it to believe that life in the camp was only a game. Far from providing a new Keynes (and I wouldn't say that's the optimal solution), even the most promising school of economics in these harsh times seems to be content with cobbling together narratives devised for something approximating the same purpose. Labels: behavioral economics, Crystia Freeland, financial crisis, Financial Times, George Akerlof, Keynesianism, Larry Peterson, rational expectations, Robert Shiller, the dull compulsion of the economic Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank's $180 Billion Credit Card Time BombIf the economy stays on its present dismal course, banks can expect to lose $180 billion, according to analysts quoted in the New York Times. The figure is much higher than the government's so-called "stress test" scenario of $82.4 billion in losses because the Fed presumed no increase from current unemployment rates, and because they didn't count the losses from securitization of credit card debt. Yes, the banks bundled up credit card debt just like it did bad mortgages, selling and reselling it to investors and creating liabilities far in excess of value of the underlying loans.The average US household has over $8,400 in credit card and other revolving debt. With unemployment rising, housing prices unlikely to climb back to bubble elevations, and consumers saving more, and Congress considering curbing the most egregious predatory practices of the industry, the glory days of credit card profits for banks appears to be over. The banks are also slashing the credit available to consumers. According to Meredith Whitney, lenders are cutting back credit lines by $2.7 trillion over the next year, a 57% reduction of available credit from just two years ago. As consumers cut back their spending, the negative feedback loop will only accelerate. --d.f. Labels: bankruptcy, Credit card industry, credit crisis, Daniel Fireside, Meredith Whitney, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). GM Bankruptcy Clock Ticking FastGM appears likely to follow fellow carmaker Chrysler into bankruptcy court. The company lost $6 billion in the first quarter of the year, with no signs that sales will improve. The company faces a June 1 deadline imposed by the government to drastically reduce its liabilities and expenses, including persuading the United Auto Workers (UAW) to accept stock to cover the company's $20 billion obligation to fund retirees' health benefits, and bondholders to accept pennies on the dollar, again in stock, for $27 billion in current debt. The company must get both the union and 90% of the bondholders to agree to the terms or the government will withhold future loans, driving the company directly into bankruptcy where a judge can impose terms on all parties.Bankruptcy would also ease the company's plans to slash 2,600 of 6,246 dealerships over the next year. --d.f. Labels: auto industry, auto industry loans, bankruptcy, Chrysler, Daniel Fireside, General Motors, GM Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banks Won Concessions on Stress Tests (WSJ)Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flareat Wells By DAVID ENRICH, DAN FITZPATRICK and MARSHALL ECKBLAD Wall Street Journal | May 9 2009 The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public. Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor. When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations. At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions. At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as "asinine," were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings. The Fed ultimately accepted some of the banks' pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter. Bank of America's final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations. A Bank of America spokesman wouldn't comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. "It wasn't lobbying," he said. Wells Fargo's capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document. "In the end we agreed with the number. We didn't necessarily like the number," said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed's assumptions about Wells Fargo's revenue outlook. At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line. Citigroup's capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions. SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors in the Fed's earlier calculations, according to a person familiar with the matter. PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn't need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall. Regulators said other banks also were told they needed more capital than initially projected. The Fed's findings were less severe than some experts had been bracing for. A weeklong rally in bank stocks continued Friday, with the KBW Bank Stocks index surging 10%. Investors were especially relieved by the relatively small capital holes at regional banks. Shares of Fifth Third soared 59%, while Regions Financial Corp.'s $2.5 billion deficit led to a 25% leap in its stock. With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets. But if they were too soft, the tests could have lost credibility, defeating their basic confidence-building purpose. All the back-and-forth is typical of the way regulators traditionally wrap up their examinations of banks: Regulators often present preliminary findings to lenders and then give them time to respond. The process can result in changes to the regulators' initial conclusions. Some of the stress-test revisions, for instance, were made to account for the beneficial impact of the industry's strong first-quarter profits. On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity. According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks' cumulative shortfall would have been more than $68 billion deeper if the government had used the latter metric, which accounts for unrealized losses. Federal officials said their projections reflected the most comprehensive analysis ever conducted of the industry. The test results showed that the 19 banks faced a total of $599 billion in losses over the next two years under the government's worst-case, Depression-like scenario. The Fed directed 10 banks to add a total of nearly $75 billion to their capital buffers to insulate themselves from potential losses. Banks pressed ahead on Friday with plans to fill their capital holes by tapping public markets. Wells Fargo raised $7.5 billion in stock through a public offering. The bank originally planned to raise $6 billion, but expanded the offering, which was valued at $22 a share, due to robust demand. Shares of Wells Fargo rallied $3.42, or 14% to $28.18. Morgan Stanley, which is facing a $1.8 billion capital hole, raised $4 billion by selling stock. Shares of Morgan rose $1.06, or 4%, to $28.20. Labels: Bank of America, bank stress testing, Wells Fargo Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 1 in 5 Homeowners Under Water and Sinking FastOver 20% of homeowners (more than 1 in 5) owe more than their homes are worth, according to a new study by Zillow.com. In all, about 20 million homeowners have mortgages worth more than their houses.Median home prices have fallen 18% in the first quarter of 2009 compared to the same period a year earlier, with no bottom in sight. Mortgages made at the peak of the bubble are in the most trouble. Nearly 60% of mortgages written in 2006 are underwater. Even with lower prices and tighter lending standards, about a third of 2008 mortgages are higher than the values of the homes. Certain areas are worse off than the average. In Las Vegas, 67.2% of homeowners would have to pay someone to take their houses off their hands. In Stockton and Modesto California, more than half of all homeowners owe more than they could sell their houses for. --d.f. Labels: housing bubble, housing market, mortgage meltdown, underwater mortgages Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Real Unemployment at Record HighThe Bureau of Labor Statistics announced that the "official" unemployment rate for April is 8.9%, a stunning jump from 4.8% just a year earlier. It is the highest jobless rate since the glory days of the Reagan Revolution in 1983. The country lost 539,000 jobs last month, which reporters are scrambling to put a happy face on by saying that "analysts had predicted a loss of 600,000," although this difference is more than offset by the 72,000 temporary government jobs associated with the 2010 census.Over 4 million million jobs have been lost in the past six months, and over 5 million during the last 16 straight months of job losses. However, to get back to pre-recession/depression rate (if things magically started recovering like last week) we would need to add 7 million jobs, to account for the growth in the population. The real story, of course, is much grimmer. The official BLS rate (shown in line U3 of the monthly reports) only counts those actively seeking work. Line U6 of that same report, however, gives a more accurate picture of the state of unemployment. This rate stands at 15.8% for April 2009, up from 8.9% a year earlier. (All the info comes from the BLS website). The U6 number includes the following:
--d.f. Labels: Bureau of Labor Statistics, Daniel Fireside, economic meltdown, real unemployment rate, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Black Male Unemployment Jumps to 17.2%Black Male Worker Jobless Rate Jumps To 17.2% in AprilThe official "seasonally adjusted" unemployment rate for Black male workers over 20 years-of-age in the United States increased from 15.4 percent to 17.2 percent between March 2009 and April 2009, according to the latest Bureau of Labor Statistics data. The official seasonally adjusted jobless rate for Black female workers over 20 years old also increased from 9.9% to 11.5% between March 2009 and April 2009; and the official "seasonally adjusted" jobless rate for all Black workers increased from 13.3% to 15% during this same period. The seasonally adjusted unemployment rate for white male workers increased from 8% to 8.5% between March 2009 and April 2009 The seasonally adjusted rate for all Hispanic or Latino workers in April 2009 was 11.3%. For all U.S. workers over 20 years old, the seasonally adjusted jobless rate increased from 8.5% to 8.9 %between March 2009 and April 2009. The seasonally adjusted jobless rate for Black youth between 16 and 19 years old increased from 32.5% to 34.7% between March 2009 and April 2009, while the unemployment rate for Hispanic or Latino youth increased from 24.9% to 26.5% during this same period. According to the Bureau of Labor Statistics' May 8, 2009 press release: "...In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000. "The number of unemployed persons increased by 563,000 to 13.7 million in April... "Among the unemployed, the number of job losers and persons who completed temporary jobs rose by 571,000 in April to 8.8 million.... "The number of long-term unemployed (those jobless for 27 weeks or more) increased by 498,000 to 3.7 million over the month... "About 2.1 million persons...were marginally attached to the labor force in April...These individuals wanted and were available for work...They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 740,000 discouraged workers in April... "Nonfarm payroll employment fell by 539,000 in April to 132.4 million; private-sector employment declined by 611,000...In April, job losses continued in most major private-sector industries... "Employment in manufacturing fell by 149,000 over the month... "Construction employment declined by 110,000 in April... "The professional and business services industry lost 122,000 jobs in April....Half of the April decline occurred in temporary help services. "Employment in retail trade fell by 47,000 in April.... Wholesale trade employment was down by 41,000 over the month... "Employment in transportation and warehousing declined by 38,000 in April...Employment in financial activities declined by 40,000 over the month...The leisure and hospitality industry lost 44,000 jobs in April..." —b.f. Labels: Black jobless rate, Bob Feldman, recession, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest Banks Need $75 Billion MoreThe results of the "stress tests" are in.According to the results, the biggest banks need $75 billion in additional capital to ride out a "prolonged downturn" (as opposed to whatever it was we've just been through and all the money we've loaned out). The Washington Post has a handy chart here. The biggest potential losers are Bank of America, Wells Fargo, and GMAC. However, according to former banking regulator and S&L scandal prosecutor William Black, the tests are a "complete sham" that don't go nearly far enough. If they really tested banks properly they would show a collective hole of $2 Trillion (yes, capital "t"), and force banks to massively increase their capitalization rates. Read the article here and the interview here, as well as Black's amazing article for D&S way back from 2007. --d.f. Labels: bank stress testing, banking crisis, banking system, Daniel Fireside, stress tests, William Black, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Bonuses Were $454 MillionTurns out the total bonuses paid to AIG were $454 million last year, or 4 times higher than previously reported. How do we know this? Because Congressman Elija Cummings asked them a direct question. See, nobody asked them this precise question before, so they didn't think anyone really wanted to know.From Politico: The 2008 AIG bonus pool just keeps getting larger and larger. In other news, AIG lost another $5 billion in the first three months of the year. I suppose that's better than losing $10 billion. Another round of bonuses for everyone! --d.f. Labels: AIG, Daniel Fireside, Elija Cummings, Wall Stree bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 25 Lenders Made $1 Trillion In Subprime LoansFrom the Center for Public Integrity via HuffPo.Read the full report here. "The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money -- including several that have paid huge fines to settle predatory lending charges," write John Dunbar and David Donald. Labels: mortgage meltdown, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Don't Believe the Hype About Union IntimidationVia Politicalaffairs.net:In the battle over the passage of the Employee Free Choice Act, right-wing opposition to the bill has centered on the claim that if a majority sign-up (sometimes referred to as "card check") process of certifying the union is used, union organizers will pressure and intimidate workers into joining the union. This claim is unfounded, a new study by the University of Illinois released earlier this month revealed. The study examined a six year period in the state of Illinois where more than 21,000 public workers joined unions through majority sign-up. Currently, federal law provides two methods of certifying a new union in a workplace: majority sign-up and a voting process (sometimes referred to as a secret ballot). As it is currently written, the law gives the employer the power to decide how workers will certify their own organization. If the employer is magnanimous enough to allow workers to use the majority sign-up methods, the process is simpler and requires fewer taxpayer resources to complete. All the workers have to do is sign a union membership card, which are then verified by the National Labor Relations Board and negotiations for a first contract begin. According to the University of Illinois study of this process in that state between 2003 and 2009, not s single proven case of union intimidation of an employee could be documented. The report proves that workers not only want to voluntarily join unions but that right-wing opposition to the Employee Free Choice Act, which would give workers the right to decide how to certify their union (rather than the employer), based on claims of union intimidation is false, AFL-CIO President John Sweeney said in a press statement this week. "Workers form unions to bargain for a better life, not because of outside intimidation. Workers need the majority sign up provision because it gives workers the choice of how to form a union, not corporations," Sweeney stated. Further, the report indicates that when employers are not hostile towards workers who favor a union in their workplace and the right to join a union is is left undisturbed, the process of certification of a union is less rancorous and less costly to taxpayers. The truth is that employer intimidation of workers who want a union is the reality, not union intimidation. Other surveys have revealed that when employers fight workers on the issue, employer harassment and intimidation of workers is rampant. According to various studies and surveys, as many as 30 percent of companies will fire pro-union employees. More than 90 percent of employers will use some kind of tactics to intimidate employees when a union organizing drive is discovered. Labels: Employee Free Choice Act, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UAW/Chrysler: How 55% = 0% (D. Henwood)From Doug Henwood's blog, on the whole Chrysler/UAW/VEBA thing:A friend sent me a copy of a brochure (click here for a copy) that the UAW is circulating to its Chrysler workers, or those of them that remain, offering details on the proposed deal with Fiat and the U.S. government. The pay and benefit cuts are nasty, but hardly a surprise. What is a surprise is that the UAW's equity stake is even less impressive a thing than it seemed on first glance. And the first glance wasn’t all that impressive to start with.(This is the full post.) Labels: Chrysler, Doug Henwood, UAW, VEBA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Stress Test HaikuHat-tip to Kiaran H. for passing this along:The stress tests are doneIt originally appeared on Jon Talbot's blog at the Seattle Times, in a thoughtful post about recent layoffs at Microsoft. Here is one of the parts that was thoughtful: The media do the public a disservice by continually looking for "good news" of a turnaround. Let me explain: This historic recession was years, even decades, in the making. Behind it are deep structural problems that can't be quickly addressed. The green-shoot watch distracts from a clear-eyed view of our situation and discussion of the reforms needed. It also continues the salesmanship seen in some of the financial media (CNBC, call your office) that enabled the disaster. I also like his comment about the CEO signing emails about layoffs simply, "Steve": "You gotta love CEO Steve Ballmer signing his layoff email to employees, 'Steve.' Just good ole Steve. Such is 'business casual'—we're all on first-name basis. Except one signs the checks and pink slips." On the topic of "green shoots," the blogger at Corrente had this gentle critique of the haiku: "I thought haiku was supposed to be seasonal. So what about those green shoots?" Corrente readers were up for the challenge; here's my favorite (partly because of its relevance to this D&S article): spring rain on green shootsThe colleague of Kiaran's who sent her the haiku thought it was from Calculated Risk blog. It was not, but they did have part of a series of haikus on bank failures: From the FDIC: FirstBank Financial Services, McDonough, GAD&S blog readers should post their own left economics haikus in the comments section; maybe we'll print them in our new "$.02" reader contributions department of the magazine.Georgia on my mind... —CS Labels: bank failures, bank stress testing, Calculated Risk, Corrente, Jon Talbot Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Private Equity Aims to Snatch Up BanksVery interesting piece from yesterday's New York Times. Private equity manager J. Christopher Flowers buys a tiny bank in Missouri in the hopes of using its national charter to snap up ailing banks across the country. The last two paragraphs are among the juiciest: Flowers "has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. 'I find it to be an extraordinary time to invest,' he said. He was even more blunt when he spoke to an industry group in New York earlier this year. 'Lowlife grave dancers like me will make a fortune,' he predicted."As Investors Circle Ailing Banks, Fed Sets Limits By Eric Lipton | May 5, 2009 CAINSVILLE, Mo.—No one seems to want to own a business in this dusty, windswept corner of rural America, population 370, with its crumbling sidewalks and boarded-up storefronts. Except, that is, for J. Christopher Flowers, a media-shy New York billionaire who last year bought the First National Bank of Cainesville, one of the United States’ smallest national banks. Mr. Flowers, a private equity manager, has no particular love for rural Missouri; in fact, he has never set foot in Cainsville. Rather, he wants to use the national bank charter he picked up in this farm town to go on a nationwide buying spree. With that charter in hand, Mr. Flowers plans to take over a handful of large struggling banks, casualties of the economic crisis. In some cases, he hopes, the federal government will help. But Mr. Flowers, whose investments in banks overseas have made him one of the richest men in America, has run into a major obstacle in the United States: the Federal Reserve, and its very notion of what a bank should be. The Fed does not mind if private equity firms have a minority interest in banks—the Obama administration even wants them to invest. But the Fed will not let them take control, a stance the firms are lobbying regulators mightily to change, especially given that stress test results to be released Thursday are expected to show a glaring need for capital in the banking system. It’s not personal, Fed officials say. It’s just that as the nation recovers from one of the worst banking crises in history, the Federal Reserve wants to make sure that it does not set the stage for the next financial implosion by turning banks over to private equity firms, some of the riskiest players in the business world. So while Mr. Flowers was able to buy the bank here with his own money, he cannot tap into the billions his firm, J. C. Flowers & Company, has raised. How this battle—and others being fought in the aftermath of the economic crisis—plays out will help determine the future shape of the financial industry. For all the talk of the banking crisis, Mr. Flowers and other giant private equity players are circling distressed banks around the country, competing to buy into the industry. Bidding wars are now breaking out among private equity firms, including the Carlyle Group, which is going up against Mr. Flowers’s firm for a stake in BankUnited of Florida. They and other investors see banks as the recession’s biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale. But like Mr. Flowers, some of them would prefer to take over the banks completely, replace their managements and take all the profit. Read the rest of the article . Labels: banking crisis, Federal Reserve, J.Christopher Flowers, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Battle for Health Care BeginsFrom Katrina vanden Heuvel at the Nation:"If there is no public insurance option…then this is not reform at all." That's what Governor Howard Dean said last night in a conference call with thousands of activists—and he's absolutely right. As Dr. Dean noted, the battle for real reform begins Tuesday morning, when Senator Max Baucus chairs a Senate Finance Committee hearing that will look into the public plan option.Activists are writing messages on why such a plan is critical and Senator John Kerry will read some of them into the record at the hearing. The conference call—organized by MoveOn and Democracy For America—began with a story similar to that of too many citizens across the nation.MoveOn member Lisa Hall said she was in a car accident—hit by a drunk driver—and was laid off in the aftermath when she couldn't work.She lost her insurance, COBRA ran out, and the bills mounted as no insurance company would cover her due to pre-existing conditions. "Ultimately," Small said, "[I went into] bankruptcy, like so many others…. The healthcare in this country has to be accessible to everyone.Not just the healthy people or the rich.We're just working folks, trying to keep our jobs and what we've earned." Dean said the outcome of this fight will be determined by activists.We know what's coming—charges of "socialized medicine", "you won't be able to choose your doctor", "a bureaucrat in Washington will make your healthcare decisions," etc.It will be up to the people to write letters to the editor, call your congressman, talk to neighbors.Myths will need to be debunked, front groups exposed, and money trails followed.Already, special interest groups are making robocalls and devoting millions of dollars to an anti-choice campaign. "What we want to do is give people a choice," Dean said."And stop saying you've got to be in the private insurance market or have no insurance whatsoever if you're under 65."(People over 65 are already in a single-payer system—Medicare.) As Dean pointed out, the facts are on our side in this battle.For starters, the proposal of a public plan option allows people to keep their private insurance if they want to and even subsidizes it.It's also cheaper than private insurance since a greater percentage of premiums goes towards healthcare instead of CEO salaries, shareholder dividends, swank offices, etc.(In Vermont, Governor Dean was able to cut administrative costs by 1/3 when the state ran Medicaid instead of a private company.) But in Washington—facts be damned—real reform that benefits ordinary citizens doesn't come without a tough fight."We're going to have an all out fight about this… and we're not going to go down again," Dean said."If members of Congress know how strongly people feel about this they're going to think twice about voting against it." Dean said that Senator Baucus is the legislator who most needs convincing since his committee is one of the two in the Senate that will deal with the bill—and he especially needs to hear from people from his home state. "He is nominally in favor of [the public option] but has also said that he might trade it away," Dean said."I don't think it's necessary to trade it away—we have a Democratic President, a Democratic Senate, and a Democratic House, there's no reason to trade it away…. I think we're going to get a good bill out of the House, the problem is in the Senate." Indeed, the Senate is a place that resists change and all too often kills needed reform.This time around, we can't let that happen.Tell your representatives now that it's time to give people the option of a public plan. Labels: health care, Howard Dean, Katrina vanden Heuvel, Max Baucus, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UAW Plans To Dump Chrysler StockIt appears that the worker takeover of what remains of industrial America will be short lived. The other day the Senate shot down the possibility of bankruptcy judges being able to alter the terms of first mortgages, citing the "sanctity of contracts." Considering that the big worry here is how to finance the commitments to retired workers, it will be interesting how much concern these same Senators for the contracts of auto workers.From the wires: STERLING HEIGHTS, Mich. - The United Auto Workers union has no intention of keeping its 55 percent stake in the new Chrysler and will sell the shares to fund a trust that will take over retiree health care costs next year, the union's president said Monday. --d.f. Labels: auto industry, bankruptcy, Chrysler, Daniel Fireside, VEBA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Swine 'Flu Action Alert (non-satirical)We received this action alert related to swine 'flu (we're not going to save the pork industry by calling it "H1N1") in our inbox:It is now well-documented that the swine flu likely arose at a huge pig farm operated by a subsidiary of the Smithfield Farms in Veracruz Mexico. The farm's waste pools appear to have created a situation in which the virus was spread to humans. The House Agriculture Committee's subcommittee on Livestock, Dairy and Poultry will meet this Tuesday, May 5. You can bet that the pork industry will be there in force trying to rein in their lost sales. What ought to be front and center both in this committee’s agenda and that of all Members of Congress who will consider trade legislation later this year—including so-called "free trade" agreement with Colombia—is that it is agreements like NAFTA that permitted the unsanitary conditions that now appear to be threatening people around the world with swine flu. The members of this subcommittee are: David Scott (D, GA), Chair, Jim Costa (D, CA) Leonard L. Boswell (D, IA), Joe Baca (D, CA), Dennis A. Cardoza (D, CA), K. Michael Conaway (R), TX, Bob Goodlatte (R, VA) Tim Holden (D, PA), Steve Kagen (D, WI), Steve King (R, IA), Frank Kratovil, Jr. (D, MD), Betsy Markey (D, CO), Walt Minnick (D, ID), Randy Neugebauer (R, TX) (Ranking Minority Member ), David P. Roe (R, TN), Mike Rogers (R, AL), Adrian Smith (R, NE) I hope the members of this committee, the rest of Congress, and legislators in Canada also considering a "free trade" deal with Colombia, hear from folks concerned about these natural consequences to corporate control that is not held in check by democratic processes trumped in free trade agreements like that proposed between the U.S. and Colombia. Labels: H1N1, House Agriculture Committee, Smithfield, Swine Flu Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WHO Running out of Panic Colors (satire)Hat-tip to TM for this gem, and "hi" to Jay O'C.World Health Organization running out of colors to scare people about Swine Flu 1 May 2009—A representative from the World Health Organization today related the agency's dissatification with the level of public anxiety over swine flu, and the diminishing number of color-coded alert levels left to combat the public's lack of concern with something they have been told they can do virtually nothing about.  "We need to get out the two messages that the world faces an unprecedented health threat which could result in Biblical-strength death and suffering, bodies stacked like cordwood, limed trenches, road warrior style disintegration of civilization resulting in the universal wearing of bondage leather fetish garb—and, that our only weapon against the disease is hand washing. "And we need to get these two messages out without causing a panic. Although, frankly, we'd like a little more panic than we're seeing now." The WHOs sole remaining color-coded alert level is, "PANIC." "We're having hard time figuring out how to raise the alert level without causing a panic, " worried one official. "In retrospect we needed a lot more levels, but the graphic designer we were working with insisted that this color palette was working, and that adding another color would have looked stupid." The organization is considering inserting a number of additional threat levels between the current level, (Orange, Panic Ready) and the highest level. (Panic.) "We know that this sounds like that scene of Spinal Tap where Nigel says, 'But this one goes to eleven.'" said one representative under condition of anonymity. A reprentative of the 80% of humanity who is refusing to get worked up until the illness has killed as many people as Sport Fishing went on record as saying, "I'll be sure to use a condom next time I make love to a pig. Stop bothering me about this. I have other things to worry about." See the original post. Labels: Spinal Tap, Swine Flu, World Health Organization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Leftists Keep Winning in Latin AmericaFrom Mark Weisbrot of the Center for Economic and Policy Research:Why Latin America's left keeps winning Washington's foreign policy establishment has been proven wrong. Latin America is more stable and democratic than ever Mark Weisbrot | The Guardian | Friday 1 May 2009 19.00 BST A few months ago I ran into an economist who was formerly head of the Bolivian Central Bank in the La Paz airport. He had been reading Nouriel Roubini, the New York University economist whom the media has nicknamed "Dr Doom", and was predicting a very gloomy economic future for the hemisphere, the region and especially his own country. I didn't agree about Bolivia, which has more international reserves relative to its economy than China. But it was striking to see the same thing in all the countries that I visited: opposition economists and political leaders everywhere reminded me of communists in the 1930s, praying for the collapse of the capitalist system – in this case, somewhat ironically, so that they could rid themselves of the left governments that the voters had chosen in Bolivia, Venezuela, Brazil, Argentina, Paraguay, Ecuador and elsewhere. In all of these countries the vast majority of the mass media, to varying degrees, shares the opposition's agenda and in many cases appears willing to present an overly pessimistic or even catastrophic scenario in order to help advance the cause. But despite the worsening of the world and regional economy, the left keeps winning in Latin America. The latest left victory was that of President Rafael Correa of Ecuador, an economist who was first elected at the end of 2006 and was re-elected last Sunday under a new constitution. This gives the charismatic 46 year-old four more years, and he can be re-elected once more for another term. There are a number of reasons that most Ecuadorians might stick with their president, despite what they hear on the TV news. Some 1.3 million of Ecuador's poor households (in a country of 14 million) now get a stipend of $30 a month, which is a significant improvement. Social spending as a share of the economy has increased by more than 50% in Correa's two years in office. Last year the government also invested heavily in public works, with capital spending more than doubling. Correa has delivered on other promises that were important to his constituents, not least of which was a referendum allowing for a constituent assembly to draft a new constitution, which voters approved by a nearly two-thirds majority. It is seen as one of the most progressive constitutions in the world, with advances in the rights of indigenous people, civil unions for gay couples and a novel provision of rights for nature. The latter would apparently allow for lawsuits on the basis of damage to an ecosystem. Many thought Correa was joking when he said during his presidential campaign that he would be willing to keep the US military base at Manta if Washington would allow Ecuadorian troops to be stationed in Florida. But he wasn't, and the base is scheduled to close later this year. He also resisted pressure from the US Congress and others in a multi-billion-dollar lawsuit that Ecuadorian courts will decide, in which Chevron is accused of dumping billions of gallons of toxic oil waste that polluted rivers and streams. And in an unprecedented move last November, Correa stopped payment on $4bn of foreign debt when an independent Public Debt Audit Commission, long demanded by civil society organisations in Ecuador, determined that this debt was illegally and illegitimately contracted. Read the rest of the article. Labels: Center for Economic and Policy Research, Ecuador, Hugo Chavez, Latin America, Mark Weisbrot, Rafael Correa Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Auto Parts Makers In DangerChrysler's bankruptcy and temporary shutdown could spell doom for a number of autoparts suppliers, reports the Wall Street Journal.
Labels: auto industry, bankruptcy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Starbucks Cited for Worker ViolationsFrom the Starbucks Workers Union (happy May Day!)Yet Another Federal Labor Complaint Against Starbucks, Emblematic of a Company in Decline 17-count Charge Latest in a String of Setbacks for Brand Minneapolis– The Starbucks Workers Union announced today that the National Labor Relations Board has found merit with 17 counts of labor rights violations at Starbucks in Minneapolis/St. Paul. The fresh charges come on the heels of a “guilty” verdict in New York Federal Court on nearly 30 similar charges last December. Once seen as a paragon of social responsibility and entrepreneurial innovation, the coffee giant’s image has recently been tarnished with mounting evidence of rampant labor violations, on top of sliding profits, increased market competition, and declining consumer demand. Mall of America Starbucks barista Erik Forman commented, “Since the recession began, Starbucks has been slashing benefits, laying off workers, reducing hours, and increasing the workload on Baristas in a quixotic effort to maintain boom-era profitability. As our standard of living comes under attack, the need for a union has never been greater. Starbucks must respect our right to association.” The charges stem from an Unfair Labor Practice charge filed by the Starbucks Workers Union in January alleging a wide range of violations, from forbidding workers from discussion the union to kicking union sympathizers out of stores. Background Since the launch of the IWW campaign at Starbucks on May 17, 2004, the company has been cited multiple times for illegal union-busting by the National Labor Relations Board. The company settled two complaints against it and was recently found guilty by a federal judge in New York of nearly 30 rights' violations. Starbucks' large anti-union operation is carried out in conjunction with the Akin Gump law firm and the Edelman public relations firm. The IWW Starbucks Workers Union is a grassroots organization of over 300 current and former employees at the world's largest coffee chain united for secure work hours and a living wage. The union has members throughout the United States fighting for systemic change at the company and remedying individual grievances with management. Labels: May Day, Starbucks, Starbucks Union Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Senators Block Cram DownsThe US Senate voted down the "cram down" legislation that would have given bankruptcy judges temporary authority to write down the value of mortgages. Responding to the behest of the banking industry (recipient of hundreds of billions in taxpayer dollars) Republican senators and a dozen or so like-minded Democrats shot the bill down, even though a stronger bill had earlier passed through the House.Bankruptcy judges currently have the authority to rewrite the terms of mortgages on second homes and yachts, but not for primary residences. The failed bill would have given judges the authority to rewrite mortgages to reflect current home values, albeit with significant caveats: banks must have refused to make fair offers to renegotiate loans, future profits on the home (if the owner sold in a rising market) would have been split with the banks, and the authority would have expired in 2012. Advocates had argued that this was a critical element of any housing recovery plan in the face of plummeting home prices and unprecedented foreclosures and abandoned properties. They also argued that banks had to accept responsibility for making huge profits on bad loans for overvalued properties. --d.f. Labels: cram down, Daniel Fireside, foreclosures, mortgage meltdown, Mortgage plan Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Economist Honored for Income Inequality WorkBerkeley economics and public policy prof Emmanuel Saez was awarded the John Bates Clark medal last week. The award recognizes his groundbreaking work showing that, contrary to standard economic thinking, income inequality in the United States has been rising steadily for the past thirty years.For more on the general topic, see James Cypher's article "Slicing Up at the Long Barbeque" in Dollars & Sense from January/February 2007 that cites Saez's work. javascript:void(0) Congratulations professor Saez, and please keep up the good work. Labels: Emmanuel Saez, income inequality, James Cypher Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
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