Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Why Private Equity Wants To Buy Banksbecause there's not much else to buy, according to this Financial Times story:On Wall Street: Banks no longer so lucrative Financial Times By Henny Sender Published: July 3 2009 19:52 | Last updated: July 3 2009 19:52 The planned merger of two Japanese banks is the latest unhappy chapter in the 10-year saga of foreign private equity capital's adventure in Tokyo finance. The two banks, Shinsei and Aozora fell into the hands of Ripplewood and Chris Flowers and Cerberus Capital Management respectively at what appeared to be close to the end of the country's lost decade. The two purchases came after the Ministry of Finance was unable to find any domestic buyers for the two ailing institutions. Ten years on, the two are still not healthy. Both got into trouble like many of their US peers by straying into investments that promised high yields with seemingly low risk, whether junk bonds that proved worthless for Shinsei or a piece of GMAC in the case of Aozora. It has been easy for both banks to stray from the banking business in Japan in recent years because they lacked a broad base of cheap funding from deposits and they never became the go-to source of loans for corporate Japan. Now private equity is an eager if frustrated buyer of troubled banks in the US and one of the few sources of fresh equity for a sector that desperately needs capital. US authorities are as paranoid as their Japanese peers of these would be owners' intentions and intend to impose onerous requirements, (which may or may not prove very burdensome) on private equity. At the same time, regulators also intend to impose all sorts of constraint on the banks and limit the degree of leverage all banks are allowed, which will likely lead to lower profitability. Read the rest of the article Labels: bailout, banking industry, financial crisis, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Didn't Have Enough To Worry About...Apparently there's major concern about an El Nino developing in the South Pacific. Such events can wreak havoc on commodity prices, some of which are already gyrating all over the place. Now that the "green shoots' view has been replaced by one that envisions considerably less growth in the near-term future, any serious reduction of supply could provide inflationary pressures in key commodities--even in oil, a (relatively-speaking, anyway) non weather-related one, that is used to hedge macroeconomic bets, like those in the dollar--in the Northern autumn and winter, when rising unemployment is likely to depress demand considerably. This, in turn, would depend on whether or not the dollar as the ultimately safe store of value during global downturns predominates over concerns about exit strategies from increasingly expensive government programs as the economic outlook stagnates or even deteriorates. The fear is that a serious shift towards the latter, especially, could lead to a situation in which oil and food prices rocket even as the dollar declines and unemployment continues its rise. The fact that US (home to a huge share of global planting in key foodstuffs) planters have ramped up in the last few months is a good sign, but...From The Financial Times: Commodities fears after El Nino alert By Javier Blas,Commodities Correspondent Financial Times Published: July 1 2009 17:41 | Last updated: July 1 2009 17:41 The emergence of El Nino, a weather phenomenon that could dramatically influence commodities markets as it brings drought conditions to south-east Asia, seems all but certain, Australia's weather office said on Wednesday. "More evidence of a developing El Nino event has emerged during the past fortnight, and computer forecasts show there's very little chance of the development stalling or reversing," Australia's Bureau of Meteorology said in a report. A month ago, the bureau said that “the odds of an El Nino were above 50 per cent”. Australian officials on Wednesday said they could declare officially an El Nino event in the next few weeks, promising an update as early as next week. The recurring climatic event--caused by an increase of the water temperature in the tropical Pacific--has in the past triggered wild gyrations of food prices, particularly wheat, rice and sugar. The event could also disrupt India's annual monsoon. Commodities traders pay extra attention to Australia's meteorologists as the country is one of the most exposed to El Niño and its weathermen have a good track record in anticipating the emergence of the phenomenon. Traders and meteorologists said that even if an El Nino emerged, its impact on commodities markets would depend on the weather pattern's strength. The previous two events were weaker, but 1998 saw a strong phenomenon. So far, analysts and traders are taking comfort from a period of favourable weather, particularly in the northern hemisphere. The weather has also been auspicious in south-east Asia, although India's monsoon has had a poor start. Sugar prices on Wednesday hit a three-year high, with the front-month contract trading as high as 18.01 cents per pound, on fears that the sugarcane crop in India, the world’s largest consumer of the sweetener, would be hit by a poor monsoon. El Nino--"Spanish for "the little boy"--has important consequences for weather, including increased rainfall across the southern tip of the US, Peru and Chile, which has caused destructive flooding, and drought in the west Pacific from Australia to Bangladesh. It has also affected fisheries, as nutrients in eastern Pacific waters drop. Labels: agriculture, commodity prices, el nino, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Rogue Trader Causes Oil SpikeFrom The Financial Times:'Rogue broker' blamed for oil spike By Javier Blas and Izabella Kaminska in London Financial Times Published: July 2 2009 12:07 | Last updated: July 2 2009 20:26 The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (7m euros) of losses for his company. PVM Oil Associates, the world's largest over-the-counter oil brokerage, said on Thursday it had been the "victim of unauthorised trading". The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss. Read the rest of the article Labels: commodity prices, financial crisis, oil prices Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Liked CDOs, You'll Love CLOs...From the Financial Times:Night of zombie company looms as debt burden remains large By Anousha Sakoui Financial Times Published: July 2 2009 20:50 | Last updated: July 2 2009 20:50 Third time lucky is a phrase often quoted by bankers who believe it takes several debt restructurings to get a company's balance sheet right. The phrase is even more relevant today amid growing concerns that debt restructurings are leaving companies saddled with too much debt, even at the end of the process. Part of the blame has been laid at the feet of capital-constrained banks which have been reluctant to write down the debt because it could create losses that would further weaken their balance sheets. Debt and bankruptcy specialists warn that trend risks creating a new breed of zombie companies--those which survive simply to repay their debts but cannot move forward because their debts remain so large. An even greater problem is posed by collateralised loan obligations--complex funds that pooled loans and at the height of the credit bubble were buying up to 60 per cent of leveraged loans. Read the rest of the article Labels: bailout, banking system, bankruptcy, collateralized loan obligations, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Roubini on Details in the Payrolls DataU.S. Job Report Suggests that Green Shoots are Mostly Yellow WeedsNouriel Roubini's Global Economonitor Nouriel Roubini | Jul 2, 2009 The June employment report suggests that the alleged 'green shoots' are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions. It's clear that even if the recession were to be over anytime soon--and it's not going to be over before the end of the year--job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over. The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we're looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours, and average hourly wages--and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone. Read the rest of the post Labels: bailout, economic indicators, financial crisis, Nouriel Roubini, US employment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Goodbye, Green ShootsThe FT's John Authers (video clip) on market reaction to today's US payrolls data, which were far worse than expected.Labels: bailout, economic indicators, employment, financial crisis, John Authers, US employment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Delasantellis on Realtors' Latest Lobby EffortFrom his Asia Times column:Cheating still beats real work By Julian Delasantellis Asia Times July 2d, 2009 A colleague recently relayed a story about her experience as an observer at a faculty/student disciplinary hearing for a pre-law undergraduate charged with cheating. Apparently, this young man had come around to the belief that, when it came to engaging in conduct that could get him expelled, in for a dime-in for a dollar. Just in the space of a single term, his teachers had found him copying from a test, rifling through the course's graduate assistant notebook looking for a test, and, word for word, punctuation mark by punctuation mark, lifting without attribution a large section of a Wikipedia entry on "jurisprudence" for a research paper. "How do you answer these charges?" asked the earnest student prosecutor, who, both my colleague and I agreed, can be expected to be next seen on TV in Kevlar helmet, flak jacket, frameless glasses and FBI windbreaker when the government takes down another religious compound in 2017 or so. Read the rest of the article Labels: appraisal management companies, bailout, financial crisis, Julian delasantellis, mortgage meltdown, National Association of Realtors Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). California to Issue IOUs at Discount?The creator of the fine website Across the Curve had the following to say about the situation on California tonight: "I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import."This piece from Breaking Views notes that banks may ask for a discount on state IOUs: Labels: bailout, banking industry, California, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banker: "This Is a Phenomenal Environment"One more from today's FT:Radical shift in the banking power base By Patrick Jenkins and Jane Croft Financial Times Published: June 30 2009 18:50 | Last updated: June 30 2009 18:50 It is barely nine months since the collapse of Lehman Brothers ushered in one of the worst financial crises since the Great Depression. But for the strongest banks, the second quarter of 2009, which closed on Tuesday, has confirmed the upbeat trends of the first quarter. While banks such as Citigroup, Merrill Lynch, Royal Bank of Scotland and UBS continue to find life difficult, thriving rivals--JPMorgan, Goldman Sachs, Morgan Stanley, Barclays, Deutsche Bank and Credit Suisse--are talking privately of a record second quarter. They have benefited from lively markets for commodity and foreign exchange trading, at profit margins that are between two and eight times higher than before the height of the financial crisis last autumn. At the same time, companies have been rushing to issue new debt and equity. More fundamentally and sustainably there have been clear shifts in market share between the banks--in everything from UK mortgages to US Treasury bill issuance--as aggressive groups have taken advantage of opportunities left by weakened rivals. BanksOne investment banker says: "There used to be 15 banks competing. Now there are six. This is a phenomenal environment. I’ve never seen anything like this in 20 years in the business." Read the rest of the article Labels: bailout, banking industry, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Behind Banks' Credit Card MovesAnother FT article goes deeper into the increasing danger credit cards are putting banks into, and what they're doing about it. Some scary stuff here.Record credit card losses force banks into action By Saskia Scholtes in New York Financial Times Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00 Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings. Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch. Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans. Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors. Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis. Read the rest of the article Labels: bailout, banking system, Credit card industry, financial crisis, securitization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citi Raises Rates on CardholdersThis is before new regulations come into effect that prevent them from doing this very thing come into effect in a few months. From The Financial Times:Citi raises card rates on millions By Francesco Guerrera Saskia Scholtes Tom Braithwaite Financial Times Published: June 30 2009 23:59 | Last updated: June 30 2009 23:59 Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks. People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears. Citi's rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries. Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent--or nearly 3 percentage points--between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research. Read the rest of the article Labels: bailout, Citibank, Credit card industry, financial crisis, financial regulation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Speculation on Demise of the PPIPFrom Wall Street Pit:Financial Crisis: The Two Sides of the Balance Sheet Wall Street Pit By James Kwak|Jun 30, 2009 Noam Scheiber at The New Republic has the inside scoop (hat tip Ezra Klein) on why Treasury is letting the Public-Private Investment Program die a quiet death (although at this point the legacy securities component may still go ahead). In short, the argument is that the point of PPIP was to help banks raise capital by cleaning up their balance sheets; since they have been able to raise capital themselves, there is no need for PPIP. According to one person Scheiber spoke to: "If you had asked–I don't want to speak for the secretary–what's problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital." This represents the latest swing of the pendulum between the two sides of the balance sheet. As anyone still reading about the financial crisis is probably aware, a balance sheet has two sides. On the left there are assets; on the right there are liabilities and equity; equity = assets minus liabilities. (There are different definitions of capital, depending on what subset of equity you use.) The goal has always been to provide confidence that there is enough capital to withstand the impact of market and economic turmoil--in particular, its impact on the toxic assets that litter banks’ balance sheets. However, there are two alternative approaches to doing this. One is to add more equity to the right side by issuing new stock (preferred or common). (This would add cash to the left side to keep them in balance.) The other is to reduce the uncertainty of the left (asset) side by helping banks sell toxic assets; even if the banks have to sell them for a little less cash than their current balance sheet value, this would have the salutary effect of reducing vulnerability, since cash does not lose value (at least not in an accounting sense). Alternatively, you could achieve the same effect by insuring the value of the assets while leaving them on bank balance sheets, because then the risk transfers to the insurer. Read the rest of the post Labels: bailout, banking system, Federal Reserve, financial crisis, PPiP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Eurozone Moves into Deflation for First TimeFrom The Financial Times:Eurozone inflation turns negative By Ralph Atkins in Frankfurt Financial Times Published: June 30 2009 11:03 | Last updated: June 30 2009 18:16 Eurozone annual inflation has turned negative for the first time since records began, creating a headache for the European Central Bank as it seeks to draw a line under emergency measures to tackle continental Europe's recession. Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union's statistical office. It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991. The fall in prices reflects sharply lower energy costs and the effects of the region's worst economic downturn since the second world war. Annual inflation is hugely undershooting the ECB's target of "below but close" to 2 per cent. Read the rest of the article Labels: bailout, European Union, financial crisis, GDP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Optimism...They keep saying the UK should emerge faster and stronger than other economies (and that may still turn out to be the case, give horrible performances elsewhere) from the recession--or whatever it is--but the carnage continues to get worse:Economy suffers steepest fall in 50 years The Independent By Russell Lynch, Press Association Tuesday, 30 June 2009 The UK economy recorded its sharpest decline in more than 50 years during the first quarter of 2009, figures showed today. And revisions to figures revealed the current recession began earlier than first thought, with a 0.1 per cent decline seen between April and June last year compared with previous estimates of zero growth. Output fell 2.4 per cent in the first three months of the year - the fastest rate since 1958, the Office for National Statistics (ONS) said. The economy also showed an annual decline of 4.9 per cent - the biggest fall since ONS records began in 1948. The first-quarter decline of 2.4 per cent is much worse than the 1.9 per cent first estimated and comes after bigger-than-expected falls in construction and the UK's key services sector. The plummet in activity between January and March was almost equal to the 2.5 per cent fall suffered during the whole of the recession in the 1990s, Investec's David Page said. He warned: "The economy is now likely to undergo a peak to trough adjustment in excess of 5 per cent, nearly as big as the overall 5.9 per cent collapse seen from 1979-1981." The scale of the decline could put pressure on Chancellor Alistair Darling's forecasts for the public finances this year. Read the rest of the article Labels: bailout, economic indicators, financial crisis, GDP, United Kingdom Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WSJ: Why Cleaning Banks' Books Is So HardIt was almost impossible to get this without being a subscriber, so I'm reproducing it in full (here's the link to the article, which has accompanying charts:JUNE 30, 2009 Wall Street Journal Wary Banks Hobble Toxic-Asset Plan By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG The government's plan to enable banks to dump troubled assets is facing troubles of its own. Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks. But that initiative--called the Public-Private Investment Program, or PPIP--has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy. A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend. U.S. officials and investors are playing down expectations for the plan--originally billed as a $1 trillion endeavor. Some federal officials say the banking environment has improved since the program was unveiled. They assert that because a dozen or so big banks recently succeeded in raising capital, they are under less pressure to sell bad assets. Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP--the government-financed buying of bad bank loans. Mr. Geithner recently said the other part--to facilitate the buying from banks of troubled securities, many backed by real-estate loans--could be scaled back because investors are "reluctant to participate." This week, the government is expected to name investment firms to manage this securities-buying portion. "The fits and starts on all this stuff has added to the uncertainty that makes [investors] stay on the sidelines," says Trabo Reed, the deputy banking superintendent in Alabama, where many small and midsize banks are looking for cash infusions from investors. Lee Sachs, counselor to the Treasury secretary, says the department remains committed to the program and has received more than 100 applications from would-be investment managers. "One of the goals of the PPIP program has been to help create liquidity in frozen markets," he says. "Some banks will sell assets. Even those that do not will benefit from the greater ability to value the assets they hold." The slimmed-down program will focus not on bad loans, but on toxic securities, which are a problem for a relatively small fraction of the nation's banks. That is bad news for hundreds of smaller banks burdened with growing piles of defaulted loans. These banks are less able to tap capital markets than their larger rivals, so they have been eager for U.S. help unloading loans as a way to bolster their capital cushions. Many of them can face big problems if just one or two large loans go bad. Seventy banks, most of them community institutions, have failed since the start of last year. Analysts are bracing for hundreds of lenders to collapse in the next few years. Because these lenders often play key roles supporting their local economies, taken together, they are important to the financial system and to a U.S. economic recovery, says Kenneth Segal, senior vice president at Howe Barnes Hoefer & Arnett Inc., an advisory firm for small and midsize lenders. During the last banking crisis, nearly two decades ago, the government established the Resolution Trust Corp. to sell off the bad loans and securities of banks that had failed. Many experts credit the RTC with helping defuse that crisis. This time around, efforts to rid banks of soured assets have sputtered repeatedly. In late 2007, federal officials helped cobble together a plan for a bank-financed fund to buy securities held by bank investment funds, but the effort was aborted. In 2008, the Bush administration established a $700 billion program to buy banks' soured assets. Partly because of the complexity of valuing those assets, the U.S. abandoned that plan, instead opting to directly pump taxpayer money into banks. Scott Romanoff, a Goldman Sachs Group Inc. managing director, has referred to the current effort, PPIP, as "the greatest program that never occurred," because it "created confidence in the markets so banks can raise equity capital." In recent weeks, markets have lost some vigor amid renewed concerns about the economy. That could make it more difficult for big banks to raise additional capital. Banks also could face further losses as bad assets decline more in value. On March 23, when Mr. Geithner unveiled PPIP, the Dow Jones Industrial Average surged nearly 500 points, or 7%, its biggest gain since October, on hopes that the program would nurse the banking industry back to health. Many bank executives were skeptical about whether the program could succeed. Even before it was announced, some had grumbled that federal officials weren't consulting them, and instead were crafting the initiative with input from would-be investors. Some banking executives say they warned that they would be loath to sell at the kind of prices investors were likely to demand. Executives at Citigroup Inc. shared those concerns, according to people familiar with the matter. While the New York bank was sitting on at least $300 billion of risky loans and securities, selling them at discounted prices would require painful hits to its already thin capital ratios, these people say. Some Citigroup executives had a different idea: Maybe they could turn a profit by bidding on their own toxic assets at discounted prices, using government financing, according to the people familiar with the talks. Other big banks also talked about setting up distressed-asset units to snap up troubled loans and securities, including from their parent companies, with taxpayer financing. FDIC Chairman Sheila Bair later publicly shot down the idea. Citigroup declined to comment. Meanwhile, many small-town bankers hoped the program would help them unload the bad assets--generally loans to finance commercial real-estate projects--that were hurting their balance sheets. Some potential buyers had surfaced before PPIP was announced, but they were offering such low prices that few banks could afford to sell the loans without severely denting their capital cushions. The hope was that PPIP would help narrow the gap between buyers and sellers. Investors would be able to bid more because the government would offer buyers little-money-down financing, along with some downside protection. "We have illiquid assets," says Patrick Patrick, chief executive of Towne Bancorp of Mesa, Ariz. "It would be helpful to have a vehicle where you could sell them at market and be able to restructure our balance sheet." Like many small banks, Towne Bancorp has been hurt by a handful of loans to finance real-estate projects that went belly up. In the first quarter, the bank said two souring commercial real-estate loans caused its portfolio of loans at least 90 days past due to swell by 52%. Such loans represent more than 22% of Towne Bancorp's $143 million in assets. The company has been trying for months to sell 19 pieces of real estate--including undeveloped land and a warehouse--that it seized when loans went into default. When PPIP was announced, big-name investors were intent on figuring out how to profit from it. Raymond Dalio of giant hedge-fund firm Bridgewater Associates, which oversees $72 billion in assets, initially expressed interest in participating. But within days, he was blasting it, saying buyers and sellers would have difficulty agreeing on pricing and fund managers that profited would be exposed to criticism from politicians. The way PPIP is set up "makes us not want to participate and it makes us question the breadth of interest that we will see in the program," he wrote to clients. Lawyers for hedge funds and private-equity investors warned clients about the risks of doing business with the government. The industry was unnerved by the restrictions placed on banks participating in another federal bailout program, the Troubled Asset Relief Program. Fund managers were also bothered by President Barack Obama's criticism of the hedge funds holding Chrysler LLC debt who had refused the government's buyout offers. In conference calls with bankers and investors, FDIC officials emphasized that PPIP was critically important to cleanse banks of their bad assets. "I think you know the stakes are very high with this," Ms. Bair, the FDIC chairman, said during a March 26 call, according to a transcript. "We need this program to work." Ms. Bair and her deputies encountered skepticism. In an April 9 conference call with the FDIC, Mark Wolf of TRI Investments LLC, described his Carlsbad, Calif., firm as a potential PPIP bidder. "Unless you've got a process that either forces banks to sell or does a better job of encouraging them to sell, we're just going to see banks sitting back and dribbling these things out through an eyedropper over the course of time," he said. Some bankers were hesitant. "If these loans are bought at a discount, we create a hole in capital," Lou Akers, executive vice president of Adams National Bank in Washington, told FDIC officials on the March 26 call. He suggested that regulators consider changing the way they calculate banks' capital in order to cushion the blow. Government officials were noncommittal, a transcript of the call indicates. FDIC officials emphasized on the conference calls that PPIP was intended to benefit all banks, not just industry giants. But smaller banks began to worry they'd be locked out. To participate in PPIP, local lenders were told, they would have to pool their loans with other banks. The process, which the FDIC said it would facilitate, was designed to simplify the bidding process for government officials and prospective investors. The agency didn't want thousands of banks put their loan portfolios on the block separately. But the FDIC planned to require participating banks to kick in a minimum amount of assets, and some small-town bankers worried they wouldn't have enough to qualify. Too high a minimum "will virtually eliminate all community banks from being able to participate in this program," wrote Julian L. Fruhling, president of Legacy Bank in Scottsdale, Ariz., in a letter to the FDIC. Still, some investment firms that were hoping to help manage the government's program were optimistic. Laurence Fink, chief executive of BlackRock Inc., said in mid-April during a trip to Japan that if his firm is selected as a manager, it was ready to raise $5 billion to $7 billion to buy securities through PPIP. He said he hoped to raise money from individual investors in Japan and the U.S., and that potential returns could be as high as 20%. The FDIC and other regulatory agencies were planning to use their "stress tests" of the nation's top 19 banks to push them to sell assets via PPIP, according to people familiar with the matter. But in the weeks before the stress-test results were announced in May, market sentiment began to improve. A number of banks succeeded in raising capital by selling new shares to the public. Once the stress tests were wrapped up in May, even more banks sold shares--a total of roughly $65 billion within a month. The capital-raising removed regulators' leverage to encourage participation in PPIP, according to government officials. Around the same time, BlackRock reduced its goal for the size of its potential PPIP investment fund to about $1 billion, say people familiar with the matter. Earlier this month, the FDIC formally postponed the loan-buying portion of PPIP, called the Legacy Loan Program. "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system," Ms. Bair said. Next month, the FDIC intends to use PPIP for a far narrower purpose: to auction loans the agency has seized from failed banks. Eventually, it hopes to resuscitate the loan-buying program so that smaller banks can benefit from it. But that could be tricky. The U.S. initially justified PPIP by invoking its "systemic risk" powers, which enable regulators to step in when the financial system is at risk. Regulators have debated whether such a justification would remain if the program were geared toward smaller banks. FDIC officials doubt they will muster the necessary consensus among regulators to invoke the special powers and keep the loan program alive, according to a person familiar with the matter. Many banking experts contend that the financial system won't fully stabilize until banks get rid of their bad assets. Mr. Segal, the bank adviser, complains that federal officials have cited recent capital raising by big banks as evidence that "the system is OK." That may be true "for the top 15 or 20 banks," he says. "But for everybody else, there really needs to be more attention paid." Labels: bailout, banking system, financial crisis, PPiP, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Steep Increase In Fannie/Freddie DelinquenciesThis is bad news: Fannie and Freddie mainly deal in prime, not subprime, mortgages. Job losses are the culprit. From The Wall Street Journal:By JAMES R. HAGERTY JUNE 29, 2009, 4:44 P.M. ET Wall Street Journal Fannie Sees Jump in Overdue Home Loans Fannie Mae reported a steep increase in the percentage of home mortgages with overdue payments. The government-backed mortgage investor said in a monthly summary released Monday that 3.42% of the single-family mortgages it owns or guarantees were 90 days or more delinquent in April, up from 3.15% a month before. Fannie's main rival, Freddie Mac, reported last week that its single-family delinquency rate for May was 2.62%, up from 2.44% in April. Fannie and Freddie are the main providers of funding for U.S. home mortgages. Although the two companies bought many of the riskier types of home loans in recent years, their main business is in prime mortgages. More prime borrowers have been falling behind as they lose jobs or their incomes fall. Richard DeKaser, an independent economist in Washington, D.C., blamed the continuing rise in loan delinquencies on the spike in job losses and on what her termed the "evaporation" of home equity amid falling home prices, leaving many borrowers without a cushion when they lose their jobs. Read the rest of the article Labels: economic indicators, Fannie Mae, financial crisis, Fredddie Mac, housing market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bloomberg Preview: June UnemploymentThey see a loss of .2% for the month, which will take it up to 9.6%, and attribute the slower pace to long-awaited signs of stabilization in manufacturing:Unemployment Probably Rose at Slower Pace: U.S. Economy Preview By Shobhana Chandra June 28 (Bloomberg) Unemployment in the U.S. probably rose at a slower pace and the manufacturing slump eased this month as evidence mounted that the end of recession is in view, economists said before reports this week. The jobless rate rose 0.2 percentage point to 9.6 percent, the highest level in 26 years, according to the median of 58 estimates in a Bloomberg News survey. The gain would be the smallest since November 2008. A survey of purchasing managers may show manufacturing shrank at the mildest pace in 10 months. Government efforts to stabilize housing and consumer spending are only now starting to pay off, indicating it will take months before a recovery develops. The job market will remain one of the biggest threats to the emerging rebound as companies from General Motors Corp. to Kimberly-Clark Corp. focus on cutting costs by trimming payrolls. Read the rest of the article Labels: economic indicators, financial crisis, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 2 On Subprime/Mortgage MessFirst, a link to Doug Henwood's latest (June 25th) radio program, which features an excellent interview with Alyssa Katz on the history of mortgage lending in the U.S. from the '30s on. Second, this piece about a recent study which casts interesting light on the role of the Community Reinvestment Act on subprime lending (courtesy of Economist's View):Most Subprime Lenders Weren't Covered by CRA The Big Picture By Barry Ritholtz - June 27th, 2009, 9:00AM The CRA brouhaha last year led the Orange County Register to run an analysis of "more than 12 million subprime mortgages worth nearly $2 trillion" in late 2008. What did their data based analysis discover? "Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market--after smaller, unregulated players showed there was money to be made." Among their research conclusions: Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law. State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in. Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren't subject to the CRA law, though some were owned by banks that could choose to include them in their CRA reports. Among lenders that were subject to the law, many ignored subprime while others couldn't get enough. Read the rest of the piece Labels: Alyssa Katz, bailout, Barry Ritholtz, Community Reinvestment Act, Doug Henwood, financial crisis, subprime lending, The Big Picture Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How Striken Banks Are Making MoneyYou guessed it--fees. From Reuters:June 26th, 2009 Fee bonanza spells more trouble for banks Reuters By: Alexander Smith Alexander Smith is a Reuters columnist. The views expressed are his own Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they've had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday. True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching--often in disbelief--the huge amount of capital raising that has been going on in both the equity and bond markets. Take the bond markets, where total first-half issuance--excluding financials--has already reached $598 billion, outstripping previous records for an entire year. If anyone pretends it has been tough selling these bonds, don't believe them. The sales teams have been pushing at an open door, with fund managers buying anything they could get their hands on. The fees are good and so far this year, the risk has been limited. The ones to suffer have been the loan desks, with syndicated lending hitting a 13-year low. But since this market has always been seen as a loss-leader to help sell other products, there are probably fewer tears being shed at the top of the banks involved. The real star of the show, however, has been equity capital markets. Traditionally the poor cousins to the sexier and higher profile "rainmakers" in mergers and acquisitions, ECM desks have raked in underwriting fees of $7.6 billion in Q2 alone, almost half the industry total. As with bond issues, lead managing or underwriting such deals does carry a risk, but so far this year that has been limited as shareholders have lapped up the rights issues. There's no denying that many companies badly needed capital and that the banks have the expertise to get these deals done. The question that will increasingly be asked is whether the fee structure can still be justified. True, rights issues can fail, as underwriters of the 4 billion pound offering by British bank HBOS last year no doubt recall. But with banks charging bigger fees and pricing offerings at larger discounts, the rewards currently outweigh the risks. One area of investment banking which is still in the doldrums is M&A, despite the best efforts of some of the brightest minds in the game to get dealmaking back on track. The Thomson Reuters data shows global M&A revenues declined for a third consecutive quarter, with fees on completed deals down some 66 percent on the same period last year at just $3 billion. M&A activity--measured by the value of deals done--is down almost 45 percent so far this year, the lowest figure since 2003 and the sharpest fall since 2001. Of course, it is possible that these big fees will be wiped out by continued losses on the toxic assets that some investment banks still have on their balance sheets. But for an industry that was teetering on the brink last autumn, investment banking appears in rude health. With a second backlash already beginning as salaries rise and bonuses come back into fashion, the big investment banks--particularly those which still owe taxpayers money or government shareholders--will need to make sure their lines are well rehearsed. At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Labels: baillout, banking system, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Incomes Surge, Wages and Salaries FallThis is entirely due to the administration's one off $250 payments to various groups receiving government benefits like Social Security; otherwise, the figures were noteworthy because they document that workers received their first quarterly drop in wages in 50 years. Also: savings increased to an almost unheard-of (well, not for more than a decade) 7%, which sits uneasily with the green shoots notions of recovery, dependent as they are on a sustained revival in consumer spending and, especially, in housing. From the Financial Times:US incomes surge as stimulus kicks in By Alan Rappeport in New York Financial Times Published: June 26 2009 14:16 | Last updated: June 26 2009 15:33 Personal income in the US surged in May thanks to an infusion of government stimulus funds, while consumers raised their spending modestly as confidence about the state of the economy continues to improve. However, most of the monthly rise was the result of Federal benefit transfers and lower taxes. Americans, still facing rising job cuts and falling home prices, have been hoarding most of the additional funds, lifting the savings rate to a 16-year high in May. Households are reverting to a more sustainable spending path vis-à-vis income that allows scope for paying down debt and adding to savings,” said Joshua Shapiro, chief US economist at MFR. Official figures showed on Friday that incomes jumped by 1.4 per cent last month, or $167.1bn, beating economists' expectations and doubling the previous month’s revised rise of 0.7 per cent. Read the rest of the article Labels: baillout, financial crisis, fiscal stimulus, personal income guarantee, savings and loan crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama in His LabyrinthFrom the Financial Times:Deficit disorder By Edward Luce Published: June 25 2009 19:53 | Last updated: June 25 2009 19:53 Back in February, Barack Obama's presidency suffered an early setback when Judd Gregg, the Republican senator from New Hampshire, withdrew as his nominee for commerce secretary. Mr Gregg, who was to be the most high-profile exhibit of Mr Obama's bipartisan credentials, decided he could not belong to an administration that would preside over such high budget deficits. The figure then being projected for this year was above the $1,000bn mark for the first time. But in the few short months since, the number has rocketed much further--to $1,800bn (1,106bn pounds, 1,291bn euros) or 13 per cent of gross domestic product. The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years. Even on its relatively optimistic assumptions for economic growth, moreover, the CBO predicts national debt will double to 82 per cent of GDP in the next decade--a level not seen since the second world war. This would push the US close to the chronic debt levels seen in Japan and Italy. "People used to talk about America's long-term fiscal crisis," says Douglas Elmendorf, head of the CBO. "That crisis is now." Once merely a worthy subject of concern, America's fiscal outlook has rapidly become the object of widespread alarm. "Aside from weapons of mass destruction and terrorism, America's fiscal situation is the most dangerous challenge facing the country," says Mr Gregg. "Unchecked, it will reduce growth, weaken the dollar and ultimately undermine America's global leadership role." Read the rest of the article Labels: baillout, Barack Obama, financial crisis, fiscal policy, Monetary Policy, tax policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UN Summit on the Financial CrisisThe G8 will meet in early July in the Italian town of L'Aquila, in a less luxurious setting than had originally been planned, according to a recent Guardian article:The organiser of next month's G8 conference near the earthquake-hit Italian town of L'Aquila today shrugged off the strong aftershocks felt in the area on Monday, suggesting a few tremors may bring the world leaders closer to the victims. We can only hope that the proximity of big-wigs from the rich countries to tent cities and the homeless will get them to remember the less well-off while they discuss ongoing measures to deal with the global financial crisis. Meanwhile, less-rich countries pushed the UN, via the General Assembly, to hold a summit on the financial crisis. Here are some resources on the summit:
—CS Labels: financial crisis, G20, G8 summit, United Nations Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Two Views of the CrisisA brief, clear comparison from Simon Johnson on the Baseline Scenario blog:There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold. Go to the original blog for links, including the slides he mentions. Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Some Takes on the Regulatory OverhaulHere are some assessments of the Obama administration's overhaul of financial regulation:In his front-page New York Times article on Wednesday (upgraded from the left-hand column of the business section), Joe Nocera finds "only a hint of Roosevelt" in what Obama described as "a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression." Michael Greenberger of the University of Maryland comments on the new regulations in an interview on WBAL Radio, AM 1090 (Baltimore) on Wednesday (it opens up directly into Quicktime audio, but the interview comes through just fine). And Greenberger contributed to this piece from Reuters (also from Wednesday).
Hat-tip to Lynn Fries for these links (though I'd seen the Nocera piece in my morning paper). Labels: financial crisis, financial regulation, Joe Nocera, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Business Press MIA Before the CrisisFrom the current Columbia Journalism Review: a detailed review of whether the U.S. business press was paying attention in the years leading up to the financial crisis. The brief answer is—no.These are grim times for the nation’s financial media. Not only must they witness the unraveling of their own business, they must at the same time fend off charges that they failed to cover adequately their central beat—finance—during the years prior to an implosion that is forcing millions of low-income strivers into undeserved poverty and the entire world into an economic winter. ...The story ends with a short list of lessons to be learned. Here there is a nod to the alternative press, but barely: Fifth, seek alternatives. Read Mother Jones, or something, once in a while.Read the whole article here. Labels: business press, Columbia Journalism Review, financial crisis, New York Times, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Recession Tracks the Great DepressionFrom yesterday's Financial Times:The recession tracks the Great Depression By Martin Wolf | June 16 2009 Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us. It is one of the guides we have to our present predicament. Fortunately, we do have the data. Unfortunately, the story they tell is an unhappy one. Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words. In their paper, Profs Eichengreen and O'Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted. First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan's industrial collapse has been far worse than in the 1930s, despite a very recent recovery. Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures. Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression. The two authors sum up starkly: "Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event." Yet what gave the Great Depression its name was a brutal decline over three years. This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated. Profs Eichengreen and O'Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP. All this is consistent with the conclusions of an already classic paper by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard. Financial crises cause deep economic crises. The impact of a global financial crisis should be particularly severe. Moreover, "the real value of government debt tends to explode, rising an average of 86 per cent in the major post–World War II episodes". The chief reason is not the "bail-outs" of banks but the recessions. After the fact, runaway private lending turns into public spending and mountains of debt. Creditworthy governments will not accept the alternative of a big slump. The question is whether today's unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression. If the latter wins, we will not. What everybody hopes is clear. But what should we expect? Read the rest of the article. Labels: economic crisis, financial crisis, Great Depression, Martin Wolf, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Back to the Trough for Happy PigletsA comment from Morningstaronline.co.uk; hat-tip to Bob F.:And it's back to the trough Friday 12 June 2009 | Comment | Morningstaronline.co.uk It wasn't that long ago that the banks precipitated a crisis that shook the world's economy to its roots and is still causing the loss of thousands of jobs every month at undercapitalised and credit-starved manufacturing companies. A cycle of share gambling and outrageous risk-taking came to crisis when the banks even stopped trusting each other and refused to lend to other banks for fear that they had been lying about their exposure to unsafe debt. This came about in part because of an unrestrained drive for multimillion-pound bonuses and other payouts by the dealers and high-level market manipulators employed by the banks to generate profits for them from speculation. At the time and, indeed, ever since, the apologists in the capitalist media were carrying on about the emergence of a "new, moral capitalism" minus the short-sellers and speculation that had brought such discredit on their system. There was even a ban on short selling instituted to prevent the ludicrous amount of damage done to capital markets by the practice. But, as anyone with a clear perspective on capitalism could have forecast, such high-sounding sentiments meant little and their implementation couldn't last. The short-selling ban was dropped as hastily as it had been instituted the moment that the immediate glare of publicity had died down a little. Short selling once more became "a necessary tool of the markets" the moment that the City speculators felt that they could get away with it. And once again, the speculators are emerging, jostling for position to get their snouts back into the trough after a short enforced layoff, during which they have been reduced to picking over the corpses of their fellows who have been forced out of business, in the hopes of gleaning a quick buck. One wonders what the 5,000-plus Barclays staff who have been made redundant over the last two years will make of the fact that the bank is selling off its Barclays Global Investors division to US specialist speculator BlackRock and, in the process, making around 380 upper-echelon Barclays employees into millionaires, chief among them being Barclays investment banking boss Bob Diamond. Mr Diamond, he of the £20 million a year salary, is set to pocket £22 million from his share of the action. The redundant staff will certainly not be overjoyed. And neither should the remaining employees, since at least one analyst has pointed out that the deal may be of benefit to those 380 top employees, but the bank is giving up a key revenue stream, which will not be entirely offset by the 19.9 per cent holding in BlackRock it acquired as part of the deal. The shareholders certainly aren't impressed, if the markets are anything to go by. Barclays shares dropped by 3 per cent immediately the deal was announced. But you can bet that those 380 new-made millionaires will be over the moon. As will private equity house CVC, which is in line to receive a £106 million payout of depositors' money for, believe it or not, doing nothing except losing out on buying part of the company. So it's back to the trough for the happy piglets. A deal goes through that doesn't help the company, doesn't help the mass of the shareholders, doesn't help the public and, in fact, only helps 380 speculators and a private equity firm. And Barclays isn't even saying what it will do with the £5.3 billion that it will collect, except that it will put it towards boosting capital resources. In other words, it will just sling it in the vaults, which is, one supposes, logical since Barclays, in common with all the other banks, isn't becoming notable for rebuilding loans to industry. You couldn't make it up. Read the original comment. Labels: bailout, Barclay's Bank, financial crisis, private equity, short-selling, UK Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hyperinflation or Deflation?Interesting piece from Counterpunch from a couple of days ago:Is Hyper-Inflation Around the Corner? By MIKE WHITNEY | Counterpunch | June 9, 2009 The Republicans are convinced that hyperinflation is just around the corner, but don't believe it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system. The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There's excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn't for the Fed's monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where's the inflation? Here's Paul Krugman with part of the answer: "It's important to realize that there's no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.... Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama's recovery plan off-course. But even if he's mistaken, there's little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed's liquidity is sitting idle in bank vaults instead of churning through the system. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can't get it; while the people who qualify, don't want it. It's just more proof that the slowdown is spreading. That doesn't mean that the dollar won't tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing and continues to monetize the debt, there's a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there's going to be a run on the dollar. Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That's pushing up yields on long-term notes which could potentially short-circuit Bernanke's plans for reviving the economy. Mortgage rates are set off the 10 year Treasury, which shot up to 3.90 per cent by market's close last Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week's auctions will be a good test of how much interest there really is in US debt. Read the rest of the article. Labels: Ben Bernanke, deflation, financial crisis, Inflation, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Systemic Fear and Forward-Looking FinanceWe have just posted the next installment of Shimshon Bichler and Jonathan Nitzan's "Contours of Crisis" article series: Systemic Fear and Forward-Looking Finance. The article puts forward an original thesis about the class underpinnings—and indeed class limits—of modern finance theory.Here's the beginning of the article: This is the third installment in our series about the current crisis. The first article examined the conventional view that this is a finance-led crisis, a turmoil triggered and exacerbated by "financial excesses." The second debunked the "mismatch thesis," the belief that the present crisis is our punishment for letting financial fiction distort economic "reality." The current paper takes on the notion of the forward-looking investor. According to the conventional creed, investors are forever looking into the future: they discount not profits that have already been earned, but those that they expect to earn. This forward-looking premise lies at the heart of modern finance, and investors usually follow its rituals with religious zeal. Read the full article. Labels: finance sector, financial crisis, Jonathan Nitzan, Shimshon Bichler Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Congress Helped Banks Defang Key RuleFrom the WSJ last week; hat-tip to Michael Perelman.Susan Pulliam and Tom McGinty | 3 June | p. A 1. Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values? The rule change angered some investor advocates. "This is political interference on a major issue, and it raises questions about whether accounting standards going forward will have the quality and integrity that the market needs," says Patrick Finnegan, director of financial-reporting policy for CFA Institute Centre for Financial Market Integrity, an investor trade group. The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don't trade on exchanges—to "mark to market." But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics. During a March 12 hearing before the House subcommittee, FASB came under intense pressure from committee members. "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself," Rep. Kanjorski said in his opening remarks. "We want you to act," Rep. Kanjorski told Robert Herz, FASB's chief. Mr. Herz waffled about how quickly the standards board could act. Rep. Kanjorski leaned over the dais. "You do understand the message that we're sending?" he said. "Yes," Mr. Herz replied. "I absolutely do, sir." FASB made speedy revisions to its rules. In an interview, Mr. Herz said FASB merely accelerated the matter on its agenda, and tried to be responsive to input from investors and financial-services firms. The change helped turn around investor sentiment on banks. Financial firms had the option of reflecting the accounting change in their first-quarter results; they will be required to do so in the second quarter. Wells Fargo & Co. said the change increased its capital by $4.4 billion in the first quarter. Citigroup Inc. said the change added $413 million to first-quarter earnings. The Federal Home Loan Bank of Boston said the shift boosted its first-quarter earnings by $349 million. Robert Willens, a tax and accounting analyst, estimates that the changes will increase bank earnings in the second quarter by an average of 7%. Mark-to-market accounting has been around for decades. Many banks were content with the rules when the markets were going up. But the rules became a big problem in late 2007. As markets turned down, FASB clarified the rules and established how certain financial instruments, including mortgage securities, should be valued. The guidelines said valuations should reflect "observable" input such as market prices whenever possible. They required banks to disclose extensive information about assets they were unable to value based on market prices. Financial firms last year reported losses or write-downs totaling roughly $175 billion, according to Michael Mayo, an analyst at the CLSA unit of Credit Agricole SA. Rep. Gary Ackerman (D., N.Y.) and Rep. Kanjorski pushed Mr. Herz to agree to a speedier timetable. They repeatedly cited Rep. Perlmutter's legislation to broaden oversight of FASB. "It will be done in three weeks. Can and will," Rep. Ackerman instructed Mr. Herz. "Yes," Mr. Herz replied. "Can and will," Rep. Ackerman repeated. Rep. Ackerman declined to comment through a spokesman. A FASB director, Lawrence Smith, said at the time that FASB had little choice but to act. "We can't ignore what's going on around us," he said. Labels: baillout, campaign contributions, financial crisis, mark-to-market, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Congress's Afterthought, Wall Street's Trillion DollarsFrom Saturday's Washington Post. One premise of the article is that this law is enough to make the Fed's actions legal—are we sure this is the case? And the off-the-balance-sheet obligations dwarf the $1 trillion anyhow.Fed's Bailout Authority Sat Unused Since 1991 By Binyamin Appelbaum and Neil Irwin Washington Post Staff Writers Saturday, May 30, 2009 On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve. Almost no one noticed. The critical language was contained in a single, somewhat inscrutable sentence, and the only public explanation was offered during a final debate that began with a reminder that senators had airplanes to catch. Yet, in removing a long-standing prohibition on loans that supported financial speculation, the provision effectively allowed the Fed for the first time to lend money to Wall Street during a crisis. That authority, which sat unused for more than 16 years, now provides the legal basis for the Fed's unprecedented efforts to rescue the financial system. Since March 2008, the central bank's board of governors has invoked its emergency powers at least 19 times: to contain the wreckage of Bear Stearns and ease the fall of American International Group, to preserve Goldman Sachs and Morgan Stanley, to limit losses at Bank of America and Citigroup, to lend more than $1 trillion. The repeated use of the once-dusty law has surprised and alarmed a wide range of people, including economists and members of Congress. It has even raised worries among presidents of the regional banks that make up the Federal Reserve system. Many critics are concerned that an institution not accountable to voters is risking vast amounts of public money and choosing which companies get help. Others are concerned that the Fed's new role will interfere with its basic responsibility for regulating economic growth. There is also a question about the roots of the crisis: Did investment banks take greater risks in the past two decades because they knew the Fed could rescue them? The 1991 legislation, authored by Sen. Christopher J. Dodd (D-Conn.), was requested by Goldman Sachs and other Wall Street firms in the wake of the 1987 market crisis, and it would save some of them a generation later. Fed Chairman Ben S. Bernanke and other leaders of the central bank have argued that the emergency authority has allowed it to rescue the financial system and that without it, the economy would be in far worse shape. And they argue that they are using the power as Congress intended. "This provision was designed as a last resort to make sure credit flows when times are tough and credit isn't being extended," said Scott Alvarez, the Fed's general counsel. "That's exactly what it's being used for today." Read the rest of the article. Labels: bailout, Christopher Dodd, financial crisis, Goldman Sachs, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 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!). 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!). 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!). 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!). Contours of Crisis: Fiction and RealityWe have posted the second article in a series by Shimshon Bichler and Jonathan Nitzan. Here are the first few paragraphs:This is the second in our Contours of Crisis paper series. The first article set the stage for the series. It began by outlining the conventional view that this is a finance-led crisis, that this turmoil was triggered and amplified by "financial excesses"; it then described the domino sequence of collapsing markets—a process that started with the meltdown of the U.S. housing and FIRE sectors (finance, insurance and real estate), expanded to the entire financial market, and eventually pulled down the so-called "real economy"; and, finally, it situated the pattern and magnitude of the current decline in historical context. The current market collapse is very significant. Even after their last month's rise, U.S. equity prices, measured in constant dollars, remain 50% below their 1999 peak—a decline comparable to the previous major bear markets of 1905-1920, 1928-1948 and 1968-1981. For many observers, though, the depth of the financial crash also implies that much of it may be over, and that the boom bulls will soon oust the doom bears. Predicting boom out of doom isn't far fetched. Equity markets are highly cyclical, and their gyrations are remarkably stylized. As our first article showed, over the past century the United States has experienced several major bear markets with very similar patterns: they all had more or less the same duration, they all shared a similar magnitude, and they all ended in a major bull run. In other words, there seems to be a certain automaticity here, and automaticity gives pundits the confidence to extrapolate the future from the past. But this automaticity is more apparent than real. Finance, we pointed out, is not an independent mechanism that goes up and down on its own. In this sense, the long-term movements of the equity market are not "technical" swings, but rather reflections and manifestations of deep social transformations that alter the entire structure of power. During the past century, every transition from a major bear market to a bull run was accompanied by a systemic reordering of the political economy: the 1920–1928 upswing marked the transition from robber-baron capitalism to big business and synchronized finance; the 1948–1968 uptrend came with the move from "laissez faire" capitalism to big government and the welfare-warfare state; and the 1981–1999 boom coincided with a return to liberal regulation on the one hand and the explosive growth of capital flows and transnational ownership on the other. Read the rest of the article. Labels: Contours of Crisis, financial crisis, Jonathan Nitzan, Shimshon Bichler Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Econ board has yet to meet publiclyFrom Politico. Hat-tip to Bob F.By JOSH GERSTEIN | 3/23/09 4:21 AM EDT Updated: 3/23/09 2:04 PM EDT Six weeks after President Barack Obama appointed a blue-ribbon panel to help him dig America out of its economic crisis, the board has yet to hold an official public meeting. The White House initially said that the 16-member Presidential Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker, would meet "every few weeks." Last month, a spokesperson told POLITICO the group would meet monthly. More recently, the White House said the high-powered board, set up to address what Obama has called the worst economic emergency since the Great Depression, would gather only about four times a year, with the next session due in "late spring." But comments from board members and Obama himself indicate that some members of the panel are meeting, in smaller gatherings that have not been announced or opened to the public. And that raises the question of whether an administration that prides itself on openness and transparency is in fact finding it more convenient to conduct public business in private. Now, the administration finds itself in a Catch-22: It does not want to say that the president's economic panel, announced amid much fanfare, is not meeting during the worst economic crisis in generations. But if it is meeting, where's the announcement, the agenda, the minutes? In short, where's the sunshine? "If the president wants to talk to his advisory committee, it seems to me he ought to do that in the open," said Sidney Shapiro, a law professor at Wake Forest University. "There ought to be accountability for private people who address the government. It seems to me it becomes even more important, not less important, when you have a presidential advisory committee." Asked about Obama's right to solicit candid suggestions, Shapiro said, "If he wants private advice, he should pick up the telephone. He can call anybody he wants. If he wants to form a presidential advisory committee, they ought to meet in public." Read the rest of the article. Labels: Barack Obama, Economic Recovery Advisory Board, financial crisis, Paul Volcker Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dean Baker at JP Forum on April 30thCo-sponsored by D&S:Economist Dean Baker to Discuss the Root of the Economic Meltdown WHAT: On Thursday, April 30th, economist Dean Baker will discuss his latest book, Plunder and Blunder: The Rise and Fall of the Bubble Economy, which chronicles the growth and collapse of the stock and housing bubbles. Baker, co-director of the Center of Economic and Policy Research, was one of the economists who saw it coming as early as 2005 when he warned about the housing bubble, lack of regulation and corruption at the root of the economic meltdown. Dean Baker was the editor of Getting Prices Right: The Debate Over the Consumer Price Index, which was a winner of a Choice Book Award as one of the outstanding academic books of the year. Baker's other books include The United States Since 1980, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, Social Security: The Phony Crisis (co-authored with Mark Weisbrot), and The Benefits of Full Employment (co-authored with Jared Bernstein). Baker appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his Ph.D. in economics from the University of Michigan. WHEN: Thursday, April 30th, 2009, 7:00 p.m. WHERE: The Jamaica Plain Forum, 6 Eliot Street, Jamaica Plain, MA 02130 Presented by The Jamaica Plain Forum and Cosponsored by: Institute for Policy Studies Dollars & Sense United for a Fair Economy Labels: Dean Baker, financial crisis, Jamaica Plain Forum Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Digs InGood online piece from Newsweek from a while ago (April 10th). The subtitle is confusing, though: clearly Obama is getting the message (from Wall St.)!Wall Street Digs In The old system refuses to change. Is Obama getting the message? Michael Hirsh | Newsweek Web Exclusive Not long ago, a group of skeptical Democratic senators met at the White House with President Obama, his chief economic adviser, Larry Summers, and Treasury Secretary Tim Geithner. The six senators—most of them centrists, joined by one left-leaning independent, Vermont's Bernie Sanders—said that while they supported Obama, they were worried. The financial reform policies the president was pursuing were not going far enough, they told him, and the people Obama was choosing as his regulators were not going to change things fundamentally enough. His appointed officials and nominees were products of the very system that brought us all this economic grief; they would tinker with the system but in the end leave Wall Street, and its practices, mostly intact, the senators suggested politely. In addition to Sanders, the senators at the meeting were Maria Cantwell, Byron Dorgan, Dianne Feinstein, Carl Levin and Jim Webb. That March 23 gathering, the details of which have gone largely unreported until now, was just a minor flare-up in a larger battle for the future—one that may already be lost. With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month. The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash. Geithner's financial regulation plan, announced April 2, does address some of these concerns. The Treasury chief wants all standardized over-the-counter trading of derivatives to go through an industry clearinghouse, which will give the government more oversight. Geithner said he wants to require "systemically important" firms to reserve more capital. He also wants to rein in "customized" derivatives contracts—those agreed to privately between firms. Whereas once these trades went totally unregulated, Geithner would require that they be "reported to trade repositories and be subject to robust standards" for documenting and collateralizing, among other new rules. But it's unlikely this will do much to change Wall Street. Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges. The response favored by the administration, the Federal Reserve and even many in Congress is to create a new all-knowing "systemic risk regulator" with as-yet-undetermined powers. Is such a person sitting at 30,000 feet really going to be able to keep up with all this onrushing complexity, especially as over-the-counter trading resumes in quiet places around the world? It is a triumph of hope over experience to think so. Meanwhile, up in Manhattan, the New York Fed has been conducting meetings on future regulation with a group of major Street insiders and their traditional regulators. At the most recent meeting, on April 1, they agreed on creating central clearinghouses for trading and "trade-information warehouses" that will track market data far better than before. But they have resisted anything more dramatic, like requiring all trading to occur on publicly recognized exchanges. Geithner has also put his stock in clearinghouses; he says he only wants to "encourage greater use of exchange-traded instruments." That has placed Geithner at odds with another Democratic senator, Tom Harkin of Iowa, chair of the agriculture committee, who wants all futures contracts traded on exchange. "The senator feels that what he's offering in his bill does include more integrity and transparency than the current Geithner plan," a Harkin spokesman told me. Officials at the firms who took part in the New York Fed meeting and at the Fed maintain that there is little difference between clearinghouses and formal exchanges; both are regulated and both are industry-run, they say. But that misses a major point, says Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has been a critic of the administration's reform efforts. Exchange trading gives the government authority over fraud and manipulation and emergency powers to stop trading, he says, and it creates the kind of public transparency that isn't possible in a privately run clearinghouse. The White House and Treasury Department did not immediately respond to my requests for comment on these issues or on the March 23 meeting (beyond confirming that it took place). But it's noteworthy that more than a month and a half passed before Obama agreed to the meeting, which was prompted by a letter that Dorgan sent in early February. The senators were invited after one of the group, Sanders, put a hold on the nomination of Gary Gensler, Obama's nominee to be head of the Commodity Futures Trading Commission. In an interview, Sanders said he opposes the nomination because Gensler has spent much of his career in Washington working for Wall Street's interests. Gensler, in testimony, has said he has learned from his past mistakes. "At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace," Sanders said. Instead, the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again. Read the original article. Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Timothy Geithner, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Financialization of the American UniversityThis is from D&S collective member Faisal Chaudhry, with whom we hung out in NYC this past weekend during this year's Left Forum. It follows up on earlier posts on this topic, here and here.Some Further Notes on the 'Financialization' of the American University In recent weeks we have been keeping an active watch on the particular corner of the story of the financial crisis having to do with Harvard’s stunning $10 billion-plus endowment drop due to its highly risky investment strategy. Here are a couple of other notes to round out the still emerging picture. The first further illuminates that Harvard’s corner in this story may not just be one about excessive "risk" taken but something closer to a scandal in the making given a lack of transparency and accountability within the ranks of its administrative bureaucracy and money managers. The second, peels back this little corner of the financial crisis to remind us that it is likely much bigger than the focus on the Harvard story, in specific, has tended to suggest. As the second item makes so clear, if Harvard’s endowment hit has obviously been the most noticeable, it would be wrong to paint its investment strategy as somehow anomalous. Chalk item two up to another chapter in the story about the growing "corporatization" or, perhaps better, financialization of the American higher education system: 1. As the Boston Globe reported earlier this month a new employee at Harvard Management, Iris Mack, warned then university president Lawrence Summers of the ticking financial time bomb the university might be facing. In a letter date May 12 of that year, Mack expressed to Summers the "troubl[ing] and surpris[ing]" nature of the things she had seen as a quantitative analyst with Harvard Management. The particular concerns she expressed—including, according to the Globe, through reiterating them in later emails and conversations—was not only that the university was too heavily invested in derivatives but that her colleagues also seemed to possibly be engaged in insider trading. Despite having asked Summers to consider her communications while keeping her confidence, two months later, Mack—herself a doctoral alumnus of Harvard's mathematics department—was suddenly fired by chief of Harvard Management, Jack Meyer. 2. In a recent email to her campus community, Shirley Tilghman notified her fellow Princetonians that her university was facing a loss of some $5 billion in endowment funds, reflecting a 30 percent drop from $16.4 to $11.5 billion (reported on here). Like Harvard, which has recently reported that it is expected to slash its operating budget quite significantly (including , through instituting a fresh round of layoffs of workers in the clerical and other service sectors; more on this here), Princeton expects cuts to its budget in the range of $90 million. (No word yet on whether major layoffs in its service sector are planned). One might think that it has only been the elite Ivy League institutions that have been so hard hit, given the disproportionate amounts they generally have to invest. This, however, is not the case. According to a recently completed study by the Commonfund Institute in Wilton, Connecticut, in a survey of 629 educational institutions, for the period from July 1 to December 1, 2008 the average drop-off in endowment size was 24%. As Bloomberg news' Gillian Wee recently noted, this compares with an average decline of 29% in the S&P 500. For the Commonfund Institute's report click here. —fc Labels: Faisal Chaudhry, financial crisis, financialization, Harvard University, Laurence Summers, Princeton University Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Online Course on the Crisis (UMass/CPE)We just received this from the folks at the Center for Popular Economics:If you have ever asked yourself...
...then this course is for you! The Economic Crisis and the Case for a Solidarity Economy An Online Course offered by the Center for Popular Economics Summer Session I (June 1 - July 9, 2009) Course Fee: $900 for THREE Univ. of Massachusetts Credits or $400 for non-credit students. 40-60 Professional Development Points (in MA) or 3.6 Continuing Education Credits (outside MA) available. Limited scholarships available for non-credit students. The Center for Popular Economics, in collaboration with the Forum on Social Wealth and the Political Economy Research Institute at Univ. of Massachusetts, Amherst is offering a special topics 3-credit online course (Econ 197) this Summer. The course runs from Monday, June 1st till Thursday July 9th. No background in Economics is required. The course is suited for students as well as activists and community members who want to learn more about the current economic crises, its causes and its solutions. Click here for more information. You can also contact Amit Basole at abasole[ @ ]gmail.com or Emily Kawano at emily[ @ ]populareconomics.org for more details. Overview: The current economics crisis has once again raised the question with great urgency: what purpose do we want our economy to fulfill? Is it fulfilling this purpose today? If not, what can we do about it? In this course we will place special emphasis on the ongoing economic and financial crisis and its long-term and short-term causes and consequences. We will also discuss various alternative economic models rooted in principles of economic democracy, cooperation and sustainability. Finally, we will talk about a vast store of wealth that communities everywhere possess and on which they can draw for constructing alternatives. The course is comprised of two main parts. Part One takes a look at how 30 years of neoliberal economic policy created the conditions for the present crisis, which threatens to be the most severe since the Great Depression. Falling or stagnant wages for the majority of Americans, rising and unsustainable levels of debt in the economy, and a poorly regulated financial sector all played a part in precipitating the crisis. We will also go beyond the crisis and attempt fo understand how our economic model has allowed unprecedented accumulation of wealth by a few and while bringing low wages, longer work hours, and rising healthcare and education costs for the many, in addition to a deterioration of our natural and social environment. We start with a look at the historical roots of neoliberalism and then try to understand the economics behind it. In Part Two, we will talk about how some of the things that we saw going wrong in Part One can be set right. Building a just economy that is not prone to repeated crises depends on the efforts we make. In the midst of growing inequality and corporate power, many grassroots economic alternatives have been springing up throughout the U.S. as well as the rest of the world. This is the new "Solidarity Economy." Grounded in principles of economic democracy, social solidarity, cooperation, egalitarianism, and sustainability, this is an alternative to the Neoliberal vision of the economy. In this part of the course we will look at some examples of such alternatives, including alternatives to the current financial system, as well as understand the economics behind them. We will also see how an economy organized around solidarity principles can tap into reservoirs of social wealth, assets that all communities possess; our cultural and ecological commons and our capacity to work for those we care. Labels: Center for Popular Economics, financial crisis, recession, solidarity economics Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Workshops on the Crisis in BostonA notice about a terrific popular economics workshop led by the fantastic Mike Prokosch of Community Labor United and United for a Fair Economy."Economic Crisis" workshop series starts April 21 Please join us for "The Economic Crisis, The Global Economy, and the Economy We Want" at Encuentro 5, 33 Harrison Ave, 5th floor, downtown Boston (near the Downtown Crossing and Chinatown stops). This lively three-evening workshop will look at the ways wealth has been stripped from workers, the public sector, and "real economy" corporations over the last 40 years; how that wealth created the Wall Street bubble; the global dimensions of the US economy and crisis; and how we can transform it. This Will Not Be A Lecture. We will form human bar graphs, stack chairs in outrageous piles, sing Wobbly songs, and generally have a riotous time as we rigorously examine our sick economy and how to make it safe for working people. The schedule is: Tuesday April 21: How did they get us into this mess? Tuesday April 28: International Dimensions of the Crisis with Adrian Boutureira of United for a Fair Economy and Tim Costello of Global Labor Strategies Tuesday May 5: Where's our leverage? What's our strategy? with Stephanie Luce of Solidarity All sessions will run from 7 to 9 pm. Pizza will be served at 6:30; pre-register to insure space and pizza with the workshop's sponsor, the Boston Radical Education Project, repboston[@]gmail.com or 617-491-2876. The suggested workshop fee is $5 and no one will be turned away. See you there! Please spread the word. Mike Prokosch (United for a Fair Economy and Jobs with Justice) Labels: Encuentro 5, financial crisis, Mike Prokosch, popular economics Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fox *Outraged* by Frat-Boy Tea HumorOk, so I am not sure we have ever linked to Fox News, and this is a little juvenile, but hey, Doug Henwood posted it at lbo-talk. My three favorite bits: (1) The author sniggers about "teabagging," but then expresses fake scorn for "frat house humor." Meanwhile, I know about teabagging from a highly reputable source: John Waters' fabulous movie Pecker (a must see--Edward Furlong, Christina Ricci, Mary Kay Place, Lili Taylor, Mink Stole, Patricia Hearst, etc.). (2)This quote: "I think what that reveals is how worried they are that this might actually be something serious. You make fun of things you're afraid of, I'd say." (3) The spectacle of Anderson Cooper talking about teabagging with a straight face.Incidentally, I saw some of the teabagger folks on the Blue Line in Boston on Wednesday (I was on my way back to East Boston; they were, I'm guessing, coming back from Fanieuil Hall or the U.S.S. Constitution or something). They looked like nice folks. Anyhow, here's the whole article; or you can read it below. (N.B.: the link below, Click here to join a discussion on teabagging, was actually part of the FoxNews.com story. If you click on it, you will go to their site, which you might not want to. The comments in the "forum" on teabagging are actually pretty amusing, though.) Cable Anchors, Guests Use Tea Parties as Platform for Frat House Humor --CS Labels: Anderson Cooper, bailout, Chris Sturr, financial crisis, Fox News, taxes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On Events in ThailandThe Financial Times has a tolerable opinion leader (never mind the idiotic title) today on the dividing lines in big, pivotal Thailand:Thailand's slide into mob rule Published: April 14 2009 19:45 | Last updated: April 14 2009 19:45 Ever since the autumn 2006 coup that deposed populist prime minister Thaksin Shinawatra, Thailand has given every impression of having succumbed to mob rule, an impression only somewhat relieved by putting a young Eton- and Oxford-educated premier, Abhisit Vejjajiva, at the front of the house. Events like last weekend's cancellation of an Asean summit, with leaders such as China's Wen Jiabao evacuated as "red shirts" protesters loyal to Mr Thaksin overran the coastal venue of Pattaya, are beginning to paint Thailand in the colours of a banana republic. Before that, of course, Thailand ran through a brace of Thaksin proxy leaders, toppled by "yellow shirts" royalists who brought the country and the economy to a standstill under the indulgent eyes of the police and the army. At the root of this now chronic instability is the complete inability of Thailand's ruling class to come to terms with the political implications of Mr Thaksin's constituency. Read the rest of the piece And LBO talk has this link to reports on the demos themselves Labels: Abhisit Vejjajiva, bailout, Class, financial crisis, Financial Times, King Bhumibol, LBO Talk, Thailand, Thaksin Shinawatra Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China Reduces US Dollar Reserves In FebruaryIt's hard to tell how significant or durable an occurence this is, but it certainly deserves close attention. From Brad Setser's fine blog, Follow the Money:China Reduced Its Dollar Holdings in FebruaryPosted on Wednesday, April 15th, 2009 by bsetser It is a good thing the US trade deficit has come down, because foreign demand for US financial assets--actually foreign demand for US assets other than short-term Treasury bills--has dried up. Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia's central bank) bought close to $14 billion. Private investors--seemingly Japanese private investors--also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn't buy much of anything. And Americans also didn’t buy many foreign assets.* After Keith Bradsher's New York Times article, though, all eyes are on China. In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion. But China also reduced its US bank deposits by $17.24 billion. Consequently, by my count, China's total US holdings fell by $13 billion. Short-term claims fell by $11.3b, and long-term claims fell by $2b. The data on China’s short-term claims can be found here. Is this the beginning of the end? Has China decided to stop buying US assets? Read the rest of the post Labels: bailout, Brad Setser, China, dollar, financial crisis, Monetary Policy, trade deficit, Treasury bonds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Consumer Prices Fall Despite Stimulus, PPIPIt's energy and food prices to a big extent, which is good, but even the whiff of deflation is precisely what scares the bejeezus out of policymakers. Coupled with an industrial production drop (about which, more below), and yesterday's retail sales figures, the spectre can not be dismissed out of hand. From Bloomberg:U.S. Economy: Consumer Prices, Industrial Production Decline By Shobhana Chandra and Courtney Schlisserman April 15 (Bloomberg) Consumer prices posted their first annual decline since 1955 and unused American manufacturing capacity reached a record, alleviating concern that Federal Reserve actions will cause inflation to soar. The consumer price index fell 0.4 percent in March from a year before, and 0.1 percent from the previous month, the Labor Department said in Washington. Output at factories, mines and utilities dropped 1.5 percent last month, when the share of industrial capacity in use slid to 69.3 percent, the Fed said. Today's figures signal deflation, or prolonged price declines, is the bigger danger, and underscores Fed Chairman Ben S. Bernanke’s call for inflation to remain "quite low for some time." The Fed's record injections of cash into the economy have spurred warnings from some economists, including central bank historian Allan Meltzer, that consumer prices will surge. "The more slack there is in the system, the longer it will take for inflation to become a concern," said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York. "Production data look terrible. Things do not look good and this means the dramatic pace of layoffs we've been seeing in manufacturing for the last several months is likely to continue." A Fed survey today also showed that manufacturing in the New York area contracted in April less than forecast, an indication some businesses have adjusted to the economy's lower level of demand, analysts said. The Fed Bank of New York's general economic index rose to minus 14.7 from minus 38.2 the prior month, when the so-called Empire State index reached its lowest level since data began in 2001. Dollar Rallies Stocks and Treasuries were little changed, while the dollar rallied against the euro on demand for the U.S. currency as a haven amid concerns about the global economic outlook. The Standard & Poor's 500 Stock Index was at 838.52 at 11:12 a.m. in New York, benchmark 10-year note yields were at 2.77 percent and the dollar rose 0.6 percent to $1.3182 per euro. Foreign demand for Treasuries spurred a net inflow of long-term international capital into the U.S. in February, government figures showed. The Treasury said net purchases of long-term equities, notes and bonds totaled $22 billion, compared with selling of $36.8 billion in January. Net foreign purchases of Treasury notes and bonds were 21.6 billion in February compared with purchases of $10.7 million a month earlier. Forecast to Rise Consumer prices were projected to rise 0.1 percent, according to the median estimate of 75 economists surveyed. Forecasts ranged from a drop of 0.3 percent to a gain of 0.5 percent. Companies from General Motors Corp. to Macy's Inc. are using incentives and promotions to draw customers as Americans contend with the biggest job losses in the post World War II era and shrinking wealth. "We're in a very deep global recession that's going to hold prices down," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in CPI. "Deflation is still something that's a risk, though I don't think we'll get into a deflationary spiral." Declining food and fuel costs brought overall prices lower. Energy costs dropped 3 percent, led by decreases in fuel oil and gasoline. Food expenses dropped 0.1 percent on lower costs for dairy and meat products. Inflation, Deflation Some economists argue disinflation could lead to outright deflation, which erodes profits, makes debts harder to repay and delays purchases by consumers and companies. Others caution that in the longer term, the unprecedented fiscal stimulus and the Fed's policy of buying more assets and pumping money into the financial system will reignite inflation. The cost of new cars rose 0.6 percent in March, the Labor report showed, even as automakers boosted discounts. Incentive spending by automakers jumped 30 percent in March from a year earlier to a record average $3,169, according to research firm Edmunds.com, helping to boost sales. The decline in industrial production was led by decreases in consumer goods, including furniture and electronics, and by business equipment such as computers and communications gear. "Businesses look like they are still quite uncertain about the outlook for the economy," said Zach Pandl, an economist at Nomura Securities International in New York. "These production cuts are still necessary because inventories are still bloated." Intel Corp.'s Chief Executive Officer Paul Otellini yesterday said his company still faces a "fragile global economic environment." Sales of personal-computer processors likely bottomed out in the first quarter after manufacturers worked through their stockpiles of parts, Otellini said. While the worst of the slump is "probably now behind us," the world's biggest chipmaker isn't ready to predict growth this quarter, he said. Labels: bailout, CPI, deflation, financial crisis, industrial production, monetary pilicy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Poor Retail Sales Counters Optimism on BanksFrom Reuters:Retail sales show recession far from bottom Tue Apr 14, 2009 1:42pm EDT By Lucia Mutikani WASHINGTON (Reuters) Sales at U.S. retailers unexpectedly fell 1.1 percent in March after rising for two straight months, government data showed on Tuesday, dimming hopes the 16-month-old recession was close to hitting bottom. A separate report showed prices received by U.S. producers fell a surprising 1.2 percent last month, underscoring the economy's weakness and lack of pricing power. Despite the weak March sales data, economists said consumer spending likely rebounded in the first quarter, which could mean gross domestic product fell less steeply than the 6.3 percent annual rate recorded in the last three months of 2008. Federal Reserve Chairman Ben Bernanke, meanwhile, said figures released in the last few weeks on housing and consumer spending suggest signs of improvement. "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing. A leveling out of economic activity is the first step toward recovery," Bernanke said in remarks prepared for delivery later on Tuesday. Read the rest of the article Labels: bailout, Ben Bernanke, financial crisis, retail Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To TIGHTEN CreditThey did this in the run-up to the crash, too. And were blamed for it then. Article contains a distressing picture of China's real estate market from one of Chiona's chief economists, which would pour some cold water on hopes that China's stimulus program can create, rather quickly, demand on the scale required to put a serious dent in trade and currency imbalances. From The Financial Times:Beijing to tighten controls on credit By Kathrin Hille and Jamil Anderlini in Beijing Published: April 12 2009 16:43 China's central bank on Sunday warned it planned to "strictly control" credit to some sectors of the economy after the country recorded a record surge in bank loans and money supply in March. The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns. Read the rest of the article Labels: bailout, China, financial crisis, Monetary Policy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Frank Rich on Larry SummersA follow-up on the last post (about Harvard money managers lost $11bn): Frank Rich's column in Sunday's New York Times made a nice connection between recent revelations of Larry Summers' $5.2 million hedge fund earnings in 2008 and the fact that Summers, while president of Harvard, chided Cornel West for making a hip-hop album and supposedly thereby neglecting his professorly duties. It turns out that Summers did some real moonlighting while president of Harvard, consulting for the hedge fund Taconic Capital Advisors:On the same Friday that the Labor Department reported the latest jobless numbers, the White House released (in the evening, after the network news) some other telling figures on the financial disclosure forms of its top officials. From those we learned more about how much the bubble's culture permeated this administration. Read the whole column; hat-tip to TM. Labels: financial crisis, Frank Rich, Harvard University, Lawrence Summers, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'A New Way Forward'--Demos TodaySorry for the late notice about this. It looks like all the demos start at 2pm ET and 11am PT, so there may still be time for people to get to them. Hat-tip to LF:Link to the site of A New Way Forward: http://www.anewwayforward.org/demonstrations/ Sorry about the perfunctory post. Labels: activism, banking crisis, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Bailout Funds' to 'Allow' Main Street to InvestYesterday's New York Times had this article about the Obama administration's proposal to have mutual-fund-style "bailout funds" that ordinary mom-and-pop investors can buy into:U.S. May Enlist Small Investors in Bank Bailout The fantastic Mike Prokosch responded with this letter to the Times (who knows whether they'll print it): To the editor: Labels: bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Elizabeth Warren on TARP on YouTubeLabels: bailout, Elizabeth Warren, financial crisis, PPiP, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Insolvent Banks and Imaginary Firesale?An interesting article on an interesting academic paper, and at least one blog post expressing reservations about the paper's conclusions. First, the article (I like "crap assets" as an alternative to "toxic assets": far preferable to the ridiculous "legacy assets"):Geithner Wrong, Crap Assets Correctly Priced, Say Harvard And Princeton Profs Next, the interesting paragraphs from the academic paper (which appears to be online only in pdf form--I had to do some reformatting/retyping; this might be the first place where a good chunk of it appears in searchable html form, though I could be wrong): Policymakers are rapidly moving towards using TARP money to purchase toxic assets—primarily tranches of collateralized debt obligations (CDOs)—from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become artificially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer reflect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector. Read the full paper. Finally, a sharply dissenting view from the blog Economics of Contempt; his point is that the paper's analysis is not of mortgage-backed securities, yet it claims to draw conclusions about them: The introduction states:On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government's view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals. ... The main objective of this paper is to determine whether …fire sales are required to explain prices currently observed in credit markets. Read the full blog post (though I've given you most of it). The criticism seems sound, but what's interesting is the very suggestion that the "firesale" scenario is imaginary. If they are right (even if the blogger is right that their evidence doesn't support their conclusion), then the bailout represents a huge transfer of wealth from ordinary folks (I hate the term "taxpayers") to shareholders and bondholders. If anyone has a better grip on this than I do, please leave enlightening comments. Labels: bailout, financial crisis, PPiP, TALF, TARP program, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Econ Team's Flawed Cosmology (AHuff)From HuffPo:The Obama Economic Team's Flawed Cosmology: Still Believing the Universe Revolves Around the Banks Arianna Huffington | Posted April 6, 2009 | 10:10 PM (EST) A series of recent meetings with members of Barack Obama's economic team (including running into Larry Summers on my way to an appointment in the West Wing, leading to a spirited back-and-forth that made me feel like I was back at Cambridge, debating the smartest kid in the class), left me with a pair of indelible impressions: 1) These are all good people, many of them brilliant, working incredibly hard with the best of intentions to solve the country's financial crisis. 2) They are operating on the basis of an outdated cosmology that places banks at the center of the economic universe. Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe -- and made the math work to "prove" his flawed theories -- Obama's senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of "epicycles" and "eccentric circles" to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing. It's easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details -- but in the obsolete cosmology. If you believe the universe is revolving around the earth -- when, in fact, it isn't -- all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner's Public-Private Investment Program will be for naught. The successive bailout plans have been frustrating to many observers (yours truly included), but when you realize how fully the economic team is mired in a bank-centric universe, all the moves suddenly make perfect sense. Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks "are keeping it in the bank because their balance sheets had gotten so bad," as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to "set up a securitized market for student loans and auto loans outside of the banking system" in order to "get credit flowing again." But think of all the time we wasted while the first scheme predictably failed. And how much better off we'd now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation. Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views -- they are also not being listened to. Which is really surprising for an administration that has prided itself on a "team of rivals" approach. Read the rest of the article. Labels: Arianna Huffington, bailout, banking crisis, Barack Obama, financial crisis, Galileo, Lawrence Summers, Ptolemy, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Re-Examining Capitalism (Jamie Galbraith)National Journal Online had an interesting forum under the title Re-Examining Capitalism. Here is the introduction to the forum, from John Maggs:Do recent events suggest that the tenets of capitalism and free market theory need to be re-examined? The New York Times has suggested that not much soul-searching is happening yet at economics departments. Does the financial meltdown, the housing bubble, or the over-leveraging of businesses and consumers, point to fundamental flaws in market-based capitalism? Does it point to particular alterations? Here's Jamie Galbraith's response (it's from a few weeks ago--h-t to LF for letting me know about it): Responded on March 19, 2009 9:32 PM James K. Galbraith, Professor of Economics, University of Texas (This is all of his comment, but you can find the full forum here.} Labels: economics profession, financial crisis, heterodox economics, James K. Galbraith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Elizabeth Warren: Sack Bank ExecsElizabeth Warren, who has been on top of this crisis since way back, is also calling for shareholders' equity to be wiped out. Too bad she's only the TARP watchdog and not in charge entirely. I like especially where she says she doesn't want to be too hard on Geithner, but essentially calls his approach "preposterous." We wish she'd say what she really thinks!US watchdog calls for bank executives to be sacked James Doran | Sunday 5 April 2009 Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse. Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees. Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said. She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous." The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out." Labels: bailout, Elizabeth Warren, financial crisis, TARP program, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Soros: U.S. banks 'basically insolvent'Just posted to Reuters; hat-tip to Bob F. Too bad that he says nationalization is "out of the question." But interesting in particular that Soros "warned about the danger of watering down mark-to-market accounting rules."NEW YORK (Reuters)—The U.S. economy is in for "a lasting slowdown" and won't recover this year, while "the banking system as a whole is basically insolvent," billionaire investor George Soros told Reuters Financial Television on Monday. While nationalization of banks is "out of the question," he said stress tests being conducted by the U.S. Treasury could be a precursor to a more successful recapitalization. But he warned about the danger of watering down mark-to-market accounting rules, saying this creates conditions for prolonging the life of U.S. 'zombie' banks. Soros also said the U.S. dollar is under pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprising dollars, euros, yen and sterling. China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency. "In the long run, having an international accounting unit other than the dollar may be to our advantage," Soros said. He added that the system that has allowed the United States to spend more than it earns has to be reformed. "That is coming to an end and it will not be allowed to recur. There will have to be some change." While a global recovery is possible in 2010, Soros said the timing will ultimately depend on the depth of the recession. China, he said, will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010. He said world policy-makers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system. The system was "fundamentally flawed, and there is no returning to where we came from," he said. Read the rest of the article. Labels: bank nationalization, banking crisis, banking regulation, financial crisis, George Soros, mark-to-market, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interview with Bill Black on MoyersRegular readers of this blog know that William K. Black, author of The Best Way to Rob a Bank Is to Own One, a history of the S&L crisis, wrote a prescient history of the U.S. banking industry for us a couple of years ago. (A shorter version of the piece was the cover story in our Nov/Dec 2007 issue; a longer version appeared in our anthology Real World Banking and Finance, which was published in January of 2008.) Bill Black was one of the regulators whom the "Keating Five" tried to deceive, and he has been in the media quite a bit over the past year or so, first during the presidential election commenting on John McCain's unfitness to even be a senator (McCain was one of the Keating Five), and more recently to comment on the role of "control fraud" in the current financial meltdown. He did a terrific interview with Bill Moyers last week. Hat-tip to LF.BILL MOYERS: For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, [William K. Black] wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s. Labels: Bill Moyers, control fraud, financial crisis, savings and loan crisis, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Leaders Not Facing Up to Scale of Crisis (Guardian)Great piece in today's Guardian, with apt discussion of how G20 protest compare with the protests against the WTO in Seattle in 1999.Our leaders still aren't facing up to the scale of the crisis It's hardly surprising that some want to trash the City, but to claim that the G20 protesters have no alternative is nonsense When mass protests exploded on the streets of Seattle in 1999 against the kind of globalisation embodied in the World Trade Organisation, their anti-capitalist message was widely portrayed as utopian. A decade on, as anti-capitalist demonstrators vented their fury yesterday on the social and ecological vandals of the City and prepared to do battle today outside the G20 meeting in the heart of what was once London's docks, it looks more like common sense. The wreckage of the neoliberal order - which reached its zenith in the wake of Seattle and has generated the greatest global economic crisis since the 1930s - is now all around us. World trade is in free fall and, by some measures, collapsing faster than at the time of the Great Depression. While G20 leaders talk of saving or creating 20 million jobs, 25 million are expected to be lost in the wealthy OECD states alone, whose main area of competition now seems to be their relative rates of economic decline. And what in the richest economies means mass unemployment and rising poverty translates into destitution and rising death rates in the developing world. So it can hardly be a surprise that some people end up trashing the homes or offices of bailed-out bankers - or that French workers have taken to "bossnapping" executives handing out mass redundancies, as has been the experience of astonished Caterpillar and Sony executives in recent weeks. As unrest over the impact of the crisis has grown across Europe, workers are increasingly resorting to direct action against closures and following the example of the successful occupation of the Republic Windows and Doors factory in Chicago, backed by Barack Obama last December. The night before last, workers occupied Belfast's Visteon car components plant after 565 out of its 610-strong UK workforce were sacked on Tuesday, and by yesterday morning the action had spread to its factories in Enfield and Basildon. There is likely to be plenty more of this kind of thing to come, as conflict over who carries the costs of the crisis becomes more overt - and so there will have to be if we are to avoid the return to business as usual that politicians and corporate powerbrokers evidently still envisage across the western world. Of course, all the talk at the ExCel centre is of regulation, a green New Deal and "partnerships of purpose". Champions of the failed free market are thin on the ground anywhere these days - even Nigel Lawson and Cecil Parkinson, the Thatcherite architects of the 1980s Big Bang City deregulation, this week turned their backs on the financial mayhem they unleashed. But the fact that many of those presiding at the G20 are the same people who brought us to the present catastrophic pass scarcely inspires confidence in their ability to overcome the crisis. No doubt some modest progress will be made on bringing hedge funds and tax havens under control, though the US and Britain are holding out against tougher regulation. The transatlantic battle over regulation versus co-ordinated expansion is in any case largely a phoney one. Obama is right that the US can't be the sole engine of global recovery, but then Germany's own fiscal stimulus is a good deal larger than its politically hybrid government likes to let on. And if demand is boosted simply to refloat the existing failed economic model - which in the US and Britain includes a crippled, corrupted financial system - it won't work anyway. The same goes for G20 plans to inject extra cash into the International Monetary Fund, which claims to have changed the nefarious neoliberal ways that made it a target for the protesters of the 1990s, but is in fact still imposing the kind of structural adjustment conditions which are the opposite of what is needed to pull countries out of the slump. As for today's expected declarations on action against global warming, they barely count as political window-dressing. All the signs are that most of the politicians playing to the gallery in London today have yet to face up to the full scale of the crisis, or what will need to be done to overcome it. Angela Merkel, Nicolas Sarkozy and President Lula are right to single out the Anglo-Saxon model and "white men with blue eyes" for the meltdown - even if that underplays its systemic nature. But this isn't only a crisis of capitalism or of a particular form of capitalism after all, it's one of US economic and global power as well. That's because it's the product not just of financialisation and deregulated markets, but also of chronically low American savings and unsustainable levels of consumption - including the massive military expenditure that has underpinned US wars and global overstretch in the years since the end of the cold war. The deficits they've generated have increasingly been financed by China and the fact that today's meeting is of the G20 rather than the G7 - and that its most important meetings are between Obama and President Hu Jintao - is a symbol of the decline of American economic power exposed by the crisis. The rebalancing of the US relationship with China, which is so far riding the economic storm somewhat more successfully than its western counterparts, can play a part in overcoming the crisis. But right now recovery is being held back by the failure of the US, and even more precariously Britain, to intervene decisively in the financial sector to drive up lending - rather than pour cash into the black hole of bankers' gambling debts. In both countries, the combination of halfhearted quantitative easing and a refusal to take control of the banks is stifling the impact of tax cuts and extra public spending. In Britain in particular, the limits of crude Keynesianism - rather than direct intervention and nationalisation - are clearly being reached. Meanwhile, market enthusiasts have once again been complaining, as they did at the time of Seattle, that the G20 protesters have no alternative. It was never true in the 1990s, but now such claims are simply ridiculous. The policies and programmes now pouring out of the international trade union movement, NGOs, political parties and thinktanks - on climate change, jobs, green investment, public services, trade, finance, international institutions and global justice - are voluminous and serious. The problem is not a shortage of alternatives, but a lack of political muscle so far to make them stick. Labels: activism, financial crisis, G20, protest, rioting, Seattle, WTO Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Too big to save: the end of financial capitalismBy Saskia Sassan, at Open Democracy.The financial logic of neo-liberal capitalism has devoured the world and exhausted itself in the process. A new model beyond "financialisation" is needed, says Saskia Sassen. The misnamed "Group of Twenty" (G20) meets in London on 2 April 2009 to discuss how to save the global financial system. It is too late. The evidence is in: we don't have the resources to save this system - even if we wanted to. It has become too big to save: the value of global financial assets is several times the size of global gross national product (GDP). The real challenge is not to save this system but to definancialise our economies, as a prelude to move beyond the current model of capitalism. Why should the value of financial assets stay at almost four times the overall GDP of the European Union, and even more of the United States. What do everyday citizens - or the planet - gain from such excess? Saskia Sassen is professor of sociology and member of the Committee on Global Thought, Columbia University. Her books include Losing Control? Sovereignty in the Age of Globalization (Columbia University Press, 1996); The Global City: New York, London, Tokyo (Princeton University Press, 2001); Territory, Authority, and Rights: From Medieval to Global Assemblages (Princeton University Press, 2006); and A Sociology of Globalization (WW Norton, 2007) Also by Saskia Sassen in openDemocracy: "A universal harm: making criminals of migrants" (21 August 2003) "Fear and camouflage: the end of the liberal state?" (22 December 2005) - part of a global end-of-year symposium "Free speech in the frontier-zone" (20 February 2006) "A state of decay" (2 May 2006) "Migration policy: from control to governance" (13 July 2006) "Globalisation, the state and the democratic deficit" (18 July 2007) "Lahore: urban space, niche repression" (21 November 2007) "The world's third spaces" (8 January 2008) "The new new deal" (23 September 2008) "Cities and new wars: after Mumbai" (29 November 2008) The question answers itself. To explore further the inner workings of the financial system that has brought the world to this predicament is also to glimpse a future beyond financialisation. The task the G20 should actually address is not to save this financial system but to begin to definancialise the major economies to a significant degree, so that the world can begin to move towards the creation of a "real" economy that delivers security, stability, and sustainability. There is much work to do. The logic A defining feature of the period that begins in the 1980s is the use of extremely complex instruments to engage in new forms of primitive accumulation, with taxpayers' money the last frontier for extraction. Global firms that outsource hundreds of thousands of jobs to low-wage countries have had to develop complex organisational formats, using enormously expensive and talented experts. For what purpose? To extract more labour at the cheapest possible price, including unskilled labour that would be fairly low in the developed countries as well. The insidious element is that millions of saved cents translates into shareholders' gains. Finance has created some of the most complicated financial instruments in order to extract the meagre savings of modest households: by offering credit for goods they may not need and (even more seriously) promising the possibility of owning a house. The aim has been to secure as many credit-card holders and as many mortgage-holders as possible, so that they can be bundled into investment instruments. Whether people pay the mortgage or the credit-card matters less than securing a certain number of loans that can be bundled up into "investment products". Once thus bundled, the investor is no longer dependent on the individual's capacity to repay the loan or the mortgage. The use of these complex sequences of "products" has allowed investors to reap trillion-dollar profits on the backs of modest-income people. This is the logic of financialisation, which has become so dominant since the neo-liberal era began in the 1980s. Thus in the United States - ground zero for these forms of primitive accumulation - an average of 10,000 homeowners have been losing their home to foreclosures every day. An estimated 10-to-12 million households in the US will not be able to pay their mortgages over the next four years; under current conditions they would lose their home. This is a brutal form of primitive accumulation: presented with the possibility (which is mostly a fantasy, a lie) of owning a house, many people of modest income will put whatever few savings or future earnings they have into a down-payment. This type of complexity is aimed at extracting additional value from wherever it can - the small and modest and the big and rich. This too explains why the global financial system is in permanent crisis. Indeed, the term "crisis" is in some respects a misnomer: for what is happening is more nearly business as usual, the way financialised capitalism in the neo-liberal era works. The financialising of more and more economic sectors since the 1980s has become both a sign of the power of this financial logic and the sign of its auto-exhaustion. When everything has become financialised, finance can no longer extract value. It needs non-financialised sectors to build on. The last frontier is taxpayers' money - which is real, old-fashioned, not (yet) financialised money. Krzysztof Rybinski's "zombies" are also parasites. The limit The difference of the current crisis is precisely that financialised capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialising. It has penetrated such a large part of each national economy (in the highly developed world especially) that the parts of the economy where it can go to extract non-financial capital for its own rescue have become too small to provide the amount of capital needed to rescue the financial system as a whole. By way of illustration: the global value of financial assets (which means: debt) in the whole world by September 2008 - as the crisis was exploding with the collapse of Lehman Brothers - was $160 trillion: three-and-a-half times larger than the value of global GDP. The financial system cannot be rescued by pumping in the money available. This in turn explains the abuses of entire economies made possible through extreme forms of financialising. Before the current "crisis" erupted, the value of financial assets in the United States had reached 450% of GDP that is to say 4.5 times total GDP (see "Mapping global capital markets", McKinsey Report, October 2008). In the European Union, it stood at 356% of GDP. More generally, the number of countries where financial assets exceed the value of their gross national product more than doubled from thirty-three in 1990 to seventy-two in 2006. Moreover, the financial sector in Europe has grown faster than in the United States over the last decade, mostly because it started from a lower level: its compound annual growth rate in 1996-2006 was 4.4%, compared with the US rate of 2.8%. Even capitalist economies - leaving aside assessments of whether this is the most desirable economic system - do not need an amount of financial assets that is four times the value of GDP. Thus even within a capitalist logic, giving more funds to the financial sector in order to solve the financial "crisis" is not going to work - for it would just deepen the vortex of financialising economies. The scale Another way to portray the current situation is via the different orders of magnitude involved in (respectively) banking and finance. In September 2008, the value of bank assets amounted to several trillion dollars; but the total value of credit-default swaps (CDS) - the straw that broke the system - stood at almost $60 trillion. That is a sum larger than global GDP. The debts fell due, and the money was not there. More generally - and again, to give a sense of the orders of magnitude that the financial system has created since the 1980s - the total value of derivatives (a form of debt, and the most common financial instrument) was over $600 trillion. Such financial assets have grown far more rapidly than has any other economic sector (see Gillian Tett, "Lost through destructive creation", Financial Times, 9 March 2009). The level of debt in the United States today is higher than in the depression of the early 1930s. In 1929, the debt-to-GDP ratio was about 150%; by 1932, it had grown to 215%. In September 2008, the outstanding debt due on credit-default swaps - a Made-in-America product (and, it should be recalled, only one type of debt - was over 400% of GDP. In global terms, the value of debt in September 2008 was $160 trillion (three times global GDP), while the value of outstanding derivatives is an almost inconceivable $640 trillion (fourteen times the GDP of all countries in the world). These numbers illustrate that this is indeed an "extreme" moment - but, again, it is not anomalous nor is it created by exogenous factors (as the notion of "crisis" suggests). Rather, it is the normal mode of operation of this particular type of financial system. Moreover, every time governments (that is, citizens and taxpayers) have bailed out the financial system since the first crisis of this phase - the New York stock-market crash of 1987 - they have given finance the instruments to continue its leveraging stampede. There have been five bailouts since the 1980s; on each occasion, taxpayers' money was used to pump liquidity into the financial system, and each time, finance used it to leverage. This time, the end of the cornucopia is near - we have run out of money to meet the enormous needs of the financial system. The bridge The implication of the foregoing is that two major challenges need to be faced: ▪ the need to definancialise the major economies ▪ the need to move out of the current model of capitalism. Both will be difficult, but it will help to focus on some very basic facts. The current estimate of official global unemployment is 50 million; the International Labour Organisation (ILO) calculates that 50 million more could lose their jobs as the recession deepens. These figures are tragic for those affected. They are also relatively modest (without minimising the human reality in any way) when set against the 2 billion people in the world who are desperately poor. But this raises the question: how many "jobs" would be created if there were a system that aimed at housing and feeding those 2 billion? The world would then need those 50 million currently unemployed to go to work - and another billion more workers into the bargain. If seen in this light, the financial "crisis" could serve as one of the bridges into a new type of social order. It could help all involved - citizens and activists, NGOs and researchers, local communities and networks, democratic governments - to refocus on the work that needs to be done to house all people, clean our water, green our buildings and cities, develop sustainable agriculture (including urban agriculture), and provide healthcare for all. This innovative order would employ all those interested in working. When all the work that needs to be done is listed, the notion of mass unemployment makes little sense. The technology to underpin this work - in helping to eliminate diseases that affect millions, and to produce enough to feed all - has existed for several decades. Yet millions still die from preventable diseases and even more go hungry. Poverty has become more radical: no longer about having only a plot of land that did not produce more, today it means having only your body. Inequality too has intensified and taken on new dimensions, including a new global class of super-rich and the impoverishment of the traditional middle classes. The history of the last generation confirms that the neo-liberal form of market economy cannot deliver answers to these problems of disease, hunger, poverty and inequality - indeed it reinforces them. Some mixing of clean markets and a strong welfare state has (as in Scandinavia) produced the best outcomes yet; but for most capitalist economies even to come near to this model would entail sweeping internal change (see Amartya Sen, "Capitalism Beyond the Crisis", New York Review of Books, 26 March 2009). In any event, the increase in the financialising of market economies over the last generation has further sharpened the negative effects of profit-maximisation logics. To move even a little in the direction of addressing the problems financialisation has created means entering an economic space that is radically different from that of high finance. The challenge is there for those attending the G20 summit in London - and for those outside the gates. Labels: financial crisis, financialization, G20, Saskia Sassen Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Quiet Coup (Simon Johnson)This article, which hypothesizes that an "American financial oligarchy" has (re)emerged and is turning the United States into a Banana Republic, is getting a lot of attention. (See our Jan/Feb 2009 cover story for a related argument, though the meat of this one is the financial elite part.) Krugman mentioned it in his March 29th column. And Brad DeLong has a post about it on his blog, with many comments, some of them interesting. The excerpt I'm giving below is not from the beginning of the article, fyi.The Quiet Coup By Simon Johnson | The Atlantic | May 2009 ... Becoming a Banana Republic In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people. But there's a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a "buck stops somewhere else" sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel. But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits—such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside. The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry's ascent. Paul Volcker's monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services. Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent. Read the full article. Labels: Brad DeLong, financial crisis, oligopoly, Paul Krugman, recession, Simon Johnson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). State-Owned Bank in ND Doing Just FineFrom Mother Jones. The comment section is worth reading; some debate about whether this is the only state-owned bank in the United States. (Doesn't the FDIC own many banks at any given time?) I weighed in, even though I am not so big on commenting on articles, just to contradict some guy who claimed that hedge funds never fail (he was arguing, preposterously, that over-regulation caused the banking crisis).How the Nation's Only State-Owned Bank Became the Envy of Wall Street By Josh Harkinson | Fri March 27, 2009 6:33 PM PST The Bank of North Dakota is the only state-owned bank in America—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota's well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn't stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, Web of Debt, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit freeze by "creating its own credit, leading the nation in establishing state economic sovereignty." Mother Jones spoke with the Bank of North Dakota's president, Eric Hardmeyer. Mother Jones: How was the bank formed? Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we're both in existence today doing exactly what we were created for 90 years ago. Only we've morphed a little bit and found other niches and ways to promote the state of North Dakota. MJ: What makes your bank unique today? EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that's only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism. MJ: Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state's own economy? EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it's agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that's our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history. MJ: Are there areas that you invest in that other banks avoid? EH: We made the first federally-insured student loan in the country back in 1967. So that's been a big part of what we do. It's become almost a mission-critical thing. I don't know if you have been following the student loan industry lately, but it's been very, very interesting as many have decided to leave. We will not though. MJ: So you are able to invest in certain areas because they provide a public good. EH: Yeah, or a direction, whether it's energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here's another thing: We're gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We've experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it's encouraging different economies to grow or dealing with a disaster. MJ: What do private banks think of you? EH: The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It's originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers' bank or a wholesale bank. So we provide services to banks, whether it's check clearing, liquidity, or bond accounting safekeeping. There's probably 20 other bankers' banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it's beyond their legal lending limit or they just want to share risk, we'll do that. We're a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy. MJ: So what's the advantage of a publicly owned "bankers' bank" instead of a privately owned one? EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We're a depository bank and can bring that to bear. MJ: If other states had a bank like yours, do you think they would have been more insulated from the credit crisis? EH: It all gets down the management and management philosophy. We're a fairly conservative lot up here in the upper Midwest and we didn't do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don't understand it, we're not going to jump into it. And so we've avoided all those pitfalls. That's not to say that we're completely immune to everything, certainly we've bought some mortgage-backed securities and we're working through some of those issues, but nothing that would cause us to be concerned. Read the rest of the interview. Labels: bailout, bank nationalization, financial crisis, North Dakota Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WE20--The People's G20A press release; hat-tip to Abby S.WE20 - THE PEOPLE'S G20 we20, the people's answer to the G20 group of nations, today announces the launch of its website at we20.org, enabling individual people and groups anywhere in the world to host their own G20 summits and formulate plans for economic recovery. In the run-up to the London G20 summit - and amid fears of street violence as protestors vent their feelings on the global economy - we20 offers a refreshing alternative: large-scale community involvement in planning the world's economic revival. People visiting we20.org can organise their own meetings, in their own communities, to draw up action plans - local, national or international - to fix economies. We20 plans are voted on at we20.org and the top we20 plans have the chance of appearing on the official G20 London Summit website. Lord Malloch-Brown, the UK's Foreign Office G20 Minister, has given his encouragement and advice to we20 meetings through a YouTube video. we20's twitter, Facebook and LinkedIn Communities are growing fast, plans have already been submitted to we20.org from the UK and Sweden, and we20 meetings are pledged in USA, Australia, Sweden, Belgium, Germany, Sudan, Thailand, Nigeria and the UK, representing communities in the media industry, local government, students and healthcare workers. As the we20 movement grows, it's expected that thousands of we20 meetings will take place around the world through 2009, with a goal of the first thousand to take place by the end of April 09. The website at we20.org acts as a facilitator and hub for these meetings. Visitors to the site can find an existing meeting or set one up to discuss and agree on a local, national or global challenge, or to read and vote on plans from other we20 meetings. Each we20 user gets 20 votes to award to the best recovery plans. The organisers of we20 hope to help favourite we20 plans become future realities as we20 develops. The we20 concept was hatched on January 6 this year by a group of volunteers in London who want to help people through the recession. The site was then developed entirely by voluntary contributions to become the start of a resource which its organisers hope will grow to be a public engagement platform alongside the G20. As a body, we20 is independent and neutral. The plans proposed on the site belong to the groups which propose them. Paul Massey, an internet lawyer from London and one of the volunteers organising we20 in his spare time, says: "The we20 initiative is a neat idea to help people organise their own G20 meetings of up to 20 people. There is speculation about what the London G20 Summit will achieve but we've already seen we20 meetings produce some great action plans to fix the economy. we20 sees the G20 Summit as a rallying call for everyone to work together to pull ourselves out of this economic mess." He continues: "There's no restriction on the challenges addressed and the plans formulated by people's we20 meetings. They may be directed towards, local, national or global issues, from the IMF, World Bank or climate change to local economic issues such as redundancies, plans for local shops, sports teams or growers' initiatives. we20 is driven by volunteers and word of mouth, and we are constantly amazed by the support we are receiving from across the board." Part of the inspiration for we20 arose from Barack Obama's use of the internet, demonstrating how ordinary people can make change happen by connecting on the internet and then meeting face to face. Massey concludes: "After the G20 Summit, we20 will assess its impact in consultation with members, continue to encourage the implementation of we20 plans and work towards future goals including the Copenhagen Climate Change Summit. we20 hopes to strengthen the policies produced by the G20, ensure transparency and encourage good governance. Whatever comes out of the London G20 Summit, we20 looks set to stay as a force of community empowerment for the longer term." Labels: bailout, Barack Obama, financial crisis, G20, G20 summit, WE20 Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Two Items on Guadeloupe General StrikeTwo items on the recent massive general strike in Guadeloupe. First, from Friday's Democracy Now!:Labor Victory in Guadeloupe After Six-Week Strike Reverberates Across French Caribbean and France Hear it or read it here. Second, an article on the general strike by Immanuel Wallerstein: Guadeloupe: Obscure Key to World Crisis Read the rest of the article. Labels: activism, Democracy Now, financial crisis, general strike, global downturn, Guadeloupe, Immanuel Wallerstein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Mike Davis on Socialism on Bill MoyersFrom the folks at SolidarityEconomy.net. Video is probably available somewhere, too.Bill Moyers Talks with Mike Davis on the Economic Crisis March 20, 2009 BILL MOYERS: For all the talk on the cable channels and in the blogosphere, you would think Washington has been invaded and conquered. Remember that scary movie from the 1950's, INVASION OF THE BODY SNATCHERS? MALE VOICE: Everyone! They're here already! You're next! You're next! Many film scholars believe the movie is a paranoid parable, warning of a Communist takeover of America. But today, the body snatchers are you ready for this? Socialists! That's right. Socialists, reportedly swarming over the city and making off with the means of production, namely the Federal budget. I'm not making this up. Newsweek was the first to spot the aliens a month ago and it was us. Here's the headline of a recent article on Salon.com. Newt Gingrich, reincarnated once again as himself, sounds as if Obama ate his Contract with America for lunch and coughed it up as "European Socialism."
BILL MOYERS: But the ghosts being conjured in the corridors of power aren't those great American radicals Eugene V. Debs or Norman Thomas. No, Stalin, Marx and Lenin have risen from the grave, stalking our highest officials. Just listen to CNBC's Jim Cramer:
BILL MOYERS: And others followed suit: RUSH LIMBAUGH: Liberal democrats and the drive-by media are speeding down the highway, implementing Socialism as fast as they can. BILL MOYERS: So what does a real live Socialist think about all this? We consulted the Endangered Species Act and actually found one, way out to the People's Republic of Southern California. That state's economy has tanked with one of the country's highest number foreclosures and unemployment above 10% and climbing. California is a financial earthquake off the Richter scale. All of this is grist for the socialist writer and historian who is sitting with me now. Once a meat cutter and a long haul truck driver, nowadays, Mike Davis teaches creative writing at the University of California, Riverside. This recipient of a MacArthur Foundation "genius grant" has written so many books we can barely get them on the screen for you. Two of his histories of Los Angeles and Southern California, CITY OF QUARTZ and ECOLOGY OF FEAR were best-sellers. His latest: IN PRAISE OF BARBARIANS: ESSAYS AGAINST EMPIRE. Mike Davis, welcome to the JOURNAL. MIKE DAVIS: My pleasure, Bill. BILL MOYERS: Did you ever in your life imagine that America's financial system would become insolvent or that our way of life would be in such a sudden freefall? MIKE DAVIS: No. And I found myself in the position of, say, a Jehovah's Witness, who, of course, believes the end is nigh but then one morning wakes up, looks out the window, and the stars are falling from heaven. It's actually happened. Of course, people a lot like myself are famous for I think the phrase is we predicted eleven out of the last three depressions. So, no. BILL MOYERS: But I do think this time most everyone would agree with what you how you've described what we're going through as the mother of all fiscal crisis. Do you have a sense of the people you know being frightened right now? MIKE DAVIS: Oh, people are terrified, particularly where I teach in Riverside County. People have no idea you know, where to turn. UC Riverside is the largest percentage of working-class students in the UC system. And their families have scrimped and saved. And they've worked hard to get into courses that pointed toward stable careers and jobs. And now those futures are incinerated. What kind of choice do you make? You know, what do you study? BILL MOYERS: You wrote an essay on one of my favorite websites, TomDispatch.com, in which you asked this question. "Can Obama see the Grand Canyon?" Now, help us understand the use of that metaphor. MIKE DAVIS: Well, the first explorers to visit the Grand Canyon, simply were overwhelmed. They couldn't visualize the Grand Canyon because they had no concept for it. That is, there was no analogue in their cultural experience, no comparable landscape that would allow them to make sense of what they were seeing. It actually took ten years of heroic scientific effort by John Wesley Powell and these great geologists, Clarence Sutton, before he was truly able to see the Grand Canyon in the sense that we see it now as a deep slice in Earth history. Before you just had confused images and, you know, feelings of vertigo. And so the reason I raised this is that do we really have an analogy? Do we have the concepts to understand the nature of the current crisis other than to step back shaking from the brink and say this is profound? Because, you know, we're in this situation where not only do we seem to be having a second depression, but this is occurring in the context of epochal climate change. It's occurring at a time when the two major benchmarks that survived for global social progress, the United Nations millennial goals for relieving poverty and child mortality, on one hand, and the Kyoto goals for reducing greenhouse admissions, both of those sets of goals are clearly not going to be achieved. They slowly failed. This would be a time of fierce urgency in any sense. And now we face a meltdown of a world economy in a way that no one anticipated, truly anticipated the possibility of another recession, even a financial crisis, but no one counted on the ability of this to happen in such a synchronized, almost simultaneous way across the world. Read the rest of the transcript. Labels: Bill Moyers, financial crisis, Mike Davis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The G20 Summit and UnionsFrom a blog I think I hadn't seen before (hat-tip to LF), Labor Is Not a Commodity. I will add it to our blogroll.The G20 Summit and Unions Tim Newman, Campaigns Assistant, International Labor Rights Forum Next week, representatives of G-20 governments will be meeting in London to discuss strategies for addressing the global economic crisis. As working people around the world are facing the LondonSummit-resized consequences of this crisis, unions are responding with their own proposals for the G-20. This Monday, the International Trade Union Confederation (ITUC) released a "London Declaration" that focuses on five key policy recommendations for the G-20:
You can read the full document online here. The introduction to the declaration states, Workers around the world, who are losing their jobs and their homes, are the innocent victims of this crisis: a crisis precipitated by greed and incompetence in the financial sector, but which is underpinned by the policies of privatisation, liberalisation and labour market deregulation of recent decades. The effects of these policies—stagnating wages, cuts in social protection, erosion of workers' rights, increased precarious work, and financialisation—have combined to increase inequality and vulnerability... While all of ITUC's policy recommendations are very important, the third recommendation definitely requires attention. As the full declaration explains, wage deflation and increasing inequality can be reversed in part "by extending the coverage of collective bargaining and strengthening wage setting institutions so as to establish a decent floor in labour markets." Here in the US, a report released this week by Government Accountability Office [we blogged on this NYT article here; it's the article that quotes Kim Bobo. —D&S] showed that the Department of Labor's Wage and Hour Division is failing in its role of protecting workers from wage theft, child labor and other abuses. With a new Secretary of Labor, it is vital that the government strictly enforce the labor laws we already have on the books. We also need to take additional steps to ensure that workers can use collective bargaining agreements to improve wages and working conditions. That means passing the Employee Free Choice Act (EFCA) as a first step. EFCA is an important part of ensuring that US workers are able to exercise the freedom of association and the right to collective bargaining. At the G20 summit in London, it is also essential that world leaders support alternative systems and Egg_a_Politician policies that can improve the lives of the workers facing poverty. Divine Chocolate, a pioneering Fair Trade chocolate company co-owned by cocoa farmers in Ghana, has shown that paying a fair price to farmers does more than create a sustainable future for a few farmers -- it is a model that can be replicated on a mass scale. Divine set up a new website where you can "Egg a Politician" -- meaning that you can toss a chocolate egg at one of the G20 leaders and then send them a message telling them to keep fair trade on the agenda. Unfortunately, I fear that the representatives at the G-20 will not be promoting policies focused on reducing inequality, protecting workers' rights and promoting fair trade. Labor rights advocates globally will have to keep the pressure on governments to support better policies and work together to raise standards for workers everywhere. As one example, workers all across the Americas are participating in an upcoming Continental Day of Action against the Crisis. How do you think unions and worker organizations around the world can work together to address the impact of the global economic crisis on workers? [This is the full post, though I didn't reproduce all the hyperlinks; to see them click here.] Labels: financial crisis, G20, labor, labor organizing, recession, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trust Your Guts (Greider)Joe Nocera likes Geithner's new plan. William Greider, not so much. Here is an excerpt from his recent article in The Nation. Hat-tip to LF.Some points I recommend people consider: Read the full article. Labels: bailout, financial crisis, Joe Nocera, The Fed, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama vs. Cuomo on Bank InvestigationsFrom Bloomberg:Obama Backs Banks, Seeks to Block Fair-Lending Probe By Greg Stohr March 26 (Bloomberg) -- The Obama administration's call for greater financial regulation may have its limits. The administration late yesterday urged the U.S. Supreme Court to bar New York and other states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks including JPMorgan Chase & Co. and Wells Fargo & Co. The legal brief, which adopts the Bush administration's position, is a setback for consumer and civil-rights groups that had urged President Barack Obama's team to switch positions. The filing puts the administration at odds with New York Attorney General Andrew Cuomo over the respective roles of state and federal regulators. The high court will hear arguments April 28. "National banks are created by the government to serve federal purposes," argued Solicitor General Elena Kagan, the Obama administration's top courtroom lawyer. "Oversight of the banks is therefore principally entrusted to the United States." The court filing coincides with this week's proposal by the administration to put large hedge funds, private-equity firms and derivatives under federal supervision for the first time. Reviving Investigation Cuomo is seeking to revive an investigation, begun by predecessor Eliot Spitzer, into the real-estate lending practices of units of JPMorgan, Wells Fargo and HSBC Holdings Plc. A lower court barred the probe, saying a regulation issued by the U.S. Comptroller of the Currency blocks state scrutiny of national banks. The case will determine whether federal regulators have exclusive governmental authority to press fair-lending and other types of complaints against national banks. More broadly, the case will shape how much ability agencies have to shield companies from state-level scrutiny. Kagan filed the brief on behalf of the OCC, an independent Treasury Department bureau still being run by Republican appointee John Dugan, whose term expires in 2010. Obama has decided to retain Dugan, two people familiar with the decision said last month. "We're disappointed to see it," said Gail Hillebrand, a San Francisco-based Consumers Union attorney who had sent a letter urging the administration to switch sides in the case. "We hope they just haven't gotten around to getting rid of those regulations. It's certainly a missed opportunity." Read the rest of the article (it's short). Labels: Andrew Cuomo, banking regulation, Barack Obama, Eliot Sptizer, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Georgists Correctly Predicted the CrisisFor more on the Georgists, Henry George, and the idea of a land tax, see this excellent sidebar D&S co-editor Amy Gluckman wrote to Mason Gaffney's excellent article about how a land tax helped rebuild San Francisco in 1906, and could be used to rebuild New Orleans after Katrina.Why Georgists Correctly Predicted the Crisis, and Why Conventional Economists Couldn't Land bubbles of varying severity and universality recur roughly every eighteen to twenty years. Like Henry George, modern Georgists attribute recessions and depressions to these bubbles. A huge real estate bubble of the 1920's preceded the Depression of the 1930's. That bubble actually began to burst in 1926, three years before the stock market crash of 1929. So when "house values" exploded around the world during the last decade and then began to decline in 2006, many of us predicted the worst. I even convinced my husband it was time to sell our property--but alas, too late. A few prominent economists recognized the bubble's threat, notably Karl Case and Robert Shiller of the Case-Shiller Home Price Index. But most economists didn't see the crisis coming until it ran them over. Why couldn't they see what Georgists saw? (Non-economists can skip to the last paragraph.) 1. Like Adam Smith and other classical economists, Georgists assume a three-factor world: land, labor and capital, earning economic rent, wages and interest respectively. But starting in the early 20th century, conventional economics merged land into capital. Land disappeared so completely that Robert Solow could joke in 1955 that "...if God had meant there to be more than two factors of production, He would have made it easier for us to draw three dimensional diagrams." 2. Conventional economics airbrushes out economic rent. The National Income and Product Accounts omit or conceal rent. They exclude even realized capital gains, let alone unrealized gains. They lump rent received by business into profits. When I teach micro I have to explain to students that those cute little triangles we label "consumer surplus" and "producer surplus" are really economic rent. 3. Conventional microeconomics is static. Textbooks incorporate discounted present value poorly, or omit it altogether. In teaching micro, I've had to write a special section on discounting--after all, someday, students will buy houses and take out mortgages. Bubbles are just unrealistic projections of rent, capitalized into the present. Without discounting, how can we understand them? (Mind you, many Georgists don't understand discounting either; they explain bubbles as the work of "speculators." But at least they know bubbles are destructive.) 4. Conventional macroeconomics tosses out the good part of micro, namely, marginal analysis. So in conventional macro, all taxes are alike, all consumer spending is alike, all saving and investment is alike. Economists can truly believe that it's good for the economy now to borrow money (from whom?) and spend it on roads and bridges. How can they understand that overspending on infrastructure stimulates bubbles? 5. Conventional economics disregards a central Georgist assumption: distribution of wealth matters. Moreover, the tax and subsidy system is rigged to drive rent to the top of the heap. This very rigging of the system also encourages bubbles. So the Georgist cure is to reverse the rigging, capture the rent and redistribute it to society either in the form of public goods, or directly as tax credits or grants. That's a dangerously radical idea. One hundred years ago, Georgists allied with Progressives to form a powerful movement for political and fiscal reform. In The Corruption of Economics, Mason Gaffney argues that neoclassical economics assumed its blinkers precisely to thwart that movement--leaving modern economists helpless. Labels: economic crisis, financial crisis, Georgists, Henry George, housing bubble, land tax, Polly Cleveland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Common Security Clubs An exciting new project spearheaded by Chuck Collins, D&S Associate, and of the Institute for Policy Studies. 'Common Security Club' as an Organizing Form for the Solidarity Economy By Chuck Collins The common security club model was born out of work done in the last few years by people struggling with overwhelming indebtedness. Participants spend some time discussing the root causes of the economic crisis, drawing on readings and materials provided by the network. But they mostly focus on what they can do together to increase their economic security and press for policy changes. "What becomes clear to participants is we are facing some major economic and ecological changes," said Andree Zaleska from the Boston office of Institute for Policy Studies, who is coordinating clubs in the Northeast. "We are not going back to some golden age of economic growth based on empire, unfettered capitalism, and cheap energy—nor do we want to! We have to prepare ourselves and our communities for transformation." As theologian Walter Brueggemann writes we need to shift from "autonomy to covenantal existence, from anxiety to divine abundance, and from acquisitive greed to neighborly generosity." Common security club participants are experimenting with ways to make the practical, political, and spiritual changes this entails. The three main functions of the clubs are: 1) Learn and reflect Through popular education tools, videos, Bible study, and shared readings, participants increase their understanding of the larger economic forces on our lives. Why is the economy in distress? How did these changes happen? What are the historical factors? How does this connect to the global economy? What are the ecological factors contributing to the changes? What is our vision for a healthy, sustainable economy? What are the sources of real security in my life? 2) Mutual aid and local action Through stories, examples, Web-based resources, a workbook, and mutual support, participants reflect on what makes them secure. What can we do together to increase our economic security at the local level? What would it mean to respond to my economic challenges in community? How can I reduce my economic vulnerability in conjunction with others? How can I get out of debt? How can I help my neighbor facing foreclosure or economic insecurity? Can I downscale and reduce my consumption and ecological footprint and save money? 3) Social action The economic crisis is in part the result of an unengaged citizenry and government. What can we do together to build an economy based on building healthy communities rather than shoring up the casino economy? What public policies would make our communities more secure? Through discussion and education, participants might find ways to engage in a larger program of change around the financial system, economic development, tax policy, and other elements of our shared economic life. Clubs can be autonomous or affiliated with an existing institution, secular or religious. The ideal size is 10 to 20 adults who make a commitment to an initial five meetings with a facilitator. Clubs then decide whether to continue meeting and self-manage. Starter sessions have been developed and include "The Roots of the Economic Crisis," "Personal Re sponses to Economic and Ecological Change," "Things We Can Do Together," and "Actions to Transform the Economy." Among the things "we can do together," the clubs examine stories and examples of various economic and mutual aid activities. These have included teaming up to help each other weatherize their homes, helping each other rework their personal budgets and reduce debt, and forming food-buying clubs. Faith-based groups weave together reflection, prayer, and action. "We can't be a bank for each other," said club participant Paul Monroe of Boston. "But there are so many things we can do to support one another and increase our economic security." One group, convened by a group of Haitian women in the Boston neighborhood of Dorchester, decided to push back against their credit card companies. "Everyone was paying really high fees," observed Charlotte Desire, who coordinated the group. "One of our best moments was when everyone in our group called their credit card company and threatened to cut up their cards unless fees were waived and interest rates were cut." Almost everyone in the group was able to save hundreds of dollars in interest payments and fees. Gerald Taylor, a veteran congregation-based organizer in Charlotte, North Carolina, has led discussions with several groups about what a healthy and democratic debt system would require. "All our religious traditions have prohibitions on usury for a reason," said Taylor. "So what would a fair and transparent credit system look like?" "We are piloting about a dozen common security clubs in different places and with very different groups," said Zaleska, describing the efforts in her region. "We're testing out several different curricula. Some clubs are pressing members of Congress to reform the casino economy, stop foreclosures, and pass an economic stimulus package." Whatever shape or focus members choose to take, common security clubs are pushing against the social isolation that may accompany a recession or depression. "I see the hurt and anxiety in my congregation—and how people privatize their pain," says Cecilia Kingman. "This is a chance for us to be real with each other." These clubs are also one of many building blocks that can move us toward a "solidarity economy" that affirms our true interconnection with one another. Coming together is a way to remind ourselves of the abundance we have, the wealth of our relationships and networks, and the mutuality of our economic security. Chuck Collins is an On the Commons Fellow and senior scholar at the Institute for Policy Studies, where he directs the Program on Inequality and the Common Good. He is co-author with Mary Wright of The Moral Measure of the Economy (Orbis, 2007). This is an excerpt of an article that originally appeared in Sojourners magazine, February 2009. For information on how to start or join a common security club, click here. Labels: Chuck Collins, Common Security Clubs, financial crisis, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Successful bank rescue still far away (Martin Wolf)Interesting piece by Martin Wolf of the Financial Times.By Martin Wolf | March 24 2009 19:24 I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best. If anybody doubts the dangers, they need only read the latest analysis from the International Monetary Fund. It expects world output to shrink by between 0.5 per cent and 1 per cent this year and the economies of the advanced countries to shrink by between 3 and 3.5 per cent. This is unquestionably the worst global economic crisis since the 1930s. One must judge plans for stimulating demand and rescuing banking systems against this grim background. Inevitably, the focus is on the US, epicentre of the crisis and the world's largest economy. But here explosive hostility to the financial sector has emerged. Congress is discussing penal retrospective taxation of bonuses not just for the sinking insurance giant, AIG, but for all recipients of government money under the troubled assets relief programme (Tarp) and Andrew Cuomo, New York State attorney-general, seeks to name recipients of bonuses at assisted companies. This, of course, is an invitation to a lynching. Yet it is clear why this is happening: the crisis has broken the American social contract: people were free to succeed and to fail, unassisted. Now, in the name of systemic risk, bail-outs have poured staggering sums into the failed institutions that brought the economy down. The congressional response is a disaster. If enacted these ideas would lead to an exodus of qualified employees from US banks, undermine willingness to expand credit, destroy confidence in deals struck with the government and threaten the rule of law. I presume legislators expect the president to save them from their folly. That such ideas can even be entertained is a clear sign of the rage that exists. This is also the background for the "public/private partnership investment programme" announced on Monday by the US Treasury secretary, Tim Geithner. In the Treasury's words, "using $75bn to $100bn in Tarp capital and capital from private investors, the public/private investment programme will generate $500bn in purchasing power to buy legacy assets—with the potential to expand to $1 trillion over time". Under the scheme, the government provides virtually all the finance and bears almost all the risk, but it uses the private sector to price the assets. In return, private investors obtain rewards—perhaps generous rewards—based on their performance, via equity participation, alongside the Treasury. I think of this as the "vulture fund relief scheme". But will it work? That depends on what one means by "work". This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks' trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody—certainly not the Treasury—thinks this scheme will end the chronic under-capitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down. Read the rest of the article. Labels: bailout, financial crisis, Martin Wolf, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hey Paul Krugman (A Song, A Plea)Catchy tune from YouTube. Hat-tip to Bryan S.Labels: bailout, financial crisis, Paul Krugman, Timothy Geithner, YouTube Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). U.S. Seeks Expanded Power to Seize FirmsFrom the Washington Post. The plot thickens. Sure sounds to me like they're thinking Geithner's plan won't work and they'll have to nationalize after all. The "we've got to move quickly" line (2nd-to-last paragraph) is getting a little old.U.S. Seeks Expanded Power to Seize Firms Goal Is to Limit Risk to Broader Economy By Binyamin Appelbaum and David Cho Washington Post Staff Writers Tuesday, March 24, 2009; A01 The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document. The government at present has the authority to seize only banks. Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document. The administration plans to send legislation to Capitol Hill this week. Sources cautioned that the details, including the Treasury's role, are still in flux. Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers. The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy. The government also would assume the authority to seize such firms if they totter toward failure. Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit. The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan. Geithner plans to lay out the administration's broader strategy for overhauling financial regulation at another hearing on Thursday. The authority to seize non-bank financial firms has emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG. "We're very late in doing this, but we've got to move quickly to try and do this because, again, it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic," Geithner said last night at a forum held by the Wall Street Journal. The powers would parallel the government's existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the Federal Deposit Insurance Corp. Geithner has cited that structure as the model for the government's plans. Labels: bailout, banking system, financial crisis, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Down the dark path (Delasantellis on Geithner)Hat-tip to Larry P. for this; he says "it's by far the best thing I've read on this travesty."I am in absolutely no possession of any historical evidence that 16th-century English jailers employed modern stand-up comedians to bring a bit of levity to their inheritantly bleak workspaces, but what if they had? What if, as the clock ticked down in the Tower of London before the execution of Sir Thomas More ordered by King Henry VIII in July 1535, a comic, in the style of the late Rodney Dangerfield, was brought in to do stand-up? "Hey, everybody looks great here. Anybody here Papists? Don't worry, your secret's safe with me—I haven't even paid the withholding tax on my foodtaster yet. I just flew in from the Isle of Man, and boy, are my arms tired—you know what I mean? Hey, prison guards! I never knew why they called you guys Beefeaters until I saw your wives outside the gates!" Turning to the condemned man. "Hey, Tommy, I got good news for you. You're not going to be drawn and quartered tomorrow." "Pray tell sir, do not jest!" "I'm serious. Big H's gonna cut your head off instead!" That's a little bit like the situation with the newly revealed, final US Treasury Secretary Timothy Geithner toxic asset recovery bank program. It may work. It may not. Whatever happens with its effectiveness, one thing is certain. US taxpayers are definitely going to be getting the chop, maybe you could even say they're getting it in the chops, as a result of its implementation and administration. Read the rest of the article. Labels: bailout, financial crisis, Henry VIII, Julian delasantellis, Rodney Dangerfield, Sir Thomas More, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Plans To Avoid Repeat of CrisisFrom Bloomberg:Obama to Outline Regulation Changes to Avoid Repeat of Crisis By Hans Nichols March 22 (Bloomberg) The Obama administration will this week outline regulatory changes aimed at avoiding a repeat of the financial crisis that's crippled the banking system and pushed the U.S. into the deepest recession since 1982. The proposals will address the risks that remain in financial regulation, an administration official said, including the need for an agency to have the power to resolve a breakdown at a major financial institution. Federal Reserve Chairman Ben S. Bernanke two weeks ago called for regulators to be given the authority to seize such firms, in the way the Federal Deposit Insurance Corp. already has for deposit-taking institutions. Officials favor giving the Fed greater responsibility for managing risk across the financial system as was proposed almost a year ago by former Treasury secretary Henry Paulson, support for which is waning in Congress. President Barack Obama may also subject executive pay to greater scrutiny, the New York Times reported. An administration official denied that curbing compensation will be a major focus of the regulatory plan. "There’s still a need for a systemic-risk regulator," Representative Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said on March 20. "The argument for the Fed alone has lost a lot of political support. I think that’s now got to be re-looked at." Treasury Secretary Timothy Geithner will testify before Frank's committee on March 26 as Obama prepares to travel to London for a summit of the Group of 20 industrial and developing nations. G-20 Summit Obama has said that the meeting must deal with how to prevent further crises like the current financial meltdown that began almost two years ago with the collapse of the market for subprime mortgages. American banks have suffered more than $800 billion in writedowns and credit losses since then. The credit contraction that followed dragged first the U.S., and then Europe and Japan, into recession. A surge in unemployment and collapse in house prices has added to bad loans and further discouraged banks from lending. The crisis also pushed the U.S. government into pouring hundreds of billions of dollars into financial institutions, including Citigroup Inc., Bank of America Corp. and American International Group Inc. Like the White House, Congress is trying to overhaul U.S. financial regulations and agencies that lawmakers have faulted for lax oversight. Frank, who is playing a lead role in the redesign, has been pushing to expand the Fed's authority. Read the rest of the article Labels: bailout, banking regulation, Barack Obama, barney frank, financial crisis, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Proposed Plan To Deal With Toxic AssetsFrom The Wall Street Journal:MARCH 21, 2009 U.S. Sets Plan for Toxic Assets Wall Street Journal By DEBORAH SOLOMON WASHINGTON -- The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance. But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate--potentially casting a cloud over the program's prospects. The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road. The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb. Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss. All told, the three efforts are designed to unglue markets that have seized up as investors have stood on the sidelines. One big problem is that many of these assets no longer trade, which means it's very hard to put a price on them. Banks are unwilling to sell at too low a price, and investors are unwilling to take the risk. Read the rest of the article Labels: bailout, financial crisis, TALF, Timothy Geithner, toxic assets, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). RBoS To Become UK's Enron?From The Observer:RBS faces probe over 'threats' to directors Peer's criminal inquiry warning on bank Toby Helm and Jamie Doward The Observer, Sunday 22 March 2009 The scandal engulfing the Royal Bank of Scotland reaches new heights today with serious allegations from a senior Labour politician that at least three of its former non-executive directors may have been intimidated and threatened with the sack for asking searching questions about its financial affairs. The Observer can reveal that a former government minister, Lord Foulkes of Cumnock, who has been extensively briefed by former bank insiders, has written to the Financial Services Authority, the City watchdog, asking it to pursue the claims which, if true, could trigger a criminal investigation. The intervention by Foulkes, who is also a member of the Scottish parliament and sits on the Commons security and intelligence committee, comes amid fears that the bank will be exposed as the UK's equivalent of Enron--the US trader that collapsed amid systemic fraud. Last night Foulkes said there was "widespread public anger among the public and Parliament that bankers in the midst of this financial crisis appear to be profiting and no action is being taken in relation to action which could constitute criminal offences". In relation to claims of intimidation, Foulkes said: "If it were to transpire that executives were pressured in such a way, then that is a most serious matter indeed that needs urgent action." Read the rest of the article Labels: bailout, financial crisis, Labour Party, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The People's Agenda (NYC event)Linda Pinkow and I (Chris Sturr) have been out in Amherst, Mass. for the Forum on the Solidarity Economy, which has been great, and inspiring. It has been great to see lots of comrades and meet new ones. We will aim to blog about it more extensively early this week.Below is an announcement for an event to be held next week. One or the other of the hosts of this event, Mimi Rosenberg and Ken Nash (hosts of Building Bridges on WBAI) will be part of the panel we have put together for this year's Left Forum, along with one or the other of the D&S co-editors (me or Amy Gluckman), Jerry Friedman (UMass-Amherst economist and D&S author, with whom we had a great chat over coffee yesterday), and Cecilia Rio, of Towson University and the Center for Popular Economics. But here's that annoucement—looks like a great event: WBAI Radio and the New York Society for Ethical Culture present The People’s Agenda: Working For An Economy By The People, For The People! Produced by WBAI’s Building Bridges: Your Community and Labor Report Hosted by Mimi Rosenberg and Ken Nash Wednesday, April 1, 2009, 7:00 – 9:30 PM (doors open at 6:30pm) NY Society for Ethical Culture, 2 W. 64th St (at Central Park West) An examination of the present crisis of capitalism and peoples’ demands that the road to economic recovery lies in directly increasing their living standard and abandoning trickle down economics. In the words of Rev. Martin Luther King Jr. who gave his life fighting for the rights of the Memphis sanitation workers and for a poor people’s movement for economic rights, "A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth…and say: 'This is not just.'" The program (partial list): . Ajamu Sankofa, Private Health Insurance Must Go Coalition . Lillian Roberts, Ex. Dir. DC 37, American Federation of State County & Municipal Employees (AFSCME) . video message from U.S. Representative Dennis Kucinich . Dean Baker, Co-Director, Center for Economic and Policy Research; author of Plunder and Blunder: The Rise and Fall of the Bubble Economy . Stanley Aronowitz, Prof. of Sociology, & Urban Education, CUNY Graduate Center; author of Left Turn: Forging a New Political Future ; University Wide Officer, Professional Staff Congress, AFT . Representatives of the April 3 and 4 marches on Wall Street Coalitions . presenters from housing and community service coalitions Suggested donation $10, (no one will be turned away) To Benefit for WBAI and the NY Society for Ethical Culture Further information: buildingbridgesradio--at--gmail.com Labels: bailout, Center for Popular Economics, financial crisis, Left Forum, WBAI Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Virtues of Public Anger, and Need for More Great piece by Glenn Greenwald at Salon.com; hat-tip to Ben C. Ben wrote me: "This article is pretty damn good. I predict that your proposed new title for D&S, 'Jump You Fuckers,' will be conventional wisdom by Sept/Oct." The virtues of public anger and the need for more Glenn Greenwald | Salon | Saturday March 21, 2009 09:08 EDT With lightning speed and lockstep unanimity, opinion-making elites jointly embraced and are now delivering the same message about the public rage triggered this week by the AIG bonus scandal: This scandal is insignificant. It's just a distraction. And, most important of all, public anger is unhelpful and must be contained or, failing that, ignored. This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing. It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments. While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying. * * * * * These endless lectures from sober, rational pundits about the relative quantitative insignificance of the AIG bonuses are condescending straw men. Nobody thinks that $165 million in bonuses for the people who destroyed AIG is what has caused the financial crisis. Nobody thinks that recouping those bonuses or having prevented them in the first place would solve or even mitigate systemic collapse. The amounts are miniscule in the context of the broader economic issues. Everyone is aware of that; nobody needs to have that pointed out. As Armando astutely observed, the attempt now to dismiss the anger over the AIG bonuses as the by-product of simple-minded ignorance and/or ideological rigidity (class warfare! crass populism!) is quite similar to how anti-war arguments were stigmatized before the attack on Iraq : ignore the screeching pacifists and let the sober Experts make the decisions, for they know best. The AIG scandal is significant and has resonated so powerfully because it is a microscope that enables the public to see what and who has wreaked the destruction that threatens their security and future and, most important of all, to realize that these practices haven't ended and the perpetrators haven't been punished. The opposite is true: those who caused the crisis continue to exert control over what happens and continue to have huge amounts of public money transferred in order to enrich them. Eliot Spitzer is absolutely right that, even at AIG, there are far larger scandals than the bonuses, such as the undiscounted compensation of AIG's counter-parties such as Goldman Sachs (and just by the way: it is indescribably symbolic that Spitzer has been punished and disgraced for his acts of consensual adult sex while the targets of his prescient Wall St. investigations, who basically destroyed the world economy, remain protected and empowered). But the bonus scandal is illustrative of why the crisis happened, who caused it to happen, and the ongoing political dominance of the perpetrators. It is, as Robert Reich put it, "a nightmarish metaphor for the Obama Administration's problems administering the bailout of Wall Street." The financial crisis has merely unmasked the corruption and rot in our establishment institutions that are staggering in magnitude and reach. Just as the Iraq War was not the by-product of wrongdoing by a few stray bad political and media actors but instead was reflective of our broken institutions generally, the financial crisis is a fundamental indictment on the way the country functions and of its ruling class. What would be unhealthy is if there weren't substantial amounts of public rage in the face of these revelations. Read the rest of the article. Labels: AIG, anger, bailout, financial crisis, Glenn Greenwald, populism, ruling class, Timothy Geithner, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Madoff's Accomplices: His Victims (Nocera)Finally, somebody in a mainstream publication says something close to what I have been thinking about the Madoff victims. In a column last Friday entitled Madoff Had Accomplices: His Victims, Joe Nocera argues that the investors whom Madoff cheated were irresponsible. As I will argue below, I think they were showed not just personal irresponsibility, but possibly also ethical and political irresponsibility. But here's Nocera:[J]ust about anybody who actually took the time to kick the tires of Mr. Madoff's operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. "The explanation of his strategy, the consistency of his returns, the way he withheld information—it was a very clear set of warning signs," said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names—but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply. I like Nocero's line of thinking, but I wish he'd gone beyond personal investment advice. There is an argument to be made that Madoff's victims—or some of them, at least—and (it should be added) plenty of other big-money investors, are guilty not only of failing in their duties to themselves to invest their money wisely, but also failing ethically to invest their money in ways that don't harm other people. And if this is true of the Madoff investors, then it's true of a lot of other investors in Wall Street's latest high-flying phase. Take Elie Wiesel, for example. Here are some excerpts from the NY Times article about Wiesel's comments at the Portfolio forum Nocera mentions: Elie Wiesel Levels Scorn at Madoff And this:
Now, the punishment Wiesel describes sounds a lot like torture to me—solidary confinement alone is torture—so I was a little taken aback that Wiesel called for it. But what about a humanitarian and professor of ethics like Wiesel failing to look into the source of his and his foundation's investment profits? In the case of Madoff, the source was theft—Madoff and his accomplices used new investors' money to pay interest to older investors (this is what a Ponzi scheme is). But what if Madoff had just been a "good" (i.e., effective) money-manager (albeit with less consistently, and suspiciously, reliable returns), and had been paying Wiesel and his foundation interest that came from, say, companies that outsourced jobs to sweatshops; leveraged buyouts of companies that were then gutted and resold; companies that pollute; companies engaged in predatory lending; etc. etc.—that is to say, the usual sources of Wall Street megaprofits? Madoff was stealing from people, but many a money-manager who hasn't been branded "the most hated man in New York" (as one of the tabloids, I believe, put it), or called a "monster" on the cover of New York magazine has been complicit in plenty of human misery. Would Wiesel have known? Labels: Bernard Madoff, Elie Wiesel, financial crisis, Joe Nocera, Wall Street |
