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Failure Beyond Finance
James Howard Kunstler, Blog
Events are driving us now, not personalities or even policies. Ben Bernanke, Hank Paulson, and the other characters in the headlines might pretend that they are managing things, but the truth is that problems in the financial sector have spun wildly out of control. The wheels are coming off and we are in that long sickening moment of sideways sliding motion when no attempt at steering will avail to avoid the crash. That it is happening at the very height of the Christmas season, when events have previously been controllable — the season of manufactured Santa Claus rallies and $50 million bonuses — shows how perilous the situation is.
The reason the financial sector is crashing is really pretty simple: it created too many fraudulent securities. What has been conspicuously absent so far is any sense of accountability for what may go down as history’s greatest swindle.
(17 December 2007)
James Howard Kunstler has been devoting recent columns to the financial crisis.
After the Money’s Gone
Paul Krugman, New York Times
On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.
n past financial crises – the stock market crash of 1987, the aftermath of Russia’s default in 1998 – the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.
Why not? Because the problem with the markets isn’t just a lack of liquidity – there’s also a fundamental problem of solvency.
Let me explain the difference with a hypothetical example.
Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.
(14 December 2007)
The consensus is moving from the soft vs. hard landing debate towards how severe the hard landing will be
Nouriel Roubini, Global EconoMonitor
While a few months ago analysts were still heatedly debating whether the US would experience a soft landing or a hard landing (a recession) the center of the macro debate has now clearly shifted away from soft landing versus hard landing discussion to a recognition that a hard landing is the most likely scenario; thus, increasingly now the debate is on how deep and severe the forthcoming hard landing will be.
David Rosenberg of Merrill Lynch is now clearly predicting a recession for the US economy in 2008; Jan Hatzius at Goldman Sachs is not formally speaking of a certain recession in 2008 but most of his analysis is consistent with a high likelihood of a recession in 2008; Mark Zandi of Moody’s Economy.com is also very close to a hard landing view.
More interesting now even the thoughtful Richard Berner – who used to be strongly in the soft landing camp while his counterpart Steve Roach was in the hard landing camp – is now predicting a recession in the US in 2008, even if he expects such a recession to be mild.
(11 December 2007)
Peak Oil and Portfolio Prudence
Jim Hansen, ASPO-USA
For most of us, the holidays mean it’s time to shop for gifts. For investors, the end of the year also means it’s time to evaluate how their investments have done and consider changes for the coming year. This includes Peak Oil aware investors who should step back and take a good look at not just investment portfolios but also lifestyles to make sure both are in line with goals and objectives.
When I spoke at the ASPO-USA conference in Houston, I made a couple of key points concerning investing within the framework of Peak Oil. The first two dealt directly with investment assets while the third was really an assessment of the energy intensity of one’s lifestyle.
My presentation in Houston began with the observation that in nearly all asset allocation models, energy is lumped into the natural resource category of equities. This is where one finds all the energy funds in the Morningstar rankings. While it is hard to make clear distinctions within the large mutual fund industry, from the investor’s perspective I believe it’s important to make that distinction. Energy should be an asset class itself.
According to the California Public Employees’ Retirement System Statement of Investment Policy, “…asset allocation decisions generally account for about 90% of the investment return.” Therefore the decision surrounding what percentage of invested assets should be devoted to energy becomes very important. It is more important than the individual security selection in determining investment return. So where do most investors put their time and effort? In most cases it is into the security selection which should be secondary to the allocation decision.
Make the decision concerning asset allocation the first and most important decision in the review process of the investment portfolio. Allocate time and resources where it will do the most good. Determine the allocation of the portfolio among the major asset classes of equities, bonds, cash, real estate and maybe precious metals with the addition of energy as its own asset class.
Every investor will need to make their own assessment of what the allocation will be, based on individual objectives, risk tolerance and perspective of Peak Oil. The key is to take advantage of the knowledge of Peak Oil to build a better portfolio for an energy constrained future.
(10 December 2007)
Report Says That the Rich Are Getting Richer Faster, Much Faster
David Cay Johnston, New York times
The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.
…The report is the latest to document the growing concentration of income at the top, a trend that President Bush said last January had been under way for more than 25 years.
Earlier reports, based on tax returns, showed that in 2005 the top 10 percent, top 1 percent and fractions of the top 1 percent enjoyed their greatest share of income since 1928 and 1929.
The budget office report takes into account a broader definition of income than tax returns that is known as comprehensive income. It includes untaxed Social Security benefits, welfare, food stamps and part of the value of Medicare benefits, giving a fuller picture of incomes at the bottom than tax data.
Much of the increase at the top reflected the rebound of the stock market after its sharp drop in 2000, economists from across the political spectrum said.
(15 December 2007)
WTO Director Pascal Lamy: “Capitalism Cannot Satisfy Us”
Daniel Fortin and Mathieu Magnaudeix, Challenges (English version at Truthout)
World Trade Organization Director Pascal Lamy, one of globalization’s shrewdest observers, rehabilitates the Marxist criticism of capitalism.
A man of the Left and director general of the World Trade Organization, Pascal Lamy is at the heart of globalization. His sense of things? Marxism remains pertinent as a tool for analysis of modern capitalism. His conviction? We must look for alternatives to this same capitalism.
Q: Does Marx, as a certain number of recent authors have written, remain the best thinker about contemporary capitalism?
Pascal Lamy: Not the best, because history has shown us that he was not the prophet some vaunted. But from the perspective of nonpredictive explanatory power nothing comparable exists. If one wants to analyze the globalized market capitalism of today, the essential tools reside in the intellectual toolkit Marx and some of those who inspired him created. Of course, everything is not perfect. There are stacks of criticisms to level against Marx, and he was probably a better philosopher and economic theoretician than he was a political thinker….
Q: What do you retain from Marx?
Lamy: Before everything else, the idea that market capitalism is a system based on a certain theory of value and the dynamic and the dysfunctions it may generate. A system where there are owners of capital who buy labor and holders of their own labor power who sell that. That relationship implies a theory of profit which ensues from alienation: the system has the tendency for the rich to become richer as they accumulate capital and for the poor to become poorer when they own nothing but their labor. All that remains largely true. No one since Marx has invented an analysis of the same significance. Even globalization is only a historical stage of market capitalism as Marx imagined it.
Q: But what good does it do to criticize capitalism? Isn’t it accepted by everyone?
Lamy: Market capitalism is a system that possesses virtues and quirks: efficiencies, inequality, innovation, short-termism…. Its recent financialization has brutally changed the equilibrium laboriously hammered out between capital and labor. The institutions developed to protect workers have proven ever more inadequate and ineffective
… Q: But all the same, we don’t want to throw everything in capitalism out….
Lamy: Of course not. I’d like to see us get beyond reciprocal anathematization. The Berlin wall fell close to twenty years ago. It’s time to be able to discuss reality without falling into caricature. Capitalism is even a very effective system. All the more so as it is now globalized, which produces more economies of scale. With the same capital, one may use more work in bigger batches. That certainly creates inequalities, but also it also creates purchasing power and growth. Capitalism has brought between 300 and 500 million people out of poverty in the course of the last twenty years. That’s the case in India and China, somewhat less so in Africa; it’s a reality and we mustn’t deny it. We have to be clear-headed enough to acknowledge the drawbacks, but also the advances of this system.
Q: With respect to China’s rise in power, isn’t that an instance of the sublimation of capitalism before its self-destruction at the heart of Marxist theory?
Lamy: If Marx analyzed today’s China in its reality and its plan and he talked about it with Tocqueville, he would tell him that America is ultimately very social-democratic compared to the model China incarnates. In the United States, you have a form of social assistance for the poorest people; you have food stamps; largely private contingency systems, certainly, but also some public ones for those who are most destitute. None of that exists in China.
… Q: Where is the French Left with respect to Marx?
Lamy: Let’s talk about the Left at a global level. In a phase when market capitalism is more efficient and less equalitarian than previously, the present political reality is, from a certain perspective, much more favorable for the Left. You have, moreover, events that come to corroborate the least bearable aspects of the model: either its intrinsic dysfunctions, such as the subprime crisis, or the phenomena that capitalism and its value system don’t allow us to deal with – the most obvious of those being global warming.
(6 December 2007)
