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Economics, civil unrest, and more reasons for banking disgust - Feb 25

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Rehearsals for a Civil War

James Howard Kunstler, blog
Amid the general incoherence of the Tea Party rebels and the failure of progressives to recognize the structural changes underway in a peak oil world, lies a deadly swamp of paradox where all parties may drown in the quicksand of their own muddled intentions.

The Tea Party appeals to the swelling numbers of the new former middle class angry at the sudden vanishing of their accustomed perqs and entitlements to a predictably comfortable suburban existence. They're mad at the government and hot for "liberty." But how do they propose to maintain the hyper-complexities of suburban life without taxes to pay for fixing the countless roads their lives depend on or to run the gold-plated central school districts that seem to exist solely to provide Friday night football?

... Meanwhile, the progressives led by President Obama are doing everything possible to deny the deep tectonic changes thundering through our economic arrangements. They have embarked on a campaign to sustain the unsustainable that will only aggravate and accelerate the more destructive effects of the historic changes underway. For instance, the financial crisis is nature's way of telling us that banking occupies too much space in our economy -- especially the "creative" kind of banking which thrives on innovations in fraud and swindles. Yet the progressives are shoveling the nation's accumulated savings (and way beyond that to earnings-not-yet-saved) into a handful of gigantic banks whose employees live in a separate universe of luxury, and the bail-outs only guarantee more financial mischief based on efforts to get something-for-nothing -- in the absence of an economy that turns capital investment into things of value.

Faced with the multiple threats of peak oil, the progressives are pounding billions into the automobile makers and shoveling tons of stimulus money into highway improvement projects, while the railroads we will desperately need in the future continue to be starved to death, and no effort is made to promote walkable communities -- including a federally-led reform of our insane zoning laws which mandate a suburban development outcome in every corner of the country.
(22 February 2010)




Athens: The First Domino?

Richard Parker, The Nation
The shadow of classical Greece has always loomed large over Western civilization--whether in literature, philosophy, art, mathematics, history or politics, it has been, in so many ways, the fons et origo of us all. Modern Greece suddenly seems poised to play that same outsized role, but by no means in the same civilizing way. Athens's fiscal crisis could very well ignite the next global financial crisis--just as the world hoped it might be starting a slow exit from the last one.

After meeting with fellow European leaders in Brussels in early February, where he argued the case for help in solving the hefty budget deficit he'd inherited on taking office last fall, Prime Minister George Papandreou flew home to Athens to tell his countrymen that he'd returned with a half-full cup of promises--and no assurance of the serious backing Greece needs to weather its woes. Global markets, which had been fibrillating nervously for three months about Greece's (and the euro's) financial health, skipped several beats after Papandreou's speech, after already suffering a long sell-off that wiped out much of Wall Street's shaky recovery. All eyes are anxiously casting about for Delphic signs of what Europe's finance ministers will do when they meet to hear Greece make its case again, this time in hard numbers.

The situation has the makings of an Aeschylean tragedy. If help isn't forthcoming, little Greece--whose economy is just 3 percent of Europe's GDP--could, against its will, set off a chain reaction that pulls down Portugal, Ireland, Spain, perhaps even Italy, and thereby throws Europe's, and then America's and the rest of the world's, fragile recoveries into reverse.

The crisis is, in classic Greek fashion, ripe with ironies. Papandreou came to office in October determined to clean up his country's longstanding fiscal recklessness and widespread corruption. It was he who first exposed the scope of the dilemma immediately after discovering that this year's deficit would be double what his conservative predecessors had promised. Moreover, Papandreou has consistently insisted that his government will keep the promises it has made to Greek voters and to EU auditors to bring the deficit, now almost 13 percent of GDP, down to less than 9 percent this coming year and to the EU-mandated ceiling of just 3 percent within two more. But traders and speculators, sensing the size of the task the government faces, have forced interest rates on Greek bonds to record highs, betting that the country is close to default. (The traders' role is itself ripe with ironies because Goldman Sachs and other top Wall Street firms had earlier in the decade helped Greek governments move liabilities off state budgets by constructing the same sort of offshore entities and complex derivative swaps that were at the heart of the US banking system's collapse a year and a half ago. Revelations of the deals by the New York Times generated new attacks on the Papandreou government, despite the fact that it was his government that had exposed the dealings.)..
(18 February 2010)




Our world balances on a sea of debt

Darius Guppy, the Telegraph
In 1994, there resided in the cell next to mine a certain “Tommy”. He had been imprisoned for counterfeiting Dutch Guilders to such a high standard that he had fooled the banks themselves.

As was customary among prisoners who became friends, Tommy allowed me to read his legal papers and I became fascinated by the judge’s sentencing speech, the gist of which was that his activities had been parasitical. By creating money out of thin air he had reduced the purchasing power of more deserving members of society. What would happen if everyone behaved like him?

A lot of nonsense has been written about the world’s current economic woes – about how the crash is the fault solely of the banks and, by implication, governments are blameless; and how it could all have been avoided, and can be put right, by greater financial regulation.

It is a classic example of what the philosopher Alasdair MacIntyre terms “the fallacy of managerial expertise”: an attempt by “experts” to blind us with science to justify their overpaid existences and mask their confusion. After all, not one of them was able to predict the current debacle.

...What is needed is a root-and-branch re?evaluation of that most curious of cultural inventions, money: how it is created, how it circulates, and how it can best be used to serve the interests of the community.

To begin, the experts must explain in the simplest terms how money actually works. Were one to ask the man on the street – or, indeed, most politicians and bankers – who creates the money that rules our lives they would reply “the State”. They would be wrong. It is true that governments create legal tender – the physical notes and coins that circulate in an economy – but that represents, at its highest, only 3 per cent of the total money in circulation in the global economy. It is the commercial banks, largely unaccountable and privately owned, that create the world’s money...
(20 February 2010)




Joseph Stiglitz: Bankers Made Reckless Bets on the Economy, Knowing Taxpayers Were Going to Pick up the Tab

Zach Cater, alternet
Nobel Prize-winning economist Joseph Stiglitz has served as the Chairman of President Bill Clinton's Council of Economic Advisers and Chief Economist for the World Bank. He has been a persistent critic of free-market economics, whose recent book Freefall: America, Free Markets, and the Sinking of the World Economy (W. W. Norton & Co., 2010) traces the roots of the financial crisis and details the government's flawed response. Dr. Stiglitz discussed the crash of '08 in an interview with AlterNet economics editor Zach Carter.

Zach Carter: How did we get here?

Joseph Stiglitz: Well, there are so many pieces that contributed to our getting here that it's hard to distill into something simple, but the bottom line is that the banks acted recklessly in their lending, in their gambling, in their management of risk. They made bad judgments about credit worthiness. In a sense, they failed their core societal function of allocating capital and managing risk. They misallocated capital and they mismanaged the risk. What I tried to do with the book is peel back the onion and ask – this is not the way capitalism supposed to work – why did things happen so badly? And here there are a number of factors. One of them was that the bankers had the incentive to engage in short-sighted behavior and excessive risk-taking. You have to ask, "Why is that?" And the answer has to do with problems of corporate governance and a host of other problems that I try to delineate in the book.

On the other side, though, they were allowed to get away with it. And here the issue was deregulation. We stripped away the regulations that had worked so well in the quarter century before 1980. We'd known about the potential for these problems for decades and we had figured out how to stop them, but then we stripped away those regulations. Then you have to ask why we did that, and it had to do with the ideology and with financial interests. The bankers wanted to be unrestrained and they painted the political process, shaped it to make sure they could get away with it. The economists provided some arguments for why it would be a good thing.

ZC: I want to focus on that word 'capitalism.' A lot of people who are advocates of financial reform are being described as 'populist' or 'socialist.' But it seems to me that one of the core thrusts of your book is that the system we had in place in the mid-'70s was a good system, and nobody was screaming about our socialist banking system at that time. What do you make of the current debate over the banks?

JS: What we have now is not real capitalism. I give it the name "ersatz capitalism" because what we're doing is socializing losses and privatizing gains. That's worse than real capitalism, of course, because it means that there are distorted incentives. So the banks can write these credit default swaps and crazy derivatives knowing that if things go bad, the taxpayer is going to pick up the tab. So the first point I want to make is that today's system is not real capitalism. It's gambling at the expense of the taxpayers.

The other point that I would make is about the use of the word "populism," which is used in a number of different ways. One meaning of populism is a government that responds to the concerns of the people. Of course, that is what democracy is supposed to be about, so reformers shouldn't worry about being labeled populist in that sense. But the other use of the word is much more negative in tone, and it describes a situation where political leaders promise things that are beyond the laws of economics....
(25 February 2010)
related: Freefall: Free Markets and the Sinking of the Global Economy by Joseph Stiglitz




Finger on the Scale

Patrick Deneen, Front Porch Republic
It’s often asked by more practical-minded readers “so what’s the point”? What is to be done? After all the theory, what practical recommendations can FPR offer by way of encouraging “limits, place, liberty”?

An article in this past Sunday’s “Outlook” section of the Washington Post offered a glimpse into one issue that would go a long way toward the restoration of localities and certain attendant virtues in American life today. Barry Lynn of the New America Foundation (a left-center technophiliac think tank) and author of Cornered: The New Monopoly Capitalism and the Economics of Destruction, authored a lead article in Sunday’s Washington Post noting the precipitous decline in small-scale business ownership in America over the past thirty years. In a lament that could easily be found elsewhere on FPR, he wrote,

Where the independent pharmacist counted pills, we see a CVS employee. Where family livestock farms dotted the landscape, we see immense operations run by Smithfield and Tyson. Where the buttonmakers of New York and Los Angeles sold their wares, we see the imported products of Li & Fung. Where our community bank stood, we see Bank of America. Where the local grocer marketed local fruit, we see Wal-Mart. Where the local general-merchandise store stacked jeans, we see, well, Wal-Mart again.

...Lynn notes several pieces of data that focus the mind: America is second-to-last among the world’s 77 richest nations (only leading Luxembourg) in small-business ownership, and over the past 50 years, self-employment in non-farm businesses has fallen by 50 percent.

We have seen the aftermath of these policies: the destruction of small businesses throughout America, and a corresponding economic crisis in which disconnection, irresponsibility, and the decline of accountability fostered bad behavior throughout the American economic system. As William O. Douglas wrote (cited by Lynn), “When independents are swallowed up by the trusts and entrepreneurs become employees of absentee owners,” [the result] “is a serious loss in citizenship. Local leadership is diluted. He who was a leader in the village becomes dependent on outsiders for his action and policy.”

For FPR sympathizers with a policy interest, this is one area needing sustained attention and examination and specific policy recommendations. It is an issue over which both Left (e.g., Lynn) and at least some on the Right can agree, even if specific policy recommendations are likely to be debated. However, perhaps it would not be too difficult to begin looking at systematic ways in which current policy supports concentrated economic power, and to begin its dismantling...
(23 February 2010)


Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs

Richard Teitelbaum, BusinessWeek
When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention.

Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a coverup. Geithner countered that he had acted properly to avert the collapse of the financial system.

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There’s been no accountability.”

...Janet Tavakoli, founder of Tavakoli Structured Finance Inc., a Chicago-based consulting firm, says the New York Fed’s secrecy has helped hide who’s responsible for the worst of the disaster. “The suppression of the details in the list of counterparties was part of the coverup,” she says.

E-mails between Fed and AIG officials that Issa released in January show that the efforts to keep Schedule A under wraps came from the New York Fed. Revelation of the messages contributed to the heated atmosphere at the House hearing.

“What date did you know there was a coverup?” Republican Congressman Brian Bilbray of California demanded of Geithner. Lawmakers used the word coverup more than a dozen times as they peppered Geithner with questions.

Geithner said that he wasn’t involved in matters of disclosure and that his former colleagues did the best they could. In a Jan. 19 statement, the New York Fed said, “AIG at all times remained responsible for complying with its disclosure requirements under the securities laws.”
The government has committed more than $182 billion to AIG and owns almost 80 percent of the company.

...“This is something that belongs in the public domain because it was done with public money,” Issa says. “The public has the right to know what was done with their money and who benefited from it.” Now, thanks to Issa, the list is out, and specific information about AIG’s unraveling can be learned from it....
(23 February 2010)

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