Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Policy Paradoxes in the Financial MeltdownThis posting is from James Miehls, a grad student in economics at UMass-Amherst and a member of the D&S collective.The financial meltdown has left us with a paradox of possible policy applications. It seems that any action, be it fiscal or monetary has the potential to both "fix" the current problems in the financial markets, or to make them worse. What is being ignored in all the coverage of the housing and financial market meltdowns is the issue that the future is fundamentally uncertain. Sometimes the past is the best predictor of the future, and sometimes it is not. Downward (and for that matter upward) spirals in markets only happen when investors believe that tomorrow will follow the pattern of today. The economy is affected by far too many variables to be isolated into a cause and effect model. The best way to stabilize the current financial crisis is to ignore the market impact, and intervene only in the areas where the social impact makes a lack of intervention inhumane. It is not high salaries of executives, opaque risk hidden funds, or investor ignorance that are causing the problem; it is a lack of foresight that is inherent in a capitalist system. The only real alternative is to leave the chaos of capitalism be while using the government to protect the hardest hit of the victims. We can only hope that eventually the chaos of capitalism will become so far out of control that a complete social overhaul becomes necessary. Labels: capitalism, financial crisis, housing bubble, markets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Accountability for the CrisisThis posting is by Arjun Jayadev, who teaches economics at UMass Boston and is a member of the D&S collective.The financial meltdown arising from the sub-prime mortgage crisis and the weakening dollar has affected everyone negatively and the outlook for all is grim. Or so at least the conventional story goes. 'Everyone' does not include those at the center of the crisis and who were controlling the levers of a financial system which permitted the extreme levels of risk that characterized this period. And no, one doesn’t mean the policy makers at the Federal Reserve who have rightly been castigated for allowing the real estate bubble to build by keeping interest rates too low for too long. A few observers (e.g. here and here), have noted the fact that executives in the largest financial concerns on Wall Street continued to be rewarded handsomely for their actions in a year where they actively abetted the worst financial crisis in the last decade. Some sorry accounting then, starting with Wall Street: —Bonuses in the securities industry amounted to 33.2 billion dollars—about 0.7 billion off its record year (2006). —The total compensation and benefits of the biggest firms(Citigroup Inc., Merrill Lynch & Co., JPMorgan Chase & Co., Goldman Sachs Group Inc., Bear Stearns Cos., Morgan Stanley and Lehman Brothers Holdings Inc.) grew by 10% since 2006, although revenue and profits fell across all the firms as did their stock prices. Companies actually increased the proportion of revenues which went to employee compensation, ostensibly in order to keep ‘high performing employees’ —To be sure, bonuses fell for those most directly involved for the mortgage market, but for those top executives who lost their jobs, parting was simply sweet. Stanley O’ Neal, the ex-CEO of Merrill was punished with a parting package of $161 million. Not bad for a bad years work. The LA times reports that Countrywide Financial Corp. founder Angelo Mozilo, could reap $115 million in severance-related pay if his organization is taken over. Meanwhile, on Main Street: —Households will lose $164 billion in equity due to foreclosures; —About 3 million homes will be foreclosed over the next three years leading to losses of about $350 billion; —With falling home values, neighbours will experience losses in equity of about $200 billion; Its enough to make you think that the system is unfair. Labels: Countrywide, foreclosures, housing bubble, severance pay, subprime crisis, The Fed, Wall Stree bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Heritage Foundation Still Won't Set You FreeWe just received our free review copy of the 2008 Index of Economic Freedom, the annual ode to meaningless statistics and ideological blather put out by the Heritage Foundation and the Wall Street Journal. We were very fortunate that we didn't have to spend $24.95 to purchase the report, although the shopping cart on the Heritage Foundation website seems to be broken anyway (too much freedom is a dangerous thing it seems).We'll spare you the suspense: The United States has stayed in the top ten (80.6 percent free!), after having fallen out of the top spots back in 2005. Estonia, the WSJ's poster child for freedom a few years ago has fallen from fourth place in 2005 to twelfth place today (2.8 percent less free than the US). If you missed it the first time, read John Miller's brilliant evisceration of the Index's methodology. This year, for instance, the study authors take the United States Congress to task for raising the minimum wage "which has harmed labor freedom," yet has failed to lower corporate taxes. The authors also dock points for the "intrusive nature" of government regulations like Sarbanes-Oxley, but not for the lack of controls that facilitated the current sub-prime mortgage crisis. Want to know more about the global economy? Check out Real World Globalization from our bookstore. Labels: Disaster Capitalism, Estonia, freedom, Heritage Foundation, ideology, Index of Economic Freedom, minimum wage, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Deliver Us from DavosThe Dull Compulsion of the Economic: the 12th in a series of blog postings by D&S collective member Larry PetersonAfter a week of financial turmoil unlike any seen since September 11th, 2001, or, arguably, even before that, it behooves us here at D&S to take a stab at figuring out where the hell we are. First and foremost: regardless of whether or not we’re technically in recession or not, a whole lot of folks are going to get hurt from this, and over a longer period of time than previously thought; and though it’s kind of cool, as many commentators have noted, to watch the spectacle of formerly turbo-charged advocates of “unfettered” free markets go, begging bowl in hand, to the reviled state, or even to those paragons of state and even crony capitalism, Sovereign Wealth Funds, we must consider it our primary objective to show solidarity with those who will lose jobs, get foreclosed on, or endure other, countless sufferings thanks, in no small part, to the greed and arrogance of the corporate welfare queens (though, it must be said, many ordinary people, dreaming of the joys of being landlords, or simply of finally getting their own homes in spite of lagging wages, allowed themselves to be carried away by the hype spewed by downright crooks, and even plain-vanilla bankers, as yesterday's New York Times suggests may have been the case). That said, let’s move on to an analysis of the current conjuncture. After important bond insurers’ top ratings were threatened (due, ultimately—and at a the end of a very long chain of causation—to subprime exposure) on January 18th, Asian and European markets suffered humungous losses; the fear that the ratings downgrades would result in falling prices on a cascading range of bonds, coupled with unrelenting indications that the US economy was already in recession (and, as we shall discuss in a minute, that Asian exporters were showing greater slowdowns—and hence dependency on exports to the US—than previously thought), was responsible for much of the selloff. But if this weren’t enough, a rogue trader at the French fincorp Societe Generale seems to engaged in a bit of fraud the likes of which hasn’t been seen since Nick Leeson brought down Barings Bank in the mid ‘nineties (though, the Financial Times reports that the trader, Jerome Kerviel, may not have lost the lion’s share of the 4.9 billion euros, and that the “board of SocGen lost the other 3.4 billion euros” by allowing the bogus positions to accumulate), and SocGen had to sell accordingly vast amounts of securities into falling markets to attempt to make up for the losses. This no doubt has symbolically confirmed that we have moved into a potential insolvency crisis, and that the bankruptcy of major financial institutions (which would challenge the ability of even hyper-accommodative central banks and deep-pocketed Sovereign Wealth Funds to fork out bailouts) is not as outlandish a thought after all: this is no longer simply a case of banks being unwilling to lend, or to take out loans themselves (or a liquidity crisis). This little aside was only beginning to play out this weekend, but the Federal Reserve decided to act even before this morsel was discovered in the toxic stew. With Monday being a market holiday in the US (in a strange twist of fate, Dr. Martin Luther King, whose memory was commemorated on January 21st, gave the Fed a little extra room to act), the Federal Reserve cut interest rates an astonishing .75% (a .25% bigger cut than that put in place after the terrorist attacks of September 11th), despite the fact that it was due to meet a mere week later (and financial markets have discounted another cut of at least .5% at the meeting). Markets seesawed—with huge swings, including a breathtaking one-day 600 point reversal on the Dow) all week, even as the Bush administration and Congress agreed on the outlines of a stimulus package. No one is convinced that the situation is under control. So where does it go from here? Well, there seem to be two conceivable (at least to the people in charge) ways out of the mess. One concerns the financial sector, and the other, foreign consumer markets. Regarding the former, it all comes down to getting the lending transmission mechanism unclogged. By injecting monstrous amounts of money into the banking system, the Fed is hoping that so much money will become available to the banks that they will no longer fear or even care about subprime losses that will surface for years to come. This strategy actually worked in the early 'nineties, when the Fed engineered a "yield pole," in which short term rates (which the monetary authorities control) were driven down as far as possible in response to the (much smaller) S&L crisis. In those days, such activity on the short end almost invariably increased inflationary expectations, and hence yields, on the long end; and banks, which make their money (or at least largely did so this way in those Glass-Steagall, pre-securitization days) by borrowing short and lending long, were able to recapitalize their balance sheets quickly, even as the rest of us suffered through the first of what have become normal, jobless recoveries. But today, the situation is vastly different: long rates (corresponding to expectations of future growth) are languishing, and even panicky Fed cuts in short rates are finding it difficult to keep up with the long end in the dash to zero. Meanwhile, of all things, inflation is rising at rates unseen for years. Add to this the fact that the Fed seems to have lost the game of chicken it was playing with global investors, who now seem able to force it into cutting rates to in the increasingly vain hopes of preventing a recession (thereby avoid the associated losses in sales and profits) in the same way as speculators in China force the People’s Bank to raise rates in anticipation of yet higher rates to come (i.e. if they invest more, the threat of inflation will cause the PboC to raise rates, etc.). And the monetary strategy seems to be reaching the point corresponding to that Keynes characterized as “pushing on a string:” lending money that is almost certain to end up losing value, and so is not borrowed. Hell: in annualized terms, real interest rates are negative (I know, interest rates have to be close to zero before we can start talking properly about negative real rates...): 4.1% inflation (CPI: and wholesalers seems to have had an even worse time of it) for 2007, vs. a Fed Funds rate of 3.5% now, with another big drop almost certain next week. Finally, a lot of potential lenders are scared of predatory-lending litigation, and borrowers seem reluctant to take out home equity as long as home prices seem destined to fall for a good while longer. So, on both the supply and demand side, serious impediments exist in the way of unclogging. And though key LIBOR interest rates have come down from their previous lofty position above the Fed Funds rate, "Libor, which is used to set many U.S. mortgage rates, continued to trade substantially higher than fed funds futures or the overnight indexed-swap rate, another gauge of short-term rate expectations. 'The Libor is a bit of a puzzle,' said Alistair Milne, senior lecturer in banking and finance at Cass Business School in London. 'The banks are stepping back and want to be a lot more careful. The Libor is a symptom of that, as they (lenders) are not as generous as in the past. What we are really seeing is the end of a 15-year-long boom in credit growth, especially on retail and commercial property.'" This from Pensions and Investments from January 26, 2008. Some have argued that it is misleading to focus on such things, given a globally financialized economy: rate differentials within nations, even the US, aren’t as important as those that exist between economies. That being the case, imbalances can be ironed out as finance follows the flow of trade (the US should import less, and solve its current-account deficit, whilst increased demand in Asia and even Europe allows for trade growth in the meantime). But, as the International Herald Tribune (amongst others) pointed out this week, Asian exporters have been far harder hit by the slowdown in the US than previously believed, and this has caused some economies (especially Japan’s) in the region to contract rapidly. Regional stockmarket performance reflects this: Japan’s NIKKEI has lost some 15% of its value in the last few months, and China’s Shanghai index lost 8% this week, in the largest drop there since the Asian crisis of 1998. And in Europe, both in the Euro zone and the UK, currencies are appreciating so fast that growth is certain to slow (both the Eurozone and UK are far more “open” economies, as measured by trade/GDP than the US, and more prone to slowdown as a result of currency appreciation). And this is assuming no further fallout from the subprime/securitization crisis. The global elite have been meeting in Davos all week, and there have been calls from the likes of Bill Gates for a new kind of capitalism, one which uses the state to direct demand toward initiatives towards the poor (and hitherto nonproductive) parts of the world that will increase "human capital"—God, I hate that phrase—and so end up paying for themselves via increased productivity and, eventaually, increased demand. I've heard talk like this before: about ten years ago, Rosabeth Moss Kanter of Harvard Business School wrote a nauseating piece in The Economist (at least she picked the right place for it) in which she called for the state to step aside and let the internet elite run global development initiatives. One writer to the editor, in turn, noting the defects of Microsoft's products, monopoly rent extraction and cutthroat tactics, opined that we should, instead, let them "fix hell when they get there." I have a feeling that the world economy may be turning into the very hell these worthies would defend us from. Pray for an increasingly unimaginable economic recovery, comrades…or a revolution. Labels: Davos, securitization, Sovereign Wealth Funds, subprime crisis, The Fed, World Economic Forum Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). D&S editor on the airAmy Gluckman, co-editor of Dollars & Sense, will be one of the featured guests on Your Call, a daily, live talk program on KALW-FM in San Francisco. Amy will be part of the weekly Media Roundtable, to talk about what's left out of the mainstream media's economic coverage.If you're in the Bay Area, be sure to tune in: Friday, Jan. 25, from 11 am-noon, on 91.7 FM. If you're not in the SF area, you can listen live, or download the podcast. Labels: Amy Gluckman, KALW, mainstream media, media criticism, Your Call Radio Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Economic Stimulus EssentialsMore from the Economic Policy Institute:Since last summer, the Economic Policy Institute has warned that the economy could go into a recession and called for consideration of an economic stimulus package. This week, President Bush has delivered a major economic address, Congressional Democrats have announced they will take action on an economic stimulus package, and the Hamilton Project is holding a panel discussion on this issue. EPI is developing a comprehensive stimulus proposal, which will be released soon. EPI economists, including EPI's president Lawrence Mishel, who was one of the economists participating in the economic forum with Speaker Pelosi on December 7, are available to discuss the current condition of the economy and the principles that should shape the stimulus package: 1) Do it now because a) there is ample evidence that the economy has weakened and may get weaker; and b) the stimulus, once passed, will not take effect for several months. 2) Do it right — get the money to the people and public investments that will pump it back into the economy: a) Accelerate federal investments on the nation's needs — repairing bridges, roads and highways; building and modernizing our children's schools; and promoting energy efficiency and independence; b) Emergency assistance to tax-strapped states, so they won't have to cut services, lay off workers, or raise taxes on the middle class; c) Targeted tax relief for the hard-pressed working families who need it most and will quickly spend the money on the necessities of life. 3) And do it on a scale sufficient to make a difference — $140 billion (1% of Gross Domestic Product) is a moderate first step. EPI's approach is distinctive because it would simultaneously stimulate the economy and address urgent needs by accelerating public investments. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AFL-CIO Proposes 5-Point Economic Stimulus PlanFrom the AFL-CIO Blog:Unemployment is climbing. The stock market is dropping. The housing boom is bust. Corporate earnings are tanking. The nation’s economy is in the worst shape it’s been in years. Maybe even headed toward recession. Working families are worried. Today, the AFL-CIO outlined several proposals to develop a short-term stimulus package that 'offers the biggest bang for the buck' and began to address the underlying causes of today's economic anxiety. Read more... Labels: AFL-CIO, economic stimulus, recession, taxes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bush tax rebate: not effective, not fairThis from the Economic Policy Institute:With an economic slowdown looming, the Bush administration has proposed a $100 billion tax rebate as part of an overall stimulus package for the slowing U.S. economy. But 70% of the rebate would go to the top 40% of earners and would exclude most low-income families, who are most in need and most likely to spend the money immediately. This week's Economic Snapshot examines the flawed proposal. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
