The Fed Must Counteract Asset Bubbles

by Dollars and Sense

From the folks at SAFER (The Economists' Committee for Stable, Accountable, Fair, and Efficient Financial Reform), which is a project of the Political Economy Research Institute. Hat-tip to LF.

The Federal Reserve Must Counteract Asset Bubbles

Dean Baker, Jane D'Arista and Gerald Epstein
Center for Economic Policy Research (CEPR) and Political Economy Research Institute
November 24, 2009

The Federal Reserve Board's main job is to use its monetary policy tools to stabilize the U.S. macro-economy. To this end, it must take responsibility for recognizing and counteracting asset bubbles before they grow large enough to pose a danger. Both the stock bubble of the 90s and the housing bubble of this decade were easily recognizable based on the fundamentals in these markets. In both cases there were sharp divergences from long-term trends with no plausible fundamentals-driven explanation. For example, the $8 trillion housing bubble which grew up in years 1996-2006 fueled by huge piles of debt, leveraged securities and massive banker bonuses, could have been easily recognized. There was a sudden acceleration of housing prices beyond inflation rates, departing from a hundred year long trend. There was no unusual increase in rents, demonstrating clearly this run-up was not driven by fundamentals. Yet the Federal Reserve, first under Alan Greenspan and then under Ben Bernanke, did nothing to counter-act this bubble that has now burst and brought down our economy.

The Fed's failure to do anything about the bubble is an egregious error, not just because the bubble was easily observable, but also because the Fed has many tools at its disposal to allow it to limit asset bubbles while achieving its other important monetary policy goals, such as achieving full employment and price stability. The Fed must use these tools now to counteract asset bubbles as they develop.

First and foremost, the Fed should try to counteract asset bubbles by informing the markets and the public. This involves using its research staff to carefully document the evidence of the existence of a bubble and its potential dangers to the economy as a whole and to various sectors. The Fed should use its public platforms to widely disseminate this information. To ensure that the Fed is appropriately monitoring these dangers, it should make periodic reports to Congress, to be disseminated widely, on emerging asset bubbles. This information will put the investing community and public on notice that the Federal Reserve has the asset bubble in its sights and may be preparing to take action against it.

In addition, when appropriate, the Fed should use other tools under its control. These include:

• Imposing margin requirements on purchases of financial instruments. For example, the Fed should extend margin requirements now legally applicable to purchases of stocks to all major credit market instruments such as mortgage- and other asset-backed securities.


• Increasing regulatory scrutiny of banks and other financial institutions whose lending is supporting the growth of the bubble. This increased scrutiny could be backed up by:


• Placing limits on loans to other financial institutions. This extension of existing law would reduce the level of inter-connectedness that fuels contagion in the system.


• And the Fed can implement new tools to discourage bubbles in a more automatic and systematic way. In particular, the Federal Reserve should consider implementing a set of asset based reserve requirements:
  


• Asset based reserve requirements (ABRR) are a systematically designed set of margin requirements on financial assets that could be raised on particular assets as price bubbles develop. To be fully effective, these would be designed to apply to all financial institutions buying these assets, and not just banks.

Finally, the Federal Reserve can also raise interest rates as a tool to attack asset bubbles, recognizing the cost to the larger economy. Used properly, a rise in interest rates, with the deflation of an asset bubble as an explicitly stated target, is likely to prove very effective. But these interest rate increases must be care-fully designed to be consistent with the Federal Reserve's goals of maintaining full employment with reasonable degrees of price stability.

If the Fed refuses to take responsibility for counteracting systemically dangerous asset bubbles, then Congress should consider imposing a rule on the Fed that would require it, for example, to raise leverage or margin requirements on a given group of assets when any one or more of them rises above the historical norm and/or by more than 10% a year (or 2 1/2% a quarter). The prospects of such a rule would likely get the Federal Reserve's attention rather quickly.

References:
Dean Baker, Investigating the Collapse: Looking for the Killer We Already Know, Center for Economic Policy Research, June 2009.

Jane D'Arista, Leverage, Proprietary Trading and Funding Activities, SAFER Policy Note # 1, November, 2009.

Thomas I. Palley, A Better Way to Regulate Financial Markets: Asset Based Reserve Requirements SAFER Policy Briefs # 15, November, 2009.

Labels: asset bubbles, Dean Baker, Federal Reserve, Gerald Epstein, Jane D'Arista, SAFER

 

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11/27/2009 04:18:00 PM 1 comments

 

Millionaires and Mass Transit

by Dollars and Sense

Happy Thanksgiving! Now that the bird is in the oven, I have time for a quick post.

This is from a nice blog called "Crash Course: Edward Ericson's annoyingly didactic musings on the Financial Meltdown" over at Baltimore's City Paper. I always liked Baltimore, and now I have one more reason. Hat-tip to Choire over at The Awl (my new favorite site). Choire picked the clutch quote: "In a properly functioning capitalist economy, rich people don't 'create jobs' for workers; workers, upon having jobs, create rich people."

The Sun has some predictable drivel today regarding the state's all-important "millionaire" head-count. Seems it's gone down. By 30 percent! And this is a terrible thing! And it's all because of taxes and Democrats!

Goddamn Democrats.

As the Sun reports, last year the stated number of "millionaires" in the state, for tax purposes, was 4,910. The year before that it was 7,067. The drivel part comes next:

Sen. David R. Brinkley, a Frederick County Republican on the Budget and Taxation Committee, acknowledged that some taxpayers fell to lower income brackets because of the economy but insisted that some fled the state's higher taxes. As a financial planner, he said, he advised one millionaire client to move to Florida.

Way to advise there, Sen. Brinkley!

The problem with the story is it takes at face value Brinkley's claims—just as the media usually does—that slightly higher tax rates on wealthy people cause terrible unintended consequences for normal people. This is not entirely the reporters' fault; one can't light a Cohiba with a $100 bill these days without getting smoke in the eyes of half a dozen "economists" who'll insist that lower taxes on the rich are always the solution to every problem. But the story lacks context and carries no challenge to a crazy theory that's embedded in the criticism of tax-the-rich policies.

First, the context. The 7,067 millionaire count from 2007 represents about .3 percent of all state filers. The 4,910 count from 2008 is about .2 percent. Statistically, about .25 percent of American filers admit to $1 million or more in income. So Maryland's numbers are still in line with national norms.

But these numbers represent a fraction of those who actually netted $1 million or more.

We know this because the IRS, in a roundabout way, estimated what it calls the "tax gap." It totals about $300 billion a year—or it did, anyway, last time they calculated, in 2001.

Tax lawyers like to say the poor cheat and the rich merely avoid. The 2001 figures suggest that the rich cheat plenty, too, with more than $110 billion in missing income—tax receipts imputed to non-farm business, rents and royalties, sales of business property, and the like. These are not all millionaires, but they are not EITC filers, either. And since these figures don't count the money stashed in secret accounts in the Cayman Islands and Zurich—all of which is incorrectly assumed to be "legal" in this exercise—they likely understate the amount of tax cheating that the millionaire class does.

Critics of the millionaire tax say they've never heard of a poor man hiring a worker. Only the rich do that; therefore, to render the wealthy less so by taxation is to destroy jobs.

The theory presumes that the wealthy hire people out of charity. In this model, jobs are bestowed upon lucky workers by the industrious entrepreneur, who derives his own wealth from some magical practices (having nothing to do with the workers he may hire) which are anyway unfathomable to outsiders.

To hear self-proclaimed capitalists make this argument is irritating, because it suggests they don't understand how our economic system is supposed to work. They have the process exactly backwards.

In a capitalist system, investors make money not despite hiring workers, but because they hire workers who, if they are adequately managed, create value in excess of the wages and benefits they are paid. This value is called "profit," and the business' owner gets to keep that, after paying taxes.

In a properly functioning capitalist economy, rich people don't "create jobs" for workers; workers, upon having jobs, create rich people.

That's how the system works, in theory.

But the reality is different from the theory. In today's marketplace, the super-rich have become richer in large part by destroying jobs. They amass staggering wealth by gambling, and fraud, and they depend very dearly on government policies (especially very low taxes on so-called "capital gains") to protect what they have and allow them to grab more. In "capitalism" as it is actually practiced today, jobs really are a kind of charity, often superfluous to the amassing of multibillion dollar fortunes.

Today's millionaires and billionaires make their money by creating contracts—and a lot of those are, at their core, tax dodges. Consider the "lease-back" scam that gained popularity in the late 1990s.

In a lease back, a government entity—typically a town, county, or utility cooperative—agrees to lease its physical asset to a for-profit corporation (usually a bank or insurance company), and then pay them to "lease back" the asset. In this way, municipal sewers, power plants, subway trains, and fleets of garbage trucks have found their way onto the books of financial services companies that have no use for them, except as tax write-offs. They share this windfall with the government entities to entice them into the deal, leaving as the only losers the rest of the tax-paying citizens. Brokers in these deals typically receive a huge chunk of the expected proceeds up front—tens of millions of dollars—for arranging the contracts.

The deals were always fraud, and now some of them are coming back to bite the municipalities and non-profits that made them, while leaving the bankers unscathed. This week's BusinessWeek cover story explains this in depth, discussing derivative contracts sold to Detroit and reprising the saga of the Hoosier Energy Rural Electric Cooperative's deal with John Hancock Financial Services, which was previously unearthed by Gretchen Morgenson of the New York Times. As BusinessWeek writes:

Around the same time the Hoosier agreement was finalized, the IRS began cracking down on leaseback deals. The federal agency in a memorandum called them a "sham" that lacked any business purpose beyond tax evasion and amounted to a circular exchange of assets and cash. Legally speaking, a transaction that merely reaps tax rewards and has no other economic purpose is often considered an abusive tax shelter. Although the IRS hasn't ruled on Hancock's tax breaks, U.S. District Court Judge David F. Hamilton concluded in an opinion last fall that they looked "abusive." Hancock says it believes it's entitled to the tax benefits.

Hancock is now trying to get out of the contract, and that could cost Hoosier $120 million. The small utility is raising electric rates and deferring maintenance and environmental upgrades on its power plants in case it has to pay. The guys who wrote the 3,000-page contract "earned" $12 million from the deal.

Similar deals are costing other municipalities more than money, BusinessWeek says:

In recent years the Washington Metropolitan Area Transit Authority tied up a third of its subway fleet—almost 300 cars, some 30 years old—in a series of pacts with investors, some of which required keeping the same equipment running until 2014. To avoid violating the terms, the transit authority rejected a 2006 recommendation by the National Transportation Safety Board (NTSB) to replace or retrofit older cars. The NTSB warned at the time that in the event of a crash the old cars posed a higher risk of injury to passengers than newer models. One of the old cars was involved in a wreck in June that killed nine people. A spokeswoman for the transit authority said it lacks the funds to replace the cars.

Of course, this would probably not trouble many of the alleged 2,157 alleged "millionaires" who allegedly might have left Maryland because of an alleged income tax on their honestly-reported, honestly-earned income.

Everyone knows mass transit is for peasants.

Read the original post.

Labels: Baltimore, Crash Course, Edward Ericson, mass transit, millionaires, public transit, rich people, The Awl

 

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11/26/2009 01:56:00 PM 0 comments

 

Bank Failures Send FDIC Into the Red

by Dollars and Sense

There are no green shoots at the FDIC, only red ink. And it's going to get worse before it gets better.

From the New York Times:

The government-administered insurance fund that protects depositors fell $8.2 billion into the red for the first time since the fallout from the savings-and-loan crisis of the early 1990s as the pace of bank failures accelerated in the third quarter.

...

Federal Insurance Deposit Corporation officials warned in October that the deposit insurance fund had been depleted, but Tuesday's third-quarter report card on the banking industry marked the first time that hard numbers had been released. Even amid early signs that the economy is recovering, the report suggested that the country's 8,100 lenders remain in fragile condition.

So far in 2009, the FDIC has seized and sold 124 problem banks. Despite booming trading profits posted by some of the larger banks, the bad loan portfolios of zombie banks weigh like a nightmare upon the living.

CNN Money reports that the FDIC has hiked up its list of "problem banks" from 416 to 562 just in the last quarter.

The Wall Street Journal reports that FDIC head Sheila Bair stated

"We do obviously have a lot more banks that will close this year and next," Bair said, adding the failures "will peak next year and then subside."

Labels: bank closures, bank failures, FDIC, FDIC fund, Sheila Bair

 

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11/24/2009 11:05:00 AM 0 comments

 

Economists Urge Passage of Health Reform

by Dollars and Sense

From the Center for American Progress Action Fund

In Letter, Economists - Including 3 Nobel Laureates - Say Passing Health Reform Is "Critical To The Nation's Economic Growth And Prosperity"

November 24, 2009

Dear President Obama and Members of Congress,

Responsible reform will help slow the growth of health care spending and cover the uninsured - both of which are critical to the nation's economic growth and prosperity.

Our current health care system is riddled with inefficiencies. We spend much more per capita on health care than do other developed nations. Yet we don't do as well as these nations on four basic indicators of health care performance: coverage, health outcomes, cost control and choice of providers. According to a recent report by the Council of Economic Advisers, reducing the inefficiencies in our health care system could reduce health care spending by as much as 5 percent of GDP without compromising care outcomes and choice.

A more efficient health care system would free up resources that could be used to produce other goods and services, and to invest in the future. That would promote economic growth and jobs, along with higher wages and living standards.

Health care reform is also essential to preventing damaging and unsustainable increases in the federal budget deficit. Escalating health care costs are projected to be the primary driver of the deficit's future growth. Growing federal budget deficits mean higher interest rates, which will translate into less investment, slower growth, fewer jobs and lower living standards. If health care costs continue to climb at current rates, the deficit could eventually become so large that the government would be unable to borrow even at much higher interest rates. At that point, the nation would confront a fiscal emergency, forcing deep cuts in other government spending and significant increases in taxes to limit the deficit and prevent an outright default on government debt and a collapse of the dollar. Health system reform that curbs the growth of health care costs now can head off this future fiscal crisis and its painful ramifications.

Covering the uninsured will also yield significant economic benefits: improved health, reduced mortality, a more productive workforce and higher standard of living. More workers will be able to work, and those who are working will be able to work longer without disability. Ending the losses that health care providers incur from treating the uninsured will eliminate cost-shifting to their insured patients, and increase the quality of care they receive. Expanding coverage will reduce the financial disruption and bankruptcy caused by unexpected medical expenses. And expanding insurance options will increase the flexibility of the labor market by allowing workers to change jobs without fear of losing their insurance coverage.

The ethical case for reforming our health care system is compelling. So is the economic case. Enacting responsible health care reform now is essential to putting the economy on a sustainable path to a more prosperous future.

Signed,

Dr. Henry Aaron, Senior Fellow, Economic Studies, Bruce and Virginia MacLaury Chair, The Brookings Institution

Dr. George Akerlof, 2001 Nobel Laureate, Koshland Professor of Economics, University of California-Berkeley

Dr. Kenneth Arrow, 1972 Nobel Laureate, Joan Kenney Professor of Economics and Professor of Operations Research, Stanford University

Dr. Susan Athey, 2007 Recipient of the John Bates Clark Medal for the most influential American economist under age 40; Professor of Economics, Harvard University

Dr. Dean Baker, Co-Director, Center for Economic and Policy Research

Dr. Linda Blumberg, Senior Fellow, Urban Institute

Dr. Clair Brown, Professor of Economics, and Director, Center for Work, Technology, and Society, University of California, Berkeley

Dr. Len Burman, Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School of Public Affairs, Syracuse University

Dr. David Cutler, Professor of Economics, Harvard University

Dr. John Holahan, Director, Health Policy Center, Urban Institute

Dr. Genevieve M. Kenney, Senior Fellow, Health Policy Center, The Urban Institute

Dr. Frank Levy, Rose Professor of Urban Economics, Department of Urban Studies and Planning, MIT

Dr. Peter Lindert, Distinguished Professor of Economics, University of California-Davis

Dr. Eric Maskin, 2007 Nobel Laureate, Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study, Princeton University

Dr. Catherine G. McLaughlin, Director, Economic Research Initiative on the Uninsured at the Department of Health Management and Policy, University of Michigan

Dr. Richard Murnane, Juliana W. and William Foss Thompson Professor of Education and Society, Harvard University

Dr. Marilyn Moon, Vice President and Director, Health Program, American Institutes for Research

Dr. Matthew Rabin, 2001 Recipient of the John Bates Clark Medal for the most influential American economist under age 40; Edward G. and Nancy S. Jordan Professor of Economics University of California-Berkeley

Dr. James B. Rebitzer, Professor and Chair, Business Policy and Law Department, Boston University School of Management

Dr. Michael Reich, Professor of Economics and Director of the Institute for Research on Labor and Employment at University of California- Berkeley

Dr. Thomas Rice, Professor, School of Public Health, University of California-Los Angeles

Dr. Laura Tyson, S. K. and Angela Chan Chair in Global Management, Haas Business and Public Policy Group, University of California-Berkeley

Dr. Paul N. Van de Water, Senior Fellow, Center on Budget and Policy Priorities

Dr. Kenneth Warner, Dean of the School of Public Health and Avedis Donabedian Distinguished University Professor of Public Health, University of Michigan

Avedis Donabedian Distinguished University Professor of Public Health

Dr. Elliot K. Wicks, Senior Economist, Health Management Associates

Dr. Stephen Zuckerman, Senior Fellow, Heath Policy Center, The Urban Institute

###

Labels: Economists, health care, health care reform, national health insurance

 

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11/24/2009 10:54:00 AM 1 comments

 

Tax Cuts and the California Education Crisis

by Dollars and Sense

From Peter Phillips, founder of Project Censored:

The Higher Education Fiscal Crisis Protects the Wealthy

Police are arresting and attacking student protesters on University of California (UC) campuses again. "Why did he beat me I wasn't doing anything," screamed a young Cal Berkeley women student over KPFA radio on Friday evening November 20. Students are protesting the 32% increase in tuition imposed by the UC regents in a time of severe state deficits. The Board of Regents claims that they have no choice. Students will now have to pay over $10,000 in tuition annually for a public university education that was free only a few decades ago.

The corporate media spins the tuition protests as if we are all suffering during the recession. For example, the San Diego Union Tribune November 20 writes, "These students need a course in Reality 101. And the reality is that there is virtually no segment of American society that is not straining with the economic recession. With UC facing a $535 million budget gap due to state cuts, the regents have to confront reality and make tough choices. So should students."

Yet, the reality is something quite different. Our current budget crisis in California and the rest of the country has been artificially created by cutting taxes on the wealthiest people and corporations. The corporate elites in the US, the top 1% who own close to half the wealth, are the beneficiaries of massive tax cuts over the past few decades. While at the same time working people are paying more through increased sales and use taxes and higher public college tuition.

The wealthy hide their money abroad. Rachel Keeler with Dollars & Sense reports that over the years, trillions of dollars in both corporate profits and personal wealth have migrated offshore in search of rock-bottom tax rates and the comfort of no questions asked. Offshore banks now harbor an estimated $11.5 trillion in individual wealth alone, and were a significant contributing factor to the international economic downturn in 2008.

According to the California Budget Project, tax cuts enacted in California, since 1993, cost the state $11.3 billion dollars annually. Had the state continued taxing corporations and the wealthy at rates equal to those fifteen years ago there would not be a budget crisis in California. Even though a budget deficit was evident last year, California income tax laws were changed in February of 2009 to provide corporations with even greater tax savings--equal to over $2 billion per year. California is similar to the rest of the country where the wealthy and corporate elites enjoy economic protection through increased costs to working people.

Higher education has been cut in twenty-eight states in the 2009-10 school year and further, even more drastic cuts, are likely in the years ahead. California State University (CSU) system is planning to reduce enrollments by 40,000 students in the fall of 2010. The CSU Trustees have imposed steep tuition hikes and forced faculty and staff to take non-paid furlough days equal to 10% of salaries.

The students who are protesting tuition increases know they are being ripped off. They know that we are bailing out the rich with hundreds of billions dollars for Wall Street and massive budget cuts for the rest of us. The corporate media doesn't explain to over-taxed working families how they are paying more while the rich sock it away.

The current economic crisis is a shock and awe process designed to undermine low-cost higher education, force labor concessions from working people and protect the wealthy. We need higher taxes on the corporations and the top 1%, combined with free public college education and tax breaks for working families. And, we must have a media that tells us the truth about inequality and wealth. A true economic stimulus increases spending from the bottom up not the top down.

Peter Phillips is a professor of sociology at Sonoma State University, President of Media Freedom Foundation, and recent past director of Project Censored.

Daily News at: http://mediafreedom.pnn.com/5174-independent-news-sources
Validated News & Research at: http://www.mediafreedominternational.org/
Daily Censored Blog at: http://dailycensored.com/
Project Censored: http://www.projectcensored.org/

Labels: California, protests, Student protests, tax evasion, Tuition

 

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11/24/2009 10:14:00 AM 2 comments

 

On the Stimulus

by Dollars and Sense

Paul Krugman's column in today's New York Times is on the stimulus and the deficit, and how Wall Street is scaring the Obama administration into not doing the right thing with a second stimulus to create jobs.

This article from Saturday's Times indicates that there's now a consensus among economists that the stimulus was a good idea (and that more would be better). (Today's Times, however, has an article that worries about U.S. government debt repayments.)

And the lead article on our website, John Miller's "Up Against the Wall Street Journal" column, argues that the deficit isn't as worrisome as the alternatives.

And here is a piece on these topics by Edward Harrison, guest-blogging at Naked Capitalism, arguing for a focus on job-creation--direct if possible.

Labels: deficit, Edward Harrison, John Miller, Naked Capitalism, Paul Krugman

 

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11/23/2009 01:32:00 PM 0 comments

 

No Need to Read Sarah Palin

by Dollars and Sense

Rudolph Delson over at The Awl has read it for you, in a real-time blog reading this weekend, with fabulous comments from The Awl's witty subscribers.

My favorite bit from Saturday's posts: Delson compares the cover of Dave Eggers' A Heartbreaking Work of Staggering Genius ("The Memoir that Began the Decade") with the covor of Palin's over-hyped memoir, Going Rogue ("The Memoir that Ended the Decade").





Here's what he has to say:

So. What we have here on the dust jacket of the last best-selling memoir of the decade is a photograph of Sarah Palin.

She is wearing a red zipper jacket (of some unknowable fabric blend) and a tri-color flag pin (from some unknowable metal alloy). She is gazing left and beaming brightly (and something bright is beaming back at her, illuminating her face with a soft and unnatural glow). The photographer must have been crouching when this photograph was snapped, must have been aiming the camera upward at Palin, because the horizon behind Palin is low in the frame, which makes Palin seem to tower down from blue and optimistic heavens. The effect is worshipful.

Or, the effect is mock-worshipful: The last memoir to feature this much gaudy red fabric, this many maudlin blue clouds, was A Heartbreaking Work of Staggering Genius.

And so, before even opening the book, I am wondering whether Palin is being lampooned. HarperCollins, her publisher, is headquartered at 10 East 53rd Street, New York, New York. This means that the editors and designers and publicists who have spent the last dozen Monday mornings ushering Going Rogue into print have also spent the last dozen Saturdays walking the variegated streets of Brooklyn and shopping the encyclopedic stores of Manhattan, have spent the last dozen Sundays reading only pertinent magazines and eating only well-researched meals. In other words? In other words, these people at HarperCollins—even the dullest of them—are not unsophisticated. They are versed in the national semiotics, are familiar with the elements of portraiture. They know that this photo of Palin is mocking. They know this photo will make half the world recoil, or snort. And yet no one at HarperCollins stopped Sarah Palin from being made a laughingstock by her own dust jacket.

And here is one of the witty Awl commenters had to say:

So you;'re saying the decade began with a self-indulgent half-true memoir by a character with a victim complex put upon by a society that doesn't understand him while he self-consciously manipulates a cult following and that it ended with a self-indulgent half-true memoir by a character with a victim complex put upon by a society that doesn't understand her while she self-consciously manipulates a cult following?

Read the full live blogging session (which continued today).

For less snarky coverage of Palin, check out Frank Rich's column in today's New York Times. But I found The Awl more entertaining.

Ok--so this post has nothing to do with economics. So here is my economics observation: Last Wednesday, D&S had a fundraiser in New York City, at the Graduate Center for Worker Education of Brooklyn College. The speakers (who were both fantastic) were Saru Jayaraman, co-director of Restaurant Opportunities Centers United (www.rocunited.org), which organizes immigrant restaurant workers, and Michael Zweig, professor of Economics at SUNY Stonybrook, director of the Center for Study of Working Class Life.

I didn't want to bring down the level of discourse in the discussion period by asking about Palin, but I was tempted to ask Mike Zweig what he thought about Palin's taking on, as part of her efforts to present herself as an ordinary person, the mantle of the working class. She emphasizes in the book (I've read) that she and Todd have worked blue-collar jobs, and have been union members. That the kinds of policies she advocates are uniformly bad for workers and (especially) union-members doesn't seem to matter.

But this observation is much blander than what you will find at The Awl or in Frank Rich's column--I encourage you to check them out.

—CS

Labels: Dave Eggers, Frank Rich, Rudolph Delson, Sarah Palin

 

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11/22/2009 08:06:00 PM 0 comments

 

The Future of Economics (BBC Business Daily)

by Dollars and Sense

The BBC radio program Business Daily had a good segment on the future of economics, with good discussions of Keynesianism and behavioral economics (though not quite enough on heterodox approaches). The main off note (to my mind) was the bit with Michael Sandel, with his emphasis on the "normative" foundations of economics. I don't think economics needs to rediscover its ethical foundations (in Adam Smith) as much as it's political foundations (in Marx). But otherwise I thought this was worth a listen.

Listen to it here.

Labels: economics, economics profession, heterodox economics

 

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11/22/2009 10:51:00 AM 0 comments

 

Growing CA Student Protests Over Tuition Hikes

by Dollars and Sense

Student protests against the decision to hike student fees by 32% have spread from UCLA across the University of California system.

The Indybay citizen media site has some of the most up-to-date info on the protests:

11/20 7am: At least 40 students have occupied Wheeler Hall on the UC Berkeley campus and are asking supporters to come out to the hall to show support. UC Police have surrounded the building as a "crime scene".

On Thursday, November 19th, the University of California regents approved a 32% increase in undergraduate fees, pushing fees to over $10,000 a year for the first time. Student regent Jesse Bernal was the only vote in opposition. Protests, including the occupation of four buildings, have taken place November 18th and 19th at UCLA, UC Berkeley, UC Santa Cruz, UC Davis, San Francisco State and San Francisco City College. Students occupied Campbell Hall at UCLA, Kresge Town Hall and Kerr Hall at UC Santa Cruz, and Mrak Hall at UC Davis.

On Wednesday at UCLA, one protester was reportedly arrested after police struck students with batons and another person was reportedly tasered.

About a hundred students were arrested on Thursday at UC Davis. UCSC's Kresege Town Hall and Kerr Hall are the only buildings that remained occupied Thursday evening.

Labels: California, protests, Student protests, Tuition, UCLA

 

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11/20/2009 01:42:00 PM 0 comments

 

UCLA Students Protest 32 Percent Tuition Hike

by Dollars and Sense

Students at UCLA have taken to the streets and occupied buildings in protest of an announced tuition hike of 32 percent. At least 14 protesters have been arrested so far.

Several students report being tased by police, according to the Daily Bruin.

Labels: California, protests, Tuition, UCLA

 

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11/19/2009 01:37:00 PM 4 comments

 

WTO Says Brazil Can Saction US Over Cotton

by Dollars and Sense

The World Trade Organization has ruled that Brazil may impose trade sanctions against a variety of U.S. exports in a 9-year old complaint about U.S. government subsidies for cotton farmers.

From the wires:

The formal move at the WTO's dispute settlement body (DSB) brought Brazil one step closer to retaliating against the United States, the world's biggest cotton exporter, in the highly sensitive 9-year-old row.

The reduction of rich countries' cotton subsidies is seen by developing countries as the litmus test of efforts to reform the world trading system in the WTO's Doha round, with African producers in particular demanding radical change.

Brazil's request to go ahead and impose sanctions, following an award by WTO arbitrators on August 31, responds to the U.S. failure to comply with earlier WTO rulings condemning the subsidies, which distort the world market for cotton, hurting farmers in poor countries.

But U.S. WTO diplomat Juan Millan told the dispute body that Washington did intend to comply with the rulings and so Brazil would not need to levy the sanctions.

"While the United States understands that the DSB will today be authorizing the suspension of concessions or other obligations, we do not believe that it will be necessary for Brazil to exercise that authorization," he said in a statement.

He said imposing sanctions could hurt the economies of both the United States and Brazil.

SCALE OF RETALIATION

The arbitrators allowed Brazil, the second biggest cotton exporter, in some circumstances to "cross-retaliate" against goods other than cotton, or even in services or intellectual property such as patents on drugs. to exercise that authorization," he said in a statement.

One source at Brazil's WTO mission said that any retaliation would not take effect until after that consultation concluded.

Meanwhile Brazilian officials are calculating the scale of any retaliation on the basis of a formula set by arbitrators.

The arbitrators allowed Brazil to impose sanctions worth $147.3 million a year for subsidies such as marketing loans and counter-cyclical payments that the WTO had previously found hurt Brazil's own industry.

In addition they allowed it to impose a variable amount to compensate for prohibited export credit guarantees known as GSM 102 payments, depending on the size of those payments.

For the fiscal year ended September 2006, that compensation would be $147.4 million, making total retaliation of around $300 million, but at the time of the arbitration award Brazil said it would be entitled to about $800 million in sanctions this year.

The Brazil mission source told Reuters that the United States had just provided data on the prohibited export subsidies for the fiscal year ended September 2008, but this now needed to be analyzed.

Labels: Brazil, Cotton, Subsidies, trade policy, WTO

 

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11/19/2009 12:52:00 PM 1 comments

 

A Better Way to Regulate Financial Markets

by Dollars and Sense

From sometime D&S author Thomas Palley, in the Financial Times's Economists' Forum series:

A better way to regulate financial markets: Asset based reserve requirements

By Thomas Palley | November 10, 2009

There is widespread recognition that the financial crisis which triggered the Great Recession was significantly due to financial excess, particularly in real estate lending. Now, policymakers are looking to reform the financial system in hope of avoiding future crises. But like the drunk who looks for his lost keys under the lamppost because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place.

There is a better way to regulate financial markets through asset based reserve requirements which would extend margin requirements to a wide array of assets held by financial institutions. ABRRs are easy to implement, use the tried and tested approach of reserve requirements, are compatible with existing regulation (including capital standards), and would fill a hole regarding adequacy of financial policy instruments.

The toleration of periodic bouts of financial excess over the past two decades reflects profound intellectual failure among central bankers and economists who believed inflation targeting was a complete and sufficient policy framework. It also reflects lack of policy instruments for directly targeting financial market excess. With central banks relying on the single instrument of short-term interest rates, this supported the argument using interest rates to target asset prices would inflict large collateral damage on the rest of the economy. ABRRs offer a simple solution to this problem by providing a new set of policy instruments that can target financial market excess, leaving interest rate policy free to manage the overall macroeconomic situation.

ABRRs require financial firms to hold reserves against different classes of assets, with the regulatory authority setting adjustable reserve requirements on the basis of its concerns with each asset class. One concern may be an asset class is too risky; another may be an asset class is expanding too fast and producing inflated asset prices.

By obliging financial firms to hold reserves, the system requires they retain some of their funds as non-interest-bearing deposits with the central bank. The implicit cost of forgone interest must be charged against investing in a particular asset category, reducing its return. Financial firms will therefore reduce holdings of assets with higher reserve requirements, and shift funds into other relatively more profitable asset categories.

The effectiveness of this approach requires system-wide application. If applied only to banks, ABRR would simply encourage lending to shift outside the banking sector. To succeed, reserve requirements must be set by asset type, not by who holds the asset.

A system of ABRRs that covers all financial firms can increase the efficacy of monetary policy. Most importantly, it enables central banks to target sector imbalances without recourse to the blunderbuss of interest rate increases. For example, if a monetary authority was concerned about a house price bubble generating excessive risk exposure, it could impose reserve requirements on new mortgages. This would force mortgage lenders to hold some cash to support their new loans, raising the cost of such loans and cooling the market.

A similar logic holds for stock market bubbles. If a monetary authority wanted to prevent stock market inflation from generating excessive consumption, it could impose reserve requirements on equity holdings. This would force financial firms to hold some cash to back their equity holdings, lowering the return on equities and discouraging such investments.

ABRRs also act as automatic stabilisers. When asset values rise or when the financial sector creates new assets, ABRRs generate an automatic monetary restraint by requiring the financial sector come up with additional reserves. Conversely, when asset values fall or financial assets are extinguished, ABRRs generate an automatic monetary easing by releasing reserves previously held against assets. In all of this, ABRRs remain consistent with the existing system of monetary control as exercised through central bank provision of liquidity at a given interest rate.

At the microeconomic level, ABRRs can be used to allocate funds to public purposes such as inner city revitalisation or environmental protection. By setting low (or no) reserve requirements on such investments, monetary authorities could channel funds into priority areas, much as government subsidized credit and guarantee programs and government-sponsored secondary markets have expanded education and home ownership opportunities and promoted regional development. Conversely, ABRRs can be used to discourage asset allocations that are deemed socially counterproductive.

Finally, ABRRs have other significant policy benefits that are especially valuable now. First, ABRRs increase the demand for reserves which will prove helpful as central banks seek to exit the current period of quantitative easing to avoid future inflation. By gradually raising asset reserve ratios, central banks can implement a form of reverse quantitative easing that smoothly transitions the system to a new more stable regime.

Second, by increasing the demand for reserves ABRRs will increase seigniorage revenue for governments at a time of fiscal squeeze. To the extent required reserves constitute a tax on financial institutions, that tax is economically efficient given the costs of financial crises. It will also shrink a system that many believe is bloated.

Thomas Palley is Schwartz economic growth fellow at the New America Foundation

Labels: ABRRs, asset-based reserve requirements, financial crisis, financial regulation, Thomas Palley

 

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11/17/2009 03:18:00 PM 0 comments

 

The Worst Is Yet to Come (Nouriel Roubini)

by Dollars and Sense

From RGE Monitor and yesterday's NY Daily News, Nouriel Roubini tells the unemployed to "hunker down":

The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses

Nouriel Roubini | Nov 15, 2009

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.

Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost.

This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries.

Other measures tell the same ugly story: The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession.

As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures.

The damage will be extensive and severe unless bold policy action is undertaken now.

Roubini is professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics.

Labels: Nouriel Roubini, real unemployment rate, recession, unemployment

 

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11/16/2009 02:18:00 PM 0 comments

 

Sustainability and Horsesh*t

by Dollars and Sense

Here are two items related to climate change that read well next to each other.

One is from a magazine called Tin House—an article by Curtis White skewering the idea of sustainability. A taste:

For environmental, business, and political organizations alike, the term that has come to stand for the hope of the natural world is "sustainable." Sustainable agriculture. Sustainable cities. Sustainable development. Sustainable economies. But you would be mistaken if you assumed that the point of sustainability was to change our ways. It's not, really. The great unspoken assumption of the sustainability movement is the idea that although the economic, political, and social systems that have produced our current environmental calamity are bad, they do not need to be entirely replaced. In fact, the point of sustainability often seems to be to preserve—not overthrow—the economic and social status quo.

This should not be surprising. Sustainability is, after all, a mainstream response to environmental crisis. It may want change, but it does not want what would amount to a fundamental self-confrontation. While it wants to modify existing models of production and consumption, especially of energy, it does not want to abandon what it calls "freedom," especially the freedom to own and use large accumulations of private property. And certainly it does not want to ask, "What went wrong in the great Western experiment with freedom? Why do we seem to be mostly free to destroy ourselves?"

Read the full article (and admire Tin House's design).

The other is from the current issue of The New Yorker—Elizabeth Kolbert gives the Freakonomics guys a well-deserved skewering. Their new book, SuperFreakonomics, sounds even stupider than their first one.

Kolbert (I can't help pronouncing her last name with a silent "T" as with Stephen Colbert) starts her review with an historical anecdote about how for a while there it looked like horseshit from all the horses used to transport people and goods all around New York City would eventually take over the city:

The problem just kept piling up until, in the eighteen-nineties, it seemed virtually insurmountable. One commentator predicted that by 1930 horse manure would reach the level of Manhattan's third-story windows. New York's troubles were not New York's alone; in 1894, the Times of London forecast that by the middle of the following century every street in the city would be buried under nine feet of manure. It was understood that flies were a transmission vector for disease, and a public-health crisis seemed imminent. When the world's first international urban-planning conference was held, in 1898, it was dominated by discussion of the manure situation. Unable to agree upon any solutions—or to imagine cities without horses—the delegates broke up the meeting, which had been scheduled to last a week and a half, after just three days.

Then, almost overnight, the crisis passed. This was not brought about by regulation or by government policy. Instead, it was technological innovation that made the difference. With electrification and the development of the internal-combustion engine, there were new ways to move people and goods around. By 1912, autos in New York outnumbered horses, and in 1917 the city's last horse-drawn streetcar made its final run. All the anxieties about a metropolis inundated by ordure had been misplaced.

This anecdote, it turns out, is a curtain-raiser to the Steves' (Steven D. Levitt and Stephen J. Dubner, that is) "argument" that we shouldn't fret about climate change, since someone is sure to come up with some kind of technological fix so that we can keep consuming, growing, and using fossil fuels. Their preferred idea is to cool the earth by shooting tons of sulphur dioxide into the atmosphere using an 18-mile-long hose (hence the title of Kolbert's review, "Hosed"—if only that could be taken as referring doubly to their idea and the Steve's careers or reputations). And here are two of the skewering bits, one sober, the other light-hearted:

[W]hat's most troubling about "SuperFreakonomics" isn't the authors' many blunders; it's the whole spirit of the enterprise. Though climate change is a grave problem, Levitt and Dubner treat it mainly as an opportunity to show how clever they are. Leaving aside the question of whether geoengineering, as it is known in scientific circles, is even possible—have you ever tried sending an eighteen-mile-long hose into the stratosphere?—their analysis is terrifyingly cavalier. A world whose atmosphere is loaded with carbon dioxide, on the one hand, and sulfur dioxide, on the other, would be a fundamentally different place from the earth as we know it. Among the many likely consequences of shooting SO2 above the clouds would be new regional weather patterns (after major volcanic eruptions, Asia and Africa have a nasty tendency to experience drought), ozone depletion, and increased acid rain. Meanwhile, as long as the concentration of atmospheric CO2 continued to rise, more and more sulfur dioxide would have to be pumped into the air to counteract it. The amount of direct sunlight reaching the earth would fall, even as the oceans became increasingly acidic.

...

To be skeptical of climate models and credulous about things like carbon-eating trees and cloudmaking machinery and hoses that shoot sulfur into the sky is to replace a faith in science with a belief in science fiction. This is the turn that "SuperFreakonomics" takes, even as its authors repeatedly extoll their hard-headedness. All of which goes to show that, while some forms of horseshit are no longer a problem, others will always be with us.

She's probably right, but let's hope she's not about the Steves in particular. Maybe the scorn getting heaped on them for this particular pile they've produced (e.g. here) will hose their reputations permanently.

Read Kolbert's review; read White's article.

Labels: climate change, Curtis White, Elizabeth Kolbert, Freakonomics, horseshit, sulphur dioxide, sustainability

 

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11/16/2009 11:26:00 AM 1 comments

 

Maybe We Were a Tad Premature

by Dollars and Sense

...in our choice of the next bailout candidate. And this one surely needs watching in the longer-term. It's the Pension Benefit Guaranty Corp (PBGC). From Calculated Risk:
Pension Benefit Guaranty Corporation Deficit Increases
by CalculatedRisk on 11/14/2009 11:58:00 AM


The Pension Benefit Guaranty Corporation (PBGC) is the federal agency that guarantees pensions for 44 million Americans. The PBGC deficit doubled over the last six months to $22 billion ... but this is only just the beginning as the agency's potential exposure to future losses increased sharply.

From the Pension Benefit Guaranty Corporation (PBGC): PBGC Releases Annual Management Report for Fiscal Year 2009

The Pension Benefit Guaranty Corporation (PBGC) ended fiscal year 2009 with an overall deficit of $22 billion, according to the agency's Annual Management Report submitted to Congress today. The result compares with the $11.2 billion deficit recorded at the previous fiscal year-end on September 30, 2008.

...

The Annual Management Report classified 27 large pension plans with total underfunding of $1.64 billion as probable losses on the PBGC balance sheet. The report also shows that the agency's potential exposure to future pension losses from financially weak companies increased to about $168 billion from the $47 billion booked in fiscal year 2008.

"Exposure to possible future terminations means that we could face much higher deficits in the future," said Acting Director Vincent K. Snowbarger. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program."

(emphasis added)

With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future--and the "long-term solution" will probably involve some sort of bailout.

Labels: Calculated Risk, financial crisis bailout, Pension Benefit Guarantee Corporation, pensions

 

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11/14/2009 02:31:00 PM 0 comments

 

Next Bailout Candidate

by Dollars and Sense

And the winner is...The Federal Housing Administration (FHA)! Lest it be forgotten, as the article duly notes:

The FHA and the government-sponsored housing agencies Fannie Mae and Freddie Mac currently provide about 90 per cent of all new mortgages in the US housing market.

From The Financial Times:
Defaults pose risks to US housing agency
By Saskia Scholtes in New York

Published: November 12 2009 21:12 | Last updated: November 12 2009 21:12
The Federal Housing Administration, the government agency that insured $360bn of US single-family mortgages last year, said on Thursday that its insurance reserves had fallen below its congressionally mandated threshold to their lowest level ever.

Amid depressed house prices and mounting losses on insured mortgages, the FHA's capital reserve ratio, which measures reserves after accounting for projected losses, fell to 0.53 per cent in the 12 months to September 30--well below the 2 per cent cushion it is required by Congress to maintain.

Last year its capital ratio stood at 3 per cent, and it was 6.4 per cent in 2007.

Rising defaults on FHA loans have prompted fears that the agency will need a taxpayer bailout. Defaults on FHA-backed loans reached 8.24 per cent in September--up from 8.1 per cent in August and 6.1 per cent a year ago.

Shaun Donovan, secretary for housing and urban development, whose office oversees the FHA, said the economy was worse than housing officials had expected. He projected that claims against the insurance fund would be higher than forecast and said action would be needed to shore up the agency's reserves.

The FHA's total reserves were more than $31bn, or more than 4.5 per cent of the insurance it had written, the agency said. Mr Donovan said that in almost every economic situation examined in an actuarial study, the FHA still had enough reserves to cover projected claims on outstanding loans.

Read the rest of the article

Labels: Fannie Mae, Federal Housing Administration, financial crisis, financial crisis bailout, Freddie Mac, housing market

 

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11/13/2009 04:59:00 PM 0 comments

 

Yves Smith on Krugman on Jobs

by Dollars and Sense

From the fantastic Yves Smith at Naked Capitalism:

Krugman on the Need for Jobs Policies

Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June (unfortunately in heavy book writing mode, and so did not get to see as much as I would have liked) and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy (although I had no idea of what norms there might be).

Krugman holds Germany up as an example of the merits of employment oriented policies (which had been the norm in America prior to the shift to "markets know best" posture (and more aggressive anti-union policies) inaugurated by Reagan:

Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result—but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.

Don't you think Country A might have something to learn from Country B?

This story isn't hypothetical. Country A is the United States, where stocks are up, G.D.P. is rising, but the terrible employment situation just keeps getting worse. Country B is Germany, which took a hit to its G.D.P. when world trade collapsed, but has been remarkably successful at avoiding mass job losses. Germany's jobs miracle hasn't received much attention in this country—but it's real, it's striking, and it raises serious questions about whether the U.S. government is doing the right things to fight unemployment....

Germany came into the Great Recession with strong employment protection legislation. This has been supplemented with a "short-time work scheme," which provides subsidies to employers who reduce workers' hours rather than laying them off. These measures didn't prevent a nasty recession, but Germany got through the recession with remarkably few job losses.

Should America be trying anything along these lines? In a recent interview, Lawrence Summers, the Obama administration's highest-ranking economist, was dismissive: "It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work." True. But we are not, in fact, expanding the total amount of work—and Congress doesn't seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn't we be considering other measures, if only as a stopgap?

Now, the usual objection to European-style employment policies is that they're bad for long-run growth—that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there's something to be said for American-style "free to lose" labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

Yves here. Krugman does Germany an injustice by failing to contest US prejudices about European (particularly German) labor practices. If German labor practices are so terrible, then how was Germany an export powerhouse, able to punch above its weight versus Japan and China, while the US, with our supposedly great advantage of more flexible (and therefore cheaper) labor, has run chronic and large current account deficits? And why is Germany a hotbed of successful entrepreneurial companies, its famed Mittelstand? If Germany was such a terrible place to do business, wouldn't they have hollowed out manufacturing just as the US has done? Might it be that there are unrecognized pluses of not being able to fire workers at will, that the company and the employees recognize that they are in the same boat, and the company has more reason to invest in its employees (ignore the US nonsense "employees are our asset," another line from the corporate Ministry of Truth).

A different example. A US colleague was sent to Paris to turn around a medical database business (spanning 11 timezones). She succeeded. Now American managers don't know how to turn around businesses without firing people, which was not an option for her. I submit that no one is willing to consider that the vaunted US labor market flexibility has produced lower skilled managers, one who resort to the simple expedient of expanding or contracting the workforce (which is actually pretty disruptive and results in the loss of skills and know-how) rather than learning how to manage a business with more foresight and in a more organic fashion because the business is defined to a large degree around its employees.

Read the original post.

Labels: fiscal stimulus, Germany, jobs, Paul Krugman, unemployment, Yves Smith

 

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11/13/2009 03:52:00 PM 0 comments

 

'Politicization' of the Fed (Dean Baker)

by Dollars and Sense

There's an interesting article in today's New York Times about how Ben Bernanke has had to learn politicking, now that some in Congress are eager to provide more oversight of the Federal Reserve. The article discusses Ron Paul's bill that would allow the Government Accountability Office to audit the Fed:

Mr. Paul's bill would require the Government Accountability Office, an arm of the Congress, to complete a wide-ranging assessment of the Fed's financial operations by the end of 2010. The audit would delve into bailouts of individual firms, short-term loans to banks, currency swaps with foreign central banks and the Fed's effort to prop up mortgage lending by purchasing $1.25 trillion in mortgage-related securities.

Mr. Bernanke initially reacted to the bill in almost apocalyptic terms. The G.A.O. audits, he told a House hearing in late June, could lead to a Congressional "takeover" of monetary policy that would be "highly destructive to the stability of the financial system, the dollar and our national economic situation."

That did not go over well with many lawmakers, who were competing to describe the Fed in dark and conspiratorial tones.

Bernie Sanders is sponsoring the Senate version of Paul's bill.

Meanwhile, a Washington Post editorial is claiming that Christopher Dodd's proposed banking regulation would "politicize" the Fed by impinging on its independence in setting monetary policy, to which Dean Baker, in his blog Beat the Press, had this amusing response:

Washington Post: Taking Away the Banks' Control of the Fed is "Politicization"

Yes folks, according to the Washington Post, if the banks don't get to call the shots, then it's politicization. This is not a joke, that is exactly what the Washington Post said in an editorial about Senator Dodd's plan to have the Fed's district bank presidents approved by Congress rather than the banks in the district.

In Washington Post land if we let Pfizer and Merck appoint the directors of the Food and Drug Administration, then we can depoliticize the FDA. We can let Disney and Time-Warner appoint the directors of the Federal Communications Commission to depoliticize the FCC. It's an interesting conception of government.

—Dean Baker

I'm sure those changes are all in the works (and some of them well underway), alas, but in case they aren't, we wish you wouldn't give them any ideas, Dean!

Labels: banking regulation, Ben Bernanke, Bernie Sanders, Christopher Dodd, Dean Baker, Ron Paul

 

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11/11/2009 04:12:00 PM 0 comments

 

The Public Purpose of Banking

by Dollars and Sense

Maybe Goldman Sachs should have used some of its bonus money to hire better P.R. folks—the company has really been taking a beating, and not just because it is "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," as Matt Taibbi put it in Rolling Stone. Really, the company's making it even worse than it has to be.

First (back in October) there was the Goldman Sachs international adviser Brian Griffiths telling people that inequality was good for society as a whole

"We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paul's Cathedral in London. The panel's discussion topic was, "What is the place of morality in the marketplace?"

This is true, apparently, because higher compensation encourages more charitable giving. "To whom much is given much is expected," Griffiths said, according to Bloomberg. "There is a sense that if you make money you are expected to give."

Later that month, Goldman Sachs abandoned adorable kittens. No kidding. As reported on the website of New Deal 2.0 (where we notice that a number of D&S authors, and at least one ex-boyfriend of a current D&S co-editor, are among the "braintrusters"), The Villager newspaper in lower Manhattan reported that Goldman Sachs "neglected to pay the vet bills for homeless kittens found in its nearly-completed Battery Park City headquarters." The newspaper offered this apology on Goldman's behalf:

Since Goldman Sachs has been a big part of the Lower Manhattan fabric for almost a century and a half, we'd like to take this opportunity to apologize to the rest of the country on behalf of our neighbor, a financial giant personifying much of what is wrong on Wall St.

Before we get to the multibillion-dollar stuff, we'd first like to apologize that the firm has not yet paid a few thousand dollars of vet bills for the five kittens born in its headquarters building nearing completion in Battery Park City. In August, after our sister publication Downtown Express reported the kittens' discovery, Goldman offered to pay the bills and encourage its employees to adopt the 'BlackBerries.'

It may be just a matter of Goldman waiting to get the vet invoices—we can't imagine they'd stiff kittens while writing out bonus checks worth $23 billion—but the cats still need adoptive homes. (Incidentally, anyone interested in one of these adorable kittens should e-mail their rescuer, the Brotmans, at rbrotpaw--at--aol.com.)

(This was a while back—I doubt any of the kittens are still homeless.)

Now Goldman's CEO, Lloyd Blankfein, is mouthing off to the London Times about how bankers do "God's work." The whole article is terrific, but here's the quotable quote:

Is it possible to make too much money?

"Is it possible to have too much ambition? Is it possible to be too successful?" Blankfein shoots back. "I don't want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I'd like them to continue to do what they are doing. I don't want to put a cap on their ambition. It's hard for me to argue for a cap on their compensation."

So, it's business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein's face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker "doing God's work"

See what I mean? They need to hire better P.R. folks or at least forbid travel to London.

This is all a lead-up to the following piece, by Marshall Auerback (also of New Deal 2.0), from Naked Capitalism. Auerback takes Blankfein as his jumping-off point for a discussion of Christopher Dodd's new banking regulation bill.

Attention Lloyd Blankfein: The Public Purpose of Banking

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

It seems odd that days after we were told by Goldman Sachs's CEO, Lloyd Blankfein, that bankers are doing "God's work", we are still having active debates about how to regulate these selfless apostles of capitalism.

The latest foray into financial reform comes from the Senate. Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank-supervision authority, according to a report from Bloomberg. Dodd, according to the Bloomberg report, has faulted the U.S. bank regulation system, saying "it encourages charter shopping and a 'race to the bottom' by agencies to win oversight roles." Bloomberg notes that "his proposal goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC."

Certainly, almost anything is an improvement over the abomination that came out of Barney Frank's committee. But we feel that the 'race to the regulatory bottom' could easily be solved via a simple mechanism: If you don't fall in line with our regulatory requirements, you're simply denied a banking license to operate in this country. Problem solved. The United States is the biggest banking market in the world. Do you think any major bank would willingly vacate this market?

And even if the "too big to fail" behemoths decided to transplant a bunch of their operations elsewhere, the country would still be left with thousands of community banks which could fill the void and better fulfill the public purpose described by Mr Blankfein: namely, to "help companies to grow by helping them to raise capital", rather than extracting their pound of flesh via grotesquely high financial intermediary fees, as is the case today.

We have argued before on New Deal 2.0 that the FDIC is best suited to carry on the role of chief systemic regulator, given its role as deposit insurer. That regulator has the best institutional incentives to be concerned with systemic risk and to be a vigorous regulator. It should be the least subject to regulatory capture (a pervasive problem at the Fed, which is full of quant economists who have virtually no interaction with other Fed examiners).

But WHO controls the banks is ultimately less important than HOW we control the banks' activities. Oversight is all very nice, but at times it pays to get back to first principles. What on earth is the public purpose of these things?

Banks are set up and supported by government for the further benefit of the macro economy via providing a payments system and lending in a way that is specifically defined by regulators. Newsflash: the public purpose of banking is NOT to provide profits per se to shareholders. Rather, the provision of the ability to earn profits is only a tool used to support the attendant public purpose. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government in regulating and supervising those activities. There are severe consequences for failure to adequately regulate and supervise those secondary market activities as well.

Banks should be prohibited from engaging in any secondary market activity because it serves no public purpose and may result in severe social costs in the case of regulatory and supervisory lapses. Some argue that these areas might be profitable for the banks, but this is not a reason to extend government sponsored enterprises into those areas. Therefore, banks should not be allowed to buy (or sell) credit default insurance. The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks.

If a bank instead relies on credit default insurance, then it is transferring that pricing of risk to a third party, which is counter to the public purpose of the current public/private banking system. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets.

If the activities of the banks are not facilitating the production and movement of real goods and services what public purpose do they serve? It is clear they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects for disadvantaged workers in many parts of the world.

It's more obvious to all of us now that when the system comes unstuck through the complexity of these transactions and the impossibility of correctly pricing risk, the real economies across the globe suffer. The consequences have been devastating in terms of lost employment and income and lost wealth.

All governments should sign an agreement which would make all financial transactions that cannot be shown to facilitate funding for real goods and services illegal. Simple as that. When we keep these principles at the front of the argument, we can see that what Senator Dodd and Congressman Frank are arguing about is akin to how to rearrange the deck chairs on the Titanic.

Read the original post.

Labels: banking regulation, Brian Griffiths, Goldman Sachs, kittens, Lloyd Blankfein, Matt Taibbi, New Deal 2.0

 

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11/11/2009 03:13:00 PM 0 comments

 

Change Wall Street can believe in (Holly Sklar)

by Dollars and Sense

Hat-tip to Mike P.

By Holly Sklar
Distributed by McClatchy Tribune News Service, 11/6/09
Copyright 2009 Holly Sklar

Wall Street is doing to America what private equity firms did to Simmons Bedding and many other productive companies. Taking control with borrowed money, stripping assets, slashing jobs and cashing out.

Taxpayer bailouts saved Wall Street from choking on its own greed. Now, as the Wall Street Journal reports, "Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high."

$140 billion is more than the combined budgets of the U.S. Departments of Commerce, Education, Energy, Housing and Urban Development, the National Science Foundation and the Environmental Protection Agency.

Typical workers, meanwhile, make less today adjusting for inflation than they did in the 1970s. Wall Street rewarded CEOs who cut employee wages and benefits and offshored manufacturing, services, and research and development; feasted on Bush's tax cuts; turned mortgages into loan sharking; and vacuumed up home equity, college funds, retirement funds and other private and public investments into their rigged casino.

Goldman Sachs, for example, "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst," McClatchy reports in a new investigative series.

The Great Depression gave way to the New Deal. The Great Recession has become the Great Ripoff.

The TARP inspector general's latest report to Congress says, "The firms that were 'too big to fail' ... are in many cases bigger still, many as a result of Government-supported and -sponsored mergers and acquisitions; the inherently conflicted rating agencies that failed to warn of the risks leading up to the financial crisis are still just as conflicted; and the recent rebound in big bank stock prices risks removing the urgency of dealing with the system's fundamental problems."

Enabled by the Bush and Obama administrations, the megabanks are lending less and gambling more -- using taxpayer money to pay bonuses, float a new stock market bubble and make even riskier bets.

The U.S. Treasury and Federal Reserve have become Wall Street's ATMs, while unemployment, foreclosures and homelessness rise, states slash public services, and small businesses are starved of credit.

Outside the TARP, trillions of dollars are flowing to the banksters in the form of near-zero interest loans, bond guarantees and extreme leverage for toxic assets. You can follow the money at www.nomiprins.com. Nomi Prins, a former managing director at Goldman Sachs, is author of "It Takes a Pillage."

The megabanks are not too big to fail. They're too big and irresponsible to exist.

Just months after taking office in 1933, President Roosevelt signed into law the Glass-Steagall Act, which separated the commercial banking of savings, checking and loans from investment banks doing underwriting and speculative trading. The former got depositor insurance, not the latter.

Glass-Steagall lasted until Citigroup and other power players killed it in 1999 through the Financial Services Modernization Act, taking us back to the pre-New Deal casino economy on steroids. Now former Citigroup CEO John Reed has joined the growing call to split commercial banking and investment.

In 2000, Congress passed the Commodity Futures Modernization Act, ignoring the warnings of Commodity Futures Trading Commission head Brooksley Born who said that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy."

By 2002, the four largest bank holding companies -- Bank of America, JP Morgan Chase, Wells Fargo and Citigroup -- had 27 percent of FDIC-insured bank assets. Now, reports the Economic Policy Institute, they have nearly half. They overlap with the biggest derivatives dealers -- JP Morgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup.

The government heavily subsidizes the megabanks, but it's the small banks that provide higher savings interest, lower fees, lower loan and credit card rates, and do much of the lending to small business, who in turn create most new jobs.

Behind their Main Street rhetoric, Congress and the Obama administration have so far been the change Wall Street can believe in. The administration and Federal Reserve are loaded with revolving door Wall Streeters and their proteges. Campaign donors and lobbyists are working Congress to minimize and distort reform.

Make your voices heard. We need to enact tough regulations and bust the banks who busted our economy -- before they do it again.

Holly Sklar is the author of "Raising the Minimum Wage in Hard Times" (www.letjusticeroll.org) and "Raise the Floor: Wages and Policies That Work for All of Us."

Labels: bailout, financial crisis, Holly Sklar, Nomi Prins, TARP program, Wall Street

 

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11/10/2009 11:37:00 AM 0 comments

 

Santa Needs Extended Benefits, Too

by Dollars and Sense

The October employment reports were released today, and the unemployment rate zoomed above 10%, to 10.2%, to be exact, earlier than most economists expected. The number of jobs lost in October also surprised on the negative side, at 190,000 (v. the projected 175,000). The unemployment rate is the highest it's been since the dreadful winter of 1982-83, when it hit 10.8% for two months running. The so-called "underemployment rate," which covers part-time workers looking for full-time work and suchlike, rose at an even higher clip, to 17.5% from 17.0%. The average workweek was unchanged at 33.0 hours, which matches readings in August and October for the lowest recording ever. Manufacturing production actually increased its average workweek length, to 40.0 hours (but lost net jobs for the month), but this is a small consolation given the heroic increases in GDP, and especially productivity, that have been reported in the past week. Oh, and lest we forget, the amout of workers unemployed more than 26 weeks rose to a stunning 3.6% of the entire workforce, which is the highest it's been since records began in 1948. All told, some 8.2 million jobs have been destroyed during this downturn--whatever name you want to give it--began some two years ago and change. It'll take 3 1/2 years of continuous, strong job growth to make that up, and that in an atmosphere starved of capital and averse to debt (unless you're the government or a big bank, and neither of them are going to be chalking up stellar jobs growth numbers anytime soon).

Some are arguing that the truly remarkable productivity statistics announced yesterday (an increase of over 9% annualized), most certainly presage an uptick in employment: you simply can't work the plebs much harder than this. But this comes off a series of strong performances for this year after which analysts said essentially the same thing. And there's still room to cut unit labor costs without cutting hours: by cutting or eliminating benefits. And there is anecdotal evidence to the effect that a good number of workers are actually accepting cuts in pay.

But it may not come to this: the vast inventory restocking that took place once the executive committee of the world bourgeoisie made it clear that governmets would guarantee all major financial institutions no matter what, may be overshooting future demand. You may be able to reestablish a global supply network in a relative jiffy, but recreating bloated living and investing standards may be a more arduous, or even impossible task. But stock markets, commodity markets and, strangely, bond markets (well, not so strangely: governments are buying heaps of their own bonds to keep interest rates down) are all way up since the near-death expereince of March. But one other employment indiccator shows how flimsy this tidal wave of risk-taking has been: holiday retail sales for October are languishing at last year's low levels, which were the lowest since, well, 1987: the month of the 1987 stock market crash. Santa's worried, too.

Labels: economic indicators, employment, real unemployment rate, US employment

 

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11/06/2009 02:26:00 PM 0 comments

 

Brad DeLong on Productivity Growth and Kalecki

by Dollars and Sense

Here's a post from Brad DeLong's blog, with DeLong using lots of all-caps and some abbreviations I can't figure out (what's "Z" for? Zounds? Zowie?--but I get the gist), and revising his view of the great Polish Marxist economist Michal Kalecki (he revised the spelling of Kalecki's first name, too, I noticed).

I am not quite sure why he's so surprised--productivity has to do with output per worker, and lots of people have been fired, and the ones who haven't are worried about losing their jobs. So--stands to reason. I guess it's that the growth is *so* large. Hat-tip to Larry P.

ZOMFG WTF!!!!! 9.5% THIRD QUARTER PRODUCTIVITY GROWTH NUMBER!!!!

I WAS EXPECTING A 6% PRODUCTIVITY GROWTH QUARTER, BUT THIS IS RIDICULOUS!!!

Productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent...

Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.

For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions--that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.

Read the original post.

Labels: Brad DeLong, Michal Kalecki, productivity, unemployment

 

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11/05/2009 06:24:00 PM 0 comments

 

U2 Fans to MTV: 'Tear Down This Wall!'

by Dollars and Sense

A funny one from the Associated Press; hat-tip to Bryan S.

Outrage over wall blocking free U2 Berlin concert

By KIRSTEN GRIESHABER | November 5th, 2009

BERLIN (AP) -- Fans hoping to glimpse U2's free concert celebrating 20 years since the Berlin Wall fell were outraged Thursday to find that a nearly 6-1/2-foot (2-meter) high metal barrier was installed to block the view for those without tickets.

Both Berliners and tourists alike saw the irony in building a wall around a concert dedicated to the wall that already has come down.

"It's completely ridiculous that they are blocking the view," said Louis-Pierre Boily, 23, who came to Berlin even though he failed to get U2 tickets. "I thought it's a free show, but MTV probably wants people to watch it on TV to get their ratings up."

Boily, from Quebec City, was among several hundred people who gathered Thursday against the new fence, which was draped with a white tarp that blocked the view of the stage from the street. Some fans already were trying to tear down the tarp before the concert, which was being held in front of Berlin's iconic Brandenburg Gate.

The music network MTV, which organized Thursday's concert, said it worked with the local promoter, the city and Berlin police to install a temporary fence "around the site to ensure the safety and security of the attendees at the event as well as residents and businesses in the area."

U2's publicist RMP refused comment about the barrier.

Some 10,000 tickets were made available online for the Irish rockers' free show—and they were snapped up in just three hours.

U2 was performing four songs but only one song was being shown on television later Thursday as part of MTV's European Music Awards, according to MTV.

The Berlin Wall fell on Nov. 9, 1989, ending almost 30 years of Cold War division between the communist East and the democratic West. Throughout those decades, the Brandenburg Gate stood just inside East Berlin.

In 1988, musicians such as Pink Floyd and Michael Jackson performed in a three-day "Berlin Rock Marathon" on the western side of the concrete barrier, with the landmark as a backdrop.

Concertgoers in the West hurled bottles and firebombs at the wall, while some 2,000 youths gathered on the eastern side to listen, many shouting "The wall must go!"

Read the original article.

Labels: Berlin Wall, Cold War, MTV, U2

 

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11/05/2009 03:06:00 PM 0 comments

 

Sit-in for Single-Payer in Pelosi's Office

by Dollars and Sense

Breaking news from the folks at the Mobilization for Health Care for All:

CALL PELOSI NOW! (415) 556-4862 and (202) 225-0100
There are 8 people sitting in RIGHT NOW in Nancy Pelosi's Office in San Francisco!

They are not leaving until they get an answer to their demands! Their demands are that the Kucinich amendment MUST be in the health care bill that the House votes on, and that the House MUST vote on the Weiner amendment.

Pelosi PROMISED the American people that she would ensure BOTH of the above would happen, and she has betrayed us by reneging on those promises!

YOU can HELP! Call her office in SF at (415) 556-4862 and Washington, DC (202) 225-0100; demand that she talk with the people sitting in. Demand that she keep her promises and put Kucinich Amendment in bill and allow Floor vote on the Weiner Amendment!

Burn up her phone lines people! This is NOT business as usual! This is FOR REAL - we can make a difference in the future of health care in this country!

Labels: health care, health care reform, Mobilization for Health Care for All, Nancy Pelosi, sit-in

 

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11/03/2009 05:30:00 PM 0 comments

 

Bird and Fortune on Bonuses and Bailouts

by Dollars and Sense

An amusing video of Brit satirists John Bird and John Fortune giving their take on the financial crisis, from the Financial Times. Hat-tip to KH.

D&S collective member Ben Greenberg posted a video of Bird and Fortune's Subprime Primer almost two years ago.

Labels: bailout, Bird and Fortune, subprime crisis, Wall Street bonuses

 

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11/02/2009 01:14:00 PM 0 comments