A real financial reform package must include an independent Consumer Financial Protection Agency, restoration of the Glass-Steagall Act, and strict new limits on the derivatives market.
To protect citizens from rapacious banks, we need a Consumer Financial Protection Agency to stop abusive mortgages and credit card terms, and other predatory financial schemes.
The Glass-Steagall Act, which separated commercial and investment banking, was enacted after the financial crash of 1929, but it was repealed in 1999. It is crucial to preventing the reckless investing by commercial banks that caused some of the greatest financial disasters in U.S. history.
Rampant speculation in the unregulated derivatives market was a major factor in the collapse of the global financial system. We need tough new restrictions on the derivatives market, or speculators will continue to imperil our country's economic stability for short-term profit.
No, this is not an essay on some X-rated movie. It is about how the government and Wall Street have continually conspired to take and use any new money it can get its hands on, which, now means YOUR money.
The latest new "idea" floated by FDIC Chairwoman Sheila Bair is to have state pension funds buyout failed banks.
Now, I am not totally ignorant about economics, nor, am I a studied professor on the subject. However, I'm not sure who could glean any meaningful information out of the following:
In a speech to the National Association for Business Economics Washington Policy Conference, FDIC Chairwoman Sheila Bair outlined what she called "a pre-funded resolution mechanism," but did not specify what exactly that is. She instead said it would be "similar to the FDIC's receivership authority for failed banks," exposing only shareholders to risk, as opposed to the bank bailouts that saw billions of taxpayer dollars funneled into a near-crippled financial system.
"Shareholders and creditors would bear the losses, not the public," she explained. "But, the process would be orderly and help prevent a catastrophic collapse of other firms."
Go ahead, do your head shake to clear the cobwebs, and let's talk about the latest plan for the government to get their hands on YOUR money.
Reading ECONned By Richard Smith. A Guest Post in Jesse's Café Américain by the copy editor of blogger Yves Smith's new book ECONned Yves explains how the spell we are still under was cast upon us.
The Financial Crisis of 2007-2009 (no-one's settled on a name yet; we are still too close to the action, and that end date might still need some discreet pushes to the right) has naturally set off a book publishing frenzy. With the first wave of instant histories now spent (the startlingly fast-out-of-the-blocks chronicle "Bailout Nation", the elephantine "Too Big To Fail" etc, etc), we are now getting a second wave of books, whose authors have had time to dig deeper and reflect more on how we got into this mess. Yves Smith's offering is the first integrated account of the root causes of the financial crisis, and a compelling one.
For Smith, it turns out to be a matter of bad economic theory, self-serving ideology, and, under cover, plain old rapacity. The author gives us a brisk historical sweep through what sounds like deeply unpromising, but, as it turns out, surprisingly engaging terrain: post- war economic theory, the evolution of the financial services industry and its regulation since the 1970s, modern financial instruments, and the Crisis itself. It's been a long time a-comin', this Crisis. It all culminates in a whodunit account of the mechanisms that brought the crisis to its acute phase; an account that respects the complexities, yet grips like a vice. But first of all, it's about the way a single phrase, "free markets", was turned into a justification for profoundly destructive behaviour.
Yves Smith (got it yet?) points out that there was always more to Adam Smith's account of the free market than its modern reduction allows:
Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the "savage injustice" that European mercantilist interests had "commit[ted] with impunity" in colonies in Asia and the Americas.
Yves shows us that little has changed since Adam's day (last chance!). Running through the book, we will find ever more glaring contrasts between the official slogans: "invisible hand", "free market" and so on, and what is really going on: scams, rip-offs, increasingly brazen looting. This is sanctioned, in an unwelcome display of bipartisanship, by intellectually bankrupt and venal politicians of all hues.
The entire post is about eight screens of text, including the following:
Next we are into the meat of the economic theory (Chapters 2-4). Smith briskly takes a sledgehammer to any number of plaster saints cluttering up the edifice of modern economics:
"assumptions that are patently ridiculous: that individuals are rational and utility-maximizing (which has become such a slippery notion as to be meaningless), that buyers and sellers have perfect information, that there are no transaction costs, that capital flows freely"
And then...papers with cooked figures, economists oblivious to speculative factors driving oil prices, travesty versions of Keynes's ideas that airbrush out its most characteristic features in the name of mathematical tractability.
And then...any number of grand-sounding theoretical constructs: the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model, the Black-Scholes option model, Value at Risk, CAPM, the Gaussian copula, that only work under blatantly unrealistic assumptions that go by high falutin' names - equilibrium, ergodicity, and so on.
The outcome of this pseudo-scientific botching is an imposing corpus of pretentious quackery that somehow elevates unregulated "free markets" into the sole mechanism for distribution of the spoils of economic activity. We are supposed to believe that by some alchemical process, maximum indulgence of human greed results in maximum prosperity for all. That's unfair to alchemy: compared with the threadbare scientific underpinnings of this economic dogma, alchemy is a model of rigor.
Too bad Yves came two centuries after her Adam! :-)
When I wrote this essay a lot of people asked me, "What should we do about it?"
It's a good question, but its also a trap. I'm not so arrogant as to believe that I know the perfect solution to our economic problems. Anyone that tells you they know is either a fool or a liar.
However, that doesn't mean we can't discover where we went wrong once you apply a little logic and data to the situation.
For instance, if you realize you have taken a wrong turn, it makes more sense to turn around and go back to the corner where the mistake was made, than it does to drive in a general direction and hope you can find your way home.
When it comes to the economy, its pretty easy to discover when the wrong turn was made - 1972.
An experienced economist and a novice economist are walking down the road. They come across some dog shit lying on the pavement.
The experienced economist says, "If you eat that dog shit, I'll give you $20,000!"
The novice economist runs his optimization program and figures out he's better off eating it, so he does and collects the money.
Continuing along the same road they almost step into another pile of dog shit.
The novice economist says, "Now, if you eat this shit I'll give you $20,000."
After evaluating the proposal, the experienced economist eats the shit and collects the money.
They go on. The novice economist wonders, "Listen, we both have the same amount of money we had before, but we both ate shit. I don't see us being better off."
The experienced economist retorts, "Not so! We've created $40,000 of trade!"
I was supposed to begin the long-delayed series of PTSD stories I've been planning, but before we begin, I need to tell y'all about something that just happened in my house.
For us it wasn't a matter of life or death, but it is the kind of story that explains, perfectly, why we need to reform the health care system we have today-and for that matter, it's also a great explanation of why a single-payer system would be a giant step forward for everyone in this country, whether you're insured today or not.
It's also hilarious and sad and frustrating, all at the same time-which makes today's story a pretty good allegory for the current American way of doing health care.
So follow along, have a good laugh...and at the same time, take a minute to consider what could be, and how much less irritating things should be.
During the State of the Union address, President Obama noted what a slew of other previous Presidents have noted--that the United States of America needs to start exporting goods again. Few people can disagree with a statement like this, but what Obama, nor any of his predecessors have ever discovered is precisely what one would need to trade with other countries and in what form this new invention would take. If were wise enough to know, I'd probably be well on my way to being a very wealthy man, so I don't underestimate the challenge in front of us. However, though I believe that the capitalist system caters more to the selfish side of us more than the altruistic one, with selfishness does come innovation for the sake of maximum material gain, and in that regard, perhaps our basest instincts might come to everyone's aid, at least for a time.
Careworn phrases like "good old fashioned American ingenuity" have been utilized over and over again for at least a century, insinuating strongly that there was no problem beyond our grasp which would not eventually render a solution. And, honestly, I don't think that this mode of thought nor of rhetorical framing has ever really gone away altogether. But what I do think is that we don't often look for these signs so much for where they are so much as where we think they ought to be. Everyone can drive by and see the looming, titanic mass of buildings that house a paper processing plant or a textile mill, but the more subtle evidence of, say, a software design firm is much less visible to our senses and our psyches. Even though we may be headed towards a purely service-based economy, other developing nations are only now in the process of beginning their industrial phase of growth. Though our example might be the means by which they set their sights and chart their course, one must also crawl before one walks.
If we were all more or less on the same page the whole world round regarding economic parity, then exporting commodities would be a much easier task. Right now we do retain some residual elements of an earlier day, but often our products can't compete globally because they cost more to produce and thus they cost more to purchase. I honestly believe that we can be indebted to one of two stances in this instance, but not both. Either we pay people more in line of a fair wage, granting them adequate benefits--- recognizing that this will ensure that many countries can always buy what they need at a cheaper price from another source, or we slash costs to the bone and with them salaries and benefits. It goes without saying that I would never advocate the second position, but for the future going forward that model might be the only option that makes our products look attractive and compelling to another country or region's buyer, based on the current state of affairs as they exist today.
Speaking specifically about food, for example, I note that our own cultural attitudes are often to blame for much of the disparity. The more affluent among us can afford to be socially conscious by means of pocketbook and pay two times as much for products at a Whole Foods or a locally-grown produce Farmer's Market. The poorest, of course, simply aren't afforded this option. Americans might cut corners or scrimp to buy a wide screen television or to save up to take a vacation, but never towards food. Food is always supposed to be readily available, unquestionably cheap, and supremely varied. Organic food is a kind of innovation of sorts, since though its stated purpose is to use older methods of cultivation, it still combines elements of more modern technological strategies with the tried-and-true methods of a different time. Though it would never willfully adopt this label, organic food is itself a hybrid concept---one that seeks the middle ground between old and new.
These, of course, are previously established channels and instances. As for what product or products would find favor among the consumers of the globe, one assumes upon first thought that the most likely innovation would come in the form of some new technological breakthrough, one perhaps tied closely to the computer or the internet. However, like organic food, perhaps it would be best to seek for something with a foot in old ways and a foot in newer formulations. The most enterprising soul would be wise to recognize that products can be designed purely with the intention of always having a reliably steady stream of buyers and demand, or that they can be modified in the hopes of both making money and pulling in less developed countries and regions more economically in line with ours. Straddling the gap between the way it has always been and they way it needs to be is partially why we are at the impasse in which we find ourselves. While I do believe that the phrase "ethical capitalism" is a complete oxymoron, I do also recognize that if we are left with a system unable to be discarded for quite some time, it would be much easier if we limited as many disparities and points of difference between people as we could, since then it would be able for us to better address the remaining and still quite numerous problems left over.
We are still in the middle of a shift between an industrial economy and an information-based one, but at times our benchmarks and guideposts are indebted to a by-gone epoch. Nostalgia is strong and so is the resistance to the way things were always supposed to be. For instance, I grew up in Birmingham, Alabama, a city which was forced to completely reinvent itself after the collapse of its native steel industry in the 1970's. In so doing, it embraced banking and a world-class health care center based around a university, both of which are the two largest employers in the metro area. We might be wise to emulate their example, which is far from the only instance that a city teetered on a knife's edge between survival and disaster and managed to righted itself.
It is a short-sighted, short-term gain over long-term ultimate resolution means of thinking that got us into our current mess. American must learn that delayed gratification provides temporarily discomfort but eventual, eternal satisfaction. Greed drives humans to go for the quick cash-in and the gravy train, instead of a more modest, but still very satisfying profit. I don't ascribe to a theory of American exceptionalism because I am too aware of the times at which we fall short, though I also recognize that we are far from the only country, society, or culture which has a tendency to opt for the quick fix rather than engaging in the soul-searching and introspection which leads towards true resolution. Lasting success is based on hard work and research, not the accidental score.
Neither do I count myself among the numbers of those who adopt a cynical tact towards American identity and greater purpose that seeks fault first and rarely gives room for success. Somewhere between those who believe that our best days are yet to come and those who assert that we are soon going the way of the UK into second-tier country status is something close to the reality of the situation. Still, what we require right now is a new kind of skill set, one willing to work with existing trends, rather than fight them, build up native industry without seeking salvation in the form of a foreign company with an open checkbook, pay a bit more than usual for household staples with the understanding that increased cost doesn't always mean money wasted, and recognize that in a truly fair world, it shouldn't matter who is number 1 or number 500. If money is what makes the world go round, we can't begin to get any other unfair construct in check until we ensure that monetary policy levels the playing field. Real equality does not trickle-down and it never will.
In light of recent discussion of national economic issues, I would like to revisit Bill Clinton's 1992 slogan, "it's the economy, stupid." Here I will look at the rhetorical clout offered in various promises, against the background of economic and political history, while arguing that it's the entire capitalist system which needs to be revisited.
After a decade-long slide into semi-irrelevance, it's now being announced that the major television broadcast networks are considering leaving behind the "free TV/advertiser supported" business model in order to turn themselves into something more closely resembling a cable operation; the idea being that they could create a second revenue stream from the same "subscriber fees" that are paid by cable and satellite operators to all the other channels those operators carry.
This has become necessary, according to the networks, partly because the market has become so fragmented...which, naturally, is cable's fault-and presumably the fault of the disloyal viewer, as well.
Another reason driving the change is related to the desire of the networks to have a source of revenue that's more reliable in times of economic downturn, when advertisers often try to husband scarce resources by cutting back on all their expenses, particularly advertising dollars.
Will this new change in the business model reverse the fortunes of the networks?
Is it possible that the networks are simply poor business managers?
And what about...Krystal Carey?
Tune in for the rest of the story-and we'll find out.
Luck: Couple of months ago, my husband's stepmother's niece, 18 years old, wants heated windshield wipers. Can't find them online, files a patent and now Walmart wants the rights. True story. (seriously)
Why I am the Mom of the Year: If your five year old finds your vibrator and thinks it's a light saber, running around the house swinging it with both hands zroom-zroom, you might want to downsize or at least choose a different color. (no comment)
Best Drinks Ever: Eiswein and Chocolate milk made with dark cocoa.
I am a veteran, a mama of three and soon starting my junior year pursuing a degree in Microbiology, then on to PA school (please science gods). I am a eco-socialist libertarian progressive atheist who also happens to have a single economic thought progressives hate so you will have to be in the dark about because unlike vibrator stories, its personal. Proud Moment: I met Howard Dean in Iowa the week he made both the Newsweek and Time covers. I would have a picture if not for some asshole who bumped my husband as he took the picture. Because we were with Sen. Johnson people, we were able to hang around in the background with Dean and his people after the event. Pelosi's daughter was filming. I hope I am not on film. I haven't watched her documentary for just that reason. Stupid, I know.
We're diving deep into "geek world" today with a story that combines economic hardball, the periodic table of the elements, and a barely noticed provision of the Defense Authorization Act that seeks to break a monopoly which today gives China near-absolute control over the materials that make cell phones, electric cars, wind turbines, and pretty much every other tool of modern life possible.
If we successfully break the monopoly, we'll be able to create millions of new manufacturing jobs in this country-and if we don't, somebody else owns the 21st Century.
Ironically, the global warming we're trying to fight with new green technologies might be an ally in our efforts to make those very same green technologies happen.
There's a revolution in industrial processing going on, rare earths are at the center of it all...and in today's story, the revolution will be televised.
Our favorite irascible media tyrant is in the news once again, and once again it's time for me to bring you a story of doing one thing while wishing for another.
We have heard a lot about the...how can I put this politely...challenges Murdoch seems to face associating factual reality with his reality, and we could have lots of fun going through his factual misstatements-but instead, I want to take on one specific issue today:
Rupert Murdoch says he hates it when people steal his content from the Internet to draw readers to their sites...which is funny, if you think about it, because he has no problem at all stealing my content (and lots of yours, as well) for his sites.
We strive to be, if anything, a participatory space around here, and I've had a question come to my inbox that is very much deserving of our attention.
To make a long story short, our questioner wants to know why, on the one hand, despite the passage of the American Recovery and Reinvestment Act of 2009 (ARRA, also known as the "stimulus"), unemployment in the construction industry continues to increase, and, on the other hand, why there is such a giant disparity, on a state-by-state basis, in the cost of saving a job?
They're great questions, and, having done a bit of research, I think I have some cogent answers.
There has been a great wailing and gnashing of teeth over the past day or so as those who follow the healthcare debate react to the Stupak/Some Creepy Republican Guy Amendment.
The Amendment, which is apparently intended to respond to conservative Democrats' concerns that too many women were voting for the Party in recent elections, was attached to the House's version of healthcare reform legislation that was voted out of the House this weekend.
The goal is to limit women's access to reproductive medicine services, particularly abortions; this based on the concept that citizens of good conscience shouldn't have their tax dollars used to fund activities they find morally repugnant.
At first blush, I was on the mild end of the wailing and gnashing spectrum myself...but having taken a day to mull the thing over, I'm starting to think that maybe we should take a look at the thinking behind this...and I'm also starting to think that, properly applied, Stupak's logic deserves a more important place in our own vision of how a progressive government might work.
It's Political Judo Day today, Gentle Reader, and by the time we're done here it's entirely possible that you'll see Stupak's logic in a whole new light.
So if you're like most people, myself included, you've probably been wondering how the stock market can be going up while American job losses keep rising, and the dollar keeps sinking.
In fact, it seems that there's a full economic slow-motion meltdown underway in this country, with record numbers of people on food stamps, countless people being evicted, losing their homes, filing for bankruptcy, living in tents .....
Yet the CEO class -- you know, those guys who now make half the money in the country -- seem to be doing just fine, and their personal little casino known as Wall Street has been having a banner year ...
Daniel Gross points out that part of the reason that the American stock markets are going up even though unemployment is rising and the real economy suffering is because multinational corporations headquartered in the U.S. are experiencing strong sales abroad:
Here's a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn't seem to justify optimism. The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky...
It could be that the notion the stock market is an accurate gauge of the domestic economy's temperature is outdated.
Ya think? I'd say that's an understatement. Of course, if we come up with a new, universally accepted barometer of the domestic economy, the media wouldn't be able to tell us every day how great the "recovery" is, now would they? They might actually have to tell us the truth. And they sure don't want to do that.
And anyway, according to the trickle-down economic theory that has been in place in this country for almost 30 years now, supposedly what is good for Corporate America is good for Americans. Right?
Don't American Workers Win?
The fact that companies based in America are raking in profits from sales abroad is good for American workers, right?
No.
Gross points out that American workers don't benefit because a lot of the goods sold abroad by American multinationals are made abroad.
We've all seen that one coming for a good long time. Sure, having U.S. companies bypass worker-safety laws, environmental laws, unions, minimum-wage laws, and pretty much every other law our forefathers fought and bled and in some cases died for does give us lower-priced goods. For a while. But then, the bill comes due. Suddenly nobody makes anything any more, nobody has a job anymore, and therefore nobody can afford to buy even the cheap shitty crap made overseas.
Ah, but if these corporations are doing so well, there's a little bit of a silver lining, right? I mean, they have to pay taxes here, don't they?
Don't Multinationals Pay A Lot in Taxes?
Well, at least the multinationals are paying a good chunk of taxes into the American economy, right?
Not exactly.
The Washington Post notes:
About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005, according to a new report scheduled to be made public today from the U.S. Government Accountability Office...
In 2005, about 28 percent of large corporations paid no taxes...
Wait a minute. I had to pay taxes. And I'm hardly rich, and I'm certainly not a corporation. So I have to pay taxes, but "large corporations" can get away with paying none?
Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using "transfer pricing" to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates...
[Senator] Levin said: "This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States."
Indeed, as Pulitzer prize winning journalist David Cay Johnston documents, American multinationals pay much less in taxes than they should through a variety of widespread schemes, including:
Selling valuable assets of the American companies to foreign subsidiaries based in tax havens for next to nothing, so that those valuable assets can be taxed at much lower foreign rates
Pretending that costs were spent in the United States, so that the companies can count them as costs or deductions in the U.S. and pay less taxes to the American government
Booking profits as if they occurred in the subsidiary's tax haven countries, so that taxes paid on profits are at the much lower safe haven rate
Working out sweetheart deals with certain foreign governments, so that the companies can pretend they paid more in foreign taxes than they actually did, to obtain higher U.S. tax credits than are warranted
Pretending they are headquartered in tax havens like Bermuda, the Cayman Islands or Panama, so that they can enjoy all of the benefits of actually being based in America (including the use of American law and the court system, listing on the Dow, etc.), with the tax benefits associated with having a principal address in a sunny tax haven.
And myriad other scams
As Johnston documents, the American economy is hurt by the massive underpayment of taxes by the huge multinationals.
Professor Raymond T. Pierrehumbert, Louis Block Professor in the Geophysical Sciences at the University of Chicago Geosciences, has published An Open Letter to Steven Levitt, the nation's Super Freakiest Economist. To put it simply, Pierrehumbert owns Levitt.
By now there have been many detailed dissections of everything that is wrong with the treatment of climate in Superfreakonomics , but what has been lost amidst all that extensive discussion is how really simple it would have been to get this stuff right. The problem wasn't necessarily that you talked to the wrong experts or talked to too few of them. The problem was that you failed to do the most elementary thinking needed to see if what they were saying (or what you thought they were saying) in fact made any sense. If you were stupid, it wouldn't be so bad to have messed up such elementary reasoning, but I don't by any means think you are stupid. That makes the failure to do the thinking all the more disappointing.
Pierrehumbert then takes one specific point from the chapter to highlight this "failure to do the thinking". Pierrehumbert's examination of the issue of whether solar cells' low albedo (high absorption of solar energy & thus heat) makes it senseless to pursue solar power provides a tour de force examination of the basics of research (using the web) and how Levitt seems to have totally flubbed.
The point here is that really simple arithmetic, which you could not be bothered to do, would have been enough to tell you that the claim that the blackness of solar cells makes solar energy pointless is complete and utter nonsense. I don't think you would have accepted such laziness and sloppiness in a term paper from one of your students, so why do you accept it from yourself? What does the failure to do such basic thinking with numbers say about the extent to which anything you write can be trusted? How do you think it reflects on the profession of economics when a member of that profession - somebody who that profession seems to esteem highly - publicly and noisily shows that he cannot be bothered to do simple arithmetic and elementary background reading. Not even for a subject of such paramount importance as global warming.
An old friend of my family had a favorite saying: "Work is something unpleasant done for money."
I lost touch with the fellow long ago, but the phrase has stuck in my mind and popped up occasionally over the years. Some of my recent conversations about economic systems, here and elsewhere, have brought it again to the fore.
It was a long hot August for those who would like to see health care reform, as rabid "Town Hall" protesters proffered visions of public options that would lead to death panels and socialism and government tax collectors with special alien mind control powers that would use sex education and child indoctrination and black helicopters as the means for gay people to impose their dangerous agenda on the innocent, God-fearing citizens of someplace in Mississippi that I'm not likely to ever visit.
Part of the reason that opposition was so rabid was because health care interests were spending millions upon millions of dollars doing...well, doing whatever the opposite of giving a distemper shot to the angry mob might be, anyway.
So wouldn't it be great if all the CEOs of all those health care interests were to gather at one time and place so you could, shall we say, gently express your own thoughts regarding the issues of reform and public options?
By an amazing coincidence, that's exactly what's going to happen Thursday in Washington, DC, as the Patient Centered Primary Care Cooperative (PCPCC) holds its Annual Summit.
Follow along, and I'll tell you everything you need to know.
Freaknomics was a great read. Interesting and provoking writing, underlining the value of taking commonly understood items, shaking the data, and seeing whether the common understandings could hold up to the light of day. Even with its problems, you didn't need to agree with it to gain from reading and thinking about it.
As an 'analyst' who values that sort of provocative challenge and who values windows to thinking in different ways, it came as welcome news that a follow-on book would come out this fall.
Sadly, however, this is one of those cases where the sequel isn't just a disappointment but does a serious disservice to its predecessor.
As Stephen Levitt summarized his and Stephen Dubner's follow-on book, "SuperFreakonomics, available this October, includes brand new research on topics from terrorism to prostitution to global warming."
Superfreakonomics came out today and we'd all be better off if it just hadn't ...
Reform Immigration -
March on Washington
in the Geophysical Sciences at the University of Chicago Geosciences, has published 
