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Stability is destabilizing: The idea of Minsky moment

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  "Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight. People change their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure and stick to it. Instead, they change their minds over time. And history is quite clear about how they change their minds. The longer the good times endure, the more people begin to see wisdom in risky strategies."

The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future, by Robert Barbera

The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to the point where the accumulation of wealth and power hurts people — eventually even those at the top of the food chain. ”

Uncle Billy Cunctator
In comment to Economic Donkeys

 
  Banks are a clear case of market failure and their employees at the senior level have basically become the biggest bank robbers of all time. As for basing pay on current revenues and not profits over extended periods of time, then that is a clear case of market failure --  
  The banksters have been able to sell the “talent” myth to justify their outsized pay because they are the only ones able to deliver the type of GDP growth the U.S. economy needs in the short term, even if that kills the U.S. economy in the long term. You’ll be gone, I’ll be gone.  
  Unfortunately, many countries go broke pursuing war, if not financially, then morally (are the two different? – this post suggests otherwise).

I occurs to me that the U.S. is also in that flock; interventions justified by grand cause built on fallacy, the alpha and omega of failure. Is the financial apparatchik (or Nomenklatura, a term I like which, as many from the Soviet era, succinctly describes aspects of our situation today) fated also to the trash heap, despite the best efforts of the Man of the hour, Ben Bernanke?

 

Minsky moment is the synonym of financial crisis -- the moment when excessive leverage that was inevitably created by the financial system during the boom phase of the cycle, starts collapsing and financial system enter the state of deep crisis with many banks becoming insolvent to the level of leverage they accumulated.  Government bailout of financial institutions under neoliberalism follows (because as Senator Durbin noted banks own the place -- the Congress) and then overhand of excessive debt depress the economy that enters the stage of prolonged stagnation. 

The view developed in this volume identifies both real and financial causes for the Great Recession, including the real income stagnation suffered by households across most of the income distribution on one hand, and deregulation and institutional change in the financial sector on the other.

The interplay of these factors led to massive debt accumulation, particularly by U.S. households seeking to supplement stagnant incomes in their pursuit of increasing consumption aspirations. Household borrowing was spurred on by a financial sector rendered ever freer of inter- and postwar financial regulations. These regulations came to be seen as unnecessary fetters on an inherently self-regulating “free market,” an idealized notion in which financiers and policy makers placed increasing trust and confidence.

Ultimately, the self-reinforcing developments in the real and financial sectors proved deadly.

Minsky should be the most admired economist in the second half of the 21st. Century. His views are now partially accepted even by neoclassical economists with their stahostic  equilibrium of supply and demand nonsense. This is mainly dues because they have no other choice. But Minsky was more then astute researcher of business cycle and the Great Depression. Perhaps his writings on eradicating poverty will earn the respect that it may deserve with time as well.

In any case he was one of the first researchers who understood (after Keynes) that financialization is inherent in capitalism and is the key to its instability:

Capitalism is essentially a financial system, and the peculiar behavioral attributes of a capitalist economy center around the impact of finance upon system behavior.” Minsky (1967)

Fifty years ago, Minsky, following Marx, viewed instability as the central flaw of the financial system under capitalism, as its inherent flaw. But unlike Marx, who thought that the periodic crisis of overproduction  is the source of instability (as well as  impoverishment of workers), Minsky assumed that the key source of that instability in the cycles of business borrowing and fractional bank lending, when "good times" lead to excessive borrowing and overproduction (The Alternative To Neoliberalism )

Minsky on capitalism:

He called his model the "Financial Instability Hypothesis". According to Steve Keen, Minsky model boils down to three   statements:

  1. The employment rate will rise if economic growth exceeds the sum of population growth and growth in labor productivity;
  2. The wages share of output will rise if money wage demands exceed the sum of inflation and growth in labor productivity; and
  3. The private debt to GDP ratio will rise if the rate of growth of private debt exceeds the sum of inflation plus the rate of economic growth.

He considered the immanent rising of private debt to GDP ratio an immanent feature of capitalism that lead to financial crisis. While the ultimate feature of neoliberlaism is redistribution of wealth up (rising of inequality) it can continue only while private debt can compensate that sliding share of labor wages in GDP.

Several other source of financial instability were pointed out by others:

The idea of Minsky moment is related to the fact that the fractional reserve banking periodically causes credit collapse when the leveraged credit expansion goes into reverse. And mainstream economists do not want to talk about the fact that increasing confidence breeds increased leverage. So financial stability breeds instability and subsequent financial crisis. All actions to guarantee a market rise, ultimately guarantee it's destruction because greed will always take advantage of a "sure thing" and push it beyond reasonable boundaries.  In other words, marker players are no rational and assume that it would be foolish not to maximize leverage in a market which is going up. So the fractional reserve banking mechanisms ultimately and ironically lead to over lending and guarantee the subsequent crisis and the market's destruction. Stability breed instability.

That means that fractional reserve banking based economic system with private players (aka capitalism) is inherently unstable. And first of all because  fractional reserve banking is debt based. In order to have growth it must create debt. Eventually the pyramid of debt crushes and crisis hit. When the credit expansion fuels asset price bubbles, the dangers for the financial sector and the real economy are substantial because this way the credit boom bubble is inflated which eventually burst. The damage done to the economy by the bursting of credit boom bubbles is significant and long lasting.

Blissex said...

«When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial.»

So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it right? Who could have imagined! :-)

«In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms.»

If only! They have been feeding credit-based asset price bubbles by at the same time weakening regulations to push up allowed capital-leverage ratios, and boosting the quantity of credit as high as possible, but specifically most for leveraged speculation on assets, by allowing vast-overvaluations on those assets.

Central banks have worked hard in most Anglo-American countries to redistribute income and wealth from "inflationary" worker incomes to "non-inflationary" rentier incomes via hyper-subsidizing with endless cheap credit the excesses of financial speculation in driving up asset prices.

Not very hands-off at all.

Steve Keen understands this.  http://www.debtdeflation.com/blogs/manifesto/

John Kay in his January 5 2010 FT column very aptly explained the systemic instability of financial sector hypothesis: 

The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007.

The manifestation of the problem in each phase was different – first emerging markets, then stock markets, then debt. But the mechanics were essentially the same. Financial institutions identified a genuine economic change – the assimilation of some poor countries into the global economy, the opportunities offered to business by new information technology, and the development of opportunities to manage risk and maturity mismatch more effectively through markets. Competition to sell products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits, of which a substantial fraction was paid to employees.

Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable – funding the financial systems of emerging economies, promoting start-up internet businesses, trading in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to make write-offs, most of the new economy stocks proved valueless and many structured products became unmarketable. Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success. At the end of each phase, regulators and financial institutions declared that lessons had been learnt. While measures were implemented which, if they had been introduced five years earlier, might have prevented the most recent crisis from taking the particular form it did, these responses addressed the particular problem that had just occurred, rather than the underlying generic problems of skewed incentives and dysfunctional institutional structures.

The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.

I do not know what the epicenter of the next crisis will be, except that it is unlikely to involve structured debt products. I do know that unless human nature changes or there is fundamental change in the structure of the financial services industry – equally improbable – there will be another manifestation once again based on naive extrapolation and collective magical thinking. The recent crisis taxed to the full – the word tax is used deliberately – the resources of world governments and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may not be there.

The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right. We should listen to them before the same message is conveyed in much more violent form, in another place and at another time. But it seems unlikely that we will.

We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions. This led to businesses riddled with conflicts of interest and culture, controlled by warring groups of their own senior employees. The scale of resources such businesses commanded enabled them to wield influence to create a – for them – virtuous circle of growing economic and political power. That mistake will not be easily remedied, and that is why I view the new decade with great apprehension. In the name of free markets, we created a monster that threatens to destroy the very free markets we extol.

The economist Hyman Minsky was the first clearly formulate the financial instability hypothesis although I think Keynes understood the dynamic pretty well. He postulated that a world with a large financial sector and an excessive emphasis on the production of investment products creates instability both in terms of output and prices. In other words it automatically tends to generate credit and asset bubbles.  The key driver is the fact that financial professionals generally risk other people’s money and due to this fact have asymmetrical incentives:

This asymmetry is not a new observation of this systemic problem. Andrew Jackson noted it in much more polemic way long ago:

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.”

This asymmetrical incentives ensure that the financial system is structurally biased toward taking on more risk than what should be taken. In other words it naturally tend to slide to the casino model, the with omnipresent reckless gambling as the primary and the most profitable mode of operation while an opportunities last.  The only way to counter this is to throw sand into the wheels of financial mechanism:  enforce strict regulations, limit money supplies and periodically jail too enthusiastic bankers. The latter is as important or even more important as the other two because bankers tend to abuse "limited liability" status like no other sector.

Asset inflation over the past 10 years and the subsequent catastrophe incurred is a way classic behavior of dynamic system with strong positive feedback loop.  Such behavior does not depends of personalities of bankers or policymakers, but is an immanent property of this class of dynamic systems. And the main driving force here was deregulation. So its important that new regulation has safety feature which make removal of it more complicated and requiring bigger majority like is the case with constitutional issues.

Another fact was the fact that due to perverted incentives, accounting in the banks was fraudulent from the very beginning and it was fraudulent on purpose.  Essentially accounting in banks automatically become as bad as law enforcement permits. This is a classic case of control fraud and from prevention standpoint is make sense to establish huge penalties for auditors, which might hurt healthy institutions but help to ensure that the most fraudulent institution lose these bank charter before affecting the whole system.  With the anti-regulatory zeal of Bush II administration the level of auditing became too superficial, almost non-existent. I remember perverted dances with Sarbanes–Oxley when it was clear from the very beginning that the real goal is not to strengthen accounting but to earn fees and to create as much profitable red tape as possible, in perfect Soviet bureaucracy style.

Deregulation also increases systemic risk by influencing the real goals of financial organizations. At some point of deregulation process the goal of higher remuneration for the top brass becomes self-sustainable trend  and replaces all other goals of the financial organization. This is the essence of  Martin Taylor’s, the former chief executive of Barclays,  article FT.com - Innumerate bankers were ripe for a reckoning in the Financial Times (Dec 15, 2009), which is worth reading in its entirety:

City people have always been paid well relative to others, but megabonuses are quite new. From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then investment bank were paid more than £1m, and no one got near £2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly – after a pause in 2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and 2007.

Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth?

In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.

In the next phase instability is amplified by the way governments and central banks respond to crises caused by credit bubble: the state has powerful means to end a recession, but the policies it uses give rise to the next phase of instability, the next bubble…. When money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up to the hilt. Thus previous bubble and crash become a dress rehearsal for the next.

Resulting self-sustaining "boom-bust" cycle is very close how electronic systems with positive feedback loop behave and   cannot be explained by neo-classical macroeconomic models. Like with electronic devices the financial institution in this mode are unable to provide the services that are needed.

As Minsky noted long ago (sited from Stephen Mihm  Why capitalism fails Boston Globe):

Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

...our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place. Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.

And he understood the roots of the current credit bubble much better that neoclassical economists like Bernanke: 
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what [Minsky] called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further.

As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

 Minsky’s financial instability hypothesis suggests that when optimism is high and ample funds are available for investment, investors tend to migrate from the safe hedge end of the Minsky spectrum to the risky speculative and Ponzi end. Indeed, in the current crisis, investors tried to raise returns by increasing leverage and switching to financing via short-term—sometimes overnight— borrowing (Too late to learn?):

In the church of Friedman, inflation was the ol' devil tempting the good folk; the 1980s seemed to prove that, let loose, it would cause untold havoc on the populace. But, as Barbera notes:

The last five major global cyclical events were the early 1990s recession - largely occasioned by the US Savings & Loan crisis, the collapse of Japan Inc after the stock market crash of 1990, the Asian crisis of the mid-1990s, the fabulous technology boom/bust cycle at the turn of the millennium, and the unprecedented rise and then collapse for US residential real estate in 2007-2008. All five episodes delivered recessions, either global or regional. In no case was there a significant prior acceleration of wages and general prices. In each case, an investment boom and an associated asset market ran to improbable heights and then collapsed. From 1945 to 1985, there was no recession caused by the instability of investment prompted by financial speculation - and since 1985 there has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an associated asset market [that] ran to improbable heights and then collapsed".

According the Barbera, "Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight. People change their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure and stick to it. Instead, they change their minds over time. And history is quite clear about how they change their minds. The longer the good times endure, the more people begin to see wisdom in risky strategies."

Current economy state can be called following Paul McCulley a "stable disequilibrium" very similar to a state  a sand pile.  All this pile of  stocks, debt instruments, derivatives, credit default swaps and God know corresponds to a  pile of sand that is on the verse of losing stability. Each financial player works hard to maximize their own personal outcome but the "invisible hand" effect in adding sand to the pile that is increasing systemic instability. According to Minsky, the longer such situation continues the more likely and violent an "avalanche".

The late Hunt Taylor wrote, in 2006:

"Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.

"... I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it."

This is a gold age for bankers. As Peter Boone Simon Johnson wrote in New Republic (The Next Financial Crisis ):

Banking was once a dangerous profession. In Britain, for instance, bankers faced “unlimited liability”--that is, if you ran a bank, and the bank couldn’t repay depositors or other creditors, those people had the right to confiscate all your personal assets and income until you repaid. It wasn’t until the second half of the nineteenth century that Britain established limited liability for bank owners. From that point on, British bankers no longer assumed much financial risk themselves.

In the United States, there was great experimentation with banking during the 1800s, but those involved in the enterprise typically made a substantial commitment of their own capital. For example, there was a well-established tradition of “double liability,” in which stockholders were responsible for twice the original value of their shares in a bank. This encouraged stockholders to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on those who managed banks. If they fared poorly, they typically faced personal and professional ruin. The idea that a bank executive would retain wealth and social status in the event of a self-induced calamity would have struck everyone--including bank executives themselves--as ludicrous.

Enter, in the early part of the twentieth century, the Federal Reserve. The Fed was founded in 1913, but discussion about whether to create a central bank had swirled for years. “No one can carefully study the experience of the other great commercial nations,” argued Republican Senator Nelson Aldrich in an influential 1909 speech, “without being convinced that disastrous results of recurring financial crises have been successfully prevented by a proper organization of capital and by the adoption of wise methods of banking and of currency”--in other words, a central bank. In November 1910, Aldrich and a small group of top financiers met on an isolated island off the coast of Georgia. There, they hammered out a draft plan to create a strong central bank that would be owned by banks themselves.

What these bankers essentially wanted was a bailout mechanism for the aftermath of speculative crashes--something more durable than J.P. Morgan, who saved the day in the Panic of 1907 but couldn’t be counted on to live forever. While they sought informal government backing and substantial government financial support for their new venture, the bankers also wanted it to remain free of government interference, oversight, or control.

Another destabilizing fact is so called myth of invisible hand which is closely related to the myth about market self-regulation. The misunderstood argument of Adam Smith [1776], the founder of modern economics, that free markets led to efficient outcomes, “as if by an invisible hand” has played a central role in these debates: it suggested that we could, by and large, rely on markets without government intervention. About "invisible hand" deification, see The Invisible Hand, Trumped by Darwin - NYTimes.com. One of the most important counterargument against financial market self-regulation is existence of so called  “Minsky moments”:

“Minsky” was shorthand for Hyman Minsky, an Amercan macroeconomist who died over a decade ago.  He predicted almost exactly the kind of meltdown that recently hammered the global economy. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

Minsky believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. As economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.

Misnky theory was not well recived due to powerful orthodoxy, born in the years after World War II, known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing free market had selectively absorbed a few insights from John Maynard Keynes, the great economist of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment. Most economists still believed that free-market capitalism was a fundamentally stable basis for an economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances play a role in keeping the economy - and employment - on an even keel.

Economists like Paul Samuelson became the public face of the new establishment; he and others at a handful of top universities became deeply influential in Washington. In theory, Minsky could have been an academic star in this new establishment: Like Samuelson, he earned his doctorate in economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter, as well as future Nobel laureate Wassily Leontief.

But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists. While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall Wray, a former student, a “character.”

So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University. Indeed, many economists weren’t even aware of his work. One assessment of Minsky published in 1997 simply noted that his “work has not had a major influence in the macroeconomic discussions of the last thirty years.”

Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which despite its seeming importance had no place in the theories formulated by Samuelson and others. He also began to ask a simple, if disturbing question: “Can ‘it’ happen again?” - where “it” was, like Harry Potter’s nemesis Voldemort, the thing that could not be named: the Great Depression.

In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists came to call “bastard Keynesianism.”

Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s ceaseless process of “creative destruction.” But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.

Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.

From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this shift was already underway: postwar stability, financial innovation, and the receding memory of the Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem, not the solution.

Moreover, the new dogma coincided with a remarkable era of stability. The period from the late 1980s onward has been dubbed the “Great Moderation,” a time of shallow recessions and great resilience among most major industrial economies. Things had never been more stable. The likelihood that “it” could happen again now seemed laughable.

Yet throughout this period, the financial system - not the economy, but finance as an industry - was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing use of leverage within the financial system.

By the end of the 20th century, the financial system that Minsky had warned about had materialized, complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning of risk. When storied financial firms started to fall, sending shockwaves through the “real” economy, his predictions started to look a lot like a road map.

“This wasn’t a Minsky moment,” explains Randall Wray. “It was a Minsky half-century.”

Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”

Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression [won’t] cure.”

But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive and unstable - never mind that it produces inequality and unemployment, as Keynes had observed - now what?

After spending his life warning of the perils of the complacency that comes with stability - and having it fall on deaf ears - Minsky was understandably pessimistic about the ability to short-circuit the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.

To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve - what he liked to call the “Big Bank” - step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of the Depression - it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.

Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.

Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government - or what he liked to call “Big Government” - should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe to say that even liberal policymakers are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”

But not perfect. Indeed, if there’s anything to be drawn from Minsky’s collected work, it’s that perfection, like stability and equilibrium, are mirages. Minsky did not share his profession’s quaint belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic. “There is no simple answer to the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into a catchy phrase and carried on banners.”

It’s a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy. But that’s probably how he would have preferred it, believes liberal economist James Galbraith. “I think he would resist being domesticated,” says Galbraith. “He spent his career in professional isolation.”

Stephen Mihm is a history professor at the University of Georgia and author of “A Nation of Counterfeiters” (Harvard, 2007). © Copyright 2009 Globe Newspaper Company.

 

Attempts to reinvent Minsky will never stop

Here is one such paper   Leveraged Bubbles (Sep 01, 2015)

The conclusion to "Leveraged bubbles," by Òscar Jordà, Moritz Schularick, and Alan Taylor:

... In this column, we turned to economic history for the first comprehensive assessment of the economic risks of asset price bubbles. We provide evidence about which types of bubbles matter and how their economic costs differ. Our historical analysis shows that not all bubbles are created equal. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit boom bubbles is significant and long lasting.
In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms. This way of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating tendencies of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles. The findings presented here can inform ongoing efforts to devise better macro-financial theory and real-world applications at a time when policymakers are still searching for new approaches in the aftermath of the Great Recession.
Posted by Mark Thoma on Tuesday, September 1, 2015 at 09:25 AM in Economics, Financial System | Permalink  Comments (8)

Double Capitulation said...

"bursting of credit boom bubbles is significant and long lasting.

In the past decades, central banks typically have taken"
~~Òscar Jordà, Moritz Schularick, and Alan Taylor:~

Did Kurt Vonnegut once quip

"Each fed governor likes to live on the edge, further out on a limb where she can see more then hope against hope that limb will not break until she leaves office." ?

Imprecisely, yet left us with a memorable hint of both his genius and fed governor's stupidity.
 

djb said...

of course if wages kept up with productivity, there would not have been as much of a bubble because people could have paid more, and borrowed less

but I doubt BIS was worried about that particular issue

Peter K. -> djb...

"This way of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating tendencies of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles."

Likewise I don't the believe the BIS is big on tighter regulation of the banks. As Krugman and others have pointed out, the BIS is always for raising rates but switches rationals. Sometimes it's about inflation, sometimes bubbles.
 

mulp -> djb...

We need a Fed that sets as policy buying long term debt that funds new infrastructure projects that are required by Federal regulation to pay prevailing aka higher wages.

If in 2010, the Fed had bought $3 trillion in bonds for such projects as building the NE HSR, for all the cities fixing their century old water and sewer systems, California's HSR, bonds for replacement bridges with tunnels as option, rerouting rail to eliminate grade crossings to speed for freight and truck traffic, then the Fed could have done what Republicans have done up until the Republicans decided to punish all the We the People for electing Obama.

Any debt issued that does not build new capital assets requiring American labor, ie, debt paying labor costs, is totally worthless to the economy.

Other than for some existing constant wealth redistribution purposes - during 2008-2011 savers were protected against having their wealth taken from them and given to the borrowers who had long ago spent it.

Arne said...

Is there some data on the extent to which asset price rises are credit fueled or not. My memory (which does not qualify as a data source) says that the housing bubble was much more so than the dot-com bubble.

Blissex said...

«When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial.»

So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it right? Who could have imagined! :-)

«In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms.»

If only! They have been feeding credit-based asset price bubbles by at the same time weakening regulations to push up allowed capital-leverage ratios, and boosting the quantity of credit as high as possible, but specifically most for leveraged speculation on assets, by allowing vast-overvaluations on those assets.

Central banks have worked hard in most Anglo-American countries to redistribute income and wealth from "inflationary" worker incomes to "non-inflationary" rentier incomes via hyper-subsidizing with endless cheap credit the excesses of financial speculation in driving up asset prices.

Not very hands-off at all.

mulp -> Blissex...

Are you questioning creating wealth by price inflation of decaying asset which are churned in pump and dump?

Do you believe selling and reselling the same fixed quantity of assets creates jobs through the wealth effect of workers spending money they don't have to buy things on credit they can't pay back to keep up with the rich?

Wealth. Creating wealth. Wealth effect. Capital gains. Money in your pocket.

Signs of free lunch economic smoke and mirrors.

Wealth is created by paid labor or hard labor by the owner of the created wealth. But paying labor costs as a virtue is not something an economist is allowed to say in the post Reagan victory world.


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[Jun 28, 2020] SEC Issues Devastating Risk Alert on Private Equity Abuses; Effectively Admits Failure of Last 5+ Years of Enforcement by Yves Smith

Jun 26, 2020 | www.nakedcapitalism.com

We've embedded an SEC Risk Alert on private equity abuses at the end of this post. 1 What is remarkable about this document is that it contains a far longer and more detailed list of private abuses than the SEC flagged in its initial round of examinations of private equity firms in 2014 and 2015. Those examinations occurred in parallel with groundbreaking exposes by Gretchen Morgenson at the New York Times and Mark Maremont in the Wall Street Journal. At least some of the SEC enforcement actions in that era look to have been triggered by the press effectively getting ahead of the SEC. And the SEC even admitted the misconduct was more common at the most prominent firms.

Yet despite front-page articles on private equity abuses, the SEC engaged in wet noodle lashings. Its pattern was to file only one major enforcement action over a particular abuse. Even then, the SEC went to some lengths to spread the filings out among the biggest firms. That meant it was pointedly engaging in selective enforcement, punishing only "poster child" examples and letting other firms who'd engaged in precisely the same abuses get off scot free.

The very fact of this Risk Alert is an admission of failure by the SEC. It indicates that the misconduct it highlighted five years ago continues and if anything is even more pervasive than in the 2014-2015 era. It also confirms that its oft-stated premise then, that the abuses it found then had somehow been made by firms with integrity that would of course clean up their acts, and that now-better-informed investors would also be more vigilant and would crack down on misconduct, was laughably false.

In particular, the second section of the Risk Alert, on Fees and Expenses (starting on page 4) describes how fund managers are charging inflated or unwarranted fees and expenses. In any other line of work, this would be called theft. Yet all the SEC is willing to do is publish a Risk Alert, rather than impose fines as well as require disgorgements?

The SEC's Abject Failure

In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses.

Undermining legislative intent of new supervisory authority . The SEC never embraced its new responsibilities to ride herd on private equity and hedge funds.

The SEC has long maintained a division between the retail investors and so-called "accredited investors" who by virtue of having higher net worths and investment portfolios, are treated by the agency as able to afford to lose more money. The justification is that richer means more sophisticated. But as anyone who is a manager for a top sports professional or entertainer, that is often not the case. And as we've seen, that goes double for public pension funds.

Starting with the era of Clinton appointee Arthur Levitt, the agency has taken the view that it is in the business of defending presumed-to-be-hapless retail investors and has left "accredited investor" and most of all, institutional investors, on their own. This was a policy decision by the agency when deregulation was venerated; there was no statutory basis for this change in priorities.

Congress tasked the SEC with supervising the fund management activities of private equity funds with over $150 million in assets under management. All of their investors are accredited investors. In other words, Congress mandated the SEC to make sure these firms complied with relevant laws as well as making adequate disclosures of what they were going to do with the money entrusted to them. Saying one thing in the investor contracts and doing another is a vastly worse breach than misrepresentations in marketing materials, yet the SEC acted as if slap-on-the-wrist-level enforcement was adequate.

We made fun when thirteen prominent public pension fund trustees wrote the SEC asking for them to force greater transparency of private equity fees and costs. The agency's position effectively was "You are grownups. No one is holding a gun to your head to make these investments. If you don't like the terms, walk away." They might have done better if they could have positioned their demand as consistent with the new Dodd Frank oversight requirements.

Actively covering up for bad conduct . In 2014, the SEC started working at giving malfeasance a free pass. Specifically, the SEC told private equity firms that they could continue their abuses if they 'fessed up in their annual disclosure filings, the so-called Form ADV. The term of art is "enhanced disclosure". Since when are contracts like confession, that if you admit to a breach, all is forgiven? Only in the topsy-turvy world of SEC enforcement.

And the coddling of crookedness continued. From a January post :

The agency is operating in such a cozy manner with private equity firms that as one investor described it:

It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on."

Specifically, as we indicated, the SEC was giving advanced warning of the issues it would focus on in its upcoming exams, in order to give investment managers the time to get their stories together and purge files. And rather than view its periodic exams as being designed to make sure private equity firms comply with the law and their representations, the agency views them as "cooperative" exercises! Misconduct is assumed to be the result of misunderstanding and error, and not design.

It's pretty hard to see conduct like this, from the SEC's Risk Alert, as being an accident:

Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses

The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund's holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings .

Advisers failed to apply or calculate management fee offsets in accordance with disclosures and therefore caused investors to overpay management fees.

We're highlighting this skimming simply because it is easier for laypeople to understand than some of the other types of cheating the SEC described. Even so, industry insiders and investors complained that the description of the misconduct in this Risk Alert was too general to give them enough of a roadmap to look for it at particular funds.

Ignoring how investors continue to be fleeced . The SEC's list includes every abuse it sanctioned or mentioned in the 2014 to 2015 period, including undisclosed termination of monitoring fees, failure to disclose that investors were paying for "senior advisers/operating partners," fraudulent charges, overcharging for services provided by affiliated companies, plus lots of types of bad-faith conduct on fund restructurings and allocations of fees and expenses on transactions allocated across funds.

The SEC assumed institutional investors would insist on better conduct once they were informed that they'd been had. In reality, not only did private equity investors fail to demand better, they accepted new fund agreements that described the sort of objectionable behavior they'd been engaging in. Remember, the big requirement in SEC land is disclosure. So if a fund manager says he might do Bad Things and then proceeds accordingly, the investor can't complain about not having been warned.

Moreover, the SEC's very long list of bad acts says the industry is continuing to misbehave even after it has defined deviancy down via more permissive limited partnership agreements!

Why This Risk Alert Now?

Keep in mind what a Risk Alert is and isn't. The best way to conceptualize it is as a press release from the SEC's Office of Compliance Inspections and Examinations. It does not have any legal or regulatory force. Risk Alerts are not even considered to be SEC official views. They are strictly the product of OCIE staff.

On the first page of this Risk Alert, the OCIE blandly states that:

This Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also to provide investors with information concerning private fund adviser deficiencies.

Cutely, footnotes point out that not everyone examined got a deficiency letter (!!!), that the SEC has taken enforcement actions on "many" of the abuses described in the Risk Alert, yet "OCIE continues to observe some of these practices during examinations."

Several of our contacts who met in person with the SEC to discuss private equity grifting back in 2014-2015 pressed the agency to issue a Risk Alert as a way of underscoring the seriousness of the issues it was unearthing. The staffers demurred then.

In fairness, the SEC may have regarded a Risk Alert as having the potential to undermine its not-completed enforcement actions. But why not publish one afterwards, particularly since the intent then had clearly been to single out prominent examples of particular types of misconduct, rather than tackle it systematically? 2

So why is the OCIE stepping out a bit now? The most likely reason is as an effort to compensate for the lack of enforcement actions. Recall that all the OCIE can do is refer a case to the Enforcement Division; it's their call as to whether or not to take it up.

The SEC looks to have institutionalized the practice of borrowing lawyers from prominent firms. Mary Jo White of Debevoise brought Andrew Ceresney with her from Debeviose to be her head of enforcement. Both returned to Debevoise.

Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. Clayton made clear his focus was on "mom and pop" investors, meaning he chose to overlook much more consequential abuses by private equity firms and hedgies. The New York Times determined that the average amount of SEC fines against corporate perps fell markedly in 2018 compared to the final 20 months of the Obama Administration. The SEC since then levied $1 billion fine against the Woodbridge Group of Companies and its one-time owner for running a Ponzi scheme that fleeced over 8,400, so that would bring the average penalty up a bit. But it still confirms that Clayton is concerned about small fry, and not deeper but just as pickable pockets.

David Sirota argues that the OCIE was out to embarrass Clayton and sabotage what Sirota depicted as an SEC initiative to let retail investors invest in private equity. Sirota appears to have missed that that horse has left the barn and is in the next county, and the SEC had squat to do with it.

The overwhelming majority of retail funds is not in discretionary accounts but in retirement accounts, overwhelmingly 401(k)s. And it is the Department of Labor, which regulates ERISA plans, and not the SEC, that decides what those go and no go zones are. The DoL has already green-lighted allowing large swathes of 401(k) funds to include private equity holdings. From a post earlier this month :

Until now, regulations have kept private equity out of the retail market by prohibiting managers from accepting capital from individuals who lack significant net worth.

Private equity firms have succeeded in storming that barricade. The Department of Labor published a June 3 information letter that allows private equity funds, or more accurately funds of funds, to be included in certain 401(k) plan offerings, namely, target date funds and balanced funds. This is significant because despite the SEC regularly calling out bad practices with target date funds, they are the strategy used to manage the majority of 401(k) assets .

Moreover, even though Sirota pointed out that Clayton had spoken out in favor of allowing retail investors more access to private equity investments, the proposed regulation on the definition of accredited investors in fact not only does not lower income or net worth requirements (save for allowing spouses to combine their holdings) it in fact solicited comments on the idea of raising the limits. From a K&L Gates write up :

Previously, the Concept Release requested comment on whether the SEC should revise the current individual income ($200,000) and net worth ($1,000,000) thresholds. In the Proposing Release, the SEC further considered these thresholds, noting that the figures have not been adjusted since 1982. The SEC concluded that it does not believe modifications to the thresholds are necessary at this time, but it has requested comments on whether the final should instead make a one-time increase to the thresholds in the account for inflation, or whether the final rule should reflect a figure that is indexed to inflation on a going-forward basis.

It is not clear how many people would be picked up by the proposed change, which was being fleshed out, that of letting some presumed sophisticated but not rich individuals, like junior hedge fund professionals and holders of securities licenses, be treated as accredited investors. In other words, despite Clayton's talk about wanting ordinary investors to have more access to private equity funds, the agency's proposed rule change falls short of that.

Moreover, if the OCIE staff had wanted to undermine even the limited liberalization of the definition of accredited investor so as to stymie more private equity investment, the time to do so would have been immediately before or while the comments period was open. It ended March 16 .

The New York Times reported that Senate Republicans deemed Clayton's odds of confirmation as US Attorney for the Southern District of New York as remote even before the Trump fired Geoffrey Berman to clear a path for Clayton. So the idea that a technical release by the OCIE would derail Clayton's confirmation is a stretch.

So again, why now? One possibility is that the timing is purely a coincidence. For instance, the SEC staffers might have been waiting until Covid-19 news overload died down a bit so their work might get a hearing (and Covid-19 remote work complications may also have delayed its release).

The second possibility is that OCIE is indeed very frustrated with the enforcement chief Peikin's inaction on private equity. The fact that Peikin's boss and protector Clayton has made himself a lame duck meant a salvo against Peikin was now a much lower risk. If any readers have better insight into the internal workings of the SEC these days, please pipe up.

______

1 Formally, as you can see, this Risk Alert addresses both private equity and hedge fund misconduct, but on reading the details, the citing of both types of funds reflects the degree to which hedge funds have been engaging in the buying and selling of stakes in private companies. For instance, Chatham Asset Management, which has become notorious through its ownership of American Media, which in turn owns the National Enquirer, calls itself a hedge fund. Moreover, when the SEC started examining both private equity and hedge funds under new authority granted by Dodd Frank, it described the sort of misconduct described in this Risk Alert as coming out of exams of private equity firms, and its limited round of enforcement actions then were against brand name private equity firms like KKR, Blackstone, Apollo, and TPG. Thus for convenience as well as historical reasons, we refer only to private equity firms as perps.

2 Media stories at the time, including some of our posts, provided substantial evidence that particular abuses, such as undisclosed termination of monitoring fees and failure to disclose that "senior advisers" presented as general partner "team members" were in fact consultants being separately billed to fund investments, were common practices. Yet the SEC chose to lodge only marquee enforcement actions against one prominent firm for each abuse, as if token enforcement would serve as an adequate deterrent. The message was the reverse, that the overwhelming majority of the abuses were able to keep their ill-gotten gains and not even face public embarrassment.

Page 1 / 7 Zoom 100%


skippy , June 26, 2020 at 4:27 am

Peter Sellers I'll say now – ????

https://www.youtube.com/watch?v=1TtZgs8k8dU

vlade , June 26, 2020 at 4:35 am

TBH, in the view of Calpers ignoring its advisors, I do have a little understanding of the SEC's point "you're grown ups" (the worse problem is that the advisors who leach themselves to the various accredited investors are often not worth the money.

On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted.

Susan the other , June 26, 2020 at 11:43 am

Yes, the SEC conveniently claims a conflicted authority – 1. to regulate compliance but without an "enforcement authority", and 2. report egregious behavior to their "enforcement authority". So the SEC is less than a permissive nanny. Sort of like "access" to enforcement authority. Sounds like health care to me.

Yves Smith Post author , June 26, 2020 at 4:06 pm

No, this is false. The SEC has an examination division and an enforcement division. The SEC can and does take enforcement actions that result in fines and disgorgements, see the $1 billion fine mentioned in the post. So the exam division can recommend enforcement to the enforcement division. That does not mean it will get done. Some enforcement actions originate from within the enforcement division, like insider trading cases, and the SEC long has had a tendency to prioritize insider trading cases.

The SEC cannot prosecute. It has to refer cases that it thinks are criminal to the DoJ and try to get them to saddle up.

Maritimer , June 26, 2020 at 5:04 am

Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes.
AKA, Kleptocracy.

Thus in 2008 and thereafter the criminal damage required 2-3 trillion, now 7-10 trillion.

Any economic expert who does not recognize crime as the number one problem in the criminogenic US economy I disregard. Why read all that analysis when, at the end of the run, it all just boils down to bailing out the criminals and trying to reset the criminogenic system?

(Can I get my economics degree now?)

Adam Eran , June 26, 2020 at 1:33 pm

You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration.

The Rev Kev , June 26, 2020 at 5:17 am

The SEC has been captured for years now. It was not that long ago that SEC Examination chief Andrew Bowden made a grovelling speech to these players and even asked them to give his son a job which was so wrong-

https://www.rollingstone.com/politics/politics-news/regulatory-capture-captured-on-video-190033/

But there is no point in reforming the SEC as it was the politicians, at the beck and call of these players, that de-fanged the SEC – and it was a bipartisan effort! So it becomes a chicken-or-the-egg problem in the matter of reform. Who do you reform first?

Can't leave this comment without mentioning something about a private equity company. One of the two major internal airlines in Oz went broke due to the virus and a private equity buyer has been found to buy it. A union rep said that they will be good for jobs and that they are a good company. Their name? Bain Capital!

Yves Smith Post author , June 26, 2020 at 5:44 am

We broke the story about Andrew Bowden! Give credit where credit is due!!!! Even though Taibbi points to us in his first line, linking to Rolling Stone says to those who don't bother clicking through that it was their story.

Plus we transcribed his fawning remarks.

https://www.nakedcapitalism.com/2015/03/secs-andrew-bowden-regulator-sale.html

And he resigned three weeks later.

The Rev Kev , June 26, 2020 at 5:56 am

Of course I remember that story. I was going to mention it but thought to let people see it in virtually the opening line of that story where he gives you credit. More of a jolt of recognition seeing it rather than being told about it first.

Jesper , June 26, 2020 at 6:36 am

Of the three branches of government which ones are not captured by big business? If two out of three were to captured then does it matter what the third does?

Is the executive working for the common good or for the interests of big business?
Is the legislature working for the common good or for the interests of big business?
Is the judiciary working for the common good or for the interests of big business?

In my opinion too much power has been centralised, too much of the productivity gains of the past 40 years have been monetised and therefore made possible to hoard and centralise.

SEC should (in my opinion) try to enforce more but without more support then I do not believe (it is my opinion, nothing more and nothing less) that they can accomplish much.

Susan the other , June 26, 2020 at 11:57 am

The SEC is a mysterious agency which (?) must fall under the jurisdiction of the Treasury because it is a monetary regulatory agency in the business of regulating securities and exchanges. But it has no authority to do much of anything. The Treasury itself falls under the executive administration but as we have recently seen, Mnuchin himself managed to get a nice skim for his banking pals from the money Congress legislated. That's because Congress doesn't know how to effectuate a damn thing – they legislate stuff that morphs before our very eyes and goes to the grifters without a hitch. So why don't we demand that consumer protection be made into hard law with no wiggle room; that since investing is complex in this world of embedded funds and glossy prospectuses, we the consumer should not have to wade through all the nonsense to make decisions – that everything be on the table. And if PE can't manage to do that and still steal its billions then PE should be declared to be flat-out illegal.

Yves Smith Post author , June 26, 2020 at 4:08 pm

Please stop spreading disinformation. This is the second time on this post.

The SEC has nada to do with the Treasury. It is an independent regulatory agency.

It however is the only financial regulator that does not keep what it kills (its own fees and fines) but is instead subject to Congressional appropriations. Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan.

Edward , June 26, 2020 at 7:16 am

More banana republic level grift. What happens when investors figure out they can't believe anything they are told?

RJMc, MD , June 26, 2020 at 8:43 am

It should be noted that out here in the countryside of northern Michigan that embezzlement (a winter sport here while the men are out ice fishing), theft and fraud are still considered punishable felonies. Perhaps that is simply a quaint holdover from a bygone time. Dudley set the tone for the C of C with his Green Book on bank deregulation. One of the subsequent heads of C of C was reported as seeing his position as "being the spiritual resource for banks". If bank regulation is treated in a farcical fashion why should be the SEC be any different?

Susan the other , June 26, 2020 at 12:08 pm

I was shocked to just now learn that ERISA/the Dept of Labor is in regulatory control of allowing pension funds to buy PE fund of funds and "balanced PE funds". What VERBIAGE. Are "PE Fund of Balanced Funds" an actual category? And what distinguishes them from good old straightforward Index Funds? And also too – what is happening before our very glazed-over eyes is that PE is high grading not just the stock market but the US Treasury itself. Ordinary investors should be buying US Treasuries directly and retirement funds should too. It will be a big bite but if it knocks PE out of business it would be worth it. PE is in the business of cooking its books, ravaging struggling corporations, and boldly privatizing the goddamned Treasury. WTF?

Kouros , June 26, 2020 at 12:27 pm

I want to bring this to Yves' attention: the recent SCOTUS decision on Thole v. U.S. Bank that opens the doors wide for corporate America to steal with impunity from the pension plans: https://www.unz.com/estriker/corrupt-supreme-court-gives-green-light-to-corporations-to-steal-from-pensioners/

Glen , June 26, 2020 at 12:51 pm

Can we come up with a better descriptor for "private equity"?

I suggest "billionaire looters".

Olivier , June 26, 2020 at 2:00 pm

What about the wanton destruction of the purchased companies? If this solely about the harm done to the poor investors? If so, that is seriously wrong.

flora , June 26, 2020 at 3:27 pm

If, you know, the neoliberal "because markets" is the ruling paradigm then of course there is no harm done. The questions then become: is "because markets" a sensible paradigm? What is it a sensible paradigm of? Is "because markets" even sensible for the long term?

flora , June 26, 2020 at 3:19 pm

an aside: farewell, Olympus camera. A sad day. Farewell, OM-1 and OM-2. Film photography is really not replicated by digital photography but the larger market has gone to digital. Speed and cost vs quality. Because markets. Now the vulture swoop.

https://www.theregister.com/2020/06/26/olympus_closes_cameras/

https://www.forbes.com/sites/marksparrow/2020/06/25/olympus-exits-the-camera-market-after-three-years-without-a-profit/#1fdef9db5fc6

Stan Sexton , June 26, 2020 at 8:17 pm

Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner. Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs.The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us.

[Apr 28, 2020] Hudson gives him the primary credit for providing the foundation for Modern Monetary Theory

Apr 28, 2020 | www.moonofalabama.org

karlof1 , Apr 27 2020 0:25 utc | 53

Some will know who Hyman Minsky was, some won't. Hudson gives him the primary credit for providing the foundation for Modern Monetary Theory, and he gets praise from Keen, Wolfe and many others too. On the occasion of his 100th birthday, here's a long essay that seeks the following:

"But the question still stands: Was Minsky in fact a communist? Of course not. But, a century after his birth, it is useful to clarify often neglected aspects of his intellectual biography."

Since Minsky's referenced so often by Hudson particularly, I think this piece will be helpful for those of us following the serious economic issues now in play. I'd reserve an hour for a critical read.

[Feb 16, 2020] Psychologist Explains Why Economists -- and Liberals -- Get Human Nature Wrong by Lynn Parramore

Feb 12, 2020 | www.nakedcapitalism.com

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

For a fictional character, homo economicus has had a pretty good run . Since the 1950s, this mono-motivated, self-seeking figure has stalked the pages of economics textbooks, busy deciding each action according to a rational calculus of personal loss and gain. But more recently his territory has shrunk as experts on human nature have demonstrated what any decent novelist could have told them: our real selves are nothing like this.

Unfortunately, many economists still plug this flawed view of people into computer models that determine all kinds of things that impact our lives, from how much workers get paid to how we value life or common goods, such as a clean environment. The results can be disastrous.

Typically, economists aren't that keen on admitting that their work is deeply connected to morality -- never mind that Adam Smith himself was a moral philosopher. But if you ask a question as simple as how to price a used car, you quickly find that moral concerns and economic activity happen together all the time.

In his 2012 book, The Righteous Mind , New York University social psychologist Jonathan Haidt explored why so many perfectly intelligent people have misread human nature– and not just economists, but plenty of psychologists and even (shocker!) people who identify as politically liberal. For him, the key to getting to know ourselves properly lies with moral psychology, a newish strain that pulls together evolutionary, neurological, and social-psychological research on moral emotions and intuitions.

As Haidt sees it, we are creatures driven by moral intuition and attuned to both our personal interests as well as what's good for the groups with which we identify. He points out that in order to thrive, we have to appreciate our complex, interactive natures and see each other more clearly and empathetically – an observation that may be especially useful at a time when threats like climate change and the concentration of money and power threatens all of us, no matter who we are or what groups we belong to. At the moment, we aren't doing such a good job of this.

The Rider and the Elephant

Morality, Haidt argues, doesn't arise from reason, and besides, humans aren't winning any prizes for rationality. Heaps of studies show how factors beyond conscious awareness influence how we think and act, from judges giving out more lenient sentences after lunch to bottles of hand sanitizer making people more feel more conservative .

In Haidt's view, the conscious mind is like a press secretary spewing after-the-fact justifications for decisions already made. Thinkers like David Hume and Sigmund Freud were certainly hip to this idea, but somehow a lot of economists missed the memo, as did psychologists following dominant rationalist models in the 1980s and '90s.

Haidt invites us to consider ourselves as a rider (our analytical, rational part) and an elephant (our emotional, intuitive part). The rider holds the reins, but the beast below is in charge, urged on by the complex interaction of genetic influence, neural wiring, and social conditioning. The rider can advise the elephant, but the elephant calls most of the shots.

Fortunately, the elephant is quite intelligent and equipped with all sorts of intuitions that are good for conscious reasoning. But elephants get very stubborn when threatened and like to stick to what's familiar. The rider, for her part, is not exactly a reliable character. She's not really searching for truth, but mostly for ways to justify what the elephant wants.

That's why a rebel economist challenging conventional thinking about subjects like human nature faces a heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a point where they are finally forced to think differently. Scientific studies are even less helpful in persuading the general public.

When I asked Haidt how the mavericks could help their cause, he noted that humans are social creatures more influenced by people than by ideas. So, it matters who says something as much as what they say. It also makes a difference how they say it: elephants don't like to be insulted, and they lean towards arguments made by people they like and admire. Not very rational, perhaps, but likely true.

Homo Duplex

The notion that human beings are social creatures is another strike against homo economicus. We are selfish much of the time, but we are also "groupish," as Haidt puts it, and perhaps better described as "homo duplex" operating on two levels. Here he offers another animal analogy, suggesting that we're 90% chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates with a more recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping others, or our groups.

This helps explain why you can't predict how someone is going to vote based on their narrow self-interest. Political opinions are like badges of social membership. We don't just ask what's in it for us, but also what it means to our groups. Having a kid in public school doesn't tell you that a person will support aid to public schools, probably because there are group interests in play. What unifies us in groups, Haidt argues, are certain moral foundations that allow us to share emotionally compelling worldviews that we can easily justify and defend against any attack by outsiders who don't share them. And we can get pretty nasty about those outsiders.

This begins to sound like ugly tribalism, the kind of stuff that leads to war. But Haidt reminds us that this propensity also prepares us to get along within our groups and even to cooperate on a large scale -- our human superpower. We differ from other primates because we exhibit shared intentionality: we're able to plan things together and work together towards a common goal. You never see two chimps carrying a log – they just don't act in concert that way. We do, and in our groups we've developed mechanisms to suppress cheaters and free riders and reap the benefit of division of labor. Groups of early humans may well have triumphed over other hominids not because they smashed them with clubs , but because they out-cooperated them.

To better understand how we operate in political groups, which have lately become more antagonistic, Haidt created a map of our moral landscape called Moral Foundations Theory which delineates multiple "foundations" we presumably use when making moral decisions, including care/harm, fairness/cheating, loyalty/betrayal, authority/subversion, sanctity/degradation, and liberty/oppression. (Some scholars have challenged his system, offering alternative maps). His research indicates that liberals and conservatives differ in the emphasis they place on each of these foundations, with conservatives tending to value all six domains equally and liberals valuing the first two much more than the other three.

Haidt argues that liberals tend to home in on care and fairness when they talk about policy issues, which can put them at a disadvantage vis-à-vis conservatives, who tend to activate the whole range of foundations. Republicans are thus better able to talk to elephants than Democrats because they possess more ways to go for the gut, as it were. If Democrats want to win, Haidt warns, they need to think of morality as more than just care and fairness and to try to better understand that foundations more important to conservatives, like deference to authority or a reverence for sacredness, are not pathological, but aspects human social evolution that have helped us survive in many situations.

When he wrote The Righteous Mind , Haidt noted that Democrats had espoused a moral vision that did not resonate with many working class and rural voters. In the current presidential race, he sees some progress on economic populism from the Bernie Sanders wing, in part because Occupy Wall Street got people attuned to issues of fairness and the oppression of the 1%. When politicians talk about the abuse of political and economic power, they can activate not only care and fairness concerns, but also the liberty/oppression foundation which people respond to across the political spectrum.

But this line is also tricky because, as Haidt pointed out to me, "Americans don't really hate their rich." (One recent study suggested only 25% of Americans have a negative view of the rich, though a majority said they should be taxed more).

Haidt also worries that many Democrats, particularly elites, are currently engaging with cultural issues by embracing a what he called a "common enemy" form of identity politics which "demonizes people at the intersectional point of evil (white men)" rather than focusing on a "common humanity" story which "draws a larger circle around everyone. (Haidt plunged into controversial territory with his 2018 book, The Coddling of the American Mind , which argues that college campuses are shutting down useful debate through "safetyism" that protects students from ideas considered harmful or offensive).

He observed to me that while the polarizing Donald Trump may have turned off the younger generation "for the next few decades," Democrats may be failing "to look seriously at the ways that their social policies -- and their messengers -- alienate many moderates." Newly "woke" white elites, for example, who see racism as the driver of nearly every phenomenon, may be having an unintended negative effect in his view. When they ascribe Trump's victory to racial resentment and ignore the concerns of those who fear sliding down the economic ladder, for example, they may turn off potential allies. Call a person or a group racist and you won't be able to convince them to support your view on anything. Their elephants aren't listening.

Haidt acknowledges that our moral matrices are not written in stone; they can and do evolve, sometimes quite rapidly within a couple of generations. Economic forces surely act to shift attunement to moral foundations, making people more susceptible, for example, to anti-immigration arguments. If you fail to consider the economic influence on this kind of moral activation, you'll be less equipped to address problems like ethnic conflict. Being able to step outside our own moral matrix is essential to persuasion. We not only have to talk to the elephant, but see the beehive.

We also have to remember the truth is not likely to be something held by any one individual, but rather something that emerges as a large number of flawed and limited minds exchange views on a given subject. Our smarts and flexibility are increased by our ability to cooperate and share information. Economists, for example, improve their understanding of human nature by opening up to other social sciences and the humanities for insight.

There is evidence that economists are paying attention to moral psychology. In their book Identity Economics , Nobel laurate George Akerlof and Rachel Kranton argue that people identify with "social categories," and that each category, whether it be Christian, mother, or neighbor, has associated norms or ideals to which people want to aspire. Sam Bowles' The Moral Economy shows that monetary incentives don't work in many situations and that policies targeting our selfish instincts can actually weaken the institutions which depend on our more selfless impulses– including financial markets. At the Institute of New Economic Thinking (INET), the connection between economics and morality has been explored by INET president Rob Johnson and political philosopher Michael Sandel as well as thinkers like economic historian Robert Skidelsky and economist Darrick Hamilton .

All of this rather bad news for homo economicus. But pretty good news for humanity.


Carolinian , February 12, 2020 at 1:37 am

we're 90% chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates with a more recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping others, or our groups.

Well if one wants to take an "evolutionary perspective" (works for me) then obviously our instincts are shaped to promote survival of the species and not just the individual. And if that's true then the Randian/economics version of rational isn't rational at all. Perhaps it would be clearer to talk about this problem in terms of rational versus irrational rather than appealing to some "altruism gene" that will supposedly save us. IMO only that rational, intelligent, creative aspect of humans will save us from that irrational side that is indeed totally instinctive. Somehow we've gotten this far–despite everything–"by the skin of our teeth." Here's hoping those minds will find a path.

eg , February 12, 2020 at 2:30 pm

I believe that a huge controversy continues to rage in Biology around "group selection"

erik , February 13, 2020 at 12:53 am

Over what? Carol's point about the sociology of Ayn Rand?

In point of fact, Carol, altruism is always secondary (where it appears) in nature. Selfishness ensures the fittest genes survive to carry on the species. Only in the face of catastrophe does altruism at
the individual level become more valuable than selfishness. So, indeed it is because of our selfishness, because we've struggled by the skin of our teeth, that we as a species have survived and prospered.

Susan the other , February 13, 2020 at 2:41 pm

but, but erik, that leaves out all the energy saving advantage we get from a cohesive group which is also determined to survive and carry on centuries of knowledge on just how to do so .

H. Alexander Ivey , February 12, 2020 at 2:01 am

Just a quick jab: why does Haidt, and others, assume that feelings are inferior to logic and intellect? Seems to me they are inter-twined, separate-able, but equal in value, if not dimension.

It could be a three way set-up instead of a two way (like markets, which are commonly spoken of as two: buyer and seller, but are three: buyer, seller, and banker /money man). Man's consciousness could be 1) feelings, 2) logic /intellect, and 3) the decider (call out to ex-prez W, so got political jab in too!).

But all that rather kicks Haidt's argument

eg , February 12, 2020 at 2:34 pm

In fairness to Haidt, I think he's more nuanced than "rationality good; feelings bad"

I have encountered more of that rather rigid approach among those who have read "Thinking Fast and Slow" perhaps because that book doesn't do as good a job of outlining as crucial the capacity to recognize which situations favor System 1 thinking and those which favor System 2 -- a problem compounded by the emphasis in the book on the rather narrow range of circumstances in which System 2 is clearly superior.

vlade , February 12, 2020 at 3:00 am

Social scientists can't add:
"value all six domains equally [ ] valuing the first two much more than the other three."

More seriously, yes. Years ago, Heinlein wrote "Man is not a rational animal, he is a rationalizing animal".

somecallmetim , February 12, 2020 at 8:56 pm

Jeez – I spent years getting an Econ degree in the homo economus/monetarist era (dark times), when I should've been making my way through my D&D Dungeon Master's sci fi collection!

Dell , February 13, 2020 at 2:53 pm

I always thought that the Professors who thought up homo economus never went with their wives (as it was back then) to the grocery store.

The rational choice, always, was the store brand. DelMonte and all other such brands owed their very existence to non-rational, emotional choices–by tons of people.

But the implications of that never sunk in.

erik , February 13, 2020 at 1:04 am

'Rational' just means 'consistently following an internally sound logic.' A machine does that – following the logic of its mechanics. A computer does that – following the logic of code. An animal does that – following the logic dictated by emotion. And an animal certainly does that better than we humans whose behaviors become muddled by ideas. Truly, by this measure animals are better machines than humans – more mechanical, more emotional, more logical, more rational.

Hayek's Heelbiter , February 12, 2020 at 5:28 am

That's why a rebel economist challenging conventional thinking about subjects like human nature faces a heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a point where they are finally forced to think differently.

As an ex-organic chemist, I was astonished to find that more than a few scientists cling to outdated paradigms with a tenacity that would shame the most rigid religious fundamentalist. Cf. heliobacter, continental drift, even the heliocentric solar system.

divadab , February 12, 2020 at 11:02 am

Huh? Heliocentric solar system is an outdated paradigm? Are you talking about this planet or are you coming from another solar system?

vlade , February 12, 2020 at 11:50 am

same for continental drift – pretty much no one in geology challenges plate tectonics, as it explains way more than any other theory on offer.

Anon , February 12, 2020 at 12:06 pm

While "continental" drift was first proposed in about 1600 AD it was not completely wrong. Like many initial geologic theories it was partially correct. It is now known that it is not the "continents" that move across the earth, but tectonic plates, on which the continents are located, that is creating movement. The convection of the earths interior magma is thought to be the movement vector for the plates.

Henry Moon Pie , February 12, 2020 at 6:04 am

"this propensity also prepares us to get along within our groups and even to cooperate on a large scale -- our human superpower"

Yuval Harari's central point revolves around this. Humans, like other primates, engage in "grooming" activities to maintain group cohesion. With the development of language, this "grooming" went from picking lice out of each other's hair (fun!) to gossiping about each other. But this behavior seems to be unable to maintain a group size larger than 150 individuals, not surprising considering the person-to-person contact necessary.

To gather a larger group around common goals requires myth, Harari says. Early myths involved gods, often imagined as living in a separate world with structures parallel to our own. In a polytheistic society, the head god related to the lesser gods as a king related to his human subjects. In the henotheistic Ancient Near East, nations like Babylon, Assyria and even the southern Israelite kingdom of Judah envisioned a parallel war occurring in "heaven" between the national gods when two countries went to war. These days, there are new, completely secular myths like what Harari calls "Money" that orient our world around materialism, competition and power.

eg , February 12, 2020 at 2:46 pm

William H. McNeill also noted the almost universal human behaviours of mass marching/dancing (which requires and reinforces cooperation) as indicative of a social behaviour rooted in a biological need

We also have "mirror neurons" for a reason -- one that baffles the proponents of "homo economicus"

Eric , February 12, 2020 at 7:20 am

I was more interested in this article from the political perspective; i.e. what liberals get wrong.

Like many who read this site, I'm interested in the primary elections and want Bernie to win.

But Bernie's message could be better by being more attuned to some of the "Moral Foundation" issues Haidt raises.

Take Medicare for All which, by most accounts, is the leading issue to most voters:

Talking more about Medicare being a simple and successful 50+ year program appeals to authority. Medicare Advantage plans can be framed as subversion. Or loyalty / betrayal. Also consider sanctity / degradation.

Talking more about the 80/20 aspect of coverage addresses fairness / cheating and "free stuff"

Not talking about eliminating private insurance shows concern for liberty / oppression. I would actually make a joke about people who would still want private insurance after M4A becomes available

Just food for thought in terms of how the ideas contained in the article could be applied.

And the next time some nefarious reporter asks how we will pay for this or that; I wish someone will just say "Mexico will pay for it".

deplorado , February 13, 2020 at 1:20 am

This!
Share it with the campaign on twitter – please!

LowellHighlander , February 12, 2020 at 7:24 am

As an economist (M.A. in Econ), I am elated to see Jonathan Haidt's work receive this kind of attention from serious thinkers. In addition to the reasons cited by Lynn Parramore, I believe Professor Haidt's work validates, by building on, the work of Humanistic Economics by Professor Mark Lutz (Ph.D. UC-Berkeley) and Dr. Kenneth Lux. Moreover, Professor Haidt's work appears, to me, to further validate the astute criticisms of Dean Baker and Mark Weisbrot for neoclassical Marxists' use of "Rational Economic Man" in their paradigm's modls (no "e"). Having obtained my degree about 25 years ago, basically in humanistic economics, I am sure that adoption of such thinking by grad students in economics can help rescue humanity from its current barbaric state. I just hope there's still time left.

Jeremy Grimm , February 12, 2020 at 1:03 pm

But economics without homo economicus? Does that not mess-up a lot of beautiful economic proofs and their beautiful mathematics?

eg , February 12, 2020 at 3:00 pm

Let them have their toys -- just don't let them near anything like policy

Ignacio , February 12, 2020 at 7:30 am

On hate and having negative view on the rich : this article mentions that "only" 25% of Americans have a negative or very negative view of the rich". Only is the proper word? I would say that is a lot of bad feelings. Hate is not a sane feeling and we are inclined to hate in stressful situations. So, if 25% of Americans, have these negative feelings (8% very negative) about the rich this spells quite a lot of despair/stress. It would be interesting a comparison with other countries to evaluate if this is normal by international standards.

Ignacio , February 12, 2020 at 7:52 am

I mention this because stress & despair might explain, at least partially, the relative low turnout in general elections in the US compared with other OECD countries. Does anybody here know the evolution of electoral turnout in the US since 1950? Has turnout declined with time?

Dirk77 , February 12, 2020 at 5:13 pm

There is a Wikipedia article under the title Voter Turnout in the US Presidential Elections fwiw.

John Wright , February 12, 2020 at 9:46 am

I remembered an old David Brooks column mentioning that Americans vote their aspirations.

I'm not a fan of Brooks, but this 20 year old column may explain some USA citizens' current attitudes..

Here is a sample quote (about a proposed Al Gore estate tax):

"The most telling polling result from the 2000 election was from a Time magazine survey that asked people if they are in the top 1 percent of earners. Nineteen percent of Americans say they are in the richest 1 percent and a further 20 percent expect to be someday. So right away you have 39 percent of Americans who thought that when Mr. Gore savaged a plan that favored the top 1 percent, he was taking a direct shot at them."

https://www.nytimes.com/2003/01/12/opinion/the-triumph-of-hope-over-self-interest.html

While it has been 20 years since this was published, one might suspect American "I'll be rich" aspirations have taken a beating during this interval.

The economics profession has ridden the hydrocarbon energy spend of the last 100+ years as hydrocarbon energy has been pulled from the ground and converted into "economic growth".

It will be interesting to see how the profession responds to future events with climate change, peak human population and peak energy inexorably (in my view) arriving.

Susan the other , February 12, 2020 at 10:38 am

Yes, after all corvid-19 only has a mortality rate of 2.5% . are viruses comparable to hate?

Donald , February 12, 2020 at 7:49 am

One thing that has happened is that over the past several decades so- called liberals have agreed with conservatives that the market represents freedom and efficiency and the government represents the opposite. Some younger people are rebelling, but older voters have been hearing this their whole lives without challenge until Sanders came along.

I just read a description of a Trump rally at the NYT and I think it was accurate. The reporters just repeated what ordinary people said there. One guy claimed the Democrats have just swung so far left he can't support them anymore, yet on economics this simply isn't the case. Sanders just represents what Democrats used to be on economic issues.

gsinbe , February 12, 2020 at 7:57 am

I enjoyed the article, and agree with the main ideas, but he was a little rough on our primate cousins. Chimps may not cooperate by "carrying logs", but, like a lot of social animals, they work together when, say, hunting other primates. And most social animals have a pretty well-developed sense of fairness (watch what happens if you give one of your dogs a treat and ignore the other one).

a different chris , February 12, 2020 at 8:59 am

Yes I am trying to think about what chimps would actually need to transport a log for. That famous jocular saying by one of the researchers "we were beginning to think the difference between us was merely cultural".

Carolinian , February 12, 2020 at 9:26 am

Is that a sense of fairness or a sense of competition or perhaps a sense of both? Each dog would prefer being the favorite but will accept being the equal.

Dogs are an interesting analogy because in my observation they are, as social animals, so much like us. Perhaps the main takeaway from the above article is the belief that there is such a thing as "human nature" and that we have a kinship with the other species. Needless to say such a view was once anathema in an intellectual climate dominated by religion and a human centric world view. Even now people like Pence are "dominionists" and believe that humans have been given dominion over the planet and all its other species because of what it says in the Bible. Power always needs to justify itself–perhaps because of that innate sense of fairness/competition that you mention.

Susan the other , February 12, 2020 at 10:54 am

Haidt got me thinking about language too. His thesis could be talking about the evolution of language itself. The evolution of rationalization. Since he seems to premise his insights on human intuition and a certain bedrock of morality that all animals seem to have. Pre language. Can we attribute the morality of animals to a lack of rationalization? They do seem to lack immorality. If we were mute, but very intuitive as we are, what effect would our intuition have on our communication skills and our actions? Raising the question here, Is language the emotional middleman that is always (duplex) less than rational and causing all this confusion? Sort of thinking here about someone giving an over-the-top sermon, like an economics professor claiming that we are all homo-economicus.

Carolinian , February 12, 2020 at 12:00 pm

Morality traditionally implies conscious choice so I'm not sure that's relevant to the animal world. Guess what I'm saying is that we are similar to certain animals in our instincts, not our intelligence.

However the language of economic profs is deceptive since they should be saying "irrational self interest" rather than "rational self interest." Pure selfishness usually ends up being bad even for the selfish.

Susan the other , February 13, 2020 at 2:56 pm

Also on this very subject, last night on Nova, the one about dogs, their domestication (or ours?) and their amazing ability to relate – communicate. They attribute a dog's ability to communicate to oxytocin – because they thrive on love and friendship. I do believe that because I've only had one aloof dog and he was very wolf-like. A throwback. Indicating that evolution tends toward love – not to be too corny. Maybe Oxytocin will save us ;-)

Susan the other , February 12, 2020 at 12:04 pm

Maybe we could develop a more finely-tuned consciousness.

eg , February 12, 2020 at 3:07 pm

Um, pack animals have hierarchies -- period

And we are biologically pack animals, mercifully moderated by culture

Carolinian , February 12, 2020 at 4:25 pm

If by "pack animals" you mean species that live in societies I never said they didn't. But obviously there is also cooperation on some level and social bonding. I do think this is a very complicated subject and not easily reduced to simplifications by yours truly–not a biologist–or the above article. But arguably the above is correct in asserting that economists themselves are ignoring the complications.

Ignacio , February 12, 2020 at 8:16 am

And for those interested, here is a paper published in 2008 that empirically demonstrates that the "Homo economicus" approach in this case disguised in the form of "median-voter model" is bullshit regarding inequality, redistribution and public opinion, though they regard it as intelectually compelling. Economists!

John Wright , February 12, 2020 at 10:19 am

Your link did not work for me.

But this did work (after google searching for "mwm006.pdf") that was buried in your link

https://academic.oup.com/ser/article-pdf/6/1/35/4761357/mwm006.pdf

Ignacio , February 12, 2020 at 11:10 am

Thank you. That was the paper.

a different chris , February 12, 2020 at 8:56 am

>Experts have to see a lot of evidence accumulating across many studies before they reach a point where they are finally forced to think differently.

Ummm, the whole, underlying maybe, point of the rest of the article is that the dominant economic thought of our age has nothing to do with evidence. Yet they overthrew Keynes. "Trust us, We're Experts" or something like that right?

DJG , February 12, 2020 at 8:58 am

I just finished slogging through The Master and His Emissary by Iain McGilchrist, which harmonizes with this article. Instead of the rider on an elephant, McGilchrist writes of the functions of the left and right hemispheres of the brain, which are significantly different. The left brain is verbal, analytical, and task oriented. It likes straight lines. (This strikes me as a description of the pseudo-accuracy and busyness of economics.) The right brain sees a larger picture, is less talky, and is generally better at perceiving the world around us. It is the hemisphere that can attain greater knowledge even if it is not as adept at expressing such knowledge in words. (The "bee" part of the brain–and more than 10 percent.)

McGilchrist's book is good, but way too long, which is an irony given that he asserts that the left brain, the emissary, is trying to subvert the master, the part of the brain less likely to go on and on and on in words.

But this era of too many easy paradigms (economics, "free markets"), too much flimsy analysis (critical studies, queer studies, economics, New York Times op-ed columnists), and too much talk (social media) is very much left-brained. I think that what is wearing all of us out is the endless tsunami of word salad. Economics, with its insistance on rationality rather than reasonableness (left brain rather than right brain), fell into the salad bowl a long time ago.

Mel , February 12, 2020 at 10:12 am

Yes. I, too, think this is a very important book. Being retired, I don't think it's too long. I revel in how much stuff I got for only thirty bucks (or whatever it was -- something like that.)
The neurological case is complete after 94 very dense pages. (535 citations. Pleasantly readable prose, though, and that bizarre experiment that "proves" that porcupines are monkeys.) After that he traces the effects and footprints of the two independent modes of thought through philosophy, art, music, and, generally, the working of our societies from ancient to post-modern.
There's a strong parallel to Daniel Kahneman's Fast and Slow thinking, the right hemisphere being the fast one. The one wrinkle is that language is the province of the left hemisphere, but Kahnemann finds that fast thinking is perfectly adept at small-talk, as long as it doesn't get too abstract.
Worst for me is that now that I've read it, I've got to go back into Heidegger, all the other modern Germans, John Dryden, classical and modern painting, religion

The Rev Kev , February 12, 2020 at 9:27 am

So how would homo economicus work out in anything other than a modern industrial system? In earlier times, I would say that at the least they would be shunned as a danger to the community or maybe even thrown out altogether as being incapable of working in a close-knit community. Want a modern example instead? How about the fact that you cannot have a military based on the idea of homo economicus unless you are talking about a band of mercenaries. This whole stupid idea is why every relationship these days whether for work, employment, government, etc is defined by contracts. In short, it is a cookie-cutter idea that come in only one shape.

Sound of the Suburbs , February 12, 2020 at 9:31 am

"Since the 1950s, this mono-motivated, self-seeking figure has stalked the pages of economics textbooks, busy deciding each action according to a rational calculus of personal loss and gain."

Advertising gave up with that sort of approach years ago.
Advertisers appeal to deep seated wants and desires and this works really well, so they haven't looked back.
Are the wealthy much more rational?
Let's have a look at adverts targeted at wealthy people.
Are they a long list of specifications and comparisons saying why these products are better?
No.
An advert for a Sunseeker luxury yacht conveys luxury, elegance, being able to get away from it all and there is usually a young woman in the back in a bikini; the less said about that the better.

What about PR and propoganda?
How do they work?
The same as advertising really, and it's got nothing to do with appealing to rational human beings.
It works; they are not going to be doing it differently anytime soon.

Economics seems to be the odd man out.

Mel , February 12, 2020 at 11:32 am

A propos of nothing, long, long ago there was an ad during the Superbowl placed by Cadillac. It was all about authority, power, celebrity, and it hardly mentioned cars at all, if it even did. Blog commenters had to work very hard to explain how this was selling Cadillacs. IMHO, it didn't sell Cadillacs. It told the top Cadillac executives all the things about themselves that they most longed to hear. It didn't sell cars to wealthy people, it sold the ad itself to the Cadillac C-suite. It worked like a charm.

Sound of the Suburbs , February 12, 2020 at 9:56 am

Inequality exists on two axes:

Y-axis – top to bottom
X-axis – Across genders, races, etc ..

As long as the Democrats wealthy donors keep them focussed on identity politics and the X-axis, the donors should be able to keep making progress in the reverse direction on the Y-axis.

Rob Chametzky , February 12, 2020 at 11:33 am

Samuel Bowles has examined these issues recently in "The moral
economy":

https://yalebooks.yale.edu/book/9780300163803/moral-economy

and he's MUCH better than Haidt. I recommend this book and lots
of his earlier work, much of it done with Herbert Gintis.

Their 1976 "Schooling in capitalist America" is no less necessary
reading now than it was then, and their 1986 "Democracy & capitalism"
is maybe even more relevant now (Milanovic credits it as a forerunner
to his current "Capitalism, alone", which it is–and much more than that).
More recent stuff is referenced in "The moral economy" and pretty
much always worthwhile.

–Rob Chametzky

Tim , February 12, 2020 at 2:41 pm

Morality is a big part of decision making, but I'll argue that is secondary to our cognitive biases that exist at an even lower level of consciousness to enable us to retain function and decision making in the face of an overwhelming number of variables.

The opposite of cognitive bias or perhaps the antidote is critical thinking, which must be taught/learned, so yeah it is preposterous to assume people use solid reasoning that could only come about with the use of critical thinking, which vasts swaths of society almost never exercise.

flora , February 12, 2020 at 2:53 pm

Thanks for this post. Homo economicus was/is always and only about the 'one'.

Whereas the basis of moral philosophy is about 'the one and the many' in equal importance, imo.

Thanks for this post and to the commentors recommending more writings in this field.

Dirk77 , February 12, 2020 at 6:10 pm

The article to me is all over the place, which builds on Haidt's views that seem all over the place too. Interesting though. Comments too. The experimental data about Haidt's classifications of moral decision making elements, and where self-described liberals and conservatives rank them in importance was interesting. I suppose the liberals regarding only two of the six as important could be due to their college educations. As a math professor I had once observed about a smart student in his class: "he learned his subject too well". Or to paraphrase Othello: "One that learned not wisely but too well".

greensachs , February 12, 2020 at 6:26 pm

Nuff sd

"It's Armageddon Time for the Democratic Party"
https://theintercept.com/2020/02/12/its-armageddon-time-for-the-democratic-party/

TG , February 12, 2020 at 6:43 pm

Hmm yes but

Humans are rational economic agents! Therefore we must ship our industrial base to China so that the rich can make more money.

Humans are rational economic agents! Therefore we must allow big companies to merge and quash competition and raise prices.

Humans are rational economic agents! Therefore we must allow "surprise medical billing" when insured people go to the emergency room.

Humans are rational economic agents! Therefore we must do nothing to stop the use of slave labor in peeling shrimp for export in Southeast Asia.

Humans are rational economic agents! Therefore we must bail out and subsidize Wall Street and big finance with tens of trillions of taxpayer dollars.

Perhaps the "humans are rational economic agents!" argument is not really an argument, as such

deplorado , February 13, 2020 at 2:29 am

The most important takeaway from this is that we should not let economists guide the economy. Not the economists believing in homo economicus anyway (and, while we are at it, believing in equilibrium as well). The reason for existence of such a concept is clearly to replace ethics and morality as a guiding principle of human economic activity with a pseudo- "natural law" (humans by nature are "economicus" – i.e. self-interested and materialistic – phew!), which once entrenched, relieves those in power from moral obligations because it safely explains away almost any economic outcome as result of "natural" forces – i.e. no one to blame (globalization=natural force). It's a great tool for them. Down with it.

Dick Swenson , February 14, 2020 at 4:25 pm

The asumption of rationality has been defeated by many economists, as well as psychologists, sociologists, etc.. Carrying on about this is unncessary. Assuming that humans worry about "care and fairness' is true. The "12" prophets of the Tanakh (Old Testament") raised this concern numerous times, and one can find it as a major issue in the Synoptic Gospels. Smith also worried about this in his first book on economocs, "The Theory of Moral Sentiments." The only reason for any further consideration of "rationality" in economics is due to the attemprt by economists to treat economics as a "science" like physics. There are also numerous misguided attempts to mathemaize economics.

But one insidious reason to pretend that economics is a "science" is to justify the idea of a "Nobel Prize" in economics, or to give a "halo" to economists that win the "Swedish Central Bank Prize in Economic Scholarship in Memory of Alfred Nobel."

Avner Offer and Gabriel Söderberg have written a good book about the creation of this prize, "The Nobel Factor." Please note, the words "Nobel Prize" do not seem to appear on either the certificates or medal awarded.

Daniel Kahneman who won the prize (justifiably, (and John Nash a famous mathematicin who won many real prizes) notd that giving labels often transfers a false aura to those being labeled. Offer and Söderberg noted that this is true of the label "winner of the Nobel Prize." Given that there is no decent encompasssing theory of economics similar to Newton's Laws and how often the prizes are awarded to economists who don't produce anything like such a theory, we should once and for all abandone the pretense that economis is a science. It is an attempt to describe social behaviour in a very restricted context. Leaving it to psychologists, sociologists and others has produce better undertandings of human behaviour.

[Jan 01, 2020] FDA Failed to Police Opioids Makers, Thus Fueling Opioids Crisis

Jan 01, 2020 | www.nakedcapitalism.com

FDA Failed to Police Opioids Makers, Thus Fueling Opioids Crisis Posted on January 1, 2020 by Jerri-Lynn Scofield By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

I had hoped to welcome 2020 with a optimistic post.

Alas, the current news cycle has thrown up little cause for optimism.

Instead, what has caught my eye today: 2019 closes with release of a new study showing the FDA's failure to police opioids manufacturers fueled the opioids crisis.

This is yet another example of a familiar theme: inadequate regulation kills people: e.g. think Boeing. Or, on a longer term, less immediate scale, consider the failure of the Environmental Protection Agency, in so many realms, including the failure to curb emissions so as to slow the pace of climate change.

In the opioids case, we're talking about thousands and thousands of people.

On Monday, Jama Internal Medicine published research concerning the US Food and Drug Administration's (FDA) program to reduce opioids abuse. The FDA launched its risk evaluation and mitigation strategy – REMS – in 2012. Researchers examined nearly 10,000 documents, released in response to a Freedom of Information ACT (FOA) request, to generate the conclusions published by JAMA.

As the Gray Lady tells the story in As Tens of Thousands Died, F.D.A. Failed to Police Opioids :

In 2011, the F.D.A. began asking the makers of OxyContin and other addictive long-acting opioids to pay for safety training for more than half the physicians prescribing the drugs, and to track the effectiveness of the training and other measures in reducing addiction, overdoses and deaths.

But the F.D.A. was never able to determine whether the program worked, researchers at the Johns Hopkins Bloomberg School of Public Health found in a new review, because the manufacturers did not gather the right kind of data. Although the agency's approval of OxyContin in 1995 has long come under fire, its efforts to ensure the safe use of opioids since then have not been scrutinized nearly as much.

The documents show that even when deficiencies in these efforts became obvious through the F.D.A.'s own review process, the agency never insisted on improvements to the program, [called a REMS]. . .

The FDA's regulatory failure had serious public health consequences, according to critics of US opioids policy, as reported by the NYT:

Dr. Andrew Kolodny, the co-director of opioid policy research at the Heller School for Social Policy and Management at Brandeis, said the safety program was a missed opportunity. He is a leader of a group of physicians who had encouraged the F.D.A. to adopt stronger controls, and a frequent critic of the government's response to the epidemic.

Dr. Kolodny, who was not involved in the study, called the program "a really good example of the way F.D.A. has failed to regulate opioid manufacturers. If F.D.A. had really been doing its job properly, I don't believe we'd have an opioid crisis today."

Now, as readers frequently emphasize in comments: pain management is a considerable problem – one I am all too well aware of, as I watched my father succumb to cancer. He ultimately passed away at my parents' home.

That being said, as CNN tells the story in The FDA can't prove its opioid strategy actually worked, study says :

Although these drugs "can be clinically useful among appropriately selected patients, they have also been widely oversupplied, are commonly used nonmedically, and account for a disproportionate number of fatal overdoses," the authors write.

The FDA was unable, more than 5 years after it had instituted its study of the opioids program's effectiveness, to determine whether it had met its objectives, and this may have been because prior assessments were not objective, according to CNN:

Prior analyses had largely been funded by drug companies, and a 2016 FDA advisory committee "noted methodological concerns regarding these studies," according to the authors. An inspector general report also concluded in 2013 that the agency "lacks comprehensive data to determine whether risk evaluation and mitigation strategies improve drug safety."

In addition to failing to evaluate the effective of the limited steps it had taken, the FDA neglected to take more aggressive steps that were within the ambit of its regulatory authority. According to CNN:

"FDA has tools that could mitigate opioid risks more effectively if the agency would be more assertive in using its power to control opioid prescribing, manufacturing, and distribution," said retired FDA senior executive William K. Hubbard in an editorial that accompanied the study. "Instead of bold, effective action, the FDA has implemented the Risk Evaluation and Mitigation Strategy programs that do not even meet the limited criteria set out by the FDA."

One measure the FDA could have taken, according to Hubbard: putting restrictions on opioid distribution.

"Restricting opioid distribution would be a major decision for the FDA, but it is also likely to be the most effective policy for reducing the harm of opioids," said Hubbard, who spent more than three decades at the agency and oversaw initiatives in areas such as regulation, policy and economic evaluation.

The Trump administration has made cleaning up the opioids crisis – which it inherited – a policy priority. To little seeming effect so far. although to be fair, this is not a simple problem to solve. And litigation to apportion various costs of the damages various prescription drugmakers, distributors, and doctors caused it far from over – despite some settlements, and judgements (see Federal Prosecutors Initiate Criminal Probe of Six Opioid Manufacturers and Distributors ; Four Companies Settle Just Before Bellwether Opioids Trial Was to Begin Today in Ohio ; Purdue Files for Bankruptcy, Agrees to Settle Some Pending Opioids Litigation: Sacklers on Hook for Billions? and Judge Issues $572 Million Verdict Against J & J in Oklahoma Opioids Trial: Settlements to Follow? )

Perhaps the Johns Hopkins study will spark moves to reform the broken FDA, so that it can once again serve as an effective regulator. This could perhaps be something we can look forward to achieving in 2020 (although I won't hold my breath).

Or, perhaps if enacting comprehensive reform is too overwhelming, especially with a divided government, as a starting point: can we agree to stop allowing self-interested industries to finance studies meant to assess the effectiveness of programs to regulate that very same industry? Please?

This is a concern in so many areas, with such self-interested considerations shaping not only regulation, but distorting academic research (see Virginia Supreme Court Upholds Ruling that George Mason University Foundation Is Not Subject to State FOIA Statute, Leaving Koch Funding Details Undisclosed ).

What madness!

[Jan 01, 2020] Prolonging the discussion about the bad habit Western Democracies have on falsifying official statistic

Jan 01, 2020 | www.moonofalabama.org

vk , Dec 29 2019 3:42 utc | 55

Prolonging the discussion about the bad habit Western Democracies have on falsifying official statistics:

On Those Questionable US Wage Stats Again

[Dec 06, 2019] Robert Bork Was the Judicial Activist He Warned Us About

Dec 06, 2019 | www.theamericanconservative.com

As the Chicago revolution took hold, Bork's views crept into the judiciary. Eventually in a fit of activism, the courts did away with the prohibition on predatory pricing. In its 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation , the United States Supreme Court completely re-imagined the Robinson-Patman Act.

The case originally involved the tobacco oligopoly controlled by six firms. Liggett had introduced a cheap generic cigarette and gained market share. When Brown & Williamson saw that generics were undercutting their shares, it undercut Liggett and sold cigarettes at a loss. Liggett sued, alleging that the predatory behavior was designed to pressure it to raise prices on its generics, thus enabling Brown & Williamson to maintain high profits on branded cigarettes.

In its decision, the Court held that in order for there to be a violation of the Clayton Act and the Robinson-Patman Act, a plaintiff must show not only that the alleged predator priced the product below the cost of its production but also that the predator would be likely to recoup the losses in the future. The recoupment test dealt a death blow to predatory pricing lawsuits because it is, of course, impossible to prove a future event.

The Supreme Court parroted Bork, noting that "predatory pricing schemes are rarely tried, and even more rarely successful ." The Court also argued that it was best not to pursue predatory pricing cases because doing so would "chill the very conduct the antitrust laws are designed to protect."

The result has been severe. After 1993, no plaintiff alleging predatory pricing has prevailed at the federal level, and most cases are thrown out in summary judgement. The DOJ and FTC have completely ignored the law and ceased enforcing it.

Through judicial activism and executive neglect, the laws regarding antitrust and predatory pricing have become odd relics, like those on greased pigs and cannibalism.

Predatory pricing is symptomatic of the broader problems when it comes to antitrust. Today, except in extreme circumstances such as outright monopoly, courts are unlikely to block mergers over an increase in market concentration. The Supreme Court has now tilted so far the other way that it prefers to allow too much concentration rather than too little. It made this clear in its Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP decision, where it stated its preference for minimizing incorrect merger challenges rather than preventing excessive concentration.

In the Trinko case, for example, Justice Scalia suggested that those who enforce antitrust laws ought to be deferential to firms with monopoly power, which are "an important element of a free market system."

Scalia continued: "Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs ." The opportunity to acquire monopoly power and charge monopoly prices is "what attracts 'business acumen' in the first place," he said, and "induces risk taking that produces innovation and economic growth." He wrote that the "mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system."

The result of all this has been an increase of monopolies. Professor John Kwoka reviewed decades of merger cases and concluded that "recent merger control has not been sufficiently aggressive in challenging mergers." The overall effect has been "approval of significantly more mergers that prove to be anticompetitive."

The Sherman Act and the Robinson-Patman Act may be deeply misguided; perhaps they should even be repealed. But they haven't been. Passing new legislation is the proper way to change laws one disagrees with. Getting rid of them in practice via judicial activism or an an unwilling executive is not democratic.

The death of antitrust and predatory pricing reflects not only a failure of jurisprudence but of economics. For all the claims of up-to-the-minute economic sophistication that activist judges have used in the field of antitrust, the scholarship on predatory pricing is wildly out of date. Brooke made Robinson-Patman irrelevant by citing "modern" economic scholarship, yet the research the Supreme Court relied on goes back to studies by John McGee and Roland Koller, published in 1958 and 1969 respectively.

Predatory pricing has only become more rational in a world where winner-take-all platforms are happy to sustain short-term losses for the sake of long-term market share gains. What they lose on one side with free shipping or below cost products, they make up for in other parts of their business.

The rationality of predatory pricing is not some new economic finding. Almost 20 years ago, Patrick Bolton , a professor at Columbia Business School, wrote that "several sophisticated empirical case studies have confirmed the use of predatory pricing strategies. But the courts have failed to incorporate the modern writing into judicial decisions, relying instead on earlier theory no longer generally accepted."

According to Bork, predatory pricing didn't work in theory, but does it work in practice? Antitrust experts remember the Brooke case, but none seem to recall what actually happened to the companies involved in the lawsuit.

After the Supreme Court decision left it without any legal remedy, Liggett succumbed to pressure from Brown & Williamson and raised its prices. The entire industry raised prices too. In the end, Liggett was not able to attract enough market share and ended up selling most of its brands to Phillip Morris a few years later. Ever since, the tobacco oligopoly has raised prices in lockstep twice a year with no competition. No company is foolish enough to lower prices for fear of predatory pricing.

The losers from the judicial activism of Brooke are consumers and the rule of law. The winners are the oligopolies and monopolies who protect their markets.

When it comes to enforcing antitrust, it's worth remembering the words of Robert Bork. As he wrote in 1971 in his seminal piece " Neutral Principles and Some First Amendment Problems ," "If the judiciary really is supreme, able to rule when and as it sees fit, the society is not democratic."

Jonathan Tepper is a founder of Variant Perception , a macroeconomic research company, and co-author of The Myth of Capitalism: Monopolies and the Death of Competition . He is also TAC 's senior fellow on economic concentration issues. This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.


polistra24 a day ago

The Supremes have been the Federal legislature since 1803. Recommending restraint is the same thing as ordering one party in a legislature to surrender to the opposite party regardless of majorities.
Kent a day ago
Monopolization is the core of Free Market economics. Free, literally, means free to become a monopoly, free to practice vulture capitalism, free to use superior capitalization to destroy competition, free to move your factory to China.

Free Market is a buzz phrase among bankers and other well-to-do to increase their income at your expense instead of through superior production, design, and advertising methods. If you want to know why we live in such a dysfunctional economy, its because we've abandoned competitive capitalism for a free market economy.

Sid Finster Kent a day ago
Adam Smith (yes, that Adam Smith) noted in Wealth of Nations that if you put two competing businessmen in a room together, not only do they get along just fine, their conversation quickly turns to the subject of how they can work work together to rig markets and screw the consumer for moar profitt.

Adam Smith was a much more interesting and sophisticated thinker than the B-school Cliffs Notes version.

northernobserver a day ago
Libertarian policy corruption, the American Right's original sin.
ElitCommInc. a day ago
I think we could us more purist views of capitalism in conversations about capitalism. The kinds of behaviors engaged designed to put others out of business described in the article is not exemplary of capitalism.

The purpose of capitalism is not explicated with models of destroying competition. And it certainly does not have mechanisms in which the government acts as an arm of business. The notion that the business of "America" (the US) is business is misleading. Because when it comes the government of the US her role is to ensure fair play. And power dynamics used to destroy the ability of another to tap into the available market share is not a capitalist principle. When one reads about the level and kinds of antics that corporate boards and CEO's play to damage competition, to include the use of campaign funds to "buy" or influence unique favors at cost to consumers - then we are talking about kind of faux "law of the jungle". Bailing out business but not the defrauded customers of those same businesses -- mercantilism not capitalism.

And it is these types of behaviors guised as capitalism, that fuels liberal demands for a system of governance that is more akin to communism and socialism. They note the abuses, but apply the wrong remedy.

I would agree that predatory pricing actually undercuts better pricing, improved products or innovation (product creativity).

Liam781 a day ago
Yes he was.
=marco01= 18 hours ago
Conservatives are outraged, still, that Democrats refused to confirm Bork to the Supreme Court.

Never mind the fact the Democrats were fully within their rights not to confirm, advise and consent does not mean rubber stamp, Bork was the guy who actually carried out Nixon's Saturday Night Massacre. Why would conservatives want a corrupt and unethical person like this in the Supreme Court in the first place?

Conservatives' outraged is very ironic considering Reagan still got to nominate another candidate, which the Dems confirmed. Meanwhile in a completely unprecedented and vindictive move, Republicans denied a Democratic president outright his right to a Supreme Court appointment. There is no comparison between these two episodes.

[Nov 28, 2019] Banker suicides go up exponentially prior to a banking collapse.

Nov 28, 2019 | www.moonofalabama.org

dltravers , Nov 28 2019 17:28 utc | 27

Walter @ 25

"Thomas Bowers, a former Deutsche Bank executive and head of the American wealth-management division, killed himself in Malibu, California, on Tuesday, November 19th, according to the Los Angeles county coroner's initial report.

You have to look at the banker suicide index. Banker suicides go up exponentially prior to a banking collapse. I lost count of banker suicides during the 2008 collapse. Bank troubles = suicides of high ranking employees is the algorithm.

[Nov 21, 2019] FED as the inflator of the bubble: It seems the Fed's abundant-reserve regime may carry a new set of risks by supporting increased interconnectedness and overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market's ability to accurately price the supply and demand for leverage as asset prices rise.

Nov 21, 2019 | www.moonofalabama.org

psychohistorian , Nov 15 2019 0:42 utc | 137

I don't know how well this will retain format but it is the latest from the US Fed on providing "liquidity" to the private banking system
"
Friday, 11/15/2019- Thursday, 12/12/2019 The Desk plans to conduct overnight repo operations on each business day as well as a series of term repo operations over the specified period.

OVERNIGHT OPERATIONS DATES AGGREGATE OPERATION LIMIT
Friday, 11/15/2019 - Thursday, 12/12/2019 At least $120 billion

TERM OPERATION DATE MATURITY DATE TERM AGGREGATE OPERATION LIMIT
Tuesday, 11/19/2019 Tuesday, 12/3/2019 14-days At least $35 billion
Thursday, 11/21/2019 Thursday, 12/5/2019 14-days At least $35 billion
Monday, 11/25/2019 Monday, 1/6/2020 42-days At least $25 billion
Tuesday, 11/26/2019 Tuesday, 12/10/2019 14-days At least $35 billion
Wednesday, 11/27/2019 Thursday, 12/12/2019 15-days At least $35 billion
Monday, 12/2/2019 Monday, 1/13/2020 42-days At least $15 billion
Tuesday, 12/3/2019 Tuesday, 12/17/2019 14-days At least $35 billion
Thursday, 12/5/2019 Thursday, 12/19/2019 14-days At least $35 billion
Monday, 12/9/2019 Monday, 1/6/2020 28-days At least $15 billion
Tuesday, 12/10/2019 Monday, 12/23/2019 13-days At least $35 billion
Thursday, 12/12/2019 Thursday, 12/26/2019 14-days At least $35 billion
"
Some take away quotes from various ZH postings
"
In short, the Fed's dual mandate has been replaced by a single mandate of promoting financial stability (or as some may say, boosting JPMorgan's stock price) similar to that of the ECB.

Here BofA adds ominously that "by deciding to dynamically assess bank demand for reserves and reduce the risk of air pockets in repo markets, we believe the Fed has entered unchartered territory of monetary policy that may stretch beyond its dual mandate." And the punchline: "By running balance-sheet policy to ensure overnight funding markets remain flush, the Fed is arguably circumventing the most important brake on excess leverage: the price."

So if NOT QE is in fact, QE, and if the Fed is once again in the price manipulation business, what then?

According to BofA's Axel, the most worrying part of the Fed's current asset purchase program is the realization that an ongoing bank footprint in repo markets is required to maintain control of policy rates in the new floor system, or as we put it less politely, banks are now able to hijack the financial system by indicating that they have an overnight funding problem (as JPMorgan very clearly did) and force the Fed to do their (really JPMorgan's) bidding.

And this is where BofA's warning hits a crescendo, because while repo is fully collateralized and therefore contains negligible counterparty credit risk, "there may be a situation in which banks want to deleverage quickly, for example during a money run or a liquidation in some market caused by a sudden reassessment of value as in 2008."

Got that? Going forward please refer to any market crash as a "sudden reassessment of value", something which has become impossible in a world where "value" is whatever the Fed says it is... Well, the Fed or a bunch of self-serving venture capitalists, who pushed the "value" of WeWork to $47 billion just weeks before it was revealed that the company is effectively insolvent the punch bowl of endless free money is taken away.

Therefore, to Bank of America, this new monetary policy regime actually increases systemic financial risk by making repo markets more vulnerable to bank cycles. This, as the bank ominously warns, "increases interconnectedness, which is something regulators widely recognize as making asset bubbles and entity failures more dangerous."

It is, however, BofA's conclusion that we found most alarming: as Axel writes, in his parting words:

"some have argued, including former NY Fed President William Dudley, that the last financial crisis was in part fueled by the Fed's reluctance to tighten financial conditions as housing markets showed early signs of froth. It seems the Fed's abundant-reserve regime may carry a new set of risks by supporting increased interconnectedness and overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market's ability to accurately price the supply and demand for leverage as asset prices rise."

"


psychohistorian , Nov 15 2019 0:49 utc | 138

What I didn't include in comment # 137 above but did in the last Weekly Open Thread is the following about the recent NOT SHORT TERM actions of the US Fed:

The POMO is a Permanent Open Market Operation (purchases from the primary private banks of Treasuries & MBS) that bought $20 billion between mid-August to mid-September, another bought $20 billion between mid-September to mid-October and $60 billion between mid-October to mid-November....totaling $100 billion of US taxpayers money, so far, and is expected to continue at the $60 billion/month until, supposedly, the middle of next year. (This is the one that should concern folks the most because the economy has supposedly not crashed yet and here the Fed is "foaming the runway" of the private banking system on the backs of Americans already

MBS = Mortgage Backed Securities

psychohistorian , Nov 15 2019 12:18 utc | 157
@ William Gruff # 156 who wrote
"
There is no increase in the domestic US production of anything but bullshit, which America is cranking out in record quantities, and with delusional fascists leading that productivity surge.
"
I agree and want to summarize my comments # 137, 138 to add that on top of the manufacturing recession that you write of and link to that the US has been in a financial recession since the August/September time frame.

The US Fed has and continues to foam the private banking runway with billions of dollars to prop up and delay price/value assessment. One reason that I can think of for that is the coming IPO of Aramco for Saudi Arabia.

Another reason is likely to be a huge game of musical chairs being played where those in control are arranging a specific set of very few chairs to be available for them when the music stops. It will all be legal of course since all these financial derivative instruments that will be in place will have Super-Priority in bankruptcy which gives those creditors of a bankrupt debtor (America) the right to receive payment before others who would seem to have superior claims to money or assets. The other losers in this case will be Social Security, pension funds, state and municipal bonds to say nothing of the savings of the public that think they are protected with FDIC.

If this event does not incite the pubic to nationalize the private banking system and imprison many then a super-national cult of folk will own what is left of the Western world and be defended by xxxx army.

[Nov 09, 2019] Paying CEOs fat bonuses for stock performance doesn't work -- Cornell study

Notable quotes:
"... There is no strong evidence of a positive impact of TSR plans on firm performance ..."
"... "Despite the fact that just under 50% of S&P 500 firms have this pay metric as part of their executive compensation plans and that this pay metric is designed to align the interest of shareholders and executives," Enayati told Yahoo Finance, "we find that there's no relationship between the pay metric and top-line business outcomes like 1-, 3-, or 5-year total shareholder return, return on equity, earnings per share growth, or revenue growth." ..."
Oct 03, 2015 | finance.yahoo.com

The analysis, done in conjunction with consultants Pearl Meyer & Partners, examined a decade's worth of data from every company in the S&P 500 (^GSPC). It compared companies that offer their top brass a total shareholder return (TSR) plan to those that don't and found the increasingly popular pay plans haven't significantly boosted any of a number of key metrics.

Total shareholder return is how well an investment in a company has done over a given period. It's a combination of the stock's price change and dividends paid. With TSR plans, managers are rewarded with shares, options, or even cash to give them a stake in how well the stock does.

For a growing number of corporate heads, big bonuses based on stock performance is a large part of their pay.

In 2004, just 17% of S&P 500 companies gave CEOs and top executives some form of a TSR plan. A decade later, nearly half of the companies in the index offered it.

As for those S&P 500 CEOs that have TSR plans, it represents on average some 29% of their total direct compensation, though that percentage is a decline from 38% a decade ago. That's because as more companies adopt TSR plans, they are doing so with less weight than companies who took on these kinds of bonuses earlier.

The average CEO of an S&P 500 company made $13.8 million – or 204 times their average employee – in 2014, according to job website Glassdoor.com.

Get the Latest Market Data and News with the Yahoo Finance App

Nonetheless, giving CEOs more for total shareholder return doesn't make a difference, according to the Cornell study.

"There is no strong evidence of a positive impact of TSR plans on firm performance," wrote Hassan Enayati, Kevin Hallock, and Linda Barrington of Cornell University's Institute for Compensation Studies.

"Despite the fact that just under 50% of S&P 500 firms have this pay metric as part of their executive compensation plans and that this pay metric is designed to align the interest of shareholders and executives," Enayati told Yahoo Finance, "we find that there's no relationship between the pay metric and top-line business outcomes like 1-, 3-, or 5-year total shareholder return, return on equity, earnings per share growth, or revenue growth."

Interestingly, the researchers discovered that while the number of companies paying top executives for shareholder return incentives is increasing, the size of those bonuses relative to total compensation is on the decline.

According to Enayati, part of that has to do with companies decreasing the weight of total shareholder return compensation plans. "But then also the new adopters are coming in at lower weights, perhaps just to test the water," he explained.

But Enayati doesn't rule out other performance bonuses. "While there's no evidence that this tool hits the mark, that isn't to say that other metrics shouldn't be pursued as a solid way to align those incentives," he said.

People on Twitter seemed interested in this:
Paying CEOs fat bonuses for stock performance doesn't work, by Lawrence Lewitinn, Yahoo Finance: It turns out offering CEOs huge bonuses to boost shareholder returns doesn't actually work, according to a new study from Cornell University.

The analysis, done in conjunction with consultants Pearl Meyer & Partners, examined a decade's worth of data from every company in the S&P 500. It compared companies that offer their top brass a total shareholder return (TSR) plan to those that don't and found the increasingly popular pay plans haven't significantly boosted any of a number of key metrics. ...

likbez said...

Looks to me like a generic problem of any neoliberal regime that became more acute as secular stagnation of economics became a "new normal".

High compensation (which is just a part of generic redistribution of wealth up -- the goal on neoliberalism) drives up ruthless sociopaths making short term stock performance the priority and displaces engineers who are capable drive the firm into the future.

Short termism and financial machinations to boost the stock price are probably among key reasons of decline of IBM and HP.

Paradoxically Icahn recently provided us with some interesting insights into bizarre world of stock buybacks. See video on http://carlicahn.com/

[Oct 08, 2019] Southwest Pilots Blast Boeing in Suit for Deception and Losses from -Unsafe, Unairworthy- 737 Max -

Notable quotes:
"... The lawsuit also aggressively contests Boeing's spin that competent pilots could have prevented the Lion Air and Ethiopian Air crashes: ..."
"... When asked why Boeing did not alert pilots to the existence of the MCAS, Boeing responded that the company decided against disclosing more details due to concerns about "inundate[ing] average pilots with too much information -- and significantly more technical data -- than [they] needed or could realistically digest." ..."
"... The filing has a detailed explanation of why the addition of heavier, bigger LEAP1-B engines to the 737 airframe made the plane less stable, changed how it handled, and increased the risk of catastrophic stall. It also describes at length how Boeing ignored warning signs during the design and development process, and misrepresented the 737 Max as essentially the same as older 737s to the FAA, potential buyers, and pilots. It also has juicy bits presented in earlier media accounts but bear repeating, like: ..."
"... Then, on November 7, 2018, the FAA issued an "Emergency Airworthiness Directive (AD) 2018-23-51," warning that an unsafe condition likely could exist or develop on 737 MAX aircraft. ..."
"... Moreover, unlike runaway stabilizer, MCAS disables the control column response that 737 pilots have grown accustomed to and relied upon in earlier generations of 737 aircraft. ..."
"... And making the point that to turn off MCAS all you had to do was flip two switches behind everything else on the center condole. Not exactly true, normally those switches were there to shut off power to electrically assisted trim. Ah, it one thing to shut off MCAS it's a whole other thing to shut off power to the planes trim, especially in high speed ✓ and the plane noise up ✓, and not much altitude ✓. ..."
"... Classic addiction behavior. Boeing has a major behavioral problem, the repetitive need for and irrational insistence on profit above safety all else , that is glaringly obvious to everyone except Boeing. ..."
"... In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual so as to further hide its existence from the public and pilots " ..."
"... This "MCAS" was always hidden from pilots? The military implemented checks on MCAS to maintain a level of pilot control. The commercial airlines did not. Commercial airlines were in thrall of every little feature that they felt would eliminate the need for pilots at all. Fell right into the automation crapification of everything. ..."
Oct 08, 2019 | www.nakedcapitalism.com

At first blush, the suit filed in Dallas by the Southwest Airlines Pilots Association (SwAPA) against Boeing may seem like a family feud. SWAPA is seeking an estimated $115 million for lost pilots' pay as a result of the grounding of the 34 Boeing 737 Max planes that Southwest owns and the additional 20 that Southwest had planned to add to its fleet by year end 2019. Recall that Southwest was the largest buyer of the 737 Max, followed by American Airlines. However, the damning accusations made by the pilots' union, meaning, erm, pilots, is likely to cause Boeing not just more public relations headaches, but will also give grist to suits by crash victims.

However, one reason that the Max is a sore point with the union was that it was a key leverage point in 2016 contract negotiations:

And Boeing's assurances that the 737 Max was for all practical purposes just a newer 737 factored into the pilots' bargaining stance. Accordingly, one of the causes of action is tortious interference, that Boeing interfered in the contract negotiations to the benefit of Southwest. The filing describes at length how Boeing and Southwest were highly motivated not to have the contract dispute drag on and set back the launch of the 737 Max at Southwest, its showcase buyer. The big point that the suit makes is the plane was unsafe and the pilots never would have agreed to fly it had they known what they know now.

We've embedded the compliant at the end of the post. It's colorful and does a fine job of recapping the sorry history of the development of the airplane. It has damning passages like:

Boeing concealed the fact that the 737 MAX aircraft was not airworthy because, inter alia, it incorporated a single-point failure condition -- a software/flight control logic called the Maneuvering Characteristics Augmentation System ("MCAS") -- that,if fed erroneous data from a single angle-of-attack sensor, would command the aircraft nose-down and into an unrecoverable dive without pilot input or knowledge.

The lawsuit also aggressively contests Boeing's spin that competent pilots could have prevented the Lion Air and Ethiopian Air crashes:

Had SWAPA known the truth about the 737 MAX aircraft in 2016, it never would have approved the inclusion of the 737 MAX aircraft as a term in its CBA [collective bargaining agreement], and agreed to operate the aircraft for Southwest. Worse still, had SWAPA known the truth about the 737 MAX aircraft, it would have demanded that Boeing rectify the aircraft's fatal flaws before agreeing to include the aircraft in its CBA, and to provide its pilots, and all pilots, with the necessary information and training needed to respond to the circumstances that the Lion Air Flight 610 and Ethiopian Airlines Flight 302 pilots encountered nearly three years later.

And (boldface original):

Boeing Set SWAPA Pilots Up to Fail

As SWAPA President Jon Weaks, publicly stated, SWAPA pilots "were kept in the dark" by Boeing.

Boeing did not tell SWAPA pilots that MCAS existed and there was no description or mention of MCAS in the Boeing Flight Crew Operations Manual.

There was therefore no way for commercial airline pilots, including SWAPA pilots, to know that MCAS would work in the background to override pilot inputs.

There was no way for them to know that MCAS drew on only one of two angle of attack sensors on the aircraft.

And there was no way for them to know of the terrifying consequences that would follow from a malfunction.

When asked why Boeing did not alert pilots to the existence of the MCAS, Boeing responded that the company decided against disclosing more details due to concerns about "inundate[ing] average pilots with too much information -- and significantly more technical data -- than [they] needed or could realistically digest."

SWAPA's pilots, like their counterparts all over the world, were set up for failure

The filing has a detailed explanation of why the addition of heavier, bigger LEAP1-B engines to the 737 airframe made the plane less stable, changed how it handled, and increased the risk of catastrophic stall. It also describes at length how Boeing ignored warning signs during the design and development process, and misrepresented the 737 Max as essentially the same as older 737s to the FAA, potential buyers, and pilots. It also has juicy bits presented in earlier media accounts but bear repeating, like:

By March 2016, Boeing settled on a revision of the MCAS flight control logic.

However, Boeing chose to omit key safeguards that had previously been included in earlier iterations of MCAS used on the Boeing KC-46A Pegasus, a military tanker derivative of the Boeing 767 aircraft.

The engineers who created MCAS for the military tanker designed the system to rely on inputs from multiple sensors and with limited power to move the tanker's nose. These deliberate checks sought to ensure that the system could not act erroneously or cause a pilot to lose control. Those familiar with the tanker's design explained that these checks were incorporated because "[y]ou don't want the solution to be worse than the initial problem."

The 737 MAX version of MCAS abandoned the safeguards previously relied upon. As discussed below, the 737 MAX MCAS had greater control authority than its predecessor, activated repeatedly upon activation, and relied on input from just one of the plane's two sensors that measure the angle of the plane's nose.

In other words, Boeing can't credibly say that it didn't know better.

Here is one of the sections describing Boeing's cover-ups:

Yet Boeing's website, press releases, annual reports, public statements and statements to operators and customers, submissions to the FAA and other civil aviation authorities, and 737 MAX flight manuals made no mention of the increased stall hazard or MCAS itself.

In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual so as to further hide its existence from the public and pilots.

We urge you to read the complaint in full, since it contains juicy insider details, like the significance of Southwest being Boeing's 737 Max "launch partner" and what that entailed in practice, plus recounting dates and names of Boeing personnel who met with SWAPA pilots and made misrepresentations about the aircraft.

If you are time-pressed, the best MSM account is from the Seattle Times, In scathing lawsuit, Southwest pilots' union says Boeing 737 MAX was unsafe

Even though Southwest Airlines is negotiating a settlement with Boeing over losses resulting from the grounding of the 737 Max and the airline has promised to compensate the pilots, the pilots' union at a minimum apparently feels the need to put the heat on Boeing directly. After all, the union could withdraw the complaint if Southwest were to offer satisfactory compensation for the pilots' lost income. And pilots have incentives not to raise safety concerns about the planes they fly. Don't want to spook the horses, after all.

But Southwest pilots are not only the ones most harmed by Boeing's debacle but they are arguably less exposed to the downside of bad press about the 737 Max. It's business fliers who are most sensitive to the risks of the 737 Max, due to seeing the story regularly covered in the business press plus due to often being road warriors. Even though corporate customers account for only 12% of airline customers, they represent an estimated 75% of profits.

Southwest customers don't pay up for front of the bus seats. And many of them presumably value the combination of cheap travel, point to point routes between cities underserved by the majors, and close-in airports, which cut travel times. In other words, that combination of features will make it hard for business travelers who use Southwest regularly to give the airline up, even if the 737 Max gives them the willies. By contrast, premium seat passengers on American or United might find it not all that costly, in terms of convenience and ticket cost (if they are budget sensitive), to fly 737-Max-free Delta until those passengers regain confidence in the grounded plane.

Note that American Airlines' pilot union, when asked about the Southwest claim, said that it also believes its pilots deserve to be compensated for lost flying time, but they plan to obtain it through American Airlines.

If Boeing were smart, it would settle this suit quickly, but so far, Boeing has relied on bluster and denial. So your guess is as good as mine as to how long the legal arm-wrestling goes on.

Update 5:30 AM EDT : One important point that I neglected to include is that the filing also recounts, in gory detail, how Boeing went into "Blame the pilots" mode after the Lion Air crash, insisting the cause was pilot error and would therefore not happen again. Boeing made that claim on a call to all operators, including SWAPA, and then three days later in a meeting with SWAPA.

However, Boeing's actions were inconsistent with this claim. From the filing:

Then, on November 7, 2018, the FAA issued an "Emergency Airworthiness Directive (AD) 2018-23-51," warning that an unsafe condition likely could exist or develop on 737 MAX aircraft.

Relying on Boeing's description of the problem, the AD directed that in the event of un-commanded nose-down stabilizer trim such as what happened during the Lion Air crash, the flight crew should comply with the Runaway Stabilizer procedure in the Operating Procedures of the 737 MAX manual.

But the AD did not provide a complete description of MCAS or the problem in 737 MAX aircraft that led to the Lion Air crash, and would lead to another crash and the 737 MAX's grounding just months later.

An MCAS failure is not like a runaway stabilizer. A runaway stabilizer has continuous un-commanded movement of the tail, whereas MCAS is not continuous and pilots (theoretically) can counter the nose-down movement, after which MCAS would move the aircraft tail down again.

Moreover, unlike runaway stabilizer, MCAS disables the control column response that 737 pilots have grown accustomed to and relied upon in earlier generations of 737 aircraft.

Even after the Lion Air crash, Boeing's description of MCAS was still insufficient to put correct its lack of disclosure as demonstrated by a second MCAS-caused crash.

We hoisted this detail because insiders were spouting in our comments section, presumably based on Boeing's patter, that the Lion Air pilots were clearly incompetent, had they only executed the well-known "runaway stabilizer," all would have been fine. Needless to say, this assertion has been shown to be incorrect.


Titus , October 8, 2019 at 4:38 am

Excellent, by any standard. Which does remind of of the NYT zine story (William Langewiesche Published Sept. 18, 2019) making the claim that basically the pilots who crashed their planes weren't real "Airman".

And making the point that to turn off MCAS all you had to do was flip two switches behind everything else on the center condole. Not exactly true, normally those switches were there to shut off power to electrically assisted trim. Ah, it one thing to shut off MCAS it's a whole other thing to shut off power to the planes trim, especially in high speed ✓ and the plane noise up ✓, and not much altitude ✓.

And especially if you as a pilot didn't know MCAS was there in the first place. This sort of engineering by Boeing is criminal. And the lying. To everyone. Oh, least we all forget the processing power of the in flight computer is that of a intel 286. There are times I just want to be beamed back to the home planet. Where we care for each other.

Carolinian , October 8, 2019 at 8:32 am

One should also point out that Langewiesche said that Boeing made disastrous mistakes with the MCAS and that the very future of the Max is cloudy. His article was useful both for greater detail about what happened and for offering some pushback to the idea that the pilots had nothing to do with the accidents.

As for the above, it was obvious from the first Seattle Times stories that these two events and the grounding were going to be a lawsuit magnet. But some of us think Boeing deserves at least a little bit of a defense because their side has been totally silent–either for legal reasons or CYA reasons on the part of their board and bad management.

Brooklin Bridge , October 8, 2019 at 8:08 am

Classic addiction behavior. Boeing has a major behavioral problem, the repetitive need for and irrational insistence on profit above safety all else , that is glaringly obvious to everyone except Boeing.

Summer , October 8, 2019 at 9:01 am

"The engineers who created MCAS for the military tanker designed the system to rely on inputs from multiple sensors and with limited power to move the tanker's nose. These deliberate checks sought to ensure that the system could not act erroneously or cause a pilot to lose control "

"Yet Boeing's website, press releases, annual reports, public statements and statements to operators and customers, submissions to the FAA and other civil aviation authorities, and 737 MAX flight manuals made no mention of the increased stall hazard or MCAS itself.

In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual so as to further hide its existence from the public and pilots "

This "MCAS" was always hidden from pilots? The military implemented checks on MCAS to maintain a level of pilot control. The commercial airlines did not. Commercial airlines were in thrall of every little feature that they felt would eliminate the need for pilots at all. Fell right into the automation crapification of everything.

[Oct 05, 2019] A Secretive Committee of Wall Street Insiders controls NY FED

Oct 05, 2019 | www.institutionalinvestor.com

A Secretive Committee of Wall Street Insiders Is the Least of the New York Fed's Concerns.

In July 17, Mary Callahan Erdoes, head of JPMorgan Chase & Co.'s $2.2 trillion asset and wealth management division, walked into the wood-paneled tenth-floor conference room at the Federal Reserve Bank of New York to address some fellow Wall Street luminaries -- Bridgewater Associates' Ray Dalio, Dawn Fitzpatrick of Soros Fund Management, short-seller Jim Chanos, and LBO kingpin David Rubenstein among them.

All are members of the Investor Advisory Committee on Financial Markets (IACFM) -- a forum to provide financial insight to the New York Fed. Chairing the meeting was New York Fed president John C. Williams, vice chair of the powerful, rate-setting Federal Open Market Committee, who was a year into his tenure.

Erdoes held forth at the meeting, which included a buffet lunch.

---

And so on.

This is us, we have a unexhaustable desire for these secret meetings to meet, so we vote, every year to convene them. If these secret meeting did not occur then we could never do a deal with the super wealthy and our precious will not be insured.
Reply Saturday, October 05, 2019 at 06:04 PM

[Sep 18, 2019] FAA Hoist on Its Own Boeing 737 Max Petard Multiagency Panel to Issue Report Criticizing Agency Approval Process, Call for Cer

Notable quotes:
"... The aim of the panel, called the Joint Authorities Technical Review, was to expedite getting the 737 Max into the air by creating a vehicle for achieve consensus among foreign regulators who had grounded the 737 Max before the FAA had. But these very regulators had also made clear they needed to be satisfied before they'd let it fly in their airspace. ..."
"... The FAA hopes to give the 737 Max the green light in November, while the other regulators all have said they have issues that are unlikely to be resolved by then. The agency is now in the awkward position of having a body it set up to be authoritative turn on the agency's own procedures. ..."
"... the FAA had moved further and further down the path of relying on aircraft manufactures for critical elements of certification. Not all of this was the result of capture; with the evolution of technology, even the sharpest and best intended engineer in government employ would become stale on the state of the art in a few years. ..."
"... Although all stories paint a broadly similar picture, .the most damning is a detailed piece at the Seattle Times, Engineers say Boeing pushed to limit safety testing in race to certify planes, including 737 MAX ..The article gives an incriminating account of how Boeing got the FAA to delegate more and more certification authority to the airline, and then pressured and abused employees who refused to back down on safety issues . ..."
"... In 2004, the FAA changed its system for front-line supervision of airline certification from having the FAA select airline certification employees who reported directly to the FAA to having airline employees responsible for FAA certification report to airline management and have their reports filtered through them (the FAA attempted to maintain that the certification employees could provide their recommendations directly to the agency, but the Seattle Times obtained policy manuals that stated otherwise). ..."
"... On Monday, the Post and Courier reported about the South Carolina plant that produced 787s found with tools rattling inside that Boeing SC lets mechanics inspect their own work, leading to repeated mistakes, workers say. These mechanic certifications would never have been kosher if the FAA were vigilant. Similarly, Reuters described how Boeing weakened another safety check, that of pilot input. ..."
"... As part of roughly a dozen findings, these government and industry officials said, the task force is poised to call out the Federal Aviation Administration for what it describes as a lack of clarity and transparency in the way the FAA delegated authority to the plane maker to assess the safety of certain flight-control features. The upshot, according to some of these people, is that essential design changes didn't receive adequate FAA attention. ..."
"... But the report could influence changes to traditional engineering principles determining the safety of new aircraft models. Certification of software controlling increasingly interconnected and automated onboard systems "is a whole new ballgame requiring new approaches," according to a senior industry safety expert who has discussed the report with regulators on both sides of the Atlantic. ..."
"... For instance, the Journal reports that Canadian authorities expect to require additional simulator training for 737 Max pilots. Recall that Boeing's biggest 737 Max customer, Southwest Airlines, was so resistant to the cost of additional simulator training that it put a penalty clause into its contract if wound up being necessary. ..."
"... Patrick Ky, head of the European Union Aviation Safety Agency, told the European Parliament earlier this month, "It's very likely that international authorities will want a second opinion" on any FAA decision to lift the grounding. ..."
"... Most prominently, EASA has proposed to eventually add to the MAX a third fully functional angle-of-attack sensor -- which effectively measures how far the plane's nose is pointed up or down -- underscoring the controversy expected to swirl around the plane for the foreseeable future. ..."
"... It's hard to see how Boeing hasn't gotten itself in the position of being at a major competitive disadvantage by virtue of having compromised the FAA so severely as to have undercut safety. ..."
"... has Boeing developed a plan to correct the trim wheel issue on the 787max? i haven't seen a single statement from them on how they plan to fix this problem. is it possible they think they can get the faa to re-certify without addressing it? ..."
"... Don't forget that the smaller trim wheels are in the NG as well. any change to fix the wheels ripples across more planes than just the Max ..."
"... The self-inflicted wound caused by systematic greed and arrogance – corruption, in other words. Boeing is reaping the wages of taking 100% of their profits to support the stock price through stock buybacks and deliberately under-investing in their business. Their brains have been taken over by a parasitic financial system that profits by wrecking healthy businesses. ..."
"... Shareholder Value is indeed the worst idea in the world. That Boeing's biggest stockholder, Vanguard, is unable to cleanup Boeing's operations makes perfect sense. I mean vanguards expertise is making money, not building anything. Those skills are completely different. ..."
"... One maxim we see illustrated here and elsewhere is this: Trust takes years to earn, but can be lost overnight. ..."
Sep 18, 2019 | www.nakedcapitalism.com

The FAA evidently lacked perspective on how much trouble it was in after the two international headline-grabbing crashes of the Boeing 737 Max. It established a "multiagency panel" meaning one that included representatives from foreign aviation regulators, last April. A new Wall Street Journal article reports that the findings of this panel, to be released in a few weeks, are expected to lambaste the FAA 737 Max approval process and urge a major redo of how automated aircraft systems get certified .

The aim of the panel, called the Joint Authorities Technical Review, was to expedite getting the 737 Max into the air by creating a vehicle for achieve consensus among foreign regulators who had grounded the 737 Max before the FAA had. But these very regulators had also made clear they needed to be satisfied before they'd let it fly in their airspace.

The JATR gave them a venue for reaching a consensus, but it wasn't the consensus the FAA sought. The foreign regulators, despite being given a forum in which to hash things out with the FAA, are not following the FAA's timetable. The FAA hopes to give the 737 Max the green light in November, while the other regulators all have said they have issues that are unlikely to be resolved by then. The agency is now in the awkward position of having a body it set up to be authoritative turn on the agency's own procedures.

The Seattle Times, which has broken many important on the Boeing debacle, reported on how the FAA had moved further and further down the path of relying on aircraft manufactures for critical elements of certification. Not all of this was the result of capture; with the evolution of technology, even the sharpest and best intended engineer in government employ would become stale on the state of the art in a few years.

However, one of the critical decisions the FAA took was to change the reporting lines of the manufacturer employees who were assigned to FAA certification. From a May post :

Although all stories paint a broadly similar picture, .the most damning is a detailed piece at the Seattle Times, Engineers say Boeing pushed to limit safety testing in race to certify planes, including 737 MAX ..The article gives an incriminating account of how Boeing got the FAA to delegate more and more certification authority to the airline, and then pressured and abused employees who refused to back down on safety issues .

As the Seattle Times described, the problems extended beyond the 737 Max MCAS software shortcomings; indeed, none of the incidents in the story relate to it.

In 2004, the FAA changed its system for front-line supervision of airline certification from having the FAA select airline certification employees who reported directly to the FAA to having airline employees responsible for FAA certification report to airline management and have their reports filtered through them (the FAA attempted to maintain that the certification employees could provide their recommendations directly to the agency, but the Seattle Times obtained policy manuals that stated otherwise).

Mind you, the Seattle Times was not alone in depicting the FAA as captured by Boeing. On Monday, the Post and Courier reported about the South Carolina plant that produced 787s found with tools rattling inside that Boeing SC lets mechanics inspect their own work, leading to repeated mistakes, workers say. These mechanic certifications would never have been kosher if the FAA were vigilant. Similarly, Reuters described how Boeing weakened another safety check, that of pilot input.

One of the objectives for creating this panel was to restore confidence in Boeing and the FAA, but that was always going to be a tall order, particularly after more bad news about various 737 Max systems and Boeing being less than forthcoming with its customers and regulators emerged. From the Wall Street Journal :

As part of roughly a dozen findings, these government and industry officials said, the task force is poised to call out the Federal Aviation Administration for what it describes as a lack of clarity and transparency in the way the FAA delegated authority to the plane maker to assess the safety of certain flight-control features. The upshot, according to some of these people, is that essential design changes didn't receive adequate FAA attention.

The report, these officials said, also is expected to fault the agency for what it describes as inadequate data sharing with foreign authorities during its original certification of the MAX two years ago, along with relying on mistaken industrywide assumptions about how average pilots would react to certain flight-control emergencies .

The FAA has stressed that the advisory group doesn't have veto power over modifications to MCAS.

But the report could influence changes to traditional engineering principles determining the safety of new aircraft models. Certification of software controlling increasingly interconnected and automated onboard systems "is a whole new ballgame requiring new approaches," according to a senior industry safety expert who has discussed the report with regulators on both sides of the Atlantic.

If the FAA thinks it can keep this genie the bottle, it is naive. The foreign regulators represented on the task force, including from China and the EU, have ready access to the international business press. And there will also be an embarrassing fact on the ground, that the FAA, which was last to ground the 737 Max, will be the first to let it fly again, and potentially by not requiring safety protections that other regulators will insist on. For instance, the Journal reports that Canadian authorities expect to require additional simulator training for 737 Max pilots. Recall that Boeing's biggest 737 Max customer, Southwest Airlines, was so resistant to the cost of additional simulator training that it put a penalty clause into its contract if wound up being necessary.

It's a given that the FAA will be unable to regain its former stature and that all of its certifications of major aircraft will now be second guessed subject to further review by major foreign regulators. That in turn will impose costs on Boeing, of changing its certification process from needing to placate only the FAA to having to appease potentially multiple parties. For instance, the EU regulator is poised to raise the bar on the 737 Max:

Patrick Ky, head of the European Union Aviation Safety Agency, told the European Parliament earlier this month, "It's very likely that international authorities will want a second opinion" on any FAA decision to lift the grounding.

Even after EASA gives the green light, agency officials are expected to push for significant additional safety enhancements to the fleet. Most prominently, EASA has proposed to eventually add to the MAX a third fully functional angle-of-attack sensor -- which effectively measures how far the plane's nose is pointed up or down -- underscoring the controversy expected to swirl around the plane for the foreseeable future.

A monopoly is a precious thing to have. Too bad Boeing failed to appreciate that in its zeal for profits. If the manufacturer winds up facing different demands in different regulatory markets, it will have created more complexity for itself. Can it afford not to manufacture to the highest common denominator, say by making an FAA-only approved bird for Southwest and trying to talk American into buying FAA-only approved versions for domestic use only? It's hard to see how Boeing hasn't gotten itself in the position of being at a major competitive disadvantage by virtue of having compromised the FAA so severely as to have undercut safety.


kimyo , September 17, 2019 at 4:42 am

Boeing Foresees Return Of The 737 MAX In November – But Not Everywhere

Even if Boeing finds solutions that international regulators can finally accept, their implementation will take additional months. The AoA sensor and trim wheel issues will likely require hardware changes to the 600 or so existing MAX airplanes. The demand for simulator training will further delay the ungrounding of the plane. There are only some two dozen 737 MAX simulators in this world and thousands of pilots who will need to pass through them.

has Boeing developed a plan to correct the trim wheel issue on the 787max? i haven't seen a single statement from them on how they plan to fix this problem. is it possible they think they can get the faa to re-certify without addressing it?

marku52 , September 17, 2019 at 1:35 pm

Don't forget that the smaller trim wheels are in the NG as well. any change to fix the wheels ripples across more planes than just the Max

divadab , September 17, 2019 at 8:36 am

The self-inflicted wound caused by systematic greed and arrogance – corruption, in other words. Boeing is reaping the wages of taking 100% of their profits to support the stock price through stock buybacks and deliberately under-investing in their business. Their brains have been taken over by a parasitic financial system that profits by wrecking healthy businesses.

It's not only Boeing – the rot is general and it is terrible to see the destruction of American productive capacity by a parasitic finance sector.

Dirk77 , September 17, 2019 at 9:12 am

+1

Shareholder Value is indeed the worst idea in the world. That Boeing's biggest stockholder, Vanguard, is unable to cleanup Boeing's operations makes perfect sense. I mean vanguards expertise is making money, not building anything. Those skills are completely different.

Noel Nospamington , September 17, 2019 at 10:41 am

Shareholder value does what it intended to do, which is to maximise stock value in the short term, even if it significantly cuts value in the long term.

By that measure allowing Boeing to take over the FAA and self-certify the 737-MAX was a big success, because of short term maximization of stock value that resulted. It is now someone else's problem regarding any long term harm.

Dirk77 , September 17, 2019 at 8:59 am

Having worked at Boeing and the FAA, this report is very welcome. One thing: federal hiring practices in a way lock out good people from working there. Very often the fed managing some project has only a tenuous grasp is what is going on.

But has the job bc they were hired in young and cheap, which is what agencies do with reduced budgets. That and job postings very often stating that they are open only to current feds says it all.

So deferring to the airline to "self-certify" would be a welcome relief to feds in many cases. At this point, I doubt the number of their "sharpest and best intended" engineers is very high.

If you want better oversight, then increase the number and quality of feds by making it easier to hire, and decrease the number of contractors.

Arthur Dent , September 17, 2019 at 10:54 am

I deal with federal and state regulators (not airplane) all the time. Very well meaning people, but in many cases are utterly unqualified to do the technical work. So it works well when they stick to the policy issues and stay out of the technical details.

However, we have Professional Engineers and other licensed professionals signing off on the engineering documents per state law. You can look at the design documents and the construction certification and there is a name and stamp of the responsible individual.

The licensing laws clearly state that the purpose of licensing is to hold public health and safety paramount. This is completely missing in the American industrial sector due to the industrial exemptions in the professional engineering licensing laws. Ultimately, there is nobody technically responsible for a plane or a car who has to certify that they are making the public safe and healthy.

Instead, the FAA and others do that. Federal agencies and the insurance institute test cars and give safety ratings. Lawyers sue companies for defects which also helps enforce safety.

Harry , September 17, 2019 at 1:44 pm

But how can individuals take responsibility? Their pockets arn't deep enough,.

XXYY , September 17, 2019 at 2:57 pm

One maxim we see illustrated here and elsewhere is this: Trust takes years to earn, but can be lost overnight.

Boeing management and the FAA, having lost the trust of most people in the world through their actions lately, seem to nevertheless think it will be a simple matter to return to the former status quo. It seems as likely, or perhaps more likely, that they will never be able to return to the former status quo. They have been revealed as poseurs and imposters, cheerfully risking (and sometimes losing) their customers' lives so they can buy back more stock.

This image will be (rightfully) hard for them to shake.

notabanker , September 17, 2019 at 9:24 pm

So people are going to quit their jobs rather than fly on Boeing planes? Joe and Marge Six-Pack are going to choose flights not based on what they can afford but based on what make of plane they are flying on? As if the airlines will even tell them in advance?

There are close to zero consequences to Boeing and FAA management. Click on the link to the Purdue Sacklers debacle. The biggest inconvenience will be paying the lawyers.

Tomonthebeach , September 17, 2019 at 11:29 am

FAA & Boeing: It's deja vu all over again.

From 1992 to 1999 I worked for the FAA running one of their labs in OKC. My role, among other things, was to provide data to the Administrator on employee attitudes, business practice changes, and policy impact on morale and safety. Back then, likely as now, it was a common complaint heard from FAA execs about the conflict of interest of having to be both an aviation safety regulatory agency and having to promote aviation. Congress seemed fine with that – apparently still is. There is FAA pork in nearly every Congressional district (think airports for example). Boeing is the latest example of how mission conflict is not serving the aviation industry or public safety. With its headquarters within walking distance of Capitol Hill, aviation lobbyists do not even get much exercise shuttling.

The 1996 Valuejet crash into the Florida swamps shows how far back the mission conflict problem has persisted. Valuejet was a startup airline that was touted as more profitable than all the others. It achieved that notoriety by flying through every FAA maintenance loophole they could find to cut maintenance costs. When FAA started clamping down, Senate Majority Leader Daschle scolded FAA for not being on the cutting edge of industry innovation. The message was clear – leave Valuejet alone. That was a hard message to ignore given that Daschle's wife Linda was serving as Deputy FAA Administrator (the #2 position) – a clear conflict of interest with the role of her spouse – a fact not lost on Administrator Hinson (the #1 position). Rather than use the disaster as an opportunity to revisit FAA mission conflict, Clinton tossed Administrator Hinson into the volcano of public outcry and put Daschle in charge. Nothing happened then, and it looks like Boeing might follow Valuejet into the aviation graveyard.

Kevin , September 17, 2019 at 12:34 pm

Boeing subsidies:

Mike , September 17, 2019 at 3:22 pm

Nothin' like regulatory capture. Along with financialized manufacturing, the cheap & profitable will outdo the costly careful every time. Few businesses are run today with the moral outlook of some early industrialists (not enough of them, but still present) who, through zany Protestant guilt, cared for their reputations enough to not make murderous product, knowing how the results would play both here and in Heaven. Today we have PR and government propaganda to smear the doubters, free the toxic, and let loose toxins.

From food to clothing, drugs to hospitals, self-propelled skateboards to aircraft, pesticides to pollution, even services as day care & education, it is time to call the minions of manufactured madness to account. Dare we say "Free government from Murder Inc."?

VietnamVet , September 17, 2019 at 3:57 pm

This is an excellent summary of the untenable situation that Boeing and the Federal Government have gotten themselves into. In their rush to get richer the Elite ignored the fact that monopolies and regulatory capture are always dangerously corrupt. This is not an isolated case. FDA allows importation of uninspected stock pharmaceutical chemicals from China. Insulin is unaffordable for the lower classes. Diseases are spreading through homeless encampments. EPA approved new uses of environmentally toxic nicotinoid insecticide, sulfoxaflor. DOD sold hundreds of billions of dollars of armaments to Saudi Arabia that were useless to protect the oil supply.

The Powers-that-be thought that they would be a hegemon forever. But, Joe Biden's green light for the Ukraine Army's attack against breakaway Donbass region on Russia's border restarted the Cold War allying Russia with China and Iran. This is a multi-polar world again. Brexit and Donald Trump's Presidency are the Empire's death throes.

RBHoughton , September 17, 2019 at 8:40 pm

NC readers know what the problem is as two comments above indicate clearly. Isn't the FAA ashamed to keep conniving with the money and permitting dangerous planes to fly?

Boeing just got a WTO ruling against Airbus. It seems that one rogue produces others. Time to clean the stable and remove the money addiction from safety regulation

The Rev Kev , September 17, 2019 at 11:26 pm

I think that I can see an interesting situation developing next year. So people will be boarding a plane, say with Southwest Airlines, when they will hear the following announcement over the speakers-

"Ladies and gentlemen, this is your Captain speaking. On behalf of myself and the entire crew, welcome aboard Southwest Airlines flight WN 861, non-stop service from Houston to New York. Our flight time will be of 4 hours and 30 minutes. We will be flying at an altitude of 35,000 feet at a ground speed of approximately 590 miles per hour.

We are pleased to announce that you have now boarded the first Boeing 737 MAX that has been cleared to once again fly by the FAA as being completely safe. For those passengers flying on to any other country, we regret to announce that you will have to change planes at New York as no other country in the world has cleared this plane as being safe to fly in their airspace and insurance companies there are unwilling to issue insurance cover for them in any case.

So please sit back and enjoy your trip with us. Cabin Crew, please bolt the cabin doors and prepare for gate departure."

Arizona Slim , September 18, 2019 at 6:32 am

And then there's this -- Southwest is rethinking its 737 strategy:

https://www.youtube.com/watch?v=IoRPhfARWkg

[Sep 09, 2019] What's the True Unemployment Rate in the US? by Jack Rasmus

Highly recommended!
Notable quotes:
"... The real unemployment rate is probably somewhere between 10%-12%. ..."
"... The U-6 also includes what the labor dept. calls involuntary part time employed. It should include the voluntary part time as well, but doesn't (See, they're not actively looking for work even if unemployed). ..."
"... But even the involuntary part time is itself under-estimated. I believe the Labor Dept. counts only those involuntarily part time unemployed whose part time job is their primary job. It doesn't count those who have second and third involuntary part time jobs. That would raise the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and 'missing labor force' is grossly underestimated. ..."
"... The labor dept. also misses the 1-2 million workers who went on social security disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment insurance. That number rose dramatically after 2008 and hasn't come down much (although the government and courts are going after them). ..."
"... The way the government calculates unemployment is by means of 60,000 monthly household surveys but that phone survey method misses a lot of workers who are undocumented and others working in the underground economy in the inner cities (about 10-12% of the economy according to most economists and therefore potentially 10-12% of the reported labor force in size as well). ..."
"... The SSDI, undocumented, underground, underestimation of part timers, etc. are what I call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%. ..."
Sep 09, 2019 | www.counterpunch.org

The real unemployment rate is probably somewhere between 10%-12%. Here's why: the 3.7% is the U-3 rate, per the labor dept. But that's the rate only for full time employed. What the labor dept. calls the U-6 includes what it calls discouraged workers (those who haven't looked for work in the past 4 weeks). Then there's what's called the 'missing labor force'–i.e. those who haven't looked in the past year. They're not calculated in the 3.7% U-3 unemployment rate number either. Why? Because you have to be 'out of work and actively looking for work' to be counted as unemployed and therefore part of the 3.7% rate.

The U-6 also includes what the labor dept. calls involuntary part time employed. It should include the voluntary part time as well, but doesn't (See, they're not actively looking for work even if unemployed).

But even the involuntary part time is itself under-estimated. I believe the Labor Dept. counts only those involuntarily part time unemployed whose part time job is their primary job. It doesn't count those who have second and third involuntary part time jobs. That would raise the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and 'missing labor force' is grossly underestimated.

The labor dept. also misses the 1-2 million workers who went on social security disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment insurance. That number rose dramatically after 2008 and hasn't come down much (although the government and courts are going after them).

The way the government calculates unemployment is by means of 60,000 monthly household surveys but that phone survey method misses a lot of workers who are undocumented and others working in the underground economy in the inner cities (about 10-12% of the economy according to most economists and therefore potentially 10-12% of the reported labor force in size as well). The labor dept. just makes assumptions about that number (conservatively, I may add) and plugs in a number to be added to the unemployment totals. But it has no real idea of how many undocumented or underground economy workers are actually employed or unemployed since these workers do not participate in the labor dept. phone surveys, and who can blame them.

The SSDI, undocumented, underground, underestimation of part timers, etc. are what I call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%.

Finally, there's the corroborating evidence about what's called the labor force participation rate. It has declined by roughly 5% since 2007. That's 6 to 9 million workers who should have entered the labor force but haven't. The labor force should be that much larger, but it isn't. Where have they gone? Did they just not enter the labor force? If not, they're likely a majority unemployed, or in the underground economy, or belong to the labor dept's 'missing labor force' which should be much greater than reported. The government has no adequate explanation why the participation rate has declined so dramatically. Or where have the workers gone. If they had entered the labor force they would have been counted. And their 6 to 9 million would result in an increase in the total labor force number and therefore raise the unemployment rate.

All these reasons–-i.e. only counting full timers in the official 3.7%; under-estimating the size of the part time workforce; under-estimating the size of the discouraged and so-called 'missing labor force'; using methodologies that don't capture the undocumented and underground unemployed accurately; not counting part of the SSI increase as unemployed; and reducing the total labor force because of the declining labor force participation-–together means the true unemployment rate is definitely over 10% and likely closer to 12%. And even that's a conservative estimate perhaps." Join the debate on Facebook More articles by: Jack Rasmus

Jack Rasmus is author of the recently published book, 'Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com .

[Aug 02, 2019] False pretences of knowledge about complicated economic situations have become all too common in public policy debates

Aug 02, 2019 | economistsview.typepad.com

Joe , July 24, 2019 at 08:18 AM

Acknowledging and pricing macroeconomic uncertainties - Hansen and Sargent

False pretences of knowledge about complicated economic situations have become all too common in public policy debates. This column argues that policymakers should take into account what they don't know in their decision making. It describes a tractable approach for acknowledging, characterising, and responding to different forms of uncertainty, by using theories and statistical methods available at any particular moment.

---------

Yes, starting about 10,000 years ago.

After our current MMT, we will get the same false pretence, we will have a bunch of AOC geeks on this blog explaining things have been fixed,'We won't do it again' to quote Ben, among the many thousands of false pretencers. We will hear from the 'Uncle can fix it later' crowd. "This time is different' chants another tribe. Someone will put up a blog, and we will recite talking points absent any evidence.

The delusionals and their preachers do not go away, and neither do their followers. It is like a religion, we know it is BS, but it keeps our hysteria in check.

[Jun 10, 2019] FAA's Boeing-biased Officials: Recuse Yourselves or Resign by Ralph Nader

Notable quotes:
"... The FAA has a clearly established pro-Boeing bias and will likely allow Boeing to unground the 737 MAX. We must demand that the two top FAA officials resign or recuse themselves from taking any more steps that might endanger the flying public. The two Boeing-indentured men are Acting FAA Administrator Daniel Elwell and Associate FAA Administrator for Aviation Safety Ali Bahrami. ..."
"... The FAA has long been known for its non-regulatory, waiver-driven, de-regulatory traditions. It has a hard time saying NO to the aircraft manufacturers and the airlines. After the aircraft hijackings directing flights to Cuba in the 1960s and 1970s, the FAA let the airlines say NO to installing hardened cockpit doors and stronger latches in their planes. These security measures would have prevented the hijackers from invading the cockpits of the aircrafts on September 11, 2001. The airlines did not want to spend the $3000 per plane. Absent the 9/11 hijackings, George W. Bush and Dick Cheney might not have gone to war in Afghanistan. ..."
"... Boeing has about 5,000 orders for the 737 MAX. It has delivered less than 400 to the world's airlines. From its CEO, Dennis Muilenburg to its swarms of Washington lobbyists, law firms, and public relations outfits, Boeing is used to getting its way. ..."
"... Right now, the Boeing/FAA strategy is to make sure Elwell and his FAA quickly decide that the MAX is safe for takeoff by delaying or stonewalling Congressional and other investigations. ..."
"... Time is not on the side of the 737 MAX 8. A comprehensive review of the 737 MAX's problems is a non-starter for Boeing. Boeing's flawed software and instructions that have kept pilots and airlines in the dark have already been exposed. New whistleblowers and more revelations will emerge. More time may also result in the Justice Department's operating grand jury issuing some indictments. More time would let the House Transportation and Infrastructure Committee, led by Chairman Peter DeFazio (D-OR) dig into the failure of accountability and serial criminal negligence of Boeing and its FAA accomplices. Chairman DeFazio knows the history of the FAA's regulatory capture. ..."
"... The FAA and its Boeing pals are using the "trade secret" claims to censor records sought by the House Committee. When it comes to investigating life or death airline hazards and crashes, Congress is capable of handling so-called trade secrets. This is all the more reason why the terminally prejudiced Elwell and Bahrami should step aside and let their successors take a fresh look at the Boeing investigations. That effort would include opening up the certification process for the entire Boeing MAX as a "new plane." ..."
Jun 10, 2019 | www.counterpunch.org

The Boeing-driven FAA is rushing to unground the notorious prone-to-stall Boeing 737 MAX (that killed 346 innocents in two crashes) before several official investigations are completed. Troubling revelations might keep these planes grounded worldwide.

The FAA has a clearly established pro-Boeing bias and will likely allow Boeing to unground the 737 MAX. We must demand that the two top FAA officials resign or recuse themselves from taking any more steps that might endanger the flying public. The two Boeing-indentured men are Acting FAA Administrator Daniel Elwell and Associate FAA Administrator for Aviation Safety Ali Bahrami.

Immediately after the crashes, Elwell resisted grounding and echoed Boeing claims that the Boeing 737 MAX was a safe plane despite the deadly crashes in Indonesia and Ethiopia.

Ali Bahrami is known for aggressively pushing the FAA through 2018 to further abdicate its regulatory duties by delegating more safety inspections to Boeing. Bahrami's actions benefit Boeing and are supported by the company's toadies in the Congress. Elwell and Bahrami have both acquired much experience by going through the well-known revolving door between the industry and the FAA. They are likely to leave the FAA once again for lucrative positions in the aerospace lobbying or business world. With such prospects, they do not have much 'skin in the game' for their pending decision.

The FAA has long been known for its non-regulatory, waiver-driven, de-regulatory traditions. It has a hard time saying NO to the aircraft manufacturers and the airlines. After the aircraft hijackings directing flights to Cuba in the 1960s and 1970s, the FAA let the airlines say NO to installing hardened cockpit doors and stronger latches in their planes. These security measures would have prevented the hijackers from invading the cockpits of the aircrafts on September 11, 2001. The airlines did not want to spend the $3000 per plane. Absent the 9/11 hijackings, George W. Bush and Dick Cheney might not have gone to war in Afghanistan.

The FAA's historic "tombstone" mentality (slowly reacting after the crashes) is well known. For example, in the 1990s the FAA had a delayed reaction to numerous fatal crashes caused by antiquated de-icing rules. The FAA was also slow to act on ground-proximity warning requirements for commuter airlines and flammability reduction rules for aircraft cabin materials.

That's the tradition that Elwell and Bahrami inherited and have worsened. They did not even wait for Boeing to deliver its reworked software before announcing in April that simulator training would not be necessary for the pilots. This judgment was contrary to the experience of seasoned pilots such as Captain Chesley "Sully" Sullenberger. Simulator training would delay ungrounding and cost the profitable airlines money.

Boeing has about 5,000 orders for the 737 MAX. It has delivered less than 400 to the world's airlines. From its CEO, Dennis Muilenburg to its swarms of Washington lobbyists, law firms, and public relations outfits, Boeing is used to getting its way. Its grip on Congress – where 300 members take campaign cash from Boeing – is legendary. Boeing pays little in federal and Washington state taxes. It fumbles contracts with NASA and the Department of Defense but remains the federal government's big vendor for lack of competitive alternatives in a highly concentrated industry.

Right now, the Boeing/FAA strategy is to make sure Elwell and his FAA quickly decide that the MAX is safe for takeoff by delaying or stonewalling Congressional and other investigations.

The compliant Senate Committee on Commerce, Science and Transportation, under Senator Roger Wicker (R-MS), strangely has not scheduled anymore hearings. The Senate confirmation of Stephen Dickson to replace acting chief Elwell is also on a slow track. A new boss at the FAA might wish to take some time to review the whole process.

Time is not on the side of the 737 MAX 8. A comprehensive review of the 737 MAX's problems is a non-starter for Boeing. Boeing's flawed software and instructions that have kept pilots and airlines in the dark have already been exposed. New whistleblowers and more revelations will emerge. More time may also result in the Justice Department's operating grand jury issuing some indictments. More time would let the House Transportation and Infrastructure Committee, led by Chairman Peter DeFazio (D-OR) dig into the failure of accountability and serial criminal negligence of Boeing and its FAA accomplices. Chairman DeFazio knows the history of the FAA's regulatory capture.

Not surprising on June 4, 2019, DeFazio sent a stinging letter to FAA's Elwell and his corporatist superior, Secretary of Transportation Elaine L. Chao, about the FAA's intolerable delays in sending requested documents to the Committee. DeFazio's letter says: "To say we are disappointed and a bit bewildered at the ongoing delays to appropriately respond to our records requests would be an understatement."

The FAA and its Boeing pals are using the "trade secret" claims to censor records sought by the House Committee. When it comes to investigating life or death airline hazards and crashes, Congress is capable of handling so-called trade secrets. This is all the more reason why the terminally prejudiced Elwell and Bahrami should step aside and let their successors take a fresh look at the Boeing investigations. That effort would include opening up the certification process for the entire Boeing MAX as a "new plane."

The Boeing-biased Elwell and Bahrami have refused to even raise in public proceedings the question: "After eight or more Boeing 737 iterations, at what point does the Boeing MAX 8 become a new plane?" Many, including Cong. David Price (D-NC), chair of the House Appropriations Subcommittee, which oversees the FAA's budget, have already questioned the limited certification process.

Heavier engines on the old 737 fuselage changed the MAX's aerodynamics and made it prone-to-stall. It is time for the FAA's leadership to change before the 737 MAX flies with vulnerable, glitch-prone software "fixes".

Notwithstanding the previous Boeing 737 series' record of safety in the U.S. during the past decade – (one fatality), Boeing's bosses, have now disregarded warnings by its own engineers. Boeing executives do not get one, two, three or anymore crashes attributed to their ignoring long-known aerodynamic engineering practices.

The Boeing 737 MAX must never be allowed to fly again, given the structural design defects built deeply into its system.

[May 08, 2019] How Accurate Are the US Jobs Numbers? by Jack Rasmus

Notable quotes:
"... Current Establishment Survey (CES) Report ..."
"... Current Population Survey (CPS ..."
"... The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase. ..."
"... The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor Force' totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate. ..."
"... Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It's about failure to evolve data and methodologies to reflect the real changes in the economy. ..."
"... Government stats are as much an 'art' (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the 'whole picture', not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates. ..."
May 08, 2019 | www.counterpunch.org

The recently released report on April jobs on first appearance, heavily reported by the media, shows a record low 3.6% unemployment rate and another month of 263,000 new jobs created. But there are two official US Labor dept. jobs reports, and the second shows a jobs market much weaker than the selective, 'cherry picked' indicators on unemployment and jobs creation noted above that are typically featured by the press.

Problems with the April Jobs Report

While the Current Establishment Survey (CES) Report (covering large businesses) shows 263,000 jobs created last month, the Current Population Survey (CPS ) second Labor Dept. report (that covers smaller businesses) shows 155,000 of these jobs were involuntary part time. This high proportion (155,000 of 263,000) suggests the job creation number is likely second and third jobs being created. Nor does it reflect actual new workers being newly employed. The number is for new jobs, not newly employed workers. Moreover, it's mostly part time and temp or low paid jobs, likely workers taking on second and third jobs.

Even more contradictory, the second CPS report shows that full time work jobs actually declined last month by 191,000. (And the month before, March, by an even more 228,000 full time jobs decline).

The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase.

And there's a further problem with the part time jobs being created: It also appears that the 155,000 part time jobs created last month may be heavily weighted with the government hiring part timers to start the work on the 2020 census–typically hiring of which starts in April of the preceding year of the census. (Check out the Labor Dept. numbers preceding the prior 2010 census, for April 2009, for the same development a decade ago).

Another partial explanation is that the 155,000 part time job gains last month (and in prior months in 2019) reflect tens of thousands of workers a month who are being forced onto the labor market now every month, as a result of US courts recent decisions now forcing workers who were formerly receiving social security disability benefits (1 million more since 2010) back into the labor market.

The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor Force' totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate.

Bottom line, the U-3 unemployment rate is basically a worthless indicator of the condition of the US jobs market; and the 263,000 CES (Establishment Survey) jobs is contradicted by the Labor Dept's second CPS survey (Population Survey).

GDP & Rising Wages Revisited

In two previous shows, the limits and contradictions (and thus a deeper explanations) of US government GDP and wage statistics were featured: See the immediate April 26, 2019 Alternative Visions show on preliminary US GDP numbers for the 1st quarter 2019, where it was shown how the Trump trade war with China, soon coming to an end, is largely behind the GDP latest numbers; and that the more fundamental forces underlying the US economy involving household consumption and real business investment are actually slowing and stagnating. Or listen to my prior radio show earlier this year where media claims that US wages are now rising is debunked as well.

Claims of wages rising are similarly misrepresented when a deeper analysis shows the proclaimed wage gains are, once again, skewed to the high end of the wage structure and reflect wages for salaried managers and high end professionals by estimating 'averages' and limiting data analysis to full time workers once again; not covering wages for part time and temp workers; not counting collapse of deferred and social wages (pension and social security payments); and underestimating inflation so that real wages appear larger than otherwise. Independent sources estimate more than half of all US workers received no wage increase whatsoever in 2018–suggesting once again the gains are being driven by the top 10% and assumptions of averages that distort the actual wage gains that are much more modest, if at all.

Ditto for GDP analysis and inflation underestimation using the special price index for GDP (the GDP deflator), and the various re-definitions of GDP categories made in recent years and questionable on-going GDP assumptions, such as including in GDP calculation the questionable inclusion of 50 million homeowners supposedly paying themselves a 'rent equivalent'.

A more accurate 'truth' about jobs, wages, and GDP stats is found in the 'fine print' of definitions and understanding the weak statistical methodologies that change the raw economic data on wages, jobs, and economic output (GDP) into acceptable numbers for media promotion.

Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It's about failure to evolve data and methodologies to reflect the real changes in the economy.

Government stats are as much an 'art' (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the 'whole picture', not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates.

When so doing, the bigger picture is an US economy being held up by temporary factors (trade war) soon to dissipate; jobs creation driven by part time work as full time jobs continue structurally to disappear; and wages that are being driven by certain industries (tech, etc.), high end employment (managers, professionals), occasional low end minimum wage hikes in select geographies, and broad categories of 'wages' ignored.

Join the debate on Facebook More articles by: Jack Rasmus

Jack Rasmus is author of the recently published book, 'Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com .

[May 05, 2019] Apres Moi le Deluge by Paul Craig Roberts

The jobs reports are fabrications and that the jobs that do exist are lowly paid domestic service jobs such as waitresses and bartenders and health care and social assistance. What has kept the American economy going is the expansion of consumer debt, not higher pay from higher productivity. The reported low unemployment rate is obtained by not counting discouraged workers who have given up on finding a job.
May 03, 2019 | www.unz.com

I was listening while driving to rightwing talk radio. It is BS just like NPR. It was about the great Trump economy compared to the terrible Obama one. The US hasn't had a great economy since jobs offshoring began in the 1990s, and with robotics about to launch Americans are unlikely ever again to experience a good economy.

The latest jobs report released today claims 236,000 new private sector jobs. Where are the jobs, if they in fact exist?

Manufacturing, that is making things, produced a mere 4,000 jobs.

The jobs are in domestic services. There are 54,800 jobs in "administrative and waste services." This category includes things such as employment services, temporary help services, and building services such as janitor services.

"Health care and social assistance" accounts for 52,600 jobs. This category includes things such as ambulatory health care services and individual and family services.

And there are 25,000 new waiters and bartenders.

Construction, mainly specialty trade contractors, added 33,000.

There are a few other jobs scattered about. Warehousing and storage had 5,400 new jobs.

Real estate rental and leasing hired 7,800.

Legal services laid off 700 people.

Architectural and engineering services lost 1,700 jobs.

There were 6,800 new managers.

The new jobs are not high value-added, high productivity jobs that provide middle class incomes.

In the 21st century the US economy has only served those who own stocks. The liquidity that the Federal Reserve has pumped into the economy has driven up stock prices, and the Trump tax cut has left corporations with more money for stock buybacks and dividend payments. The institute on Taxation and Economic Policy reports that 60 Fortune 500 companies paid no taxes on $79 billion in income, instead receiving a rebate of $4.3 billion. https://itep.org/notadime/

The sign of a good economy is when companies are reinvesting their profits and borrowed money in new plant and equipment to meet rising demand. Instead, US companies are spending more on buybacks and dividends than the total of their profits. In other words, the companies are going into debt in order to drive up their share prices by purchasing their own shares. The executives and shareholders are looting their own companies, leaving the companies less capitalized and deeper in debt. https://systemicdisorder.wordpress.com/2016/10/26/work-harder-for-speculators/

Meanwhile, for the American people the Trump regime's budget for 2020 delivers $845 billion in cuts to Medicare, $1.5 trillion in cuts to Medicaid, and $84 billion in cuts to Social Security disability benefits.

History is repeating itself: Let them eat cake. After me the deluge.

The French Revolution followed.

[Mar 31, 2019] Bank Regulation Can t Be Heads Banks Win, Tails Taxpayers Lose naked capitalism

Notable quotes:
"... By Thomas Ferguson, Director of Research for the Institute of New Economic Thinking; Professor Emeritus, University of Massachusetts, Boston. Originally published at the Institute of New Economic Thinking website ..."
"... Kane, who coined the term "zombie bank" and who famously raised early alarms about American savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them. ..."
"... We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues, state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing the financial system. ..."
"... In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk, in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion. Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge piece of any upside if they rescue two failing institutions? ..."
Mar 31, 2019 | www.nakedcapitalism.com

[Mar 18, 2019] The Boeing debacle is the latest example of regulatory capture by D. Saint Germain

Mar 15, 2019 | medium.com

How the Boeing 737 Max grounding and the Genoa bridge collapse show us that allowing companies to self-certify the safety of their products can be deadly

On Wednesday the United States joined 42 other countries in grounding Boeing's 737 Max 8 jets, days after a crash in Ethiopia of a 737 Max 8 jet left 157 people dead. The United States was a holdout, taking days longer to ground the planes than most of Europe. Our Federal Aviation Administration (FAA) said, in those days between, that they weren't grounding the planes because " the agency's own reviews of the aircraft show no 'systematic performance issues.' "

There were some conflicting accounts of exactly how the US came to ground the 737 Max 8. A statement from Boeing on Wednesday read that "Boeing has determined  --  out of an abundance of caution and in order to reassure the flying public of the aircraft's safety  --  to recommend to the FAA the temporary suspension of operations of the entire global fleet of 371 737 MAX aircraft."

In other words, Boeing claimed it was their idea / recommendation that the FAA ground the aircraft. Meanwhile, Donald Trump declared that he grounded the aircraft by executive order, forcing the FAA's hand.

Which begs the question  --  why did it take a presidential decree and/or the company itself to get the FAA, the main agency responsible for overseeing airplane transit in the United States, to ground potentially dangerous aircraft?

As James Hall, the former National Transportation Safety Board chairman, explained in the Times , in 2005 the FAA turned its safety certification responsibilities over to the manufacturers themselves (if manufacturers met some requirements). In plain speak, this means that Boeing got to decide if Boeing's airplanes were safe enough to fly  --  with no additional third-party checks.

The FAA said the purpose of this change was to save the aviation industry roughly $25 billion between 2006 to 2015.

Given this, it makes you wonder if the statement on Tuesday by Acting FAA Administrator Daniel K. Elwell  --  that the agency had conducted its own review  --  was factual, or if the agency had simply reviewed the safety review that Boeing had conducted on itself. It also clarifies why Boeing came to recommend to the FAA that their planes be grounded, rather than the FAA taking any decisive action on their own.

The term for this maze, where a government safety agency allows an industry to regulate itself so the industry can save some money , and where the industry itself has to be the one to recommend to government that their product shouldn't be in operation pending investigation, is regulatory capture .

From Wikipedia : "Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating."

The issue, in short, is that it is rarely in a business' self-interest to ensure the absolute safety of their products. Safety testing takes time, money, and if inspections reveal problems that need fixing, more money. Corporations are profit maximizers and pursue whatever method they need to minimize cost (including minimizing fixing flaws in their products) and maximize profit.

Without the threat of outside inspection or serious repercussions, there are few incentives to fix potential problems. Insurance covers accidents, and most mega-corporations have funds set aside in their operating budgets to pay the (generally small, relative to their operating budgets) fines governments may impose if and when a problem is discovered.

This is why it is unlikely that industry will ever sufficiently regulate itself on safety issues. Remember Edward Norton's job in "Fight Club"? "The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A. Multiply it by the probable rate of failure, B. Multiply the result by the average out-of-court settlement, C. A x B x C equals X. If X is less than the cost of a recall, we don't do one."

The United States isn't alone in turning over self-certification of its transportation and infrastructure to industry. The Genoa Bridge Collapse in Italy last year, in which 43 people died, is another case.

The Morandi Bridge is a privately-owned toll bridge, publicly built but later sold off to Autostrade, a company majority owned by the Benetton clothing family. As a private infrastructure company, Autostrade has a profit maximization goal of keeping bridge maintenance costs low and toll profits high. Thanks to further privatization efforts of the Italian government, the safety and inspection of bridges is also conducted by private companies. In the case of the Morandi Bridge, the inspection company responsible for safety checks and certification of the bridge was owned by Autostrade's parent company, leaving the company that owns the bridge to self-certify its safety. The result, as the world saw, was a bridge that collapsed.

As Texas engineer Linwood Howell said in the Times, "the engineers inspecting the bridge would have their own professional liabilities to worry about, including the profits of the company that was paying them," i.e. a clear conflict of interest between maintaining basic safety and ensuring their own jobs.

Meanwhile, as Italian law professor Giuliano Fonderico noted , "the government behaved more like its first priority was cooperating with Autostrade, rather than regulating it."

These current examples of regulatory capture are the latest in a series of examples from recent times; others have pointed to regulatory capture in the Federal Reserve during the economic crisis , and the Mineral Management Service during the BP Oil Spill , to name two. Unfortunately it is only when a tragedy occurs that the public expresses concern.

George Stigler, who received the Nobel Peace Prize in Economics in part for his work around regulatory capture in 1982, believed that it was likely that industry would come to dictate the regulatory issues within their industries because of personal connections, a greater understanding of issues facing industry than the general public, but mostly, a public ignorance around what their regulators are up to.

Perhaps it is time for people to pay a little more attention to what our regulators, who we pay to protect us from bridge collapses and plane crashes, are up to. There are some people with big ideas on fixes for regulatory capture, but public demand will also need to exist for real reform efforts to take place.

[Mar 14, 2019] Regulatory Capture: The Banks and the System That They Have Corrupted

Mar 14, 2019 | jessescrossroadscafe.blogspot.com


"But the impotence one feels today -- an impotence we should never consider permanent -- does not excuse one from remaining true to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear. Not the one facing us across the frontier or the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us its slaves. The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its service, all human values in ourselves and in others."

Simone Weil

"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else...

If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."

Neil Barofsky

"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.

The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining was gone.

She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there...

In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player .

If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate's aborted inquiry into the New York Fed's labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component of the Democrat's 2020 platform. Senator Bernie Sanders' platform can certainly be expected to continue the accurate battle cry that 'the business model of Wall Street is fraud.'"

Pam Martens, Wall Street on Parade

[Mar 10, 2019] U.S. SEC to review stock trading rules in big potential shakeup by John McCrank

Mar 10, 2019 | finance.yahoo.com

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is launching a review of the main set of rules governing stock trading, opening the door to the biggest potential changes in a decade-and-a-half, the head of the agency said on Friday.

The possible changes are aimed at making it easier to trade illiquid stocks, making more trading information available to investors, and improving the speed and quality of public data feeds needed for trading.

The SEC in 2005 adopted a broad framework called Regulation National Market System that was largely aimed at ensuring retail investors get the best price possible and preventing trades from being executed at prices that are inferior to bids and offers displayed on other trading venues.

Since then, faster, more sophisticated technology has put a bigger focus on rapid-fire, high-speed trading. There has also been an influx of new electronic stock exchanges, fragmenting liquidity and increasing costs for brokers around exchange connectivity and market data needed to fuel algorithmic trading.

"It is clear that the market challenges we faced in the early 2000s are not the same as the issues that we confront over a decade later," Jay Clayton, chairman of the SEC, said at an event in New York.

To get a better grasp of current market issues, the SEC held a series of roundtable discussions with industry experts last year that led to potential rule-making recommendations around thinly-traded securities, combating retail fraud, and market data and market access, Clayton said.

Some areas the SEC is looking at include:

The 2019 review follows an active 2018 for the SEC.

The regulator adopted rules to increase transparency around broker-dealer stock order routing and private off-exchange trading venues. It also ordered a pilot program to test banning lucrative rebate payments that exchanges make to brokers for liquidity-adding stock orders.

(Reporting by John McCrank; Editing by Tom Brown)

https://s.yimg.com/rq/darla/3-6-3/html/r-sf.html

Sign in to post a message. 17 viewing1 person reacting

judi 1 hour ago What about Naked Shorting? It is out of control and no one including the SEC is doing anything to stop it??

Tara 41 minutes ago The rules implemented in 2005 did nothing to help retail traders with accounts under 25K.
When are you going to address the real issue of stock price manipulation? Also, bring back the uptick rule. And while you are at it, we need rules to punish dishonest analysts who publish opinions of price that are so far off the charts, they never reflect actual earnings often announced days later.

Rob 38 minutes ago They are going to make it more in favor of big boys aka the banks

[Mar 09, 2019] The USA new class in full glory: rich are shopping differently from the low income families and the routine is like doing drags, but more pleasurable and less harmful. While workers are stuglling with the wages that barely allow to support the family, the pressure to cut hours and introduce two tire system

Notable quotes:
"... Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously."" ..."
"... "Erie Locomotive Plant Workers Strike against Two-Tier" [ Labor Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it would impose a two-tier pay system that would pay new hires and recalled employees up to 38 percent less in wages, institute mandatory overtime, reorganize job classifications, and hire temporary workers for up to 20 percent of the plant's jobs. ..."
"... Workers voted on Saturday to authorize the strike." • Good. Two-tier is awful, wherever found (including Social Security). ..."
Mar 09, 2019 | www.nakedcapitalism.com

Guillotine Watch

"My Year of Living Like My Rich Friend" [ New York Magazine ].

"[S]hopping with T was different. When she walked into a store, the employees greeted her by name and began to pull items from the racks for her to try on. Riding her coattails, I was treated with the same consideration, which is how I wound up owning a beautiful cashmere 3.1 Philip Lim sweater that I had no use for and rarely wore, and which was eventually eaten by moths in my closet.

Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously.""

Indeed:

https://www.youtube.com/embed/dfO0TgcDUnI

Class Warfare

"Erie Locomotive Plant Workers Strike against Two-Tier" [ Labor Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it would impose a two-tier pay system that would pay new hires and recalled employees up to 38 percent less in wages, institute mandatory overtime, reorganize job classifications, and hire temporary workers for up to 20 percent of the plant's jobs.

Workers voted on Saturday to authorize the strike." • Good. Two-tier is awful, wherever found (including Social Security).

[Feb 26, 2019] THE CRISIS OF NEOLIBERALISM by Julie A. Wilson

Highly recommended!
Notable quotes:
"... While the Tea Party was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-, it represented a more authoritarian, right [wing] version of neoliberalism. ..."
"... Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering. Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. ..."
"... Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders' energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood" path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy. ..."
"... In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many concerned about the rise of U.S. fascism. ..."
"... We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism. ..."
"... While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the chance of a better world. They have not yet been offered one."' ..."
Oct 08, 2017 | www.amazon.com

Quote from the book is courtesy of Amazon preview of the book Neoliberalism (Key Ideas in Media & Cultural Studies)

In Chapter 1, we traced the rise of our neoliberal conjuncture back to the crisis of liberalism during the late nineteenth and early twentieth centuries, culminating in the Great Depression. During this period, huge transformations in capitalism proved impossible to manage with classical laissez-faire approaches. Out of this crisis, two movements emerged, both of which would eventually shape the course of the twentieth century and beyond. The first, and the one that became dominant in the aftermath of the crisis, was the conjuncture of embedded liberalism. The crisis indicated that capitalism wrecked too much damage on the lives of ordinary citizens. People (white workers and families, especially) warranted social protection from the volatilities and brutalities of capitalism. The state's public function was expanded to include the provision of a more substantive social safety net, a web of protections for people and a web of constraints on markets. The second response was the invention of neoliberalism. Deeply skeptical of the common-good principles that undergirded the emerging social welfare state, neoliberals began organizing on the ground to develop a "new" liberal govemmentality, one rooted less in laissez-faire principles and more in the generalization of competition and enterprise. They worked to envision a new society premised on a new social ontology, that is, on new truths about the state, the market, and human beings. Crucially, neoliberals also began building infrastructures and institutions for disseminating their new' knowledges and theories (i.e., the Neoliberal Thought Collective), as well as organizing politically to build mass support for new policies (i.e., working to unite anti-communists, Christian conservatives, and free marketers in common cause against the welfare state). When cracks in embedded liberalism began to surface -- which is bound to happen with any moving political equilibrium -- neoliberals were there with new stories and solutions, ready to make the world anew.

We are currently living through the crisis of neoliberalism. As I write this book, Donald Trump has recently secured the U.S. presidency, prevailing in the national election over his Democratic opponent Hillary Clinton. Throughout the election, I couldn't help but think back to the crisis of liberalism and the two responses that emerged. Similarly, after the Great Recession of 2008, we've saw two responses emerge to challenge our unworkable status quo, which dispossesses so many people of vital resources for individual and collective life. On the one hand, we witnessed the rise of Occupy Wall Street. While many continue to critique the movement for its lack of leadership and a coherent political vision, Occupy was connected to burgeoning movements across the globe, and our current political horizons have been undoubtedly shaped by the movement's success at repositioning class and economic inequality within our political horizon. On the other hand, we saw' the rise of the Tea Party, a right-wing response to the crisis. While the Tea Party was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-, it represented a more authoritarian, right [wing] version of neoliberalism.

Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering. Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. There were just too many fissures and fault lines in the glossy, cosmopolitan world of left neoliberalism and marketized equality. Indeed, while Clinton ran on status-quo stories of good governance and neoliberal feminism, confident that demographics and diversity would be enough to win the election, Trump effectively tapped into the unfolding conjunctural crisis by exacerbating the cracks in the system of marketized equality, channeling political anger into his celebrity brand that had been built on saying "f*** you" to the culture of left neoliberalism (corporate diversity, political correctness, etc.) In fact, much like Clinton's challenger in the Democratic primary, Benie Sanders, Trump was a crisis candidate.

Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders' energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood" path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy.

Universal health care. Free higher education. Fair trade. The repeal of Citizens United. Trump offered a different response to the crisis. Like Sanders, he railed against global trade deals like NAFTA and the Trans-Pacific Partnership (TPP). However, Trump's victory was fueled by right neoliberalism's culture of cruelty. While Sanders tapped into and mobilized desires for a more egalitarian and democratic future, Trump's promise was nostalgic, making America "great again" -- putting the nation back on "top of the world," and implying a time when women were "in their place" as male property, and minorities and immigrants were controlled by the state.

Thus, what distinguished Trump's campaign from more traditional Republican campaigns was that it actively and explicitly pitted one group's equality (white men) against everyone else's (immigrants, women, Muslims, minorities, etc.). As Catherine Rottenberg suggests, Trump offered voters a choice between a multiracial society (where folks are increasingly disadvantaged and dispossessed) and white supremacy (where white people would be back on top). However, "[w]hat he neglected to state," Rottenberg writes,

is that neoliberalism flourishes in societies where the playing field is already stacked against various segments of society, and that it needs only a relatively small select group of capital-enhancing subjects, while everyone else is ultimately dispensable. 1

In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many concerned about the rise of U.S. fascism.

We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism.

While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the chance of a better world. They have not yet been offered one."'

Mark Fisher, the author of Capitalist Realism, put it this way:

The long, dark night of the end of history has to be grasped as an enormous opportunity. The very oppressive pervasiveness of capitalist realism means that even glimmers of alternative political and economic possibilities can have a disproportionately great effect. The tiniest event can tear a hole in the grey curtain of reaction which has marked the horizons of possibility under capitalist realism. From a situation in which nothing can happen, suddenly anything is possible again.4

I think that, for the first time in the history of U.S. capitalism, the vast majority of people might sense the lie of liberal, capitalist democracy. They feel anxious, unfree, disaffected. Fantasies of the good life have been shattered beyond repair for most people. Trump and this hopefully brief triumph of right neoliberalism will soon lay this bare for everyone to see. Now, with Trump, it is absolutely clear: the rich rule the world; we are all disposable; this is no democracy. The question becomes: How will we show up for history? Will there be new stories, ideas, visions, and fantasies to attach to? How can we productively and meaningful intervene in the crisis of neoliberalism? How can we "tear a hole in the grey curtain" and open up better worlds? How can we put what we've learned to use and begin to imagine and build a world beyond living in competition? I hope our critical journey through the neoliberal conjuncture has enabled you to begin to answer these questions.

More specifically, in recent decades, especially since the end of the Cold War, our common-good sensibilities have been channeled into neoliberal platforms for social change and privatized action, funneling our political energies into brand culture and marketized struggles for equality (e.g., charter schools, NGOs and non-profits, neoliberal antiracism and feminism). As a result, despite our collective anger and disaffected consent, we find ourselves stuck in capitalist realism with no real alternative. Like the neoliberal care of the self, we are trapped in a privatized mode of politics that relies on cruel optimism; we are attached, it seems, to politics that inspire and motivate us to action, while keeping us living in competition.

To disrupt the game, we need to construct common political horizons against neoliberal hegemony. We need to use our common stories and common reason to build common movements against precarity -- for within neoliberalism, precarity is what ultimately has the potential to thread all of our lives together. Put differently, the ultimate fault line in the neoliberal conjiuicture is the way it subjects us all to precarity and the biopolitics of disposability, thereby creating conditions of possibility for new coalitions across race, gender, citizenship, sexuality, and class. Recognizing this potential for coalition in the face of precarization is the most pressing task facing those who are yearning for a new world. The question is: How do we get there? How do we realize these coalitional potentialities and materialize common horizons?

HOW WE GET THERE

Ultimately, mapping the neoliberal conjuncture through everyday life in enterprise culture has not only provided some direction in terms of what we need; it has also cultivated concrete and practical intellectual resources for political interv ention and social interconnection -- a critical toolbox for living in common. More specifically, this book has sought to provide resources for thinking and acting against the four Ds: resources for engaging in counter-conduct, modes of living that refuse, on one hand, to conduct one's life according to the norm of enterprise, and on the other, to relate to others through the norm of competition. Indeed, we need new ways of relating, interacting, and living as friends, lovers, workers, vulnerable bodies, and democratic people if we are to write new stories, invent new govemmentalities, and build coalitions for new worlds.

Against Disimagination: Educated Hope and Affirmative Speculation

We need to stop turning inward, retreating into ourselves, and taking personal responsibility for our lives (a task which is ultimately impossible). Enough with the disimagination machine! Let's start looking outward, not inward -- to the broader structures that undergird our lives. Of course, we need to take care of ourselves; we must survive. But I firmly believe that we can do this in ways both big and small, that transform neoliberal culture and its status-quo stories.

Here's the thing I tell my students all the time. You cannot escape neoliberalism. It is the air we breathe, the water in which we swim. No job, practice of social activism, program of self-care, or relationship will be totally free from neoliberal impingements and logics. There is no pure "outside" to get to or work from -- that's just the nature of the neoliberalism's totalizing cultural power. But let's not forget that neoliberalism's totalizing cultural power is also a source of weakness. Potential for resistance is everywhere, scattered throughout our everyday lives in enterprise culture. Our critical toolbox can help us identify these potentialities and navigate and engage our conjuncture in ways that tear open up those new worlds we desire.

In other words, our critical perspective can help us move through the world with what Henry Giroux calls educated hope. Educated hope means holding in tension the material realities of power and the contingency of history. This orientation of educated hope knows very well what we're up against. However, in the face of seemingly totalizing power, it also knows that neoliberalism can never become total because the future is open. Educated hope is what allows us to see the fault lines, fissures, and potentialities of the present and emboldens us to think and work from that sliver of social space where we do have political agency and freedom to construct a new world. Educated hope is what undoes the power of capitalist realism. It enables affirmative speculation (such as discussed in Chapter 5), which does not try to hold the future to neoliberal horizons (that's cruel optimism!), but instead to affirm our commonalities and the potentialities for the new worlds they signal. Affirmative speculation demands a different sort of risk calculation and management. It senses how little we have to lose and how much we have to gain from knocking the hustle of our lives.

Against De-democratization: Organizing and Collective Coverning

We can think of educated hope and affirmative speculation as practices of what Wendy Brown calls "bare democracy" -- the basic idea that ordinary' people like you and me should govern our lives in common, that we should critique and try to change our world, especially the exploitative and oppressive structures of power that maintain social hierarchies and diminish lives. Neoliberal culture works to stomp out capacities for bare democracy by transforming democratic desires and feelings into meritocratic desires and feelings. In neoliberal culture, utopian sensibilities are directed away from the promise of collective utopian sensibilities are directed away from the promise of collective governing to competing for equality.

We have to get back that democractic feeling! As Jeremy Gilbert taught us, disaffected consent is a post-democratic orientation. We don't like our world, but we don't think we can do anything about it. So, how do we get back that democratic feeling? How do we transform our disaffected consent into something new? As I suggested in the last chapter, we organize. Organizing is simply about people coming together around a common horizon and working collectively to materialize it. In this way, organizing is based on the idea of radical democracy, not liberal democracy. While the latter is based on formal and abstract rights guaranteed by the state, radical democracy insists that people should directly make the decisions that impact their lives, security, and well-being. Radical democracy is a practice of collective governing: it is about us hashing out, together in communities, what matters, and working in common to build a world based on these new sensibilities.

The work of organizing is messy, often unsatisfying, and sometimes even scary. Organizing based on affirmative speculation and coalition-building, furthermore, will have to be experimental and uncertain. As Lauren Berlant suggests, it means "embracing the discomfort of affective experience in a truly open social life that no

one has ever experienced." Organizing through and for the common "requires more adaptable infrastructures. Keep forcing the existing infrastructures to do what they don't know how to do. Make new ways to be local together, where local doesn't require a physical neighborhood." 5 What Berlant is saying is that the work of bare democracy requires unlearning, and detaching from, our current stories and infrastructures in order to see and make things work differently. Organizing for a new world is not easy -- and there are no guarantees -- but it is the only way out of capitalist realism.

Against Disposability: Radical Equality

Getting back democratic feeling will at once require and help us lo move beyond the biopolitics of disposability and entrenched systems of inequality. On one hand, organizing will never be enough if it is not animated by bare democracy, a sensibility that each of us is equally important when it comes to the project of determining our lives in common. Our bodies, our hurts, our dreams, and our desires matter regardless of our race, gender, sexuality, or citizenship, and regardless of how r much capital (economic, social, or cultural) we have. Simply put, in a radical democracy, no one is disposable. This bare-democratic sense of equality must be foundational to organizing and coalition-building. Otherwise, we will always and inevitably fall back into a world of inequality.

On the other hand, organizing and collective governing will deepen and enhance our sensibilities and capacities for radical equality. In this context, the kind of self-enclosed individualism that empowers and underwrites the biopolitics of disposability melts away, as we realize the interconnectedness of our lives and just how amazing it feels to

fail, we affirm our capacities for freedom, political intervention, social interconnection, and collective social doing.

Against Dispossession: Shared Security and Common Wealth

Thinking and acting against the biopolitics of disposability goes hand-in-hand with thinking and acting against dispossession. Ultimately, when we really understand and feel ourselves in relationships of interconnection with others, we want for them as we want for ourselves. Our lives and sensibilities of what is good and just are rooted in radical equality, not possessive or self-appreciating individualism. Because we desire social security and protection, we also know others desire and deserve the same.

However, to really think and act against dispossession means not only advocating for shared security and social protection, but also for a new society that is built on the egalitarian production and distribution of social wealth that we all produce. In this sense, we can take Marx's critique of capitalism -- that wealth is produced collectively but appropriated individually -- to heart. Capitalism was built on the idea that one class -- the owners of the means of production -- could exploit and profit from the collective labors of everyone else (those who do not own and thus have to work), albeit in very different ways depending on race, gender, or citizenship. This meant that, for workers of all stripes, their lives existed not for themselves, but for others (the appropriating class), and that regardless of what we own as consumers, we are not really free or equal in that bare-democratic sense of the word.

If we want to be really free, we need to construct new material and affective social infrastructures for our common wealth. In these new infrastructures, wealth must not be reduced to economic value; it must be rooted in social value. Here, the production of wealth does not exist as a separate sphere from the reproduction of our lives. In other words, new infrastructures, based on the idea of common wealth, will not be set up to exploit our labor, dispossess our communities, or to divide our lives. Rather, they will work to provide collective social resources and care so that we may all be free to pursue happiness, create beautiful and/or useful things, and to realize our potential within a social world of living in common. Crucially, to create the conditions for these new, democratic forms of freedom rooted in radical equality, we need to find ways to refuse and exit the financial networks of Empire and the dispossessions of creditocracy, building new systems that invite everyone to participate in the ongoing production of new worlds and the sharing of the wealth that we produce in common.

It's not up to me to tell you exactly where to look, but I assure you that potentialities for these new worlds are everywhere around you.

[Feb 15, 2019] CAPE Fear The Bulls Are Wrong. Shiller's Measure Is the Real Deal

Notable quotes:
"... The CAPE aims to correct for those distortions. It smooths the denominator by using not current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting that when stocks are this expensive, a downturn may be at hand. ..."
"... is 36.1% higher ..."
"... Here's the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2 points (3.2% versus 2%). That's a reversal of long-term trends. ..."
"... Right now, earnings constitute an unusually higher share of national income. That's because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum. ..."
"... t's often overlooked that although profits grow in line with GDP, which by the way, is now expanding a lot more slowly than two decades ago, earnings per share ..."
"... The reason is dilution. Companies are constantly issuing new shares, for everything from expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are also challenging incumbents, raising the number of shares that divide up an industry's profits faster than those profits are increasing. Since total earnings grow with GDP, and the share count grows faster than profits, it's mathematically impossible for EPS growth to consistently rise in double digits, although it does over brief periods––followed by intervals of zero or minuscule increases. ..."
"... The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former. and that profits are bound to stagnate at best, and more likely decline. ..."
"... In an investing world dominated by hype, the CAPE is a rare truth-teller ..."
Feb 15, 2019 | finance.yahoo.com

For the past half-decade, a controversial yardstick called the CAPE has been flashing red, warning that stock prices are extremely rich, and vulnerable to a sharp correction. And over the same period, the Wall Street bulls and a number of academics led by Jeremy Siegel of the Wharton School, have been claiming that CAPE is a kind of fun house mirror that makes reasonable valuations appear grotesquely stretched.

CAPE, an acronym "Cyclically-adjusted price-to-earnings ratio," was developed by economist Robert Shiller of Yale to correct for a flaw in judging where stock prices stand on the continuum from dirt cheap to highly expensive based on the current P/E ratio. The problem: Reported earnings careen from lofty peaks to deep troughs, so that when they're in a funk, multiples jump so high that shares appear overpriced when they're really reasonable, and when profits explode, they can skew the P/E by creating the false signal that they're a great buy.

The CAPE aims to correct for those distortions. It smooths the denominator by using not current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting that when stocks are this expensive, a downturn may be at hand.

The CAPE's critics argue that its adjusted PE is highly inflated, because the past decade includes a portion of the financial crisis that decimated earnings. That period was so unusual, their thinking goes, that it makes the ten-year average denominator much too low, producing what looks like a dangerous number when valuations are actually reasonable by historical norms. They point to the traditional P/E based on 12-month trailing, GAAP profits. By that yardstick today's multiple is 19.7, a touch above the 20-year average of 19, though exceeding the century-long norm of around 16.

I've run some numbers, and my analysis indicates that the CAPE doesn't suffer from those alleged shortcoming, and presents a much truer picture than today's seemingly reassuring P/E. Here's why. Contrary to its opponents' assertions, the CAPE's earnings number is not artificially depressed. I calculated ten year average of real profits for six decade-long periods starting in February of 1959 and ending today, (the last one running from 2/2009 to 2/2019). On average, the adjusted earnings number rose 22% from one period to the next. The biggest leap came from 1999 to 2009, when the 10-year average of real earnings advanced 42%.

So did profits since then languish to the point where the current CAPE figure is unrealistically big? Not at all. The Shiller profit number of $91 per share is 36.1% higher than the reading for the 1999 to 2009 period, when it had surged a record 40%-plus over the preceding decade. If anything, today's denominator looks high, meaning the CAPE of almost 30 is at least reasonable, and if anything overstates what today's investors will reap from each dollar they've invested in stocks.

Indeed, in the latest ten-year span, adjusted profits have waxed at a 3.2% annual pace, slightly below the 3.6% from 1999 to 2009, but far above the average of 1.6% from 1959 to 1999.

Here's the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2 points (3.2% versus 2%). That's a reversal of long-term trends. Over our entire 60 year period, GDP rose at 3.3% annually, and profits trailed by 1.3 points, advancing at just 2%. So the rationale that P/Es are modest is based on the assumption that today's earnings aren't unusually high at all, and should continue growing from here, on a trajectory that outstrips national income.

It won't happen. It's true that total corporate profits follow GDP over the long term, though they fluctuate above and below that benchmark along the way. Right now, earnings constitute an unusually higher share of national income. That's because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum.

Now, rates are rising and so it pay and employment, forces that will crimp profits. I t's often overlooked that although profits grow in line with GDP, which by the way, is now expanding a lot more slowly than two decades ago, earnings per share grow a lot slower, as I've shown, lagging by 1.3 points over the past six decades.

An influential study from 2003 by Rob Arnott, founder of Research Affiliates, and co-author William J. Bernstein, found that EPS typically trails overall profit and economic growth by even more, an estimated 2 points a year.

The reason is dilution. Companies are constantly issuing new shares, for everything from expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are also challenging incumbents, raising the number of shares that divide up an industry's profits faster than those profits are increasing. Since total earnings grow with GDP, and the share count grows faster than profits, it's mathematically impossible for EPS growth to consistently rise in double digits, although it does over brief periods––followed by intervals of zero or minuscule increases.

The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former. and that profits are bound to stagnate at best, and more likely decline. The retreat appears to have already started. The Wall Street "consensus" Wall Street earnings forecast compiled by FactSet calls for an EPS decline of 1.7% for the first quarter of 2017, and zero inflation-adjusted gains for the first nine months of the year.

In an investing world dominated by hype, the CAPE is a rare truth-teller .

[Feb 05, 2019] The bottom line is that this preoccupation with the 'headline number' for the current month as a single datapoint that is promoted by Wall Street and the Government for official economic data is a nasty neoliberal propaganda trick. You need to analise the whole time serioes to get an objective picture

Highly recommended!
Notable quotes:
"... And as for the median wage and income -- it is still too weak to sustain an economic recovery. ..."
Feb 05, 2019 | jessescrossroadscafe.blogspot.com

The bottom line is that this preoccupation with the 'headline number' for the current month as a single datapoint that is promoted by Wall Street and the Government for official economic data is misleading.

The effective method of considering a heavily adjusted and revised data series like this is with a trend analysis of at least seven to twelve observations, and more if you can get them.

But, that makes for a much less interesting and convenient narrative.

And as for the median wage and income -- it is still too weak to sustain an economic recovery.

Stocks were a bit weak today, despite all this fabulous economic data, having exhausted the sugar rush that was spoonfed to them by their friendly neighborhood Federal Reserve.

[Feb 02, 2019] In Fiery Speeches, Francis Excoriates Global Capitalism

The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital in the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies, a direct challenge to the conventional view that economic inequalities shrink over time. The controversial implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy.
Notable quotes:
"... His speeches can blend biblical fury with apocalyptic doom. Pope Francis does not just criticize the excesses of global capitalism. He compares them to the "dung of the devil." He does not simply argue that systemic "greed for money" is a bad thing. He calls it a "subtle dictatorship" that "condemns and enslaves men and women." ..."
"... The Argentine pope seemed to be asking for a social revolution. "This is not theology as usual; this is him shouting from the mountaintop," said Stephen F. Schneck, the director of the Institute for Policy Research and Catholic studies at Catholic University of America in Washington. ..."
"... Left-wing populism is surging in countries immersed in economic turmoil, such as Spain, and, most notably, Greece . But even in the United States, where the economy has rebounded, widespread concern about inequality and corporate power are propelling the rise of liberals like Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts, who, in turn, have pushed the Democratic Party presidential front-runner, Hillary Rodham Clinton, to the left. ..."
"... Even some free-market champions are now reassessing the shortcomings of unfettered capitalism. George Soros, who made billions in the markets, and then spent a good part of it promoting the spread of free markets in Eastern Europe, now argues that the pendulum has swung too far the other way. ..."
"... Many Catholic scholars would argue that Francis is merely continuing a line of Catholic social teaching that has existed for more than a century and was embraced even by his two conservative predecessors, John Paul II and Benedict XVI. Pope Leo XIII first called for economic justice on behalf of workers in 1891, with his encyclical "Rerum Novarum" - or, "On Condition of Labor." ..."
"... Francis has such a strong sense of urgency "because he has been on the front lines with real people, not just numbers and abstract ideas," Mr. Schneck said. "That real-life experience of working with the most marginalized in Argentina has been the source of his inspiration as pontiff." ..."
"... In Bolivia, Francis praised cooperatives and other localized organizations that he said provide productive economies for the poor. "How different this is than the situation that results when those left behind by the formal market are exploited like slaves!" he said on Wednesday night. ..."
"... It is this Old Testament-like rhetoric that some finding jarring, perhaps especially so in the United States, where Francis will visit in September. His environmental encyclical, "Laudato Si'," released last month, drew loud criticism from some American conservatives and from others who found his language deeply pessimistic. His right-leaning critics also argued that he was overreaching and straying dangerously beyond religion - while condemning capitalism with too broad a brush. ..."
"... The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital in the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies, a direct challenge to the conventional view that economic inequalities shrink over time. The controversial implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy. ..."
"... "Working for a just distribution of the fruits of the earth and human labor is not mere philanthropy," he said on Wednesday. "It is a moral obligation. For Christians, the responsibility is even greater: It is a commandment." ..."
"... "I'm a believer in capitalism but it comes in as many flavors as pie, and we have a choice about the kind of capitalist system that we have," said Mr. Hanauer, now an outspoken proponent of redistributive government ..."
"... "What can be done by those students, those young people, those activists, those missionaries who come to my neighborhood with the hearts full of hopes and dreams but without any real solution for my problems?" he asked. "A lot! They can do a lot. ..."
Jul 11, 2015 | msn.com

ASUNCIÓN, Paraguay - His speeches can blend biblical fury with apocalyptic doom. Pope Francis does not just criticize the excesses of global capitalism. He compares them to the "dung of the devil." He does not simply argue that systemic "greed for money" is a bad thing. He calls it a "subtle dictatorship" that "condemns and enslaves men and women."

Having returned to his native Latin America, Francis has renewed his left-leaning critiques on the inequalities of capitalism, describing it as an underlying cause of global injustice, and a prime cause of climate change. Francis escalated that line last week when he made a historic apology for the crimes of the Roman Catholic Church during the period of Spanish colonialism - even as he called for a global movement against a "new colonialism" rooted in an inequitable economic order.

The Argentine pope seemed to be asking for a social revolution. "This is not theology as usual; this is him shouting from the mountaintop," said Stephen F. Schneck, the director of the Institute for Policy Research and Catholic studies at Catholic University of America in Washington.

The last pope who so boldly placed himself at the center of the global moment was John Paul II, who during the 1980s pushed the church to confront what many saw as the challenge of that era, communism. John Paul II's anti-Communist messaging dovetailed with the agenda of political conservatives eager for a tougher line against the Soviets and, in turn, aligned part of the church hierarchy with the political right.

Francis has defined the economic challenge of this era as the failure of global capitalism to create fairness, equity and dignified livelihoods for the poor - a social and religious agenda that coincides with a resurgence of the leftist thinking marginalized in the days of John Paul II. Francis' increasingly sharp critique comes as much of humanity has never been so wealthy or well fed - yet rising inequality and repeated financial crises have unsettled voters, policy makers and economists.

Left-wing populism is surging in countries immersed in economic turmoil, such as Spain, and, most notably, Greece. But even in the United States, where the economy has rebounded, widespread concern about inequality and corporate power are propelling the rise of liberals like Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts, who, in turn, have pushed the Democratic Party presidential front-runner, Hillary Rodham Clinton, to the left.

Even some free-market champions are now reassessing the shortcomings of unfettered capitalism. George Soros, who made billions in the markets, and then spent a good part of it promoting the spread of free markets in Eastern Europe, now argues that the pendulum has swung too far the other way.

"I think the pope is singing to the music that's already in the air," said Robert A. Johnson, executive director of the Institute for New Economic Thinking, which was financed with $50 million from Mr. Soros. "And that's a good thing. That's what artists do, and I think the pope is sensitive to the lack of legitimacy of the system."

Many Catholic scholars would argue that Francis is merely continuing a line of Catholic social teaching that has existed for more than a century and was embraced even by his two conservative predecessors, John Paul II and Benedict XVI. Pope Leo XIII first called for economic justice on behalf of workers in 1891, with his encyclical "Rerum Novarum" - or, "On Condition of Labor."

Mr. Schneck, of Catholic University, said it was as if Francis were saying, "We've been talking about these things for more than one hundred years, and nobody is listening."

Francis has such a strong sense of urgency "because he has been on the front lines with real people, not just numbers and abstract ideas," Mr. Schneck said. "That real-life experience of working with the most marginalized in Argentina has been the source of his inspiration as pontiff."

Francis made his speech on Wednesday night, in Santa Cruz, Bolivia, before nearly 2,000 social advocates, farmers, trash workers and neighborhood activists. Even as he meets regularly with heads of state, Francis has often said that change must come from the grass roots, whether from poor people or the community organizers who work with them. To Francis, the poor have earned knowledge that is useful and redeeming, even as a "throwaway culture" tosses them aside. He sees them as being at the front edge of economic and environmental crises around the world.

In Bolivia, Francis praised cooperatives and other localized organizations that he said provide productive economies for the poor. "How different this is than the situation that results when those left behind by the formal market are exploited like slaves!" he said on Wednesday night.

It is this Old Testament-like rhetoric that some finding jarring, perhaps especially so in the United States, where Francis will visit in September. His environmental encyclical, "Laudato Si'," released last month, drew loud criticism from some American conservatives and from others who found his language deeply pessimistic. His right-leaning critics also argued that he was overreaching and straying dangerously beyond religion - while condemning capitalism with too broad a brush.

"I wish Francis would focus on positives, on how a free-market economy guided by an ethical framework, and the rule of law, can be a part of the solution for the poor - rather than just jumping from the reality of people's misery to the analysis that a market economy is the problem," said the Rev. Robert A. Sirico, president of the Acton Institute for the Study of Religion and Liberty, which advocates free-market economics.

Francis' sharpest critics have accused him of being a Marxist or a Latin American Communist, even as he opposed communism during his time in Argentina. His tour last week of Latin America began in Ecuador and Bolivia, two countries with far-left governments. President Evo Morales of Bolivia, who wore a Che Guevara patch on his jacket during Francis' speech, claimed the pope as a kindred spirit - even as Francis seemed startled and caught off guard when Mr. Morales gave him a wooden crucifix shaped like a hammer and sickle as a gift.

Francis' primary agenda last week was to begin renewing Catholicism in Latin America and reposition it as the church of the poor. His apology for the church's complicity in the colonialist era received an immediate roar from the crowd. In various parts of Latin America, the association between the church and economic power elites remains intact. In Chile, a socially conservative country, some members of the country's corporate elite are also members of Opus Dei, the traditionalist Catholic organization founded in Spain in 1928.

Inevitably, Francis' critique can be read as a broadside against Pax Americana, the period of capitalism regulated by global institutions created largely by the United States. But even pillars of that system are shifting. The World Bank, which long promoted economic growth as an end in itself, is now increasingly focused on the distribution of gains, after the Arab Spring revolts in some countries that the bank had held up as models. The latest generation of international trade agreements includes efforts to increase protections for workers and the environment.

The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital in the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies, a direct challenge to the conventional view that economic inequalities shrink over time. The controversial implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy.

Mr. Piketty roiled the debate among mainstream economists, yet Francis' critique is more unnerving to some because he is not reframing inequality and poverty around a new economic theory but instead defining it in moral terms. "Working for a just distribution of the fruits of the earth and human labor is not mere philanthropy," he said on Wednesday. "It is a moral obligation. For Christians, the responsibility is even greater: It is a commandment."

Nick Hanauer, a Seattle venture capitalist, said that he saw Francis as making a nuanced point about capitalism, embodied by his coinage of a "social mortgage" on accumulated wealth - a debt to the society that made its accumulation possible. Mr. Hanauer said that economic elites should embrace the need for reforms both for moral and pragmatic reasons. "I'm a believer in capitalism but it comes in as many flavors as pie, and we have a choice about the kind of capitalist system that we have," said Mr. Hanauer, now an outspoken proponent of redistributive government policies like a higher minimum wage.

Yet what remains unclear is whether Francis has a clear vision for a systemic alternative to the status quo that he and others criticize. "All these critiques point toward the incoherence of the simple idea of free market economics, but they don't prescribe a remedy," said Mr. Johnson, of the Institute for New Economic Thinking.

Francis acknowledged as much, conceding on Wednesday that he had no new "recipe" to quickly change the world. Instead, he spoke about a "process of change" undertaken at the grass-roots level.

"What can be done by those students, those young people, those activists, those missionaries who come to my neighborhood with the hearts full of hopes and dreams but without any real solution for my problems?" he asked. "A lot! They can do a lot. "You, the lowly, the exploited, the poor and underprivileged, can do, and are doing, a lot. I would even say that the future of humanity is in great measure in your own hands."

[Jan 20, 2019] Bubblicious Disregard for Risks

Notable quotes:
"... Mispricing risk is the new normal, apparently. The assumption is that the stock market is now in hand and will be fine -- unless something startles it. ..."
Jan 20, 2019 | jessescrossroadscafe.blogspot.com

We will be getting more individual company financial results now that we are in the reporting period again. These may help to sway the markets in some direction, or not.

The market seemed to be shrugging off the results being shown by the financials thus far.

Mispricing risk is the new normal, apparently. The assumption is that the stock market is now in hand and will be fine -- unless something startles it.

Have a pleasant evening.

[Jan 20, 2019] Who Could See It Coming - Dead Reckoning the Minsky Moment

Jan 20, 2019 | jessescrossroadscafe.blogspot.com

Stocks and Precious Metals Charts - Who Could See It Coming? - Dead Reckoning the Minsky Moment

"

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance."

Hyman Minsky, The Financial Instability Hypothesis

"Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky's colleagues regarded his 'financial-instability hypothesis,' which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial web sites and in the reports of Wall Street analysts. Minsky's hypothesis is well worth revisiting."

John Cassidy, The Minsky Moment , The New Yorker, 4 February 2008.

"The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revival, but finally giving up in the final collapse."

Charles Kindelberger, Manias, Panics, and Crashes: A History of Financial Crises

"The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street [and in the professional and credentialed class] are nearly always silent."

John Kenneth Galbraith, The Great Crash of 1929

"People who lost jobs -- and those are in the millions in 2008, 2009, and 2010 -- have now gotten jobs, that's true, but the jobs they've gotten have lower wages, have less security and fewer benefits than the ones they lost, which means they can't spend money like we might have hoped they would if they had got the kinds of jobs they lost, but they didn't...

The big tax cut last December, 2017, gave an awful lot of money to the richest Americans and to big corporations. They had no incentive to plow that into their businesses, because Americans can't buy any more than they already do. They're up to their necks in debt and all the rest.

So what they did was to take the money they saved from taxes and speculate in the stock market, driving up the shares and so forth. Naive people thought that was a sign of economic health. It wasn't. It was money bidding up the price of stock until the underlying economy was so far out of whack with the stock market that now everybody realizes that and there's a rush to get out and boom, the thing goes down."

Richard Wolff, The Next Economic Crisis Is Coming


Bubbles most often resolve their imbalances irresponsibly and jarringly, with a correction that is sharp and destructive. It is often triggered by some seemingly trivial event, especially if its predatory mispricing of risk has been allowed to fester for an extended period of time.. How can this be?

Credit cycles explain bubbles in modern finance, but the elite protect themselves and their banks from the effects. Hence, only the middle and working class loses. And this has been the case for many years now. Hence the growing unrest abroad, and the decisions by the electorate at home that seem to puzzle and provoke the very comfortable 'credentialed' class.

The reason for this is quite easy to understand. Those who benefit the most from the bubble both actively and passively help sustain it. They are reluctant to surrender any potion of their enormous advantage and personal gains, even if it might be better for them in the long term.

They do not consider the damage that may be done to the underlying social fabric that supports and protects their wealth. Contrary to all of the familiar assumptions, they are not acting rationally or prudently, even for themselves. Their focus is short term and short-sighted. They are drunk on their own success.

The interpreters and creators of the prevailing narrative are themselves beneficiaries of the bubble economy, and will go to great lengths to misdirect the public discussion from any root causes, and often from its very existence. They will distract the public with inflammatory issues, economic fear, stage-managed spectacles, and manufactured complexity. And finally, in the extremes of their shamelessness, they will seek to blame the victims for their lack of sophistication and the government for its efforts to restrain their predatory frauds.

This enables the cycle of boom and bust to repeat and worsen beyond all reasonable expectations.

The lesson from history is that a system based on the ascendant greed of powerful insiders is rarely rational and self-correcting, and is often spectacularly self-destructive. And those with the most power, in their wonderful self-delusion, simply do not care until it is too late. They are blinded by the moment, in their competition with each other, and the insatiable nature of greed itself. 'Enough' is not in their reckoning.

To this end governments are fashioned, and people organize themselves from the damage that can be done to society as a whole by a few. Unfortunately people forget, and it seems that at least once every generation or so the madness slips loose its restraints, and this sad lesson from history repeats.

And so once again the world must face its rendezvous with destiny.

The box scores for today's market action are shown in the graphs below.

Apparently rough weather is heading towards the east coast. The local grocery store was a nuthouse even in the early afternoon. I am making some chicken soup for myself and Dolly. Even if I could coax her out of her fuzzy blanket and pillows, Dolly would offer limited assistance. She is clearly just in it for the chicken.

Have a pleasant evening.

[Jan 20, 2019] Psychologogical prerequisites for the financial bubble: gullibility of most people

Look at financial fraud and smoke and mirrors in the current USA "casino capitalism" as another example of the same. People do believe the insane valuations of tech firms like Apple, Facebook, Google and Amazon despite dot-com bubble. A lot of people put hard earned money in stock of those companies in wane hope to get out before the bubble pops.
Jan 20, 2019 | www.moonofalabama.org
the pair , Jan 18, 2019 1:42:50 PM | 4 ">link

"war is a racket" as the saying goes. it's usually less about actual capability than it is keeping all the usual suspects latched firmly on the "military industrial" teat. it's basically the world's largest welfare program disguised as "national defense" and - coupled with financial fraud/smoke and mirrors - what props up the sad remnants of the US. unless people believe the insane overvaluation of tech firms like facebook and amazon for another generation.

it is also - like you and others have mentioned - an offensive system allowing for first-strike capability and not feasible for many reasons (not the least of which is the sheer amount of "space junk" floating around in orbit.) all it takes is one russian/chinese/belgian/? missile getting through anyway...unless these idiots still agree with bush sr's idea of "acceptable losses of entire cities".

[Jan 07, 2019] The 1920's were marked by a credit expansion, a significant growth in consumer debt, the creation of asset bubbles, and the proliferation of financial instruments and leveraged investments. Now we have exactly the same trends

Highly recommended!
This article published 10 years ago looks like it was written yesterday. The more things change in the USA casino capitalism the more they stay the same
Now Trump tariffs will cause drop in consumption. What will follow it not very clear.
Hypertrophied growth of financial system is cancer. It is a parasitic institution much like cancer cells in human body.
Notable quotes:
"... The Federal Reserve made tragic policy errors most certainly with regard to interest rates. They were hampered by a lack of coordinated effort because of the official US policy focus on liquidation and non-interference, along with mass bank failures which rendered their attempts to reflate the money supply as largely futile. ..."
"... But good policies applied with vigor during a period of economic illness may be like forcing patients seriously ill with pneumonia to swim laps and run in marathons because you think such physical activity is inherently good and beneficial in itself at all times. ..."
"... Today it seems to us that the Fed and Treasury are trying to cure our current problems by filling the banks full of liquidity with the idea that it will eventually trickle down to the real economy through their toll gates. ..."
"... We believe this will not work. The financial system is rotten, and not only in its toxic and fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the rescue attempts. ..."
Oct 31, 2008 | jessescrossroadscafe.blogspot.com

The 1920's were marked by a credit expansion, a significant growth in consumer debt, the creation of asset bubbles, and the proliferation of financial instruments and leveraged investments. The Federal Reserve expanded the money supply and the Republican government pursued a laissez-faire approach to business.

This helped to create a greater wealth disparity, and saddled a good part of the public with debts on consumables that were vulnerable to an economic contraction.

The bursting of the credit bubble triggered the stock market Crash of 1929. The Hoover administration's response was guided by Secretary of the Treasury Andrew Mellon. As noted by Herbert Hoover in his memoirs, "Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'"

Indeed, the collapse of consumption and credit, and the ensuing 'do nothing' policy of liquidation by the government crippled the economy and drove unemployment up to the incredible 24% level at the climax of the liquidation and deleveraging.

Although some assets fared better than others, virtually everything was caught up in the cycle of liquidation and everything was sold: stocks, bonds, farms, even long dated US Treasuries, all of them collapsing into the bottom in late 1932.

The Federal Reserve made tragic policy errors most certainly with regard to interest rates. They were hampered by a lack of coordinated effort because of the official US policy focus on liquidation and non-interference, along with mass bank failures which rendered their attempts to reflate the money supply as largely futile.

Thrifty management of the credit and monetary levels when the economy is balanced in the manufacturing, service, export-import, and consumption distribution levels is a good policy to follow.

But good policies applied with vigor during a period of economic illness may be like forcing patients seriously ill with pneumonia to swim laps and run in marathons because you think such physical activity is inherently good and beneficial in itself at all times.

Additionally, monetary expansion alone also does not work, as can be seen in the early attempts by the Fed to expand the monetary base without policy initiatives to support expansion and consumption. Hoover's administration raised the income tax and cut spending for a balanced budget.

A combined monetary and government bias to stimulating consumption while restoring balance and correcting the errors that fostered the credit bubble is the more effective course of action.

Today it seems to us that the Fed and Treasury are trying to cure our current problems by filling the banks full of liquidity with the idea that it will eventually trickle down to the real economy through their toll gates.

We believe this will not work. The financial system is rotten, and not only in its toxic and fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the rescue attempts.

Better to cauterize the bleeds in the financial system and assume a 'trickle up' approach by reaching the econmy through the individual rather than the individual through the banks.

Provide secure FDIC insurance to everyone to a generous degree , and let those banks who must fail, fail. You will encourage reform and savings, we guarantee it. Stimulate work and wages, and then consumption, and the financial system will follow.

While the financial system as it is constituted today remains the centerpiece of our economy, we cannot sustainably recover since it is a source of recurring infection.

Globalists like to cite the introduction of the Smoot-Hawley tariffs as a major factor in the development of the Great Depression. This appears to be largely unsubstantiated, and attributable to a dogmatic bias to international trade as a panacea for failing domestic demand.

In fact, before Smoot-Hawley both exports and imports were in a steep decline as consumption collapsed around the world. If the US had declared itself open for free trade, to whom would they sell, and who in the US would buy? Consumption was in a general collapse around the world. Smoot Hawley did not help, but it also did not hurt because it was largely irrelevant.

It is a lesser discussed topic, but the US held the majority of the gold in the world in 1930 as the aftermath of their position as an industrial power in World War I and the expansion that followed. Since the majority of the countries were on some version of the gold standard, one could make a case that the US had an undue influence on the 'reserve currency of the world' at that time, and its mistaken policies were transmitted via the gold standard to the rest of the world.

The nations that exited the Great Depression the soonest, those who recovered more quickly and experienced a shallower economic downturn, were those who stimulated domestic consumption via public works and industrial policies: Japan, Germany, Italy, Sweden.

As a final point, we like to show this chart to draw a very strong line under the fact that the liquidationist policy of the Hoover Administration caused most assets to suffer precipitous declines. Certainly some fared better than others, such as gold which was pegged, and silver which declined but not nearly as much as industrial metals and certainly financial instruments like stocks which declined 89% from peak to trough.

FDR devalued the dollar by 40%, but he never followed Britain off the gold standard, maintaining fictitious support by outlawing domestic ownership. As the government stepped away from its liquidationist approach the economy gradually recovered and the money supply reinflated, despite the carnage delivered to the US economy and the world, provoking the rise of militarism and statist regimes in many of the developed nations.

There is a fiction that the economy never really recovered, and FDR's policies failed and only a World War caused the recovery. In fact, if one cares to look at the situation more closely, the recession of 1937 was a result of the aggressive military buildup for war in the world, the diversion of capital and resources to non-productive goods and services, and of course the general reversal of the New Deal by the US Supreme Court and the Republican minority in Congress.

As an aside, it is interesting to read about the efforts of some US industrialists to foster a fascist solution here in the US, as their counterparts and some of them had done in Europe.

What finally put the world on the permanent road to recovery was the savings forced by the lack of consumer goods during World War II and the rebuilding of Europe and Asia, devastated by war, significantly aided by the policies of the Allied powers.

A Depression following a Crash caused by an asset bubble collapse is a terrible thing indeed. But it does not have to be a prolonged ordeal.

Governments can and do make policy errors that prolong the period of adjustment, most notably instituting an industrial policy that discourages domestic consumption and money supply growth in a desire to obtain foreign reserves through exports.

From what we have seen thus far, we believe that the Russian experience in the 1990's is going to be closer to what lies ahead for the US. Unless the US adopts an export driven, low domestic consumption, high savings policy bias, non-productive military buildup and public works, and discourages population growth we don't believe the Japanese experience will be repeated.

Preventing the banking system from collapsing is a worthy objective. Perpetuating the symptom of fraud and abuse and 'overreach' that was becoming pervasive in the system before the collapse is not sustainable, instead leading to more frequent and larger collapses.

Balance will be restored, and a reversion to the means will occur, one way or the other. It would be most practical to accomplish this in a peaceful, sustainable manner, with justice and toleration.

[Jan 07, 2019] The Fed IS the Ugly Truth

Notable quotes:
"... "The entire US economy today is about the quick buck." ..."
"... " When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history giving us a grand total of over $15 trillion." ..."
The Automatic Earth
... ... ...

Central banks are founded for one reason only: to save [private] banks from bankruptcy, invariably at the cost of society at large. They'll bring down markets and societies just to make sure banks don't go under. They'll also, and even, do that when these banks have taken insane risks. It's a battle societies can't possibly win as long as central banks can raise unlimited amounts of 'money' and shove it into private banks. Ergo: societies can't survive the existence of a central bank that serves the interests of its private banks.

Henrich:

Stock-Market Investors, It's Time To Hear The Ugly Truth

For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up. As I've been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch. And don't think this is hyperbole on my part. I will, of course, present evidence.

In March 2009 markets bottomed on the expansion of QE1 (quantitative easing, part one), which was introduced following the initial announcement in November 2008. Every major correction since then has been met with major central-bank interventions: QE2, Twist, QE3 and so on. When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history. The sum: More than $5 trillion between 2016 and 2017, giving us a grand total of over $15 trillion, courtesy of the U.S. Federal Reserve, the European Central Bank and the Bank of Japan:

When did global central-bank balance sheets peak? Early 2018. When did global markets peak? January 2018. And don't think the Fed was not still active in the jawboning business despite QE3 ending. After all, their official language remained "accommodative" and their interest-rate increase schedule was the slowest in history, cautious and tinkering so as not to upset the markets.

With tax cuts coming into the U.S. economy in early 2018, along with record buybacks, the markets at first ignored the beginning of QT (quantitative tightening), but then it all changed. And guess what changed? Two things. In September 2018, for the first time in 10 years, the U.S. central bank's Federal Open Market Committee (FOMC) removed one little word from its policy stance: "accommodative." And the Fed increased its QT program. When did U.S. markets peak? September 2018.

[..] don't mistake this rally for anything but for what it really is: Central banks again coming to the rescue of stressed markets. Their action and words matter in heavily oversold markets. But the reality remains, artificial liquidity is coming out of these markets. [..] What's the larger message here? Free-market price discovery would require a full accounting of market bubbles and the realities of structural problems, which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems.

is it $15 trillion, or is it 20, or 30? How much did China add to the total? And for what? How much of it has been invested in productivity? I bet you it's not even 10%. The rest has just been wasted on a facade of a functioning economy. Those facades tend to get terribly expensive.

Western economies would have shrunk into negative GDP growth if not for the $15-20 trillion their central banks injected over the past decade. And that is seen, or rather presented, as something so terrible you got to do anything to prevent it from happening. As if it's completely natural, and desirable, for an economy to grow forever.

It isn't and it won't happen, but keeping the illusion alive serves to allow the rich to put their riches in a safe place, to increase inequality and to prepare those who need it least to save most to ride out the storm they themselves are creating and deepening. And everyone else can go stuff themselves.

And sure, perhaps a central bank could have some function that benefits society. It's just that none of them ever do, do they? Central banks benefit private banks, and since the latter have for some braindead reason been gifted with the power to issue our money, while we could have just as well done that ourselves, the circle is round and we ain't in it.

No, the Fed doesn't hide the ugly truth. The Fed is that ugly truth. And if we don't get rid of it, it will get a lot uglier still before the entire edifice falls to pieces. This is not complicated stuff, that's just what you're made to believe. Nobody needs the Fed who doesn't want to pervert markets and society, it is that simple.

zerosum #44732

The word your looking for "abyss" definition -- a catastrophic situation seen as likely to occur to the people with wealth that is built upon "leverage."

https://www.investopedia.com/terms/l/leverage.asp

Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money -- specifically, the use of various financial instruments or borrowed capital -- to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as "highly leveraged," it means that item has more debt than equity.

... ... ...

Doc Robinson January 7, 2019 at 4:06 am #44737

"The entire US economy today is about the quick buck."

Even the stock market these days seems to be about the quick buck. In the US, the average holding period for stocks has dropped from 8 years (1960), to 5 years (1970), to 2 years (1990), to 4 months (in the past few years).

https://www.politifact.com/virginia/statements/2016/jul/06/mark-warner/mark-warner-says-average-holding-time-stocks-has-f/

The policies of the Fed (as well as the Board of Directors of the companies) are evidently geared towards the short-term benefits of the owners who will be leaving in a few months. The long-term health of the companies, the economy, and the overall society (mostly non-owners) is evidently not so important to the Fed and the CEOs.

" When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history giving us a grand total of over $15 trillion."

Those $15 trillion in assets being held by the central banks propped the global stock market capitalization up to around $75 trillion. Short term thinking that gives short-term benefits. Take away the props and of course that sucker is going to fall.

What were they thinking, the overweight patient with all of those systemic problems is going to be able to walk just fine when the crutches are taken away?

[Dec 16, 2018] Trump Models His War on Bank Regulators on Bill Clinton and W's Disastrous Wars by Bill Black

Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... Wall Street Journal ..."
"... Wall Street Journal ..."
"... The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. ..."
"... The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ ..."
"... I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true. ..."
"... Obama et al confusing "banking" with sound banking is too ironic, imo. ..."
"... It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry. ..."
"... Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies? And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie. ..."
Dec 14, 2018 | www.nakedcapitalism.com
By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

The Wall Street Journal published an article on December 12, 2018 that should warn us of coming disaster: "Banks Get Kinder, Gentler Treatment Under Trump." The last time a regulatory head lamented that regulators were not "kinder and gentler" promptly ushered in the Enron-era fraud epidemic. President Bush made Harvey Pitt his Securities and Exchange Commission (SEC) Chair in August 2001 and, in one of his early major addresses, he spoke on October 22, 2001 to a group of accounting leaders.

Pitt, as a private counsel, represented all the top tier audit firms, and they had successfully pushed Bush to appoint him to run the SEC. The second sentence of Pitt's speech bemoaned the fact that the SEC had not been "a kinder and gentler place for accountants." He concluded his first paragraph with the statement that the SEC and the auditors needed to work "in partnership." He soon reiterated that point: "We view the accounting profession as our partner" and amped it up by calling accountants the SEC's "critical partner."

Pitt expanded on that point: "I am committed to the principle that government is and must be a service industry." That, of course, would not be controversial if he meant a service agency (not "industry") for the public. Pitt, however, meant that the SEC should be a "service industry" for the auditors and corporations.

Pitt then turned to pronouncing the SEC to be the guilty party in the "partnership." He claimed that the SEC had terrorized accountants. He then stated that he had ordered the SEC to end this fictional terror campaign.

[A]ccountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession. Those days are ended.

This prompted Pitt to ratchet even higher his "partnership" language.

I speak for the entire Commission when I say that we want to have a continuing dialogue, and partnership, with the accounting profession,

Recall that Pitt spoke on October 22, 2001. Here are the relevant excerpts from the NY Times' Enron timeline :

Oct. 16 – Enron announces $638 million in third-quarter losses and a $1.2 billion reduction in shareholder equity stemming from writeoffs related to failed broadband and water trading ventures as well as unwinding of so-called Raptors, or fragile entities backed by falling Enron stock created to hedge inflated asset values and keep hundreds of millions of dollars in debt off the energy company's books.

Oct. 19 – Securities and Exchange Commission launches inquiry into Enron finances.

Oct. 22 – Enron acknowledges SEC inquiry into a possible conflict of interest related to the company's dealings with Fastow's partnerships.

Oct. 23 – Lay professes confidence in Fastow to analysts.

Oct. 24 – Fastow ousted.

The key fact is that even as Enron was obviously spiraling toward imminent collapse (it filed for bankruptcy on December 2) – and the SEC knew it – Pitt offered no warning in his speech. The auditors and the corporate CEOs and CFOs were not the SEC's 'partners.' Thousands of CEOs and CFOs were filing false financial statements – with 'clean' opinions from the then 'Big 5' auditors. Pitt was blind to the 'accounting control fraud' epidemic that was raging at the time he spoke to the accountants. Thousands of his putative auditor 'partners' were getting rich by blessing fraudulent financial statements and harming the investors that the SEC is actually supposed to serve.

Tom Frank aptly characterized the Bush appointees that completed the destruction of effective financial regulation as "The Wrecking Crew." It is important, however, to understand that Bush largely adopted and intensified Clinton's war against effective regulation. Clinton and Bush led the unremitting bipartisan assault on regulation for 16 years. That produced the criminogenic environment that produced the three largest financial fraud epidemics in history that hyper-inflated the real estate bubble and drove the Great Financial Crisis (GFC). President Trump has renewed the Clinton/Bush war on regulation and he has appointed banking regulatory leaders that have consciously modeled their assault on regulation on Bush and Clinton's 'Wrecking Crews.'

Bill Clinton's euphemism for his war on effective regulation was "Reinventing Government." Clinton appointed VP Al Gore to lead the assault. (Clinton and Gore are "New Democrat" leaders – the Wall Street wing of the Democratic Party.) Gore decided he needed to choose an anti-regulator to conduct the day-to-day leadership. We know from Bob Stone's memoir the sole substantive advice he gave Gore in their first meeting that caused Gore to appoint him as that leader. "Do not 'waste one second going after waste, fraud, and abuse.'" Elite insider fraud is, historically, the leading cause of bank losses and failures, so Stone's advice was sure to lead to devastating financial crises. It is telling that it was the fact that Stone gave obviously idiotic advice to Gore that led him to select Stone as the field commander of Clinton and Gore's war on effective regulation.

Stone convinced the Clinton-Gore administration to embrace the defining element of crony capitalism as its signature mantra for its war on effective regulation. Stone and his troops ordered us to refer to the banks, not the American people, as our "customers." Peters' foreword to Stone's book admits the action, but is clueless about the impact.

Bob Stone's insistence on using the word "customer" was mocked by some -- but made an enormous difference over the course of time. In general, he changed the vocabulary of public service from 'procedure first' to 'service first.'"

That is a lie. We did not 'mock' the demand that we treat the banks rather than the American people as our "customer" – we openly protested the outrageous order that we embrace and encourage crony capitalism. Crony capitalism's core principle – which is unprincipled – is that the government should treat elite CEOs as their 'customers' or 'partners.' A number of us publicly expressed our rage at the corrupt order to treat CEOs as our customers. The corrupt order caused me to leave the government.

Our purpose as regulators is to serve the people of the United States – not bank CEOs. It was disgusting and dishonest for Peters to claim that our objection to crony capitalism represented our (fictional) disdain for serving the public. Many S&L regulators risked their careers by taking on elite S&L frauds and their powerful political fixers. Many of us paid a heavy personal price because we acted to protect the public from these elite frauds. Our efforts prevented the S&L debacle from causing a GFC – precisely because we recognized the critical need to spend most of our time preventing and prosecuting the elite frauds that Stone wanted us to ignore..

Trump's wrecking crew is devoted to recreating Clinton and Bush's disastrous crony capitalism war on regulation that produced the GFC. In a June 8, 2018 article , the Wall Street Journal mocked Trump's appointment of Joseph Otting as Comptroller of the Currency (OCC). The illustration that introduces the article bears the motto: "IN BANKS WE TRUST."

Otting, channeling his inner Pitt, declared his employees guilty of systematic misconduct and embraced crony capitalism through Pitt's favorite phrase – "partnership."

I think it is more of a partnership with the banks as opposed to a dictatorial perspective under the prior administration.

Otting, while he was in the industry, compared the OCC under President Obama to a fictional interstellar terrorist. Obama appointed federal banking regulators that were pale imitation of Ed Gray, Joe Selby, and Mike Patriarca – the leaders of the S&L reregulation. The idea that Obama's banking regulators were akin to 'terrorists' is farcical.

The WSJ's December 12, 2018 article reported that Otting had also used Bob Stone's favorite term to embrace crony capitalism.

Comptroller of the Currency Joseph Otting has also changed the tone from the top at his agency, calling banks his "customers."

There are many terrible role models Trump could copy as his model of how to destroy banking regulation and produce the next GFC, but Otting descended into unintentional self-parody when he channeled word-for-word the most incompetent and dishonest members of Clinton and Bush's wrecking crews.

The same article reported a trade association's statement that demonstrates the type of outrageous reaction that crony capitalism inevitably breeds within industry.

Banks are suffering from "examiner criticisms that do not deal with any violation of law," said Greg Baer, CEO of the Bank Policy Institute ."

The article presented no response to this statement so I will explain why it is absurd. First, "banks" do not "suffer" from "examiner criticism." Banks gain from examiner criticism. Effective regulators (and whistleblowers) are the only people who routinely 'speak truth to power.' Auditors, credit rating agencies, and attorneys routinely 'bless' the worst CEO abuses that harm banks while enriching the CEO. The bank CEO cannot fire the examiner, so the examiners' expert advice is the only truly "independent" advice the bank's board of directors receives. That makes the examiners' criticisms invaluable to the bank. CEOs hate our advice because we are the only 'control' (other than the episodic whistleblower) that is willing and competent to criticize the CEO.

The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. While "violations of law" (felonies) are obviously of importance to us in almost all cases, our greatest expertise is in identifying – and stopping – "unsafe and unsound practices" because such practices, like fraud, are leading causes of bank losses and failures.

Third, repeated "unsafe and unsound practices" are a leading indicator of likely elite insider bank fraud and other "violations of law."

The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ reporters' failure to point out the absurdity of that complaint – demonstrate that the banking industry's goal remains the destruction of effective banking regulation. Trump's wrecking crew is using the Clinton and Bush playbook to restore fully crony capitalism. He has greatly accelerated the onset of the next GFC.


Chauncey Gardiner , December 14, 2018 at 2:01 pm

Thank you for this, Bill Black. IMO the long-term de-regulatory policies under successive administrations cited here, together with their neutering the rule of law by overturning the Glass-Steagall Act; de-funding and failing to enforce antitrust, fraud and securities laws; financial repression of the majority; hidden financial markets subsidies; and other policies are just part of an organized, long-term systemic effort to enable, organize and subsidize massive control and securities fraud; theft of and disinvestment in publicly owned resources and services; environmental damage; and transfers of social costs that enable the organizers to in turn gain a hugely disproportionate share of the nation's wealth and nearly absolute political control under their "Citizens United" political framework.

Not to diminish, but among other things the current president provides nearly daily entertainment, diversion and spectacle in our Brave New World that serves to obfuscate what has occurred and is happening.

RBHoughton , December 14, 2018 at 9:41 pm

I'm with you Chauncey. I believe the rot really got started with creative accounting in early 1970s. That's when accountants of every flavor lost themselves and were soon followed by the lawyers. Sauce for the goose.

Banks and Insurers and many industrial concerns have become too big. We could avoid all the regulatory problems by placing a maximum size on commercial endeavour.

chuck roast , December 14, 2018 at 4:28 pm

Sameo-sameo

A number of years ago I did both the primary capital program and environmental (NEPA) review for major capital projects in a Federal Region. Hundreds of millions of dollars were at stake. A local agency wanted us (the Feds) to approve pushing up many of their projects using a so-called Public Private Partnership (PPP). This required the local agency to borrow many millions from Wall Street while at the same time privatizing many of their here-to-fore public operations. And of course there was an added benefit of instituting a non-union shop.

To this end I was required to sit down with the local agency head (he actually wore white shoes), his staff and several representatives of Goldman-Sachs. After the meeting ended, I opined to the agency staff that Goldman-Sachs was "bullshit" and so were their projects.

Shortly thereafter I was removed to a less high-profile Region with projects that were not all that griftable, and there was no danger of me having to review a PPP.

Oh, and I denied, denied, denied saying "bullshit."

flora , December 14, 2018 at 10:08 pm

Thank you, NC, for featuring these posts by Bill Black.

I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true.

Main Street also knows the importance of sound banking. Sound banking is not a 'poker chip' to be used for games. Sound banking is key to the American experiment in self-determination, as it has been called.

Politicians who 'don't get this" have lost touch with the entire American enterprise, imo. And, no, the neoliberal promise that nation-states no longer matter doesn't make this point moot.

flora , December 14, 2018 at 10:47 pm

adding: US founding father Alexander Hambleton did understand the importance of sound banking, and so Obama et al confusing "banking" with sound banking is too ironic, imo.

Tim , December 15, 2018 at 8:29 am

It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry.

John k , December 15, 2018 at 12:14 pm

Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies?
And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie.

[Dec 08, 2018] Now that the banks are calling in their insurance, the EU has to deliver either by screwing down Italy the same as they did Greece or getting the French and German public (or better the whole EU) to bail out the banks.

Dec 08, 2018 | www.unz.com

Anonymous [295] Disclaimer , says: December 7, 2018 at 12:23 pm GMT

@Miro23

Now that the banks are calling in their insurance, the EU has to deliver either by 1) screwing down Italy the same as they did Greece, or 2) getting the French and German public (or better the whole EU) to bail out the banks.

There is a third option: the banks simply accept their losses, and the bankers make do without their customary bonuses for a few quarters.

[Nov 27, 2018] Warning Contagion is Now Spreading to Corporate Bonds Zero Hedge

Nov 27, 2018 | www.zerohedge.com

by Phoenix Capita Sat, 11/24/2018 - 13:52 19 SHARES

Ignore the day-to-day moves in the markets, in the big picture, some MAJOR is happening namely, that the Everything Bubble is bursting.

By creating a bubble in sovereign bonds, the bedrock of the current financial system, Central Banks created a bubble in EVERYTHING. After all, if the risk-free rate of return is at FAKE level based on Central Bank intervention ALL risk assets will eventually adjust to FAKE levels.

This whole mess starting blowing up in February when we saw the bubble in passive investing/ shorting volatility start to blow up (some investment vehicles based on these strategies lost 85% in just three days).

The media and Wall Street swept that mess under the rug which allowed the contagion to start spreading to other, more senior asset classes like corporate bonds.

The US Corporate bond market took 50 years to reach $3 trillion. It doubled that in the last 9 years, bringing it to its current level of $6 trillion.

This debt issuance was a DIRECT of result of the Fed's intervention in the bond markets. With the weakest recovery on record, US corporations experienced little organic growth. As a result, many of them resorted to financial engineering through which they issued debt and then used the proceeds to buyback shares.

This:

  1. Juiced their Earnings Per Share (the same earnings, spread over fewer shares= better EPS).
  2. Provided the stock market with a steady stream of buyers, which
  3. Lead to higher options-based compensation for executives.

If you think this sounds a lot like a Ponzi scheme that relies on a bubble in corporate debt, you're correct. And that Ponzi scheme is now blowing up. The question now is
how bad will it get?"

VERY bad.

The IMF estimates about 20% of U.S. corporate assets could be at risk of default if rates rise – some are in the energy sector but it also includes companies in real estate and utilities . Exchange-traded funds that buy junk bonds, like iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK), could be among the most vulnerable if credit risks rise. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) could also suffer.

Source: Barron's

With a $6 trillion market, a 20% default rate would mean some $1.2 trillion in corporate debt blowing up: an amount roughly equal to Spain's GDP .

This process is officially underway.

Credit Markets Are Bracing for Something Bad

Cracks in corporate debt lead market commentary.

the Bloomberg Barclays U.S. Corporate Bond Index losing more than 3.5 percent and on track for its worst year since 2008.

Source: Bloomberg

Indeed, the chart for US corporate junk bonds is downright UGLY.

This is just the beginning. As contagion spreads we expect more and more junior debt instruments to default culminating in full-scale sovereign debt defaults in the developed world (Europe comes to mind).

This will coincide with a stock market crash that will make 2008 look like a picnic.

Again, the markets are going to CRASH. The time to prepare is now BEFORE this happens.

On that note we just published a 21-page investment report titled Stock Market Crash Survival Guide .

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

Today is the last day this report will be available to the public. We extended the deadline into the weekend based on last week's action, but this is IT no more extensions.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

[Nov 26, 2018] How Low Can This Stock Market Go by JIM COLLINS

In essence this is the largest casino in the world, created by casino capitalism. Previously only wealthy individuals owned stocks. Now everybody owed them via thier 401K (which in recession can easily become 201K ;-). In 2008 S&P500 touched the level of around 700. Does this mean that the it was oversold? And what would happen to him if the government will not pushed trillions to large banks, and some of those money went into S&p500.
Notable quotes:
"... There is no magic valuation level that supports high-flying stocks. They are driven by sentiment in both directions. ..."
"... That gets to the oft-quoted notion of "support." Does it really exist? Is there a level at which assets are just "too cheap" relative to their intrinsic values and therefore must be bought regardless of prevailing market trends? ..."
"... The mistake many market observers often make is to attribute all selloffs to gyrations in sentiment and to misunderstand that stock booms are driven by that exact factor -- in reverse. Sentiment will always rule market pricing in the short-term. ..."
Nov 26, 2018 | realmoney.thestreet.com
Stocks quotes in this article: AAPL , NFLX , FB , AMZN , F , GE , IBM , T , GOOGL There is no magic valuation level that supports high-flying stocks. They are driven by sentiment in both directions.

It's on now. The markets are in full-blown correction mode.

I hope the truncated trading day on Friday did not escape your attention, because it continued a negative price trend for stocks that began in late-September. The question now is: How low can we go?

That gets to the oft-quoted notion of "support." Does it really exist? Is there a level at which assets are just "too cheap" relative to their intrinsic values and therefore must be bought regardless of prevailing market trends?

The mistake many market observers often make is to attribute all selloffs to gyrations in sentiment and to misunderstand that stock booms are driven by that exact factor -- in reverse. Sentiment will always rule market pricing in the short-term. That was just as true with Apple ( AAPL ) at $220 per share as it is with Apple at $172 per share, Netflix ( NFLX ) at $420 and $258 and on and on down the list. Portfolio managers were buying Facebook ( FB ) above $200 per share and Amazon ( AMZN ) above $2,000 because they had to, though, not based on innately unquantifiable, voodoo metrics such as "disruption."

I am basing that statement on my regular conversations with fund managers at very large asset managers, and of course no one can definitively take the pulse of every player in the market. That is the great divide between individuals (my clients at Portfolio Guru LLC) and institutions (pension funds, insurance companies, college endowments, sovereign wealth funds, etc.)

Individuals want their portfolio values to rise. Period. Institutions want their portfolios to outperform their carefully selected benchmarks over specific time periods on a risk-adjusted basis.

So, that's what creates high-flying stocks to begin with. Portfolio managers need to overweight the biggest names in the market -- owning more Apple, for instance, than its weighting in the chosen benchmark would require, not simply owning or not owning Apple. In a rising market that has a beneficial effect on valuations of those names.

If every portfolio manager needs to buy more Apple, Apple's share price will go up, making it a larger component of the S&P 500 and Nasdaq 100. As Apple's weighting increases, those fund managers would have to -- you guessed it -- buy more Apple!

The circularity of that logic is undeniable, but I am telling you that's how the market for big-cap stocks works. Please remember the men and women pulling those levers are responsible for much, much larger asset bases than you are. So they will always move the markets, even if history has proven their timing to be poor more often than it is excellent.

Bottom line: High-flying stocks are driven by sentiment in both directions, thus there is no magic valuation level that supports them.

This is quite apparent in the charts of "fallen angel" stocks such as Ford ( F ) , General Electric ( GE ) , IBM ( IBM ) , and AT&T ( T ) . The market hates those stocks no more the day after Thanksgiving than it did the day after Independence Day, but certainly no less, either. An investor could generate hours of amusement by Googling "this is a bottom for..." and then entering in any of those names. So many pundits, so many bad support level calls.

So, value traps are no way to ride out a market correction, but what about the stocks that brought us into that correction? Are the FAANG names -- Facebook, Amazon, Apple, Netflix, Apple and Alphabet ( GOOGL ) (parent company of Google) -- destined to end up in the "hate pile" with GE and IBM? God, I hope not. That's the difference between a pullback and a crash and, by implication, the difference between a depression and a recession.

My analysis shows that buying Apple at 13x next year's earnings -- which implies a price of $172.55, slightly above Friday's close -- has been a lucrative strategy in the past three years. That said, I am worried that the steady stream of noise about production cuts from Apple's suppliers implies Wall Street's estimates for Apple's fiscal 2019 earnings are inflated. So I am not buying Apple today.

And so it goes. Chicken and egg. Is the stock market telling us the global economy is slowing or is the global economy slowing driving down prices for assets, especially oil, thus creating an economic slowdown? Crude's decline has spooked the market to no end, but so has Apple's decline. And Netflix's and Facebook's.

At the end of the day, all securities are assets on someone's balance sheet. Gold, oil, stocks, bonds, really anything on your screen except crypto, which is very very difficult to clear and hence to accurately value. Anything that can be physically transferred can be sold, and in a downturn that can be a sobering thought. Don't forget it.

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[Nov 24, 2018] Update on the Comparison with Prior Notable Declines

Nov 24, 2018 | jessescrossroadscafe.blogspot.com

[Nov 03, 2018] Crashed How a Decade of Financial Crises Changed the World Adam Tooze 9780670024933 Amazon.com Books

Nov 03, 2018 | www.amazon.com

"An intelligent explanation of the mechanisms that produced the crisis and the response to it...One of the great strengths of Tooze's book is to demonstrate the deeply intertwined nature of the European and American financial systems." -- The New York Times Book Review

wsmrer 5.0 out of 5 stars 2008 Neoliberalism crashes the state rushes back-- just in time August 10, 2018 Format: Kindle Edition Verified Purchase

"Whereas since the 1970s the incessant mantra of the spokespeople of the financial industry had been free markets and light touch regulation, what they were now demanding was the mobilization of all of the resources of the state to save society's financial infrastructure from a threat of systemic implosion, a threat they likened to a military emergency." (Loc. 3172-3174)

Adam Tooze takes the well know Financial Crisis of 2007-08 through its full history of international ramifications and brings it up to the present with the question of whether the large organizations, structures and processes on the one hand; decision, debate, argument and action on the other that managed to fall into place in that crisis period in this and many other countries will develop if needed again. "The political in "political economy" demands to be taken seriously." (Loc. 11694). That he does.

Tooze is an Economic Historian and Crashed: How a Decade of Financial Crises Changed the World is a wonderfully rich enquiry into causes and effects of the Financial Crisis and how the failing of poorly managed greed motivated practices of a few financial institutions, and their subprime mortgagees, tumbled economies in the developed and developing world, causing events that matched the Great Depression's dislocation and could have matched its duration, springing from world wide money markets "interlocking matrix" of corporate balance sheets -- bank to bank."

A warning he is not kind to existing political beings, the Republican Party in particular " to judge by the record of the last ten years, it is incapable of legislating or cooperating effectively in government." (Loc.11704)
His criticism is, in fairness, based on technical management grounds, and he does find fault as well with the inner core of the Obama advisors and their primary concerns for the financial sectors well being, rather than nationwide happenings where homes and incomes disappeared.

This reviewer's favorite (not mentioned by Tooze) is the early 2009 comment of Larry Sumners when Christina D. Romer, the chairwoman of President Obama's Council of Economic Advisers and leading authority on the Great Depression saw a need for $1.8 trillion stimulus package, "What have you been smoking?"
Sumners, Geithner, and Orszag, who favored transferring $700 billion to the banks to offset possible bank failures and such -- became policy. Tooze mentions that by 2012 Sumners was concerned by the slowness of the U.S. economy's recovery taking, as it did, 8 years to reach 2008 levels of employment.

Can an Economic History be an exciting read? Tooze gives us over 700 pages of just that, but much will be familiar as reported news and may be skimmed, and some of the Fed's expanded international roles very dense in content. His strength is the knowledge of what could have happened, had solutions not been found, and how agreements were reached out of public sight.
" the world economy is not run by medium-sized entrepreneurs but by a few thousand massive corporations, with interlocking shareholdings controlled by a tiny group of asset managers. (Loc.418-419).
Add wily politicians and hard driven bankers EU Ukraine and China you have an adventure.

Corporate control is not new -- rich descriptions of its inner connections are.
Adam Tooze does this well a reference work for years to come.
5 stars

David Shulman 5.0 out of 5 stars The World in Crisis August 22, 2018 Format: Kindle Edition Verified Purchase

Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an authoritative history of the financial crises and their aftermath that have beset the world since 2008. He integrates economics, the plumbing of the interbank financial system and the politics of the major players in how and why the financial crisis of 2008 developed and the course of the very uneven recovery that followed. I must note that Tooze has some very clear biases in that he views the history through a social democratic prism and is very critical of the congressional Republican caucus and the go slow policies of the European Central Bank under Trichet. To him the banks got bailed out while millions of people suffered as collateral damage from a crisis that was largely made by the financial system. His view may very well be correct, but many readers might differ. Simply put, to save the economy policy makers had to stop the bleeding.

He starts off with the hot topic of 2005; the need for fiscal consolidation in the United States. Aside from a few dissidents, most economists saw the need for the U.S. to close its fiscal deficit and did not see the structural crisis that was developing underneath them. Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky's most important insight that "stability leads to instability" as market participants are lulled into a false sense of security. It therefore was against the backdrop of the "great moderation" that the crisis began. And it was the seemingly calm environment that lulled all too many regulators to sleep.

The underbelly of the financial system was and still is in many respects is the wholesale funding system where too many banks are largely funded in repo and commercial paper markets. This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term mortgage securities. It was problems in that market that triggered the crisis in August 2007.

The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In Tooze's view the decision to let Lehman fail was political, not economic. After that the gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for $750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over this appropriation where Tooze believes the split in the Republican Party between the business conservative and social populist wing hardens. We are living with that through this day. The TARP program passes with Democratic votes. Tooze also notes that there was great continuity between the Bush and early Obama policies with respect to the banks and auto bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the table. Tooze also correctly notes that the major beneficiary of the TARP program was Citicorp, the most exposed U.S. bank to the wholesale funding system.

Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program where it buys up not only treasuries, but mortgage backed securities as well. It was with the latter Europe's banks were bailed out. Half of the first QE went to bail out Europe's troubled banks. When combined the dollar swap lines with QE, Europe's central banks essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve Act does it say that the Fed is the central bank to the world? To some it maybe a stretch.

Tooze applauds Obama's stimulus policy but rightly says it was too small. There should have been more infrastructure in it. To my view there could have been more infrastructure if only Obama was willing to deal with the Republicans by offering to waive environmental reviews and prevailing wage rules. He never tried for fear of offending his labor and environmental constituencies. Tooze also gives great credit to China with it all out monetary and fiscal policies. That triggered a revival in the energy and natural resource economies of Australia and Brazil thereby helping global recovery.

He then turns to the slow responses in Europe and the political wrangling over the tragedy that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness to have the frugal German taxpayer subsidize the profligate Greeks. As they say "all politics is local". The logjam in Europe doesn't really break until Mario Draghi makes an off-the-cuff remark at a London speech in July 2012 by saying the ECB will do "whatever it takes" to engender European recovery.

As a byproduct of bailing out the banks and failing to directly help the average citizen a rash of populism, mostly of the rightwing variety, breaks out all over leading to Brexit, Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it wasn't only banking policy that created this. The huge surge in immigration into Europe has a lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having a monetary policy that is too easy and too long. The same type of Minsky risk discussed earlier is now present in the global economy: witness Turkey, for example. Thus it is too early to tell whether or not the all-out monetary policy of the past decade will be judged a success from the vantage point of 2030.

Adam Tooze has written an important book and I view it as must read for a serious lay reader to get a better understanding of the economic and political policies of the past decade.

[Nov 01, 2018] The 2018 Globie Crashed by Joseph Joyce

Notable quotes:
"... Crashed: How a Decade of Financial Crises Changed the World ..."
"... Grave New World: The End of Globalization, the Return of History ..."
"... Global Inequality ..."
"... Currency Power: Understanding Monetary Rivalry ..."
"... The Shifts and the Shocks: What We've Learned–and Have Still to Learn–from the Financial Crisis ..."
Nov 01, 2018 | angrybearblog.com

Each year I choose a book to be the Globalization Book of the Year, i.e., the "Globie". The prize is strictly honorific and does not come with a check. But I do like to single out books that are particularly insightful about some aspect of globalization. Previous winners are listed at the bottom.

This year's choice is Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze of Yale University . Tooze, an historian, traces the events leading up to the crisis and the subsequent ten years. He points out in the introduction that this account is different from one he may have written several years ago. At that time Barak Obama had won re-election in 2012 on the basis of a slow but steady recovery in the U.S. Europe was further behind, but the emerging markets were growing rapidly, due to the demand for their commodities from a steadily-growing China as well as capital inflows searching for higher returns than those available in the advanced economies.

But the economic recovery has brought new challenges, which have swept aside established politicians and parties. Obama was succeeded by Donald Trump, who promised to restore America to some form of past greatness. His policy agenda includes trade disputes with a broad range of countries, and he is particularly eager to impose trade tariffs on China. The current meltdown in stock prices follows a rise in interest rates normal at this stage of the business cycle but also is based on fears of the consequences of the trade measures.

Europe has its own discontents. In the United Kingdom, voters have approved leaving the European Union. The European Commission has expressed its disapproval of the Italian government's fiscal plans. Several east European governments have voiced opposition to the governance norms of the West European nations. Angela Merkel's decision to step down as head of her party leaves Europe without its most respected leader.

All these events are outcomes of the crisis, which Tooze emphasizes was a trans-Atlantic event. European banks had purchased held large amounts of U.S. mortgage-backed securities that they financed with borrowed dollars. When liquidity in the markets disappeared, the European banks faced the challenge of financing their obligations. Tooze explains how the Federal Reserve supported the European banks using swap lines with the European Central Bank and other central banks, as well as including the domestic subsidiaries of the foreign banks in their liquidity support operations in the U.S. As a result, Tooze claims:

"What happened in the fall of 2008 was not the relativization of the dollar, but the reverse, a dramatic reassertion of the pivotal role of America's central bank. Far from withering away, the Fed's response gave an entirely new dimension to the global dollar" (Tooze, p. 219)

The focused policies of U.S. policymakers stood in sharp contrast to those of their European counterparts. Ireland and Spain had to deal with their own banking crises following the collapse of their housing bubbles, and Portugal suffered from anemic growth. But Greece's sovereign debt posed the largest challenge, and exposed the fault line in the Eurozone between those who believed that such crises required a national response and those who looked for a broader European resolution. As a result, Greece lurched from one lending program to another. The IMF was treated as a junior partner by the European governments that sought to evade facing the consequences of Greek insolvency, and the Fund's reputation suffered new blows due to its involvement with the various rescue operations.The ECB only demonstrated a firm commitment to its stabilizing role in July 2012, when its President Mario Draghi announced that "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro."

China followed another route. The government there engaged in a surge of stimulus spending combined with expansionary monetary policies. The result was continued growth that allowed the Chinese government to demonstrate its leadership capabilities at a time when the U.S. was abandoning its obligations. But the ensuing credit boom was accompanied by a rise in private (mainly corporate) lending that has left China with a total debt to GDP ratio of over 250%, a level usually followed by some form of financial collapse. Chinese officials are well aware of the domestic challenge they face at the same time as their dispute with the U.S. intensifies.

Tooze demonstrates that the crisis has let loose a range of responses that continue to play out. He ends the book by pointing to a similarity of recent events and those of 1914. He raises several questions: "How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do great tectonic shifts in the global world order unload in sudden earthquakes?" Ten years after a truly global crisis, we are still seeking answers to these questions.

Previous Globie Winners:

[Oct 30, 2018] Anyone working at IBM after 1993 should have had no expectation of a lifetime career

Under neoliberlaism the idea of loyalty between a corporation and an employee makes no more sense than loyalty between a motel and its guests.
Notable quotes:
"... Any expectation of "loyalty", that two-way relationship of employee/company from an earlier time, was wishful thinking ..."
"... With all the automation going on around the world, these business leaders better worry about people not having money to buy their goods and services plus what are they going to do with the surplus of labor ..."
"... This is the nail in the coffin. As an IT manager responsible for selecting and purchasing software, I will never again recommend IBM products ..."
"... The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The idea of loyalty between a corporation and an at-will employee makes no more sense than loyalty between a motel and its guests. ..."
"... The annual unemployment rate topped 8% in 1975 and would reach nearly 10% in 1982. The economy seemed trapped in the new nightmare of stagflation," so called because it combined low economic growth and high unemployment ("stagnation") with high rates of inflation. And the prime rate hit 20% by 1980. ..."
Oct 30, 2018 | features.propublica.org
Jeff Russell , Thursday, March 22, 2018 4:31 PM
I started at IBM 3 days out of college in 1979 and retired in 2017. I was satisfied with my choice and never felt mistreated because I had no expectation of lifetime employment, especially after the pivotal period in the 1990's when IBM almost went out of business. The company survived that period by dramatically restructuring both manufacturing costs and sales expense including the firing of tens of thousands of employees. These actions were well documented in the business news of the time, the obvious alternative was bankruptcy.

I told the authors that anyone working at IBM after 1993 should have had no expectation of a lifetime career. Downsizing, outsourcing, movement of work around the globe was already commonplace at all such international companies. Any expectation of "loyalty", that two-way relationship of employee/company from an earlier time, was wishful thinking .

I was always prepared to be sent packing, without cause, at any time and always had my resume up-to-date. I stayed because of interesting work, respectful supervisors, and adequate compensation.

The "resource action" that forced my decision to retire was no surprise, the company that hired me had been gone for decades.

DDRLSGC Jeff Russell , in reply to" aria-label="in reply to">
With all the automation going on around the world, these business leaders better worry about people not having money to buy their goods and services plus what are they going to do with the surplus of labor
John Kauai Jeff Russell , in reply to" aria-label="in reply to">
I had, more or less, the same experience at Cisco. They paid me to quit. Luckily, I was ready for it.

The article mentions IBMs 3 failures. So who was it that was responsible for not anticipating the transitions? It is hard enough doing what you already know. Perhaps companies should be spending more on figuring out "what's next" and not continually playing catch-up by dumping the older workers for the new.

MichiganRefugee , Friday, March 23, 2018 9:52 AM
I was laid off by IBM after 29 years and 4 months. I had received a division award in previous year, and my last PBC appraisal was 2+ (high performer.) The company I left was not the company I started with. Top management--starting with Gerstner--has steadily made IBM a less desirable place to work. They now treat employees as interchangeable assets and nothing more. I cannot/would not recommend IBM as an employer to any young programmer.
George Purcell , Friday, March 23, 2018 7:41 AM
Truly awesome work. I do want to add one thing, however--the entire rhetoric about "too many old white guys" that has become so common absolutely contributes to the notion that this sort of behavior is not just acceptable but in some twisted way admirable as well.
Bob Fritz , Thursday, March 22, 2018 7:35 PM
I read the article and all the comments.

Is anyone surprised that so many young people don't think capitalism is a good system any more?

I ran a high technology electronic systems company for years. We ran it "the old way." If you worked hard, and tried, we would bend over backwards to keep you. If technology or business conditions eliminated your job, we would try to train you for a new one. Our people were loyal, not like IBMers today. I honestly think that's the best way to be profitable.

People afraid of being unjustly RIFFed will always lack vitality.

petervonstackelberg , Thursday, March 22, 2018 2:00 PM
I'm glad someone is finally paying attention to age discrimination. IBM apparently is just one of many organizations that discriminate.

I'm in the middle of my own fight with the State University of New York (SUNY) over age discrimination. I was terminated by a one of the technical colleges in the SUNY System. The EEOC/New York State Division of Human Rights (NYDHR) found that "PROBABLE CAUSE (NYDHR's emphasis) exists to believe that the Respondent (Alfred State College - SUNY) has engaged in or is engaging in the unlawful discriminatory practice complained of." Investigators for NYDHR interviewed several witnesses, who testified that representatives of the college made statements such as "we need new faces", "three old men" attending a meeting, an older faculty member described as an "albatross", and "we ought to get rid of the old white guys". Witnesses said these statements were made by the Vice President of Academic Affairs and a dean at the college.

davosil , Sunday, March 25, 2018 5:00 PM
This saga at IBM is simply a microcosm of our overall economy. Older workers get ousted in favor of younger, cheaper workers; way too many jobs get outsourced; and so many workers today [young and old] can barely land a full-time job.
This is the behavior that our system incentivises (and gets away with) in this post Reagan Revolution era where deregulation is lauded and unions have been undermined & demonized. We need to seriously re-work 'work', and in order to do this we need to purge Republicans at every level, as they CLEARLY only serve corporate bottom-lines - not workers - by championing tax codes that reward outsourcing, fight a livable minimum wage, eliminate pensions, bust unions, fight pay equity for women & family leave, stack the Supreme Court with radical ideologues who blatantly rule for corporations over people all the time, etc. etc. ~35 years of basically uninterrupted Conservative economic policy & ideology has proven disastrous for workers and our quality of life. As goes your middle class, so goes your country.
ThinkingAloud , Friday, March 23, 2018 7:18 AM
The last five words are chilling... This is an award-winning piece....
RetiredIBM.manager , Thursday, March 22, 2018 7:39 PM
I am a retired IBM manager having had to execute many of these resource reduction programs.. too many.. as a matter of fact. ProPUBLICA....You nailed it!
David , Thursday, March 22, 2018 3:22 PM
IBM has always treated its customer-facing roles like Disney -- as cast members who need to match a part in a play. In the 60s and 70s, it was the white-shirt, blue-suit white men whom IBM leaders thought looked like mainframe salesmen. Now, rather than actually build a credible cloud to compete with Amazon and Microsoft, IBM changes the cast to look like cloud salespeople. (I work for Microsoft. Commenting for myself alone.)
CRAW David ,

Now IBM still treats their employees like Disney - by replacing them with H-1B workers.

MHV IBMer , Friday, March 23, 2018 10:35 PM
I am a survivor, the rare employee who has been at IBM for over 35 years. I have seen many, many layoff programs over 20 years now. I have seen tens of thousands people let go from the Hudson Valley of N.Y. Those of us who have survived, know and lived through what this article so accurately described. I currently work with 3 laid off/retired and rehired contractors. I have seen age discrimination daily for over 15 years. It is not only limited to layoffs, it is rampant throughout the company. Promotions, bonuses, transfers for opportunities, good reviews, etc... are gone if you are over 45. I have seen people under 30 given promotions to levels that many people worked 25 years for. IBM knows that these younger employees see how they treat us so they think they can buy them off. Come to think of it, I guess they actually are! They are ageist, there is no doubt, it is about time everyone knew. Excellent article.
Goldie Romero , Friday, March 23, 2018 2:31 PM
Nice article, but seriously this is old news. IBM has been at this for ...oh twenty years or more.
I don't really have a problem with it in terms of a corporation trying to make money. But I do have a problem with how IBM also likes to avoid layoffs by giving folks over 40 intentionally poor reviews, essentially trying to drive people out. Just have the guts to tell people, we don't need you anymore, bye. But to string people along as the overseas workers come in...c'mon just be honest with your workers.
High tech over 40 is not easy...I suggest folks prep for a career change before 50. Then you can have the last laugh on a company like IBM.
jblog , Friday, March 23, 2018 10:37 AM
From pages 190-191 of my novel, Ordinary Man (Amazon):

Throughout it all, layoffs became common, impacting mostly older employees with many years of service. These job cuts were dribbled out in small numbers to conceal them from the outside world, but employees could plainly see what was going on.

The laid off employees were supplanted by offshoring work to low-costs countries and hiring younger employees, often only on temporary contracts that offered low pay and no benefits – a process pejoratively referred to by veteran employees as "downsourcing." The recruitment of these younger workers was done under the guise of bringing in fresh skills, but while many of the new hires brought new abilities and vitality, they lacked the knowledge and perspective that comes with experience.

Frequently, an older more experienced worker would be asked to help educate newer employees, only to be terminated shortly after completing the task. And the new hires weren't fooled by what they witnessed and experienced at OpenSwitch, perceiving very quickly that the company had no real interest in investing in them for the long term. To the contrary, the objective was clearly to grind as much work out of them as possible, without offering any hope of increased reward or opportunity.

Most of the young recruits left after only a year or two – which, again, was part of the true agenda at the company. Senior management viewed employees not as talent, but simply as cost, and didn't want anyone sticking around long enough to move up the pay scale.

turquoisewaters , Thursday, March 22, 2018 10:19 PM
This is why you need unions.
Aaron Stackpole , Thursday, March 22, 2018 5:23 PM
This is the nail in the coffin. As an IT manager responsible for selecting and purchasing software, I will never again recommend IBM products. I love AIX and have worked with a lot if IBM products but not anymore. Good luck with the millennials though...
awb22 , Thursday, March 22, 2018 12:14 PM
The same thing has been going on at other companies, since the end of WWII. It's unethical, whether the illegality can be proven or not.

In the RTP area, where I live, I know many, many current and former employees. Times have changed, but the distinction between right and wrong hasn't.

Dave Allen , Thursday, March 22, 2018 1:07 PM
I worked for four major corporations (HP, Intel, Control Data Corporation, and Micron Semiconductor) before I was hired by IBM as a rare (at that time) experienced new hire.

Even though I ended up working for IBM for 21 years, and retired in 2013, because of my experiences at those other companies, I never considered IBM my "family."

The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The idea of loyalty between a corporation and an at-will employee makes no more sense than loyalty between a motel and its guests.

It is a business arrangement, not a love affair. Every individual needs to continually assess their skills and their value to their employer. If they are not commensurate, it is the employee's responsibility to either acquire new skills or seek a new employer.

Your employer will not hesitate to lay you off if your skills are no longer needed, or if they can hire someone who can do your job just as well for less pay. That is free enterprise, and it works for people willing to take advantage of it.

sometimestheyaresomewhatright Dave Allen , in reply to" aria-label="in reply to">
I basically agree. But why should it be OK for a company to fire you just to replace you with a younger you? If all that they accomplish is lowering their health care costs (which is what this is really about). If the company is paying about the same for the same work, why is firing older workers for being older OK?
Dave Allen sometimestheyaresomewhatright , in reply to" aria-label="in reply to">
Good question. The point I was trying to make is that people need to watch out for themselves and not expect their employer to do what is "best" for the employee. I think that is true whatever age the employee happens to be.

Whether employers should be able to discriminate against (treat differently) their employees based on age, gender, race, religion, etc. is a political question. Morally, I don't think they should discriminate. Politically, I think it is a slippery slope when the government starts imposing regulations on free enterprise. Government almost always creates more problems than they fix.

DDRLSGC Dave Allen , in reply to" aria-label="in reply to">
Sorry, but when you deregulate the free enterprise, it created more problems than it fixes and that is a fact that has been proven for the last 38 years.
Danllo DDRLSGC , in reply to" aria-label="in reply to">
That's just plain false. Deregulation creates competiiton. Competition for talented and skilled workers creates opportunities for those that wish to be employed and for those that wish to start new ventures. For example, when Ma Bell was regulated and had a monopoly on telecommunications there was no innovation in the telecom inudstry. However, when it was deregulated, cell phones, internet, etc exploded ... creating billionaires and millionaires while also improving the quality of life.
DDRLSGC Danllo , in reply to" aria-label="in reply to">
No, it happens to be true. When Reagan deregulate the economy, a lot of those corporate raiders just took over the companies, sold off the assets, and pocketed the money. What quality of life? Half of American lived near the poverty level and the wages for the workers have been stagnant for the last 38 years compared to a well-regulated economy in places like Germany and the Scandinavian countries where the workers have good wages and a far better standard of living than in the USA. Why do you think the Norwegians told Trump that they will not be immigrating to the USA anytime soon?
NotSure DDRLSGC , in reply to" aria-label="in reply to">
What were the economic conditions before Regan? It was a nightmare before Regan.

The annual unemployment rate topped 8% in 1975 and would reach nearly 10% in 1982. The economy seemed trapped in the new nightmare of stagflation," so called because it combined low economic growth and high unemployment ("stagnation") with high rates of inflation. And the prime rate hit 20% by 1980.
DDRLSGC NotSure , in reply to" aria-label="in reply to">
At least we had a manufacturing base in the USA, strong regulations of corporations, corporate scandals were far and few, businesses did not go under so quickly, prices of goods and services did not go through the roof, people had pensions and could reasonably live off them, and recessions did not last so long or go so deep until Reagan came into office. In Under Reagan, the jobs were allowed to be send overseas, unions were busted up, pensions were reduced or eliminated, wages except those of the CEOs were staganent, and the economic conditions under Bush, Senior and Bush, Jr. were no better except that Bush, Jr, was the first president to have a net minus below zero growth, so every time we get a Republican Administration, the economy really turns into a nightmare. That is a fact.

You have the Republicans in Kansas, Oklahoma, and Wisconsin using Reaganomics and they are economic disaster areas.

DDRLSGC NotSure , in reply to" aria-label="in reply to">
You had an industrial base in the USA, lots of banks and savings and loans to choose from, lots of mom and pop stores, strong government regulation of the economy, able to live off your pensions, strong unions and employment laws along with the court system to back you up against corporate malfeasance. All that was gone when Reagan and the two Bushes came into office.
james Foster , Thursday, March 29, 2018 8:37 PM
Amazingly accurate article. The once great IBM now a dishonest and unscrupulous corporation concerned more about earnings per share than employees, customers, or social responsibility. In Global Services most likely 75% or more jobs are no longer in the US - can't believe a word coming out of Armonk.
Philip Meyer james Foster , in reply to" aria-label="in reply to">
I'm not sure there was ever a paradise in employment. Yeah, you can say there was more job stability 50 or 60 years ago, but that applied to a much smaller workforce than today (mostly white men). It is a drag, but there are also lot more of us old farts than there used to be and we live a lot longer in retirement as well. I don't see any magic bullet fix either.
George A , Tuesday, March 27, 2018 6:12 PM
Warning to Google/Facebook/Apple etc. All you young people will get old. It's inevitable. Do you think those companies will take care of you?
econdataus , Sunday, March 25, 2018 3:01 PM
Great article. What's especially infuriating is that the industry continues to claim that there is a shortage of STEM workers. For example, google "claim of 1.4 million computer science jobs with only 400,000 computer science graduates to fill them". If companies would openly say, "we have plenty of young STEM workers and prefer them to most older STEM workers", we could at least start addressing the problem. But they continue to promote the lie of there being a STEM shortage. They just want as big a labor pool as possible, unemployed workers be damned.
Buzz , Friday, March 23, 2018 12:00 PM
I've worked there 17 years and have worried about being layed off for about 11 of them. Moral is in the toilet. Bonuses for the rank and file are in the under 1% range while the CEO gets millions. Pay raises have been non existent or well under inflation for years. Adjusting for inflation, I make $6K less than I did my first day. My group is a handful of people as at least 1/2 have quit or retired. To support our customers, we used to have several people, now we have one or two and if someone is sick or on vacation, our support structure is to hope nothing breaks. We can't keep millennials because of pay, benefits and the expectation of being available 24/7 because we're shorthanded. As the unemployment rate drops, more leave to find a different job, leaving the old people as they are less willing to start over with pay, vacation, moving, selling a house, pulling kids from school, etc. The younger people are generally less likely to be willing to work as needed on off hours or to pull work from a busier colleague. I honestly have no idea what the plan is when the people who know what they are doing start to retire, we are way top heavy with 30-40 year guys who are on their way out, very few of the 10-20 year guys due to hiring freezes and we can't keep new people past 2-3 years. It's like our support business model is designed to fail.
OrangeGina , Friday, March 23, 2018 11:41 AM
Make no mistake. The three and four letter acronyms and other mushy corporate speak may differ from firm to firm, but this is going on in every large tech company old enough to have a large population of workers over 50. I hope others will now be exposed.
JeffMo , Friday, March 23, 2018 10:23 AM
This article hits the nail right on the head, as I come up on my 1 year anniversary from being....ahem....'retired' from 23 years at IBM....and I'll be damned if I give them the satisfaction of thinking this was like a 'death' to me. It was the greatest thing that could have ever happened. Ginny and the board should be ashamed of themselves, but they won't be.
Frankie , Friday, March 23, 2018 1:00 AM
Starting around age 40 you start to see age discrimination. I think this is largely due to economics, like increased vacation times, higher wages, but most of all the perception that older workers will run up the medical costs. You can pass all the age related discrimination laws you want, but look how ineffective that has been.

If you contrast this with the German workforce, you see that they have more older workers with the skills and younger workers without are having a difficult time getting in. So what's the difference? There are laws about how many vacation weeks that are given and there is a national medical system that everyone pays, so discrimination isn't seen in the same light.

The US is the only hold out maybe with South Africa that doesn't have a good national medical insurance program for everyone. Not only do we pay more than the rest of the world, but we also have discrimination because of it.

Rick Gundlach , Thursday, March 22, 2018 11:38 PM
This is very good, and this is IBM. I know. I was plaintiff in Gundlach v. IBM Japan, 983 F.Supp.2d 389, which involved their violating Japanese labor law when I worked in Japan. The New York federal judge purposely ignored key points of Japanese labor law, and also refused to apply Title VII and Age Discrimination in Employment to the parent company in Westchester County. It is a huge, self-described "global" company with little demonstrated loyalty to America and Americans. Pennsylvania is suing them for $170 million on a botched upgrade of the state's unemployment system.
Jeff , Thursday, March 22, 2018 2:05 PM
In early 2013 I was given a 3 PBC rating for my 2012 performance, the main reason cited by my manager being that my team lead thought I "seemed distracted". Five months later I was included in a "resource action", and was gone by July. I was 20 months shy of 55. Younger coworkers were retained. That was about two years after the product I worked on for over a decade was off-shored.

Through a fluke of someone from the old, disbanded team remembering me, I was rehired two years later - ironically in a customer support position for the very product I helped develop.

While I appreciated my years of service, previous salary, and previous benefits being reinstated, a couple years into it I realized I just wasn't cut out for the demands of the job - especially the significant 24x7 pager duty. Last June I received email describing a "Transition to Retirement" plan I was eligible for, took it, and my last day will be June 30. I still dislike the job, but that plan reclassified me as part time, thus ending pager duty for me. The job still sucks, but at least I no longer have to despair over numerous week long 24x7 stints throughout the year.

A significant disappointment occurred a couple weeks ago. I was discussing healthcare options with another person leaving the company who hadn't been resource-actioned as I had, and learned the hard way I lost over $30,000 in some sort of future medical benefit account the company had established and funded at some point. I'm not sure I was ever even aware of it. That would have funded several years of healthcare insurance during the 8 years until I'm eligible for Medicare. I wouldn't be surprised if their not having to give me that had something to do with my seeming "distracted" to them. <rolls eyes="">

What's really painful is the history of that former account can still be viewed at Fidelity, where it associates my departure date in 2013 with my having "forfeited" that money. Um, no. I did not forfeit that money, nor would I have. I had absolutely no choice in the matter. I find the use of the word 'forfeited' to describe what happened as both disingenuous and offensive. That said, I don't know whether's that's IBM's or Fidelity's terminology, though.

Herb Jeff , in reply to" aria-label="in reply to">
Jeff, You should call Fidelity. I recently received a letter from the US Department of Labor that they discovered that IBM was "holding" funds that belonged to me that I was never told about. This might be similar or same story .

[Oct 14, 2018] Hedge Fund CIO: "Some See Parallels Between Today And The Late-1930s, Which Led To World War II" by Eric Peters

Notable quotes:
"... Virtually every investment portfolio measures risk by utilizing some combination of volatility and correlation, both of which are backward-looking and low. But the present is knowable. The past too. And the multi-decade trends that carried us to today produced levels of inequality rarely seen. ..."
"... To an observer, it's neither right nor wrong, it simply is. Some see parallels between today and the late-1930s, which led to World War II. We also see parallels with the mid-1960s, which led to The Great Inflation. ..."
Oct 14, 2018 | www.zerohedge.com

Submitted by Eric Peters of One River Asset Management

The future is unknowable. Yet never has capital been so concentrated in strategies that depend on the future closely resembling the past. The most dominant of these strategies requires bonds to rally when stocks fall. For decades, both rose inexorably. And a new array of increasingly complex and illiquid strategies depends on a jump in volatility to be followed by a rapid decline of equal magnitude. They appear uncorrelated until they are not.

Virtually every investment portfolio measures risk by utilizing some combination of volatility and correlation, both of which are backward-looking and low. But the present is knowable. The past too. And the multi-decade trends that carried us to today produced levels of inequality rarely seen.

Low levels of inflation, growth, productivity, and volatility are features of this cycle's increasingly unequal distribution. But cycle extremes produce pressures that reverse their direction.

On cue, an anti-establishment political wave washed away the globalists, with promises to turn the tide. Such change is nothing new, just another loop around the sun.

Now signs of a cycle swing abound; shifting trade agreements, global supply chains, military dynamics, immigration, wage pressures, polarization, nationalism, tribalism.

To an observer, it's neither right nor wrong, it simply is. Some see parallels between today and the late-1930s, which led to World War II. We also see parallels with the mid-1960s, which led to The Great Inflation.

What comes next is sure to look different still. But investment strategies that prospered from the past decade's low inflation, growth, productivity and volatility will face headwinds as this cycle turns.

Those strategies that suffered should enjoy tailwinds. That's how cycles work . And we know the 1940s was a strong decade for Trend performance. The 1970s was the best decade for Trend in 150yrs. And following cycle turns in both the 1930s and 1960s, the world became a profoundly volatile place.

* * *

And, as a bonus, here are three observations from Peters on what he calls " Groundhog Day"

"Starting in the mid-1960s several significant policy changes, made in the context of a belief that inflation wasn't a concern, all but caused the outcome that was considered impossible," wrote Lindsay Politi in her latest thought piece. "The first proximate catalyst to the great inflation was the Tax Reduction Act of 1964. At the time, it was the largest tax cut in American history. The Act slashed income taxes, especially on higher income households, by reducing income taxes by 20% across the board in addition to reducing corporate rates . The expectation was that the tax cut would ultimately increase total tax revenue by lowering unemployment, increasing consumption, and increasing the incentive for companies to invest and modernize their capital stock. The tax cut did increase growth, but it also pushed unemployment very low, to one of the only sustained periods of unemployment below 4% in the post war period."

"The 2nd policy change was how employment was considered," continued Lindsay. "In the mid-1960s, there was concern about a cultural divide. The US social critic Michael Harrington spoke about "The Other America": the unskilled Americans in mostly rural areas who had a "culture of poverty" and were being left behind by the post war economic boom of the 1950s. In that context the drop in the unemployment rate after the tax cut was welcome. The belief was that pushing the unemployment rate to very low levels would help transfer wealth from the prosperous urban and suburban areas to "The Other America." They thought that, while very low unemployment might increase inflation, the increase would only be modest, and the social benefits of modestly higher inflation and lower unemployment were desirable. At the time, there wasn't a uniform theory for the relationship between inflation and unemployment, so when inflation started to increase with very low unemployment rates it wasn't a concern."

"A 3rd proximate cause of The Great Inflation was the failure to appreciate a significant, structural productivity decline. Capital deepening for WWII and the Korean War had boosted productivity. However, much lower peacetime capital spending had caused productivity growth to slow. Despite the relative lack of capital spending, productivity declines were generally dismissed . It became clear at the end of the 1960s into the early 1970s that inflation has a self-reinforcing trend. Stability in inflation can reinforce stability, but acceleration also reinforces acceleration. As inflation increases, all else equal, it lowers real interest rates which stimulates growth, creating higher inflation. It 's part of why anchored inflation expectations are so critical to inflation staying low, but also why expectations of higher inflation can be hard to fight."

For the full thought piece: Lessons from the Origins of The Great Inflation for Today – What the mid-1960s Can Teach Us About Trading Current Markets


Paracelsus , 13 minutes ago link

Most people forget that Hitler was elected to power, and then proceeded to make himself a dictator.

Germany escaped much of the 1929 crash effects, but in 1932 a Rothschild bank in Austria failed (Kredit-Anstalt) after being forced to absorb two smaller banks which were insolvent.

Along with the failure of two other German banks around that time period, hyper-inflation of the currency returned to German society. Savers saw their life savings disappear overnight.

During the elections, the Nazi's gained enough seats that they rose to power. Hitler promised to stabilize the currency,reduce unemployment, and stop the running gun battles in the street.He achieved all of these goals. Hitler was a liar and worse, a micro-manager. But so was Churchill, who would keep his staff up until the early hours of the morning on a regular basis.

To avoid the hardship of not having substantial hard currency reserves, Germany engaged in a great deal of barter trade in the late thirties. Because this sidelined the banks, they objected to this economic activity, which desperate countries have used for thousands of years.

Archive_file , 9 minutes ago link

Hitler also rose to power because liberals were discredit and offered nothing but rhetoric.

Davidduke2000 , 28 minutes ago link

the difference is WWIII will finish in few hours with the US-UK completely wiped off the map as well as part of China and Russia.

DocMims , 56 minutes ago link

Tariffs will cause the sky to fall and the oceans to burn.

There. Fixed it for you.

Get back to building child sweat shops and loansharking the 3rd world.

johngaltfla , 58 minutes ago link

One word:

Facepalm.

Enderjedi , 1 hour ago link

Wasn't there another recent globalist agenda article today about parallels between tariffs and the onset of the great depression?

ardent , 1 hour ago link

America will undergo KARMA for perpetuating

the Greatest Injustice of the 20th Century.

markmotive , 1 hour ago link

Unlike WWII we now have nuclear weapons.

https://www.risktopia.com/2018/10/the-nuclear-war-movie-all-should-watch.html

mabuhay1 , 1 hour ago link

The current tariffs are not the same as the ones that brought about the Great Depression, nor were tariffs the cause of World War 2. Your analogies are false and misleading to the extreme.

Handful of Dust , 1 hour ago link

Lots of writers are trying to make Trump look bad. Where were they during the real second depression under Bush and Soweeto bin Bama?

The writer sounds like the wookie, Mooshell Obama and her "feeling of hopelessness" over the Trump election.

I personally have not seen small businessmen so happy after years of Obama's Reign of Terror.

Davidduke2000 , 22 minutes ago link

I want the republicans and trump to stay in power however all his tariffs and sanctions are harming the us more than yo think. of course it takes a couple of years to realize the damage , but the deficit is easy to realize this years it will be over $1.3 trillion next year $ 1.5 trillion in addition to the $22 trillion obama left, in other words you are fucked.

romanmoment , 1 hour ago link

Everyone sees parallels to WW2....and WW1....and the American Civil War....and the Russian Revolution....and The Thirty Years War.....and.....and....and.....

A bunch of broken clocks. One thing I know for sure, nobody knows a ******* thing and there will definitely be another very nasty world war.

Fiscal.Enema , 1 hour ago link

Well, Nuclear winter is one way to solve global warming. It deals with the population crisis too.

JimmyJones , 1 hour ago link

I read "Tragedy and Hope" (great read, highly recommend it) it goes into great detail on the players throughout history, from what's in there I would say it's way more like pre-WW1 then 2.

[Sep 19, 2018] The Minsky Moment Ten Years After by Barkley Rosser

Notable quotes:
"... My take on Minsky moment is that banking introduces positive feedback loop into the system, making it (as any dynamic system with strong positive feedback loop) unstable. ..."
"... To compensate you need to introduce negative feedback loop in a form of regulation and legal system that vigorously prosecute financial oligarchy "transgressions," instilling fear and damping its predatory behavior and parasitic rents instincts. In a way number of bankers who go to jail each year is metric of stability of the system. Which was a feature (subverted and inconsistent from the beginning and decimated in 70th) of New Deal Capitalism. ..."
Sep 18, 2018 | angrybearblog.com

These days are the tenth anniversary of the biggest Minsky Moment since the Great Depression. While when it happened most commentators mentioned Minsky and many even called it a "Minsky Moment," most of the commentary now does not use that term and much does not even mention Minsky, much less Charles Kindleberger or Keynes. Rather much of the discussion has focused now on the failure of Lehman Brothers on September 15, 2017. A new book by Lawrence Ball has argued that the Fed could have bailed LB out as they did with Bear Stearns in February of that year, with Ball at least, and some others, suggesting that would have resolved everything, no big crash, no Great Recession, no angry populist movement more recently, heck, all hunky dory if only the Fed had been more responsible, although Ball especially points his finger at Bush's Treasury Secretary, Hank Paulson, for especially pressuring Bernanke and Geithner at the Fed not to repeat Bear Stearns. And indeed when they decided not to support Lehman, the Fed received widespread praise in much of the media initially, before its fall blew out AIG and brought down most of the pyramid of highly leveraged derivatives of derivatives coming out of the US mortgage market ,which had been declining for over two years.

Indeed, I agree with Dean Baker as I have on so many times regarding all this that while Lehman may have been the straw that broke the camel's back, it was the camel's back breaking that was the problem, and it was almost certainly going to blow big time reasonably soon then. It it was not Lehman, it was going to be something else. Indeed, on July 12, 2008, I posted here on Econospeak a forecast of this, declaring "It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier)."

I drew on Minsky's argument (backed by Kindleberger in his Manias, Panics, and Crashes ) that the vast majority of major speculative bubbles experience periods of gradual decline after their peaks prior to really seriously crashing during what Minsky labeled the "period of financial distress," a term he adopted from the corporate finance literature. The US housing market had been falling since July, 2006. The bond markets had been declining since August, 2007, the stock market had been declining since October, 2007, and about the time I posted that, the oil market reached an all-time nominal peak of $147 per barrel and began a straight plunge that reached about $30 per barrel in November, 2008. This was a massively accelerating period of distress with the real economy also dropping, led by falling residential consumption. In mid-September the Minsky Moment arrived, and the floor dropped out of not just these US markets, but pretty much all markets around the world, with world economy then falling into the Great Recession.

Let me note something I have seen nobody commenting on in all this outpouring on this anniversary. This is how the immediate Minsky Moment ended. Many might say it was the TARP or the stress tests or the fiscal stimulus, All of these helped to turn around the broader slide that followed by the Minsky Moment. But there was a more immediate crisis that went on for several days following the Lehman collapse, peaking on Sept. 17 and 18, but with obscure reporting about what went down then. This was when nobody at the Board of Governors went home; cots made an appearance. This was the point when those at the Fed scrambled to keep the whole thing from turning into 1931 and largely succeeded. The immediate problem was that the collapse of AIG following the collapse of Lehman was putting massive pressure on top European banks, especially Deutsches Bank and BNP Paribas. Supposedly the European Central Bank (ECB) should have been able to handle this But along with all this the ECB was facing a massive run on the euro as money fled to the "safe haven" of the US dollar, so ironic given that the US markets generated this mess.

Anyway, as Neil Irwinin The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a fullout global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet. These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities. This was the save the Fed pulled off at the worst moment of the Minsky Moment. The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.

Barkley Rosser


run75441 , September 18, 2018 7:07 am

Barkley:

A few days ago, it was just a housing bubble to which a few of us pointed out an abnormal housing bubble created by fraud and greed on Wall Street. The market was riddled with false promises to pay through CDS, countering naked-CDS both of which had little if any reserves in this case to back up each AIG CDS insuring Goldman Sachs securities. When Goldman Sachs made that call to AIG, there were few funds to pay out and AIG was on the verge of collapse.

And today, some of those very same created banks under TARP which were gambling then and some of which had legal issues are free from the stress testing Dodd – Frank imposed upon banks with assets greater than $50 billion. Did the new limit need to be $250 billion? Volcker thought $100 billion was adequate and Frank argued for a slightly higher limit well under $250 billion. The fox is in the chicken coop again with Deutsche Bank, BNP Paribas, UBS, and Credit Suisse not being regulated as closely and 25 of the largest 38 banks under less regulation. These are not community banks and they helped to bring us to our knees. Is it still necessary for American Express to be a bank and have access to low interest rates the Fed offers? I think not; but, others may disagree with me. It is not a bank.

You remember the miracle the Fed pulled off as detailed in The Alchemists which I also read at your recommendation. I remember the fraud and greed on Wall Street for which Main Street paid for with lost equity, jobs, etc. I remember the anger of Wall Street Execs who were denied bonuses and states who had exhausted unemployment funding denying workers unemployment. We were rescued from a worse fate; but, the memory of the cure the nation's citizenry had to take for Wall Street greed and fraud leaves a bitter taste in my mouth.

EMichael , September 18, 2018 8:39 am

This never ending meme about Tarp saving the banks is really starting to aggravate me. The Fed saved the banking system(on both sides of the Atlantic) before Tarp issued one dollar, and they did so with trillions, not billions, of loans and guarantees that stopped the run on the banks and mutual funds on both sides of the Atlantic.

Just look at the amounts. Tarp gave out $250 billion to the banks. Do people seriously think this saved the banking system? Or that Wells goes under without their $25 billion loan?

Tarp was window dressing and pr, not a solution by any stretch of the imagination.

"Bloomberg ran quite a story, yesterday. It stems from a Freedom of Information Act Request that yielded the details of previously secret borrowing from the federal government to the biggest banks.

The bottom line, reports Bloomberg, by March of 2009, the Fed had committed $7.77 trillion "to rescuing the financial system, more than half the value of everything produced in the U.S. that year." The lending began in August of 2007.

The reporting from Bloomberg Markets Magazine is spectacular, so we hope you click over and give the exhaustive piece a read."

https://www.npr.org/sections/thetwo-way/2011/11/28/142854391/report-fed-committed-7-77-trillion-to-rescue-banks

run75441 , September 18, 2018 11:57 am

EM:

If you pick up The Alchemist, I believe you will see all of this ($7 trillion) explained in there. TARP was used to buy up junk MBS from banks by the Treasury and separate from the FED. It was also used to buy up bank stock to give them reserves. It saved two of the three OEMs too.

Ken Houghton , September 18, 2018 11:52 am

The general U.S. mortgage market died on Hallwe'en 2006. By the first quarter of 2007, it was dead even for IBs who owned originators.

There were two IBs who were dependent on MBS for their profits: Bear and Lehmann. Doesn't mean they didn't have other businesses, but their earnings would go from a V-8 to a 3-cylinder.

Bear went first, and ShitforBrains Fuld & Co. had six months after that to shore up capital, find a buyer, or go under.

We all knew that the reason Bear was saved wasn't out of generosity, but because it really would have had a systemic effect had it gone through bankruptcy proceedings. But THAT was because Bear had two core businesses, and the other one was Custodial Services.

Had Bear gone through bankruptcy, those Customer funds would have been inaccessible for at least 30 days.

Lehmann had no similar function; failure of Lehmann was failure of Lehmann.

Fuld knew all of this and still fucked around for six months pretending he was driving a 911 instead of a Geo Metro.

Lawrence Ball is a brain-dead idiot if he thinks saving that firm would have in any way made things better.

likbez , September 18, 2018 12:41 pm

My take on Minsky moment is that banking introduces positive feedback loop into the system, making it (as any dynamic system with strong positive feedback loop) unstable.

To compensate you need to introduce negative feedback loop in a form of regulation and legal system that vigorously prosecute financial oligarchy "transgressions," instilling fear and damping its predatory behavior and parasitic rents instincts. In a way number of bankers who go to jail each year is metric of stability of the system. Which was a feature (subverted and inconsistent from the beginning and decimated in 70th) of New Deal Capitalism.

As neoliberalism is essentially revenge of financial oligarchy which became the ruling class again, this positive feedback loop is an immanent feature of neoliberalism.

Financial oligarchy is not interesting in regulation and legal framework that suppresses its predatory and parasitic "instincts." So this is by definition is an unstable system prone to periodic financial "collapses." In which the government needs to step in and save the system.

So the question about the 2008 financial crisis is when the next one commences and how destructive it will be. Not why it happened.

likbez , September 18, 2018 12:47 pm

In a perverse way the percentage of financial executives who go to jail each year might be viewed as a metric of stability of the financial system ;-)

[Sep 18, 2018] The Minsky Moment Ten Years After

Sep 18, 2018 | angrybearblog.com

Barkley Rosser | September 18, 2018 6:01 am

Taxes/regulation US/Global Economics The Minsky Moment Ten Years After These days are the tenth anniversary of the biggest Minsky Moment since the Great Depression. While when it happened most commentators mentioned Minsky and many even called it a "Minsky Moment," most of the commentary now does not use that term and much does not even mention Minsky, much less Charles Kindleberger or Keynes. Rather much of the discussion has focused now on the failure of Lehman Brothers on September 15, 2017. A new book by Lawrence Ball has argued that the Fed could have bailed LB out as they did with Bear Stearns in February of that year, with Ball at least, and some others, suggesting that would have resolved everything, no big crash, no Great Recession, no angry populist movement more recently, heck, all hunky dory if only the Fed had been more responsible, although Ball especially points his finger at Bush's Treasury Secretary, Hank Paulson, for especially pressuring Bernanke and Geithner at the Fed not to repeat Bear Stearns. And indeed when they decided not to support Lehman, the Fed received widespread praise in much of the media initially, before its fall blew out AIG and brought down most of the pyramid of highly leveraged derivatives of derivatives coming out of the US mortgage market ,which had been declining for over two years.

Indeed, I agree with Dean Baker as I have on so many times regarding all this that while Lehman may have been the straw that broke the camel's back, it was the camel's back breaking that was the problem, and it was almost certainly going to blow big time reasonably soon then. It it was not Lehman, it was going to be something else. Indeed, on July 12, 2008, I posted here on Econospeak a forecast of this, declaring "It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier)."

I drew on Minsky's argument (backed by Kindleberger in his Manias, Panics, and Crashes ) that the vast majority of major speculative bubbles experience periods of gradual decline after their peaks prior to really seriously crashing during what Minsky labeled the "period of financial distress," a term he adopted from the corporate finance literature. The US housing market had been falling since July, 2006. The bond markets had been declining since August, 2007, the stock market had been declining since October, 2007, and about the time I posted that, the oil market reached an all-time nominal peak of $147 per barrel and began a straight plunge that reached about $30 per barrel in November, 2008. This was a massively accelerating period of distress with the real economy also dropping, led by falling residential consumption. In mid-September the Minsky Moment arrived, and the floor dropped out of not just these US markets, but pretty much all markets around the world, with world economy then falling into the Great Recession.

Let me note something I have seen nobody commenting on in all this outpouring on this anniversary. This is how the immediate Minsky Moment ended. Many might say it was the TARP or the stress tests or the fiscal stimulus, All of these helped to turn around the broader slide that followed by the Minsky Moment. But there was a more immediate crisis that went on for several days following the Lehman collapse, peaking on Sept. 17 and 18, but with obscure reporting about what went down then. This was when nobody at the Board of Governors went home; cots made an appearance. This was the point when those at the Fed scrambled to keep the whole thing from turning into 1931 and largely succeeded. The immediate problem was that the collapse of AIG following the collapse of Lehman was putting massive pressure on top European banks, especially Deutsches Bank and BNP Paribas. Supposedly the European Central Bank (ECB) should have been able to handle this But along with all this the ECB was facing a massive run on the euro as money fled to the "safe haven" of the US dollar, so ironic given that the US markets generated this mess.

Anyway, as Neil Irwinin The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a fullout global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet. These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities. This was the save the Fed pulled off at the worst moment of the Minsky Moment. The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.

Barkley Rosser


run75441 , September 18, 2018 7:07 am

Barkley:

A few days ago, it was just a housing bubble to which a few of us pointed out an abnormal housing bubble created by fraud and greed on Wall Street. The market was riddled with false promises to pay through CDS, countering naked-CDS both of which had little if any reserves in this case to back up each AIG CDS insuring Goldman Sachs securities. When Goldman Sachs made that call to AIG, there were few funds to pay out and AIG was on the verge of collapse.

And today, some of those very same created banks under TARP which were gambling then and some of which had legal issues are free from the stress testing Dodd – Frank imposed upon banks with assets greater than $50 billion. Did the new limit need to be $250 billion? Volcker thought $100 billion was adequate and Frank argued for a slightly higher limit well under $250 billion. The fox is in the chicken coop again with Deutsche Bank, BNP Paribas, UBS, and Credit Suisse not being regulated as closely and 25 of the largest 38 banks under less regulation. These are not community banks and they helped to bring us to our knees. Is it still necessary for American Express to be a bank and have access to low interest rates the Fed offers? I think not; but, others may disagree with me. It is not a bank.

You remember the miracle the Fed pulled off as detailed in The Alchemists which I also read at your recommendation. I remember the fraud and greed on Wall Street for which Main Street paid for with lost equity, jobs, etc. I remember the anger of Wall Street Execs who were denied bonuses and states who had exhausted unemployment funding denying workers unemployment. We were rescued from a worse fate; but, the memory of the cure the nation's citizenry had to take for Wall Street greed and fraud leaves a bitter taste in my mouth.

EMichael , September 18, 2018 8:39 am

This never ending meme about Tarp saving the banks is really starting to aggravate me. The Fed saved the banking system(on both sides of the Atlantic) before Tarp issued one dollar, and they did so with trillions, not billions, of loans and guarantees that stopped the run on the banks and mutual funds on both sides of the Atlantic.

Just look at the amounts. Tarp gave out $250 billion to the banks. Do people seriously think this saved the banking system? Or that Wells goes under without their $25 billion loan?

Tarp was window dressing and pr, not a solution by any stretch of the imagination.

"Bloomberg ran quite a story, yesterday. It stems from a Freedom of Information Act Request that yielded the details of previously secret borrowing from the federal government to the biggest banks.

The bottom line, reports Bloomberg, by March of 2009, the Fed had committed $7.77 trillion "to rescuing the financial system, more than half the value of everything produced in the U.S. that year." The lending began in August of 2007.

The reporting from Bloomberg Markets Magazine is spectacular, so we hope you click over and give the exhaustive piece a read."

https://www.npr.org/sections/thetwo-way/2011/11/28/142854391/report-fed-committed-7-77-trillion-to-rescue-banks

run75441 , September 18, 2018 11:57 am

EM:

If you pick up The Alchemist, I believe you will see all of this ($7 trillion) explained in there. TARP was used to buy up junk MBS from banks by the Treasury and separate from the FED. It was also used to buy up bank stock to give them reserves. It saved two of the three OEMs too.

Ken Houghton , September 18, 2018 11:52 am

The general U.S. mortgage market died on Hallwe'en 2006. By the first quarter of 2007, it was dead even for IBs who owned originators.

There were two IBs who were dependent on MBS for their profits: Bear and Lehmann. Doesn't mean they didn't have other businesses, but their earnings would go from a V-8 to a 3-cylinder.

Bear went first, and ShitforBrains Fuld & Co. had six months after that to shore up capital, find a buyer, or go under.

We all knew that the reason Bear was saved wasn't out of generosity, but because it really would have had a systemic effect had it gone through bankruptcy proceedings. But THAT was because Bear had two core businesses, and the other one was Custodial Services.

Had Bear gone through bankruptcy, those Customer funds would have been inaccessible for at least 30 days.

Lehmann had no similar function; failure of Lehmann was failure of Lehmann.

Fuld knew all of this and still fucked around for six months pretending he was driving a 911 instead of a Geo Metro.

Lawrence Ball is a brain-dead idiot if he thinks saving that firm would have in any way made things better.

likbez , September 18, 2018 12:41 pm

My take on Minsky moment is that banking introduces positive feedback loop into the system, making it (as any dynamic system with strong positive feedback loop) unstable.

To compensate you need to introduce negative feedback loop in a form of regulation and legal system that vigorously prosecute financial oligarchy "transgressions," instilling fear and damping its predatory behavior and parasitic rents instincts. In a way number of bankers who go to jail each year is metric of stability of the system. Which was a feature (subverted and inconsistent from the beginning and decimated in 70th) of New Deal Capitalism.

As neoliberalism is essentially revenge of financial oligarchy which became the ruling class again, this positive feedback loop is an immanent feature of neoliberalism.

Financial oligarchy is not interesting in regulation and legal framework that suppresses its predatory and parasitic "instincts." So this is by definition is an unstable system prone to periodic financial "collapses." In which the government needs to step in and save the system.

So the question about the 2008 financial crisis is when the next one commences and how destructive it will be. Not why it happened.

likbez , September 18, 2018 12:47 pm

In a perverse way the percentage of financial executives who go to jail each year might be viewed as a metric of stability of the financial system ;-)

[Sep 15, 2018] Ten Misconceptions About Financial Crisis on 10-Year Anniversary

Sep 15, 2018 | www.bloomberg.com

One of the most intriguing aspects of the 2007-09 financial crisis is how little understanding there is of what actually occurred. Some of this has to do with the complexities of the event, as well as how hard it is to identify forces lurking below the surface that had built up over the years.

Even a decade later, many people still cling to false ideas about the underlying causes (there wasn't just one, folks!) of the crisis. What follows are my 10 favorite flawed memes, misunderstandings and just outright falsehoods about the financial crisis and its aftermath:

No. 1. Lehman's collapse caused the crisis : "If only we had saved Lehman Brothers, we could have avoided the crisis," goes a popular lament. This reflects a fundamental misunderstanding of the scale of the dislocations. To accept this premise -- former Lehman employees are some of the loudest apostles of this theory -- then one has to pretend an entire universe of other issues didn't exist.

Lehman, like Bear Stearns before it, suffered from many of the same issues that afflicted most of the U.S.'s other big banks and brokers: too much junk paper, too much leverage, too little capital and deficient risk controls. Lehman was simply among the most overleveraged and undercapitalized of the lot.

No. 2. If not for X, we would have been OK: Take your pick of things to insert here, but it's important to understand that this was not a single event , but rather the result of many factors that came together over time. These include: the Federal Reserve's ultralow interest rates, a fundamentally weak recovery from the dot-com collapse, the housing boom and bust, huge amounts of financial leverage, securitization of mortgages, the embrace of derivatives and reckless deregulation of the financial industry that enabled much of the above, and more. I depicted these elements via this graphic in " Bailout Nation ."

No. 3. Repeal of Glass-Steagall : The argument is that in the decades after Glass-Steagall was enacted during the Great Depression, Wall Street crises were confined to Wall Street and didn't spill onto Main Street. See as examples the 1987 stock-market crash or the Mexican peso crisis of 1994. But the causative issue we run into to is the but-for test. Would we have had a crisis if Glass-Steagall were still in place? I don't see how we can make that claim. Perhaps had Glass-Steagall not been repealed, the crisis might have been smaller, but it is very hard to say it wouldn't have occurred anyway.

No. 4. Bailouts were the only option : There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest. It would have been more difficult in the short term, but the economy would have rebounded much sooner.

No. 5. Taxpayers were repaid in full and even made a profit : There are two major issues with this claim: The first is that the Troubled Asset Relief Program and most other loans and bailouts were all (or almost all) repaid. But to make that happen, the federal government in a move questioned by tax experts allowed failed American International Group to carry forward the net operating losses for use to offset future earnings; this was a stealth bailout worth tens of billions of dollars that didn't appear to "cost" anything. Meanwhile the Federal Reserve kept rates at zero for almost a decade. This resulted in a huge transfer from savers to bailed-out lenders.

The federal government also took a huge amount of risk during a period when financial markets tripled. And that is before we account for all of the collateral losses and moral hazards we created.

https://cdn.iframe.ly/le122fY?app=1

No. 6. No one went to jail because stupidity isn't a crime : This one is laugher, from the behavior of the executives at Lehman Brothers to all of the foreclosure fraud that took place. Jesse Eisinger, author of " The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives ," explained how the white-collar defense bar successfully lobbied and undercut the Department of Justice during the years before the crisis. You can't convict a criminal if you don't have the personnel, intellectual firepower or stomach to prosecute in the first place.

No. 7. Borrowers were as blameworthy as lenders : First, we know that for huge swaths of the banking industry, the basis for lending changed in the run-up to the crisis. For most of financial history, credit was granted based on the borrower's ability to repay . In the years before the crisis, the incentive to lend shifted: It was based not on the likelihood of repayment but on whether a loan could be sold to someone else, often a securities firm, which would repackage the loan with other loans to create a mortgage-backed security. Selling 30-year mortgages with a 90-day warranty changes the calculus for who qualifies: just find a warm body that will make the first three payments; after that it's someone else's problem.

Second, we know that if you offer people free money, they will take it. This is among the reasons we have banking regulations in the first place. We expect the banking professionals to understand risk better than the unwashed masses.

No. 8. Poor people caused the crisis : This is another intellectually dishonest claim. If any U.S. legislation such as the Community Reinvestment Act was the actual cause of the crisis, then the boom and bust wouldn't have been global. Second, if poor people and these policies were the cause, then the crisis would have been centered in South Philadelphia; Harlem, New York; Oakland, California; and Atlanta instead of the burgeoning suburbs of Las Vegas, Southern California, Florida and Arizona. The folks making this argument seem to have questionable motivations.

No. 9. The Fed made a mistake by stepping in when Congress refused: Congress is the governmental entity that should have done more in response to the crisis. But it didn't, and all of those members who opposed efforts to repair the economy and financial system should have been thrown out of office. The Fed gave cover to Congress, creating congressional moral hazard and allowing it to shirk its responsibilities . We don't know how the world would have looked if that hadn't happened, but I imagine it would be significantly different than it does today -- and not necessarily better.

No. 10. Lehman could have been saved : This is perhaps the most delusional of all the claims. Lehman was insolvent . We know this from an accounting sleight-of-hand it performed called Repo 105, in which it which "sold" $50 billion in holdings to an entity it owned, booked a profit just before quarterly earnings, then repurchased the holdings. The sleuthing done by hedge-fund manager David Einhorn reached the same conclusion about Lehman's solvency long before the collapse ; the Fed itself also made clear that it couldn't take on Lehman's losses.

When people stubbornly refuse to acknowledge facts, when they insist on staying married to their own faulty belief system, it becomes very challenging to respond with sound policies. As a society, the sooner we reckon with reality, the sooner we can begin to avoid disasters like the financial crisis.

[Aug 22, 2018] The US financial sector has manifestly failed at allocating capital properly and is filled with rent seeking by Anatoly Karlin

Highly recommended!
Notable quotes:
"... Since the 80s, the stock market capitalization to GDP ratio has been much higher than the historical norm, higher than when the US had higher rates of growth. ..."
"... In financialized economies with inflated asset prices, people have low savings and can't even afford to buy real estate or can only afford it by taking on lots of debt and having to depend on further price inflation so that they don't go underwater. In countries with financial repression, public debt tends to be low and interest rates tend to be low and capital gets directed towards industry ..."
"... Well like I said earlier, this is a matter of one's values and views on political economy. If one prefers asset price inflation and a capital structure of heavily indebted households and young adults, then there's nothing wrong and everything is rosy. ..."
"... Household income overall, not just wages, has stagnated. ..."
Aug 22, 2018 | www.unz.com
Thorfinnsson , says: May 31, 2018 at 8:44 pm GMT
@Anonymous

... ... ...

"Paper pusher" is an irrational criticism of the finance sector. Allocating capital is a very important job.

Anonymous , [400] Disclaimer says: May 31, 2018 at 9:35 pm GMT
@Thorfinnsson

No doubt there are fanboys among asset managers.

Whether it's an irrational criticism or not depends on one's values and views on political economy. To some, the financial sector has manifestly failed at allocating capital properly and is filled with rent seeking. Others will point to its size and the capitalization of financial markets as evidence of its value and importance.

Thorfinnsson , says: May 31, 2018 at 10:12 pm GMT
@Anonymous

What's the evidence that it has failed at allocating capital successfully? No shortage of rent-seeking of course. But if there's one thing I've learned it's that bagholders are gonna bag. This isn't some hypothetical either, look at countries without sophisticated financial markets. People are forced to save by speculating in real estate, and credit is often not available to business unless the state makes it available (perfectly reasonable in such economies to be fair).

Anonymous , [400] Disclaimer says: June 1, 2018 at 3:02 am GMT
@Thorfinnsson

Since the 80s, the stock market capitalization to GDP ratio has been much higher than the historical norm, higher than when the US had higher rates of growth.

There have been several bubbles, and consumer debt has risen significantly while income has stagnated and startup formation is at a 40 year low. Capital allocation has been very unproductive. It's caused lots of asset price inflation and increased debt without producing new assets and income streams. Capital allocation is highly centralized and it has the same problems communist economies have with central planning where capital is centralized in the state. A lot of unproductive activity and rent seeking.

In financialized economies with inflated asset prices, people have low savings and can't even afford to buy real estate or can only afford it by taking on lots of debt and having to depend on further price inflation so that they don't go underwater. In countries with financial repression, public debt tends to be low and interest rates tend to be low and capital gets directed towards industry.

Thorfinnsson , says: June 1, 2018 at 4:04 am GMT
@Anonymous

Real Soon Now.

Since the 80s, the stock market capitalization to GDP ratio has been much higher than the historical norm, higher than when the US had higher rates of growth.

Stock prices were unusually low in the 1970s, as epitomized by BusinessWeek's famous 1979 The Death of Equities cover. In addition to reversion to the mean, several other factors made stocks more valuable since that time.

The collapse of inflation and interest rates increased the net present value of stocks, the rise of emerging markets with poor domestic capital markets increased foreign demand for stocks, America's persistent trade deficit further increased foreign demand for American assets, and the low-cost trading and 401k revolutions.

... ... ...

Anonymous , [400] Disclaimer says: June 1, 2018 at 5:26 am GMT
@Thorfinnsson

Well like I said earlier, this is a matter of one's values and views on political economy. If one prefers asset price inflation and a capital structure of heavily indebted households and young adults, then there's nothing wrong and everything is rosy.

Household income overall, not just wages, has stagnated.

Startup formation is still at a 40 year low, despite all the noise about venture capital and Silicon Valley.

ROC and ROE are based on corporate income, which are at historical highs.

The rest of your comment is just econ 101 and biz school corp finance and accounting 101 hand waving to justify the status quo.

Your whole argument in the original post is that Tesla and SpaceX could not get the capital that they have without Musk committing fraud and violating a bunch of laws. In other words, two new industrial firms with tremendous brand value and advancing decades ahead of the competition ( https://www.nextbigfuture.com/2018/05/every-3-5-years-spacex-is-adding-a-decade-lead-on-competitors.html ) could not have been capitalized otherwise.

[Aug 07, 2018] Ministry of Plenty

Aug 07, 2018 | en.wikipedia.org

The Ministry of Plenty ( Newspeak : Miniplenty ) is in control of Oceania's planned economy .

It oversees rationing of food , supplies , and goods . As told in Goldstein's book, the economy of Oceania is very important, and it's necessary to have the public continually create useless and synthetic supplies or weapons for use in the war, while they have no access to the means of production .

This is the central theme of Oceania's idea that a poor, ignorant populace is easier to rule over than a wealthy, well-informed one. Telescreens often make reports on how Big Brother has been able to increase economic production, even when production has actually gone down (see § Ministry of Truth ).

The Ministry hands out statistics which are "nonsense". When Winston is adjusting some Ministry of Plenty's figures, he explains this:

But actually, he thought as he readjusted the Ministry of Plenty's figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another. Most of the material that you were dealing with had no connection with anything in the real world, not even the kind of connection that is contained in a direct lie. Statistics were just as much a fantasy in their original version as in their rectified version. A great deal of time you were expected to make them up out of your head.

Like the other ministries, the Ministry of Plenty seems to be entirely misnamed, since it is, in fact, responsible for maintaining a state of perpetual poverty , scarcity and financial shortages. However, the name is also apt, because, along with the Ministry of Truth, the Ministry of Plenty's other purpose is to convince the populace that they are living in a state of perpetual prosperity. Orwell made a similar reference to the Ministry of Plenty in his allegorical work Animal Farm when, in the midst of a blight upon the farm, Napoleon the pig orders the silo to be filled with sand, then to place a thin sprinkling of grain on top, which fools human visitors into being dazzled about Napoleon's boasting of the farm's superior economy.

A department of the Ministry of Plenty is charged with organizing state lotteries . These are very popular among the proles, who buy tickets and hope to win the big prizes – a completely vain hope as the big prizes are in fact not awarded at all, the Ministry of Truth participating in the scam and publishing every week the names of non-existent big winners.

In the Michael Radford film adaptation , the ministry is renamed the Ministry of Production, or MiniProd.

[Aug 07, 2018] Bill Black Pre-Crisis 4506-T Studies Showed Massive Fraud in Liar's Loans; Fed Ignored Warning, DoJ Refused to Target Implic

Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... New Economic Perspectives ..."
"... The Pentagon Wars ..."
"... The Generals ..."
"... The Chickenshit Club ..."
Aug 07, 2018 | www.nakedcapitalism.com

Bill Black: Pre-Crisis "4506-T Studies" Showed Massive Fraud in Liar's Loans; Fed Ignored Warning, DoJ Refused to Target Implicated Banksters Posted on August 7, 2018 by Yves Smith Yves here. With the tsunami of "ten years after the crisis" stories that are already starting to hit the beach, I am endeavoring to focus on ones that contain new or significantly under-reported information or give particularly insightful overviews. Here Black gives a telling example of both how the authorities were warned of massive mortgage fraud and ignored it, and then later failed to use the same evidence to pursue the perps.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

Steven Krystofiak formed the Mortgage Brokers Association for Responsible Lending, a professional association dedicated to fighting mortgage fraud and predation. On August 1, 2006. He tried to save our Nation by issuing one of the most prescient warnings about the epidemic of mortgage fraud and predation and the crisis it would so cause.

The context was Congress' effort to empower and convince the Federal Reserve to take action against what the mortgage lending industry called, behind closed doors, "liar's" loans. A liar's loan is a loan in which the lender does not verify (at least) the borrower's actual income. The industry knew that the failure to verify inherently led to endemic fraud. George Akerlof and Paul Romer's 1993 article on "Looting" by financial CEOs explicitly cited the failure to verify the borrower's income as an example of a lending practice that only fraudulent lenders would use on a widespread basis.

Congress gave the Fed the unique authority to ban all liar's loans in 1994, by passing the Home Ownership and Equity Protection Act (HOEPA). HOEPA gave the Fed the authority to ban liar's loans even by "shadow" sector financial firms that had no federal deposit insurance.

Liar's loans began to become material around 1989 during the savings and loan debacle where all good U.S. financial frauds are born – Orange County, California. In that era, they were called "low documentation" ('low doc') loans. We (the West Region of the Office of Thrift Supervision (OTS), were the federal regulator for these S&Ls, and we were overwhelmed dealing with the "control frauds" driving the debacle, who overwhelmingly used commercial real estate (CRE) as their accounting "weapon" of choice. Our examiners, however, made two critical points. No honest lender would make widespread loans without verifying the borrower's income because it was certain to produce severe "adverse selection" and produce serious losses. The examiners' second warning was that such loans were growing rapidly in Orange County and multiple lenders were involved.

We listened and responded well to our examiners' timely and sound warnings and made it a moderate priority to drive liar's loans out of the industry we regulated. The last of the major fraudulent S&L liar's loan lenders was Long Beach Savings. Long Beach set a common pattern for fraudulent lenders by also engaging in predation primarily against Latinos and blacks. In 1994, the same year HOEPA became law; Long Beach voluntarily gave up federal deposit insurance and its charger as a savings and loan. Long Beach's controlling owner, Roland Arnall, did this for the sole purpose of escaping our regulatory jurisdiction and our ability to examine, sue, and sanction the S&L and its officers. Arnall changed its name to Ameriquest, and converted it to a mortgage bank. Mortgage banks were essentially unregulated. Arnall successfully sought sanctuary in what we now call the "shadow" financial sector. The S&L debacle did not end. It found sanctuary in the Shadow and grew 50% annually for 13 years.

Ameriquest and its leading mortgage bank competitor, run by former S&L officers we (OTS) had "removed and prohibited" from working in any federally insured lender, became the leading "vectors" spreading the epidemic of fraudulent liar's loans through (initially) the shadow sector and later back into federally insured lenders. Many of Arnall's lieutenants eventually left Ameriquest to lead other fraudulent and predatory lenders making predatory liar's loans. Michael W. Hudson's book, The Monster , is a great read that presents this history. Ameriquest and its fraudulent and predatory peers grew at extraordinary rates for over a decade. They hyper-inflated the bubble and drove the financial crisis.

Alan Greenspan and Ben Bernake refused to use HOEPA to stop this surging epidemic of fraudulent and predatory liar's loans. This was the setting when Krystofiak, on his own dime and initiative took advantage of a Fed hearing on predatory lending near his home to warn us all of the coming disaster. Krystofiak was not the first warning. His written testimony cited the appraisers' and the FBI's prior warnings. The appraisers' 2000 petition explaining how lenders and their agents were extorting appraisers to inflate appraisals was superb. Chris Swecker's 2004 warning on behalf of the FBI that the developing "epidemic" of mortgage fraud would cause a financial "crisis" if not stopped was superb.

Krystofiak was also superb. The Fed did not want to conduct hearings on fraudulent and predatory liar's loans – Congress forced it to do so. The Fed's Board members were not interested in stopping fraudulent and predatory liar's loans. The Fed did not invite Krystofiak to testify. The Fed offered only a brief "cattle call" at the end of the hearing allowing (after a top Fed official had left to fly back to DC) the public to make a very brief statement.

The Fed's treatment of Krysofiak stood in sharp contrast to its fawning treatment of the Mortgage Bankers Associations' chosen witness. The MBA chose the leading originator of fraudulent liar's loans in California – IndyMac – to present the MBA's position. The MBA's position was that the Fed should not use its HOEPA authority to ban fraudulent and predatory liar's loans. The Fed officials cracked jokes with and treated the IndyMac officer like an old pal. They treated Krytofiak with cold indifference. The MBA witness presented utter BS. Krystofiak spoke truth to power. Power loved the BS. The truth discomfited the Fed officials.

Krytofiak's written testimony made many vital points, but I refer to only two related points here. First, he warned the Fed that the twin mortgage fraud origination epidemics – appraisal fraud and liar's loans – were so large that they were inflating the housing bubble. Second, his means of quantifying the incidence of liar's loan fraud showed the regulators and the prosecutors that they could use the same method to document reliably, cheaply, and quickly the incidence of liar's loan fraud at every relevant financial firm.

Data Collected by the Mortgage Brokers Association for Responsible Lending

A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90 % of the income was exaggerated by 5 % or more. MORE DISTURBINGLY, ALMOST 60 % OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the "liar's loan" (emphasis in original).

The MBA's anti-fraud experts, MARI, appears to have conducted the study for Krystofiak. They featured the 4506-T (the "T" stands for "transcript") study and its finding of a 90% fraud incidence in liar's loans. In 2006, MARI presented its fraud study at the MBA's annual meeting. The MBA sent MARI's report to every member, which included all the major mortgage players.

Any honest originator, purchaser, or packager of liar's loans was on notice no later than mid-2006 that they could determine quickly, cheaply, and reliably the fraud incidence in those liar's loans by using the 4506-T forms to test a sample of those loans. Krystofiak aptly noted that while lenders typically required borrowers to sign the IRS 4506-T form allowing the lender to access their tax information, it was actually "hardly done." Lenders supposedly require the 4506-T because taxpayers have an obvious interest in not inflating their income to the IRS. The self-employed have to report their income accurately or face potential tax fraud sanctions.

The reason liar's loan mortgage lenders, purchasers, the packagers of toxic collateralized debt obligations (CDOs ) that typically were composed of large amounts of liar's loans, and credit rating agencies, "hardly [ever] used" or required the sellers to use their 4506-T authority is also clear if you understand "accounting control fraud." Any 4506-T study of liar's loans will document their pervasive frauds. Virtually all liar's loan and CDO sales required "reps and warranties" that they were not fraudulent. If a firm making or selling liar's loans conducted a 4506-T study and documented that it knew its reps and warranties were false, and it continued t make, sell, package, or rate those fraudulent loans under false reps and warranties it would be handling its counterparty a dream civil fraud suit. They would be handing DOJ the ability to prosecute them successfully for felonies that caused hundreds of billions of dollars in losses. The fraudulent mortgage money machine relied on the major players following a financial "don't ask; don't tell" policy.

The exceptions prove the rule. I have found public evidence of only two cases in which mortgage players (other than Krystofiak) conducted 4506-T audits of liar's loans. I have never found public evidence that any federal regulator or prosecutor conducted or mandated a 4506-T study. The two known cases of 4506-T audits were Wells Fargo (just disclosed by DOJ) and Countrywide (disclosed by the SEC investigation and complaint). Both audits found massive fraud incidence in the liar's loans. The risk officers presented these audit results to the banks' senior managers.

Bank Whistleblowers United's 4506-T Proposal

Two and-a-half years ago, Bank Whistleblowers United (BWU) discussed the senior officers of Countrywide's response to its 4506-T audit. We noted that BWU co-founder Michael Winston blew the whistle on Countrywide's frauds to the bank's most senior officers to try to prevent these frauds. Mr. Winston eagerly aided potential prosecutors – who failed to prosecute Countrywide's senior officers leading the frauds. BWU then explained the analogous response of Citigroup's senior officers to a different but equally reliable audit conducted by BWU co-founder Richard Bowen. We did so in a January 30, 2016 New Economic Perspectives blog urging presidential candidates in the 2016 election to pledge to implement the 60-day BWU plan to restore the rule of law to Wall Street.

As documented in the SEC complaint, Countrywide's managers conducted a secret internal study of Countrywide's liar's loans that, on June 2, 2006, confirmed Krystofiak's findings of endemic fraud in liar's loans. Fraud was the norm in Countrywide's liar's loans, a fact that it failed to disclose to its stockholders and secondary market purchasers. Instead of stopping such loans, Countrywide's senior officers caused it to adopt what they termed "Extreme Alt-A" loans offered by Bear and Lehman that "layered" this fraud risk on top of a half dozen additional massive risks to create what Countrywide's controlling officer described as loans that were "toxic" and "inherently unsound." "Alt-A" was the euphemism for liar's loans. Countrywide made massive amounts of "Extreme Alt-A" and acted as a vector spreading these "toxic" loans throughout the financial system. A member of our group, Dr. Michael Winston, tried to stop these kinds of abuses, which enriched top management but bankrupted Countrywide.

Similarly, a member of our group, Richard Bowen and his team of expert underwriters, documented that Citigroup knew that it was purchasing tens of billions of dollars of loans annually on the basis of fraudulent "reps and warranties" – and then reselling them to Fannie and Freddie on the basis of fraudulent reps and warranties. Bowen put the highest levels of Citigroup (including Bob Rubin) on personal notice in writing as the incidence of fraud climbed from 40% to 60%. (It eventually reached an astonishing 80% fraud incidence.) Citigroup's leadership's response was to remove his staff. Senior Citigroup officers also responded to the surging fraud by causing Citigroup to become a major purchaser of fraudulently originated liar's loans.

We can now add the senior leaders that determined Wells Fargo's response to its 4506-T audit. We draw on the Department of Justice (DOJ) disclosures in conjunction with its indefensible settlement of civil fraud claims against Wells Fargo's massive mortgage fraud. The DOJ press release revealed that "in 2005, Wells Fargo began an initiative to double its production of subprime and Alt-A loans." DOJ did not explain that this was after the FBI warned there was an emerging "epidemic" of mortgage "fraud" that would cause a financial "crisis" if it were not stopped. The settlement discloses that Wells' risk officers alerted senior managers that the plan to increase greatly the number of liar's loans would greatly increase fraud in 2005 before Wells implemented the plan.

The press release had other bombshells (unintentionally) demonstrating the strength of the criminal cases that DOJ refused to bring against Wells' senior officers. Wells Fargo's 4506-T audit found that its liar's loans were endemically fraudulent, and the amount of inflated income was extraordinary.

The results of Wells Fargo's 4506-T testing were disclosed in internal monthly reports, which were widely distributed among Wells Fargo employees. One Wells Fargo employee in risk management observed that the "4506-T results are astounding" yet "instead of reacting in a way consistent with what is being reported WF [Wells Fargo] is expanding stated [income loan] programs in all business lines."

The press release note some other actions by Wells' senior managers that show what prosecutors term "consciousness of guilt." Such actions make (real) prosecutors salivate. The press release's final substantive revelation is the unbelievable rate of loan defaults on Wells Fargo's fraudulent loans and the exceptional damages those loans and sales caused.

Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.

Typical default rates on conventional mortgages averaged, for decades, around 1.5 percent. The Wells Fargo liar's loans defaulted at a rate 30 times greater.

How Corrupt is Wells? Cheating Customers is "Courageous"

The press release does not contain the Wells Fargo gem that proves our family rule that it is impossible to compete with unintentional self-parody. Paragraph H of the settlement reveals that Wells' term for doubling its number of fraudulent liar's loans in 2005 was "Courageous Underwriting." Wells' senior managers changed its compensation system to induce its employees to approve even worse loans. Calling defrauding your customers "courageous" epitomizes Wells Fargo's corrupt culture built on lies and lies about lies.

DOJ's pathetic settlement with Wells Fargo has no admissions by the bank. It does not require a penny in damages from any bank officer. It does not require a bank officer to return a penny of bonuses received through these fraudulent loans. The settlement contains DOJ's statement that its investigation found that Wells' violated four federal criminal statutes. DOJ will continue to grant de facto immunity from prosecution to elite banksters. The Trump administration has again flunked a major test dealing with the swamp banksters.

Section H (b) of the settlement is factually inaccurate in a manner that makes it highly favorable to fraudulent lenders making liar's loans. There is no indication that DOJ ever investigated Wells' fraudulent loan origination practices. It was overwhelmingly lenders and their loan brokers that put the lies in liar's loans. DOJ's settlement documents do not refer to Wells whistleblowers, even though and competent investigation would have identified dozens of whistleblowers. Throughout its Wells documents, DOJ implies that borrowers overstated their income rather than Wells and its loan brokers.

The Jig is Up on DOJ's Pathetic Excuses for Refusing to Jail Elite Bank Frauds

We now know with certainty from the whistleblowers and the internal audits that the response of Citigroup, Countrywide, and Wells Fargo's senior leaders to knowing that most of their liar's loans and the reps and warranties they made about those loans were fraudulent. We know with certainty that Michael Winston and Richard Bowen's disclosures were correct. We know with certainty that each served up to DOJ on a platinum platter dream cases for prosecuting Citigroup and Countrywide's top managers. The senior managers' response to proof that their banks were engaged in endemic fraud makes sense only if the senior managers were leading an "accounting control fraud," which enriches the managers by harming the lender.

When the appraisers' warned of extensive extortion by lenders and their agents to inflate appraisals, when the FBI warned that mortgage fraud was becoming "epidemic" and would cause a financial "crisis" if not halted, and when the MBA publicized Krystofiak and MARI's warnings that liar's loans were endemically fraudulent, the fraudulent CEOs' response was always the same. In each case, they expanded what they knew were endemically fraudulent liar's loans and increased the extortion of appraisers.

Back to BWU's 4506-T Proposal

This brings us back to reminding the public what BWU proposed 32 months ago about 4506-T audits. Point 17 of our 60-day plan began:

Within 60 days, each federal financial regulatory agency directs any bank that it regulates to conduct and publicly report a "Krystofiak" study on a sample of "liar's" loans that they continue to hold. Krystofiak devised a clever study that he presented to the Federal Reserve in an unsuccessful attempt to try to get the Fed to stop the epidemic of fraudulent liar's loans. Lenders and secondary market purchasers routinely required borrowers to authorize the lender and any subsequent purchaser of the loan to obtain a "transcript" (4506-T) of the borrower's tax returns from the IRS to allow the lender to quickly and inexpensively verify the borrower's reported income.

Other parts of our 60-day plan called for DOJ appointees with the courage, integrity, and skills to restore the rule of law to Wall Street. We also explained the needs (and means) for the banking regulators to conduct the investigations (such as 4506-T audits), activate a legion of whistleblowers, and make the criminal referrals to DOJ essential to bring successful prosecutions.

Conclusion

Had the regulators (particularly the Fed through its HOEPA power) required each bank making liar's loans to conduct a 4506-T audit, the senior managers would have faced a dilemma. They could stop the fraudulent lending or provide DOJ with a great opportunity to prosecute them. The bank CEOs' response to the internal audits showing endemic fraud and the retaliation against the whistleblowers combine to offer superb proof of senior managers' 'specific intent' to defraud. The reasons for the failure to prosecute were some combination of cowardice and politics. If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

Of course, the Republican Senate and House chairs could order those steps today . We are not holding our breath, but BWU's co-founders are eager to aid either, or both, parties restore the rule of law to Wall Street. Instead, we are rapidly creating an intensely criminogenic environment on Wall Street that will eventually cause a severe financial crisis.


Hayek's Heelbiter , August 7, 2018 at 5:35 am

Did John Stumpf (President of Wells Fargo 2007-2016) really say, "If one family loses their home, it is a tragedy. If ten million people lose their homes, it is a statistic?"

Tinky , August 7, 2018 at 6:33 am

Even by Black's lofty standards, this is an outstanding article. The fact that it won't be published in the mainstream media, and that the vast majority of regulators and politicians will ignore it, underscores once again just how broken and corrupted the American political and economic systems are.

Colonel Smithers , August 7, 2018 at 7:54 am

Thank you, Tinky.

It's the same in the UK with regard to mortgage fraud and reporting.

A colleague, brought in from the regulator to clean up our German basket case TBTF's brief and late in the day foray into the mortgage market, said the UK mortgage market was as corrupt / fraudulent. The same US firms were involved in many, if not most, cases. Lehman had an outpost, Ascendant, in my home county, Buckinghamshire, for such activity. Lehman, Merrill and Citi carved out the UK on geographical lines. One (US) firm was given the name of the Germanic tribe that settled in the area 1500 years before.

readerOfTeaLeaves , August 7, 2018 at 11:34 am

Agree about the excellence of this post.

FWIW, the kinds of government errors, cowardice, and confusions that Black relates – on top of having taxpayers foot the bill for it all – was a key factor IMVHO in people voting Trump as a kind of protest vote. He talks about 'fake news' to a huge number of Americans who faked income, or approved fake income.

The rest of us, I assume, continue to seethe and are supporting 'honest money, fair wages/salary' candidates like Warren and Sanders.

flora , August 7, 2018 at 11:54 am

+1

Tom Stone , August 7, 2018 at 7:49 am

In early 2005 I was working as a loan Broker when I met the World Savings rep or the first time.
The first words out of his mouth were a warning not to take more than 3 pints on the back end because it was greedy, the second sentence was "If there's a problem with the income the underwriter will drop the file on my desk, I'll call you and we'll fix it".
He's still in the business, a few rungs further up the corporate ladder, I got out of the business the following week.

Peter Pan , August 7, 2018 at 10:31 am

If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

The establishment democrats that receive donor dollars from Wall Street banks? I wouldn't hold my breath waiting for them to even investigate much less do anything else to stop this criminal activity.

Otherwise another excellent post by Bill Black.

Tomonthebeach , August 7, 2018 at 3:31 pm

Also, is there a statute of limitations on this fraud? If so, both parties might just be running out the clock.

crittermom , August 7, 2018 at 7:43 pm

+1

Bewildered , August 7, 2018 at 10:41 am

Fabulous piece as usual from Mr. Black. Just makes the tenure of the previous administration all the more complicit in the current state of affairs. As Mr. Black details there was an obvious solution to uncover the fraud and go after senior execs, something that also could have also been done when the 'democrat' party held the House and at least a leverage position in the Senate. What the American public received instead was a giant con job/cover-up advertised as restitution and Obama goes on national TV to pathetically claim that grossly fraudulent behavior was simply unethical. Obviously that maneuver had a higher ROI for post-tenure legacy building and fundraising.

georgieboy , August 7, 2018 at 10:50 am

Wells Fargo -- doing it the Warren Buffet way! For that matter, Goldman Sachs -- doing it the Warren Buffet way!

Superb summary by Mr. Black, thanks Yves.

Bottom Gun , August 7, 2018 at 11:10 am

There is really a simple solution: fire everyone at DOJ and replace them with Air Force officers.

An Air Force officer is brave. He will fly through enemy fire if he has to in order to do his job. He gives no thought to the Taliban career opportunities that he might be forgoing by bombing them.

An Air Force officer is competent. He can fly through thunderstorms in the dead of night and get his bombs when and where the forward air controller down with the infantry needs them. Compare that to the experience of an honest IG official trying to get an indictment from DOJ for anyone at a mega-bank.

An Air Force officer knows how to get funding for his priorities. The Air Force annual budget, at $156 billion, is about 5 times that of DOJ. Enough said.

When you know these facts, the solution is obvious.

Kevbot5000 , August 7, 2018 at 4:36 pm

Go read The Pentagon Wars or Coram's Boyd . Air Force (or other service) officers have no particular claim to virtue. If you pulled mostly captains maybe it'd work, but the bravery and competence needed on the front line is vastly different from that needed from say a Colonel or General running programs/units which is likely the officers you'd be bringing in. Remember you're advocating bringing in people responsible for the boondoggle that is the F35 to shape up an organization. (which is not an isolated instance but emblematic of the upper tiers of the service)

Bottom Gun , August 7, 2018 at 8:00 pm

Thanks for the referrals; let me take a look. (I have read Thomas Ricks' The Generals , which I suspect makes a similar point to those.) The point is acknowledged, although I have not only read The Chickenshit Club but lived through it. There were many DOJ people I had to deal with whom I can only describe using Bundy's pungent phrase for the South Vietnamese political leadership: "the absolute bottom of the barrel." They contrasted starkly with the fellow junior officers I knew in my youth, but as you noted, those were junior officers.

Susan the other , August 7, 2018 at 12:08 pm

The simplicity of the 4506-T audits is as profound as the physics comparison of the diversity of the economy to GDP. These things don't work when all the chaos comes home to roost. In 1989 our economy was on the rocks and our corporations were offshoring as fast as they could; the USSR collapsed and we landed like a murder of crows to pick their bones and loot Russia. OPEC was naming their price; China was exporting massive deflation; our banks were already on the brink. But how to bring home all the loot from not just Russia but all the other illegal sources connected with our once and future imperialism? We were no longer a country of laws; we were looters, thieves and launderers. We were trying to salvage our "investments" or we were hoovering up flight capital or some other thing that had nothing to do with law and order and democracy. You name it. How else did all the banks, all of them, agree to forego their own standards and make all those conveyor belt loans? They prolly all had to become industrial laundromats and get rid of the stuff asap. Which was perhaps only one aspect to the ongoing collapse of "capitalism" as we once knew it – but were unable to protect it. I love Bill Black because he makes me come to uncomfortable explanations who knows how it all fell apart? Somebody does.

templar555510 , August 7, 2018 at 2:34 pm

Superb comment Susan. I make know how ' it all fell apart ' other than recognising that the early capitalists worked with stuff that had to be produced, and so despite vile excesses produced something useful to many , whereas these financial capitalists produce nothing of value to anyone except themselves and take away something from everybody else ( liar's loans being a key example ) . The question is , is there any here beyond here ? Clearly not with ANY of the present political incumbents ( I am in the UK it's the same for you and us ) . So that in two sentences is my answer to your question . My question is ' how on earth do we get beyond here ?'

Chauncey Gardiner , August 7, 2018 at 12:18 pm

Re Bill Black: " Instead, we are rapidly creating an intensely criminogenic environment on Wall Street that will eventually cause a severe financial crisis."

By design and intent with no fear of criminal prosecution for fraud, imprisonment, or even surrender of ill-gotten personal financial gains. All brought to us courtesy of the political donor class and large corporations, those they have corrupted, and the Supreme Court's Orwellian-named Citizens United decision and expanded executive branch powers that make it possible.

Look at any set of issues: Failure to pass and implement policies to address climate change, endless wars, defunding public education and infrastructure, the opioid crisis, manipulation of financial markets, federal government austerity, transfers of public lands and resources into private hands, privatization of public services, healthcare, stagnant real wages, loss of any semblance of economic equality, debt burdens placed on our young people seeking economic opportunity or family formation, lack of legal separation of bank depository and payments system functions from their market speculations, failure to enforce corporate antitrust laws, erosion of privacy and civil liberties, repeated bubbles, concentration of media ownership in the hands of a few, secret international tax havens, etc. and what do you see?

Tim , August 7, 2018 at 12:22 pm

In case you need comedy – George Carlin The Death Penalty from 1996

https://youtu.be/qDO6HV6xTmI

crittermom , August 7, 2018 at 8:02 pm

Thanks, Tim. Comedy was exactly what I needed after Bill Black's excellent article. (One of his best, IMHO)

I saw George Carlin in person at a small theater in Denver long ago. He was great, & still cracks me up.

shinola , August 7, 2018 at 12:49 pm

With the latest disclosures about WF stealing directly from their banking customers on top of their previous frauds, I'm just sure the regulators will come down hard on them this time (NOT!)

I wonder if Mr. Trump, with his involvement in commercial RE, ever "mis-stated" his his income, assets and/or liabilities when obtaining a loan. Nah, couldn't happen.

Tomonthebeach , August 7, 2018 at 3:37 pm

I wonder why anybody still banks with WF. My late mom had about 30K in a WF account under a trust that I could not close out for 24 months (Florida laws – WF had a branch in their eldercare facility.) I was delighted that my closeout check did not bounce.

Karma Fubar , August 7, 2018 at 1:22 pm

A while back I worked at a medical device startup operating within a formal (i.e. written and comprehensive) quality system. A quality system is required for any commercial sales of medical products; previously I had been involved in early stage R+D and had not been bound by such systems. So a lot of it was new to me.

Something that stuck out at the time, and probably ties in to the article above, was the sanctity of corporate internal audit files. The FDA could demand access to almost any company quality system document, except for internal audit files. They could be provided with summaries of these internal audits indicating something like "6 minor deficiencies found, 1 major deficiency found, 0 extreme deficiencies found" , but were not permitted access to the raw internal audits.

I suspect that financial firms have the same level of protection for their internal audits. Had they hired a consulting firm to investigate the accuracy of stated income in the loans they originated, the results of that outside investigation would probably be a document reviewable by government regulators (assuming they were interested in doing their job). But by pursuing this as an internal audit, executives knew that the results would never be reviewable, and give them plausible deniability that they knew of the systemic level of fraud.

There certainly must be other ways of investigating efficiency or compliance within a company, but by pursuing it as an internal audit they could easily bury the results.

Oregoncharles , August 7, 2018 at 1:52 pm

A quibble: comparing stated income to income tax forms may be misleading, although it is the standard. People have an interest in understating their income to the IRS, and in overstating it when seeking a loan. The logic is that they risk prosecution if they understate to the IRS, but there are plenty of situations where they're very unlikely to get caught. It's conceivable the loan application is more honest than the tax return.

perpetualWAR , August 7, 2018 at 7:57 pm

Neither is correct.

Enquiring Mind , August 7, 2018 at 3:09 pm

Loan officers I knew over the decades have changed their views. Asking them if they would lend their own money to the proposed borrower used to be more likely to elicit a Yes. When standards loosened (again) earlier this millennium, some answered No until realizing that they shouldn't care since the money wasn't theirs. What really mattered was getting that commission endorsed and deposited, given the rise of IBGYBG (I'll be gone, you'll be gone) thinking.

Another question I asked was about tracking borrower performance relative to loan officer compensation. Relationship building and longer term interactions declined with the rise of neo-liberalish (the -ish suffix indicates a primitive reaction to immediate perceived incentives without further investigation) mindsets. Portfolio lenders had more at risk but still laid off some of that on the deposit insurance funds. Loan buyers did not fully appreciate that they had to trust everyone preceding them in the value (destruction) cycle, from brokers and investment bankers through ratings agencies.

Internal audits, compliance functions and regulatory exams were often the only temporary inconveniences or obstacles to transactions and related income distribution.

Ron Con Coma , August 7, 2018 at 3:20 pm

Eric Holder for President – NOT!

steelhead23 , August 7, 2018 at 4:02 pm

If Democrats win control of the House they can use their investigative powers to force each bank regulator to cause every relevant financial institution to conduct a 4506-T audit.

Let us, for a moment, imagine this happens. Then what? The results would show widespread fraud and a pathetic lack of adequate vetting by the issuer. Then those fraudulent loans were aggregated into various RMBS and sold to others. I hope you can see that just this disclosure is likely to cause a substantial hiccup in the financial system, perhaps another full-blown crisis. And who would the public blame? The criminals – or the cops? I could see Dems, even Dems with little or no connection to the Street, deciding not to open Pandora's box.

That is one of the problems with the American political system. From defense appropriations to banking regulation, the pols live in fear of being tarred for doing the right thing, if the outcome is temporarily bad or unpopular. Yes, it would obviously be best to cleanse the wound, but doing so would hurt, so the pols decide that it would be best for their popularity to let the wound fester until it becomes too big to ignore or financial Armageddon occurs. Isn't that precisely the thinking of the Obama Administration?

Murgatroy , August 7, 2018 at 6:25 pm

All major Wall St banks and brokerages including Wachovia, Wells, BofA and even Citadel and a few foreign banks (ABN Amro, Deutsche Bank, Credit Suisse, etc) set up an offshore sub called CDS Indexco. This was used as a defacto cartel to control the prices of both Sub-Prime CDO issues and their respective Credit Default Swaps. They created the Markit BBB- index which was used by Paulsen, Ackman and a few other chosen ones to short the MBS sub-prime market. This is the truth.. CDS Indexco dropped that name in Nov. 2008 when the accounting rules forced Marked to Market accounting and also the Consolidation of VIE's (Special Purpose Financial Subs that got an exception to the Enron Rule). So in other words: if banks had been made to follow the "Enron Rule" the financial crisis wouldn't have happened. Goldman's own employee was the Chairman of CDS Indexco, I couldn't make this shit up. And Yves knows it too. Gramm Leach Bliley made it all possible – so banks could hold both the debt and the equity of an entity that they took no responsibility for. This was the precise reason for Glass-Steagall banks were manhandling the ownership of business due to inherent conflicts of interest between debt and equity holders.

steelhead23 , August 7, 2018 at 7:30 pm

My dear Murgatory, Wow. This is the first I have heard of CDS Indexco. You are suggesting that it was much more than a mere market clearinghouse. Where could I read more on this?

perpetualWAR , August 7, 2018 at 7:51 pm

Google it. I just did.
I. Am. Stunned.
Just when I think the shiitake can't get any deeper, it does.

perpetualWAR , August 7, 2018 at 7:34 pm

A former bank/trustee foreclosure attorney is running for a District Court judge position in Seattle. Remember Trott, the Foreclosure King, who Michigan sent to Congress? Yeah, this dude is trying to get on the bench.

crittermom , August 7, 2018 at 8:19 pm

Of course no bankers went to jail.

But does anyone remember this news from 2011, about the homeowner who did?
The lengths they went to 'catch him' once he was in their sites, says it all.
https://www.businessinsider.com/charlie-engle-2011-3

[Jul 04, 2018] Stabilizing an Unstable Economy by Hyman P. Minsky

Jul 04, 2018 | www.amazon.com

Larry R Frank Sr, MBA, CFP 5.0 out of 5 stars | Verified Purchase

Just what have we learned over the years (or not)?

Unfortunately, economists seem to given more attention after they're deceased and it appears Hyman P. Minsky (1919 -1986) is one in this category as well. As I read this book, originally published in 1986, I was amazed at not only one, but the many, parallels to today his synthesis of economic views, a blend of today's camps including the behavioral, had.

More valuable to you are his comments than mine, so I will quote Minsky as much as possible in this review and highly suggest its reading to fill in the gaps he so well articulates on his own. I decided to read this book because I'm not an economist and heard how his theories may better apply today than ever.

Many years later, the preface to this edition provides an excellent summary of Minsky's work. You do not need to be an expert to follow along. In the Introduction (8), Minsky points out that the institutional arrangements we have today in response to the Great Depression were set up pre-Keynes and with a pre-Keynesian understanding of the economy. ¨The evidence from 1975 indicates that, although the simple Keynesian model in which a large government deficit stabilizes and the helps the economy to expand is valid in a rough and ready way, the relevant economic relations are more complicated than the simple model allows. In particular, because what happens in our economy is so largely determined by financial considerations, economic theory can be relevant only if finance is integrated in the structure of the theory.¨

Minsky discusses Big Government and lender-of-last-resort (Federal Reserve or Fed) which is enlightening is and of itself. The balance of Chapters two and three are devoted to how these two interventions may work in theory. ¨To understand how Big Government stopped the economy's free fall, it is necessary to delve into the different impacts of government deficits on our economy ...¨ (24) He proceeds to define and then discuss three impacts: income and employment effect; budget effect; and portfolio effect. The standard view only incorporates one impact while Minsky argues and expanded view must incorporate all three views. ¨As a result of the 1975 experience, the issues in economic theory and policy that we should have to face are not about the ability of prodigious government deficit spending to halt even a very sharp recession but about the relative efficiency of specific measures and the side and after effects associated with particular policy strategies.¨ (24-25) I would suggest this has not been done effectively in response to the 2007 recession (started in Dec 2007 and has not been declared over as of this review writing (google "nber recession dates" for start and finish dates for this recession) which to date has had a more blind application of Keynesian without much thought as Minsky suggested long ago. Of interest is his discussion how Big Government entitlement programs impart an inflationary bias into the economy. (29)

Minsky's lender-of-last-resort includes a discussion on the lack of understanding of the inflationary side effects affects of intervention (51) and explosive growth of speculative liability structures (52) are as applicable today as to then. ¨Unless a theory can define the conditions in which a phenomenon occurs, it offers no guide to the control or elimination of the phenomenon.¨ He discusses the open market and discount window functions of the Fed and is instructive as to how the FOMC loses its power to affect member bank behavior, thus the Fed is not acting on intimate knowledge of banking practices. (54) Wow! Wasn't that also true this time! Minsky points out five causes of concern that the 1974 Chairman of the Federal Reserve System had appear as relevant today as to then as well: ¨first, the attenuation of the banking systems' base of equity capital; second, greater reliance on funds of a potentially volatile character; third, heavy loan commitments in relation to resources; fourth, some deterioration in the quality of assets; fifth, increased exposure to the larger banks to risks entailed in foreign exchange transactions and other foreign operations.¨

Minsky foresees how regulators (and politicians it seems) in imputing ¨...the difficulties he sees to either a laxness of regulatory zeal or, perhaps, some rather trivial mistake in how the regulatory bodies were organized, rather than to a fundamental behavioral characteristic of our economy.¨ (58) Even today, we see more shuffling of regulatory responsibilities and body creation rather than understand the behavior that causes the problems first in order to develop solutions.

He also points out how real estate was a problem back then as well, as result from explosive speculation. ¨The need for lender-of-last-resort intervention follows from an explosive growth in speculative finance and the way in which speculative finance leads to a crisis-prone situation.¨ (59) ¨Inasmuch as the successful execution of lender-of-last-resort functions extends the domain of the Federal Reserve guarantees to new markets and to new instruments there is an inherent inflationary bias to these operations; by validating the past use of an instrument, an implicit guarantee of its future is extended.¨ (58-59)

¨It is important to emphasize that ... any constraint placed on the Federal Reserve flexibility (e.g. by mandating mechanical rules of behavior) attenuates its power to act. Rules cannot substitute for lender-of-last-resort discretion.¨ Recall, the call by many to constrain the Fed? Minsky suggests otherwise. He also states ¨Certainly the bank examination aspects of the FDIC and the Federal Reserve should be integrated, especially if inputs from bank examinations are to become part of an early warning system for problem banks.¨ (64) This ties in with the idea above where the Fed has lost intimate knowledge of the banking practices.

Minsky discusses how the behavior of many actors need to be considered in a cohesive theory when he states ¨The dynamics of the financial system that lead to institutional change result from profit-seeking activities by businesses, financial institutions, and households as they manage their affairs.¨ (77) The problems that exist in the hierarchical financial system between mainstream banks and fringe banks is also noticed by Minsky years ago where a potential domino effect can cause serious disruptions as a result of the lender-of-last-resort guarantee to the mainstream banks as discussed on page 58. (97)

So far Minsky has laid the groundwork for actor interactions and issues. He then proceeds to theory. ¨In all disciplines theory plays a double role: it is both a lens and a blinder.¨ "It is ironic that an economic theory that purports to be based on Keynes fails because it cannot explain instability. ... Identifying a phenomenon is not enough: we need a theory that makes instability a normal result in our economy and gives us handles to control it." (111) "In what lies ahead, we will develop a theory explaining why our economy fluctuates, showing that the instability and incoherence exhibited from time to time is related to the development of fragile financial structures that occur normally within capitalist economies in the course of financing capital asset ownership and investment. We thus start with a bias in favor of using the market mechanism to the fullest extent possible to achieve social goals, but with recognition that market capitalism is both intrinsically unstable and can lead to distasteful distributions of wealth and power." (112) "The elements of Keynes that are ignored in the neoclassical synthesis deal with the pricing of capital assets and the special properties of economies with capitalistic financial institutions." (114) Minsky goes on to deconstruct both pre-Keynesian and and after-Keynesian constructs and synthesis. Minsky's "financial instability hypothesis" (127) addresses weaknesses he views in the neoclassical model. "In the neoclassical view, speculation, financing conditions, inherited financial obligations, and the fluctuating behavior of aggregate demand have nothing whatsoever to do with savings, investment, and the interest rate determination." (123) "In neoclassical theory, money does not have any significant relation to finance and the financing activity." (124) Minsky addresses the point that Keynes thoughts came out after government programs for reform and recovery were put into place, not the other way around and many may think today. (134) Minsky then develops how cause and effect to lay the ground work for his hypothesis throughout chapters 6 through 9 as he discusses in turn price relations allowing for government, foreign trade, consuming out of profits and saving out of wages, supply prices, taxes and government spending, financing of business spending, investment and finance, capital asset prices, investment, cash flows, and three kinds of financing (hedge, speculative and Ponzi: "The mixture of hedge, speculative, and Ponzi finance in an economy is a major determinant of its stability. (232)). "The main reason why our economy behaves in different ways at different times is that financial practices and structure of financial commitments change." (219) He calls the economy existing always in a transitory state.

Minsky then builds a larger model by discussion Institutional dynamics in Part 4. "Business cycles are `natural' in a investing capitalist economy, but to understand why this is so it is necessary to deal with the financing of investment and positions in capital assets explicitly." (249) He also recognized the distinction between commercial banks and investment banks and that the distinction between the two were breaking down even back in the 80's. (249) "In a capitalist economy money is tied up with the process of creating and controlling capital assets." (250) "Money is created as bankers go about their business of arranging for the financing of trade, investment, and positions in capital assets." (250).

Deposit (commercial banks) are emphasized in Chapter 10. Minsky's observation in the 80's rings as true today as it did then when he says "The narrow view that banking affects the economy only through the money supply led economists and policymakers to virtually ignore the composition of bank portfolios." (252) The rest of Chapter 10 explains how bank portfolio composition works and the economic effect this has.

Chapter 11 in about inflation. "My theory emphasizes the composition of financed demand and the spending of incomes that are allocations of profits as the determinants of the prices of consumption goods. It is compatible with the multiplier analysis in orthodox Keynesian theory" (254) "The determination of employment, wages, and prices starts with the profit calculations of businessmen and bankers. This proposition is in sharp contrast to the views of neoclassical monetarist theory." (255) Milton Friedman is a monetarist that he discusses next with this weakness in that theory in mind. Minsky develops his inflation theory by discussing money wages, price-deflated wages, government as an inflation engine, and trade union roles in inflation.

Part 5 is the culmination of his work where he discusses possible policy implications of his theory through the lens of his financial instability hypothesis. "Even if a program of reform is successful, the success will be transitory." (319) He continually reminds us that a dynamic system will need continual monitoring, adjustment and trade offs in the attempt to keep instability within reasonable bounds. An overarching agenda and approach should be developed to do this. An employment strategy should be developed, financial reform should be carefully crafted so as to not make matter worse.

**********
Conclusion:
As I mentioned at the beginning, I am not an economist. Minsky's description of the economy as developed through his instability model appears to describe much of how the interactions work, the inherent instability of a capitalist system, and his proposals to manage the instability appear to have merit for consideration. Especially in light of the 2007 recession.

Minsky appears to be an interesting combination of Keynesians who look to mitigate busts, and Austrians who look to prevent artificial booms.

For an easy read which builds a hypothetical economy, using an example of an island and fish on up, to describe economic history through the lens of the Austrian economic model: How an Economy Grows and Why it Crashes by Peter D Schiff and Andrew J Schiff.

For more on Keynes, this work by Hunter Lewis describes what Keynes said and what he didn't say side by side. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts

Review by Larry Frank, author of Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?

[Jul 04, 2018] Why Minsky Matters An Introduction to the Work of a Maverick Economist L. Wray 9780691178400 Amazon.com Books

www.theatlantic.com
Jul 04, 2018 | www.amazon.com

Amazon.com Das Boot Jürgen Prochnow, Herbert Gronemeyer, Klaus Wennemann, Wolfgang Petersen Amazon Digital Services LLC

[May 30, 2018] How Media Amnesia Has Trapped Us in a Neoliberal Groundhog Day

Highly recommended!
Notable quotes:
"... By Laura Basu, a Marie Curie Research Fellow at Cardiff School of Journalism, Media and Culture. Originally published at openDemocracy ..."
"... This ideology spread through the media from the 1980s ..."
"... Fast-forward to April 2009, barely 6 months after the announcement of a £500 billion bank bailout. A media hysteria was nowraging around Britain's deficit . While greedy bankers were still taking some of the blame, the systemic problems in finance and the problems with the free-market model had been forgotten. Instead, public profligacy had become the dominant explanation for the deficit. The timeline of the crisis was being erased and rewritten. ..."
"... These measures were a ramped-up version of the kinds of reforms that had produced the crisis in the first place. This fact, however, was forgotten. These 'pro-business' moves were enthusiastically embraced by the media, far more so than austerity. Of the 5 outlets analysed (The BBC, Telegraph, Sun, Guardian and Mirror), only the Guardian rejected them more frequently than endorsing them. ..."
"... "One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. We're no longer interested in finding out the truth. The bamboozle has captured us. It's simply too painful to acknowledge, even to ourselves, that we've been taken. Once you give a charlatan power over you, you almost never get it back." ..."
"... This post is disheartening in so many ways. Start with "media hysteria" -- adding yet another glib coinage to hide a lack of explanation behind a simple but innapt analogy like the endless "addictions" from which personifications of various abstract entities suffer. ..."
"... This coinage presupposes a media sufficiently free to be possessed by hysteria. Dancing puppets might with some art appear "hysterical". And the strange non-death of Neoliberalsm isn't so strange or poorly understood in 2018 though the detailed explanation hasn't reached as many as one might have hoped, including the authors of this brief post. Consider their unhappy mashup of thoughts in a key sentence of the first paragraph: "This power has been maintained with the help of a robust ideology centred on free markets (though in reality markets are captured by corporations and are maintained by the state) and the superiority of the private sector over the public sector." The tail of this sentence obviates the rest of the post. And we ought not ignore the detail that Neoliberalism believes in the Market as a solution to all problems -- NOT the 'free market' of neoclassical economics or libertarian ideology. ..."
"... From "media hysteria" the post postulates "amnesia" of a public convinced of "greedy bankers" who need regulation. In the U.S. the propaganda was more subtle -- at least in my opinion. We were fed the "bad apples" theory mocked in a brief series of media clips presented in the documentary film "Inside Job". Those clips suggest a better explanation for the swift media transitions from banking reform to balanced budgets and austerity with more tax cuts for the wealthy than "amnesia" or "hyper-amnesia". The media Corporations are tightly controlled by the same forces that captured Corporations and -- taking the phrase "the superiority of the private sector over the public sector" in the sense that a superior directs an inferior [rather than the intended(?) sense] -- direct and essentially own our governments. ..."
"... The remarkable thing about public discourse and political and economic news reporting is how superficial it has become, so devoid of a foundation of any kind in history or theory. You can not have an effective critique of society or the economy or anything, if you do not see a system with a history and think it matters. Neoliberalism has become what people say when they think none of it really matters; it is all just noise. ..."
"... "Neoliberalism has become what people say when they think none of it really matters; it is all just noise." ..."
"... I also think that the crisis of neoliberalism echos a problem caused by capitalism, itself. I think David Harvey stated that "capitalism doesn't solve problems, it often just moves them around". ..."
"... Matt Stoller tweet from August 2017, as germane now as ever: "The political crisis we are facing is simple. American commerce, law, finance, and politics is organized around cheating people." ..."
"... George Orwell noted that the middle class Left couldn't handle dealing with real working class people, although there isn't the same huge gulf these days, I believe there is still a vestige of it due to the British class system. The Fabians set up shop in the East End around the turn of the last century & directly rubbed shoulders with the likes of Coster Mongers – a combination that led to a strike that was one of the first success stories in the attempt to get a few more crumbs than what was usually allowed to fall from the top table. ..."
"... If Neoliberalism is now being noticed I imagine that it is because of it's success in working it's way up the food chain. After all these same Middle classes for the most part did not care much for the plight of the poor during those Victorian values. Many could not wait to employ maids of all work who slaved for up to fourteen hours a day with only Sunday afternoon's off. The Suffragettes had a real problem with this as their relatively comfortable lives would soon descend into drudgery without their servants. ..."
"... Coincidentally, the NYT article on Austerity Britain is the closest I have read to an accurate picture that I have seen for a good while. ..."
"... It's also not a new thing. British media worship of neoliberalism has been growing since the 1980s, at the same time as newspapers have been closing and media sources of all kinds laying off their staff. 2008 was a temporary blip, and since the average journalist has the attention span of a hamster, it was back to usual a few months later. Once the crash stopped being "news" old patterns reasserted themselves. I wonder, incidentally, how many economics journalists in the UK actually remember the time before neoliberalism? ..."
"... Consuming corporate media is increasingly a bizarro-world experience. Even something like the Trump scandal/constitutional crisis/investigation seems like the arrogant internecine warfare of corrupt factions of the establishment. Meanwhile, Americans are increasingly living out of their cars. ..."
"... 1. Oligarchs having captured thoroughly the media, the legislatures and the judiciary, (as well as large parts of what might be construed as "liberal" political organisations e.g. the Democratic Party of the USA) ..."
May 30, 2018 | www.nakedcapitalism.com

Posted on May 29, 2018 by Yves Smith Yves here. I'm sure readers could write a US version of this timeline despite the fact that we had a second crisis and bailout, that of way more foreclosures than were warranted, thanks to lousy incentives to mortgage servicers and lack of political will to intervene, and foreclosure fraud to cover up for chain of title failures.

By Laura Basu, a Marie Curie Research Fellow at Cardiff School of Journalism, Media and Culture. Originally published at openDemocracy

It hasn't escaped many people's attention that, a decade after the biggest economic crash of a generation, the economic model producing that meltdown has not exactly been laid to rest. The crisis in the NHS and the Carillion and Capital scandals are testament to that. Sociologist Colin Crouch wrote a book in 2011 about the 'strange non-death of neoliberalism', arguing that the neoliberal model is centred on the needs of corporations and that corporate power actually intensified after the 2008 financial meltdown. This power has been maintained with the help of a robust ideology centred on free markets (though in reality markets are captured by corporations and are maintained by the state) and the superiority of the private sector over the public sector. It advocates privatisation, cuts in public spending, deregulation and tax cuts for businesses and high earners.

This ideology spread through the media from the 1980s , and the media have continued to play a key role in its persistence through a decade of political and economic turmoil since the 2008 crash. They have done this largely via an acute amnesia about the causes of the crisis, an amnesia that helped make policies like austerity, privatisation and corporate tax breaks appear as common sense responses to the problems.

This amnesia struck at dizzying speed. My research carried out at Cardiff University shows that in 2008 at the time of the banking collapse, the main explanations given for the problems were financial misconduct ('greedy bankers'), systemic problems with the financial sector, and the faulty free-market model. These explanations were given across the media spectrum, with even the Telegraph and Sun complaining about a lack of regulation . Banking reform was advocated across the board.

Fast-forward to April 2009, barely 6 months after the announcement of a £500 billion bank bailout. A media hysteria was nowraging around Britain's deficit . While greedy bankers were still taking some of the blame, the systemic problems in finance and the problems with the free-market model had been forgotten. Instead, public profligacy had become the dominant explanation for the deficit. The timeline of the crisis was being erased and rewritten.

Correspondingly, financial and corporate regulation were forgotten. Instead, austerity became the star of the show, eclipsing all other possible solutions to the crisis. As a response to the deficit, austerity was mentioned 2.5 as many times as the next most covered policy-response option, which was raising taxes on the wealthy. Austerity was mentioned 18 times more frequently than tackling tax avoidance and evasion. Although coverage of austerity was polarized, no media outlet rejected it outright, and even the left-leaning press implicitly (and sometimes explicitly) backed 'austerity lite'.

In 2010, the Conservative-Lib Dem government announced £99 billion in spending cuts and £29 billion in tax increases per year by 2014-15. Having made these 'tough choices', from 2011 the coalition wanted to focus attention away from austerity and towards growth (which was, oops, being stalled by austerity). To do this, they pursued a zealously 'pro-business' agenda, including privatisation, deregulation, cutting taxes for the highest earners, and cutting corporation tax in 2011, 2012, 2013, and in 2015 and 2016 under a Conservative government.

These measures were a ramped-up version of the kinds of reforms that had produced the crisis in the first place. This fact, however, was forgotten. These 'pro-business' moves were enthusiastically embraced by the media, far more so than austerity. Of the 5 outlets analysed (The BBC, Telegraph, Sun, Guardian and Mirror), only the Guardian rejected them more frequently than endorsing them.

The idea behind these policies is that what's good for business is good for everyone. If businesses are handed more resources, freed from regulation and handed tax breaks, they will be encouraged to invest in the economy, creating jobs and growth. The rich are therefore 'job creators' and 'wealth creators'.

This is despite the fact that these policies have an impressive fail rate. Business investment and productivity growth remain low, as corporations spend the savings not on training and innovation but on share buy-backs and shareholder dividends. According to the Financial Times, in 2014, the top 500 US companies returned 95 per cent of their profits to shareholders in dividends and buybacks. Meanwhile, inequality is spiralling and in the UK more than a million people are using food banks .

Poverty and inequality, meanwhile, attracted surprising little media attention. Of my sample of 1,133 media items, only 53 had a primary focus on living standards, poverty or inequality. This confirms other researchshowing a lack of media attention to these issues . Of these 53 items, the large majority were from the Guardian and Mirror. The coverage correctly identified austerity as a primary cause of these problems. However, deeper explanations were rare. Yet again, the link back to the 2008 bank meltdown wasn't made, let alone the long-term causes of that meltdown. Not only that, the coverage failed even to identify the role of most of the policies pursued since the onset of the crisis in producing inequality – such as the bank bailouts, quantitative easing, and those 'pro-business' measures like corporation tax cuts and privatisation.

And so it seems we are living with a hyper-amnesia , in which it is increasingly difficult to reconstruct timelines and distinguish causes from effects. This amnesia has helped trap us in a neoliberal groundhog day. The political consensus around the free market model finally seems to be breaking. If we are to find a way out, we will need to have a lot more conversations about how to organise both our media systems and our economies.


Summer , May 29, 2018 at 10:31 am

Tick-Tock.
It depends. Do you believe the worst can be avoided or do you believe the world is already knee deep in all the things we're told to be afraid will happen? There is a big difference between organizing for reform and organizing to break capture.

makedoanmend , May 29, 2018 at 10:42 am

" Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Surely some revelation is at hand;
Surely the Second Coming is at hand "

W.B. Yeats

I suppose we can take some succour from the fact that WWI (and the Spanish flu) seemed to be a harbinger of worse to come but we're still here

Doug , May 29, 2018 at 11:21 am

The hyper-amnesia ground hog problem described in the post happens, in part, because the 'centre continues to hold'. It demonstrates the center can, and does, hold. We don't want the centre to hold. We want it to disappear and get replaced by policies and perspectives keen on an economy (and society) that works for all, not just some

makedoanmend , May 29, 2018 at 11:33 am

I know what you're saying and I tend to agree. But the centre to Yeats (my interpretation, anyway) is that there is a cultural centre both apart from but also part of the social centre, and when that centre goes all hell breaks loose. Meaning of events becomes very confused or impossible to understand on many levels.

Then, it's often the little people (and don't go making jokes about leprechauns) that get crushed in the confusion.

Pam of Nantucket , May 29, 2018 at 10:32 am

We should reflect about the root causes of why our information is not informing us. How can decades go by with the meme "smoking has not been conclusively proven to cause cancer" or now "the science of climate change is inconclusive", not to mention countless similar horror stories in pharma. Bullshit about the effectiveness of supply side economics is no different.

Somehow we collectively need to expect and demand more objectivity from our information sources. We fall for the fox guarding hen houses scam over and over, from TARP bailouts, to FDA approvals to WMD claims. Not sure of the answer, but I know from talking with my boomer parents, skepticism about information sources is not in the DNA of many information consumers.

Isotope_C14 , May 29, 2018 at 11:52 am

"One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. We're no longer interested in finding out the truth. The bamboozle has captured us. It's simply too painful to acknowledge, even to ourselves, that we've been taken. Once you give a charlatan power over you, you almost never get it back."

― Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark

One of Sagan's best, I loaned this out to a not terribly thoughtful acquaintance and I was told it was "too preachy".

I guess Sagan proves himself correct time and time again.

Off The Street , May 29, 2018 at 2:56 pm

Bamboozlers often look to bezzle. That should give anyone pause.

steelhead23 , May 29, 2018 at 12:43 pm

It is also worth noting that a number of newspapers lauded Hitler's rise to power – they overlooked violence against Jews because the trains ran on time. Nor should we ignore disinformation campaigns, led by newspapers (e.g. Hearst and cannabis). In general, each media outlet is a reflection of its owners, most of whom are rich and adverse to any suggestion that we "tax the rich."

sharonsj , May 29, 2018 at 1:59 pm

I've come to the conclusion that we don't have a media anymore. I was watching MSNBC this AM discuss the "missing" 1500 immigrant children. The agency responsible says it calls the people who now have the kids, but most of the people don't call back within the 30-day requirement period.

Now the next logical questions to ask the rep would be: What happens after 30 days? Do you keep calling them? Do send out investigators?" But are these questions asked? No. Instead we get speculation or non-answers. It's the same with every issue.

The internet is not any better. Many articles are just repeating what appears elsewhere with no one checking the facts, even on respected sites. I also got a chain email today regarding petition for a Constitutional Convention. The impetus is a list of grievances ranging from "a congressman can retire after just one term with a full pension" to "children of congressmen don't have to pay back college loans." I already knew most of the claims weren't true but the 131 recipients of the organization I belong to didn't. I did find out that this chain email has been circulating on the internet for five years and it is the work of a conservative groups whose real aim is to stop abortion and make Christianity the law of the land. I was not surprised.

I have said for years that there is no news on the news. And I have repeated this meme for just as long: There is a reason why America is called Planet Stupid.

lewis e , May 29, 2018 at 2:43 pm

On the 1500

https://twitter.com/jduffyrice/status/1000927903759110144

JBird , May 29, 2018 at 3:38 pm

Now the next logical questions to ask the rep would be: What happens after 30 days? Do you keep calling them? Do send out investigators?" But are these questions asked? No. Instead we get speculation or non-answers. It's the same with every issue.

Even competent reporting takes practice, time, and effort, even money sometimes. The same with even half way competent governing. Neither is rewarded, and are often punished, for doing nowadays; asking as a follow-up question "did you call the local police or send over a pair of ICE officers just to politely knock on the door?" Police do people checks all the time. "I haven't see so and so for a week", or "my relative hasn't returned my calls for a month, can you?" It is possible that the paperwork just got lost and asking the guardians/family some questions personally would solve.

But all that is boring bovine excrement, which is just not done.

Jeremy Grimm , May 29, 2018 at 2:41 pm

This post is disheartening in so many ways. Start with "media hysteria" -- adding yet another glib coinage to hide a lack of explanation behind a simple but innapt analogy like the endless "addictions" from which personifications of various abstract entities suffer.

This coinage presupposes a media sufficiently free to be possessed by hysteria. Dancing puppets might with some art appear "hysterical". And the strange non-death of Neoliberalsm isn't so strange or poorly understood in 2018 though the detailed explanation hasn't reached as many as one might have hoped, including the authors of this brief post. Consider their unhappy mashup of thoughts in a key sentence of the first paragraph: "This power has been maintained with the help of a robust ideology centred on free markets (though in reality markets are captured by corporations and are maintained by the state) and the superiority of the private sector over the public sector." The tail of this sentence obviates the rest of the post. And we ought not ignore the detail that Neoliberalism believes in the Market as a solution to all problems -- NOT the 'free market' of neoclassical economics or libertarian ideology.

From "media hysteria" the post postulates "amnesia" of a public convinced of "greedy bankers" who need regulation. In the U.S. the propaganda was more subtle -- at least in my opinion. We were fed the "bad apples" theory mocked in a brief series of media clips presented in the documentary film "Inside Job". Those clips suggest a better explanation for the swift media transitions from banking reform to balanced budgets and austerity with more tax cuts for the wealthy than "amnesia" or "hyper-amnesia". The media Corporations are tightly controlled by the same forces that captured Corporations and -- taking the phrase "the superiority of the private sector over the public sector" in the sense that a superior directs an inferior [rather than the intended(?) sense] -- direct and essentially own our governments.

orangecats , May 29, 2018 at 10:09 pm

"skepticism about information sources is not in the DNA of many information consumers"

This.

bruce wilder , May 29, 2018 at 11:37 am

The essayist complains that poverty and the manifest failures of neoliberalism get little critical attention, but she leads off, "It hasn't escaped many people's attention . . ."

The remarkable thing about public discourse and political and economic news reporting is how superficial it has become, so devoid of a foundation of any kind in history or theory. You can not have an effective critique of society or the economy or anything, if you do not see a system with a history and think it matters. Neoliberalism has become what people say when they think none of it really matters; it is all just noise.

Summer , May 29, 2018 at 4:48 pm

"Neoliberalism has become what people say when they think none of it really matters; it is all just noise."

There is a connection there with movies like Deadpool 2.

JohnnyGL , May 29, 2018 at 1:35 pm

Another thing to recall was how quickly talk of nationalizing banks evaporated. Even Paul Krugman, among others were supporting the idea that "real capitalists nationalize".

Once LIBOR came down, and the lending channels began to reopen, the happy talk ensued and the amnesia kicked in strongly.

I also think that the crisis of neoliberalism echos a problem caused by capitalism, itself. I think David Harvey stated that "capitalism doesn't solve problems, it often just moves them around".

The financial crisis and austerity have now manifested themselves into a media crisis of elites and elite legitimacy (BREXIT, Trump's election, etc). The ability to manufacture consent is running into increased difficulty. I don't think the financial crisis narrative shift helped very much at all. A massive crime requires an equally massive cover-up, naturally.

WheresOurTeddy , May 29, 2018 at 1:41 pm

Why, it's almost as if 90% of all media outlets are owned by 5 multibillion dollar conglomerates, controlled by the top 0.1%, for the purposes of protecting their unearned parasitic power, and the employees making six-to-low-seven figures are on the Upton Sinclair "paycheck demands I not understand it" model.

Or it's amnesia.

Matt Stoller tweet from August 2017, as germane now as ever: "The political crisis we are facing is simple. American commerce, law, finance, and politics is organized around cheating people."

maria gostrey , May 29, 2018 at 2:13 pm

this is why frank sobotka got my vote in the 2016 election:

https://m.youtube.com/watch?v=T-j5XWo1fPI#

KLG , May 29, 2018 at 9:56 pm

A big thumbs up for that! Sobotka was a hero in very dark times.

As my brother-in-law puts it: The American Dream used to be "work hard in a useful job, raise a family of citizens, retire with dignity, and hand the controls to the next generation." Now? It's just "Win the lottery."

Problem is, "The Lottery" is right out of Shirley Jackson.

hemeantwell , May 29, 2018 at 3:12 pm

Or it's amnesia.

Agreed. The author is inclined to interpret at the level of cumulative effect -- apparent forgetting -- and to ignore how fear -- of editors, of owners -- plays any role. Her proposed unveiling of a coercive process becomes yet another veiling of it.

precariat , May 29, 2018 at 3:16 pm

There is not a writer or thinker I agree with more than Matt Stoller.

Avalon Sparks , May 29, 2018 at 5:33 pm

He's one I agree with too. His writings on monopoly activity are excellent.

Pamela More , May 29, 2018 at 9:57 pm

This.

It's a feature, not a bug.

Alex morfesis , May 29, 2018 at 1:54 pm

Sadly the narrative of details is lost to history The German landesbanks who had guaranteed payments in loan pools in the USA were allowed to skirt thru crash and burn by the agencies (moody s&p and your little fitch too) fake and shake ratings process But all things German are magical Having lived thru NYC Mac Corp effective bankruptcy of man hat tan..

it was amusing watching the hand wave given when the city of Berlin actually defaulted .

Ah reality I remember it welll

Eustache De Saint Pierre , May 29, 2018 at 2:23 pm

My own view for what it is worth is that the Guardian pays some lip service to the plight of the UK's " Deplorables ", but like most of it's readership does not really give a damn. A state of being exacerbated by Brexit similar to the situation in the US with Trump. It's much easier to imagine hordes of racist morons who inhabit places that you have no direct experience of, than to actually go & take a look. It's also very easy to be in favour of mass immigration if it does not effect your employment, housing & never likely to spoil your early morning dawn chorus with a call to prayer.

Unfortunately it has been left to the Right to complain about such things as the Rotherham abuse scandal, which involved a couple of thousand young girls, who I suspect are worth less to some than perhaps being mistaken as a racist. There are also various groups made up of Muslim women who protest about Sharia councils behaviour to their sex, but nobody in the media is at all interested.

George Orwell noted that the middle class Left couldn't handle dealing with real working class people, although there isn't the same huge gulf these days, I believe there is still a vestige of it due to the British class system. The Fabians set up shop in the East End around the turn of the last century & directly rubbed shoulders with the likes of Coster Mongers – a combination that led to a strike that was one of the first success stories in the attempt to get a few more crumbs than what was usually allowed to fall from the top table.

As for Mirror readers, I suspect that the majority are either the voiceless or are too busy fighting to avoid the fate of those who find themselves availing of food banks, while being labelled as lazy scroungers all having expensive holidays, twenty kids, about thirty grand a year, while being subjected to a now updated more vicious regime of that which was illustrated by " I, Daniel Blake ".

If Neoliberalism is now being noticed I imagine that it is because of it's success in working it's way up the food chain. After all these same Middle classes for the most part did not care much for the plight of the poor during those Victorian values. Many could not wait to employ maids of all work who slaved for up to fourteen hours a day with only Sunday afternoon's off. The Suffragettes had a real problem with this as their relatively comfortable lives would soon descend into drudgery without their servants.

Coincidentally, the NYT article on Austerity Britain is the closest I have read to an accurate picture that I have seen for a good while.

David , May 29, 2018 at 2:39 pm

It's also not a new thing. British media worship of neoliberalism has been growing since the 1980s, at the same time as newspapers have been closing and media sources of all kinds laying off their staff. 2008 was a temporary blip, and since the average journalist has the attention span of a hamster, it was back to usual a few months later. Once the crash stopped being "news" old patterns reasserted themselves. I wonder, incidentally, how many economics journalists in the UK actually remember the time before neoliberalism?

precariat , May 29, 2018 at 2:54 pm

"And so it seems we are living with a hyper-amnesia"

Consuming corporate media is increasingly a bizarro-world experience. Even something like the Trump scandal/constitutional crisis/investigation seems like the arrogant internecine warfare of corrupt factions of the establishment. Meanwhile, Americans are increasingly living out of their cars.

The corporate media forgets the causes of the worst economic crisis since the Depression, and it put Trump in a position to be elected. Trump was the Republican nominee because he was relentlessly promoted by the media -- because ratings, because neoliberal rigged markets.

Break up the media monopolies, roll back Citizens United, enforce the fairness doctrine.

Pamela More , May 29, 2018 at 9:55 pm

Agree.

Slight edit

" Consuming corporate media is increasingly a bizarro-world experience the Trump scandal/constitutional crisis/investigation is nothing other than internecine warfare between corrupt factions of the establishment."

JBird , May 29, 2018 at 3:24 pm

I think there are several issues here for Americans, which can partially be applied to the Europeans.

First, the American nation as whole only has short term memory. It is our curse.

Second, those with the money spend a lot of money, time and effort the late 19th century covering up, massaging, or sometimes just creating lies about the past. American and British businesses, governments, and even private organizations are masters at advertising and propaganda. Perhaps the best on Earth.

Third, the people and the institutions that would counter this somewhat, independent unions, multiple independent media, tenured professors at functioning schools, even non-neoliberalized churches, and social organizations like bowling, crocheting, or heck, the Masons would all maintain a separate continuing body of memory and knowledge.

Lastly, we are all freaking terrified somewhere inside us. Those relative few who are not are fools, and most people, whatever their faults, truly are not fools. Even if they act like one. Whatever your beliefs, position, or knowledge, the knowing of the oncoming storm is in you. Money or poverty may not save you. The current set of lies, while they are lies, gives everyone a comfortable known position of supporting or opposing in the same old, same old while avoiding thinking about whatever catastrophe(s) and radical changes we all know are coming. The lies are more relaxing than the truth.

Even if you are one of society's homeless losers, who would welcome some changes, would you be comfortable thinking about just how likely it is to be very traumatic? Hiding behind begging for change might be more comfortable.

precariat , May 29, 2018 at 4:25 pm

"Even if you are one of society's homeless losers, who would welcome some changes, would you be comfortable thinking about just how likely it is to be very traumatic? Hiding behind begging for change might be more comfortable."

On the contrary, the upheaval the "losers" have been subjected to will be turned around and used as a just cause for rectification. Trumatic consequences can be unpredictable and this is why society should have socio-economic checks and balances to prevent an economic system running amok. Commonsense that necessitates amnesia for neoliberalism to seem viable.

Peter Phillips , May 29, 2018 at 4:54 pm

Facing the current scenario in which we have:

1. Oligarchs having captured thoroughly the media, the legislatures and the judiciary, (as well as large parts of what might be construed as "liberal" political organisations e.g. the Democratic Party of the USA)

2. the seemingly inexorable trend to wealth concentration in the hands of said oligarchs

..one asks oneself.."What is one to do?"

My own response, (and I acknowledge straight off its limited impact), is to do the following:

1. support financially in the limited ways possible media channels such as Naked Capitalism that do their level best to debunk the lies and deceptions perpetrated by the oligarchs

2. support financially social organisations and structures that are genuinely citizen based and focused on a sustainable future for all

3. Do very very limited monitoring of the oligarch's "lies and deceptions" (one needs to understand one's enemies to have a chance to counter them) and try on a personal level, in one's day to day interactions, to present counter arguments

We cannot throw in the towel. We must direct our limited financial resources and personal efforts to constructive change, as, for the 99%..there are no "bunker" to run to when the "proverbial" hits the fan..as it must in the fullness of time.

Spring Texan , May 29, 2018 at 8:21 pm

Yep. One has to go ahead and do what one can. It all makes a difference. Thanks for your strategy, Peter Phillips. Limited impact is not no impact, and we don't have the luxury of despairing because there is only a bit we can do.

sgt_doom , May 29, 2018 at 8:10 pm

Yet this has been going on forever – – this past Sunday, for the first time I recall, I finally heard an accurate Real News story filed on the Bobby Kennedy assassination (50th anniversary coming this June 6, 2018) by the BBC World Service.
They actually noted that there were multiple shooters, that Sen. Kennedy was shot from behind, not the front where Sirhan was located, etc., etc.
I guess we do occasionally witness Real News – – – just that it takes 50 years or so to be reported . . .

[Apr 24, 2018] Home Prices In 80% Of US Cities Grew 2x Faster Than Wages... And Then There Is San Francisco

Apr 24, 2018 | www.zerohedge.com

In February, 16 of 20 major cities experienced home price growth of 5.4% or higher: double the average wage growth. And then there was San Francisco ...

[Apr 24, 2018] Lyapanov's work on the inherent instability of complex systems which was used as a basis of Chaos Theory, is enough in itself to relegate predictions based on a linear model when applied to the complex to be thrown into the dustbin of history.

Apr 24, 2018 | www.nakedcapitalism.com

Eustache De Saint Pierre , April 21, 2018 at 6:13 am

Lyapanov's work on the inherent instability of complex systems which was used as a basis of Chaos Theory, is enough in itself to relegate predictions based on a linear model when applied to the complex to be thrown into the dustbin of history.

LTCM L.P. Was I believe wiped out due to a combination of the 90's Asian & Russian crisis' ( karma in the case of the latter ? ). It would be impossible to discover which tiny flap of the butterfly's wings initiated the tipping point or to predict it beforehand.

But as long as it works for those driving it.

[Mar 23, 2018] Jim Kunstler Warns An Unspooling Has Begun

"Doom porn" argument aside it was almost 10 years since the last financial crisis. And neoliberalism tend to produce financial crisis with amazing regularity. This is the nature of the beast. So timing might be wrong, but the danger is here.
Mar 23, 2018 | www.zerohedge.com

Tendrils of evidence point to a coordinated campaign that included the Obama White House and the Democratic National Committee starring Hillary Clinton. Robert Mueller even comes into the picture both at the Uranium One end of the story and the other end concerning the activities of his old friend, Mr. Comey. Most tellingly of all, Attorney General Jeff Sessions was not shoved out of office but remains shrouded in silence and mystery as this melodrama plays out, tick, tick, tick.

None of this makes President Trump a more reassuring figure. His lack of decorum remains as awesome as his apparent lack of common sense. But he has labored against the most intense campaign of coordinated calumny ever seen against a chief executive and his fortitude, at least, is impressive. What is unspooling for him, and the body politic, are the nation's finances, and the dog of an economy that gets wagged by finance. Yesterday's 724-point dump in the Dow Jones Industrial Average is liable to not be a fluke event, but the beginning of a cascade into the pitiless maw of reality - the reality that just about everything is grossly mispriced.

There is plenty of dysfunction in plain sight to suggest that the financial markets can't bear the strain of unreality anymore. Between the burgeoning trade wars and the adoption in congress this week of a fiscally suicidal spending bill, you'd want to put your fingers in your ears to not be deafened by the roar of markets tumbling. A 40 to 75 percent drop in the equity markets will leave a lot of one-percent big fish gasping on the beach as the tide rolls out. But the minnows and anchovies will suffer too, as regular economic activity declines in response to tumbling markets. And then the Federal Reserve will ride to the rescue with QE-4, which will very sharply drive the dollar toward worthlessness. The result: a nation with a sucking chest wound, whirling around the drain en route to political pandemonium.

DillyDilly Fri, 03/23/2018 - 14:28 Permalink

Look on the bright side Kuntsler ~ You'll keep selling doom porn articles & newsletters so you can keep playing the $2 exacta & daily double tickets at the Saratoga Springs late summer meet.

Maybe you'll hit the pick 6

FreeShitter -> DillyDilly Fri, 03/23/2018 - 14:29 Permalink

It must be friday, cuz here comes a Kuntser piece.

[Feb 11, 2018] Justice department's No 3 official to take Walmart's top legal job

Feb 11, 2018 | www.theguardian.com

Revolving door in action

Brand attracted interest because of her potential to assume a key role in the Trump-Russia investigation. The official overseeing the special counsel Robert Mueller's investigation, the deputy attorney general Rod Rosenstein, has been repeatedly criticized by Trump. If Rosenstein had been fired or quit, oversight would have fallen to Brand. That job would now fall to the solicitor general, Noel Francisco.

"She felt this was an opportunity she couldn't turn down," her friend and former colleague Jamie Gorelick said. Walmart sought Brand to be head of global corporate governance at the retail giant, a position Gorelick said has legal and policy responsibilities that will cater to her strengths.
"It really seems to have her name on it," Gorelick said.

[Feb 07, 2018] Epochal Stock Market Flash Crash Reconnects Stocks and Bonds, Portends End of Fake Recovery

Notable quotes:
"... Yes, fundamentally, a lot of flaws are built in to how the markets operate in a "financially engineered" manner, but it blew for the simple reason that interest rates nudged upward at the end of January as soon as the Federal Reserve got serious about its quantitative squeezing. That strongly supports my central thesis of this blog that this economy, built on caverns of debt and riddled with market design flaws, is too fragile to absorb any reduction in the Fed's balance sheet. ..."
"... Carl Icahn says he expects stock markets to bounce back after the massive sell-off Friday and Monday, while warning that current market volatility is a harbinger of things to come . The volatility of recent weeks is cause for concern, Icahn said, adding that he doesn't remember a two-week period as turbulent as this one. He said the problem is that too much money is flowing into the index funds, where investors don't know what they're actually investing in. ..."
"... "Passive investing is the bubble right now, and that's a great danger," he said. Eventually, that will implode and could lead to a crisis bigger than in 2009, he added. ..."
"... Risk parity funds. Volatility-targeting programs. Statistical arbitrage. Sometimes the U.S. stock market seems like a giant science project, one that can quickly turn hazardous for its human inhabitants. ..."
"... You didn't need an engineering degree to tell something was amiss Monday. While it's impossible to say for sure what was at work when the Dow Jones Industrial Average fell as much as 1,597 points, the worst part of the downdraft felt to many like the machines run amok. For 15 harrowing minutes just after 3 p.m. in New York a deluge of sell orders came so fast that it seemed like nothing breathing could've been responsible. ..."
"... The result was a gut check of epic proportion for investors . "We are proactively calling up our clients and discussing that a 1,600-point intraday drop is due more to algorithms and high-frequency quant trading than macro events or humans running swiftly to the nearest fire exit ." ..."
"... "What was frightening was the speed at which the market tanked," said Walter "Bucky" Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management . " The drop in the morning was caused by humans, but the free-fall in the afternoon was caused by the machines. It brought back the same reaction that we had in 2010, which was 'What the heck is going on here?" ..."
"... Particular suspicion landed on trading programs tied to volatility , mathematical measures of which exploded as the day progressed . ( Newsmax ) ..."
"... The machines that now run the stock market are out of control. They do the bidding for us, but their algorithms have been designed by college sprouts who have never seen a falling market. ..."
"... Most dangerous of all, they're self-programming. They rewrite their own algorithms based on their successes and failures so that even their programmers no longer know why the machines are doing what they are doing. Even if one group of programmers does know exactly what its own algorithms are doing, they certainly don't know what is in all the others and, therefore, how they might interact to self-reinforce wrong actions. ..."
"... They don't exist in one room where you can pull a circuit breaker and disconnect them from the market. They exist in office buildings by the hundreds of thousands all over the world. Even the decisions and bids that are made by humans doing their own thinking are placed through the machines, so there is usually no way to know if a single bid coming through is by a human or is machine generated. ..."
"... The fifteen-minute, 900-point drop on Friday was a mere foreshock of that, too. We've already had a few flash-crash foreshocks that none of the experts can understand, but it hasn't slowed us from moving deeper and deeper into the machines' labyrinth. Nor have we even begun to try to work out some of the design flaws that caused those initial flash crashes. ..."
"... If the market technowizards have actually managed to get all the robo-traders unplugged or quickly reprogrammed, maybe the slide will stabilize before it becomes an all-out crash. They attempted that with some success today by stopping all volatility trading before the market opened, which I'll get into below. But, even if they've gotten the ill-programmed robots off to the side or have fixed their sizzling little heads, the market that opens tomorrow will be a whole new market -- no longer one that hyperventilates on the fumes of hope, but one that has relearned how to fear risk. ..."
Feb 07, 2018 | www.zerohedge.com

Yes, fundamentally, a lot of flaws are built in to how the markets operate in a "financially engineered" manner, but it blew for the simple reason that interest rates nudged upward at the end of January as soon as the Federal Reserve got serious about its quantitative squeezing. That strongly supports my central thesis of this blog that this economy, built on caverns of debt and riddled with market design flaws, is too fragile to absorb any reduction in the Fed's balance sheet.

And that's why I was able to time when the first crash would be likely to hit. It's simple: When is the Fed scheduled to start getting serious in its Great Unwind? January. What week did they actually do it in? The last week of January. Kaboom!

The Fed cannot ever unwind. It will try because it believes it can, but kaboom! We'll find ways to recover from this first shock over what happens to interest when they stop rolling over government debt. The government will adapt. It will find other buyers. But the cost will go up. And the kabooms will keep happening. I've always maintained that the failure of the recovery is baked in by design and will show when the Fed's artificial life support is actually withdrawn. (Whether it is there by intentional design or design flaw, I'll leave up to one's conspiratorial imagination, as it doesn't matter to me; both get you to the same place: kaboom!)

Some bigger voices than mine are saying the same thing:

Carl Icahn says he expects stock markets to bounce back after the massive sell-off Friday and Monday, while warning that current market volatility is a harbinger of things to come . The volatility of recent weeks is cause for concern, Icahn said, adding that he doesn't remember a two-week period as turbulent as this one. He said the problem is that too much money is flowing into the index funds, where investors don't know what they're actually investing in.

"Passive investing is the bubble right now, and that's a great danger," he said. Eventually, that will implode and could lead to a crisis bigger than in 2009, he added.

"When you start using the market as a casino, that's a huge mistake," Icahn said. (" Carl Icahn Says Market Turn Is 'Rumbling' of Earthquake Ahead ")

The fact that the market has completed its de-evolution into a casino, rather than a place to buy ownership in a company, is part of the rickety framework I've described for our economy -- part of what makes it easy to shove over with a nudge in interest because the entire economy has been made utterly dependent on low interest.

... ... ...

The mechanized meltdown -- machines rule and drool

"Dow Drops 900 Points in 10 Minutes as Machines Run Amok on Wall Street"

Risk parity funds. Volatility-targeting programs. Statistical arbitrage. Sometimes the U.S. stock market seems like a giant science project, one that can quickly turn hazardous for its human inhabitants.

You didn't need an engineering degree to tell something was amiss Monday. While it's impossible to say for sure what was at work when the Dow Jones Industrial Average fell as much as 1,597 points, the worst part of the downdraft felt to many like the machines run amok. For 15 harrowing minutes just after 3 p.m. in New York a deluge of sell orders came so fast that it seemed like nothing breathing could've been responsible.

The result was a gut check of epic proportion for investors . "We are proactively calling up our clients and discussing that a 1,600-point intraday drop is due more to algorithms and high-frequency quant trading than macro events or humans running swiftly to the nearest fire exit ."

"What was frightening was the speed at which the market tanked," said Walter "Bucky" Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management . " The drop in the morning was caused by humans, but the free-fall in the afternoon was caused by the machines. It brought back the same reaction that we had in 2010, which was 'What the heck is going on here?"

It may never be clear what accelerated the tumble -- people still aren't sure what caused the flash crash on May 6, 2010. Unlike then, most of the theorizing about today's events centered not on the market's plumbing or infrastructure, but on the automated quant strategies that gained popularity with the advent of electronic markets last decade. Particular suspicion landed on trading programs tied to volatility , mathematical measures of which exploded as the day progressed . ( Newsmax )

There is some basis for saying, "this looks like a technically driven selloff," but this is another problem for which there is no solution, and one I've written about here in the past. No solution because they cannot even identify the problem back in 2010! You cannot solve what you cannot identify.

The machines that now run the stock market are out of control. They do the bidding for us, but their algorithms have been designed by college sprouts who have never seen a falling market. They try to trick each other, and try to bid the market up. They're an accelerant. Most dangerous of all, they're self-programming. They rewrite their own algorithms based on their successes and failures so that even their programmers no longer know why the machines are doing what they are doing. Even if one group of programmers does know exactly what its own algorithms are doing, they certainly don't know what is in all the others and, therefore, how they might interact to self-reinforce wrong actions.

They don't exist in one room where you can pull a circuit breaker and disconnect them from the market. They exist in office buildings by the hundreds of thousands all over the world. Even the decisions and bids that are made by humans doing their own thinking are placed through the machines, so there is usually no way to know if a single bid coming through is by a human or is machine generated. Therefore, there is not really any way to shut the machines entirely off if they get out of control because their disjointed, convoluted, false-bidding, intentionally tricking, interacting and over-reacting zillions of intercommunications per second all around the world add up to a sum that is far more evil than its innumerable mischievously and deviously conceived parts. The system is built from the core out factious parts intended to trick each other upward, but what happens if this amalgamated beast starts tricking itself downward? Who has the authority or the controls to stop the collapse in the microseconds in which it may originate and climax?

So, FUNDAMENTALLY, the market system, itself, is deeply and inexorably flawed by intentional human design. It wasn't designed to destroy the world. It was merely designed with its own sinful machinations because of the flaws of its designers. The whole beastly thing is of a corrupted nature because of all the people who hoped to use their machines to out-game all the other people's machines. It is a network of sparks and tricks. However, because it can multiply its devilish intentions millions of times per nanosecond, we have no idea how much market carnage it might create if all the algos one day just happen to line up in the wrong direction (wrong direction for humans, anyway).

The fifteen-minute, 900-point drop on Friday was a mere foreshock of that, too. We've already had a few flash-crash foreshocks that none of the experts can understand, but it hasn't slowed us from moving deeper and deeper into the machines' labyrinth. Nor have we even begun to try to work out some of the design flaws that caused those initial flash crashes.

Other problems with the machines emerged when trading became so frantic that the sheer volume was frying the brains of many computer networks, causing the financial services of several trading companies to go offline.

Investment firms T. Rowe Price Group Inc. and Vanguard Group apologized to customers for sporadic outages on their websites during the Dow industrials' 1600-point downturn . Online brokerages TD Ameritrade and Charles Schwab also experienced issues. ( Newsmax )

The computers couldn't handle all the other computers.

If the market technowizards have actually managed to get all the robo-traders unplugged or quickly reprogrammed, maybe the slide will stabilize before it becomes an all-out crash. They attempted that with some success today by stopping all volatility trading before the market opened, which I'll get into below. But, even if they've gotten the ill-programmed robots off to the side or have fixed their sizzling little heads, the market that opens tomorrow will be a whole new market -- no longer one that hyperventilates on the fumes of hope, but one that has relearned how to fear risk.


Iconoclast421 Feb 7, 2018 1:26 PM Permalink

All this talk about crashes when the DOW is still up YTD...

Eman Laer -> Iconoclast421 Feb 7, 2018 2:51 PM Permalink

Right. Who would find it interesting or useful to discuss a market crash because the market is up for the year? *wipes drool*

Son of Loki Feb 7, 2018 1:36 PM Permalink

At some point when things actually do correct (or crash as some call it), bond yields will soar.

taketheredpill Feb 7, 2018 2:11 PM Permalink

me feelings on how this ends....

So far haven't seen anything that makes me expect US 10's to break the top of the 30-year yield downtrend channel (driven by 30+ dis-inflationary years of borrowing growth from the future).

So if no break-out on US 10s, then what happened in previous years when US 10s touched the top of the channel?

Equities break down, slowly at first then OMG faster. Bonds rally.

The Fed makes noises about cutting rates but markets ignore.

Fed cuts rates and markets ignore. US 10s test previous yield lows again.

Fed goes "all in" with Helicopter money. End of $ and US Treasury market.

Bye!

Bemused Observer Feb 7, 2018 2:48 PM Permalink

Everything will hit the wall. Try to 'time' it if you must, but just be aware that those last few yards come up on you real quick...that's why people always get nailed by these events. (I'm always amused by the ones who seem to think that they can and will time it right...do they really believe all the folks who got nailed in the past were just stupid?...What kind of over-inflated ego would even entertain that idea?)

If it WERE possible to do that, there would BE no downturns, ever. These things do the damage they do because you CAN'T time them. Predict, yes, but not time.

Haitian Snackout Feb 7, 2018 3:16 PM Permalink

Regardless of what marky is doing, Dave's quite correct. The longtime flooring of interest rates has created a world dependent on it continuing. Maybe if it had something more going for it things would be different. The unwinding of the fed balance sheet was always just a theory. No one knew if or when it would happen. Or more important if it was even possible. But the car has no reverse gear and many people have spoken about this. That we will only hear a grinding noise if they try to shift into reverse. For myself, I'm certainly no expert, but I know enough about the housing market to know that somewhere around 2.80 on the ten year the increase will certainly be felt. And that once margin interest rates reaches parity with dividend yields, or sooner, that one goes pear shaped as well. The engine that has propelled housing prices to several times their real value ( granted, not everywhere ) is now in reverse. And that, as Dave has noted, is only the tip of the iceberg of total debt. And even if they reverse course, the debt saturation is so widespread the patient would only barely limp forward from here. There also are likely pension funds and others in the ICU. We won't know about everything right away.

Wild tree -> Haitian Snackout Feb 7, 2018 4:47 PM Permalink

Yes HS, Dave called it out correctly IMHO. Here is what he wrote in three sentences that is the sum of the whole article, and why the seeds of our destruction as a country, and world have been fervently watered since 2008.

"No, the fundamentals do not provide reason for optimism. They provide reason for grave concern. As I've been writing all along, the greatest fundamental that is exerting pressure right now is the massive debt that the entire global economy is built on."

The steam train is on the track, clickety-clack, clickety-clack,

Picking up speed as it heads down the mountain, clickety-clack, clickety-clack.

People are hanging on for dear life, clickety-clack, clickety-clack,

Won't matter none when the train runs out of track, clickety-clack, clickety-clack.

[Feb 07, 2018] Is the Stock Market Loaded for Bear by Dambisa Moyo

She completely missed the importance of automatic trading algorithms.
Notable quotes:
"... Winner Take All ..."
"... How the West Was Lost ..."
Feb 07, 2018 | www.project-syndicate.org

Market participants could easily be forgiven for their early-year euphoria. After a solid 2017, key macroeconomic data – on unemployment, inflation, and consumer and business sentiment – as well as GDP forecasts all indicated that strong growth would continue in 2018.

The result – in the United States and across most major economies – has been a rare moment of optimism in the context of the last decade. For starters, the macro data are positively synchronized and inflation remains tame. Moreover, the International Monetary Fund's recent upward revision of global growth data came at precisely the point in the cycle when the economy should be showing signs of slowing.

Moreover, stock markets' record highs are no longer relying so much on loose monetary policy for support. Bullishness is underpinned by evidence of a notable uptick in capital investment. In the US, gross domestic private investment rose 5.1% year on year in the fourth quarter of 2017 and is nearly 90% higher than at the trough of the Great Recession, in the third quarter of 2009.

This is emblematic of a deeper resurgence in corporate spending – as witnessed in durable goods orders. New orders for US manufactured durable goods beat expectations, climbing 2.9% month on month to December 2017 and 1.7% in November.

Other data tell a similar story. In 2017, the US Federal Reserve's Industrial Production and Capacity Utilization index recorded its largest calendar year gain since 2010, increasing 3.6%. In addition, US President Donald Trump's reiteration of his pledge to seek $1.5 trillion in spending on infrastructure and public capital programs will further bolster market sentiment.

All of this bullishness will continue to stand in stark contrast to warnings by many world leaders. In just the last few weeks, German Chancellor Angela Merkel cautioned that the current international order is under threat. French President Emmanuel Macron noted that globalization is in the midst of a major crisis, and Canadian Prime Minister Justin Trudeau has stated that the unrest we see around the world is palpable and "isn't going away."

Whether or not the current correction reflects their fears, the politicians ultimately could be proved right. For one thing, geopolitical risk remains considerable. Bridgewater Associates' Developed World Populism index surged to its highest point since the 1930s in 2017, factoring in populist movements in the US, the United Kingdom, Spain, France and Italy. So long as populism lingers as a political threat, the risk of reactionary protectionist trade policies and higher capital controls will remain heightened, and this could derail economic growth.

Meanwhile the market is mispricing perennial structural challenges, in particular mounting and unsustainable global debt and a dim fiscal outlook, particularly in the US, where the price of this recovery is a growing deficit. In other words, short-term economic gain is being supported by policies that threaten to sink the economy in the longer term.

The Congressional Budget Office, for example, has forecast that the US deficit is on course to triple over the next 30 years, from 2.9% of GDP in 2017 to 9.8% in 2047, "The prospect of such large and growing debt," the CBO cautioned, "poses substantial risks for the nation and presents policymakers with significant challenges."

The schism in outlook between business and political leaders is largely rooted in different time horizons. For the most part, CEOs, hemmed in by the short termism of stock markets, are focused on the next 12 months, whereas politicians are focusing on a more medium-term outlook.

As 2018 progresses, business leaders and market participants should – and undoubtedly will – bear in mind that we are moving ever closer to the date when payment for today's recovery will fall due. The capital market gyrations of recent days suggest that awareness of that inevitable reckoning is already beginning to dawn.

Dambisa Moyo, an economist and author, sits on the board of directors of a number of global corporations. She is the author of Dead Aid , Winner Take All , and How the West Was Lost .

[Feb 07, 2018] Steve Keen Why Did It Take So Long For This Crash To Happen

Might be harbinger of things to come. It's 12 years since the financial crash of 2007. And neoliberalism can't exist without stock market crashes.
Notable quotes:
"... Everyone who's asking "why did the stock market crash Monday?" is asking the wrong question; the real question, Keen exclaims, is "why did it take so long for this crash to happen? " ..."
Feb 07, 2018 | www.zerohedge.com
Originally written at RT, outspoken Aussie economist Steve Keen points out

Everyone who's asking "why did the stock market crash Monday?" is asking the wrong question; the real question, Keen exclaims, is "why did it take so long for this crash to happen? "

The crash itself was significant - Donald Trump's favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index - and so according to conventional economics, it should almost never happen.

Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much.

Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different.

It's like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be "up"?) had regarded Monday's level and the previous day's tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been.

More To Come?

There is only one time that it's been higher: during the DotCom Bubble, when Robert Shiller's "cyclically adjusted price to earnings" ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron). The S&P500 fell more than 11 percent that day, so Monday's fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50 percent from today's level, they'd still be twice as expensive as they have been, on average, for the last 140 years.

After the 2000 crash, standard market dynamics led to stocks falling by 50 percent over the following two years, until the rise of the Subprime Bubble pushed them up about 25 percent (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50 percent, from 28 times earnings to 14 times.

This was when central banks thought The End of the World Is Nigh, and that they'd be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings.

Safe Havens

That valuation level, before central banks (staffed and run by people with PhDs in mainstream economics) decided that they knew how to manage capitalism, is where the market really should be. It implies a dividend yield of about six percent in real terms, which is about twice what you used to get on a safe asset like government bonds -- which are safe, not because the governments and the politicians and the bureaucrats that run them are saints, but because a government issuing bonds in its own currency can always pay whatever interest level it promises. There's no risk that it can't pay, and it can't go bankrupt, whereas a company might not pay dividends, and it can go bankrupt.

Now shares are trading at a valuation that implies a three percent return, as if they're as safe as government bonds issued by a government which owns the bank that pays interest on those bonds. That's nonsense.

And it's a nonsense for which, ironically, central banks are responsible. The smooth rise in stock market prices which led to the levels that preceded Monday's crash began when central banks decided to rescue the economy by "Quantitative Easing (QE)." They promised to do "whatever it takes" to drive shares up from the entirely reasonable values they reached in late 2009, and did so by buying huge amounts of government bonds back from private banks and other financial institutions (pension funds, insurance companies, etc.). In the USA's case, this amounted to $1 trillion per year -- equal to about seven percent of America's annual output of goods and services (GDP or "gross domestic product"). The Bank of England brought about £200 billion worth, which was an even larger percentage of GDP.

With central banks buying that volume of bonds, private financial institutions found themselves awash with money, and spent it buying other assets to get yields - which meant that QE drove up share prices as banks, pension funds and the like bought them with money created by QE.

Blind Oversight

So this is the first central bank-created stock market bubble in history, and central banks have just had the first stock market crash where the blame is entirely theirs.

Were this a standard, private hysteria and leverage driven bubble, we could well be facing a further 50 percent fall in the market -- like what happened after the DotCom crash. This would bring shares back to the long-term average of 17 times earnings.

Instead, what I believe will happen is that central banks, having recently announced that they intend to end QE, will restart it and try to drive shares back to what think are "normal" levels, but which are at least twice what they should be.

As I said in my last book 'Can we avoid another financial crisis ?' QE was like Faust's pact with the Devil: once you signed the contract, you could never get out of it. They'll turn on their infinite money printing machine, buy bonds off financial institutions once more, and give them liquidity to pour back into the markets, pushing them once more to levels that they should never rightly have reached.

This, of course, will help to make the rich richer and the poor poorer by further increasing inequality. Which is arguably the biggest social problem of the modern era. So, as well as being incompetent economists these mainstreamers are today's Marie Antoinette. Let them eat cake, indeed.


DennisR Feb 7, 2018 6:57 PM Permalink

What crash? Every 3% dip is met with money printing, secret QE, etc. You can't expect to have a free market in 2018...

Arrowflinger Feb 7, 2018 6:59 PM Permalink

It is too low on the scale to be a "crash"

Yet.

Dilluminati Feb 7, 2018 7:01 PM Permalink

http://quotes.wsj.com/index/DJIA

What crash?

[Jan 30, 2018] Perfect worker on the cheap by Dan Crawford

Jan 29, 2018 | angrybearblog.com

Via Bloomberg Obsession for the Perfect Worker Fading in Tight U.S. Job Market points to an issue in hiring that has been discussed here at AB:

This is a problem because, at 4.1 percent last month, U.S. unemployment is at the lowest level since 2000 and companies from Dallas to Denver are struggling to find the right workers. In some cases this is constraining growth, the Federal Reserve reported last week.

Corporate America's search for an exact match is "the number-one problem with hiring in our country," said Daniel Morgan, a recruiter in Birmingham, Alabama, who owns an Express Employment Professionals franchise. "Most companies get caught up on precise experience to a specific job," he said, adding: "Companies fail to see a person for their abilities and transferable skills."

U.S. employers got used to abundant and cheap labor following the 2007-2009 recession. Unemployment peaked at 10 percent in October 2009, and didn't return to the lows of the previous business cycle until last year. Firms still remain reluctant to boost pay or train employees with less-than-perfect credentials, though recruiters say that may have to change amid a jobless rate that's set to dip further.


Bill H , January 29, 2018 9:53 am

The way the article is cut off with the wage gains chart makes it seem that the article is on the Dean Baker theme of "pay higher wages and they will come," in which he argues that there is no shortage because you can hire workers away from your competitor, thereby merely moving the deficit from one place to another without eliminating it and unintentionally suggesting that there is actually is a shortage after all.

Immediately after that chart, however, the article segues into a pretty intelligent discussion of employers learning to ascertain "how can your experience be used in my application," making it unclear why the wage chart is even there.

The "lack of trained workers" complaint has long annoyed me, with its implication that it is the public sector's responsibility to train workers for the private sector. Why? If a company needs welders, why should that company not train its own welders?

J.Goodwin , January 29, 2018 11:39 am

Last week we were reviewing a job description we were preparing for a role in Canada. It was basically a super senior description, they wanted everything, specific experience, higher education, what amounts to a black belt project management certification but also accounting and finance background.

At the bottom it says 5 years experience.

I almost fell off my chair. That's an indicator of the pay band they were trying to fill at (let's say 3, and the description was written like a 10-15 years 6).

I tried to explain it to the person who wrote it and I said hey if we put this out there, we will get no hits. There is no one with this experience who will take what you are offering. I'm afraid we're going to end up with another home country expat instead. They're often not up the same standard you could get with a local if you reasonably scoped the job and gave a fair offer.

I think companies have forgotten how to compete for employees, and the recruiters are completely out of touch. Or maybe they are aware of the conditions and HR just won't sign on to fair value.

Mona Williams , January 29, 2018 1:09 pm

Before I retired 12 years ago, on-the-job training was much more common. Borders Books (remember them?) trained me for a week with pay for just a temporary Christmas-season job. Employers have gotten spoiled, and I hope they will figure this out. Some of the training programs I hear about just make me sigh. Nobody can afford to be trained while not being paid.

axt113 , January 29, 2018 1:26 pm

My Wife works as a junior recruiter, the problem she says is with the employers, they want a particular set of traits, and if there is even a slight deviation they balk

She says that one recent employer she worked with wanted so many particulars for not enough pay that even well experienced and well educated candidates she could find were either unwilling to accept the offer, or were missing one or two traits that made them unacceptable to the company.

rps , January 29, 2018 3:58 pm

This is exciting news for many of us who've been waiting for the pendulum to swing in favor of potential employees after a decade of reading employers help wanted Santa wish list criteria for a minimum wage job of 40+ hours. I'd argue the unemployment rate is not 4.1%; rather, I know of many intelligent/educated/experienced versatile people who've been cut out of the job market and/or chose not to work for breadcrumbs.

HR's 6 second resume review rule of potential candidates was a massive failure by eliminating candidates whose skills, experience and critical thinking abilities could've cultivated innovation across many disciplines. Instead companies looked for drone replacement at slave wages. HR's narrow candidate searches often focused on resume typos or perceived grammatical errors (highly unlikely HR recruiters have an English Ph.D), thus trashing the resume. Perhaps, HR will be refitted with critical thinking people who see a candidate's potential beyond the forgotten comma or period.

[Dec 15, 2017] Neoliberalism undermines workers health not only via the financial consequences of un/under employment and low wages, but also through chronic exposure to stress due to insecurity

Neoliberalism as "Die-now economics." "Embodiment into lower class" or "the representation as a member the lower class" if often fatal and upper mobility mobility is artificially limited (despite all MSM hype it is lower then in Europe). So just being a member of lower class noticeably and negatively affects your life expectancy and other social metrics. Job insecurity is the hazard reserved for lower and lower middle classes destructivly effect both physical and mental health. Too much stress is not good for humans. Neoliberalism with its manta of competition uber alles and atomization of the workforce is a real killer. also the fact that such article was published and the comments below is a clear sign that the days of neoliberalism are numbered. It should go.
Notable quotes:
"... In our new book , we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies. Focusing on the social determinants of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives, while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity, stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. ..."
"... Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment, inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in biologically measurable ways . ..."
"... Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction." In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children, families, household work ). So, even if class in our political economy is the driver, it's not everything. ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
"... Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve." ..."
"... As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we" are not possible because we have all become "I". ..."
"... Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is at once belittling (it's all about f-e-e-e-lings ..."
"... "we have measurable health outcomes from political choices" So True!!! ..."
Dec 12, 2017 | www.nakedcapitalism.com

...Neoliberal epidemics are particular pathways of embodiment. From Ted Schrecker and Clare Bambra in The Conversation :

In our new book , we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies. Focusing on the social determinants of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives, while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity, stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. They are epidemics because they are observable on such an international scale and have been transmitted so quickly across time and space that if they were biological contagions they would be seen as of epidemic proportions.

(The Case-Deaton study provides an obvious fifth: Deaths of despair. There are doubtless others.) Case in point for one of the unluckier members of the 90%:

On the morning of 25 August 2014 a young New Jersey woman, Maria Fernandes, died from inhaling gasoline fumes as she slept in her 13-year-old car. She often slept in the car while shuttling between her three, low-wage jobs in food service; she kept a can of gasoline in the car because she often slept with the engine running, and was worried about running out of gasoline. Apparently, the can accidentally tipped over and the vapours from spilled gasoline cost her life. Ms Fernandes was one of the more obvious casualties of the zero-hours culture of stress and insecurity that pervades the contemporary labour market under neoliberalism.

And Schrecker and Bambra conclude:

Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment, inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in biologically measurable ways .

... ... ...

Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction." In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children, families, household work ). So, even if class in our political economy is the driver, it's not everything.

nonclassical , December 11, 2017 at 8:30 pm

L.S. reminiscent of Ernst Becker's, "The Structure of Evil" – "Escape from Evil"? (..not to indicate good vs. evil dichotomy) A great amount of perspective must be agreed upon to achieve "change" intoned. Divide and conquer are complicit, as noted .otherwise (and as indicated by U.S. economic history) change arrives only when all have lost all and can therefore agree begin again.

There is however, Naomi Klein perspective, "Shock Doctrine", whereby influence contributes to destabilization, plan in hand leading to agenda driven ("neoliberal"=market fundamentalism) outcome, not at all spontaneous in nature:

"Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning.

Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve."

Amfortas the Hippie , December 11, 2017 at 4:20 pm

Well done, as usual.

On Case-Deason: Sounds like home. I keep the scanner on(local news) ems and fire only since 2006(sheriff got a homeland security grant). The incidence of suicide, overdose and "intoxication psychosis" are markedly increased in the last 10+ years out here in the wilderness(5K folks in whole county, last I looked). Our local economy went into near depression after the late 90's farm bill killed the peanut program then 911 meant no hunting season that year(and it's been noticeably less busy ever since) then drought and the real estate crash(we had 30 some realtors at peak..old family land being sold off, mostly). So the local Bourgeoisie have had less money to spend, which "trickles down" onto the rest of us.:less construction, less eating out even at the cheap places, less buying of gas, and on and on means fewer employees are needed, thus fewer jobs. To boot, there is a habit among many employers out here of not paying attention to labor laws(it is Texas ) the last minwage rise took 2 years to filter out here, and one must scrutinize one's pay stub to ensure that the boss isn't getting squirrelly with overtime and witholding.
Geography plays into all this, too 100 miles to any largish city.

... ... ...

Rosario , December 11, 2017 at 10:55 pm

I'm not well versed in Foucault or Lacan but I've read some of both and in reading between the lines of their writing (the phantom philosophy?) I saw a very different message than that often delivered by post-modern theorists.

As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we" are not possible because we have all become "I".

Considering what both their philosophies claimed, if identity is a lie, and the subject is always generated relative to the other, then how the hell can there be any security or well being in self-actualization? It is like trying to hit a target that does not exist.

All potentially oppressive cultural categorizations are examples of this (black, latino, gay, trans, etc.). If the identity is a moving target, both to the oppressor and the oppressed, then how can it ever be a singular source of political action? You can't hit what isn't there. This is not to say that these groups (in whatever determined category) are not oppressed, just that formulating political action based strictly on the identity (often as an essential category) is impossible because it does not actually exist materially. It is an amalgamation of subjects who's subjectivity is always relative to some other whether ally or oppressor. Only the manifestations of oppression on bodies (as brought up in Lambert's post) can be utilized as metrics for political action.

... ... ...

Lambert Strether Post author , December 11, 2017 at 11:20 pm

I thought of a couple of other advantages of the "embodiment" paradigm:

Better Framing . Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is at once belittling (it's all about f-e-e-e-lings *) and disempowering (solutions are individual, like therapy or drugs). Embodiment by contrast insists that neoliberalism (the neoliberal labor market (class warfare)) has real, material, physiological effects that can be measured and tracked, as with any epidemic.

... ... ...

oaf , December 12, 2017 at 7:11 am

"we have measurable health outcomes from political choices" So True!!!

Thank you for posting this.

[Dec 13, 2017] Stress of long-term unemployment takes a toll on thousands of Jerseyans who are out of work by Leslie Kwoh

Notable quotes:
"... Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147. ..."
Jun 13, 2010 | www.nj.com

At 5:30 every morning, Tony Gwiazdowski rolls out of bed, brews a pot of coffee and carefully arranges his laptop, cell phone and notepad like silverware across the kitchen table.

And then he waits.

Gwiazdowski, 57, has been waiting for 16 months. Since losing his job as a transportation sales manager in February 2009, he wakes each morning to the sobering reminder that, yes, he is still unemployed. So he pushes aside the fatigue, throws on some clothes and sends out another flurry of resumes and cheery cover letters.

But most days go by without a single phone call. And around sundown, when he hears his neighbors returning home from work, Gwiazdowski -- the former mayor of Hillsborough -- can't help but allow himself one tiny sigh of resignation.

"You sit there and you wonder, 'What am I doing wrong?'" said Gwiazdowski, who finds companionship in his 2-year-old golden retriever, Charlie, until his wife returns from work.

"The worst moment is at the end of the day when it's 4:30 and you did everything you could, and the phone hasn't rung, the e-mails haven't come through."

Gwiazdowski is one of a growing number of chronically unemployed workers in New Jersey and across the country who are struggling to get through what is becoming one long, jobless nightmare -- even as the rest of the economy has begun to show signs of recovery.

Nationwide, 46 percent of the unemployed -- 6.7 million Americans -- have been without work for at least half a year, by far the highest percentage recorded since the U.S. Labor Department began tracking the data in 1948.

In New Jersey, nearly 40 percent of the 416,000 unemployed workers last year fit that profile, up from about 20 percent in previous years, according to the department, which provides only annual breakdowns for individual states. Most of them were unemployed for more than a year.

But the repercussions of chronic unemployment go beyond the loss of a paycheck or the realization that one might never find the same kind of job again. For many, the sinking feeling of joblessness -- with no end in sight -- can take a psychological toll, experts say.

Across the state, mental health crisis units saw a 20 percent increase in demand last year as more residents reported suffering from unemployment-related stress, according to the New Jersey Association of Mental Health Agencies.

"The longer the unemployment continues, the more impact it will have on their personal lives and mental health," said Shauna Moses, the association's associate executive director. "There's stress in the marriage, with the kids, other family members, with friends."

And while a few continue to cling to optimism, even the toughest admit there are moments of despair: Fear of never finding work, envy of employed friends and embarassment at having to tell acquaintances that, nope, still no luck.

"When they say, 'Hi Mayor,' I don't tell a lot of people I'm out of work -- I say I'm semi-retired," said Gwiazdowski, who maxed out on unemployment benefits several months ago.

"They might think, 'Gee, what's wrong with him? Why can't he get a job?' It's a long story and maybe people really don't care and now they want to get away from you."


SECOND TIME AROUND

Lynn Kafalas has been there before, too. After losing her computer training job in 2000, the East Hanover resident took four agonizing years to find new work -- by then, she had refashioned herself into a web designer.

That not-too-distant experience is why Kafalas, 52, who was laid off again eight months ago, grows uneasier with each passing day. Already, some of her old demons have returned, like loneliness, self-doubt and, worst of all, insomnia. At night, her mind races to dissect the latest interview: What went wrong? What else should she be doing? And why won't even Barnes & Noble hire her?

"It's like putting a stopper on my life -- I can't move on," said Kafalas, who has given up karate lessons, vacations and regular outings with friends. "Everything is about the interviews."

And while most of her friends have been supportive, a few have hinted to her that she is doing something wrong, or not doing enough. The remarks always hit Kafalas with a pang.

In a recent study, researchers at Rutgers University found that the chronically unemployed are prone to high levels of stress, anxiety, depression, loneliness and even substance abuse, which take a toll on their self-esteem and personal relationships.

"They're the forgotten group," said Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers, and a co-author of the report. "And the longer you are unemployed, the less likely you are to get a job."

Of the 900 unemployed workers first interviewed last August for the study, only one in 10 landed full-time work by March of this year, and only half of those lucky few expressed satisfaction with their new jobs. Another one in 10 simply gave up searching.

Among those who were still unemployed, many struggled to make ends meet by borrowing from friends or family, turning to government food stamps and forgoing health care, according to the study.

More than half said they avoided all social contact, while slightly less than half said they had lost touch with close friends. Six in 10 said they had problems sleeping.

Kafalas says she deals with her chronic insomnia by hitting the gym for two hours almost every evening, lifting weights and pounding the treadmill until she feels tired enough to fall asleep.

"Sometimes I forget what day it is. Is it Tuesday? And then I'll think of what TV show ran the night before," she said. "Waiting is the toughest part."


AGE A FACTOR

Generally, the likelihood of long-term unemployment increases with age, experts say. A report by the National Employment Law Project this month found that nearly half of those who were unemployed for six months or longer were at least 45 years old. Those between 16 and 24 made up just 14 percent.

Tell that to Adam Blank, 24, who has been living with his girlfriend and her parents at their Martinsville home since losing his sales job at Best Buy a year and half ago.

Blank, who graduated from Rutgers with a major in communications, says he feels like a burden sometimes, especially since his girlfriend, Tracy Rosen, 24, works full-time at a local nonprofit. He shows her family gratitude with small chores, like taking out the garbage, washing dishes, sweeping floors and doing laundry.

Still, he often feels inadequate.

"All I'm doing on an almost daily basis is sitting around the house trying to keep myself from going stir-crazy," said Blank, who dreams of starting a social media company.

When he is feeling particularly low, Blank said he turns to a tactic employed by prisoners of war in Vietnam: "They used to build dream houses in their head to help keep their sanity. It's really just imagining a place I can call my own."


LESSONS LEARNED

Meanwhile, Gwiazdowski, ever the optimist, says unemployment has taught him a few things.

He has learned, for example, how to quickly assess an interviewer's age and play up or down his work experience accordingly -- he doesn't want to appear "threatening" to a potential employer who is younger. He has learned that by occasionally deleting and reuploading his resume to job sites, his entry appears fresh.

"It's almost like a game," he said, laughing. "You are desperate, but you can't show it."

But there are days when he just can't find any humor in his predicament -- like when he finishes a great interview but receives no offer, or when he hears a fellow job seeker finally found work and feels a slight twinge of jealousy.

"That's what I'm missing -- putting on that shirt and tie in the morning and going to work," he said.

The memory of getting dressed for work is still so vivid, Gwiazdowski says, that he has to believe another job is just around the corner.

"You always have to hope that that morning when you get up, it's going to be the day," he said.

"Today is going to be the day that something is going to happen."

Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147.

DrBuzzard Jun 13, 2010

I collect from the state of iowa, was on tier I and when the gov't recessed without passing extension, iowa stopped paying tier I claims that were already open, i was scheduled to be on tier I until july 15th, and its gone now, as a surprise, when i tried to claim my week this week i was notified. SURPRISE, talk about stress.

berganliz Jun 13, 2010

This is terrible....just wait until RIF'd teachers hit the unemployment offices....but then, this is what NJ wanted...fired teachers who are to blame for the worst recession our country has seen in 150 years...thanks GWB.....thanks Donald Rumsfeld......thanks Dick Cheney....thanks Karl "Miss Piggy" Rove...and thank you Mr. Big Boy himself...Gov Krispy Kreame!

rp121 Jun 13, 2010

For readers who care about this nation's unemployed- Call your Senators to pass HR 4213, the "Extenders" bill. Unfortunately, it does not add UI benefits weeks, however it DOES continue the emergency federal tiers of UI. If it does not pass this week many of us are cut off at 26 wks. No tier 1, 2 -nothing.

[Dec 13, 2017] Unemployment health hazard and stress

The longer you are unemployed, the more you are effected by those factors.
Notable quotes:
"... The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects. ..."
"... Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system. ..."
"... Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises. ..."
"... Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem. ..."
"... One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available. ..."
"... Depression is universally hated by anyone who's ever had it. ..."
"... Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either. ..."
"... You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard. ..."
Dec 13, 2017 | www.cvtips.com

It's almost impossible to describe the various psychological impacts, because there are so many. There are sometimes serious consequences, including suicide, and, some would say worse, chronic depression.

There's not really a single cause and effect. It's a compound effect, and unemployment, by adding stress, affects people, often badly.

The world doesn't need any more untrained psychologists, and we're not pretending to give medical advice. That's for professionals. Everybody is different, and their problems are different. What we can do is give you an outline of the common problems, and what you can do about them.

The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects.

For others, there are a series of issues, and the big three are:

Stress

Stress is Stage One. It's a natural result of the situation. Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system.

Over an extended period, the body's natural hormonal balances are affected, and this can lead to problems. These are actually physical issues, but the effects are mental, and the first obvious effects are, naturally, emotional.

Anger, and other negative emotions

Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises.

If the actual situation was already bad, this mental state makes it a lot worse. Constant aggravation doesn't help people to keep a sense of perspective. Clear thinking isn't easy when under constant stress.

Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem.

One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available.

If you have reservations about seeking help, bear in mind it can't possibly be any worse than the problem.

Depression

Depression is universally hated by anyone who's ever had it. This is the next stage, and it's caused by hormonal imbalances which affect serotonin. It's actually a physical problem, but it has mental effects which are sometimes devastating, and potentially life threatening.

The common symptoms are:

It's a disgusting experience. No level of obscenity could possibly describe it. Depression is misery on a level people wouldn't conceive in a nightmare. At this stage the patient needs help, and getting it is actually relatively easy. It's convincing the person they need to do something about it that's difficult. Again, the mental state is working against the person. Even admitting there's a problem is hard for many people in this condition.

Generally speaking, a person who is trusted is the best person to tell anyone experiencing the onset of depression to seek help. Important: If you're experiencing any of those symptoms:

Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either.

Alcohol, in particular, makes depression much worse. Alcohol is a depressant, itself, and it's also a nasty chemical mix with all those stress hormones.

If you've ever had alcohol problems, or seen someone with alcohol wrecking their lives, depression makes things about a million times worse.

Just don't do it. Steer clear of any so-called stimulants, because they don't mix with antidepressants, either.

Unemployment and staying healthy

The above is what you need to know about the risks of unemployment to your health and mental well being.

These situations are avoidable.

Your best defense against the mental stresses and strains of unemployment, and their related problems is staying healthy.

We can promise you that is nothing less than the truth. The healthier you are, the better your defenses against stress, and the more strength you have to cope with situations.

Basic health is actually pretty easy to achieve:

Diet

Eat real food, not junk, and make sure you're getting enough food. Your body can't work with resources it doesn't have. Good food is a real asset, and you'll find you don't get tired as easily. You need the energy reserves.

Give yourself a good selection of food that you like, that's also worth eating.

The good news is that plain food is also reasonably cheap, and you can eat as much as you need. Basic meals are easy enough to prepare, and as long as you're getting all the protein veg and minerals you need, you're pretty much covered.

You can also use a multivitamin cap, or broad spectrum supplements, to make sure you're getting all your trace elements. Also make sure you're getting the benefits of your food by taking acidophilus or eating yogurt regularly.

Exercise

You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard.

Don't just sit and suffer

If anything's wrong, check it out when it starts, not six months later. Most medical conditions become serious when they're allowed to get worse.

For unemployed people the added risk is also that they may prevent you getting that job, or going for interviews. If something's causing you problems, get rid of it.

Nobody who's been through the blender of unemployment thinks it's fun.

Anyone who's really done it tough will tell you one thing:

Don't be a victim. Beat the problem, and you'll really appreciate the feeling.

[Dec 12, 2017] Can Uber Ever Deliver Part Eleven Annual Uber Losses Now Approaching $5 Billion

Notable quotes:
"... Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. ..."
"... Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins. ..."
"... In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week. ..."
"... An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8] ..."
"... Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017. ..."
"... Socialize the losses, privatize the gains, VC-ize the subsidies. ..."
"... The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. ..."
"... "Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs ..."
Dec 12, 2017 | www.nakedcapitalism.com

Uber lost $2.5 billion in 2015, probably lost $4 billion in 2016, and is on track to lose $5 billion in 2017.

The top line on the table below shows is total passenger payments, which must be split between Uber corporate and its drivers. Driver gross earnings are substantially higher than actual take home pay, as gross earning must cover all the expenses drivers bear, including fuel, vehicle ownership, insurance and maintenance.

Most of the "profit" data released by Uber over time and discussed in the press is not true GAAP (generally accepted accounting principles) profit comparable to the net income numbers public companies publish but is EBIDTAR contribution. Companies have significant leeway as to how they calculate EBIDTAR (although it would exclude interest, taxes, depreciation, amortization) and the percentage of total costs excluded from EBIDTAR can vary significantly from quarter to quarter, given the impact of one-time expenses such as legal settlements and stock compensation. We only have true GAAP net profit results for 2014, 2015 and the 2nd/3rd quarters of 2017, but have EBIDTAR contribution numbers for all other periods. [5]

Uber had GAAP net income of negative $2.6 billion in 2015, and a negative profit margin of 132%. This is consistent with the negative $2.0 billion loss and (143%) margin for the year ending September 2015 presented in part one of the NC Uber series over a year ago.

No GAAP profit results for 2016 have been disclosed, but actual losses likely exceed $4 billion given the EBIDTAR contribution of negative $3.2 billion. Uber's GAAP losses for the 2nd and 3rd quarters of 2017 were over $2.5 billion, suggesting annual losses of roughly $5 billion.

While many Silicon Valley funded startups suffered large initial losses, none of them lost anything remotely close to $2.6 billion in their sixth year of operation and then doubled their losses to $5 billion in year eight. Reversing losses of this magnitude would require the greatest corporate financial turnaround in history.

No evidence of significant efficiency/scale gains; 2015 and 2016 margin improvements entirely explained by unilateral cuts in driver compensation, but losses soared when Uber had to reverse these cuts in 2017.

Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. These driver compensation cuts improved Uber's EBIDTAR margin, but Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins.

In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week.

An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8]

A business model where profit improvement is hugely dependent on wage cuts is unsustainable, especially when take home wages fall to (or below) minimum wage levels. Uber's primary focus has always been the rate of growth in gross passenger revenue, as this has been a major justification for its $68 billion valuation. This growth rate came under enormous pressure in 2017 given Uber efforts to raise fares, major increases in driver turnover as wages fell, [9] and the avalanche of adverse publicity it was facing.

Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

MKS , December 12, 2017 at 6:19 am

"Uber's business model can never produce sustainable profits"

Two words not in my vocabulary are "Never" and "Always", that is a pretty absolute statement in an non-absolute environment. The same environment that has produced the "Silicon Valley Growth Model", with 15x earnings companies like NVIDA, FB and Tesla (Average earnings/stock price ratio in dot com bubble was 10x) will people pay ridiculous amounts of money for a company with no underlying fundamentals you damn right they will! Please stop with the I know all no body knows anything, especially the psychology and irrationality of markets which are made up of irrational people/investors/traders.

JohnnySacks , December 12, 2017 at 7:34 am

My thoughts exactly. Seems the only possible recovery for the investors is a perfectly engineered legendary pump and dump IPO scheme. Risky, but there's a lot of fools out there and many who would also like to get on board early in the ride in fear of missing out on all the money to be hoovered up from the greater fools. Count me out.

SoCal Rhino , December 12, 2017 at 8:30 am

The author clearly distinguishes between GAAP profitability and valuations, which is after all rather the point of the series. And he makes a more nuanced point than the half sentence you have quoted without context or with an indication that you omitted a portion. Did you miss the part about how Uber would have a strong incentive to share the evidence of a network effect or other financial story that pointed the way to eventual profit? Otherwise (my words) it is the classic sell at a loss, make it up with volume path to liquidation.

tegnost , December 12, 2017 at 9:52 am

apples and oranges comparison, nvidia has lots and lots of patented tech that produces revenue, facebook has a kajillion admittedly irrational users, but those users drive massive ad sales (as just one example of how that company capitalizes itself) and tesla makes an actual car, using technology that inspires it's buyers (the put your money where your mouth is crowd and it can't be denied that tesla, whatever it's faults are, battery tech is not one of them and that intellectual property is worth a lot, and tesla's investors are in on that real business, profitable or otherwise)

Uber is an iphone app. They lose money and have no path to profitability (unless it's the theory you espouse that people are unintelligent so even unintelligent ideas work to fleece them). This article touches on one of the great things about the time we now inhabit, uber drivers could bail en masse, there are two sides to the low attachment employees who you can get rid of easily. The drivers can delete the uber app as soon as another iphone app comes along that gets them a better return

allan , December 12, 2017 at 6:52 am

Yet another source (unintended) of subsidies for Uber, Lyft, etc., which might or might not have been mentioned earlier in the series:

Airports Are Losing Money as Ride-Hailing Services Grow [NYT]

For many air travelers, getting to and from the airport has long been part of the whole miserable experience. Do they drive and park in some distant lot? Take mass transit or a taxi? Deal with a rental car?

Ride-hailing services like Uber and Lyft are quickly changing those calculations. That has meant a bit less angst for travelers.

But that's not the case for airports. Travelers' changing habits, in fact, have begun to shake the airports' financial underpinnings. The money they currently collect from ride-hailing services do not compensate for the lower revenues from the other sources.

At the same time, some airports have had to add staff to oversee the operations of the ride-hailing companies, the report said. And with more ride-hailing vehicles on the roads outside terminals,
there's more congestion.

Socialize the losses, privatize the gains, VC-ize the subsidies.

Thuto , December 12, 2017 at 6:55 am

The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. The only question is how long can they keep the show going before the lights go out, slick marketing and propaganda can only take you so far, and one assumes the dumb money has a finite supply of patience and will at some point begin asking the tough questions.

Louis Fyne , December 12, 2017 at 8:35 am

The irony is that Uber would have been a perfectly fine, very profitable mid-sized company if Uber stuck with its initial model -- sticking to dense cities with limited parking, limiting driver supply, and charging a premium price for door-to-door delivery, whether by livery or a regular sedan. And then perhaps branching into robo-cars.

But somehow Uber/board/Travis got suckered into the siren call of self-driving cars, triple-digit user growth, and being in the top 100 US cities and on every continent.

Thuto , December 12, 2017 at 11:30 am

I've shared a similar sentiment in one of the previous posts about Uber. But operating profitably in decent sized niche doesn't fit well with ambitions of global domination. For Uber to be "right-sized", an admission of folly would have to be made, its managers and investors would have to transcend the sunk cost fallacy in their strategic decision making, and said investors would have to accept massive hits on their invested capital. The cold, hard reality of being blindsided and kicked to the curb in the smartphone business forced RIM/Blackberry to right-size, and they may yet have a profitable future as an enterprise facing software and services company. Uber would benefit from that form of sober mindedness, but I wouldn't hold my breath.

David Carl Grimes , December 12, 2017 at 6:57 am

The question is: Why did Softbank invest in Uber?

Michael Fiorillo , December 12, 2017 at 9:33 am

I know nothing about Softbank or its management, but I do know that the Japanese were the dumb money rubes in the late '80's, overpaying for trophy real estate they lost billions on.

Until informed otherwise, that's my default assumption

JimTan , December 12, 2017 at 10:50 am

Softbank possibly looking to buy more Uber shares at a 30% discount is very odd. Uber had a Series G funding round in June 2016 where a $3.5 billion investment from Saudi Arabia's Public Investment Fund resulted in its current $68 billion valuation. Now apparently Softbank wants to lead a new $6 billion funding round to buy the shares of Uber employees and early investors at a 30% discount from this last "valuation". It's odd because Saudi Arabia's Public Investment Fund has pledged $45 billion to SoftBank's Vision Fund , an amount which was supposed to come from the proceeds of its pending Aramco IPO. If the Uber bid is linked to SoftBank's Vision Fund, or KSA money, then its not clear why this investor might be looking to literally 'double down' from $3.5 billion o $6 billion on a declining investment.

Yves Smith Post author , December 12, 2017 at 11:38 am

SoftBank has not yet invested. Its tender is still open. If it does not get enough shares at a price it likes, it won't invest.

As to why, I have no idea.

Robert McGregor , December 12, 2017 at 7:04 am

"Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs of efficiency, and hopes of greater efficiency, and make most people just overlook the essential fact that Uber is the most unprofitable company of all time!

divadab , December 12, 2017 at 7:19 am

What comprises "Uber Expenses"? 2014 – $1.06 billion; 2015 $3.33 billion; 2016 $9.65 billion; forecast 2017 $11.418 billion!!!!!! To me this is the big question – what are they spending $10 billion per year on?

ALso – why did driver share go from 68% in 2016 to 80% in 2017? If you use 68% as in 2016, 2017 Uber revenue is $11.808 billion, which means a bit better than break-even EBITDA, assuming Uber expenses are as stated $11.428 billion.

Perhaps not so bleak as the article presents, although I would not invest in this thing.

Phil in Kansas City , December 12, 2017 at 7:55 am

I have the same question: What comprises over 11 billion dollars in expenses in 2017? Could it be they are paying out dividends to the early investors? Which would mean they are cannibalizing their own company for the sake of the VC! How long can this go on before they'll need a new infusion of cash?

lyman alpha blob , December 12, 2017 at 2:37 pm

The Saudis have thrown a few billion Uber's way and they aren't necessarily known as the smart money.

Maybe the pole dancers have started chipping in too as they are for bitcoin .

Vedant Desai , December 12, 2017 at 10:37 am

Oh article does answer your 2nd question. Read this paragraph:-

Since mass driver defections would cause passenger volume growth to collapse completely , Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

As for the 1st, read this line in the article:-

There are undoubtedly a number of things Uber could do to reduce losses at the margin, but it is difficult to imagine it could suddenly find the $4-5 billion in profit improvement needed merely to reach breakeven.

Louis Fyne , December 12, 2017 at 8:44 am

in addition to all the points listed in the article/comments, the absolute biggest flaw with Uber is that Uber HQ conditioned its customers on (a) cheap fares and (b) that a car is available within minutes (1-5 if in a big city).

Those two are not mutually compatible in the long-term.

Alfred , December 12, 2017 at 9:49 am

Thus (a) "We cost less" and (b) "We're more convenient" -- aren't those also the advantages that Walmart claims and feeds as a steady diet to its ever hungry consumers? Often if not always, disruption may repose upon delusion.

Martin Finnucane , December 12, 2017 at 11:06 am

Uber's business model could never produce sustainable profits unless it was able to exploit significant anti-competitive market power.

Upon that dependent clause hangs the future of capitalism, and – dare I say it? – its inevitable demise.

Altandmain , December 12, 2017 at 11:09 am

When this Uber madness blows up, I wonder if people will finally begin to discuss the brutal reality of Silicon Valley's so called "disruption".

It is heavily built in around the idea of economic exploitation. Uber drivers are often, especially when the true costs to operate an Uber including the vehicle depreciation are factored in, making not very much per hour driven, especially if they don't get the surge money.

Instacart is another example. They are paying the deliver operators very little.

Jim A. , December 12, 2017 at 12:21 pm

At a fundamental level, I think that the Silicon Valley "disruption" model only works for markets (like software) where the marginal cost for production is de minimus and the products can be protected by IP laws. Volume and market power really work in those cases. But out here in meat-space, where actual material and labor are big inputs to each item sold, you can never just sit back on your laurels and rake in the money. Somebody else will always be able to come and and make an equivalent product. If they can do it more cheaply, you are in trouble.

Altandmain , December 12, 2017 at 5:40 pm

There aren't that many areas in goods and services where the marginal costs are very low.

Software is actually quite unique in that regard, costing merely the bandwidth and permanent storage space to store.

Let's see:

1. From the article, they cannot go public and have limited ways to raise more money. An IPO with its more stringent disclosure requirements would expose them.

2. They tried lowering driver compensation and found that model unsustainable.

3. There are no benefits to expanding in terms of economies of scale.

From where I am standing, it looks like a lot of industries gave similar barriers. Silicon Valley is not going to be able to disrupt those.

Tesla, another Silicon Valley company seems to be struggling to mass produce its Model 3 and deliver an electric car that breaks even, is reliable, while disrupting the industry in the ways that Elon Musk attempted to hype up.

So that basically leaves services and manufacturing out for Silicon Valley disruption.

Joe Bentzel , December 12, 2017 at 2:19 pm

UBER has become a "too big to fail" startup because of all the different tentacles of capital from various Tier 1 VCs and investment bankers.

VCs have admitted openly that UBER is a subsidized business, meaning it's product is sold below market value, and the losses reflect that subsidization. The whole "2 sided platform" argument is just marketecture to hustle more investors. It's a form of service "dumping" that puts legacy businesses into bankruptcy. Back during the dotcom bubble one popular investment banker (Paul Deninger) characterized this model as "Terrorist Competition", i.e. coffers full of invested cash to commoditize the market and drive out competition.

UBER is an absolute disaster that has forked the startup model in Silicon Valley in order to drive total dependence on venture capital by founders. And its current diversification into "autonomous vehicles", food delivery, et al are simply more evidence that the company will never be profitable due to its whacky "blitzscaling" approach of layering on new "businesses" prior to achieving "fit" in its current one.

It's economic model has also metastasized into a form of startup cancer that is killing Silicon Valley as a "technology" innovator. Now it's all cargo cult marketing BS tied to "strategic capital".

UBER is the victory of venture capital and user subsidized startups over creativity by real entrepreneurs.

It's shadow is long and that's why this company should be ..wait for it UNBUNDLED (the new silicon valley word attached to that other BS religion called "disruption"). Call it a great unbundling and you can break up this monster corp any way you want.

Naked Capitalism is a great website.

Phil in KC , December 12, 2017 at 3:20 pm

1. I Agree with your last point.

2. The elevator pitch for Uber: subsidize rides to attract customers, put the competition out of business, and then enjoy an unregulated monopoly, all while exploiting economically ignorant drivers–ahem–"partners."

3. But more than one can play that game, and

4. Cab and livery companies are finding ways to survive!

Phil in KC , December 12, 2017 at 3:10 pm

If subsidizing rides is counted as an expense, (not being an accountant, I would guess it so), then whether the subsidy goes to the driver or the passenger, that would account for the ballooning expenses, to answer my own question. Otherwise, the overhead for operating what Uber describes as a tech company should be minimal: A billion should fund a decent headquarters with staff, plus field offices in, say, 100 U.S. cities. However, their global pretensions are probably burning cash like crazy. On top of that, I wonder what the exec compensation is like?

After reading HH's initial series, I made a crude, back-of-the-envelope calculation that Uber would run out of money sometime in the third fiscal quarter of 2018, but that was based on assuming losses were stabilizing in the range of 3 billion a year. Not so, according to the article. I think crunch time is rapidly approaching. If so, then SoftBank's tender offer may look quite appetizing to VC firms and to any Uber employee able to cash in their options. I think there is a way to make a re-envisioned Uber profitable, and with a more independent board, they may be able to restructure the company to show a pathway to profitability before the IPO. But time is running out.

A not insignificant question is the recruitment and retention of the front line "partners." It would seem to me that at some point, Uber will run out of economically ignorant drivers with good manners and nice cars. I would be very interested to know how many drivers give up Uber and other ride-sharing gigs once the 1099's start flying at the beginning of the year. One of the harsh realities of owning a business or being an contractor is the humble fact that you get paid LAST!

Jan Stickle , December 12, 2017 at 5:00 pm

We became instant Uber riders while spending holidays with relatives in San Diego. While their model is indeed unique from a rider perspective, it was the driver pool that fascinates me. These are not professional livery drivers, but rather freebooters of all stripes driving for various reasons. The remuneration they receive cannot possibly generate much income after expenses, never mind the problems associated with IRS filing as independent contractors.

One guy was just cruising listening to music; cooler to get paid for it than just sitting home! A young lady was babbling and gesticulating non stop about nothing coherent and appeared to be on some sort of stimulant. A foreign gentleman, very professional, drove for extra money when not at his regular job. He was the only one who had actually bought a new Prius for this gig, hoping to pay it off in two years.

This is indeed a brave new world. There was a period in Nicaragua just after the Contra war ended when citizens emerged from their homes and hit the streets in large numbers, desperately looking for income. Every car was a taxi and there was a bipedal mini Walmart at every city intersection as individuals sold everything and anything in a sort of euphoric optimism towards the future. Reality just hadn't caught up with them yet .

[Dec 05, 2017] House Members Tee Up Bipartisan Bill to Kill CFPB Payday Lending Rule

Notable quotes:
"... By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans. ..."
"... The Unbanking of America: How the New Middle Class Survives ..."
Dec 05, 2017 | www.nakedcapitalism.com

Posted on December 4, 2017 by Jerri-Lynn Scofield By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

Three Democrats and three Republicans have co-sponsored a resolution, under the Congressional Review Act (CRA), to scuttle the Consumer Financial Protection Bureau's payday lending rule.

CRA's procedures to overturn regulations had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (as I've previously discussed (see here , here , here and here ). Not only does CRA provide expedited procedures to overturn regulations, but once it's used to kill a regulation, the agency that promulgated the rule is prevented from revisiting the issue unless and until Congress provides new statutory authority to do so.

Payday Lending

As I wrote in an extended October post, CFPB Issues Payday Lending Rule: Will it Hold, as the Empire Will Strike Back, payday lending is an especially sleazy part of the finance sewer, in which private equity swamp creatures, among others, operate. The industry is huge, according to this New York Times report I quoted in my October post, and it preys on the poorest, most financially-stressed Americans:

The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald's restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.

The CFPB's payday lending rule attempted to shut down this area of lucrative lending– where effective interest rates can spike to hundreds of points per annum, including fees (I refer interested readers to my October post, cited above, which discusses at greater length how sleazy this industry is, and also links to the rule; see also this CFPB fact sheet and press release .)

Tactically, as with the ban on mandatory arbitration clauses in consumer financial contracts– an issue I discussed further in RIP, Mandatory Arbitration Ban , (and in previous posts referenced therein), the CFPB under director Richard Cordray made a major tactical mistake in not completing rule-making sufficiently before the change of power to a new administration- 60 "session days" of Congress, thus making these two rules subject to the CRA.

The House Financial Services Committee press release lauding introduction of CRA resolution to overturn the payday lending rule is a classic of its type, so permit me to quote from it at length:

These short-term, small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB's rule would mark the first time the federal government has gotten involved in the regulation of these loans.

.

House Financial Services Committee Chairman Jeb Hensarling (R-TX), a supporter of the bipartisan effort, said the CFPB's rule is an example of how "unelected, unaccountable government bureaucracy hurts working people."

"Once again we see powerful Washington elites using the guise of 'consumer protection' to actually harm consumers and make life harder for lower and moderate income Americans who may need a short-term loan to keep their utilities from being cut off or to keep their car on the road so they can get to work," he said. "Americans should be able to choose the checking account they want, the mortgage they want and the short-term loan they want and no unelected Washington bureaucrat should be able to take that away from them."

[Rep Dennis Ross, a Florida Republican House co-sponsor]. said, "More than 1.2 million Floridians per year rely on Florida's carefully regulated small-dollar lending industry to make ends meet. The CFPB's small dollar lending rule isn't reasonable regulation -- it's a de facto ban on what these Floridians need. I and my colleagues in Congress cannot stand by while an unaccountable federal agency deprives our constituents of a lifeline in times of need, all while usurping state authority. Today, we are taking bipartisan action to stop this harmful bureaucratic overreach dead in its tracks."

As CNBC reports in New House bill would kill consumer watchdog payday loan rule , industry representatives continue to denounce the rule, with a straight face:

"The rule would leave millions of Americans in a real bind at exactly the time need a fast loan to cover an urgent expense," said Daniel Press, a policy analyst with the Competitive Enterprise Institute, in a statement after the bill's introduction.

Consumer advocates think otherwise (also from CNBC):

"Payday lenders put cash-strapped Americans in a crippling cycle of 300 percent-interest loan debt," Yana Miles, senior legislative counsel at the Center for Responsible Lending, said in a statement.

Prospects Under CRA

When I wrote about this topic in October, much commentary assumed that prospects for CRA overturn were weak. I emphasized instead the tactical error of failing to insulate the rule from CRA, which could have been done if the CFPB had pushed the rule through well before Trump took office:

If the payday rule had been promulgated in a timely manner during the previous administration it would not have been as vulnerable to a CRA challenge as it is now. Even if Republicans had then passed a CRA resolution of disapproval, a presidential veto would have stymied that. Trump is an enthusiastic proponent of deregulation, who has happily embraced the CRA– a procedure only used once before he became president to roll back a rule.

Now, the Equifax hack may have changed the political dynamics here and made it more difficult for Congressional Republicans– and finance-friendly Democratic fellow travellers– to use CRA procedures to overturn the payday lending rule.

The New York Times certainly seems to think prospects for a CRA challenge remote:

The odds of reversal are "very low," said Isaac Boltansky, the director of policy research at Compass Point Research & Trading.

"There is already C.R.A. fatigue on the Hill," Mr. Boltansky said, using an acronymn for the act, "and moderate Republicans are hesitant to be painted as anti-consumer.

I'm not so sure I would take either side of that bet. [Jerri-Lynn here: my subsequent emphasis.]

A more telling element than CRA-fatigue in my assessment of the rule's survival prospects was my judgment that Democrats wouldn't muster to defend the payday lending industry– although that assumption has not fully held, as this recent American Banker account makes clear:

After the payday rule was finalized in October , it was widely expected that Republicans would attempt to overturn it. It's notable, though, that the effort has attracted bipartisan support in the House.

.

Passage in the Senate, however, may be a much heavier lift. The chamber's vote to overturn the arbitration rule in late October came down to the wire, forcing Republicans to call in Vice President Mike Pence to cast the tie-breaking vote.

Bottom Line

I continue to think that this rule will survive– as the payday lending industry cannot count on a full court press lobbying effort by financial services interests. Yet as I wrote in October, I still hesitate to take either side of the bet on this issue.

Dpfaef , December 4, 2017 at 10:53 am

I think this whole article is totally disingenuous. There is a serious need for many Americans to have access to small amount, short term loans. While, these lenders may appear predatory, they do serve a large sector of society.

Maybe you need to read: The Unbanking of America: How the New Middle Class Survives by Lisa Servon . It might be worth the read.

GF , December 4, 2017 at 11:02 am

Where's the Post Office Bank when you need it. This overturning of the rule is just an effort to stop the Post Office Bank from gaining traction as the alternative non-predatory source of small loans to the people. Most pay day lender companies are owned by large financial players.

Jerri-Lynn Scofield Post author , December 4, 2017 at 11:11 am

I agree that's a far better approach and indeed, I discussed the Post Office bank in my October post– which is linked to in today's post. Permit me to quote from my earlier post:

The payday lending industry preys on the poorest financial consumers. One factor that has allowed it to flourish is current banking system's inability to provide access to basic financial services to a shocking number of Americans. Approximately 38 million households are un or underbanked– roughly 28% of the population.

Now, a sane and humane political system would long ago have responded with direct measures to address that core problem, such as a Post Office Bank (which Yves previously discussed in this post, Mirabile Dictu! Post Office Bank Concept Gets Big Boost and which have long existed in other countries.)

Regular readers are well aware of who benefits from the current US system, and why the lack of institutions that cater to the basic needs of financial consumers rather than focusing on extracting their pound(s) of flesh is not a bug, but a feature.

So, instead, the United States has a wide-ranging payday lending system. Which charges borrowers up to 400% interest rates for short-term loans, many of which are rolled over so that the borrower becomes a prisoner of the debt incurred.

Wisdom Seeker , December 4, 2017 at 3:23 pm

With phrasing like "unbanked" or "underbanked", I worry that you've bought into the banking-industry framing of this issue, which I'm sure is not your intent.

Ordinary people should not need any bank (not even a government or post office bank) for everyday life, with the possible exception of mortgages. De-financialization of the medium of exchange, and basic payments, is something the public should be fighting for.

lyman alpha blob , December 4, 2017 at 3:30 pm

I would consider myself an ordinary person and I pay in cash when purchasing day to day items the vast majority of the time and yet I'd still prefer to deposit my money in a bank rather than hiding it in my mattress for any number of good reasons.

Banks aren't the problem – their predatory executives are.

Wisdom Seeker , December 4, 2017 at 3:44 pm

But there are, or at least ought to be, safe and secure ways to store money other than by lending it to banks or stuffing it into mattresses. Or carrying wads of cash.

For instance, a debit card (or possibly cell phone) with a secure identity / password can already act as a cashless wallet. The digital cash could be stored directly on the device, and accounted for through something similar to TreasuryDirect, without any intermediaries. But this would require the Federal Government to get serious about having a modern Digital Dollar of some kind (not bitcoin, shudder)

Cary D Berkelhamer , December 4, 2017 at 4:32 pm

Even better would be State Banks. Every state should have one. I believe the State Bank of North Dakota made money in 2008. While the TBTF Banks came hat in hand to our Reps. Of course OUR Reps handed them a blank check and told them to "Make it go Away". However Post Office Banks would be GREAT!!

diptherio , December 4, 2017 at 11:08 am

This is the boilerplate argument that always gets brought up by payday loan defenders, and there is a good bit of truth to it. However, what you are not mentioning is that there are already far superior options available to pretty much any person who needs a small, short term loan. That solution is your friendly neighborhood Credit Union, most of which offer very low interest lines of overdraft coverage. I don't mind saying that it has saved my heiny on more than one occasion. Pay check a little late in arriving? No problem, transfer $200 from your overdraft account into your checking account on-line and you're good to go. Pay it back at your convenience, also on-line, at 7% APR.

Payday lenders are legal loansharks. The problems with their predatory lending model and the damage it does to low-income people are well documented. Simply pointing out that there is a reason that people end up at payday lenders is not a valid justification for the business practices of those lenders, especially when there are much better alternatives readily available.

Vatch , December 4, 2017 at 11:19 am

Payday lenders are legal loansharks.

Very true! There are several web sites that point out how the fees associated with payday loans raise the effective annual percentage rate into the stratosphere, ranging from 300% to over 600%. Here's one:

http://paydayloansonlineresource.org/average-interest-rates-for-payday-loans/

Off The Street , December 4, 2017 at 12:10 pm

One frustration that I have with legislation in general, and finance legislation in particular, is that it does not tell the truth, the whole truth and nothing but the truth.

In my Panglossian world, I envision a financial services bill that lays out the following:

Define the problem
Unserviced people: X percent( for discussion, say 10% to make the math easy) of people are un-serviced (or under-, or rapaciously-serviced) by conventional financial companies, whether banks, credit unions or other, whatever other is conventionally.
Unserviced and don't want: Y percent of that X percent (say, 50% of 10%, so 5%) doesn't want services.
Unserviced and want: 1-Y percent of that X percent (say, 50% of 10%, so 5%) wants services but can not get them. That could be due to various factors, ranging from bad credit (how defined?, say FICO < 600?) to geographic remoteness (no branches within miles, no internet, precious little slow mail service, whatever).

Within that deemed unserved 5% of the population, what are the costs to serve and what are the alternatives?

What would an honest service provider need to provide service, accounting for credit risks and the like, and still make a profit sufficient to induce investment?

If I knew how to make and add a nice graphic, I'd include a waterfall chart here to show the costs and components of the interest and fees paid in regular and default mode. Sorry, please bear with me as I make up numbers.

Regular costs
Interest at 30%
Less: cost of funds at, say, 10%
Less: personnel, overhead, everything else at, say, 5%
Pre-tax profit: 15%

Default mode costs:
Interest at 275%
Plus: Fees at 25%
Less: cost of funds 20%
Less: personnel, overhead, etc 5%
Less: added default cost not in personnel etc line, say 25%
Pre-tax profit: 250%

In that little example, who couldn't make money at those rates?

Extending the notion of APR and Truth-In-Lending to include payday lenders and anyone else without a brick-and-mortar branch who wants to do business in the US, how about mandating some type of honest waterfall chart as dreamt of above?

Then cross-reference and publicize the voting on finance legislation with the campaign contributions from payday people and their ilk, and layer in the borrower costs and credit scores and other metrics in those Congressional districts and zip+4 codes and census tracts and whatever other level of granularity will help provide any amount of disinfecting sunlight to help see the scattering cockroaches.

a different chris , December 4, 2017 at 12:57 pm

The problem I suspect is that your "friendly neighborhood credit union" is actually rarely anywhere near the neighborhoods where people who need these kind of loans live.

They don't have cars and mass transit is non-existent or so slow they couldn't get to the Credit Union during business hours, and back again, anyway. That's the problem with expecting Private Enterprise to be a solution for people at the bottom. They don't set up shop where those people live, or the ones that do are not exactly do-gooders.

lyle , December 4, 2017 at 7:33 pm

I just checked and a lot of credit unions let you apply for a loan online, (earlier you can set up membership online). So the issue of transport and time is lessened assuming folks have some form of net access.

JTMcPhee , December 4, 2017 at 1:04 pm

One might ask why there are millions of people reduced to having to get ripped off by payday and auto-title lenders, to somehow survive from week to week. Maybe because people can't make a living wage? Can't save any money, however prudent and abstemious they may be? Because inter-citizen cruelty and Calvinism are so very strong a force in this rump of an Empire?

Some of the comments here seem to build on the baseline assumption that's part of the liberal-neoliberal mantra, "You get what's coming to you (or the pittance we can't quite squeeze out of you yet)".

diptherio, I am guessing you may mean that there are models of better alternatives readily available, like paying a living wage, a social safety net for the worst off, a postal bank, national health care, stuff like that. I don't see that there are any alternatives actually available to most real people "on the ground."

Wukchumni , December 4, 2017 at 1:08 pm

There is an alternative to excessive payday loans, but only if you're in the military, where it's capped @ 36%.

Why not 36% for everybody?

diptherio , December 4, 2017 at 1:27 pm

You are, of course, correct in that the underlying problem is that so many people are forced to live on so little that they need payday loans in the first place. Thanks for pointing that out.

My point is simply that in the short-term, as a matter of practicality for those of us who don't always make it until payday before running out of money, a CU overdraft account is a very good option.

mpalomar , December 4, 2017 at 1:36 pm

Agree. The AB article from October deadpans a description of the ins and outs governing the hellishness of the company town we're living in.

lyman alpha blob , December 4, 2017 at 1:32 pm

This is a far superior option and thank you for bringing it up. The only problem is most banks and credit unions will not tell you it exists because they make a lot more money if you just keep bouncing checks.

I only learned about it when I worked for WAMU. We were tasked by management with promoting various new products to customers as a condition of being paid a monthly bonus which was the only thing that made the job pay enough to live on. Funny, they never asked us to promote the overdraft line of credit (aka an ODLOC), ever. I do remember one of my managers tell me that circa 2000 or so, WAMUs operating costs for the entire company for the entire year were offset just by the fees they collected off of bounced checks etc.

The fees or interest you pay for using an ODLOC are a small fraction of what you'd pay for bouncing just one check. IIRC, if I overdrew by $200 or so and paid it back on my next payday, the interest was generally less than $1. My local credit union has since added a $5 fee for accessing the ODLOC on top of the interest, but it's still much less than a bounced check fee or interest on a payday loan. I believe that depending on your credit history, you can get an ODLOC of up to $2500 or so which pretty much negates the need for any payday loans.

sd , December 4, 2017 at 11:14 am

A friend of mine was evicted from her apartment because of a payday loan. She failed to pay it off in full quick enough and it spiraled out of control tripling in a very short time. I really fail to see how usury is beneficial to society.

RepubAnon , December 4, 2017 at 11:55 am

Yes, there's a need for high-interest loans that bankrupt borrowers:

Mom-and-Pop Loan Sharks Being Driven Out by Big Credit Card Companies

Frank Pistone is part of the dying breed known as the American Loan Shark. Not so long ago, the loan shark flourished, offering short-term, high-interest loans to desperate people with nowhere else to turn. Today, however, Pistone and countless others like him are being squeezed out by the major credit-card companies, which can offer money to the down-and-out at lower rates of interest and without the threat of bodily harm

FluffytheObeseCat , December 4, 2017 at 12:25 pm

I read Servon's book. It is not a brief on behalf of the payday loan industry. She worked at a couple of payday lenders and explains how they serve the communities they're in, but a few things need to be noted:

The business she was most sympathetic with was a small, local one with only a couple of storefronts, in an east coast inner city. The owner and his help knew the customer base, often by name. Much of her sympathy came from her respect for the women who were dishing out the loans at the windows, not the owners and not the business model. This local joint operated like the most benign of old time pawnbroker/loansharking operation from the early part of the last century.

Most "Cash America" storefront shops (on shabby, midcentury shopping strips in inner ring scuburbs across the US) aren't this decent. They aren't "part of a community" in any sense. And the rates are usurious any way, for all of them.

Thank you to Ms. Scofield for continuing to cover this and related businesses. The upper, cleaner part of our finance industry derives more filthy lucre from these kinds of loan shops than they ever want you to know (sub-prime lending shops, title loans shops . there are a lot of modalities for fleecing the poor and the near-poor nowadays).

JTMcPhee , December 4, 2017 at 12:35 pm

The NC staff must be pleased that it seems like so many subtle apologists for the looters, predators, "intelligence community," and so forth, appear to be turning up here early in the opening of new site posts. I'm guessing the Elite are not exactly quaking in fear that NC's reporting will catalyze some change that might sweep the political economy in the direction of what the mopery would categorize as "fairness," but still

ger , December 4, 2017 at 12:42 pm

Raised the dollar definition of middle class and declared a 'new middle class' or could it be 'new middle class' is actually referring to the 'new middle poor'. The former middle class is desperately trying to avoid a plunge into the pits of the 'poor poor'. Payday Loan predators are greasing the handrails.

Matthew Cunningham-Cook , December 4, 2017 at 3:15 pm

"Where will the money-changers change money if not in the Holy Temple? Aren't we starving the priests of much-needed revenue? This Jesus guy is totally disingenuous."

John , December 4, 2017 at 9:32 pm

In good neo liberal fashion that Jesus dude got exactly what he deserved. The effrontry of that guy to chase those hard working money lenders out of the temple square. Got exactly what was coming to him.

sd , December 4, 2017 at 11:11 am

H.J.Res.122 – Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Bureau of Consumer Financial Protection relating to "Payday, Vehicle Title, and Certain High-Cost Installment Loans".

December 1, 2017

Sponsor Rep. Ross, Dennis A. [R-FL-15] (Introduced 12/01/2017)
Rep. Hastings, Alcee L. [D-FL-20]
Rep. Graves, Tom [R-GA-14]
Rep. Cuellar, Henry [D-TX-28]
Rep. Stivers, Steve [R-OH-15]
Rep. Peterson, Collin C. [D-MN-7]

perpetualWAR , December 4, 2017 at 12:21 pm

Ahhh ..look at this list. TWO Florida lawbreakers introducing this banker bill. And one from Minnesota. Y'all know that Jacksonville, FL and St. Paul, MN are the two places where the forgeries continue to be provided to the financial crooks? So, it goes to figure that the lawbreakers are attempting to protect the financial crooks committing forgery in their prospective states! How appro.

jawbone , December 4, 2017 at 1:44 pm

If any of these House critters are "representing" you, time for lots of calls to them.

And thanks, SD, for listing them. I always wonder why our vaunted free press so seldom lists the sponsors of legislation when it's reported on . Hhmm .
m .

Mike R. , December 4, 2017 at 1:19 pm

I have mixed feelings about this specific issue.
The larger issue of a grossly skewed economic system is what needs to be fixed.
There will always be people that lack common sense and brains regarding money. There will always be people that will take advantage of that.
I don't know how or why you would try and legislate that away.
We need to move in the direction of solving the biggest problems and not get wrapped up in the little problems.
The numbers above sound horrendous, but 7 billion in profit on 46 billion loaned is 14% return. Credit card companies are worse. 7 billion in profit off of 12 million people is $600 per person. Alot for poor folks I recognize, but not necessarily life shattering for all.

The "system" loves to wrangle around with issues like this (trivial in my mind) so the handful of big ones go unattended.

nonclassical , December 4, 2017 at 1:46 pm

some have apparently not felt it necessary to bail out family members for aggressive, egregious and immediate interest rates and escalations charged by these scammers

but there certainly appears concerted effort by (likely) shills to perpetuate scams (and to discredit Consumer Financial Protection Agency and Liz Warren )

Warren-Sanders 2020

Wisdom Seeker , December 4, 2017 at 3:37 pm

I think there's an error in the original article, where it says:

CRA's procedures to overturn legislation had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (emphasis added)

My understanding is that CRA gives Congress the power to overturn executive branch regulations , not legislation (which Congress already can overturn anyway). Is that incorrect?

P.S. It's sad that it might not even matter. Nowadays the public can't tell the difference between regulations (written by unaccountable, unelected officials who take the revolving door back to working at the firms they regulated) and legislation (written by unaccountable, only notionally elected politicians who get paid off in various ways by lobbyists for the same firms)

Jerri-Lynn Scofield Post author , December 4, 2017 at 8:07 pm

You're correct– fixed it! Slip of the fingers there that I didn't catch when I proofread the post. As the rest of the paragraph makes clear, CRA procedures are used to overturn regulations.

Thanks for reading my work so carefully and drawing the error to my attention.

John k , December 4, 2017 at 8:26 pm

Finally bipartisan!
Trump loves it
Obomber woulda loved it
She who cannot be named woulda loved it, too.
Time for them all to get over that little spat she did it before trump should appoint her to something useful I bet she'd love secdef

Taras 77 , December 4, 2017 at 10:40 pm

Where is the lovely Debbie Wasserman schultz in all of this? She has not surprisingly been a leading cheerleader for these pay day lender sharks. but hey, what the hey, the lobby money is good!

[Dec 05, 2017] Inside Casino Capitalism by Max Holland

Notable quotes:
"... Barbarians at the Gate: The Fall of RJR Nabisco ..."
"... The Wall Street Journal ..."
"... The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire ..."
"... Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll. ..."
"... the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles ..."
"... Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development. ..."
"... The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains. ..."
Washington DeCoded

Inside Casino Capitalism Barbarians at the Gate: The Fall of RJR Nabisco
By Bryan Burrough and John Helyar
Harper & Row. 528 pp. $22.95

In 1898, Adolphus Green, chairman of the National Biscuit Company, found himself faced with the task of choosing a trademark for his newly formed baking concern. Green was a progressive businessman. He refused to employ child labor, even though it was then a common practice, and he offered his bakery employees the option to buy stock at a discount. Green therefore thought that his trademark should symbolize Nabisco's fundamental business values, "not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States." Eventually he decided that a cross with two bars and an oval – a medieval symbol representing the triumph of the moral and spiritual over the base and material – should grace the package of every Nabisco product.

If they had wracked their brains for months, Bryan Burrough and John Helyar could not have come up with a more ironic metaphor for their book. The fall of Nabisco, and its corporate partner R.J. Reynolds, is nothing less than the exact opposite of Green's business credo, a compelling tale of corporate and Wall Street greed featuring RJR Nabisco officers who first steal shareholders blind and then justify their epic displays of avarice by claiming to maximize shareholder value.

The event which made the RJR Nabisco story worth telling was the 1988 leveraged buyout (LBO) of the mammoth tobacco and food conglomerate, then the 19th-largest industrial corporation in America. Battles for corporate control were common during the loosely regulated 1980s, and the LBO was just one method for capturing the equity of a corporation. (In a typical LBO, a small group of top management and investment bankers put 10 percent down and finance the rest of their purchase through high-interest loans or bonds. If the leveraged, privately-owned corporation survives, the investors, which they can re-sell public shares, reach the so-called "pot of gold"; but if the corporation cannot service its debt, everything is at risk, because the collateral is the corporation itself.

The sheer size of RJR Nabisco and the furious bidding war that erupted guaranteed unusual public scrutiny of this particular piece of financial engineering. F. Ross Johnson, the conglomerate's flamboyant, free-spending CEO (RJR had its own corporate airline), put his own company into play with a $75-a-share bid in October. Experienced buyout artists on Wall Street, however, immediately realized that Johnson was trying to play two incompatible games. LBOs typically put corporations such as RJR Nabisco through a ringer in order to pay the mammoth debt incurred after a buyout. But Johnson, desiring to keep corporate perquisites intact, "low-balled" his offer. Other buyout investors stepped forward with competing bids, and after a six-week-long auction the buyout boutique of Kohlberg, Kravis, Roberts & Company (KKR) emerged on top with a $109-a-share bid. The $25-billion buyout took its place as one of the defining business events of the 1980s

Burrough and Helyar, who covered the story for The Wall Street Journal, supply a breezy, colorful, blow-by-blow account of the "deal from hell" (as one businessman characterized a leveraged buyout). The language of Wall Street, full of incongruous "Rambo" jargon from the Vietnam War, is itself arresting. Buyout artists, who presumably never came within 10,000 miles of wartime Saigon, talk about "napalming" corporate perquisites or liken their strategy to "charging through the rice paddies, not stopping for anything and taking no prisoners."

At the time, F. Ross Johnson was widely pilloried in the press as the embodiment of excess; his conflict of interest was obvious. Yet Burrough and Helyar show that Johnson, for all his free-spending ways, was way over his head in the major leagues of greed, otherwise known as Wall Street in the 1980s. What, after all, is more rapacious: the roughly $100 million Johnson stood to gain if his deal worked out over five years, or the $45 million in expenses KKR demanded for waiting 60 minutes while Ross Johnson prepared a final competing bid?

Barbarians is, in the parlance of the publishing world, a good read. At the same time, unfortunately, a disclaimer issued by the authors proves only too true. Anyone looking for a definitive judgment of LBOs will be disappointed. Burrough and Helyar do at least ask the pertinent question: What does all this activity have to do with building and sustaining a business? But authors should not only pose questions; they should answer them, or at least try.

Admittedly, the single most important answer to the RJR puzzle could not be provided by Burrough and Helyar because it is not yet known. The major test of any financial engineering is its effect on the long-term vitality of the leveraged corporation, as measured by such key indicators as market share (and not just whether the corporation survives its debt, as the authors imply). However, a highly-leveraged RJR Nabisco is already selling off numerous profitable parts of its business because they are no longer a "strategic fit": Wall Street code signifying a need for cash in order to service debts and avoid bankruptcy.

If the authors were unable to predict the ultimate outcome, they still had a rare opportunity to explain how and why an LBO is engineered. Unfortunately, their fixation on re-creating events and dialogue – which admittedly produces a fast-moving book – forced them to accept the issues as defined by the participants themselves. There is no other way to explain the book's uncritical stance. When, for example, the RJR Nabisco board of directors tried to decide which bid to accept, Burrough and Helyar report that several directors sided with KKR's offer because the LBO boutique "knew the value of keeping [employees] happy." It is impossible to tell from the book whether the directors knew this to be true or took KKR's word. Even a cursory investigation would have revealed that KKR is notorious for showing no concern for employees below senior management after a leveraged buyout.

The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire environment procured by buyout artists via their political contributions is scarcely mentioned, crucial though it is. Nowhere are the authors' priorities more obvious than in the number of words devoted to Henry Kravis's conspicuous consumption compared to those devoted to the details of the RJR deal. In testimony before Congress last year, no less an authority than Treasury Secretary Nicholas Brady – himself an old Wall Street hand – noted that the substitution of tax-deductible debt for taxable income is "the mill in which the grist of takeover premiums is ground."

In the case of RJR Nabisco, 81 percent of the $9.9 billion premium paid to shareholders was derived from tax breaks achievable after the buyout. This singularly important fact cannot be found in the book, however; nor will a reader learn that after the buyout the U.S. Treasury was obligated to refund RJR as much as $1 billion because of its post-buyout debt burden. In Barbarians, more time is spent describing Kravis's ostentatious gifts to his fashion-designer wife than to the tax considerations that make or break these deals.

Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll.

As the economist Henry Kaufman has written, the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles. Inexorably, the shift away from equity invites the close, even intrusive involvement of institutional investors (banks, pension funds, and insurance companies) that provide the financing. Superficially, this moves America closer to the system that prevails in Germany and Japan, where historically the relationship between the suppliers and users of capital is close. But Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development.

The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains.

[Nov 29, 2017] Positive Feedback Loops, Financial Instability, The Blind Spot Of Policymakers

Highly recommended!
Notable quotes:
"... Primates with about exponentially increasing physical technologies continue to deliberately ignore and misunderstand themselves as much as is humanly possible, due to the history of warfare making and maintaining the currently existing political economy, whose maliciousness is manifesting through runaway vicious feedback loops, whereby the excessively successful control of Civilization through applications of the methods of organized crime are resulting in that Civilization manifesting runaway criminal insanities. Indeed, in that context, where there is almost nothing but the central core of triumphant organized crime, namely bankster dominated governments, surrounded by various layers of controlled "opposition" groups, which stay within the same bullshit-based frames of reference regarding those phenomena, the overall situation is that society becoming about exponentially sicker and insane. ..."
"... In general, "Asset Managers" are stuck inside taking for granted that everything they do has become almost totally based on being able to enforce frauds, despite some of them noticing the increasingly blatant ways that there are accumulating apparent anomalies in those systems, as vicious feedback loops drive those systems to become about exponentially more fraudulent, and therefore increasingly unbalanced. To come to better terms with those apparent anomalies requires going through series of intellectual scientific revolutions and profound paradigm shifts, which overall become ways that human beings better understand themselves as manifestations of general energy systems. However, since doing so requires recognizing how and why governments are necessarily the biggest forms of organized crime, dominated by the best organized gangsters, the banksters, it continues to be politically impossible to accomplish that. ..."
"... At each open, algos compute the increase in their AUM from the prior day and their margin reach. They then begin buying. All algos do this. Buying whenever cash/margin exists; selling whenever profit targets exist. On pullbacks, the algos withdraw, volume evaporates, minimizing the drop. The algos collectively increase equity prices without consideration of the value of the money involved. Not valuations. No fundamentals. Just ones and zeroes. Just a program. ..."
Nov 22, 2017 | www.zerohedge.com

Macro-prudential regulations follow financial crises, rarely do they precede one. Even when evidence is abundant of systemic risks building up, as is today, regulators and policymakers have a marked tendency to turn an institutional blind eye, hoping for imbalances to fizzle out on their own – at least beyond the duration of their mandates. It does not work differently in economics than it does for politics, where short-termism drives the agenda, oftentimes at the expenses of either the next government, the broader population or the next generation.

It does not work differently in the business world either, where corporate actions are selected based on the immediate gratification of shareholders, which means pleasing them at the next round of earnings, often at the expenses of long-term planning and at times exposing the company itself to disruption threats from up-and-comers.

Long-term vision does not pay; it barely shows up in the incentive schemes laid out for most professions . Economics is no exception. Orthodoxy and stillness preserve the status quo, and the advantages hard earned by the few who rose from the ranks of the establishment beforehand.

Yet, when it comes to Central Banking, and more in general policymaking, financial stability should top the priority list. It honorably shows up in the utility function, together with price stability and employment, but is not pursued nearly as actively as them. Central planning and interventionism is no anathema when it comes to target the decimals of unemployment or consumer prices, yet is residual when it comes to master systemic risks, relegated to the camp of ex-post macro-prudential regulation. This is all the more surprising as we know all too well how badly a deep unsettlement of financial markets can reverberate across the real economy, possibly leading into recessions, unemployment, un-anchoring of inflation expectations and durable disruption to consumer patterns. There is no shortage of reminders for that in the history books, looking at the fallout of dee dives in markets in 1929, 2000 and 2007, amongst others.

Intriguingly, the other way round is accepted and even theorized. Manipulating bond and stock prices, directly or indirectly, is mainstream policy theory today. From Ben Bernanke's 'portfolio balance channel theory', to the relentless pursuit of the 'wealth effect' via financial repression under Janet Yellen and Haruhiko Kuroda, to Mario Draghi tackling the fragmentation of credit markets across the EU via direct asset purchases, the practice has become commonplace. To some, like us, the 'wealth effect' may be proving to be more of an 'inequality effect' than much, leading to populism and constantly threatening regime change, but that is beyond the scope of this note today.

What we want to focus on instead is the direct impact that monetary interventionism like Quantitative Easing ('QE') and Negative or Zero Interest Rate Policies ('NIRP' or 'ZIRP') have on the structure of the market itself, how they help create a one-sided investment community, oftentimes long-only, fully invested when not levered up, relying on record-highs for bonds and stocks to perpetuate themselves endlessly - despite a striking disconnect from fundamentals, life-dependent on the lowest levels of volatility ever seen in history . The market structure morphed under the eyes of policymakers over the last few years, to become a pressure cooker at risk of blowing-up, with a small but steadily growing probability as times goes by and the bubble inflates. The positive feedback loops between monetary flooding and the private investment community are culpable for transforming an ever present market risk into a systemic risk, and for masking as peaceful wha