|Contents||Bulletin||Scripting in shell and Perl||Network troubleshooting||History||Humor|
|News||Financial Sector Induced Systemic Instability of Economy||Recommended Links||Steve Keen||Randall Wray||Michael Hudson|
|Casino Capitalism||Principal-agent problem||Numbers racket||Criminal negligence in financial regulation||Corruption of FED||Invisible Hand Hypothesis|
|The “Too Big To Fail” Problem||In Goldman Sachs we trust||Citi - The bank that couldn’t shoot straight||JPMorgan||AIG collapse||Lehman|
|Free Markets Newspeak as Opium for regulators||Derivatives Lobby Corrupts Congress||Lobbying and the Financial Crisis||Control Fraud
(crisis of corporate governance)
|Stock Market buybacks as a Ponzy scheme||Derivatives|
|Quiet coup||Financial Bonuses as Money Laundering||Corporatist Corruption: Systemic Fraud under Clinton-Bush-Obama Regime||Corporatism||Neoliberalism as a New Form of Corporatism||Financial obesity|
|Anatomy of stock market bubble||HFT||Corruption of Regulators||Financial crash of 2008||Financial Humor||Etc|
|"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. ”
|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 followed Marx stating that "capitalism is inherently flawed, being prone to booms, crises and depressions.
- This instability is due to characteristics the financial system must possess and will inevitably acquire, if it is to be consistent with full-blown capitalism.
- Such a financial system will be capable of both generating signals that induce an accelerating desire to invest and of financing that accelerating investment." (Minsky 1969b: 224)
- “The natural starting place for analyzing the relation between debt and income is to take an economy with a cyclical past that is now doing well.
- The inherited debt reflects the history of the economy, which includes a period in the not too distant past in which the economy did not do well.
- Acceptable liability structures are based upon some margin of safety so that expected cash flows, even in periods when the economy is not doing well, will cover contractual debt payments.
- As the period over which the economy does well lengthens, two things become evident in board rooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid to lever." (65)
- It becomes apparent that the margins of safety built into debt structures were too great. ans should be reduced...
- As a result, over a period in which the economy does well, views about acceptable debt structure change. In the dealmaking that goes on between banks, investment bankers, and businessmen, the acceptable amount of debt to use in financing various types of activity and positions increases.
- This increase in the weight of debt financing raises the market pnce of capital assets and increases investment. As this continues the economy is transformed into a boom economy... ” (65)
- This transforms a period of tranquil growth into a period of speculative excess
- “Stable growth is inconsistent with the manner in which investment is determined in an economy in which debt-financed ownership of capital assets exists, and the extent to which such debt financing can be carried is market determined.
- It follows that the fundamental instability of a capitalist economy is upward.
- The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy." (65)
He called his model the "Financial Instability Hypothesis". According to Steve Keen, Minsky model boils down to three statements:
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.
«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?
- First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale).
- Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments.
- Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example.
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.And he understood the roots of the current credit bubble much better that neoclassical economists like Bernanke:
...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.
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:
This is a gold age for bankers. As Peter Boone Simon Johnson wrote in New Republic (The Next Financial Crisis ):
"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."
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 , 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.
Here is one such paper Leveraged Bubbles (Sep 01, 2015)
Posted by Mark Thoma on Tuesday, September 1, 2015 at 09:25 AM in Economics, Financial System | Permalink Comments (8) Double Capitulation said...
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.
"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.
Peter K. -> djb...
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
mulp -> 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.
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.
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...mulp -> Blissex...
«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.
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.
Apr 21, 2017 | www.nytimes.com
Wells Fargo 's board and management are scheduled to meet shareholders at the company's annual meeting Tuesday in Ponte Vedra Beach, Fla. With the phony account-opening scandal still making headlines , and the company's stock underperforming its peers, it's a good bet the bank's brass will have some explaining to do.
How could such pernicious practices at the bank be allowed for so long? Why didn't the board do more to stop the scheme or the incentive programs that encouraged it? And where, oh where, were the regulators?
Wells Fargo's management has conceded making multiple mistakes over many years; it also says it has learned from them. In a meeting this week with reporters at The New York Times, Timothy J. Sloan, Wells Fargo's chief executive, said the bank had made substantive changes to its structure and culture to ensure that dubious practices won't take hold again.
But there's a deeper explanation for why Wells Fargo's corrosive sales practices came about and continued for years. And it has everything to do with the bank-friendly regulatory regime in Washington and the immense sway that institutions like Wells Fargo have there. This poisonous combination contributes to a sense among giant banking institutions that they answer to no one.Continue reading the main story Advertisement Continue reading the main story
The capture of our regulatory and political system by big and powerful corporations is real. And it is a central and disturbing theme in the new book by Senator Elizabeth Warren , Democrat of Massachusetts.Advertisement Continue reading the main story
"This Fight Is Our Fight" contains juicy but depressing anecdotes about how our most trusted institutions have let us down. It also shows why, years after the financial crisis, big banks are still large, in charge and, basically, unaccountable for their actions.
"In too many of these organizations, there are rewards for cheating and punishments for calling out the cheaters," Ms. Warren said in an interview Wednesday. "As long as that's the case, the biggest financial institutions will continue to put their customers and the economy at risk."
Ms. Warren's no-nonsense views are bracing. But they are also informed by a thorough understanding of how dysfunctional Washington now is. This failure has cost Main Street dearly, she said, but has benefited the powerful.
Wells Fargo got a lot of criticism from Ms. Warren, both in her book and in my interview - and on live television during the Senate Banking Committee hearing on the account-opening mess in September. She was among the harshest cross-examiners encountered by John G. Stumpf, who was Wells Fargo's chief executive at the time. "You should resign," she told him , "and you should be criminally investigated." (Mr. Stumpf retired the next month.)
This week, Ms. Warren called for the ouster of the company's directors and a criminal inquiry into the bank.
"Yes, the board should be removed, but that's not enough," she told me. "There still needs to be a criminal investigation. The expertise is in the regulatory agencies, but the power to prosecute lies mostly with the Justice Department, and if they don't have either the energy or the talent - or the backbone - to go after the big banks, then there will never be any real accountability."
Banks are not the only targets in Ms. Warren's book. Others include Wal-Mart, for its treatment of employees; for-profit education companies, for the way they pile debt on unsuspecting students; the Chamber of Commerce, for battling Main Street; and prestigious think tanks, for their undisclosed conflicts of interest.
My favorite moments in the book involve the phenomenon of regulatory capture: the pernicious condition in which institutions that are supposed to police the nation's financial behemoths actually come to view them as clients or pals.
One telling moment took place in 2005, when Ms. Warren, then a Harvard law professor, was invited to address the staff at the Office of the Comptroller of the Currency, a top regulator charged with monitoring the activities of big banks.Advertisement Continue reading the main story
She was thrilled by the invitation, she recalled in the book. After years of tracking various problems consumers experienced with their banks - predatory lending, sky-high interest rates and dubious fees - Ms. Warren felt that, finally, she'd be able to persuade the regulators to crack down.
Her host for the meeting was Julie L. Williams, then the acting comptroller of the currency. In a conference room filled with economists and bank supervisors, Ms. Warren presented her findings: Banks were tricking and cheating their consumers.DealBook
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After the meeting ended and Ms. Williams was escorting her guest to the elevator, she told Ms. Warren that she had made a "compelling case," Ms. Warren writes. When she pushed Ms. Williams to have her agency do something about the dubious practices, the regulator balked.
"No, we just can't do that," Ms. Williams said, according to the book. "The banks wouldn't like it."
Ms. Warren was not invited back.
Ms. Williams left the agency in 2012 and is a managing director at Promontory , a regulatory-compliance consulting firm specializing in the financial services industry. When I asked about her conversation with Ms. Warren, she said she had a different recollection.
"I told her I agreed with her concerns," Ms. Williams wrote in an email, "but when I said, 'We just can't do that,' I explained that was because the Comptroller's office did not have jurisdiction to adopt rules to ban the practice. I told her this was the Federal Reserve Board's purview."
Interestingly, though, Ms. Warren's take on regulatory capture at the agency was substantiated in a damning report on its supervision of Wells Fargo, published by a unit of the Office of the Comptroller of the Currency on Wednesday.
The report cited a raft of agency oversight breakdowns regarding Wells Fargo. Among them was its failure to follow up on a slew of consumer and employee complaints beginning in early 2010. There was no evidence, the report said, that agency examiners "required the bank to provide an analysis of the risks and controls, or investigated these issues further to identify the root cause and the appropriate supervisory actions needed."Advertisement Continue reading the main story
Neither did the agency document the bank's resolution of whistle-blower complaints, the report said, or conduct in-depth reviews and tests of the bank's controls in this area "at least from 2011 through 2014." ( The agency recently removed its top Wells Fargo examiner, Bradley Linskens, from his job running a staff of 60 overseeing the bank.)
"Regulatory failure has been built into the system," Ms. Warren said in our interview. "The regulators routinely hear from the banks. They hear from those who have billions of dollars at stake. But they don't hear from the millions of people across this country who will be deeply affected by the decisions they make."
This is why the Consumer Financial Protection Bureau plays such a crucial role, she said. The agency allows consumers to sound off about their financial experiences, and their complaints provide a heat map for regulators to identify and pursue wrongdoing.
But this setup has also made the bureau a target for evisceration by bank-centric politicians.
"There was a time when everything that went through Washington got measured by whether it created more opportunities for the middle class," Ms. Warren said. "Now, the people with money and power have figured out how to invest millions of dollars in Washington and get rules that yield billions of dollars for themselves."
"Government," she added, "increasingly works for those at the top."
Apr 15, 2017 | economistsview.typepad.comDenis Drew , April 15, 2017 at 06:58 AMWhat's missing in each and every case above -- at least in the USA! -- is countervailing power. 6% labor union density in private business is equivalent to 20/10 blood pressure in the human body: it starves every other healthy process.cm -> Denis Drew ... , April 15, 2017 at 12:16 PM
It is not just labor market bargaining power that has gone missing, it is not only the lost political muscle for the average person (equal campaign financing, almost all the votes), it is also the lack of machinery to deal with day-to-day outrages on a day-to-day basis (that's called lobbying).
Late dean of the Washington press corps David Broder told a young reporter that when he came to DC fifty years ago (then), all the lobbyists were union. Big pharma's biggest rip-offs, for profit school scams, all the stuff you hear about for one day on the news but no action is ever taken -- that's because there is no (LABOR UNION) mechanism to stay on top of all (or any) of it (LOBBYISTS).It is a chicken and egg problem. Before large scale automation and globalization, unions "negotiated" themselves their power, which was based on employers having much fewer other choices. Any union power that was ever legislated was legislated as a *result* of union leverage, not to enable the latter (and most of what was legislated amounts to limiting employer interference with unions).Peter K. -> cm... , April 15, 2017 at 12:18 PM
It is a basic feature of human individual and group relations that when you are needed you will be treated well, and when you are not needed you will be treated badly (or at best you will be ignored if that's less effort overall). And by needed I mean needed as a specific individual or narrowly described group.
What automation and globalization have done is created a glut of labor - specifically an oversupply of most skill sets relative to all the work that has to be done according to socially mediated decision processes (a different set of work than what "everybody" would like to happen as long as they don't have to pay for it, taking away from other necessary or desired expenditure of money, effort, or other resources).
Maybe when the boomers age out and become physically too old to work, the balance will tip again."What automation and globalization have done is created a glut of labor - "cm -> Peter K.... , April 15, 2017 at 01:32 PM
No it's been policy and politics. Automation and globalization are red herrings. They've been used to enrich the rich and stick it to everyone else.
They don't have to be used that way.
There is nothing natural or inherent about it. It's all politics and class war and the wrong side is winning.
OK - they have *enabled* it. The agency is always on the human side. But at the same time, you cannot wish or postulate away human greed.cm -> Peter K.... , April 15, 2017 at 01:44 PMSame thing with the internet - it has been hailed as a democratizing force, but instead it has mostly (though not wholly) amplified the existing power differentials and motivation structures.Denis Drew -> cm... , April 15, 2017 at 03:19 PM
Anecdotally, a lot of companies and institutions are either restricting internal internet access or disconnecting parts of their organizations from the internet altogether, and disabling I/O channels like USB sticks, encrypting disks, locking out "untrusted" boot methods, etc. The official narrative is security and preventing leaks of confidential information, but the latter is clearly also aimed in part at whistleblowers disclosing illegal or unethical practices. Of course that a number of employees illegitimately "steal" data for personal and not to uncover injustices doesn't really help.
Surely there is a huge difference between the labor market here and the labor market in continental Europe -- though labor there faces the same squeezing forces it faces here. Think of German auto assembly line workers making $60 an hour counting benefits.libezkova -> Denis Drew ... , April 15, 2017 at 04:14 PM
Think Teamster Union UPS drivers -- and pity the poor, lately hired (if they are even hired) Amazon drivers -- maybe renting vans.
The Teamsters have the only example here of what is standard in continental Europe: centralized bargaining (aka sector wide labor agreements): the Master National Freight Agreement: wherein everybody doing the same job in the same locale (entire nation for long distance truckers) works under one common contract (in French Canada too).
Imagine centralized bargaining for airlines. A few years ago Northwest squeezed a billion dollars in give backs out of its pilots -- next year gave a billion dollars in bonuses to a thousand execs. Couldn't happen under centralized bargaining -- wouldn't even give the company any competitive advantage."What's missing in each and every case above -- at least in the USA! -- is countervailing power."
It was deliberately destroyed. Neoliberalism needs to "atomize" work force to function properly and destroys any solidarity among workers. Unions are anathema for neoliberalism, because they prevent isolation and suppression of workers.
Amazon and Uber are good examples. Both should be prosecuted under RICO act. Wall-Mart in nor far from them.
Rising fatalities from heart disease and stroke, diabetes, drug overdoses, accidents and other conditions caused the lower life expectancy revealed in a report by the National Center for Health Statistics .
== quote ==
Anne Case and Angus Deaton garnered national headlines in 2015 when they reported that the death rate of midlife non-Hispanic white Americans had risen steadily since 1999 in contrast with the death rates of blacks, Hispanics and Europeans. Their new study extends the data by two years and shows that whatever is driving the mortality spike is not easing up.
... ... ..
Offering what they call a tentative but "plausible" explanation, they write that less-educated white Americans who struggle in the job market in early adulthood are likely to experience a "cumulative disadvantage" over time, with health and personal problems that often lead to drug overdoses, alcohol-related liver disease and suicide.
== end of quote ==
Greed is toxic. As anger tends to accumulate, and then explode, at some point neoliberals might be up to a huge surprise. Trump was the first swan.
Everybody bet on Hillary victory. And then...
Apr 15, 2017 | economistsview.typepad.comGerald Scorse , April 14, 2017 at 06:20 AMStatistical Significance Is Overrated - Noah SmithChris G -> Gerald Scorse... , April 14, 2017 at 07:29 AM
"[R]emember that statistical significance is only part of what you need to know. How strong an effect is, and how important it is in the real world, might matter even more."
I try to learn something new every day. This is it for Friday, April 14, 2017. Thanks Noah.I thought Smith's column was quite good. (I don't write that very often.) "We know what the effect accurately and precisely. It's really small and doesn't matter." is important if/when that's the case. You want to know when you can get away with ignoring something when you're creating your (approximate) model of how the world works. Conversely, "We know what the effect is pretty accurately but not super precisely. We know enough that we can say that it's a big deal but we're still figuring out precisely how big a deal." is also critical information. Knowledge re the former effect may be more statistically significant than the latter while at the same time being less materially significant. That can be a fairly subtle point to a non-technical audience. Heck, it can be a subtle point to technically-oriented audience.libezkova said in reply to Chris G ... , April 14, 2017 at 04:11 PM
I think that requirement of the normal (or Gaussian) distribution that is behind most statistical metrics is the weakest part.
Normal distribution is the distribution with the maximum entropy for a specified mean and variance. As such it is poorly suited as the distribution of the data reflecting economic or social processes (fat tails problems).
Mar 18, 2017 | economistsview.typepad.comPeter K. : March 18, 2017 at 09:29 AMhttp://www.bradford-delong.com/2017/02/the-united-states-had-an-immense-boom-in-the-1990s-that-was-in-the-end-financial-disappointing-for-those-who-invested-in-it.htmlPeter K. -> Peter K.... , March 18, 2017 at 09:31 AM
Major Malinvestments Do Not Have to Produce Large Depressions by Brad DeLong
February 22, 2017 at 06:06 AM
The United States had an immense boom in the 1990s. That was in the end financial disappointing for those who invested in it, but not because the technologies they were investing in did not pan out as technologies, not because the technologies deliver enormous amounts of well-being to humans, but because it turned out to be devil's own task to monetize any portion of the consumer surplus generated by the provision of information goods.
Huge investments in high tech and communications. Huge amounts of utility generated. Little financial return. $4 trillion of investors' wealth destroyed as assets were revalued. That is something like 8 times the fundamental losses we saw in subprime mortgages and home equity loans made on houses in the desert between Los Angeles and Albuquerque from mid 2006-mid 2008.
A 1.5%-point rise in the unemployment rate after 2000 is not nothing--it is a bad thing. But it is not a 7%-point rise. And it is not a failure to close any of the gap vis-a-vis the pre-crisis trend of potential thereafter and a dark shadow over economic growth for a generation thereafter. Yet the fundamental shock from dot-com looks to me 8 times as large as the fundamental shock from subprime.
That tells me that we can deal with such shocks to private sector credit that go wrong: Have them be to equity wealth in the first place, or rapidly transform all the financial asset claims affected into equity on the fly as the crisis hits. Easy to say. Hard to do. We make sure they are diversified. And we do not, not, not, not, not, not let the people in Basle get too clever with their ideas of what reserves and capital structure look like, and allow core reserves to be placed in assets that are not AAA--even if some ratings agency whose revenues depend on pleasing investment banks has labeled them as AAA.
Axel Weber tells this story:
"In Davos, I was invited to a group of banks--now Deutsche Bundesbank is frequently mixed up in invitations with Deutsche Bank. I was the only central banker sitting on the panel. It was all banks. It was about securitizations. I asked my people to prepare. I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions. When I was at this meeting--and I really should have been at these meetings earlier--I was talking to the banks, and I said: "It looks to me that since the buyers and the sellers are the same institutions, as a system they have not diversified" .
That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them.
What was missing--and I think that is important for the view of what could be learned in economics--is that finance and banking was too-much viewed as a microeconomic issue that could be analyzed by writing a lot of books about the details of microeconomic banking. And there was too little systemic views of banking and what the system as a whole would develop like. The whole view of a systemic crisis was just basically locked out of the discussions and textbooks..."
Eichengreen, Alan Taylor, and Kevin O'Rourke think that, once the run on the shadow banking system was underway, this was the largest shock relative to the size of the market financial markets have ever experienced. We could have avoided this. If we had done our surveillance sufficiently deeper, we would have seen that this might be coming...
But, even so there was nothing baked in the cake of the housing bubble that in any sense required what the world economy has gone through in the past decade.
Indeed, John Maynard Keynes had a good deal to say about this in Notes on the Trade Cycle:
"The preceding analysis may appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest against a slump.
To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous. It may refer to investments which are destined to disappoint the expectations which prompted them or for which there is no use in conditions of severe unemployment, or it may indicate a state of affairs where every kind of capital-goods is so abundant that there is no new investment which is expected, even in conditions of full employment, to earn in the course of its life more than its replacement cost. It is only the latter state of affairs which is one of over-investment, strictly speaking, in the sense that any further investment would be a sheer waste of resources. Moreover, even if over-investment in this sense was a normal characteristic of the boom, the remedy would not lie in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking drastic steps, by redistributing incomes or otherwise, to stimulate the propensity to consume.
According to my analysis, however, it is only in the former sense that the boom can be said to be characterised by over-investment. The situation, which I am indicating as typical, is not one in which capital is so abundant that the community as a whole has no reasonable use for any more, but where investment is being made in conditions which are unstable and cannot endure, because it is prompted by expectations which are destined to disappointment.
It may, of course, be the case - indeed it is likely to be - that the illusions of the boom cause particular types of capital-assets to be produced in such excessive abundance that some part of the output is, on any criterion, a waste of resources; - which sometimes happens, we may add, even when there is no boom. It leads, that is to say, to misdirected investment. But over and above this it is an essential characteristic of the boom that investments which will in fact yield, say, 2 per cent. in conditions of full employment are made in the expectation of a yield of, say, 6 per cent., and are valued accordingly. When the disillusion comes, this expectation is replaced by a contrary "error of pessimism", with the result that the investments, which would in fact yield 2 per cent. in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 per cent. in conditions of full employment, in fact yield less than nothing. We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.
Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom..."http://jwmason.org/slackwire/links-and-thoughts-for-march-15-2017/libezkova -> Peter K.... , March 18, 2017 at 07:11 PM
by J.W. Mason
Against malinvestment. Brad Delong has, I think, the decisive criticism* of malinvestment theories of the Great Recession and subsequent slow recovery. In terms of the volume of investment based on what turned out to be false expectations, and the subsequent loss of asset value, the dot-com bubble of the late 1990s was much bigger than the housing bubble. So why were the macroeconomic consequences so much milder?..
* http://www.bradford-delong.com/2017/02/the-united-states-had-an-immense-boom-in-the-1990s-that-was-in-the-end-financial-disappointing-for-those-who-invested-in-it.htmlIt's not malinvestment that played decisive role. It's leverage which gradually increased during boom until it reached the level at which it necessarily caused the crash. Dot-com boom crash came at the levels of leverage far less then subprime. Generally financial firms only get appetite for exorbitant leverage at this time. So there were no Lehman Brother event during dot-com crash.
Also subprime bubble was facilitated by the Fed as a remedy for dot-com bubble. From this point of view it was just the second stage of dot-com bubble.
"Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last."
is very questionable, but typical for dyed-in-the-wool neoliberals. They are completely ahistoric.
He does not understand Minsky because he can't.
In reality when finance reached Ponzi stage nothing can prevent the crash and the longer the boom is artificially prolonged be deeper will be the crash and subsequent recession. So Fed efforts to mitigate dot-com bubble played a huge role of making the Great Recession as painful as it was.
zzz:The benefit of liquidity insurance, however, is undermined if the option to withdraw funding is triggered en masse by fear instead of fundamentals. Indeed, the notion that psychological factors are responsible for triggering ?nancial crises has a long tradition in the history in economic thought. Diamond and Dybvig (1983) formalize this idea by demonstrating how simple bank deposit contracts can induce a coordination game exhibiting two equi librium outcomes. In the fundamental equilibrium, all depositors represent their liquidity needs truthfully, so that options are exercised for fundamental economic reasons only. In the bank panic equilibrium, depositors not in need of liquidity pretend that they are. In this case, options are exercised out of a fear that little will be left for latecomers if other depositors are similarly misrepresenting themselves. In this way, the mere expectation of widespread redemptions can become a self-ful?lling prophecy.
While the notion of a panic-induced crisis has certain appeal, the phe- nomenon is di¢ cult to identify empirically. An alternative and equally plausible view asserts that ?nancial instability and its associated emotional trauma is merely symptomatic of deteriorating fundamentals experienced in the broader economy prior to an economic downturn; see Gorton (1988) and Allen and Gale (1998). While there is merit to this view, it is not inconsistent with the possibility that some crises are panic-driven. In particular, not all ?nancial crises are associated with recessions; see Capiro and Klingebiel (1997).
Because it is difficult to discriminate empirically between panic-based and fundamental-based explanations of crises, policymakers should hedge their bets when designing ?nancial regulation.1 We think that the proper hedge in this case might be usefully informed by theoretical, as well as empirical, plausibility. Given the current state of theory, a case could be made for adjusting posterior odds in favor of fundamentals over panics. The basis for this assessment rests on the apparent di¢ culty of generating bank panics in model economies, at least for economies that permit an empirically plausible degree of contractual ?exibility.
To explain what we mean by this, note that the seminal model of Dia- mond and Dybvig (1983) does not exhibit bank panics when banks adopt a simple suspension scheme,2 a device that was actually used? sometimes suuccessfully? to halt runs.
We pose a theory in which bank panics that can arise easily and naturally whenever short-term debt is used to ?nance investments characterized by even a modest degree of increasing returns to scale. And, while our explanation does not require sequential service, it is certainly not compromised if sequential service is imposed. Our idea is based on the notion that many investments entail some ?xed costs. A large commercial development project, for example, requires a signi?cant outlay in capital and labor services, e.g., cranes and crane operators, that must be paid regardless of how much construction activity is actually taking place on site.
Apr 06, 2017 | www.nakedcapitalism.comFrom a trading perspective, the big news was at the top: "The minutes will show it will be unlikely that the labor market improvement will be substantial enough to stave off new Treasury purchases into 2013." And in the sixth paragraph it describes how the Fed was likely to vote as early as December to stop the part of its MBS buying designed to counter the bonds being paid off (due to foreclosures, home sales, refis) and buy roughly $45 billion a month of Treasuries instead.
The amount of granular detail was stunning. For instance:
The committee will attach a predictive timetable outlining the duration of these purchases The monthly MBS purchases of around $40 billion will continue along side the new program Tomorrow's minutes will reference a staff paper The minutes will show the dovish majority was ready .[to make] open ended MBS and Treasury purchases as early as last month.
This is so specific that it comes of as if Medley either got its hands on an advance draft of the FOMC minutes or someone read it to her.
The report also describes, again in depth, how the decision process prior to the September meeting departed from established norms as well as voyeristic tidbits, such as that finalizing the text of the policy recommendations kept staffers up until after midnight.
Given how extraordinarily revealing this note was, Lacker's departure is unsatisfactory. Specifically:
Either Lacker lied or the investigators aren't even close to getting to the bottom of this . Lacker has admitted only to taking a call from the Medley analyst, supposedly having her run insider detail by him, and indirectly confirming it by not getting off the phone. From his resignation letter, which was released by law firm McGuireWoods, not the Richmond Fed:
During that October 2, 2012 discussion, the [Medley] Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued. Additionally, after that phone call, I did not, as required by the Information Security Policy, report to any FOMC personnel that the Analyst was in possession of confidential FOMC information. When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.
This reads like the equivalent of a plea bargain, that Lacker and his lawyers negotiated him to 'fess up to the most minimal breach possible provided he resign.
Alternatively, if Lacker is being truthful, it means that one or more additional people provided the information to the Medley analyst, Regina Schleiger.
Apr 04, 2017 | jessescrossroadscafe.blogspot.com
The Richmond Fed's noted rate hawk and serial dissenter Jeffrey Lacker resigned today as a result of an investigation into a leak in 2012 of confidential information to an analyst that sells hard to get information to wealthy subscribers.
The guest commentators, talking heads, and spokesmodels were attributing this resignation, or faux pas if you will, to an inadvertent slip by one of their own who is burdened with managing the finances of the US.
They kept mentioning that they do not wish this incident to diminish the public's confidence in the FED. I guess fomenting serial asset bubbles and enabling historic financial inequality through hare-brained policies is not enough. LOL
Apr 04, 2017 | economistsview.typepad.comBenIsNotYoda April 04, 2017 at 10:25 AMhttps://www.bloomberg.com/news/articles/2017-04-04/fed-s-lacker-quits-today-after-improper-disclosure-ny-timesBenIsNotYoda , April 04, 2017 at 10:41 AM
Fed's Lacker Quits Today After Improper Disclosure: NY Times
Richmond Fed president, Jeff Lacker, says he is resigning effective today after improperly disclosing confidential Fed information, NY Times said in tweet.
Fed President involved in disclosing future QE to analyst at firm selling research to hedge funds.
In other places, this is called insider information. At the Fed? I am shocked there is gambling at this establishment.
We need to clean house at the Fed. Starting at the top.Statement Of Dr. Jeffrey Lackerlibezkova , April 04, 2017 at 11:26 AM
During the past 13 years it has been my privilege to serve as President of the Federal Reserve Bank of Richmond. It has also been an honor to contribute to the development of our nation's monetary policy as a member of the Federal Reserve's Federal Open Market Committee ("FOMC").
While transparency of the monetary policy process is important, equally important are the confidentiality policies that protect the internal deliberations of the FOMC and ensure the integrity of our financial markets. The Federal Reserve's confidentiality policies seek to guide participants in maintaining the balance between transparency and confidentiality. The FOMC has had in place for many years two specific policies relating to confidentiality. the FOMC Policy on External Communications of Committee Participants (the "External Communications Policy-) and the Program for Security of FOMC Information (the "Information Security Policy").
In 2012, my conduct was inconsistent with those important confidentiality policies. Specifically, on October 2, 2012, I spoke by phone with an analyst ("the Analyst") concerning the September 2012 meeting of the FOMC. The Analyst authors reports on Federal Reserve matters on behalf of Medley Global Advisors ("Medley'). Medley publishes macro-economic policy intelligence for institutions such as hedge funds and asset managers and is owned by the Financial Times Limited.
During that October 2, 2012 discussion, the Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued. Additionally, after that phone call I did not, as required by the Information Security Policy, report to any FOMC personnel that the Analyst was in possession of confidential FOMC information. When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.
I deeply regret the role I may have played in confirming this confidential information and in its dissemination to Medley's subscribers. In this episode, as in all of my communications with analysts, journalists and the public, it was never my intention to reveal confidential information. I further acknowledge that through this and other conversations with the Analyst, I may have contravened the External Communications Policy, which prohibits providing any profit-making person or organization with a prestige advantage over its competitors.
Following these events, I was interviewed on December 10, 2012, as part of an internal review conducted by the General Counsel of the FOMC. In advance of that interview, on December 6, 2012, I provided written responses to a questionnaire issued by the General Counsel seeking, among other things, all relevant information regarding my communications with the Analyst. Althoug it was my intention to cooperate fully with the internal review, I regret that I did not disclose to the General Counsel, either in my December 6, 2012 questionnaire or the December 10, 2012 interview, that the Analyst was in possession of confidential information during my conversation with her on October 2,2012.
In 2015, I was interviewed again as part of a separate investigation conducted by the United States Attorney's Office for the Southern District of New York, the Office of the Inspector General of the Federal Reserve Board, the Federal Bureau of Investigation, and the U.S. Commodity Futures Trading Commission. In this subsequent 2015 interview with law enforcement officials, I did disclose that the Analyst was in possession of confidential information during my October 2. 2012 conversation with her.
I apologize to my colleagues and to the public I have been privileged to serve. I have always strived to maintain the appropriate balance between transparency and confidentiality, but I regret that in this instance I crossed the line to confirming information that should have remained confidential. I previously announced my intention to retire as President of the Federal Reserve Bank of Richmond in October 2017, and in light of these matters I have decided to make my departure from the Federal Reserve effective today."Fed President involved in disclosing future QE to analyst at firm selling research to hedge funds."
"I am shocked there is gambling at this establishment."
That's good ! Thank you !
Now let me wear Anne hat :-). The proper quote is "I'm shocked, shocked to find that gambling is going on in here! "
== quote ==
Rick: How can you close me up? On what grounds?
I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.
Captain Renault: Everybody out at once!
Apr 03, 2017 | www.nakedcapitalism.comPosted on March 31, 2017 by Yves Smith By Don Quijones of Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It's almost as if the more serious the crisis gets, the less we hear about it - otherwise, investors and voters might get spooked. And elections are coming up.
But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have "Texas Ratios" of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank's non-performing loans by its tangible book value plus reserves - or as American money manager Steve Eisman put it, "all the bad stuff divided by the money you have to pay for all the bad stuff."
If the TR is over 100%, the bank doesn't have enough money "pay for all the bad stuff." Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.
Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy's biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.
Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy's largest banks.
Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks' failure would send shock waves through the wider Italian financial industry.
There are other major Italian banks with Texas Ratios well in excess of 100%. They include:
Banco Popolare (the offspring of a merger of Banco Popolare di Verona e Novara and Banca Popolare Italiana in 2017 and then a subsequent merger with Banca Popolare di Milano on 1 January 2017): €120 billion in assets; TR: 217%. UBI Banca: €117 billion in assets; TR: 117% Banca Nazionale del Lavoro: €77 billion in assets; TR: 113% Banco Popolare Dell' Emilia Romagna: €61 billion in assets; TR: 140% Banca Carige: €30 billion in assets; TR: 165% Unipol Banca: €11 billion in assets; TR: 380%
In sum, almost all of Italy's largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%.
But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.
To stay on the right side of the solvency threshold, Unicredit has already had to raise €13 billion of new capital this year and last week it took advantage of the ECB's latest splurge of charitable lending (formally known as TLTRO II) to borrow €24 billion of free money. But as long as the financial health of the banks all around it continues to deteriorate, staying upright is going to be a tough order.
This is where things get complicated. In order to qualify for public assistance, banks must be solvent. Presumably, that would automatically disqualify any bank with a Texas Ratio of over 150%, which includes MPS, Banco Popolare, Popolare di Vicenza, Veneto Banca, Banca Carige and Unipol Banca. The bailout must also comply with current EU regulations including the Bank Recovery and Resolution Directive of Jan 1, 2016, which specifically mandates that before public funds are injected into a bank, shareholders and creditors must be bailed in for a minimum amount of 8% of total liabilities, as famously happened in the rescue of Cyprus' banking system in 2013.
The Italian government knows that this approach could end up wiping out retail investors (otherwise known as voters) who were missold, in many cases fraudulently, subordinated bonds by cash-hungry banks in the wake of the last crisis, in turn wiping out the government's votes. To avoid such an outcome, the government has proposed compensating those retail bondholders with public funds, just as the Spanish government did with the holders of preferente bonds. Which, of course, is in direct contravention of EU laws.
So far, the European Commission has stayed silent on the issue, presumably in the hope that the resolution of Italy's financial sector can be held off until at least after the French elections in late April, if not the German elections in September. Then, if those elections go Brussels' way, a continent-wide taxpayer funded bailout of banks' NPLs can be unleashed, as already requested by ECB Vice President Vitor Constancio and European Banking Authority President Andrea Enria.
With no guarantee that Italy's NPL-infested banks can hold out that long, it's a dangerous waiting-and-hoping game. In the meantime, shhhhhhhh0 0 63 3 1 This entry was posted in Banana republic , Banking industry , Doomsday scenarios , Europe , Guest Post , Politics , Regulations and regulators on March 31, 2017 by Yves Smith .
Subscribe to Post Comments 28 comments jsn , March 31, 2017 at 10:05 am
Trade now with TradeStation – Highest rated for frequent traderscraazyman , March 31, 2017 at 5:49 pm
I love it, hadn't heard that before. Natural outgrowth of the S&L bubble I figure.
What better state (my home state that I love/hate) to name a Bullshit to Bona Fide ratio for!AbateMagicThinking but Not money , March 31, 2017 at 10:44 pm
I wanna tell you about Texas Ratios and he Big Cheat
It comes out of the Italian swamps
cool and slow without any precision
like a fettuncini marinara recipe that's hard to master
Some call it heavenly in its brilliance
others mean and rueful of the Prussian dream
Don't you love the friends gathered together for this Italian graft
They have schemed up pyramids in honor of their escaping
This is the land where the euro died.
(Haygood knows what we're talkin about . . . )Dr Duh , March 31, 2017 at 11:09 am
Seems no one else spotted, or can be bothered to comment on your allusion to The Doors and The Wasp. I for one, cannot let it pass.
Reminds me that I used to to think it was:
Cows piss down my window like the waves down on the beach.
Happy mondegreens!John Tipre , April 2, 2017 at 8:30 pm
Great article. A couple questions
1. What is the overall Texas Ratio for the Italian banking system?
2. What is the mechanism connecting a 'bad' Texas Ratio to failure in this case? Are they funding long term liabilities with short term borrowing like Lehman and hence are at risk of being locked out of the market?
3. How interconnected are the Italian banks? Is there potential for a domino effect? What would be the mechanism, loss of confidence or actual counterparty risk?craazyman , March 31, 2017 at 11:41 am
All good questions. Come June, one may expect more EU austerity practices in the form of public bailout, Yes? The "public," the disappeared element of modern western political cultures, is the "backstop," the final insurer. Neoliberalism plays a strong role in the grossly unfair practice of public bailouts.Susan the other , April 1, 2017 at 11:01 am
What radar? Italy's last radar stations shut down for lack of money in 2013 and all the operators who could leave the country left for science jobs in Uganda and Brazil. There is no radar in Italy. Germany has radar but it only picks up signals from NATO or Brussels. Italy's scientific minds are busy with financial theory, in New Yawk. I've seen a few of them. Pretty smart dudes! And women! They like stochastic volatility and Wishart distributions but God Forbid you put them in front of a radar machine. They wouldn't know a bird from the Luftwaffe (haha sorry that was a long time ago).
What radar? Radar is so 20th century! Today we have Twitter and Facebook if you wanna stare at a glass screen and hear beeps. I think there's a Wikipedia page for radar but it's rusting. They use radar on boats and ships though. Maybe one of Italy's banks will go floating by on the ocean of liquidity from the ECB. Then it might show up on a radar someplace out near the Azores. Too bad you'll lose money no matter how you try to trade it. Or at least I would! That's for sure.DJG , March 31, 2017 at 11:57 am
a day late and a dollar short here, why do I have all my good ideas on April Fool's day? – but anyway: Schaeuble's "we are overbanked" is now Schaeuble's Paradox because if they let the little ones go they will bring down the big ones because everybody and their dog has a stake in this – much like you explained about China's bubble. So, yes Wolfgang, we are overbanked and no, Wolfgang, we are not overbanked everything is in perfect balance. And all those euros and dollars racing around with nowhere to go? – here's a suggestion: pour them as fast as you can back into the planet. Clean it up. Cool it down.ChrisAtRU , March 31, 2017 at 12:40 pm
A couple of reasons come to mind, but I may be too anecdotal:
When I was in Italy three weeks back, some friends of mine (and my friends are all pretty much red) mentioned that parties on the left had looted Monte dei Paschi di Siena. So the Partito Democratico, the successor party, is going to end up with a scandal (or with even more scandal).
A second idea crossed my mind: For many years, the Italians were the champion savers of Europe. (They were nearly as good at savings as the Japanese.) So these banks are filled with Italians' savings accounts and their retirement nest eggs. Weirdly, the Italian regulators may have some idea that the Italians and their savings habits can shift the balance. What's more likely, though, and what's worse is that once these banks start failing in series, you will see Italian families wiped out financially. The social devastation will bring down the government and may even bring down most of the political parties. The irony would be that the newer Movimento Cinque Stelle is less implicated (not that they have a plan either).JustAnObserver , March 31, 2017 at 1:46 pm
Thanks for this. I follow Bloomberg on Twitter and this came across the wire a day of so ago:
Italy Finance Minister Says Banking Problems 'Solved'
Needless to say, raised eyebrows by yours truly given previous material posted here. Just gave a first listen to it, and nothing he (Padoan) says suggests the dire straits outlined in the NC post. I'll follow up later, but perhaps a shorter version of his answers to the interviewer here would have been "Shhhhhhhhh "dontknowitall , March 31, 2017 at 2:10 pm
All we need now is for some Italian financial official to utter the Words Of Doom:
"The Fundamentals of the Economy are Sound".
(H/T J.K. Galbraith (I think))ChrisAtRU , March 31, 2017 at 7:33 pm
Maybe they are expecting a mysterious cash drop like it happened a number of years ago when two Japanese men were arrested at the Italian-Swiss border at Chiasso with fat briefcases carrying $134 billion in US bearer bonds. Of course since it was undeclared money the Italian State got to keep 50%. Now, since the Italian finance minister thinks the banking problems are resolved I imagine there must be a whole bus of Japanese moneymen on their way to Chiasso
https://en.wikinews.org/wiki/Italian_border_guards_seize_$134_billion_in_U.S._bonds_at_Swiss_borderChrisAtRU , March 31, 2017 at 7:31 pm
Hahahah! That is too funny – regardless of whether the bonds were real or not. Maybe the Italians are following the Wu Tang Financial paradigm ;-)John , March 31, 2017 at 9:12 pm
Ha! Yes, it was JKG. And for sure, the Words of Doom will be uttered just before well, Doom.ScottB , April 2, 2017 at 2:13 am
Well isn't that what most Keynesians think? That the fundamentals are relatively sound, the only problem is a financial crisis caused by asset bubbles? And that if we just increase the deficit (update the nation's infrastructure), things will be fine?
The reality is that it wasn't just a financial crisis that caused the post 2008 recession. The real economy is not in good shape, nor has been since the 1970's. The industrialization of Europe and Japan, followed by China and India, has caused a crisis of overproduction/under-utilization of capacity that has eaten away profit rates in manufacturing firms around the globe (even with the abundant supply of labor available from the ease of outsourcing). The only growth we've had since then has been from asset bubbles (Japanese real estate in the 80's, the US stock market in the 90's, US real estate in the 00's, EU bubbles in the 00's, etc.).
Fiscal stimulus can temporarily ease the burden by increasing demand, and monetary stimulus can temporarily reflate the asset bubbles, but there's no light at the end of the tunnel. (Not to mention that US federal deficit spending just boosts Chinese manufacturing sector and pollutes the planet more than anything else.) Earth has a finite amount of space and resources, and the mathematics of compound interest mean that growth rates will have to be low from here on out (there's no way the global economy will double by 2060 and then double again by 2100; not even the Chinese and Indian booms together could get us growing like that, nor do I think Africa alone could, either). That's something that fixing up a few dilapidated subway stations won't change–eventually, the gains will slow as we'll run out of infrastructure to repair.
The reality is the urbanization and industrialization are the lifeblood of capitalism, and without those two processes happening on a major scale, growth is low (just as it was during the 17th century). The only thing that will get us growing again is a major world war that blows up buildings and infrastructure everywhere, just like World War II did.BillC , March 31, 2017 at 1:02 pm
Followed by, "ittttttt."Stein , April 1, 2017 at 7:57 am
The article does not emphasize the factor that should (but surely will not) mitigate the extent to which the EU requires bail-ins by depositors and retail bondholders: the Italian banks' problem is non-performing loans substantially attributable to the austerity imposed by the EU's [non]growth and [non]stability pact. (Of course there's also the factor of bank managers' favoritism to political allies and back-scratching among the local elites. While that's a key factor with MPS and some of the four already-partially-rescued smaller regional banks, it's not the main cause of the Italian banking crisis).
Why should this be significant? Because some Italian political party (5 Stelle? Fratelli d'Italia? Lega Nord?) may be able to clearly and simply enunciate the case that (1) EU austerity is the direct result of other nations' (Spain, UK, Germany, US, ) banks' irresponsible speculation in derivatives and the like but (2) Italian banks did not participate in that speculative orgy; they were just fulfilling their proper mission of financing local, regional, and national enterprises and (3) much of the Italian middle class will be ruined by EU-required bail-ins. If the voting public understands this causal chain, I think Italians' conservative tendency to thus far stick with the EU and the Euro no matter what might be reversed overnight - and high time, too.sunny129 , March 31, 2017 at 4:03 pm
I'm sorry; but for the current problems, the Italians have nobody to blame but themselves.
1/ Their system did not allow them to fix their banks in time. The financial crisis was in 2008. It's almost TEN years after and they still haven't fixed their non-performing loans. The US did it quite fast (thanks, Obama) and put in a new bail-in rule. The EU took their time, but eventually did it and put in the BRRD, too. THe BRRD took years to negotiate and was not immediately implemented – so Italy could have bailed in its banks in the mean time, too.
They did not.
2/ The bail in would have worked like a charm in a non-fraudulent system. But Italian banks sold their subordinated bonds – fraudulently – to mom&pop investors, thus making it ill-adapted.
3/ Italian banks did not receive non-performing loans out of nowhere. It is the Italian banks themselves that gave or bought such non-performing loans.
So they did participate in the orgy, did not clean up afterwards for more than 10 years, fraudulently tried to cover everything up (because the subordinated bonds that are bail-in able are supposed to provide more capital to the banks), and are now going to screw the entire European Union because of this.
I think Italian banks should be bailed in.
But Italian bankers should be sent to jail.LT , April 1, 2017 at 1:30 pm
They have successfully masked the Banking problems under various CREATIVE accounting with final paint job of Extend & Pretend' No one challenged and the investors have accepted without any skepticism. Besides, they believe in the PUT by Draghi!Gman , March 31, 2017 at 6:02 pm
They've also masked it as I've said before:
They say it's a "populist" (voter) created crisis.
At root, it's yet anothet gift from the financial sector.TheCatSaid , March 31, 2017 at 7:35 pm
Italy as a country, 8th richest in global terms I believe, ain't poor, so somewhere along the line as ever, both within and without, as elsewhere in the EZ and the rest of the world, some are making hay out this debt crisis and have an interest in perpetuating it, whilst the blameless are yet again forced to endure its bitter consequences.John , March 31, 2017 at 9:19 pm
I wonder how Italy would fare if they left the Euro, compared to the problems discussed here in the case of Greece. Specifically, how easily could Italy be self-sufficient in food at medicines? I suspect Italy would be in a stronger position to weather any such storm, and they would have even more tourism Euro revenue in a transition period. (Assuming a messy transition period during which the conventional payment systems would be in disarray.)H. Alexander Ivey , March 31, 2017 at 10:05 pm
I've seen Yves and NC writers argue a few times that Italy is the euro country best suited to ditch the euro. I think it'd be France though; their economy has always been more national and independent than the rest of Europe, which is why in the early years of the crisis, things weren't nearly as bad there as they were in the PIIGS.
Whichever country decides to do so will end up facing economic ruin as the powers that be will make sure to punish it as much as possible (just as they'll do to the UK with the trade agreements) to make an example of it. Currency speculators will destroy the value of the new currency. And there are all of the crazy logistical and IT challenges that have been well-documented here as well.
Of course the most interesting scenario, by far, is Germany leaving the euro. But I can't ever seeing them be the first to do so, as they benefit too much from it.John , April 1, 2017 at 1:26 pm
Germany leaving the euro. But I can't ever seeing them be the first to do so, as they benefit too much from it
That might have been Cameron's thought about Brexit. How well did that work out?John , March 31, 2017 at 8:29 pm
Well, Cameron was an idiot for holding that referendum. And it's also important to remember that Germans hate referendums.RBHoughton , March 31, 2017 at 10:03 pm
I think that the EU and Italy will come to some sort of compromise on the bail-in law, or they will organize some sort of private sector rescue. And if not, I don't think Italians are quite ready to ditch the euro, even if a lot of folks lose money on the bail-in. Also, Beppe Grillo is not allowed to run for public office because of that manslaughter charge. We'll see more of the status quo, at least for a few more years.Stein , April 1, 2017 at 7:58 am
" . the more serious the crisis gets, the less we hear about it" Isn't that always the case with our 'keep it under your hat' media – information is money. For the money reporter its "What am I bid for an early chance to avoid loss?" For the politician hoping for a trouble-free life its "Don't excite the natives you know how irritable they can get!"
Don Quijones, Wolf Street and Naked Capitalism have done us all a great favor yet again. The level of money inflation is accelerating everywhere.Ignim Brites , April 1, 2017 at 2:55 pm
I was left under the impression that naked capitalism endorses the bail out of Italian banks. Has that changed?
Why are NPLs important in determining the solvency of a bank? Certainly, the bank doesn't have to pay to keep them on their books. So they are neither an asset or a liability. All that is relevant are performing loans, i.e. income, to liabilities. Now, it is certainly probable that banks have taken on liabilities in the expectation that what are now NPLs would be performing. And that is the core of the problem. But the measurement of the extent of the problem is simply income, future and current, based on performing assets vs liabilities, future and current.
Apr 02, 2017 | www.nakedcapitalism.comPosted on April 1, 2017 by Yves Smith By Raúl Ilargi Meijer, editor of Automatic Earth. Originally published at Automatic Earth
We are witnessing the demise of the world's two largest economic power blocks, the US and EU. Given deteriorating economic conditions on both sides of the Atlantic, which have been playing out for many years but were so far largely kept hidden from view by unprecedented issuance of debt, the demise should come as no surprise.
The debt levels are not just unprecedented, they would until recently have been unimaginable. When the conditions for today's debt orgasm were first created in the second half of the 20th century, people had yet to wrap their minds around the opportunities and possibilities that were coming on offer. Once they did, they ran with it like so many lemmings.
The reason why economies are now faltering invites an interesting discussion. Energy availability certainly plays a role, or rather the energy cost of energy, but we might want to reserve a relatively larger role for the idea, and the subsequent practice, of trying to run entire societies on debt (instead of labor and resources).
It almost looks as if the cost of energy, or of anything at all really, doesn't play a role anymore, if and when you can borrow basically any sum of money at ultra low rates. Sometimes you wonder why people didn't think of that before; how rich could former generations have been, or at least felt?
The reason why is that there was no need for it; things were already getting better all the time, albeit for a briefer period of time than most assume, and there was less 'want'. Not that people wouldn't have wanted as much as we do today, they just didn't know yet what it was they should want. The things to want were as unimaginable as the debt that could have bought them.
It's when things ceased getting better that ideas started being floated to create the illusion that they still were, and until recently very few people were not fooled by this. While this will seem incredible in hindsight, it still is not that hard to explain. Because when things happen over a period of decades, step by step, you walk headfirst into the boiling frog analogy: slowly but surely.
At first, women needed to start working to pay the bills, health care and education costs started rising, taxes began to rise. But everyone was too busy enjoying the nice slowly warming water to notice. A shiny car -or two, three-, a home in the burbs with a white picket fence, the American -and German and British etc.- Dream seemed to continue.
Nobody bothered to think about the price to pay, because it was far enough away: the frog could pay in installments. In the beginning only for housing, later also for cars, credit card debt and then just about anything.
Nobody bothered to look at external costs either. Damage to one's own living environment through a huge increase in the number of roads and cars and the demise of town- and city cores, of mom and pop stores, of forest land and meadows, basically anything green, it was all perceived as inevitable and somehow 'natural' (yes, that is ironic).
Damage to the world beyond one's own town, for instance through the exploitation of domestic natural resources and the wars fought abroad for access to other nations' resources, only a very precious few ever cared to ponder these things, certainly after the Vietnam war was no longer broadcast and government control of -or cooperation with- the media grew exponentially.
Looking at today's world in a sufficiently superficial fashion -the way most people look at it-, one might be forgiven for thinking that debt, made cheap enough, tapers over all other factors, economic and otherwise, including thermodynamics and physics in general. Except it doesn't, it only looks that way, and for a limited time at that. In the end, thermodynamics always beats 'financial innovation'. In the end, thermodynamics sets the limits, even those of economics.
That leads us into another discussion. If not for the constraints, whether they emanate from energy and/or finance, would growth have been able to continue at prior levels? Both the energy and the finance/political camps mostly seem to think so.
The energy crowd -peak oilers- appear to assume that if energy would have been more readily available, economic growth could have continued pretty much unabated. Or they at least seem to assume that it's the limits of energy that are responsible for the limits to economic growth.
The finance crowd mostly seems to think that if we would have followed different economic models, growth would have been for the taking. They tend to blame the Fed, or politics, loose regulation, the banking system.
Are either of them right? If they are, that would mean growth can continue de facto indefinitely if only we were smart enough to either make the right economic and political decisions, or to find or invent new sources of energy.
But what kind of growth do both 'fields' envision? Growth to what end, and growth into what? 4 years ago, I wrote What Do We Want To Grow Into? I have still never seen anyone else ask that question, before or since, let alone answer it.
We want growth by default, we want growth for growth's sake, without caring much where it will lead us. Maybe we think unconsciously that as long as we can secure growth, we can figure out what to do with it later.
But it doesn't work that way: growth changes the entire playing field on a constant basis, and we can't keep up with the changes it brings, we're always behind because we don't care to answer that question: what do we want to grow into. Growth leads us, we don't lead it. Next question then: if growth stops, what will lead us?
Because we don't know where we want growth to lead us, we can't define it. The growth we chase is therefore per definition blind. Which of necessity means that growth is about quantity, not quality. And that in turn means that the -presupposed- link between growth and progress falls apart: we can't know if -the next batch of- growth will make us better off, or make our lives easier, more fulfilling. It could do the exact opposite.
And that's not the only consequence of our blind growth chase. We have become so obsessed with growth that we have turned to creative accounting, in myriad ways, to produce the illusion of growth where there is none. We have trained ourselves and each other to such an extent to desire growth that we're all, individually and collectively, scared to death of the moment when there might not be any. Blind fear brought on by a blind desire.
As we've also seen, we've been plunging ourselves into ever higher debt levels to create the illusion of growth. Now, money (debt) is created not by governments, as many people still think, but by -private- banks. Banks therefore need people to borrow. What people borrow most money for is housing. When they sign up for a mortgage, the bank creates a large amount of money out of nothing.
So if the bank gets itself into trouble, for instance because they lose money speculating, or because people can't pay their mortgages anymore that they never could afford in the first place, the only way out for that bank, other than bailouts, is to sign more people up for mortgages -or car loans-, preferably bigger ones all the time.
What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn't have dreamt of buying not long ago now fits in their 'budget'. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.
Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It's of course not just the banks that are kept alive, it's the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.
That's right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.
What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we're doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.
This is today's general economic dynamic. It's exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it's just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it's paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.
Do we need growth? Is that even a question we can answer if we don't know what we would need or use it for? Is there perhaps a point, both from an energy and from a financial point of view, where growth simply levels off no matter what we do, in the same way that our physical bodies stop growing at 6 feet or so? And that after that the demand for economic growth must necessarily lead to The Only Thing That Grows Is Debt ?
It's perhaps ironic that the US doesn't appear to be either first or most at risk this time around. There are plenty other housing markets today with what at least look to be much bigger bubbles, from London to China and from Sydney to Stockholm. Auckland's bubble already looks to be popping. The potential consequences of such -inevitable- developments are difficult to overestimate. Because, as I said, the various banking systems and indeed entire economies depend on these bubbles.
The aftermath will be chaotic and it's little use to try and predict it too finely, but it'll be 'interesting' to see what happens to the banks in all these countries where bubbles have been engineered, once prices start dropping. It's not a healthy thing for an economy to depend on blowing bubbles. It's also not healthy to depend on private banks for the creation of a society's money. It's unhealthy, unnecessary and unethical. We're about to see why.
0 0 81 0 0 This entry was posted in Banking industry , Doomsday scenarios , Economic fundamentals , Free markets and their discontents , Guest Post , Income disparity , Real estate , The destruction of the middle class on April 1, 2017 by Yves Smith .
Subscribe to Post Comments 122 comments JEHR , April 1, 2017 at 5:54 am
Trade now with TradeStation – Highest rated for frequent tradersMoneta , April 1, 2017 at 7:39 am
This is one of the most succinct analyses of what we are doing and what we are in for. It answers my question about why each new subdivision where I live has bigger and bigger houses built on it. I think it is preposterous that a family of two or maybe four roams around in a three-story house with three bathrooms and four bedrooms in a highly priced home.
Growth is really destruction when you think about it: destruction of the trees cut down to build homes; destruction of the earth beneath the house that can no longer grow crops; destruction of bird's nests (by the thousands) when the trees are cut down; destruction of the water polluted by runoff; destruction and erosion from other plant removal, etc. And my example is just the building of one house–multiply that by many hundreds of thousands and the destruction becomes world wide. This is mind-boggling!Norb , April 1, 2017 at 7:57 am
New builds keep on getting bigger here too it gives people the idea that resources and energy are plentiful. Many don't seem to realize that this growth is based on short-termism and externalities.
It's ironic that houses are getting ever bigger when environmental and infrastructural problems are ballooning.Moneta , April 1, 2017 at 8:11 am
On a similar vein, a heavily wooded lot near my home was clearcut about a year ago and an office building was constructed. It sits vacant to this day. I have no idea what the speculative motivation for constructing the building was, but the entire character of the area was irrevocably changed for the worst. Where once a beautiful natural environment soothed the soul and offered habitat for numerous creatures, an unsightly building now stands- unused. Concrete, asphalt, and minimal landscaping. It is really a hole in the world. An unused hole.
The building is currently maintained though unoccupied, no doubt the investors still hoping to unload the property. With a downturn in the economy, the building is headed for abandonment. The only bright spot is that the forest will eventually reclaim the land- in only a few hundred years.c , April 2, 2017 at 5:30 am
Is it owned by a private equity fund?
Here in Ottawa, every time a building goes against the welfare of the community, it seems to be owned by a private equity fund.
Out in the burbs, one building owner charges peanuts for parking just to be annoying? Private equity.
Gym cutting costs not enough towels with bad ventilation private equity owns building and gym debt financed by private equity firm.
The list goes on then when I mention that pension plans are destroying our economy all hell breaks loose.c , April 2, 2017 at 5:35 am
Also the sand of waterways and coastal beaches worldwide shrinks fast; to be used in concrete and other building materials.
The mining of sand, a non-renewable resourceTeejay , April 2, 2017 at 8:03 am
SAND MININGBryan Kavanagh , April 1, 2017 at 6:00 am
Beach sand can not be used for making concrete.
https://www.quora.com/Why-is-sea-sand-not-used-for-construction-purposes-1Carla , April 1, 2017 at 6:21 am
Top article! Banks rent-seeking like there's no tomorrow have ensured for many borrowers there will be no tomorrow. But the banks will be OK: they'll be bailed out for their excesses. As Michael Hudson says, the FIRE sector (finance, insurance and real estate) is running rampant at enormous cost to the real economy.HBE , April 1, 2017 at 11:56 am
"We want growth by default, we want growth for growth's sake, without caring much where it will lead us."
We are cancer.
"It's also not healthy to depend on private banks for the creation of a society's money. It's unhealthy, unnecessary and unethical."
Altogether, a great post - Thank you, Ilargi and Yves!nonsense factory , April 1, 2017 at 2:47 pm
Extending this line of thought, the article (and your link) makes it very clear why economic growth, especially growth with no goal is unsustainable and damaging.
The same is true for population. Overpopulation leads to increased exploitation, increased ecological destruction, a decreasing standard of living and increased suffering for billions.
Population growth for the sake of growth leads to the same unmanageable and unjust state of affairs that we see in unsustainable economic growth.
Overpopulation is also a driver for that economic instability as resources and energy to keep that keep real-econ growth going become thinner and thinner and more capital is funneled into speculative bubbles, less real resource dependent.
Population growth can either be managed, stabilized and slowly reduced, just as unfocused and exploitative economic growth should be, or we have 2 other choices.
The entire world population lives at the same standard in terms of energy and caloric intake as rural Nigeria or we continue to blow a giant population bubble that will pop with truly disastrous effects that we may never come back from.bob , April 1, 2017 at 2:59 pm
Indeed a great post. The focus on thermodynamics is why.
When we look at biological systems, "growth" is balanced by "consumption"; or more technically, photosynthesis is balanced by respiration. Hence even though the biosphere is very active, it consumes as much as it creates, so it is in steady state. So the grass grows every year, then is eaten every year, and life goes on at a placid rate. Can humans learn to live like this?
This society encourages the opposite behavior – accumulate, accumulate, accumulate. One small house? Get a bigger house. Get a vacation home. Get two vacation homes. Put two cars and a truck in each home. Buy a boat and an airplane. Put expensive electronics in every home. Buy food imported from all over the world. Fly all over the world for expensive vacations. That's the dream. Of course everyone can't live like this so there has to be a large servant class to take care of the elite class. But they are encouraged to consume as much as possible, too. One house, maybe, but lots of electronics. Garages stuffed with exercise machines and stuff they bought on sale but never use. Closests full of clothes they never wear, huge racks of shoes. And huge credit bills to pay for all the stuff. Let alone all the addictive substances to blow money on, from alcohol to opiates to tobacco, more money down the rat hole.
I don't get it. I'd rather have a tiny cottage on a huge lot with a garden and a hedgerow than a huge house covering the whole lot. I could grow a lot of my own food, I'd have space outside, I'd never buy any processed food, I'd rarely eat out, I could invest in solar panels and cut down on energy use and be perfectly happy. And if everyone did this, they'd call it an economic recession because nobody would be buying all the cheap plastic crap imported from China.
What kind of screwed-up system have we invented? A system that deliberately produces greed, envy, anxiety, depression, misery, so go buy more useless shit to make yourself feel better, that's the essence of this society. It's everywhere, you can't get away from it – everyday interactions with people consumed by this mentality, it's like living with a pack of crazed idiot monkeys high on consumerism. Alienation is a sign of sanity.Moneta , April 1, 2017 at 3:38 pm
"The focus on thermodynamics is why."
There is no reason to believe that thermodynamics applies to anything but thermodynamics. Why not apply the "law of gravity" to economics?
It's just another attempt to apply "science" or sciency sounding words and "laws" to stuff that science has never been able to model, let alone predict in any reliable way. Which, seems very un-sciency.PhilM , April 1, 2017 at 10:56 pm
It does. What goes up must come down.Jeotsu , April 1, 2017 at 5:20 pm
Congratulations. You just proved his point.Carla , April 1, 2017 at 7:30 pm
Economics is an ecological system by extension. Living organisms (us) are using energy resources from the environment (our food is oil) to generate a "civilizational free energy" that allows us to do things and increase our population.
This is exactly the kind of system that is bound by laws of thermodynamics (maximum efficiency, inevitable loss, etc).
We create mighty illusions that humans are somehow divorced from the laws of physics. We print trillions and call ourselves rich.
Self deception only lasts for so long. People will realize that the perpetual motion machine they have been sold (the economic model of eternal growth as the basis for our entire civilization) only in a time of it's-to-late-now-mega-crisis.Moneta , April 1, 2017 at 7:17 am
My parents were both classical musicians. I am so lucky! In our home there was never money for the latest gizmo, but always enough to pay for piano lessons. My mother cut everybody's hair, but opened bank accounts in my sister's and my names when we were born - our "college accounts." We had very nice home-cooked meals, but never ate out. I remain profoundly grateful to my parents for the example they gave us: that neither money nor material goods could constitute a worthy aim in life.sunny129 , April 2, 2017 at 4:03 pm
Debt and printing has permitted us to keep on getting the resources and energy to keep the game going.
Over the last 5 decades, the number of people enjoying developed world creature comforts has gone from maybe 500 million to maybe 2 billion. But those not enjoying this have gone from 3 billion to 5 billion.
There is a limit to this materialism and this fact has been creeping up on us in developed countries. Most think it's only the 1% not sharing when instead we are probably facing a global redistribution of resources. IMO, most in developed countries are confusing past wealth and future wealth infra and a structure of society that needs mega energy and resources might just be wealth destroying.jackiebass , April 1, 2017 at 7:35 am
Who needs MONEY when one can have debt to infinity?Moneta , April 1, 2017 at 7:51 am
Ten years ago I wondered how people could afford the big homes, cars and all of the consumer products they were buying. 45 years ago I bought a home. I thought I got a deal at 7 3/4% interest. At that time a car loan was a good deal at 10% or less. Knowing this I wondered how people could be buying so much stuff when real wages were not any better than when I joined the work force in 1963. Then it hit me like a brick thrown into my face. It was because of so called cheap money. This leads people to borrow more than they really should because as long as they could make the payment everything would be fine. That is as long as they don't experience a crises like becoming unemployed , their job disappearing ,or having to take a job at a lower wage. Also they may become sick or disabled and not able to work. Neoliberal economics created the false economy. Then came the great recession that is still effecting the majority of the population. It happened gradually so most people dind't see it coming. Not mentioned that I believe is important is the creation of the student debt bubble. These college graduates, who were prime candidates to buy homes and consumer goods, found out they had no extra money after they paid their student debt. In fact many were forced to live with their parents. This removed an entire generation from the housing market and excess consumption. Until we have a drastic overhaul of how the economy functions things will only get worse for the majority of people. A major crises is in the making when present day working people reach retirement age. Since the vast majority of them lack enough resources they will retire in poverty or be forced to work until the die. The future looks very grim for the majority of todays working population.JTMcPhee , April 1, 2017 at 1:02 pm
Over the last few decades, stats show that something like 40% of 55+ are forced into early retirement due to sickness or restructuring
Since debt has grown drastically in the older group over over the last few decades, we are definitely facing a crisis.HopeLB , April 1, 2017 at 8:29 pm
The old could always just file bankruptcy, and zero out all that unplayable student-loan and consumer-credit and mortgage debt oh wait, I forget a fresh star is only for corporate persons
Or we olds could do what heedless youngs and the neolibs advise: Just Die!JTMcPhee , April 1, 2017 at 10:02 pm
Thank Joe Biden for that.different clue , April 2, 2017 at 1:12 am
Yah, that jovial bustards name was in mind at the moment.
Of course, he didn't do it all by himselflyman alpha blob , April 1, 2017 at 10:13 am
No . . . but he was happy to help. In fact, he was happy to lead and take some of the credit for it.JTMcPhee , April 1, 2017 at 10:41 am
There was a TV commercial several years ago with a crisply dressed, smiling man mowing the immaculate lawn of his McMansion, with a new SUV in the driveway, seemingly living the American Dream.
The narration asked 'How do they do it?' with the answer being 'They're up to their eyeballs in debt'. As someone brought up to be extremely debt averse, that commercial really hit home.
I tried to make do with what my paycheck would allow and yet I'd see others who I knew made about the same salary as me living much better and I never could figure out how they managed. Fast forward several years and my wife is out for a 'ladies night' with 3-4 other moms who all have larger homes, more cars, and go on more expensive vacations than we do. They started talking about pooling some money to start an investment club. As they got to talking about their financial situations, ALL of them except us had declared bankruptcy in recent years to get out from under their debt burdens.
This seems to be the dirty little secret of life in the US – if you're not in the 1%, the only way to 'keep up with the Joneses' is to take on unsustainable debt.lyman alpha blob , April 1, 2017 at 12:56 pm
What does "living much better" actually mean, I wonder?
Rich folks apparently display very pointedly a flaw in human wiring: an infinite capacity to absorb self-pleasing "getting and spending." Hardly a new observation, cf. Wordsworth, 1888: http://www.bartleby.com/145/ww317.html
"We" have no idea of "enough," not a clue about eating to a reasonably hunger and stopping with the satisfaction of a reasonable thirst. And of course zero agreement on what is "reasonable:" how dare "we" deny the agile and corrupt, or the desperate and oppressed, their shot at yuuuuge consumption and destruction?
I'm not likely to live to see it, but it sure seems like there's a big die-off coming - and once again, the Few who promote and profit from it, who serve up the cultural corpse that "we" have been trained to recognize as "good," with a heaping helping of Bernays sauce ™
So some of ":us" recognize the problem. Next question is, what is ?(or is there) a solution?HopeLB , April 1, 2017 at 9:05 pm
That wasn't the best choice of words on my part – living more expensively would have been better.
But you're right and it does get to the heart of the problem – how much is enough? Running an economy based on financialization is not going to end well.
And about the die-off, it's already here. It just hasn't affected humans yet so we pretend not to notice. Everything will be OK though – until suddenly it isn't.Anti Schmoo , April 2, 2017 at 1:39 am
Thank You for the Wordsworth! This one is often running in my mind:
The Second Coming
By William Butler Yeats
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.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?Anonymous , April 2, 2017 at 4:10 am
Apparently the great "die-off" has already started in the U.S., and white Usian's are leading the way.
Just 72 myself; so I don't expect to see the worst of itGman , April 2, 2017 at 5:04 am
The 'rich folks' I know are remarkable for their lack of spending. It's not that they make more money than others, though some do. It's that they consume less and invest their savings. Nobody wants to hear that.
'The Millionaire Next Door' was a popular book with an unpopular message: as far as becoming wealthy goes, playing defense is more important than playing offense. A frugal wife is very helpful. Planning is important. Some of the millionaires in the book never earned more than $75,000 a year.
Nobody wants to hear those messages of self sacrifice. Too bad. They work.Moneta , April 2, 2017 at 6:37 am
A more equitable society isn't just a Lefty's wet dream or a thinly veiled disguise for the politics of envy.
Constantly striving to aspire to it, which can only be achieved by 'good' government incidentally rather than relying on the largely pointless symbolic acts of often well meaning individuals, actually makes sound economic sense as well as social.
I've always believed that the sole justification for current warped status quo, for those who make their money largely in their sleep, is that maybe they like to see themselves as closet environmentalists, albeit self-serving eco-warriors, whose very actions effectively amount to the suppression of consumption through controlled impoverishment by debt.Gman , April 2, 2017 at 7:29 am
I believe we should all be more frugal when it comes to goods and services that are resource and energy intensive.
However, those millionaires next door getting rich on 70k incomes needed the market returns to get them their million or 2. So their wealth depended on the masses' overconsumption.Anonymous , April 2, 2017 at 10:04 am
Yes indeed, I agree, and the power that accruing wealth allows them to exercise ever more control of course. The environmental 'upside' is clearly an unintended, if arguably positive, consequence.
Thanks to the close to tested to destruction debt based money system the 'masses' are merely one component of demand. Their sheer numbers ensure a ready supply of consumers, thus rendering them expendable to those best placed to exploit them.
They are sustained increasingly at subsistence levels because, as you rightly say, they are vital to sustaining the wealth advantage of those who need them, but in their eyes, to coin a phrase, 'there's one born every minute.'optimader , April 1, 2017 at 12:23 pm
Moneta: I certainly agree that the Millonaire Next Door who got their on $70K or less probably needed the stock market to get there. However, I think the more typical MND got there by being thrifty while building a business, often a not very sexy business having to do with some obscure service that one would never think of when describing a millionaire.
We all need each other in some way. What many of the utopians writing on this page miss–I don't consider you among them, I might add–is how many services and goods would stop being produced, and how many jobs would disappear, if income and property were suddenly taxed at the levels they prefer.different clue , April 2, 2017 at 1:13 am
I tried to make do with what my paycheck would allow and yet I'd see others who I knew made about the same salary as me living much better and I never could figure out how they managed.
Sounds like you still have dry powder! I think you should put on your Altruism Hat and start buying down your neighbors debts!
Maybe park your beater on the driveway so there room to fix their fking jetskiis in your garage while you store them??johnnygl , April 1, 2017 at 8:31 am
Perhaps 'letting the Joneses pull ahead' is a viable behavioral alternative. At least for some.Moneta , April 1, 2017 at 8:37 am
Housing is really raging again. Who thought it was possible to have a second bubble in a decade? We're looking at a 6% rise in the last six months around here!
This is a terrible way to run a society.Alejandro , April 1, 2017 at 9:37 am
We've got a huge cohort hitting retirement years. According to the pension structure that was determined decades ago, this retirement needs to be financed with either markets and/or real estate.
Since something like 75% of our leaders are part of that cohort which needs high valuations, can we expect anything different?Moneta , April 1, 2017 at 9:51 am
We know when and where we're born, but know not when and where we'll die.
"Contributions" is a euphemism for taxes, implying that the difference between "pre-funding" and "pay-as-you-go" seems one of perception and deceptionAlejandro , April 1, 2017 at 10:43 am
Funding implies using capital markets to exploit the planet.
Pay as you go would mean taking from the workers' pay to give to retirees nobody wants to pay taxes so markets are usedMoneta , April 1, 2017 at 11:50 am
Huh? Not sure how you got to " exploit the planet" from my comment, but it mostly seems that when using the word "capital", the distinction between the nominal and the real always seems blurred, whether willingly or unwittingly.
Interesting that you would use a phrase like " taking from the workers' pay" and use the word "retirees" as opposed to retired workers, while never considering a LVT and a TFRT taxes have never been voluntary, and tax-cuts ARE debt write-downs, implying that an ISSUER of a currency CAN write-down a USERS "private" debt much more readily than a USER-as-creditor willMoneta , April 1, 2017 at 12:11 pm
Let's say the retiree needs to buy groceries and then you tax the land value of the rich retiree to pay for the poor retiree's grocery bill the rich retiree is still not working. It's the worker who still gets to produce the food and the retiree who gets to eat it. Great the worker gets to work for the benefit of others.
At the end of the day, the real world trumps the money world. It's the workers who produce the goods and services no matter how many dollars you print. So if you print and tax in a way where the workers stop working or become less productive, you are in trouble.Alejandro , April 1, 2017 at 12:42 pm
It's like the Spaniards thinking that coming back with shiploads of gold from the new world will make them rich while their economy has not changed. Just huge inflation or loss of purchasing power.different clue , April 2, 2017 at 1:17 am
Just as a reminder, the constraints on a USER of a currency are not the same constraints on an ISSUER and in this context, taxes do NOT fund spending. However taxes can AND do modify behavior.
>" Great the worker gets to work for the benefit of others."
This is a wedge and phatic half-statement "we" "all work for the benefit of others", so why shouldn't "we" also benefit from the work of others via a living wage? In the context of social security, why should age, disability, sickness, unemployment etc. translate into a death sentence?
In the context of inequality, a TFRT (Too F*cking Rich Tax) would not be needed to "fund" anything but could mitigate the effects of the contempt that the "haves" have with the "have-nots".Moneta , April 2, 2017 at 6:30 am
Retirees would be buying food from the foodmaker-worker, which would keep the foodmaker-worker working and buying other things from other thingmakers.
The retirees' spent money is actively mediating exchanges, not passively storing value.meme , April 2, 2017 at 11:52 am
It does not change the fact that there are people producing goods and services and people not producing them.
For a producer it makes more sense to give part of his labor to someone who can offer something in return.
When you have a huge boomer cohort trying to get the baby bust to transfer the fruits of their labor, you know you're heading for a problem.Moneta , April 2, 2017 at 6:52 am
I think that plenty of that boomer cohort, those that haven't saved enough for their retirements, would be happy to have and willing to work at living wage jobs and forgo retirement.
That problem, lack of living wage jobs, cuts across age demographics.justanotherprogressive , April 1, 2017 at 10:13 am
I guess if you believe the economy is a perpetual motion machine and that all we need is redistribution, your argument makes sense.
But what I see is a planet with physical limits and those retiring in the developed world clinging to a high energy/resource way of life.
IMO, the vast majority of those about to retire have already consumed more than their fair share of the world's resources and want the young's help to keep it going in retirement.
I believe our humanity requires us to help the elderly but the question for me is how do we distributes those joules? Everyone focuses on dollars when the treasure is the joulesMark , April 2, 2017 at 9:51 am
My house has appreciated 23.5% in price since I bought it three years ago. I was talking with my neighbors about this just last week. We are concerned because what appears to be happening in our sub is that houses are being bought by investment companies and then being put up for rent (there are real estate agents knocking on doors weekly in my sub asking to list our houses). When someone in our area puts up a house for sale, it is rarely on the market for more than a couple of weeks. What scares us even more is that these investment companies are renting them out for extremely low prices – far lower than what someone would pay for a mortgage, even with a 20% + down. It just doesn't make sensecraazyboy , April 1, 2017 at 10:57 am
Out here where I live, homes have appreciated in value ~20% per year for many years now.
I'm in the process of house hunting now in an area south of Seattle. Crappy starter track homes with zero character or view run for $450-500k, and the national home builders are throwing these places up as fast as they can. There are vast subdivisions of these places under construction now, and many of the empty lots already have "sold" signs out front. Better construction that looks like it will still be in good shape in 10-15 years will run in the $650-700k range, minimum.
Also, when I drive around and see the people buying these places are they do not strike me as the kinds of people who can afford a half-million dollar starter home – beater pickups parked in the driveways, obese people smoking cigarettes on the porches, etc. They've got to be just on the edge of what they can afford. I predict eventually this is going to end very badlyoptimader , April 1, 2017 at 12:25 pm
Quick! Take out a home equity loan before they change their minds!perpetualWAR , April 2, 2017 at 10:58 am
it's a real eye opener to look at the price escalation of Chicago lakefront condos on ZillowSound of the Suburbs , April 1, 2017 at 8:46 am
House across the street just sold for $649,000. It is 684 sf.
Seattle Bubble intact, ready for popping.Moneta , April 1, 2017 at 9:43 am
Why do we need growth?
The monetary system depends on it; the monetary system requires growth to pay off the interest.
The banks create money through loans but they only create the principal and not the money to pay the interest. There is never enough money in existence to pay off all the debt plus all the interest.
Government issued money that is not based on debt can be used in a static system, but people who propose this tend to get assassinated, e.g. Lincoln and Kennedy.
Why did debt explode?
Debt = money
When the world came off the gold standard in 1971, there were no hard anchors on the monetary system and debt and money creation were now unlimited.
One nation couldn't go crazy on its own as their currency would depreciate against everyone elses, the West when crazy together.
Housing booms create lots of money from new debt, which feeds back into the economy and gives rise to a more general boom throughout the economy.
House prices peak and the capital gain possibilities disappear, the speculators run and the housing boom turns to bust, usually caused by rising interest rates.
The repayments start to overtake the new debt and now the opposite effect takes hold, the money supply contracts into debt deflation, money is sucked out of the general economy and a very dangerous doom loop can easily form.
What is the problem with the explosion of debt?
It is all money borrowed from an impoverished future.
Hardly any of the lending has been productive lending into business and industry that generates the money to pay off the debt.
It has nearly all been lending intro financial speculation of all kinds, including housing.
Why are Western economies stagnating?
All the wealth has concentrated at the top subduing demand.
This is the US .
http://static5.businessinsider.com/image/557ef766ecad04fe50a257cd-960/screen shot 2015-06-15 at 11.28.56 am.png
Debt based consumption maxes. out.
We used neoclassical economics in the 1920s and maintained consumption with debt and allowed debt fuelled speculation in the US stock market. The stock market crashed and the debt deflation of the 1930s Great Depression followed. The impoverished future, set up by the preceding debt binge.
Keynes realized redistribution was needed to make capitalism sustainable, progressive taxation funding subsidized housing, education and services.
Income was just as important as profit, income looked after the demand side and profit the supply side.
We went back to neoclassical economics to find it still has all the old problems.Sound of the Suburbs , April 1, 2017 at 12:36 pm
What we humans perceive as wealth is not wealth in Mother Nature's eyes. Rien ne se perd, rien ne se crée. It's a transformation of matter pure and simple.
This means that most of the wealth we create depreciates and needs to be maintained or replaced for wealth to keep its value over the long term. So most of it is a reflection of past wealth not future wealth.
Over the last 5 decades, our profitability and productivity has depended on exploiting the investments we made in the decades before. Many of those assets are reaching their end of life and will need to be replaced.
However our system is mainly set up for growth and exploitation of existing assets/minimal maintenance not for replacing assets.
And the US with the reserve currency has forced everyone to play the same game.
I don't see how we can avoid a shock when all at the same time, we all start rebuilding the assets reaching their end of lifecraazyboy , April 1, 2017 at 11:13 am
We have probably gone back to raw capitalism at the worse possible time, some of those resource limits are already over the horizon and coming towards us.
The neo-liberal, new world order is disintegrating and it has left many problems behind to keep our minds off what should be the most pressing issues.
The main pre-occupation of our elites is getting one over on everyone else, not a good place to be.
When they start squabbling among themselves, this is when wars start, and with the existing order falling apart there is going to be some squabbling, they hate to lose anything.Sound of the Suburbs , April 1, 2017 at 12:42 pm
Not exactly. The problem is you are officially bankrupt when no one will lend you the money to pay off the compounding interest. The secret is to perpetually roll over the principal. This can go on a surprisingly long time – which explains why we have boiling frog syndrome.
That happens to be almost were we are. Now economists like to believe if you are a government, you can eternally run a 3% deficit. But the math still says someday the interest payment will balloon beyond this. Another popular fix is "inflate the debt away". But this means you need to be able to borrow forever at interest rates below the general inflation level. Some countries have been borrowing at negative interest rates very recently, but that is an anomaly in the history of the world.
None of these things work for consumer borrowers, so they are the weak point, and need real income growth to get ahead of the game.
The only thing that fixes this scenario is real growth. So we got our self addicted to growth, at both personal and state and federal guv level, and withdrawal may be fatal. Generally, corporate and bank leverage is also too high to withstand any shocks to the economy.JTMcPhee , April 1, 2017 at 10:09 pm
South America being a good example, they kept rolling over the debt until it eventually got out of control.
The neo-liberal ideology assumes the trading world will naturally come to a stable equilibrium and the mainstream complain about Trump's protectionism.
Like you say you can't run a deficit forever and the fault lines in the global economy are just widening not converging.
The Greek's liked German products until they reached max. debt and collapsed.
Debt based consumption is only ever a short term solution, it maxes. out.different clue , April 2, 2017 at 1:27 am
Time for a Grand Jubilee, maybe? At least for the Mope Class?
I'm still of a mind that there is no fixing any of it in any survivable way.perpetualWAR , April 2, 2017 at 11:06 am
Several million words ago, commenter Guy Fawkes Lives wrote a comment about how those relatively few people who "own" their houses and yards after finishing paying off the mortgage may, in some cases, be able to force the "proof" of ownership down out of the digital Cloud ( MERS) and back to analog Earth ( a legally unassailable Deed or whatever that thing is called) in a County Courthouse Registry of Deeds.
But that was several million words ago. Who has the time to go back and find it now?
If it is actually realistically possible for some house-and-yard owners to really do this the way I think I remember Guy Fawkes Lives writing about it in a comment, it would be nice if someone could re-write about it in a way totally understandable to the intelligent layman. If it were written well enough to be a Post, perhaps our Blogmasters might even decide to hoist it up out of Comments and make it a Post of its Own.
Perhaps it could even be the first Post to begin a new category which could be called Airgapping. As in persons or even communities airgapping themselves against one or another part of the Greater System.
This is not "setting an assignment". This is "voicing a wishful dream." Perhaps if enough "Airgapping" posts showed up over time, from devoted Commenters doing their best to write Postworthy comments, the accumulating buildup of "Airgap" -categorizable posts might grow big enough to earn itself an Airgap category just as so many Permaculture Posts were posted that it was decided that they had earned the right to the category-title Permaculture.craazyboy , April 2, 2017 at 3:31 am
The banks are doing a nice dance called the "Deed of Satisfaction." That way, they get to robosign that you're done paying them. But wait-- don't they still retain the promissory note? Why arent you getting that back when you finish paying? Because the thieves continue to rehypothecate it into eternity. Ask for the promissory note back. It will be a battle you lose.
I won't ever be playing this debt game again. No loans. No taxes. Nothing to fuel their fake economy. I'm done. It's all a big circle jerk.skippy , April 2, 2017 at 4:43 am
"Jubilee" means "party", I think, so that's not a very descriptive plan in my mind. I think about what it may mean in terms of specific actions, then decide I don't wanna think about it anymore. Depending on scope, it can lead to international wars, civil wars, assassin wars, or collapse of all our institutions that make things sorta an intelligent civilization instead of having 7 billion lone wolves roaming the planet and surviving however they can manage.
But without making too big a deal of things, they really blew it when they decided to go with what we hear described as "Socialism for the Rich and capitalism for the poor". That's just a nice way of saying the government aligned the legal system and other government powers with banks, capitalism, and the rich to protect their paper wealth and become an all powerful predator class aligned against, say, the 90%.
Allowing the bankruptcy system to function as it should – eliminating bad debt and making holders of bad debt take losses, would have purged the worst cases in the system. If additional safety net programs are required, or maybe you find out you have a surplus of empty houses, then devise equitable solutions once you understand what's needed.
Then some obviously grossly unfair things like student loans at 8% during 10 years of a ZIRP economy – restructure these w/ new terms, or if that's not legally possible, re-fi at what mortgages go for – 3.5%. That would cut payments nearly in half.
Then the Fed goes and blows the next bubble economy by blowing assets bubbles in order to fix up everyone's net worth. Except, IIRC, the 3% own 90% of the assets. So home prices never stay affordable relative to incomes, and we are back to the game of taking out home equity loans to finance your cost of living.
So that's as much thought as I care to give it, then I get tired and give up.craazyboy , April 2, 2017 at 10:53 am
Jubilee in the biblical sense only means a reversion of contracts to null and void, money and asset evaluations had nothing to do with it because they had no stock exchanges, nor the effects such concentration of trading creates.
BTW the Fed does not blow bubbles, that distinction is the result of industry leverage applied to the political system, by all and sundry, too include the decades of funding wonky economics to facilitate some quasi religious ideological agenda.
disheveled . how many years have you been reading this blog – ?????skippy , April 2, 2017 at 3:42 pm
As long as it's been around, and yes, the Fed does indeed blow bubbles.
I've been reading financial news, working in biz, investing, and watching the Fed since the 70s, and a few NC bloggers and commenters don't have a monopoly on the Truth in these areas. Often, very much not.craazyboy , April 2, 2017 at 4:13 pm
Fiddling around with IR does not have distributional vectors, nor does the Fed dictate what ADI's do.
Industries and their lobbyists [see Hudson] have a much more distributional effect on asset prices [see Gates frictionless capitalism and the Dot.com bubble].
disheveled . Wall St. is the distribution mechanism imoRuben , April 2, 2017 at 5:57 am
See "Search for yield" when the Fed floods the system with liquidity and drives the Fed Funds Rate to zero. Then also claims they are not a "regulator" in the financial system.sunny129 , April 2, 2017 at 4:07 pm
"Not exactly. The problem is you are officially bankrupt when no one will lend you the money to pay off the compounding interest. The secret is to perpetually roll over the principal. "
Or (instead of denying a new loan):
The new and higher interest rate to lend you money to roll over your debt is beyond your ability to pay.human , April 1, 2017 at 9:15 am
'The new and higher interest rate to lend you money to roll over your debt is beyond your ability to pay.
This what happening in Auto loans in new and used/leased car markets! But who cares?
the new money is DEBT to perpetuity! CBers will back you up!PhilM , April 1, 2017 at 11:32 pm
What is this "The Economy" that has been foisted on us? We treat it as this nebulous, yet fearsome god that must be appeased. Was there an Economy before '71? 1933? 1913? What is a "functioning economy"?
To re-purpose Arthur Silbers' "The Tale That Might Be Told" (powerofnarrative.blogspot.com/2008/02/tale-that-might-be-told.html): What would happen to ordinary folk if we began to avoid the multi-nationals as best we could and increased our cash spending on Main St? Would we still be at the mercy of The Economy? How long? Is there a tipping point? How do we get the word out?
How do we demand local, public banking? Not to mention local public health-care and indigent relief, retirement security, and better funded local education.
Starve the beast.different clue , April 2, 2017 at 1:38 am
Please do. All of you, please do what the human tells you to do. The rest of us, who know what happens to prices when the demand curve sinks, promise to cooperate. At first. We promise not to go shopping! Not, at least, until your virtuous self-denial has had its predictable effect on the prices at the Big Box stores, as manifested during this year's inventory clearance sale.BeekeeperRorie , April 1, 2017 at 9:24 am
If just enough grouploads of people do this in a purposeful way, they might build little Lifeboat Fortresses of Conviviality Economics. Here is a groupload of people doing and researching some of that in their own little area of expertise.
Your suggestion is just as good a theory as anyone else's. Actions based upon it would be Theory-Action. If enough people joined together to do this in the same time and place to be called a Group, then you would have a Theory Action Group . . . a TAG, if you will.
Someone else who has spent years working out a Theory-Action theory of this approach is named Catherine Austin Fitts. It has been years since I thought about Catherine Austin Fitts. She calls her concept "Solari". Some of it that I read begins to feel ever so slightly cultish, and she keeps referrencing God over and over. But could the concepts be cooled off to a less-than-cultish temperature? Could it be merely secular and not God-invoking? I don't know. Perhaps it is worth study.
And there is Richard Heinberg with his Power Down, and there is the Transition Town movement, and other such groups.justanotherprogressive , April 1, 2017 at 10:53 am
Terrific post- you've articulated the current scenario as I see it quite well. I've been saying this verbally for about five years, that the global dominance of capitalism depends upon constant expansion, which we cannot continue with the parameters we have established. I've been deriding capitalism since the mid nineties for the inherent exploitation on which it depends. So you're not alone in this view, you've simply taken the lead in writing it all out.
"Growth to what end, and growth into what? 4 years ago, I wrote What Do We Want To Grow Into? I have still never seen anyone else ask that question, before or since, let alone answer it."
I'm comfortable with less, a lot less, and a much more ethically based, spiritual existence. My community, as in the people who share and live my values who I commune with, has shrunk commensurate with my ambitions. My relationships feel more genuine, though, and my quality of life and mental/emotional/spiritual well being has improved considerably.
Thank you for offering solutions. I fear the likelihood of our collective ability to restructure our economies around production is slim, at best. We'd have to get the banksters to release their strangle hold on the rest of us, and we'd have to get all the bubble participants to wake up and completely re arrange their lives incorporating sustainable models. Convert all those trophy homes into cooperative living arrangements, reduce our environmental footprint to a limited amount per person, etc. It's such a radically different model than what we have here in the US, I'm tempted to look for it elsewhere and emigrate. As if that were an easy option.
"It's not a healthy thing for an economy to depend on blowing bubbles." –Great line. Sadly, a great line and image for us to savor as we collectively implode.LT , April 1, 2017 at 12:07 pm
"And that's not the only consequence of our blind growth chase. We have become so obsessed with growth that we have turned to creative accounting, in myriad ways, to produce the illusion of growth where there is none. We have trained ourselves and each other to such an extent to desire growth that we're all, individually and collectively, scared to death of the moment when there might not be any. Blind fear brought on by a blind desire."
Wasn't that the story of Enron? Does everyone think it will be "different this time", for them?meme , April 1, 2017 at 11:50 am
And as for housing, do people really think the issue about public records of deeds and all the disasters of robo signing were resolved after 08?
It must be nice living in American Dream sugar plum fairy optimism alt reality.Moneta , April 1, 2017 at 11:58 am
Not sure I understand the implications of your "solution", a debt jubilee.
Whose debt, specifically, will be relieved? Owners of debt on multimillion dollar properties and Range Rovers or students?
What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs.sunny129 , April 2, 2017 at 4:10 pm
The developed world wants a debt jubilee so it can keep on consuming at the expense of the 5 billion in the developing world . "but it's no fair, we were promised the American dream!"
Time will tell us who wins the tug of warMoneta , April 2, 2017 at 5:29 pm
'Time will tell us who wins the tug of war '
This has been going on since late 80s but accelerated since 2009 with more credit explosion!
No one worried about DEFICIT spending, National DEBT or MKTS bubble built on debt on debt with leverage!
Those who lived or trying to live prudently WITHOUT debt appear FOOLS!fresno dan , April 1, 2017 at 11:55 am
Until you reach 55+, get sick or restructured out of your job.
It's a game of musical chairs where one chair after the other is taken away.oh , April 1, 2017 at 2:49 pm
The funny thing about debt is that if Goldman Sachs loses a trillion dollars, the government lickety split creates a trillion dollars at 0 interest for them (and to add insult to injury, the government pays interest to the banks for holding money that the government just loaned to the banks for free ) If millions of homeowners lose a trillion dollars, they are tossed into the streets .Paying your debts is important when your poor, but not at all when your rich
And inflation as a cure???? Inflation in health care, inflation in education, inflation in housing ..yet no inflation in wages.
And the worst thing is that the CARNAGE is not spoken of, lest the fact that the system works for the few and against the many becomes apparent.different clue , April 2, 2017 at 1:43 am
Let's look forward, not back. /sMcWatt , April 1, 2017 at 12:37 pm
If one knows one is going to be unfairly driven out of one's home with nothing to show for it, might there be slow motion ways to sabotage the property so that no-one else can reap any underserved-by-definition gains from it?
Filling the toilet, bathtub, furnace, water heater and all lines and pipes with cement? Opening small strategically placed holes in the roof so that water can seep in slowly and slo-mo destructively? removing electrical socket plates and hiding small pieces of ultra-stenchy-when-rotted food in the revealed spaces and then carefully replacing the socket plates? Etc. etc. etc.?craazyboy , April 1, 2017 at 1:24 pm
It certainly seems as if our country was much better off with 150 million people in it rather than
the current 330 million.animalogic , April 2, 2017 at 12:08 am
Yeah! Almost seems like 180 million aren't doin' anything except borrowing boatloads of money and blowing it on German cars, overpriced houses, and Chinese stuff.
Weird. hahaha. Pass the bong, please. Just picked up an ounce of pot for $300. For only $200, went to an ophthalmologist who told me I'm going blind and wrote me a 'script. Feel like I beat the system! At least until the OZ is gone and gotta get another. haha.
Actually I made that up. I'm not an idiot. craazyman wouldn't even do that. He goes for sensible shoes, red wine and xanex.different clue , April 2, 2017 at 1:48 am
The shoes might be sensible, but the xanax isn't: it's
vicious addictive.JerryDenim , April 1, 2017 at 1:24 pm
Kurt Saxon the survivalist author once wrote an article about how to grow your own marijuana cheaply in money and electricity. I haven't been able to re-find it anywhere.
It most basically involved getting one of those U-Haul type long-distance-moving garment boxes.
Paint the inside totally white with flat white latex paint. Hang a fluorescent bulb shop-light from the hanger bar with long small link hardware chains. Adjust the free-hanging chain length so that the lights are about 6 inches above the growing plants. As the plants grow taller, adjust the chains so as to keep the lights always 6 inches above the growing plants. That's your grow chamber.
And tell nobody. The way he put it was . . . " tell nobody. Don't tell your future ex-boyfriend. Don't tell your future ex-wife. Tell NOOOOO – body."Dead Dog , April 1, 2017 at 3:13 pm
Bravo and amen! Ever since I discovered the true nature of our money supply twenty some years ago in my college-aged youth the realization has plagued me and alienated me from the rest of our consumption based, debt crazed, materialistic society. Just thinking of thirty year mortgage on a unbelievably inflated house just so I can make some idiot, drop-out house flipper a multimillionaire, and prop up the lavish lifestyles and elaborate schemes of Wall Street bankers is enough to make me want to wretch because I know bank money (Federal Reserve Notes) is fake, but the debt and obligation involved with taking a mortgage for hundreds of thousands of dollars, for me as a peon, is extremely real. It's wonderful that places like Naked Capitalism exist, as I remember a time when Monetary reform and even the mere talk of the workings of our monetary system was the domain of gold bugs, right-wing, tin foil hatters and musty old alternative press bookstores. It's amazing though, even post MMT, post derivative meltdown 2008 financial crisis, post Naked Capitalism/left/wing financial blogs, 99% of the populace still thinks you're a tin foil hat fool if you tell them money is created out of thin air when they take a loan from a bank. The eye-roll and the accompanying condescending response is guaranteed to increase proportionally with education and income level. The most vitriolic reactions almost always come from finance guys, but maybe one out of twenty already know the truth, enlighten you with some interesting insider tidbit and admit they just want to loot a little more for themselves and then they will retire to a nice comfortable and simple life far away from the casino.
"Grow into what?" A fantastic question that every elected official and government economist should be forced to answer for the public record. The next question every citizen/consumer should ask before their next purchase is does this new "x" really make me happy and do I need it? Can I be simpler? What are the impacts of me enjoying this new consumer thing and who really pays the costs associated with creation, transportation and eventual discarding of this thing? Is there a better way or a way for me to go without this? Simple questions that could go a long way towards solving our problems.james wordsworth , April 1, 2017 at 1:48 pm
Good post, mate. Yes, who'd have thought this. The govt has told us they manage the supply of money. They even issue bonds, which they must repay!!!
Yet, private banks create money when we borrow from them, without much regulation on how much they do it.
Funny, I thought the supply of money was something that the govt did and should control.JerryDenim , April 1, 2017 at 8:57 pm
The problem is using GDP as a goal. As the old maxim says "What gets measured gets done". If the goal is stupid the result will be as well.
Consider a simple service economy where everyone is a hair cutter. In order to get growth you have to cut hair more often. You may start with everyone getting a hair cut every 2 months, but if you want a growth in GDP you need to gradually increase the frequency of hair cuts (otherwise you have no growth). Soon you have everyone getting hair cuts every day. So you have gotten growth, but where is the "wealth". It only comes from whether or not you see a daily hair cut as some kind of gain. It definitely is not permanent!
Our current economy is similar especially as we move to a more and more service based economy. Most new jobs are in restaurants and bars (almost now equal to manufacturing jobs in total) and old aged homes. Basically looking after people. This by its nature limits the kind and amount of growth you can get under the current goals (GDP). I mean once you get to where somebody cooks your three meals a day how much more upside is there.
The solution is obvious, but hard to get to. A different metric, that is quality based. Change the goal and behaviour will follow. The problem finding a goal that is acceptable and that will not happen until we have a crisis.John , April 1, 2017 at 2:09 pm
++ Bhutan measures "GNH" – Gross National Happiness instead of GDP. Let the thoughtful Buddhists lead the way perhaps?ExtraT , April 1, 2017 at 2:21 pm
We haven't had real economic growth since the 1970's. Once the reconstruction of Europe and Japan in the postwar era finished, the global manufacturing sector became stymied in a crisis of overproduction/under-utilization of capacity that only continuously worsens as profit rates continue their decline. The only growth the first world countries have had since then has been from asset bubbles (Japanese real estate in the 80's, US stock market in the 90's, US real estate in the 00's, euro bubbles in the 00's).
Capitalism cannot provide 3% growth rates ad infinitum. There is a finite amount of space and resources, and because of the math behind compound interest, to grow at 3% per year the economy would need to double by 2060 and double again by 2100 (with the pace only increasing). What drives economic growth is industrialization and urbanization, and after those processes are finished, only asset bubbles or external demand can do the trick (this is the same reason that growth rates during the 17th century were anemic).
These are structural problems that remodeling a few old train stations will not solve. The Keynesian solution may temporarily boost demand in the short term, but eventually you run out of infrastructure to repair. (And in the US nowadays, more than anything else, fiscal stimulus simply subsidize Chinese manufacturing and pollute the planet). The best case scenario is that we'll be stuck with low growth indefinitely–unless a war destroys most of civilization and we get to rebuild again.James McFadden , April 1, 2017 at 2:22 pm
This article misses the root of the problems we face. Economic growth does not require environmental destruction, or increases of private debt. If you check Michael Hudson's article published earlier this week at NC, you will have much better understanding of how the economy works:
craazyboy , April 1, 2017 at 3:08 pm
The author addresses the symptoms, not the disease.
Growth is demanded by capitalism, which is the root of the problem. Who will invest capital unless there is a reasonable expectation for a return on the investment – i.e. growth of capital? Macro-scale capitalism requires macro-scale growth in the national and/or global real economy. The fake financial economy, which is just rentier extraction for the leisure class, is merely an accelerant to inequality that capitalism creates. Macro-scale real growth requires more physical resources – more people, more energy, more materials, more land – so population growth and expanding resource exploitation are necessary requirements for capitalism to flourish. Capitalism was never going to last. The energy resources were banked over millions of years, but are being used up in mere hundreds of years – therefore not sustainable. Overpopulation is causing wars and migrations – we are running out of land to support an expanding population – therefore not sustainable. CO2 levels in the ocean are killing off ecosystems, and CO2 in the air is changing the climate – a finale to the man-made 6th extinction.
Since growth is not sustainable, capitalism is not sustainable. As Naomi Klein clearly outlined in "This Changes Everything" – capitalism is the root cause of all the coming crises – economic, climate, migrations, and war. Time to create a sustainable economic system – and it can't be capitalism. Fortunately there are an infinite set of choices. Economies are merely sets of rules governing how goods and wealth are distributed, and how exchanges of goods are made. How do we fix the economy? Easy – change the rules so they penalize unsustainable exploitation and so they are not designed to just benefit the 1% (no more trickle-down economics). How do we solve the debt crisis? Easy – we forgive the debt – after all it is just money owed to ourselves. "the debts that can't be repaid won't be repaid. And all you have to work at is how you're not going to repay them." (Steve Keen partly paraphrasing Michael Hudson). How do we solve overpopulation? Easy – education and birth control, create a global economy where the next generation does not require population growth to survive. How do we solve wars and migrations? Easy – stop manufacturing the crises through corporate resource exploitation and theft, and stop funding the military-industrial complex. How do we solve the climate crisis? Easy – heavily tax fossil fuels and fund clean energy (solar and wind) – it will cost no more than the bank bailout.
How do we do all this politically? Hard – very hard – because we have a 1% that is more interested in protecting their unearned wealth, protecting their profit margins, then in saving the human race from catastrophe. We won't be able to convince them to change their ways – they believe they are "doing God's work" (Blankfein) – their indoctrination is too complete. "It is difficult to get a man to understand something when his salary depends upon his not understanding it." (Upton Sinclair) That 1% is the most ruthless 1% of the population – they would kill billions of us to protect their wealth – and they are currently killing millions. They use that wealth to manipulate us and to control the political system by buying the politicians. They rely on "the pounding twin impulses that drive modern America: burning hatred of all losers and the poor, and breathless, abject worship of the rich, even the talentless and undeserving rich." (Taibbi) They use a "complex system of public-private bureaucracies that constitutes our modern politics a giant, brainless machine for creating social inequity. It mechanically, automatically keeps the poor poor, devours money from the middle class, and sends it upward. And because it's fueled by the irrepressibly rising vapor of our darkest hidden values, it attacks people without money, particularly nonwhite people, with a weirdly venomous kind of hatred, treating them like they're already guilty of something, which of course they are – namely, being that which we're all afraid of becoming." (Matt Taibbi)
So what do we do? We look to the past for what worked – movements and unions addressed slavery, suffrage, inequality, child labor, jim crow – they created the progressive long-lasting changes in our social structures. We abandon what doesn't work – the delegating of the struggle to NGOs and advocates who ask for our donations and merely call on small groups of us to mobilize and shout on a warm sunny afternoon. We look at those groups that have the power elite concerned – BLM, DAPL, Occupy, Whistleblowers, minimum wage movement – and consider what they could become if only they had the rest of us onboard. We educate ourselves and each other – and we inoculate ourselves against manipulation by understanding how propaganda and manipulation works. (study Bernays, watch "The Brainwashing of my Dad") We do deep organizing into networks of support groups (Jane McAlevey – "No Shortcuts") and form a movement. We abandon the major political parties and create new ones (the first thing to do is re-register to a 3rd party, preferably the Greens, then take over the party and make it your own. The major parties are too entrenched with corporate money for this inside strategy to work). And we grab the reins of power from the 1% – which will likely cost many lives because the 1% are ruthless – but as with most bullies, they will eventually back down – but our window of opportunity is short.
Or we do nothing and let the crises continue until the collapse. Do we allow billions of people to suffer and die in the crises because we were too lazy to get off our butts? Was Cornel West correct when he said: "The oppressive effect of the prevailing market moralities leads to a form of sleepwalking from womb to tomb, with the majority of citizens content to focus on private careers and be distracted with stimulating amusements. They have given up any real hope of shaping the collective destiny of the nation. Sour cynicism, political apathy, and cultural escapism become the pervasive options." Will we allow the insanity that Arundhati Roy describes to continue: "While one arm is busy selling off the nation's assets in chunks, the other, to divert attention, is arranging a baying, howling, deranged chorus of cultural nationalism. The inexorable ruthlessness of one process feeds directly into the insanity of the other." Will we be like the Jews and Armenians and wait too long – "And when they came for me, there was no one left to speak out for me." (Martin Niemoller) Or like Chris Hedges, do we believe that some things are worth fighting for: "I do not fight fascists because I will win. I fight fascists because they are fascists."James McFadden , April 1, 2017 at 7:26 pm
"Growth is demanded by capitalism, which is the root of the problem. "
Actually, this is another half truth created by the neolib folks back in the 60s-70s era.
Taking the case of publically held corporations whose common stock traded on Wall Street, we used to have two basic types of companies to buy stock in. One was the "growth company" and the other was one which paid out most free cash flow in the form of regular dividends. Electric utilities and telecom stocks were examples of this type, some are still around today, but they are known as being "slow growth". The investor expectation is the stock price will only grow fast enough to keep up with inflation.
Any kind of company could adopt the high dividend approach to provide a return to investors. But for many reasons, like growth stock actually costing companies nothing, and tax deferment by not taking dividends and getting long term capital gains instead being preferred by most investors, most companies decided to aspire to being growth(stock) companies.
Where the problem came in was some companies, mostly in emerging growth fields, really could mange 15% growth or more, investors came to expect growth like that from most of the market. Then Wall Street figured out if they could load up upper management with lots of company stock or stock options, this would "align management's interests with the shareholders". Oh man, did that work. Good biz sense was no longer an impediment to looting the company anyway they could think of as long as they could justify it as short term benefit to the shareholders.
So we got massive mergers, leveraged buyouts financed by junk bonds, disappearing pension plans, off shoring, mega sizing of factories – they ship to the whole world now – my bet is eventually from Bangladesh, H1-Bs and green cards, outsourcing and related consolidation there, and a bunch of stuff I'm probably forgetting. Oh yeah, a "Cloud" and accounting firms in India. And here we are.craazyboy , April 1, 2017 at 8:00 pm
Apparently craazyboy fails to understand the difference between a rentier economy (or feudal system) and capitalism. Such rentier drains on the economy are exactly what the capitalists were trying to end when they attacked the feudal system several centuries ago. A rentier economy is not capitalism – just pure wealth extraction – a parasitical relationship as Michael Hudson so eloquently describes in "Killing the Host." And it appears that the capitalists, now that they own practically everything, want to bring back good old fashioned feudalism using financialization to place us all in their debt - accelerating the process by using their purchased politicians to privatize the profits and socialize the losses. When capitalism fails and the key goal is protecting the unearned wealth of the 1%, I guess feudalism is their next best choice. Perhaps Blankfein's message of "doing God's work" will morph into "Wall Street was ordained by God" to own everything. That way the 1% can justify charging us rents for everything - even the soon-to-be privatized water we drink – the same reason the Nobles and Kings used to justify the theft from the peasants.John , April 2, 2017 at 7:02 am
???Moneta , April 2, 2017 at 7:35 am
I don't think either of you see the problem.
It's not that the 'rentier economy' is inefficient or that investors are addicted to high returns (although both are true). The problem is the rate of profit in manufacturing (the lifeblood of a modern economy) has been in steady decline since the 1970s because of the crisis of overproduction/under-utilization of capacity that resulted from the rise of European and Japanese competition.
Yes, space and resources on a planet are finite, but more importantly, at 3% growth the global economy would have to double by 2060 and then double again by the end of the century (and that pace will only increase ad infinitum). I'm sorry but there's just no way that that's going to happen. What drives robust economic growth in a capitalist economy is industrialization and urbanization (this is why growth rates were anemic in the 17th century), and once those processes have been completed, growth can only come from external demand, "urban renewal," or asset bubbles. This has been the case for the developed world since the 70's, and why our future, at best, is looking like post-1990 Japan.
Unless a big war blows the heck out of everything and we get to rebuild, just like we did in the post-WWII era. But if not, remodeling a few old train stations won't get us out of this crisis, as eventually you run out of infrastructure to repair.John , April 2, 2017 at 8:46 am
It's more like why would the developed world get to write off its debt so as to get a clean slate so it can keep on buying resources to replace its infra when many parts of the world still have not gotten its own share?
Many here seem to think that the only problem we face is redistribution not realizing that a fair redistribution on a global basis would mean a drastic drop in their material lives.Norb , April 2, 2017 at 9:46 am
Completely. And of course the dynamics of the global economy benefit the first world countries at the expense of the third world countries. And even Keynesian stimulus is unjust: it subsidizes the wealthy economies in ways that poorer countries cannot enjoy (if they did the same, they'd face a public debt/currency crisis). Although I guess nowadays in the US, Keynesian economics means subsidizing Chinese manufacturing firms–at the expense of US workers and the environment.
Everyone talks about how we want a more equitable distribution of wealth: tax the rich to provide social programs for the poor, use government spending to create more middle class jobs, etc. But if we actually wanted to redistribute wealth, it'd mean all of us would have to see a huge drop in the standard of living in order to help the poor in other countries live a little more like we do.
Of course all of this is ecologically unsustainable. A capitalist economy (and especially Keynesian economics) is entirely dependent upon consumption ad infinitum, and that is impossible for our planet. We have a finite amount of space and resources, and our ecological footprint is far greater than what the earth can produce.John , April 2, 2017 at 4:00 pm
If you define "standard of living" by the current capitalist metric, then yes, all our "living" standards will go down. We will all have less disposable stuff for our individual consumption.
But what if you imagined society based on the satisfaction of human needs instead of infinite wants- which is the pathology of the extreamely rich and is needed to maintain the current system.
Society has lost the larger motivating vision. The elite offer a paltry vision that is unsatisfactory to the human soul.
Thinking about sustaining life, instead of exploiting it, offers new avenues for action. It makes life worth living.Norb , April 2, 2017 at 9:32 am
The only way to keep the economy going (reasonable growth rates and reasonable unemployment rates) is through consumption ad infinitum. This is not ecologically, economically, or socially sustainable. We need to transition to an economy that only serves human (and the planet's) needs rather than the need to create "wealth" (assets in the hands of a feel capitalists) until the end of time.
Of course the only way this will happen is if the people seize the means of production and we move away from the capitalist system. Not exactly something the Keynesians are suggesting (they think that government spending ad infinitum can solve these problems).JTMcPhee , April 2, 2017 at 10:33 am
The true problem is changing our thinking from a "growth" economy to a steady state economy. The need is for building a sustainable, self reinforcing system that takes inspiration from life cycles based on nature. Nothing grows forever. An optimal size is reached and then the organism dies of old age, returning all the material elements of itself back into the environment from which it arose, enabling the process to begin again.
The failed understanding and appreciation of humans place in the world, in the order of life, will be our undoing as a species. We have a choice to be stewards of this world, or to be exploiters, parasites. The reigning ideology is that humans are separate from the natural world. We are natures master. Our rational minds have given us a glimpse into a great potential for molding the natural world to our will. To have influence over our collective futures. The current reigning ideology is one of dominance not of unity.
The notion of rebuilding society from the ashes of war and conflict, brought about by competition is the root cause of our failure. War and planned obsolescence is the longterm failure of capitalism. The proof of this statement is evident from the slow destruction of the natural environment upon which all life depends. The environment cannot regenerate fast enough to keep up with the greed and avarice of those in power. The few parasites have convinced the many that there is no other way of life. It truly is a death spiral, masked by hubris and shortsightedness. The fate of humanity is in the balance. Will it take mass die offs to drive this point home? Can any other explanation for the degradation visible all around hold sway? If that outcome is welcomed by the power elite, how can they hold legitimacy in the aftermath?. In the end, In evolutionary terms, humans are a blip in the chain of life. This works against positive change. It seems catastrophe is the only motivator on both individual and societal scales- along with positive action being reabsorbed into the competitive, scarcity driven, individualistic, narrow view vision.
Shortsightedness and willful blindness is the problem. Larger questions of why are we here- and what is our purpose in life need to be redirected. Hedonistic leadership, brought about by the short term success of capitalism as an organizing structure, will one way or another come to an end. People don't choose a life of slavery. They are driven to it.craazyboy , April 2, 2017 at 11:24 am
A word about "Sharia Banking and Finance Law:" James McFadden asks "Who will invest capital unless there is a reasonable expectation for a return on the investment – i.e. growth of capital?" "Sharia banking" and "Sharia investment" get shoved in with head-chopping and ethnic cleansing, likely by the "capitalist" PR folks who want to drown the humane elements and wisdom of Muslim economic -relation models in a bathtub of rotting Bernays sauce. But it seems to me that there's wisdom in Islamic finance and banking that ought to inform any efforts to displace the cancers that are riding us westerners.
Note that I make no claim to deep understanding of either the western mess or Islamic banking and finance. The surface contrasts, though, are absolutely striking, to my understanding.
Here's a primer on what the BoE started trying in 2013, based on notions that date back maybe a thousand years to a different part of the human-infested biosphere: "Islamic finance - the lowdown on Sharia-compliant money," https://www.theguardian.com/money/2013/oct/29/islamic-finance-sharia-compliant-money-interest ," https://www.theguardian.com/money/2013/oct/29/islamic-finance-sharia-compliant-money-interest Well looking here, no interest on the rent of money; shared risk by bankers and their client-partners; no money for war and stuff (western "banks" and gov'ts and stuff like ISIS's protection rackets and sub rosa oil sales provide all the funding the war asses and gun-men, "theirs" and "ours," need).
The government has announced plans for Britain to issue a £200m Islamic bond in a bid to attract new money to London. The bond will be aimed at institutions, but there are Islamic finance products available to regular savers, investors and homebuyers. Here us a guide to how sharia-compliant funds and mortgages work.
Why aren't regular accounts sharia-compliant?
Central to Islamic finance is the fact that money itself has no intrinsic value; it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person. A Muslim is not allowed to benefit from lending money or receiving money from someone.
This means that earning interest (riba) is not allowed – whether you are an individual or a bank. To comply with these rules, interest is not paid on Islamic savings or current accounts, or charged on Islamic mortgages.
How do sharia-complaint banking products work?
There are several ways that banks can structure accounts so that they are sharia-compliant.
Ijara works as a leasing arrangement: the bank buys something for a customer and then leases it back to them. Different forms of leasing are permissible, including those where part of the instalment payment goes toward the final purchase. This might be used to help you buy a car or other item, or to help a business buy equipment.
Murabaha works by the bank supplying goods for resale to the customer at a price that includes a margin above the costs, and allows them to repay in installments. This might be used to provide a mortgage on a property. The property is registered to the buyer from the start.
Musharaka is a joint venture in which the customer and bank contribute funding to an investment or purchase and agree to share the returns (as well as the risks) in proportions agreed in advance.
Wakala is an agreement that the bank will work as the individual's agent. If a saver enters into this type of agreement, the bank can use their cash to invest in sharia-compliant trading activities to generate a target profit for them.
How do the banks make money?
Banks can profit [nothing like the "profit" that western banks and banksters extract and extort, of course, but a decent living] from the buying and selling of approved goods and services. The principal means of Islamic finance are based on trading, and it is essential that risk be involved in any trading activity, so banks and financial institutions will trade in sharia-compliant investments with the money deposited by customers, sharing the risks and the profits between them.
Islamic banks are structured so that they retain a clearly differentiated status between shareholders' capital and clients' deposits in order to make sure profits are shared correctly.
Although they cannot charge interest, the banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.
There are firm laws governing the types of businesses with which the banks can trade. There should be absolutely no investment in unsuitable businesses, including those involved with armaments, pork, tobacco, drugs, alcohol or pornography.
So what is a "reasonable return on investment?" That would justify a prudent, grasping capitalist to put some of that money stuff into?
Here's a a more scholarly link that will lead into the lots of scholarly articles that frame what, for a western bankster, "capitalist," re-election specialist, or corruption generator, would be complete anathema: http://www.islamic-banking.com/islamic_banking_principle.aspx
And yes, there's lots of cheating amongst the Sharia financial it's (often fomented by western "banks" and QGOs (:quasi-government organizations, like World Bank and IMF and such) who have found how much pleasure and power can be scammed, with no apparent consequences to themselves, for lying with the enemy.
It seems clear to me that the flood of "anti-Sharianism" all about the west has a whole lot to do with the long-game need to be sure ideas of such equityable and just and distributionalist and true-risk-based finance and banking don't gain a toe hold. Although interestingly enough, quite a few US banks now offer some forms of sharia accounts to help their growth profiles http://www.kslaw.com/Library/publication/6-09%20New%20Horizon%20Shayesteh.pdfJTMcPhee , April 2, 2017 at 3:47 pm
Looks to me like Sharia means banks charge commissions and fees rather than interest. I don't see where the big magic is. It's the magnitude of money that the bank gets that matters. Like if they are ripping off the economy. Or another way to look at it is if the financial sector consumes too large a percentage of GDP. Tho that seems an incomplete measure after you have a GFC and kill the world economy.
Altho one thing is if banks can only make money on the front end of a transaction rather than a small steady income like interest or rent from lending, then econ and industry political pressure would be to increase transactions in the economy – for example, banks would embrace supporting real estate flipping rather than refuse to participate. This is how pursuit of industry profit growth gets conflated to transaction growth then to GDP growth. Kinda what is metastasizing the cancer.craazyboy , April 2, 2017 at 4:19 pm
Like I said, I do not pretend to understand western or Islamic banking, either theory or practice, well enough to do an Ilargi or Hudson-level exegesis. Yes, fees after a fashion, but what I read is that the banker has to take on a lot more risk in every transaction. And that prohibition on money for armaments, pornography (broadly defined, no doubt, like "not wearing a hijab" and such), pork, alcohol, tobacco and illicit drugs, that kind of resonates. Also all those derivatives and re-insurance scams, And maybe stock buybacks? Those purists would take away all the fun, right?
No doubt there are endless, slippery workarounds, supported by fatwahs and encyclicals from the many ayatollahs and mullahs who parse the entrails, that's our nature of course. And also, of course, the "ethics" and practice in western banking might make me or you, if we can participate in the grift and casino, richer in money and pleasure-bits. Who will be the first acknowledged TRILLIONAIRE, I wonder" But isn't there some silly sense that maybe that way lies the precipice?
Of course, living in our "advanced" and "sophisticated" part of the world, a few of us can hope for those 10-baggers, and maybe be smart or lucky enough to buy the next original issue Microsoft or Apple or Berkshire Hathaway, or do a Bezos or something. And then diddle ourselves silly in pursuit of pleasures always just over the horizon, until death finally overtakes us (with nice nurses and doctors to clean our poop and pee, and wipe our drooling chins,) so we "go with dignity and comfort" to where we are beyond retribution or restitution. Yah, "Apres nous le deluge," so foch all you inept mopes!
I think both of us are oversimplifying and not fully understanding (and what's that bit about a man not understanding if his payday depends on it?) the tenets of Islamic banking, finance and economics, as it comes from the doctrinal source (tho possibly, in this most corrupt and increasingly devastated world,full of rotten, selfish humans, not how it gets applied and perverted).
Seems to me it is hardly as simple to get around moral hazard under what I perceive as the Islamic fundamentals, as it is in our own charming systemJohn , April 2, 2017 at 4:02 pm
It's pretty clear that if "good ethics" ruled biz, the world would be more ethical. But in the mean time we search around for a mechanical mechanism that keeps everyone honest – but we always fail to find it.oh , April 1, 2017 at 3:18 pm
The problem is that people are addicted to economic growth. The whole system is. If we get 1% growth, everyone complains (while it's only the poor that really have right to). The only way we're going to this "steady-state economy" is if people get so dissatisfied with capitalism that they rebel and somehow manage to beat the right (backed by the military).Dead Dog , April 1, 2017 at 3:26 pm
Good comments, all. I agree with you.different clue , April 2, 2017 at 1:54 am
Good post, mate. Yet, I think the majority feel that protests are a waste of time.
They see what happened to occupy and DAPL – the return of the Pinkerton boys.
I don't think the big change (where the govt acts in the working person's interest) can be achieved politically. The only way that money is coming back, for all those commons to be returned, is to use force. It's he only language the rich understand.toolate , April 1, 2017 at 8:50 pm
Are you in a position to speak force louder than the upper class can speak force?HopeLB , April 1, 2017 at 11:19 pm
Beautiful post JMRexl , April 1, 2017 at 3:06 pm
Thank You!animalogic , April 2, 2017 at 12:33 am
The only part of this essay I have a problem with is the recommendation to lower private debt by "Jubilee style" if necessary. Isn't this what bankruptcy is in effect, a jubilee style lowering of debt. I do not think people learn anything from these "gifts". I was in favor of helping the economy after the debacle of 2008, because I did not think an actual depression served any purpose, but now I question if anyone learned a damn thing from all the "quantitative easing"? I am afraid that people have to have their noses rubbed in it to really learn a lesson from their own stupidity.different clue , April 2, 2017 at 1:55 am
Ah, the Calvinist comes out ! Rub people's noses in it (naughty dog!)
Incidentally, "people" got damn little benefit from QE - nor were they intended to.
A debt jubilee is only moral in secondary sense: it's technical – a reset to remove financial blockages (unpayable debt)Dead Dog , April 1, 2017 at 3:33 pm
The bankster bailouts did not help the economy. They helped the bankster predasite anticonomy.Moneta , April 1, 2017 at 3:44 pm
A debt jubilee would not be undertaken as a gift.
Debt inflation has led to asset inflation way beyond the fundamentals, the income needed to service the debt. Look at student debt. It should not exist in the first place if a society says we value a highly educated workforce and we will pay for it. All those note holders of your debt own assets which are inflated (regardless of what they paid for it). And in a debt jubilee, they should lose their investment as you don't have the income to service it a live a good life.
A jubilee would write down or off your debt and every other natural person's debt, AND, the asset prices return to normal levels.
It's a reset, a realisation, by society, that everyone has borrowed too muchkgw , April 1, 2017 at 5:39 pm
A debt jubilee would also wipe out pensions. Then who would pay the retirees?Moneta , April 1, 2017 at 6:46 pm
Boy, are you a dullard or what? (in somewhat of a jest, he said!) Who pays for anything? (rhetorical) ALL OF US!UnhingedBecauseLucid , April 1, 2017 at 8:14 pm
Sorry, I was not necessarily responding to him. I was just implying that a debt jubilee would create as many problems as it would solve.
Kind of like when you say something under your breath when someone is talking.clevinger , April 1, 2017 at 8:15 pm
Probably one of Ilargi all time best postGman , April 2, 2017 at 6:06 am
Let's see - our economy is built on housing and financial services. One serves the other, and so on.
How long can this folie a deux go on?sunny129 , April 2, 2017 at 4:00 pm
Property has been the go to economic and political 'strategy' for self-serving financiers and venal, expedient, resolutely unimaginative, lazy careerist politicians the world over. Unfortunately they just can't get enough of it, and it's not difficult to see why.
A safe and secure home satisfies one of our most primal needs. In pretty much any society people don't just WANT a roof over their heads, they actually NEED one. As luck would have it (for some) property is also one of, if not the greatest and most effective means of debt/money creation, and has consequently come to be seen as the preminent measure and store of wealth.
I would also argue that in some countries, particularly the UK, the supply of property is deliberately suppressed in the face of ever greater demand in order to stoke price inflation, hence facilitating the greater debt creation that in turn feeds into the money supply and helps to promote the illusion, albeit ephemeral, of growing prosperity.
For the politicians and money men it's the low maintenance golden goose that just keeps on laying, and when it eventually stops, which it always does of course, and these economic miracle workers are revealed for the snake oil salesmen they are, most of them have long since donned their golden parachutes, grabbed their ill-gotten gains and bailed out.
*On a positive note, and lest we forget, somewhere at the bottom of this teetering Ponzi economic tower that debt built, there still is a genuine economic foundation underpinning it all, and hopefully there's still time to save what's left of it from these voracious, sociopathic debtmongers hellbent on mortgaging the future to infinity and beyond.
'It's not a healthy thing for an economy to depend on blowing bubbles. It's also not healthy to depend on private banks for the creation of a society's money. It's unhealthy, unnecessary and unethical.
We had the HOUSING bubble already in 2007-2008 followed by the burst. Now the bubble is back to the previous level! Who needs MONEY when one can have debt to infinity?
Apr 02, 2017 | economistsview.typepad.com
Soul Super Bad -> RGC... , April 02, 2017 at 11:39 AMthe end – its demands for payment cannot be met. It was fictitious because it consistedcm -> RGC... , April 02, 2017 at 11:57 AM
That is why we have bankruptcy statutes. The exponential expansion of aggregate debt will end when we brighten up enough to begin 6% per annum deflation. With that much deflation bankers would not charge interest. As interest accumulation into the aggregate-debt-compartment stops, exponential expansion of same comes to a bitter end. Tell me something!
Are some ethnic sectors prohibited from charging interest? How do their bankers survive?
By support from the Palatial-economy! Prop-up would be unnecessary with ongoing deflation. Tell me something else, Elsie!
Do our t-bonds pay 3% interest ? Minus 2% inflation? 1% real?
You bet chore bottom butt pillow, Mad Marx! That means that 6% deflation would be unnecessary for exorcising Marx. 1.04% deflation would be taxation enough, budget-balance enough to ghost-bust the blighter.
Let the good times roll, and thrill your soul! Got soul?
!The mistake or misjudgement of Marx, if one wants to call it that, was constructing a narrative of social progress assuming that people (and specifically the decision makers and influencers in any social hierarchy) would actually be interested in superseding the previous order rather than becoming the new feudal lords (or if not outright working for that, getting comfortable in their role of power that invariably enables liege-vassal relationships).RGC -> cm... , April 02, 2017 at 12:23 PM
I've always thought that Marx's mistake was thinking that industrial capitalists would displace rentiers, thus paving the way for socialism.RC AKA Darryl, Ron -> RGC... , April 02, 2017 at 02:29 PM
I think Lenin had the thought that the petite bourgeoisie wanted to emulate the haute bourgeoisie and would therefore be a major impediment to dictatorship of the proletariat. Maybe your thought is similar to Lenin's.When Schumpeter said that corporatism would induce the public will to adopt social democracy it seemed like a classic bait and switch to me. I have not read Marx to know what might have been on his mind, but he was not really a prole himself. So, likely being true to himself was not in the cards.RGC -> RC AKA Darryl, Ron... , April 02, 2017 at 02:57 PMIIRC, Marx spent most of his time in the British Library, almost like a full-time job, and he was supported by Engels, who owned a factory. I think Marx was broke most of the time.
So I see Marx as a nerd and a poverty-stricken ivory tower type.
We could add Schumpeter's "creative destruction" to your thought.
One of Keynes' major points was that the future is unpredictable and, in a monetary economy, expectations lead to instability. Hyman Minsky took that further.
https://en.wikipedia.org/wiki/Hyman_Minsky Reply Friday, March 31, 2017 at 10:41 AM ilsm said in reply to RGC... My favorite Yogi Berra quote:
"Nobody goes there anymore, it is too crowded".
Works for me with the diner in town I drive by the overcrowded parking lot every Sunday,,,,,,, Reply Saturday, April 01, 2017 at 04:39 AM RGC said in reply to libezkova... Can you tell me what you think would be the standard Russian view on what would have happened if Lenin had gotten rid of Stalin in the 1920's? Reply Friday, March 31, 2017 at 10:50 AM
Apr 02, 2017 | economistsview.typepad.comRGC , April 02, 2017 at 10:24 AMDas Kapital - Not just volume 1
More than any other economist of his century, Marx tied together the major kinds of crisis that were occurring.
His Theories of Surplus Value and volumes 2 and 3 of Das Kapital explained the two main forms of crisis his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy and banking fortunes.
Marx pointed to the tendency of debts to grow exponentially, independently of the economy's ability to pay, and indeed faster than the economy itself.
Marx called finance capital "imaginary" or "fictitious" to the extent that it does not stem from within the industrial economy, and because – in the end – its demands for payment cannot be met. It was fictitious because it consisted of bonds, mortgages, bank loans and other rentier claims on the means of production and the flow of wages, profit and tangible capital investment.
Most of all, of course, Marx pointed to the form of exploitation of wage labor by its employers in volume 1.
That did indeed stem from the capitalist production process.
Marx analyzed economic crisis stemming from the inability of wage labor to buy what it produces. That is the inner contradiction specific to industrial capitalism. As described in Volume I of Das Kapital, employers seek to maximize profits by paying workers as little as possible. This leads to excessive exploitation of wage labor, causing underconsumption and a market glut.
Marx certainly provided the tools needed to analyze the crises that the industrial capitalist economies have been suffering for the past two hundred years.
But history has not worked out the way Marx expected. He expected every class to act in its own class interest. That is the only way to reasonably project the future.
The historical task and destiny of industrial capitalism, Marx wrote in the Communist Manifesto, was to free society from the "excrescences" of interest and rent (mainly land and natural resource rent, along with monopoly rent) that industrial capitalism had inherited from medieval and even ancient society.
These useless rentier charges on production are faux frais, costs that slow the accumulation of industrial capital. They do not stem from the production process, but are a legacy of the feudal warlords who conquered England and other European realms to found hereditary landed aristocracies.
Financial overhead in the form of usury-capital is, to Marx, a legacy of the banking families that built up fortunes by war lending and usury.
The interest of the rising class of industrial capitalists was to free economies from this legacy of feudalism, from the unnecessary faux frais of production – prices in excess of real cost-value.
The destiny of industrial capitalism, Marx believed, was to rationalize economies by getting rid of the idle landlord and banking class – by socializing land, nationalizing natural resources and basic infrastructure, and industrializing the banking system – to fund industrial expansion instead of unproductive usury.
If capitalism had achieved this destiny, it would have been left primarily with the crisis between industrial employers and workers discussed in Volume I of Capital: exploiting wage labor to a point where labor could not buy its products.
But at the same time, industrial capitalism would be preparing the way for socialism, because industrialists needed to conquer the political stranglehold of the landed aristocracy and the financial power of banking. It needed to promote democratic political reform to overcome the vested interests in control of Parliaments and hence the tax system. Labor's organization and voting power would press its own self-interest and turn capitalism into socialism.
Today's economic crisis in the West is financial and rent extraction, leading to debt deflation. Today's financial crisis is largely independent of the industrial mode of production.
As Marx noted in Volumes II and III of Capital and Theories of Surplus Value, banking and rent extraction are in many ways adverse to industrial capitalism.
Every Western economy measures "output" as Gross National Product (GNP). This accounting format includes the Finance, Insurance and Real Estate (FIRE) sector as part of the economy's output. It does this because it treats rent and interest as "earnings," on the same plane as wages and industrial profits – as if privatized finance, insurance and real estate are part of the production process.
Marx treated them as external to it. Their income was not "earned," but was "unearned." This concept was shared by the Physiocrats, Adam Smith, John Stuart Mill and other major classical economists. Marx was simply pressing classical economics to its logical conclusion.
All three kinds of crisis that Marx described are occurring. But the West is now in a chronic depression – what has been called Debt Deflation. Instead of banking being industrialized as Marx expected, industry is being financialized.
Instead of democracy freeing economies from land rent, natural resource rent and monopoly rent, the rentiers have fought back and taken control of Western governments, legal systems and tax policy.
The result is that we are seeing a lapse back to the pre-capitalist problems that Marx described in Volumes II and III of Capital and Theories of Surplus Value.
Mar 31, 2017 | www.calculatedriskblog.com
"Weekly Initial Unemployment Claims decrease to 258,000"
by Bill McBride...3/30/2017...08:40:00 AM
The DOL reported:
..... In the week ending March 25, the advance figure for seasonally adjusted initial claims was 258,000, a decrease of 3,000 from the previous week's unrevised level of 261,000. The 4-week moving average was 254,250, an increase of 7,750 from the previous week's unrevised average of 246,500.
The previous week was revised up.
...This was above the consensus forecast.
The low level of claims suggests relatively few layoffs."
Reply Thursday, March 30, 2017 at 05:40 PM libezkova said in reply to im1dc... This "seasonally adjusted" magic is more like another flavor of statistical fraud... Because assumptions behind those adjustments are so wrong they are not even discussed.
Also McJobs and Walmart jobs -- anything paying below subsistence level are not actually jobs.
It's more like slavery. That's another nail in the coffin of "free market" ideology. What is so free in a person taking job in Wal Mart? Or any other McJob? That's neo-feudalism with Wal Mart as a huge feudal landlord and mass of desperate, hungry peasants.
Please note that around $100K jobs in the USA are needed just to accommodate growing workforce.
== quote ==
How Many Jobs Are Needed to Keep Up with Population Growth?
Submitted by Robert Oak on September 8, 2012 - 6:45pm
The press quotes all sorts of figures for the number of monthly job gains needed to keep up with population growth. We see numbers like 80,000, 100,000, 125,000 and 175,000 thrown around like statistical snow as the number of jobs needed each month just to keep up. What's the right one? How many jobs are needed each month just to keep up with population growth?
The actual monthly amount can be calculated and the Atlanta Fed even did us a huge favor by publishing an interactive monthly jobs calculator so you can go check for yourself. This month shows we need 104,116 payroll jobs to maintain the same unemployment rate of 8.1% with all of the other same terrible conditions the state of employment is in.
Reply Thursday, March 30, 2017 at 08:06 PM
Mar 31, 2017 | economistsview.typepad.comPeter K. , March 31, 2017 at 05:53 AMI like this blogger Campbell. Stephen Williamson should be excommunicated from the Economics Guild. He should receive a letter of reproach from former CEA Chairs. (I'm thinking about the DeLong-SWL debate.)
"Thus it's worth peering into [Williamson's] intellectual journey. First, after QE, despite high unemployment and a weak economy, he repeatedly predicted that inflation would rise. When it didn't happen, he changed his mind, which is what one should do. Only, he couldn't concede that standard Keynesian liquidity trap analysis was largely correct. That would be equivalent to surrendering his army to the evil of evils, Paul Krugman. Much easier to venture into the wilderness, and instead conclude, not that inflation wasn't rising despite low interest rates because the economy was still depressed, and banks were just sitting on newly printed cash, but rather that inflation was low because interest rates were low!
Fortunately, not all of Macro went in this direction, as Larry Christiano, a mainstream economist, discusses the Keynesian Revival* due to the Great Recession."
The Great Recession: A Macroeconomic Earthquake
Lawrence J. Christiano Northwestern University Federal Reserve Bank of Minneapolis
The Great Recession was particularly severe and has endured far longer than most recessions. Economists now believe it was caused by a perfect storm of declining home prices, a financial system heavily invested in house-related assets and a shadow banking system highly vulnerable to bank runs or rollover risk. It has lasted longer than most recessions because economically damaged households were unwilling or unable to increase spending, thus perpetuating the recession by a mechanism known as the paradox of thrift. Economists believe the Great Recession wasn't foreseen because the size and fragility of the shadow banking system had gone unnoticed.
The recession has had an inordinate impact on macroeconomics as a discipline, leading economists to reconsider two largely discarded theories: IS-LM and the paradox of thrift. It has also forced theorists to better understand and incorporate the financial sector into their models, the most promising of which focus on mismatch between the maturity periods of assets and liabilities held by banks.
By Barry Ritholtz - November 21st, 2010, 8:31AM
The Economist asks: "Fifty years after the dawn of empirical financial economics, is anyone the wiser?"
My short answer: "Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."
Markets are driven by myriad factors, most of which are readily quantifiable. But the small number of inputs that do not lend themselves to easy modeling is how certain empiricists get themselves into trouble. They believe their models accurately account for the real world, when they do not.
One would imagine that the parade of Black Swan events that keep upending their models would convince these economists otherwise, but you would be surprised at how foolishly stubborn these folks are.
The EMH proponents, the VAR analysts, the "stocks for the long run" folks - the grim reality of their performance has not dissuaded them from their beliefs. This has Yale Professor Robert Shiller concerned:
"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data". To have seen the financial crisis coming, he argues, it would have been better to "go back to old-fashioned readings of history, studying institutions and laws. We should have talked to grandpa."
Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations. That allowed banks to run wild, something the pure quants were not prepared to detect and act upon. The radical deregulation of the past 3 decades was the equivalent of dark matter, undetectable by Newtonian physics - or quant trading funds.
Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.
Here is the Economist:
IT ALL began with a phone call, from a banker at Merrill Lynch who wanted to know how investors in shares had performed relative to investors in other assets. I don't know, but if you gave me $50,000 I could find out, replied Jim Lorie, a dean at the University of Chicago's business school, in so many words. The banker, Louis Engel, soon agreed to stump up the cash, and more. The result, in 1960, was the launch of the university's Centre for Research in Security Prices. Half a century later CRSP (pronounced "crisp") data are everywhere. They provide the foundation of at least one-third of all empirical research in finance over the past 40 years, according to a presentation at a symposium held this month. They probably influenced much of the rest. Whether that is an entirely good thing has become a matter of debate among economists since the financial crisis.
It is an interesting article worth perusing . . .
Economist Nov 18th 2010
34 Responses to "Are Empirical Economists Idiot Savants?"
KentWillard: November 21st, 2010 at 8:51 am
My personal experience has been that most 'quants' in Finance don't have economics degrees. Often a PhD in Physics. Sometimes in Math, sometimes in Finance. Many aren't from the US, or even the West. They don't have an understanding, or often interest in markets. They can sure run a lot of simulations quickly though.
machinehead : November 21st, 2010 at 8:53 am
'Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations.'
To these factors, I would add the cyclical analysis described in a Big Picture post about Felix Zulauf a couple of days ago. Quantitative models do a pretty good job of identifying 'late expansion phase' syndrome: bubbly equity markets, loose credit standards, tightening capacity, persistent inflation (properly measured).
But every time, economists as a group say that the Federal Reserve will achieve a soft landing, and recession will be averted. Many of them are saying this now about China, currently manifesting 'late expansion phase' syndrome with a vengeance.
Why are economists so poor at reading the business cycle? I'd contend that most of them are conflicted. Their paychecks come from corporate entities who don't want to hear recession forecasts. Federal Reserve economists certainly aren't going to bite the FOMC's guiding hand. Academic economists should be freer, you'd think, but some have corporate research funding. Robert Schiller at Yale was one of the few (with Irrational Exuberance, January 2000) to get a cyclical peak right.
Behavioral economics says that economists, like every other cohort, will be victims of groupthink at inflection points, always zigging when they should zag. This is the tragedy of the Federal Reserve's interest rate central planners. Never will they succeed at day-trading this vast economy into prosperity. They've spectacularly failed at even the much narrower task of enriching their client banking cartel at the expense of everyone else.
Here's hoping that B.S. 'Benny Bubbles' Bernanke will be history's last Fed chairman.
ToNYC: November 21st, 2010 at 9:02 am
Granpa knew that Moral Authority took care of business and was worth more to effect continuity or change than any manipulation of currency or credit. JP Morgan knew that Lending was all about Character and told Congress that other factors were secondary. Quants know how to manipulate data and the value of nothing.
Opir: November 21st, 2010 at 9:27 am
If we accept, for the sake of argument, that economics is really 90% mass psychology, 10% math, then isn't a large part of the issue that many of its professional practitioners have tried to understand problems though a lens where those percentages are reversed? There is perhaps kind of bias that causes many of these people to only see the world using neat models, and discount that what economics is really about trying to understand (once you get beyond the simple cases where said models and standard ideas about incentives work):
what people do and want to do; how many of them do it; and for how long, modified by:
1) geopolitical events 2) the zeitgeist 3) culture (and subculture)
People may go into the field with a love of numbers and an interest in money; what we may really need, however, are people who care about understanding human behavior as it pertains to resources and power within and between societies. A "sociology for money", as it were.
Go Dog Go: November 21st, 2010 at 9:27 am
Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.
I just got that. Very funny
Mark E Hoffer: November 21st, 2010 at 9:42 am
funny, the Argument, ~"over-reliance on imperfect Models/questionable Data", is, no doubt, True..
though, substitute "AGW/"Climate Change" for "Econometrics/Financial Engineering" and . ~~
differently, Economists, of course, should be snorting more *Exhaust Fumes, and less Laser Toner..
billkeep: November 21st, 2010 at 9:42 am
There are empiricists and then there are empiricists. A quick look at Reinhart and Rogoff's book "This Time Is Different," shows the incestual limitation of quant jocks (whether trained in econ or physics or math - it's all the same because they use the same tired data) and the power that can come from fresh data, fresh thinking, and an absence of self-interest in the outcome (see Folbre's piece on the ethics of economists in the NYT Economix column).
Bill W: November 21st, 2010 at 9:47 am
Despite our great triumphs of science and advances in understanding, we still don't know jack about the universe. I believe in the constant advance of knowledge, but I also believe in being realistic.
We need to be prudent when we apply our theories about the world to the real world. The results can be disappointing.
What's much worse than a fool? A fool with ambition.
How the Common Man Sees It Says:
November 21st, 2010 at 10:08 am The fact is, if you pay people to look the other way, they usually do.
mhdoc: November 21st, 2010 at 10:14 am
Many years ago I was a biology graduate student when we got our first computer terminal and I discovered the joys of stepwise regression. I spent hours searching out the last 5% of the variance. Then I went on my first field trip of the season to check on the rainfall collectors I had randomly scattered through the forest. We measured the dissolved elements in the water we collected; parts per million potassium, etc.
One of the collectors had gotten plugged, filled with water, and a thirsty chipmunk had fallen in and drowned. In addition, the water was covered with pollen. Suddenly the value of stepwise regression for explaining what was going on took a serious hit. I guess my black swan looked like a chipmunk :)
Bill W: November 21st, 2010 at 10:26 am
billkeep, I like what you said about fresh thinking and and absence of self-interest. How often do "data driven," "open-minded," scientists become high priests of their own theories. They will put down traditional religious beliefs, without realizing the dogma of their own thinking. There will always be religion of some sort in this world, whether the practitioners realize it or not.
I think the quants are probably missing a healthy dose of the applied knowledge of experienced investors. You don't have to be able to mathematically formulate why something works to understand that it does. How do you separate the quack theories from the real ones? If I knew that I'd be considerably wealthier.
farmera1: November 21st, 2010 at 10:34 am
Misuse of statistics by economist/quants is a root cause of our recent meltdown.
Seeing the world and economics as a normal/Gaussian/bell curve world (it isn't in most cases) will lead you to a path of unforeseen and destructive events. You end up making all kinds of risk assessments and predictions that are built upon "facts/Gaussian models/bell curve" that just don't reflect the real world. Some big unpredicted event will get you.
For example thinking (and building an investment house of cards) just because models show you that the real estate market never goes down (nation wide) that it will never happen is a fool's approach, but it built huge bonuses (say a cool $100,000,000/yr for several) for the executives so in that sense it was successful. It also made the Ownership Society possible. It allowed this country to live way beyond its means for years so most benefited. Cut taxes and start wars, no problem, we got this baby humming. Since we were able to predict and control risk so well who needs regulations. Leverage, no problem, we have it under control (aka being fully hedged). RIGHT.
By the way the social sciences do the same thing, in using things like ANV, standard deviations, risk, relative error (?)etc. This misuse is just as big in its' own way as the quants/economists' errors.
Petey Wheatstraw: November 21st, 2010 at 11:12 am
"Markets are driven by myriad factors, most of which are readily quantifiable." _______________
The least quantifiable of which is direct intervention in, and manipulation by, central bankers. The markets are rigged. Quantify THAT, bitch.
(sorry for the last sentence, not aimed at anyone.)
BR: $600 Billion dollars over 6-9 months.
Mark E Hoffer: November 21st, 2010 at 11:35 am
though, speaking of 'Empiricists', these cats http://www.gapminder.org/ offer some interesting analytics, esp. here http://www.gapminder.org/labs/
as per, YMMV, YOMP ..
louis: November 21st, 2010 at 11:38 am
There are a myriad of factors that set a point spread.
Sechel: November 21st, 2010 at 11:55 am
There's an old joke about the drunk economists looking for his keys by the light post even though they were lost elsewhere, when asked he responded, "because this is where the light is
The market seems intent on assuming the market operates under the efficient market hypothesis, price distribution is normal and that participants always act rationally. Nothing could be further from the truth. Mandelbrot discussed how observations of Cotton price movements disproved this. We know there is information asymmetry in the marketplace.
The market knows what models to use, it just chooses not to. It's beyond fat tails, it requires extreme value theory, knowing that risk scales at the extremes and that bad news comes in threes(dependence).
So why use the failed tools, the answer is simple. If the market gives up on OAS, Black-Scholes and the like, it has to accept being in the dark more than it's used to.
Sechel: November 21st, 2010 at 12:02 pm
Barry, the mortgage market learned that VAR does not work, that OAS is a terrible tool. Many have turned to scenario analysis, but a great deal many like the simplicity of the old failed tools.
daf48: November 21st, 2010 at 12:12 pm
"most of which are readily quantifiable" Really? I'd be careful if that was my point of view. Economic reality is compiled by using data points from thousands of governments, corporate think tanks, independent agencies, etc'. But little work has been done to look at the system as a whole. Or better yet. is there a global economic system?
Uchicagoman: November 21st, 2010 at 12:18 pm
Uchicagoman: November 21st, 2010 at 12:22 pm
$190 billion under management.
RW: November 21st, 2010 at 12:28 pm
IMO your "short answer" is spot on BR: The illusion of precision is a major problem not only because the data are limited or much more granular than suspected - e.g., the fact that price can be recorded down to the penny does not mean that is where the significant digit is - but also because increased precision cannot significantly improve predictability of system behavior if nonlinear factors are present.*
*this was a key insight of the meteorologist Edward Lorenz, one of the first 'chaos' theoreticians (1963), that and the sensitivity of even the best model simulations to minute changes in initial conditions (butterfly effect).
Uchicagoman: November 21st, 2010 at 12:38 pm
Here's an old (physics?) saying:
"You can either dazzle me with data, or butter me with bullshit."
b_thunder: November 21st, 2010 at 3:16 pm
"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data".
I wonder who Shiller had in mind? How about that guy who used to go over massive amounts of data while in his bathtub? Remember the Maestro? And another one who says we're under threat of deflation (according to statisticians) and who doesn't see that other than houses and flat-screen TVs, prices for everything else are rising in the real world. The one who thinks that because cost of gasoline and food are not in his data tables and charts, they do not matter. The one who thinks that in times of 17% U6 un/under-employment and massive outsourcing wages will rise and people will get hired if prices go up.
I also wonder what Barry's buddy "Invictus" thinks about all this. He seems to trust the charts and data more than the real world sentiment.
Sechel: November 21st, 2010 at 4:01 pm
Who can believe anything they say. With one breadth they tell us quantitative easing is meant to spur bank lending, then they pay banks on their reserves encouraging them not to lend those same reserves out. As far as the Fed goes, no credibility.
Julia Chestnut: November 21st, 2010 at 4:02 pm
You know, BR, the best economics class I had during my graduate studies was econometrics. The thing that was so good about it (and so incredibly annoying at the time) was that the prof made us work the matrix algebra from the ground up in building regression analyses. We were going to be using computers to regress the data - but he was adamant that unless you understood the math, and knew exactly what the math was doing with the data we input, you would have no idea what the limitations of the analysis were. He also insisted that we understand the limitations of the data – how it was collected, what it meant. I've used that course at least weekly since I graduated embarrassingly long ago (unlike "finance," where I at least learned that derivatives are for hedging, not investing).
I'd say that either a true statistician or an applied mathematician for a quant is the way to go. I meet loads of economists who couldn't figure their way out of a paper bag. Know what's worse, though? The number of MDs with less than a clue about the math underlying normative numbers in lab tests. I'm less likely to get killed by a quant.
TerryC: November 21st, 2010 at 4:07 pm
"Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."
Barry, I think you mean accuracy.
billkeep: November 21st, 2010 at 4:08 pm
Actually if you knew that you wouldn't be wealthy. You would only be wealthy if you knew it first and with enough time to act in your own interests. There is a unreconcilable difference of purpose between public and private interests when it comes to understanding markets. As Sechel says We know there is information assymetry in the marketplace. In fact, we bet on it. The problem we seem to now have is that a few analysts who do understand the psychology of investors or not "public" analysts. As a result, the public analysts lag behind because they have been trained too narrowly in terms of the data and lack the understanding of investor behavior. That is the way it appears to me anyway.
constantnormal: November 21st, 2010 at 5:35 pm
As in most things, the quality of the question says more than the completeness of the answer.
Andy T: November 21st, 2010 at 6:35 pm
Amen to that my friend.
What many people lose sight of is the fact that we humans tend to move in "excesses." First there is excessive greed which causes asset bubbles, then comes the excessive fear after the bubble bursts.
This has been going on for several hundred years, regardless of regulatory structure.
And, you know what?
That's OK. It is it what it is
Attempts to "modify" human behavior or attempts to disrupt the natural flow of things will have it's own unintended consequences.
ezrasfund: November 21st, 2010 at 7:21 pm
So right. You can build a giant edifice of precise calculations. But so often that edifice is build on a foundation of vague assumptions such as "housing prices won't go down."
RodgerMitchell: November 21st, 2010 at 7:26 pm
All the mathematical formulas in the world are trumped by the simple fact that the U.S. is monetarily sovereign.
1. It does not need to borrow
2. It can pay for any deficits of any size, without raising taxes
3. It never should engage in "austerity."
4. It cannot be forced into bankruptcy, nor can any of its agencies (i.e. Social Security, Medicare et al) be forced into bankruptcy. .
Spending by the U.S. neither is constrained by taxes and borrowing, nor is it even related to taxes and borrowing. Either can be done or eliminated without affecting the other. That is, taxing does not affect spending, and spending does not affect taxing. They, in fact, are two, unrelated operations. . The sole constraint on federal spending is inflation. We are nowhere near inflation, and it easily can be prevented and cured with interest rate control. . Those who do not understand monetary sovereignty do not understand economics. .
Rodger Malcolm Mitchell
Mark E Hoffer: November 21st, 2010 at 7:35 pm
aren't you overlooking http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Federal+Reserve+Act+of+1913 ?
and, because of such, it, actually, "does need to borrow", contra to your first assertion..(?)
soloduff: November 21st, 2010 at 9:50 pm
The author exhibits an elementary conceptual confusion. Financial economics (of the EMH/Modern Portfolio fame) is not "empirical" economics. Rather, it is based upon analogy with 19th century statistical mechanics; hence its fetish of the bell curve ("normal distribution"), which fails as a benchmark in every crisis. B. Mandlebrot and E. Derman have written extensively on this genre of economics; which differs from mainstream ("neoclassical" a la Samuelson et al.) only inasmuch as neoclassical economics takes its metaphor from an even more antiquated department of 19th century physics, namely, "rational mechanics"–remember your Econ 101 text's proud mention of the "production function" (Cobb-Douglas) and the Lagrangian multiplier? About 15 years ago Philip Mirowski wrote an expose of the neoclassical analogy–"More Heat Than Light"–demonstrating conclusively that the luminaries of economics understood neither the physics that they borrowed nor the economics that they data-fitted to their analogy. (Ditto with financial economics in the critiques provided by Mandlebrot and Derman.) –Oh, well, should we expect scholarly accuracy from a mere financial reporter when the scholars themselves serve up such wanton slop? In a word: All idiots, no savants.
CitizenWhy: November 21st, 2010 at 10:32 pm
Empirical economists are idiot savants only in regard to economics. In other things they are probably OK.
Mar 23, 2017 | economistsview.typepad.comreason : , March 22, 2017 at 07:25 AMThe most valuable part of Chris Dillow's piece is the link to Campbell's law.anne -> reason ... , March 22, 2017 at 07:36 AM
I have often referenced this without being aware of it.
My version is that any proxy measure will become less relevant over time as it drifts away from the intended target (the more so if it is used to guide policy).https://en.wikipedia.org/wiki/Campbell%27s_lawJF -> anne... , March 22, 2017 at 07:50 AM
Campbell's law is an adage developed by Donald T. Campbell, an example of the cobra effect:
"The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."
Campbell's law was published in 1976 by Campbell, a social psychologist, an experimental social science researcher and the author of many works on research methodology: "When a measure becomes a target, it ceases to be a good measure."Chris G probably liked this too. I had Campbell's stuff next to my bed for a long long time.anne -> JF... , March 22, 2017 at 08:18 AMI had Donald Campbell's stuff next to my bed for a long long time.JF -> anne... , March 22, 2017 at 10:31 AM
[ Do suggest a reading for us. ]"Experimental and Quasi-Experimental Designs for Research" - copyright 1963, my version was the tenth printing in 1973anne -> JF... , March 22, 2017 at 08:23 AMhttp://www.nytimes.com/1996/05/12/us/donald-t-campbell-master-of-many-disciplines-dies-at-79.htmlJF -> anne... , March 22, 2017 at 10:34 AM
Donald T. Campbell, Master of Many Disciplines
By ROBERT MCG. THOMAS JR.
Donald T. Campbell, a nimble-minded social scientist who left his mark on half a dozen disciplines and helped revolutionize the fundamental principles of scientific inquiry common to them all, died on Monday in a hospital near his home in Bethlehem, Pa....
Dr. Campbell, who did his major work at Northwestern University, was by training and his Berkeley doctorate a social psychologist, but it was a tribute to his bewildering range as a master methodologist that when he took up his last academic post, at Lehigh University, in 1982 university officials threw up their hands and simply designated him "university professor," with faculty listings in the departments of psychology, sociology and anthropology and the department of education.
They could easily have thrown in biology, the philosophy of science and market research. For a generation, virtually no respectable researcher this side of the chemistry lab has designed or carried out a reputable scientific study without a thorough grounding in what Dr. Campbell called quasi-experimentation, the highly sophisticated statistics-based approach he invented to replicate the effects of the truly randomized scientific studies that are all but impossible in the slippery and unruly world of human interactions....Should have added influence in political science and public administration to itemize the influence this should have on public policy making.im1dc -> reason ... , March 22, 2017 at 08:59 AMIt is a valid and reliable adage from a Social Psychologist who Economists should take seriously. His adage explains why Economists are so often wrong, i.e., they fail to take into account the nature and thus behavior of people as individuals, groups, and as both sentient and thinking beings who can and do change behavior routinely sometimes for rational reasons but just as often just to do and be different.libezkova -> im1dc... , March 22, 2017 at 02:08 PM
That's impossible to predict with statistical models although with statistical models scientists can capture WHEN a change is occurring, even where and sometimes why and how but only after the change has occurred, which makes Prediction most difficult.Add to this what Marxists used to call "class interest" of financial oligarchy and we get closer to understanding why neo-classical economics is so bad.
Mar 23, 2017 | michael-hudson.comReply Tuesday, March 21, 2017 at 02:32 PM
Mar 09, 2017 | profile.typepad.comsaid... The ProMarket piece is interesting, but really misses the point. "Regulation" in itself is not what matters, but rather what kinds of regulations and how they work. Some regulations, favored by the industries themselves (like taxi licensing in most metropolitan areas) tend to act to reduce competition and enhance company profits. Others, like the background checks mentioned in the article, serve to protect the public interest. Reply Thursday, March 09, 2017 at 07:42 AM Youarecorrect said in reply to DrDick ... You are correct to point out that a catchall phrase like regulation disguises many intentions. But there is a tension between motivations of regulation. A regulation that is supposed to increase reliability (e.g. vetting of entrants), can be essentially a rent seeking tool in disguise. That's the point of the ProMarket article. Reply Thursday, March 09, 2017 at 11:27 AM DrDick said in reply to Youarecorrect... This is really a question of looking at who is proposing or favoring the regulation and how it is structured and thus whose interests are being protected. If it is coming from established businesses, it is about rent seeking. Reply Thursday, March 09, 2017 at 01:53 PM
Feb 20, 2017 | economistsview.typepad.com
Richard H. Serlin : February 18, 2017 at 07:51 PM"Mr. Friedman underscored problems of asymmetry in regulation: People who especially benefit from a particular regulation will be inclined to lobby or bribe government officials for it. On the other hand, members of the general public, who might suffer from such regulations, will not be attentive to the many rules that affect them, each in a small way." -- Shiller article
This is the same Milton Friedman who assumed people had perfect information and expertise on everything in the market. They were all electrical engineers who knew the exact schematics of every toaster and refrigerator to know if it would burn down their house, but they had no idea what any government regulations or policies were -- Hey, it's ok, and so scientific, to just assume anything you want about human beings, as long as there's lots of math and internal consistency and microfoundations -- And, of course, it makes libertarianism look better.
Feb 18, 2017 | economistsview.typepad.comRC AKA Darryl, Ron... , February 16, 2017 at 07:35 AMJohn Kenneth Galbraith laid out the problem of companies with too much market/political power back in the 1950s and 60s. I never read Galbraith in an economics course, only on my own. Economists were not interested...not enough mathematics and marginal this equals marginal that.RC AKA Darryl, Ron -> JohnH... , February 16, 2017 at 08:27 AM
Nothing like overlooking the elephant is the room...something that economists are better at doing than trying to do their jobs.Totally. John Kenneth Galbraith, like John Maynard Keynes, was a giant among midgets both figuratively and literally.
Feb 15, 2017 | economistsview.typepad.com
RGC : February 15, 2017 at 10:04 AMContrary to What Robert Samuelson Says We Did Bail Out the Bankers and Did Not Prevent a Second Great Depression
13 February 2017
Robert Samuelson is unhappy that people continue to believe something that is true - that we bailed out the bankers - and happy that people still believe something that is not true - that we prevented a second Great Depression. In his column Samuelson complains:
"The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks' shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system."
Okay, let's imagine the counterfactual. We decide to take the free market seriously and let it work its magic on Citigroup, Bank of America, Goldman Sachs and the rest of the high rollers. These huge banks all go into bankruptcy with the commercial banking parts of the operations taken over by the FDIC. All insured deposits are fully protected, with the FDIC and Fed having the option to raise the limits to protect smaller savers.
The shareholders of these banks are out of luck. They have zero. Samuelson is right that share prices were depressed during the crisis, but that is different than going to zero. Furthermore, operating with the protection of Treasury Secretary Timothy Geithner's promise of "no more Lehmans," the share prices soon bounced back.
As far as the folks with uninsured loans that would have lost, well, many of these people were hedge-fund types and other financial institutions. They would have paid a price for not being very competent. The bailout ensured that they would not be left to suffer the consequences of their actions.
As far as the top executives of the banks, while some were shown the door, many of these people continue to earn paychecks in the millions or tens of millions as the financial sector remains hugely bloated. We had an opportunity to downsize the financial sector in one fell swoop, eliminating this enormous albatross which sucks money out of the economy and hands it to the very rich.
The narrow securities and commodities trading sector is now close to 2.5 percent of GDP ($470 billion a year). In the seventies, it was around 0.5 percent of GDP. Does anyone believe that capital is being allocated more effectively today than forty years ago or that our savings are safer?
The additional money spent operating this sector is a huge waste from an economic standpoint, which also plays a large role in the upward redistribution of the last four decades.
In terms of preventing a second Great Depression, this is a nice children's story that the elite like to tell. (And, they get very mad and call people names if they don't agree - we are supposed to take name-calling by the elites very seriously.) We know how to get out of a depression, we learned that lesson in the last one. It's called "spending money."
The claim that we would have suffered a decade of double-digit unemployment if we had not bailed out the banks is premised on a political claim, not an economic one, that we would never have spent the money needed to boost the economy out of a prolonged slump. This claim is not only that any initial stimulus would have been shot down, but even after two, three, or five years of double-digit unemployment the president and congress would not have agreed to a serious stimulus.
This is a pretty strong claim since even tax cuts would serve to provide stimulus, albeit less than spending. (Anyone ever meet a Republican that didn't like tax cuts?) Remember, the first stimulus occurred with George W. Bush in the White House and a 4.7 percent unemployment rate. Those making the claim that in the counterfactual the politicians in Washington never would have done anything to boost the economy has a really low opinion of these folks intelligence and/or honesty. That would be a good topic for a column, if someone really believed it.
Feb 15, 2017 | economistsview.typepad.comsanjait -> Jerry Brown... , February 15, 2017 at 10:38 AMEconomists are enormously diverse as a group. Any piece that explicitly or implicitly describes them as being homogeneous is being reductionist at best.DrDick -> sanjait... , February 15, 2017 at 10:51 AM
But Noah makes good points. Though it's probably worth emphasizing that if there exists a problem of communication between professionals and the public, there is probably mutual blame to be assigned. Economists should talk better to the general public, but as citizens we don't serve ourselves well when we expect the world to cater to our lack of knowledge and interest in complex but important issues.I have to disagree. It is the professionals who need to do a better job of educating the public. It is ridiculous to assume that the general public has the time or resources to discover this for themselves.Peter K. -> sanjait... , February 15, 2017 at 11:19 AM"Economists are enormously diverse as a group.Peter K. -> sanjait... , February 15, 2017 at 11:20 AM
Mainstream economists who get paid well for their services are not that diverse. For one thing, most are white males.
That was Hillary's one good idea about the Fed. One."there is probably mutual blame to be assigned."Jerry Brown -> sanjait... , February 15, 2017 at 11:31 AM
What a masochist.
Stockholm syndrome.Yes economists are diverse as a group, but the opinions of the majority of that group might be described as having moved to the right since 1970. And often certain types of economists are described as fringe and there is a reluctance to discuss their ideas. That is somewhat understandable because any one economist has only so much time, but it seems to go deeper than that very often. Trade has been one of those areas, and I am happy to see many economists doing some re-evaluation of the free trade mantra, among other things. I would include Paul Krugman in that group.
As far as being a knowledge lacking citizen- well we all are. Ain't no economist got it all completely figured out as far as I know. That's how I read Noah Smith's article, as a call to re-examine some previously sacred ideas with maybe a goal of keeping in mind their effects on different segments of society. And economists or anyone else who wants to impact public policy in a democracy certainly should expect to cater somewhat to those who are less knowledgeable about their theories.
Feb 13, 2017 | economistsview.typepad.comRGC : February 13, 2017 at 06:13 AM , 2017 at 06:13 AMJohn Kenneth Galbraith on Monetary Policy:anne -> RGC... , February 13, 2017 at 08:19 AM
"If the near future is an extension of the near and more distant past, there are six imperatives that will shape or control monetary policy and the larger economic policy of which it is now a lesser part. these are:
(1) The perverse unusefullness of monetary policy and the frustrations and danger from relying on it. This is perhaps the clearest lesson of the recent past. The management of money is no longer a policy but an occupation. Though it rewards those so occupied, its record of achievement in this century has been patently disastrous.
It worsened both the boom and the depression after World War 1. It facilitated the great bull market of the 1920s. It failed as an instrument for expanding the economy during the Great depression. When it was relegated to a minor role during World War 11 and the good years thereafter, economic performance was, by common consent, much better. Its revival as a major instrument of economic management in the late '60s and early '70s served to combine massive inflation with serious recession.
And it operated with discriminatory and punishing effect against, not surprisingly, those industries that depend on borrowed money, of which housing is the leading case. To argue that it was a success may well be beyond even the considerable skills of its defenders. Only the enemies of capitalism will hope that, in the future, this small, perverse and unpredictable lever will be a major instrument in economic management.
The central bank remains important for useful tasks - the clearing of checks, the replacement of worn and dirty banknotes, as a loan source of last resort. These tasks it performs well. With other public agencies in the United States, it also supervises the subordinate commercial banks. This is a job which it can do well and needs to do better. In recent years the regulatory agencies, including the Federal reserve, have relaxed somewhat their vigilence. At the same time numerous of the banks have been involved in another of the age-old spasms of optimism and feckless expansion. The result could be a new round of failures. It is to such matters that the Federal Reserve needs to give its attention.
These tasks apart, the reputation of central bankers will be the greater, the less responsibility they assume. Perhaps they can lean against the wind - resist a little and increase rates when the demand for loans is persistently great, reverse themselves when the reverse situation holds.
But, in the main, control must be - as it was in the United States during the war years and the good years following - over the forces which cause firms and persons to seek loans and not over whether they are given or not given the loans.
-From "Money: Whence it came, Where it went" 1975 - pgs 305,6.https://www.amazon.com/Money-Whence-Came-Where-Went/dp/0735100705RC AKA Darryl, Ron said in reply to RGC... , -1
Money: Whence it came, Where it went
By John Kenneth GalbraithExcellent! THANKS!
Feb 13, 2017 | economistsview.typepad.comllisa2u2, February 13, 2017 at 10:34 AMJust finished reading a great little book, THE ECONOMIC PINCH, by C.A.Lindbergh, SR. Here's a link to it: https://archive.org/stream/nkooan_yahoo_Lind/Lind#page/n1/mode/2upSanjait, February 13, 2017 at 11:10 AM
Yes, the writing style is a bit dated, but it gives the bottom-line in really clear, well-written English.
It's a GREAT little book, should be required reading with proof by some book report written by each economist, before their being allowed any public discussion about the FEDERAL RESERVE.
It's probably more relevant today for all U.S. citizens than it was back in the early 1900's.The Great Moderation era Fed has some good aspects but has fundamentally failed to understand how its obsession with keeping inflation from ever even thinking abut going up has suppressed wages and caused labor hysteresis.libezkova : February 13, 2017 at 03:07 PM , 2017 at 03:07 PM
I think they assume that all those problems just equilibriate away across the cycle but the reality is not that.
So definitely it could and should be better.
But .. that doesn't make every proposal to change it a good one, or even a coherent one. Nor does it justify the attitude that we should just blow everything up and hope something better happens. Those bad arguments are what got us Trump, and at no point should reasonable people pander to such bad arguments, or confuse the fact that bad arguments are widely held with the notion that they aren't bad.Fed independence was always a convenient fiction. This is an independence limited to implementing neoliberal policies.
Which was done under "Maestro" Greenspan. This Ann Rand follower and staunch believer in unrestrained "free market" (which means the law of jungles) subverted the institution and pressured the Presidents who deviated from the "Party line" (and one time Bill Clinton tried). This is the extent he was a Maestro. Later, after 2008, Maestro turned into cornered rat, but this is quite another story.
Under Maestro Greenspan Fed as an institution became not so dissimilar to such post WWII financial institutions as IMF and World Bank (which became the key instruments for implementing "Washington consensus"). It became a very effective enforcer of the neoliberalization of the country.
Feb 12, 2017 | economistsview.typepad.com
im1dc : February 12, 2017 at 07:44 PMThe Tax stuff is maybe, this is happening nowlibezkova -> im1dc...
"America's Biggest Creditors Dump Treasuries in Warning to Trump"
by Brian Chappatta...February 12, 2017...5:00 PM EST
> Japanese investors cull U.S. government debt by most since '13
> Currency-hedged returns were worst on record last quarter
"In the age of Trump, America's biggest foreign creditors are suddenly having second thoughts about financing the U.S. government.
In Japan, the largest holder of Treasuries, investors culled their stakes in December by the most in almost four years, the Ministry of Finance's most recent figures show. What's striking is the selling has persisted at a time when going abroad has rarely been so attractive. And it's not just the Japanese. Across the world, foreigners are pulling back from U.S. debt like never before.
From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it's the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world's safest debt market seems less of a sure thing -- particularly after the upswing in yields since November. And then there is Trump's penchant for saber rattling, which has made staying home that much easier.
"It may be more difficult than usual for Japanese to invest in Treasuries and the dollar this year because of political uncertainty," said Kenta Inoue, chief strategist for overseas bond investments at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. "Treasury yields may rise rapidly again in the near future, which will continue to discourage them from buying aggressively."
Nobody is saying that foreigners will abandon Treasuries altogether. After all, they still hold $5.94 trillion, or roughly 43 percent of the U.S. government debt market. (Though that's down from 56 percent in 2008.) A significant drawdown can harm major holders like Japan and China as much as it does the U.S.
And, of course, homegrown demand has of late been able to absorb the pickup in overseas selling..."
Here is the link https://www.bloomberg.com/amp/news/articles/2017-02-12/america-s-biggest-creditors-dump-treasuries-in-warning-to-trump )
Bloomberg, like WaPo and NYT, is "a wholly-owned subsidiary of the Deep State"
Thank God they stopped their Putin-did-it nonsense. Now they have found something new along the lines Trump-did-it. Both those attempts to control the narrative are false and dishonest.
I understand that Trump is now assigned to be as designated scapegoat for all blunders of three previous neoliberal administrations.
But can you please ask yourself two very simple questions:
- Who and how accumulated that much debt?
- Who did run the wars of neoliberal empire expansion to the tune of five trillion dollars?
Was it Trump?
I would greatly appreciated if you can answer them in the reply to this post. Or, even better, make some pause in posting neoliberal propaganda.
Feb 12, 2017 | economistsview.typepad.com
Choco Bell -> Ed Brown... February 12, 2017 at 07:50 AM , 2017 at 07:50 AMasymmetric information, and the recent illuminating example of Wells Fargo's excellence in pushing products that customers did not want nor need.
BY: Some financial "innovation" is faddish. It does not create value.
GR: Approximately 9 percent of U.S. GDP is finance. Some economists argue that probably 3-5 percent is useful for allocating capital, storing value, smoothing consumptions, and creating competition, and the rest is preying on asymmetric information
Do you see how this asymmetric information plays out?
It is the retail vendor who keeps better information than the retail customer. It is the vendor's expectations of disinflation vs inflation rather than the customer's expectations that control the change in M2V. Got it?
When vendor expects deflation he dumps inventory, but when he expects inflation he holds on to inventory as he waits for higher profit margins to arrive. He holds onto merchandise by simply raising prices. But why do economists advertise the reverse mechanism? Why does the status quo have a need for distorting truth?
Inflation is offered to the proles as a substitute for tax relief to the impoverished. Do you see how it works?
" Tax relief for the wealthy will give you delicious inflation. Now jump for it! " ~~The Yea Sayers~
Jump, Fools, Jump
Feb 12, 2017 | www.amazon.com
Selected as a Financial Times Best Book of 2013
Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we austerity for what it is, and what it costs us.
Metallurgist TOP 1000 REVIEWER on April 20, 2013 Format: Hardcover Vine Customer Review of Free Product ( What's this? )An interesting Keynesian view of the current EU austerity programsDavid Lindsay on September 25, 2016 Format: Paperback Verified Purchase
" I found this to be a very interesting and thought provoking book. The author makes his viewpoint very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and even more importantly, dangerous because it does not lead to prosperity, but only to decreased economic growth and increased unemployment. This thesis is backed up by an analysis of the banking crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the problem worse for the EU and why using austerity to solve the problems will not work. It also discusses the history of the idea of austerity, both in terms of the economic theory that promotes it and the economic history that does not. Conservatives, who find Keynesian economics to be not only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this book that they should look at, if only to criticize it. I found this book very enlightening and while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter), I learned a lot, so for me it was 5-stars.
What is in the book?
The book is divided into 7 chapters, which cover the following:
Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of the book (mentioned above), and sets the stage for the more detailed discussions in subsequent chapters.
Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does a good job of explaining these terms and how the interaction worked.
Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe, which first believed it was not going to be affected by the US banking crisis, became a major casualty of it and their own internal banking problems. All these factors were compounded by the single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering the idea that governmental austerity was the only way to correct a problem produced by the private banking sector.
Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed. It also covers the idea in the early 20th century and the development of anti-austerity Keynesian economic theory. It is a nice primer on classical economic ideas.
Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story of the idea of austerity into the present time. It shows how the idea of austerity, discredited by the Great Depression and the success of the Keynesian solution (although conservatives would argue these successes were illusory and set the stage for future economic problems), has been resurrected by economists writing in the latter part of the 20th century and early 21st.
Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that, contrary to the theories presented in the previous chapter, austerity has not worked in practice. Much of the chapter is spent it refuting the writings of several economists that say that the recent historical data does support the idea. Blyth contends that in general it does not and if is does in a few cases it either does not when all the data is considered, or worked only marginally under a very limited set of conditions.
Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank bailouts as absolutely necessary to prevent a complete collapse of the banking system and with it the whole capitalist economic system and with it democratic society as a whole, now questions whether in might not have been better to let the banks fail. He cites the case of Iceland where the banks were allowed to fail and society has recovered. This was done by making the bank's creditors bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss was borne by foreign creditors of a very small country, whose banking system was an immense part of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately, he fails to say how a banking collapse in the US or EU could be handled when the systems are huge compared to Iceland's and where the creditors are largely internal. He does not explain how the failure of these huge banking systems, with their internal creditors, would not result in the scenario he originally envisioned. I found this analysis to be poor and not in keeping with the thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives, and many not quite so conservative, will likely blanch at these ideas. There is no discussion of the political difficulties of doing this or very much development of the idea, which is contained in only the last four pages of the book.Brilliant OverviewFang on September 27, 2016 Format: Paperback Verified Purchase
" Mark Blyth is a professor at Brown University and he explains why austerity doesn't work. He points out that whenever austerity has been tried in the past it has usually proven to be disastrous. What its supporters often seem to forget is that one person's spending is another's income and demand in the economy would collapse if everyone stopped spending. The book is a sobering read because Blyth is not optimistic about the future. However, the book is well written and is often funny.
Blyth shows that the case for austerity does not add up. The US did not pursue austerity during the recession and its economy has been growing. US GDP is 10% higher than it was in 2007. The EU has pursued austerity with vigor, but GDP in the euro zone is still lower than it was in 2007. Blyth shows that countries that cut the most have had lower rates of growth. Blyth claims that all the countries that cut public spending in response to the financial crises had significantly more debt in 2012 than when they started. For example, Ireland's debt to GDP ratio more than quadrupled, from 24.8% in 2007 to 106.4% in 2012. The other problem is that austerity increased unemployment. Throughout southern Europe, unemployment has been at levels not seen since the Great Depression. It is still over 20% in Spain and Greece. As a result of cutting public expenditure Greece's GDP dropped by 30% in four years. There is no evidence that austerity improves growth.
Blyth spends a lot of time trashing the pro-austerity thinking that took place in Europe. Germany is driving economic policy for the euro zone and they have never believed in Keynesian economics. Keynes advised that austerity was a bad idea during a recession. German politicians seem to believe that all nations could have trade surpluses if only they tried hard enough, despite the fact that it is impossible for all countries to have a surplus. Only one European country can be Germany. The Germans have often advocated the sort of solutions that failed in the 1930s. They argue that budget deficits and government debt have to be kept under strict control. The Maastricht Treaty, which established the EU, required that national debt should not exceed 60% of GDP and the deficit should not exceed 3.0%. Entry to the euro also requires a budget deficit of 3.0%.
Blyth points out that when you have a deficit, you can either raise taxes or cut spending to fill the gap. The British government of David Cameron favored the latter in 2010. The British deficit had reached 10% in 2010. However, UK government debt went up, not down, despite the cuts, from 52.3% of GDP in 2009 to 90.7% in 2013. The same pattern was repeated throughout the euro zone. Cutting public expenditure shrank the underlying economy.
The German argument is that running large deficits increases the risk of high inflation. Blyth points out that the Germans have selective amnesia about their past. It was the Wall Street Crash in 1929 not hyper-inflation in 1924 that led to Hitler. Before the crash, 1.25 million people were unemployed in Germany. Hitler was an accidental Keynesian and by 1937 German unemployment had fallen from six million to one million. Unfortunately, much of his spending involved preparing for war. Blyth argues that Germany's continuing insistence on austerity is the biggest threat to the euro zone.
According to Blyth, the current version of the austerity argument was created by a group of Italian economists, originating from Bocconi University, in Milan. He explains why their arguments are deeply flawed. Blyth argues that, apart from Greece, public sector debt in the euro zone countries was not out of control before the financial crises. Blyth rubbishes the theory of "expansionary austerity," that cutting spending will lead to higher economic growth. The "austerians" believed that large spending cuts would be followed by expansion rather than contraction. The reason, they suggested, was that decisive fiscal austerity created confidence in the private sector. Keynesians agreed that insufficient private spending was the cause of the problem, but only governments could stimulate demand on the scale needed. Austerity failed to stimulate demand in Europe. Blyth also argues that everybody cannot cut their way to growth at the same time. The IMF once went along with austerity but it has recently concluded that austerity has had major adverse economic effects.
Blyth is worried that inequality could become a serious problem in the US. The 400 richest Americans own more assets than the poorest 150 million. He argues that both major parties have written off the bottom 30% of society. He claims that the American working class has not had a pay rise since 1979, and globalization has failed them. He believes this explains the anger behind the Trump phenomenon. Blyth points out that rich Americans and the country's biggest companies are reluctant to pay tax, so government borrowing has had to go up. Blyth claims that he pays more tax than GE.
Blyth is critical of Republicans who advocated austerity. Republicans in the US also favored balancing the budget and cutting taxes. Keynesians, like Paul Krugman, argued that this is what Herbert Hoover tried to do in the early 1930s and the result was a 25% unemployment rate. Obama inherited an 11.4% budget deficit in 2009. The Republicans wanted to cut government expenditure but Blyth argues the reason the US has recovered faster than Europe is because it cut less. He makes it clear that it is poorer people who usually rely on government services to make ends meet that are the hardest hit when public expenditure is cut. He believes that the rich and corporate America need to start paying more tax. He also argues that the US government should probably have let its banks go bankrupt – as the Icelandic government did – rather than bail them out.
Blyth reminds us that 2008 was a private sector crisis. The debts of the banks landed on the balance sheet of the public sector through bank bailouts and quantitative easing. In other words, taxpayers bailed out the bankers. He calls this the "greatest bait-and-switch in modern history." The EU is imposing austerity on southern Europe and dismantling the welfare state in Greece in order to protect German banks that made stupid decisions.
Blyth in recent interviews has argued that the EU may have a sinister agenda and it really wants to drag wages in Western Europe down to East European levels so that it can better compete with China. I assumed this must be an exaggeration but it might not be. The Guardian mapped labor costs across the euro zone from 1999 to 2013. What they found is that German workers have barely seen wages rise for that 14-year stretch, despite Germany having massive trade surpluses. We could be in for real trouble.The Richness of Austerity
" Mark Blyth tries to convey a simple message: austerity simply does not work. Defining austerity as "voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness .best achieved by cutting the state's budget, debts and deficits" (p.2), Blyth argued that austerity's fallacies lies in the impossibility of having everybody to be thrift at the same time and the cyclical nature of debt (pp.7 and 12).
Blyth also suggests that austerity efforts unevenly hurt the lower strata of societies (p.8), and conflates debt and financialization problems in private sector (primarily referring to bank and financial institutions) into state (sovereign) issues (p.6 and p.23). In the first three chapters, Blyth strives to demonstrate that the financial and economic turmoil since 2008 is largely a crisis of financialization, lack of regulation, slow growth and imbalance between monetary policy and final creditor of printing press (in the case of Europe), not that of austerity (save the marginal case of Greece). Blyth argues that it is a mentality of treating these crises as endogenous and private actors as "rational" that underlay the bad policy choices in America and Europe (pp.91-93).
In chapters 4 through 6, Blyth provides an intellectual and practical history of austerity. It is suggested that a spirit of thrift and aversion towards state and state spending runs through the vein of economic liberalism, ranging from classical liberalism to neoclassical economics and to the Austrian school. In more contemporary era, it is public choice theory, neoliberalism and Milton Friedman's monetarism that carries this tradition forward to construct a pro-market and private-sector-favoring package that turns public spending into a corporate calculation of costs and benefits. Blyth goes on to illustrate the history of austerity in practice, arguing that it is usually the Keynesian expansionary policies that couple austerity that reinvigorated economy amid crises; austerity, carried out on its own, constitutes massive redistribution consequences.
Blyth obviously attempts to engage as wide an audience as possible in the public intellectual realm. As much as he is successful in his empirical chapters, Blyth appears to fight a deflationary economic policy with his own inflationary writing strategy. From chapters 4 to 5, he constantly conflates the moral teaching of thrift and financial prudence from Adam Smith to avoidance of debt, the Ordoliberalism's quest for order and proper state function to aversion of democratic politics, the methodological insights of public choice to a general fear of bureaucracy and government, and so on. These inflations, while sometimes credited, are bound to subject to scrutiny and questions.
Moreover, by glossing over the details of this rich intellectual history, Blyth dodges some key questions that his empirical chapters also fail to articulate: what is the distinction between private and public debt, and personal thrift and public austerity, when we talk about austerity, and how significant is it? How does this distinction play out in more classical economic philosophy?
And amid crisis, who should be considered the "ultimate creditor" or "final guarantor" of debt (and money)? There questions certainly exceeds the scope and intention of Blyth's book, but they should be instrumental in deepening our understanding of austerity.
Feb 12, 2017 | economistsview.typepad.comyuan -> DeDude... , February 10, 2017 at 09:49 AM"The real question is how much support he has a year from now when most of his voters realize that the majority of what he directly or implicitly promised them, turns out to be a lie."DeDude -> yuan... , February 10, 2017 at 12:52 PM
I'm sure that people in Kansas were telling themselves this 7 years ago.Yep - and they were right. The democrats lost the next midterm election. The midterm blowback is that of both an energized opposition and of a lot of disappointed followers.ilsm -> DeDude... , February 10, 2017 at 04:04 PMIf the libruls think Obama's multinational collateral damage from senseless bombing by drone and expensive aircraft is not worth protesting, then rallies and faux moral indignation against a travel ban are incongruous to reason.sanjait -> Estate Agent - Emily ... , February 10, 2017 at 10:31 AM"It's not quite that bad."ilsm -> sanjait... , February 10, 2017 at 04:08 PM
We can only hope.
But we have an administration that is unconstrained by conscience and logic and a GOP majority in both houses of Congress that shows scant willingness to stand against the administration on anything.
The only remaining check between now and 2018 is the fear Congresspersons might have of losing their seats, and the judiciary.
The former is very weak though, because rapid Trump supporters make up the majority of the GOP voting base, so GOP congressmen are going to stay in line to avoid primary challenges. Their party is almost completely captured by the wingnut wing.
Also, few at-risk GOP Senators are even up for re-election in 2018.
The latter is our only real hope, and even that is tenuous. Judges can be fickle and peculiar, but most GOP judges were selected for their partisan loyalty. Most will go along with almost anything the GOP wants, and as time passes, Trump is going to add more judges, and he will be damn sure to pick ones that go along with anything he wants.
We're hoping for judges' consciences, and loyalty to country over party, and common sense, to save us. But when the GOP picks judges they select against those traits.ilsm : , February 10, 2017 at 04:09 AM"administration that is unconstrained by conscience and logic", we have had that continuously since 1980.
You get worked up over a travel ban but not Obama's US bombing wedding parties. Or taking out 14 non combatants and losing n MV 22 to get a few smart phones.
Do you have stock in both refugee referral companies and Lockheed?poor pk has grabbed the alt right's the concession over cognitive bias, false analogy and cherry picked faux facts.Benedict@large -> ilsm... , February 10, 2017 at 05:04 AMDoes anyone take this guy seriously anymore? This is Chicken Little, Sky-Is-Falling nonsense from a PhD Nobelist? Certainly the guy has lost his marbles, and someone needs to put him in a padded room. At least be kind, and retire him.RC AKA Darryl, Ron -> Benedict@large... , February 10, 2017 at 05:30 AMYou certainly cannot expect Krugman to criticize the constitutional political system of dollar democracy that gave us a choice between Trump and Hillary through first past the post elections and party caucuses any more than you can expect him to criticize lifetime congressional seats and a SCOTUS unanswerable to the people.pgl -> RC AKA Darryl, Ron... , February 10, 2017 at 05:59 AM
I believe even Krugman will criticize gerrymandering, which is a safe target since it is implemented at the state rather than federal level.DeLong is - at least when it comes to the Electoral College. This system is sort of telling the folks in California that they really do not matter.ilsm -> pgl... , February 10, 2017 at 06:10 AMElectoral college exists until "they" gut/get rid of states rule on amendments in the US constitution.RC AKA Darryl, Ron said in reply to pgl... , February 10, 2017 at 06:12 AM
Democracy is one thing within toen lesser in states........ the rest is republic the 'burgs' not wanting to be run from Morningside Hts.The electoral college although problematic is not the best place to start. Campaign finance, gerrymandering, legislative term limits, and an alternative to first past the post voting are all state to state neutral, allowing a large and powerful electoral consensus to form without undue obstacles except for elite authority itself.yuan -> RC AKA Darryl, Ron... , February 10, 2017 at 08:39 AM
These are all assessable solidarity issues. The fear of reversal for Roe V. Wade makes petition and referendum to overturn SCOTUS decisions more difficult first time around, but not impossible since Citizens United. Liberals on the fence only need consider the polling numbers comparing those two SCOTUS decisions to see that petition and referendum to overturn SCOTUS would not threaten Roe V. Wade, but rather end the threat to Roe V. Wade. OTOH, the electoral college is a state by state issue and small states are not going to give it up. New York and California will need to subdivide into a bunch of small states to ever change that.
The constitutional ratification procedure can be hijacked by a solidarity electoral movement only so long as the solidarity is large and cohesive.And, IMO, you are not seeing the forest for the trees. The republican party is laser focused on voter suppression. And they will not waste a crisis or supreme court judge slot.RC AKA Darryl, Ron -> yuan... , February 10, 2017 at 09:27 AM
"A review of these documents shows that North Carolina GOP leaders launched a meticulous and coordinated effort to deter black voters, who overwhelmingly vote for Democrats."
When the Supreme court becomes un-deadlocked Jim Crow will destroy opposition to Trumpism.You are certainly correct in their intent and if the South less Virginia, which was purple enough to go for Hillary in 2016, were the entire country then you would be correct in the impending reality.yuan -> RC AKA Darryl, Ron... , February 10, 2017 at 09:42 AM
The reality is uncertain though because many of the Trump voters were racists and misogynists, but then many of the Trump voters were just reacting to an opportunity to strike back at the corporatist hegemony in control of the political establishment. The corporatist controlled dollar democracy has dominated the conversation about the advantages of trade regardless of trade deficits for over thirty years now. A rebellion is long overdue. The US Constitution provides sufficient political tools to the electorate to stage a revolution using electoral means, but not by just choosing between establishment political parties without providing an electoral agenda of its own along with solidarity in imposing bipartisan anti-incumbency sanctions for failure to perform."The US Constitution provides sufficient political tools to the electorate to stage a revolution using electoral means"sanjait -> RC AKA Darryl, Ron... , February 10, 2017 at 10:39 AM
And I see a mostly corrupt legal system that has already proven willing to overturn the will of the people.Great. While Trump tries to tear down democracy, the supposed representatives of "the people" will keep talking about shit like how much they hate NAFTA.ilsm -> sanjait... , February 10, 2017 at 04:16 PMI won't type much here:libezkova said in reply to yuan... , February 10, 2017 at 07:57 PM
The opening rif is cool.
I need to play this once a week!"And, IMO, you are not seeing the forest for the trees. The republican party is laser focused on voter suppression."ilsm -> RC AKA Darryl, Ron... , February 10, 2017 at 04:13 PM
With all due respect, I do not believe that.
Why republicans should be focused on voter suppression, if Democrats are working relentlessly to move blue collar workers and lower middle class voters to far right ?'dollar democracy' is deeper than that.ken melvin : , February 10, 2017 at 05:22 AM
it is 99% the system
but you got to do the right system
or the left one
trouble is like tamany
cannot see the system to fixPaul Krugman didn't give us Trump, the progressives who can't stand dems, demonized Hillary, either didn't vote or voted for Trump gave us Trump. Idee fixe and big picture are not the same.Peter K. -> ken melvin... , February 10, 2017 at 05:38 AMWrong. Progressive neoliberals helped give us Trump. Nobody forced Hillary to give speeches to Goldman Sachs or to give Bush a blank check for war.yuan -> Peter K.... , February 10, 2017 at 08:56 AM
"We're re-learning today what we should have learned in the 30s ... economic stagnation breeds reaction and intolerance"
Blaming the few who didn't vote Hillary. What about the many who stayed home? You're an example of learned helplessness. Like the wife who won't leave her abusive husband.Peter K. -> yuan... , February 10, 2017 at 09:09 AM"Wrong. Progressive neoliberals helped give us Trump. Nobody forced Hillary to give speeches to Goldman Sachs or to give Bush a blank check for war."
How many Goldman Sachs banksters does Trump have in his administration? I lost count.
The best predictor of a Trump vote was a tendency towards sexism and racism. And Trump voters were generally well-off middle class whites, not the underclass who either stayed home or predominantly voted for Clinton.yuan -> Peter K.... , February 10, 2017 at 09:38 AM"The best predictor of a Trump vote was a tendency towards sexism and racism. And Trump voters were generally well-off middle class whites, not the underclass who either stayed home or predominantly voted for Clinton."
Trump won the uneducated vote. Many of those people ain't middle class.
"How many Goldman Sachs banksters does Trump have in his administration? I lost count."
Yeah they own both parties. Democrats need to be for the people, not corporations. You are pretty naive for being leftwing. Probably you just get off on being argumentative.
"Trump won the uneducated vote. Many of those people ain't middle class." I see you are pimping Trump's faux-populist mythology again. Clinton won the majority of votes of those earning less the $50,000 and Trump won the majority of votes for those who earn more than $50,000.
Peter K. -> yuan... , February 10, 2017 at 11:55 AMhigh school or less [18 percent of total]yuan -> Peter K.... , February 10, 2017 at 05:49 PM
Clinton 46 %
Trump 51 %
some college [32% of total]
college graduate [32%]
Trump 37%has it ever occurred to you that older white voters can be middle/upper class without having a college degree?libezkova said in reply to Peter K.... , February 10, 2017 at 08:05 PM
it's ironic that many of these same people oppose unions, social insurance (e.g. pensions), and free education (GI bill) despite having benefited from these socialist programs.
FYIGMIf Trump got 37% of votes of people with postgraduate degree that's tell you something about Democratic Party. That only can means that Democratic Party smells so badly that most people can not stand it, not matter what is the alternative. As in "you should burn in hell".RC AKA Darryl, Ron said in reply to pgl... , February 10, 2017 at 06:16 AM
It's kind of reversal of voting for "lesser evil" on which Bill Clinton counted when he betrayed the working class and lower middle class. Worked OK for a while but then it stopped working as he essentially pushed people into embraces of far right.My wife says Liz Warren will run in 2020 and win. I am hoping that it will be someone off radar now that gets elected as the youngest POTUS in history. We need a sea change with full millennial backing.Jay -> RC AKA Darryl, Ron... , February 10, 2017 at 06:32 AMYou're wife's prediction for next president will keep DeVos.RC AKA Darryl, Ron said in reply to Jay... , February 10, 2017 at 09:38 AM
"A taxpayer-funded voucher that paid the entire cost of educating a child (not just a partial subsidy) would open a range of opportunities to all children. . . . Fully funded vouchers would relieve parents from the terrible choice of leaving their kids in lousy schools or bankrupting themselves to escape those schools.
the public-versus-private competition misses the central point. The problem is not vouchers; the problem is parental choice. Under current voucher schemes, children who do not use the vouchers are still assigned to public schools based on their zip codes. This means that in the overwhelming majority of cases, a bureaucrat picks the child's school, not a parent. The only way for parents to exercise any choice is to buy a different home-which is exactly how the bidding wars started.
Under a public school voucher program, parents, not bureaucrats, would have the power to pick schools for their children-and to choose which schools would get their children's vouchers."
Remember which side of the debate is pro-choice and which side of the debate is pro teacher's union.I am not for either side. My wife's mother was a teacher as was her older sister. I am not sure what she thinks of the teacher's union.ilsm -> RC AKA Darryl, Ron... , February 10, 2017 at 04:26 PM
The pedagogical system is so oriented to a system of establishment indoctrination that the average private school is just as bad as the average public school and even the worst public schools are no worse than the worst private schools. Only the best private schools stand out along with a few of the charter schools as better than their public school counterparts and even then not by a great margin. The problem is the pedagogical approach itself. It is also a matter of who taught the teachers? We have developed a system that aspires to mold us all into obedient followers and it works very well. It is also self-replicating.Putting up "competition" against public education which as evolved since the Northwest Ordinance is a crusade for the tea party.yuan -> Jay... , February 10, 2017 at 10:02 AM
But they would trip WW III, war to keep Russia from breaking up the Frankensteins of East Europe!
The system is: who makes money."Remember which side of the debate is pro-choice and which side of the debate is pro teacher's union."sanjait -> RC AKA Darryl, Ron... , February 10, 2017 at 10:47 AM
Who needs labor and civil rights when we have capitalist billionaires who will give us "school choice vouchers", "right to work laws", and "deregulation"!Complaining about the electoral college being screwed up is like complaining that human nature is screwed up.libezkova said in reply to RC AKA Darryl, Ron... , February 10, 2017 at 08:11 PM
It's true, but almost pointless, because it won't change in the foreseeable future.I doubt that Trump is a political cycle outlier. He is a sign of the crisis of neoliberal political system, which pushes authoritarian figures as "Hail Mary Pass", when Hillarius politicans are proved to be un-electable.Peter K. -> The People's Pawn... , February 10, 2017 at 06:19 AM
And despite his "bastard liberalism" he is the symbol of rejection of liberalism, especially outsourcing/offshoring and neoliberal globalization. Or more correctly his voters are.Trump said the Iraq war was a disaster. He bragged about being against the war before it started. He used the Iraq war against Jeb Bush and Hillary as an example of the corrupt elite's incompetence.sanjait -> Peter K.... , February 10, 2017 at 10:55 AM
This infuriates thoughtless partisans like Krugman to no end.
The appellate court ruled against Trump's Muslim band even more strongly than the lower court judge."Trump said the Iraq war was a disaster. He bragged about being against the war before it started."wally : , February 10, 2017 at 06:20 AM
That is a very sneaky way of talking around the fact that Trump never said anywhere on record before the war that he was against it."America as we know it will soon be gone." Don't you think that much of it is already gone? We did not see ourselves as a nation of cowards years ago, but that's what we now appear to be.yuan -> wally... , February 10, 2017 at 09:13 AM"We did not see ourselves as a nation of cowards years ago, but that's what we now appear to be." USAnians have been cowards for generations. The transition from corporatist dyarchy to one-party authoritarianism is and was inevitable.ilsm -> wally... , February 10, 2017 at 04:36 PMpoor pk's [whatever it is] America is not my [or a lot of peoples'] America. America like freedom is a perspective thing!point : , February 10, 2017 at 06:41 AMIt seems we live in a system where two parties fight to a draw and then volatility in the system acts as a coin toss and we get new leadership. The people line up approximately half and half for the two.yuan -> point... , February 10, 2017 at 09:33 AM
I'm having a hard time understanding why if half support the new leadership established by the operations of the system, that we should worry this a threat to the system itself.
For if that's what we think, it seems we have far bigger problems than simple disagreement to worry about. It seems those among us who think that way should be planning as revolutionaries to change this doomed system that except for luck has not yet careened over the edge into whatever.Where do you see a draw? The republicans control the house, the senate, the executive branch, the majority of state legislatures, the majority of state governorships, and will soon control the supreme court.Julio -> point... , February 10, 2017 at 10:41 AMThe Republicans have embraced the idea that this is a battle, and that their 50% need to win and keep their heels on the neck of the other 50%. The Democrats seem more conflicted about this fight, partly because some of them have bought the neoliberal ideology of their opposition.yuan -> Julio ... , February 10, 2017 at 12:23 P"some of them have bought the neoliberal ideology of their opposition." i like the understatement.
Feb 12, 2017 | economistsview.typepad.comyuan -> Jim Harrison ... , February 10, 2017 at 12:34 PM"Does anybody around here have anything useful to suggest"Jim Harrison -> yuan... , February 10, 2017 at 01:46 PM
both demonstration and general strikes are powerful ways to express popular outrage. one is planned on for the 17th (too soon) and another more organized one is being planned for march.
"but you have no more of an idea of a global replacement for capitalism"
so the british welfare state, the war on poverty/great society policy era, and the scandinavian social model are unpossible pipe dreams because..."the british welfare state, the war on poverty/great society policy era, and the scandinavian social model are" not replacements for capitalism. They are forms of capitalism. And the sorts of policies that go with these versions of conventional social democracy are...pretty much the platform articles that Clinton ran on. Which is the serious reason the American right despised Hillary. They, at least, didn't have any trouble telling the candidates apart.yuan -> Jim Harrison ... , February 10, 2017 at 04:50 PM
There are two problems with storming the Winter Palace. First, you won't have a decisive majority of Americans behind you. Second, you have no idea what you'd do if somehow did seize the Winter Palace. You could conceivably solve the first problem by going balls out demagogue a la Hugo Chavez; but, like Chavez, you'd have to dispense with democracy to keep power because you have no solution to the second problem. For my money, a decent social democracy-universal healthy care, more progressive taxes, a higher minimum wage, more affordable college education, etc.- is plenty hard enough to secure."They are forms of capitalism."
Before the long-decline began in the 70s, a large fraction of the UK's economic activity was chartered, regulated, and/or managed for the people. That's not capitalism, by definition. (Socialism was a market/trade-based system at its inception. The tendencies with alternative economic models came later.)
And Corbyn has returned labor to its socialist roots: http://www.independent.co.uk/news/uk/politics/jeremy-corbyn-to-bring-back-clause-four-contender-pledges-to-bury-new-labour-with-commitment-to-10446982.html
"And the sorts of policies that go with these versions of conventional social democracy are...pretty much the platform articles that Clinton ran on."
I guess I missed Clinton advocating for the nationalization of health care, education, energy production, and transportation.
And the "welfare state" has little to do with "social democracy" (whatever that recent nonsense phrase means), all of them were developed by socialist movements.
Feb 12, 2017 | economistsview.typepad.comRGC : Reply Sunday, February 12, 2017 at 08:08 AM , February 12, 2017 at 08:08 AMClassicals or Neoclassicals - who you got?RGC -> RGC... , February 12, 2017 at 08:55 AM
Classicals vs Neoclassicals: Tax and Rent
Posted on 8 January 2011
At the university I attended, a few of the academics were strongly influenced by Classical Political Economy, especially that of Smith and Ricardo. Prior to my student days, one of them had published a paper in the Cambridge Journal of Economics entitled "On the origins of the term 'neoclassical'" (no free link available), which is quite well known in heterodox circles. In it, he argued that the 'classical' in the term 'neoclassical' is a misnomer and that neoclassical and classical economics actually have little in common, despite attempts by neoclassicals to claim Smith, in particular, as their forefather.
The classical-influenced economists at my university happened to belong to the Sraffian School. This school attempts to synthesize Classical value and distribution with Keynesian output and employment determination, and is also known for its key role and victory in the Cambridge Capital Controversy. The school is named after Piero Sraffa, whose interpretation of Classical Political Economy, particularly Ricardo's work, has been highly influential.
Sraffians are not the only modern-day economists influenced by Smith and Ricardo. Another prominent example is Michael Hudson. In a recent interview (h/t to Tom Hickey), Hudson discusses one big difference between the Classical economists and the neoclassicals: their analysis of taxation as applied to economic rent.
Hudson touches on a number of noteworthy points during the interview. He draws attention to a historical correspondence that would probably surprise many, between high top tax rates and strong economic growth, and observes that the top rates were high in the period prior to WWII. Importantly, the focus of taxation in Classical Political Economy, which Hudson argues influenced US government policy in the late 1800s and much of the first half of the 1900s, was on confiscating economic rents. These rents include income that derives from ownership of assets that appreciate in value merely because of the growth in national income and/or improved public infrastructure, and not due to any participation in the production process (they arise especially in the real estate and financial sectors).
It is not mentioned in the interview, but profit, of course, is also income that derives from the mere ownership of assets – the means of production. However, the classical economists were engaged in a class war with rentiers, not capitalists. It was Marx who drew this reasoning out to its logical conclusion, and this probably goes a long way to explaining why neoclassical theory, rather than being a continuation of classical economics (as was often claimed once it was established), was an escape into a different conceptualization of a capitalist economy that sought to reframe the distribution of income as the result of marginal contributions (an attempt that failed and was the chief target and theoretical casualty of the Cambridge Capital Controversy). Even so, there does remain a significant distinction between profit, which relates to assets employed in the production process, and economic rents. For this reason, Marx also distinguished between these two categories of income and spent a great deal of space in volume 3 of Capital analyzing the various forms of surplus value, including different types of rent.
Hudson goes on to stress that the taxation imposed in the late 1800s and first half of the 1900s was highly progressive. Initially only the top 1 percent of income earners were required to submit tax returns. The purpose of this was to keep taxes on wages and profit low to promote price competitiveness against lower wage countries. This can be contrasted with neo-liberal policies of today which seem to be designed almost with the opposite intent: to tax wage and profit income (and also consumption) but provide loopholes or tax breaks for the recipients of economic rents.
Above all, Hudson distinguishes between what the classical economists meant by the term "free market" and what that term has come to mean in the neo-liberal period. Hudson emphasizes that, for the classical economists, "free market" meant a market unencumbered by rent-based claims on income that would draw economic activity away from income production and toward speculation. The aim of the classical economists was to incentivize production. This is a very different notion than the neo-liberal one of labor-market "deregulation" (meaning regulation in favor of employers over employees), which is really just code for union smashing and an attack on real wages, or the neo-liberal deregulation of financial markets, which is a euphemism for enabling financial parasitism.
Hudson makes another observation in passing. The observation is not central to his argument in the interview, but is relevant to current debates over deficits and public debt, and consistent with MMT. He notes that immediately prior to the commencement of the only extended period of high capitalist growth (WWII until the late 1960s), the US population was not in debt, and in fact had pent up savings from the war that it was waiting to spend.
By little or no debt, Hudson clarifies that he means little or no private debt. There was, of course, a large public debt – larger as a percentage of GDP than the current US government "debt". This public debt did not matter, in spite of the familiar opposition to deficits and public debt, the echoes of which can be heard today, simply because the budget deficit shrinks endogenously once private-sector activity and income growth resume. This is precisely what happened in the immediate postwar period.
Today, with the US government the monopoly issuer of its own flexible exchange-rate fiat currency, public "debt" is – or rather should be – even less of an issue. Unlike in the immediate postwar period, the government is not subject to the constraints of Bretton Woods or a similar commodity-backed money system. It is free to utilize its fiscal capacity to the extent necessary to restore full employment.
Government "debt" is nothing other than the accumulated net financial wealth of the non-government. Once the non-government is ready to spend, income growth will deliver stronger revenues, reducing the deficit. But the private sector needs to have its debt under control before it will resume spending at levels sufficient to sustain strong economic growth.
In addition to the absence of significant private debt at the end of WWII, there were other factors that contributed to the strong growth of the immediate postwar period, including Keynesian demand-management policies, a progressive tax system, and significant financial regulation. All these beneficial features of the economy were gradually undermined, and then exposed to outright attack from the 1970s onwards.
Hudson discusses how, over time, much of the progressivity in the tax system was removed, paving the way for the construction of the inequitable and anti-productive monster of today. Keynesian demand-management policies were also largely eschewed throughout the neo-liberal era on the basis of an opportunistic misinterpretation of the stagflation of the 1970s. All this took place alongside deregulation of the financial sector and an aggressive dismantling of worker employment protections.
The result of this neo-liberal policy mix was an increasing financialization and "rentification" of the economy, widening income inequality, and an adherence to fiscal austerity that directly corresponded, as a matter of accounting, to an unsustainable build up in the only US debt that matters – private debt – and culminated in the Global Financial Crisis and Great Recession.
If the aim is to restore sustainable growth under capitalism (which is not my preferred social system, but presumably the one commanding the allegience of policymakers), the insights obtained from the classical economists in conjunction with the lessons of the postwar period would seem to suggest some combination of the following policy responses: tighter regulations of speculative activities; a more steeply progressive tax system targeted at the confiscation of economic rents and the incentivization of production and consumption; stronger worker protections; and the abandonment of the faulty construct of a 'government budget constraint' and a return to deficit expenditure sufficient to underpin non-government net saving and full employment.
But the actual policy response has instead been to manipulate financial markets to engineer a massive transfer of wealth to the rentiers and exacerbate income and wealth inequality; to continue with the approach of taxing wage and profit income along with consumption rather than economic rents; and possibly even to revert foolishly to austerity while the private sector remains deeply indebted.
http://heteconomist.com/classical-vs-neoclassical-economics-tax-and-rent/If you favor the neoclassicals, you also favor Paul Samuelson and the neo/new Keynesians- and today's mainstream economists.
Feb 12, 2017 | economistsview.typepad.comFloxo : February 11, 2017 at 01:11 PM , 2017 at 01:11 PMI originally tried to post this comment on Mainly Macro. It is in reply to some critical comments I received when I posted a comment suggesting economists themselves were largely responsible for the unpleasant political consequences typified by Trump and Brexit. I argued there has been a failure to properly communicate the serious distributional implications of trade and globalization. This has led people to become disillusioned with stagnant living standards and growing inequality. For some reason, my reply was disallowed, making it appear as though I had no answer to my critics. As my reply addresses issues of concern here I am hoping it will be published .anne -> Floxo... , February 11, 2017 at 01:23 PM
Thankyou for your replies to my comment.
Stéphane, I did not say trade gain arises from price convergence; neither do trade gains arise from differences in opportunity costs (I think that is what you meant). Trade gain can arise from several sources, these include relative differences in productive efficiency (Ricardian comparative advantage), differences in relative factor abundance (HO theory), from tradeable goods where production exhibits increasing returns to scale and from monopolistic competition (Krugman).
When trade gain is exhausted it is possible to derive further gains from factor mobility. For example, shifting capital from a capital abundant region to a capital poor region will typically result in further gains. An example of this process is off-shoring, where a firm shifts production to another country where wages are lower and rent (the return on capital invested) is higher.
So why are potential gains from globalization a problem? The challenge is the sheer size of the population industrializing from a very low capital base. Economically big regions with abundant labour and scarce capital mean low wages and high rents extending into the long term. For a developed economy, adopting a policy of free trade without capital controls with these regions will have two significant consequences:
1. There is a trade induced shift to more capital intensive production driven by the factor advantage of having a relative abundance of capital. This lowers the domestic labour share of GDP.
2. Capital abundance implies a capital drain as domestic saving is increasingly used to finance foreign investment in productive capacity, driven by the higher foreign return. This correspondingly lowers domestic investment which also slows growth. Labour now has less capital applied to it, reducing labour productivity and also wages.
What are called "magnification effects" virtually guarantee wage earners are big losers in these scenarios, whereas, capital owners are big winners; hence the rise in inequality.
The theoretical support for this view is very robust. I became interested in the debate when such effects showed up strongly in the numerical trade models I develop. Economists, generally, have not supported this basic theoretical perspective, preferring a grab bag of miscellaneous empirically based models. Rapid technological change, too little technological change, skills biased technological change, union demise, banks unwilling to lend, demographics, austerity, labour hoarding, financialization, shift in consumer preference to services and on and on. Personally, I prefer basic economic theory and regard all of these thought bubbles as garbage.
In answer to Anonymous, it is true; many economists assert automation is the principle cause of our economic woes. This is theoretically baseless. I cannot describe a model of how technological improvement is supposed to give rise to the above effects, because no such model exists. Improved technology means we get more goods and services from the same resources of capital and labour, boosting growth and wages and rents.
Where is the precise reference? Mainlymacro must however be separate as "mainly" and Macro" in posting the link.Floxo -> anne... , February 11, 2017 at 05:09 PMThankyou Anne, here is the reference you requested.anne -> Floxo... , February 12, 2017 at 04:59 AM
https://mainlymacro.blogspot.com.au/2017/01/why-voting-for-article-50-may-ruin-mps.htmlanne -> anne... , February 12, 2017 at 05:01 AM
January 29, 2017
Why voting for Article 50 * may ruin an MP's career
The last time I did something like this was to urge Labour party members to vote for Smith rather than Corbyn, knowing full well that Corbyn was almost certain to win. Being proved right on that occasion is no consolation, because I would rather have been wrong. This is even more futile, but now as then I feel a decision is about to be made that is both disastrous and irreversible. I also want to say something about the longer term interests of MPs that I have not seen said elsewhere.
There are so many principled reasons for MPs to vote against triggering Article 50. Let me summarise what I see as the main ones here, but this is far from comprehensive....
Article 50 of the Treaty on European Union is a part of European Union law that sets out the process by which member states may withdraw from the European Union.
-- Simon Wren-LewisCorrecting:anne -> Floxo... , -1
Mainlymacro can now be linked to directly. There is no need to separate "mainly" and "macro" in posting a link.Interesting response to an interesting argument. I am grateful for this post.libezkova -> anne... , February 12, 2017 at 10:34 AMI do not share your enthusiasm.
A couple of points
1. Neoliberal economists are stooges of financial oligarchy (much like Soviet economists were stooges of Communist Party) and if they do not promote Washington consensus on trade and globalization they would be ostracized and replaced by other no less talented puppets. They all are replaceable and they understand that perfectly well and behave accordingly. Being puppets they have no degrees of freedom to express the discontent with neoliberalism.
2. The author himself is still in completely under the spell of neoclassical economic framework. that's why his critique is so superficial. As in "There is a trade induced shift to more capital intensive production driven by the factor advantage of having a relative abundance of capital. This lowers the domestic labour share of GDP. " What a "neoliberal speak." Reminds me 1984 Newspeak. That was a political decision to shift capital to developing countries in order to destroy union power and decimate "trade unionism" as political force opposing to neoliberalism. As simple as that.
Feb 12, 2017 | economistsview.typepad.comanne : February 11, 2017 at 11:43 AM , 2017 at 11:43 AMhttp://www.yalelawjournal.org/article/amazons-antitrust-paradox
Amazon's Antitrust Paradox
By Lina M. Khan
Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm's structure and conduct pose anticompetitive concerns-yet it has escaped antitrust scrutiny.
This Note argues that the current framework in antitrust-specifically its pegging competition to "consumer welfare," defined as short-term price effects-is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon's dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational-even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.
This Note maps out facets of Amazon's dominance. Doing so enables us to make sense of its business strategy, illuminates anticompetitive aspects of Amazon's structure and conduct, and underscores deficiencies in current doctrine. The Note closes by considering two potential regimes for addressing Amazon's power: restoring traditional antitrust and competition policy principles or applying common carrier obligations and duties.
Feb 12, 2017 | economistsview.typepad.comanne : February 11, 2017 at 06:45 AM , 2017 at 06:45 AMhttp://cepr.net/blogs/beat-the-press/justin-wolfers-is-mistaken-restrictions-on-firing-don-t-have-to-reduce-employmentcm -> anne... , February 11, 2017 at 11:55 AM
February 10, 2017
Justin Wolfers Is Mistaken, Restrictions on Firing Don't Have to Reduce Employment
Donald Trump has used his podium on several occasions to harangue companies about moving jobs overseas. This is probably not an effective way to conduct economic policy, but Justin Wolfers misled * New York Times readers in claiming:
"Research shows that efforts to boost employment by making it difficult or costly to fire workers have backfired. The prospect of a costly and lengthy legal battle for laid-off employees makes it less appealing to hire new workers. The result has been that higher firing costs have led to to weaker productivity, sclerotic labor markets and higher unemployment."
Actually, more recent research results, ** including more recent work *** from the Organisation for Economic Co-operation and Development (the source to which he links), show that there is no necessary link between restrictions on firing and unemployment. While excessive restrictions on firing can undoubtedly hurt employment and growth, there is no reason to assume that moderate amounts of severance pay, or other disincentives to dismiss workers, will discourage investment and hiring.
A requirement to give longer term workers severance pay when dismissed does change the incentives facing an employer. In this situation they have more incentive to retrain workers to ensure that they are as productive as possible. They may also opt to invest more in existing facilities rather than move overseas in order to avoid severance pay.
-- Dean BakerThe primary reason preventing hiring is lack of demand or sales prospects for additional product/services the company produces. A company that can pressure its existing workers to work more, without much risk of resistance or departure, will usually do that. Of course that works only up to a point due to negative impact on work quality etc. When there is convincing additional demand promising sufficient margin, they *will* hire. I have yet to see a company that will forgo profitable business to restrict its size (exception - small founder-owned/controlled businesses where the owner doesn't want the business to grow to the point where they can no longer themselves manage it, and have to accept outside "meddling" in business decisions, i.e. it's no longer their business; also known as "lifestyle business").cm -> anne... , February 11, 2017 at 12:01 PM
In the latter case the reason may also be that outside funding is needed to acquire new capacity (e.g. buy or build a new location), with the risk and imposition of external control that brings. But none of those are problems hiring workers.
One thing that employers will frequently do, if they can, is bring in contingent workers on time-limited contracts that are extended one period at the time, for any position where this is possible (low cost to bring somebody up to speed, no dependency on and risk of loos of institutional memory).anne -> cm... , February 11, 2017 at 12:12 PM
State or national labor departments will often at some point react to "abuse" (e.g. perma-temps) by imposing limits on contract extensions. Then the next gambit is herding temp workers through staffing agencies, and telling them to change employer every so often to avoid the extension limit. And they will do it because they have no better options.
And that's where it always ends up - too few better options for workers.Really nicely explained.cm -> anne... , February 11, 2017 at 12:32 PMThanks. Of course what would be convenient for employers is to be able to just let go of people who they have to hire as "perm" and retain for a while because of high costs of acquiring in-house experience and institutional knowledge effects. But every product/technology becomes obsolete eventually, the related experience diminishes in value, or at least the volume of demand for it, and after a number of years/decades, well, the workers are also exactly that many years older.
Feb 11, 2017 | economistsview.typepad.com
libezkova -> Trump February 11, 2017 at 05:04 AMWhat has happened to "hope and change" is very straightforward: it buried Democratic Party with its lies and militarism and there is no way back.
That's why Trump. Obama said all the right things and did the opposite. He has gutted the country and obliterated the middle class while continuing fighting wars of neoliberal expansion and conquest.
Dismissing Trump and Trump's voters as "deplorables" gives Democrats like Krugman an excuse to avoid any self examination about how the neoliberal policies they advocated failed the majority of population of the country and have alienated electorate.
The last two democrat presidents destroyed as much of the New Deal as their Republican counterparts and couldn't wait to gut the remnants such as SS. That's undeniable.
As a result the key tenets of neoliberal ideology are now as dead as the key postulates of Bolshevism were in 1945. The rule of financial oligarchy disguised as "Liberal democracy", globalization and free trade, free markets as a substitute for government, deregulation, de-industrialization, letting market forces determine the characteristics of employment, etc.
Does anybody here believes this sh*t? I doubt it. Even those who advocate it, have doubts.
Still as a result of 36 years of brainwashing large swathes of US society accept without questioning the core tenets of neoliberalism much like Soviet population accepted the key postulates of Bolshevism. They believe that "the market" trumps all other forms of organization of activities of the society, that everything works better that way, that markets are virtuous. As a result, they believe in the false notion that the government is always and ever getting in the way of markets and therefore needs to be made as small and weak as possible.
If you read Michael Mann's, The Sources of Social Power you will notice that he places Ideological Power first in his four component model of social power: ideological, economic, military, and political.
Each of them create different but complementary sources of power within a given society:
- Ideological Power derives from the human need to find ultimate meaning in life, to share norms and values, and to participate in aesthetic and ritual practices with others.
- Economic Power derives from the human need to extract, transform, distribute, and consume the products of nature. Economic relations are powerful because they combine the intensive mobilization of labor with use of capital, trade, and production chains
- Military Power is based on refined, concentrated and lethal violence.
- Political Power is the centralized and territorial regulation of social life. The basic function of government is the provision of order using this type of power.
The main tenets of neoliberalism are still very powerfully embedded in people minds. But ideology is dead and that spells troubles the same way as death of Bolshevism spelled troubles for the USSR.
See also series of Mark Blyth interviews such as
- What Trump Voters Know That The Democrat Elite Don't! (Mark Blyth Interview)
- Mark Blyth--"Liberalisms' great trick has been to naturalize very difficult political contests."
- Liberalism Under Siege Mark Blyth, Margaret Weir with Ed Steinfeld
- Chris Hedges Brace Yourself! The American Empire Is Over - YouTube
- Chris Hedges On Alex Jones The Authoritarian Takeover - YouTube
Feb 10, 2017 | economistsview.typepad.comGibbon1 : February 10, 2017 at 01:47 AM""seem unimpressed by the fact that globalization has lifted hundreds of millions of desperately poor people in China and India into the global middle class. ""libezkova -> Gibbon1... , February 10, 2017 at 02:08 AM
Ergo enabling the savaging of working class people in the US was worth it.And I am not sure that it was neoliberal globalization as the only factor in rasining the standards of living in case of China. They have also industrialization process going on, give or take. Chinese maquiladoras were allowed under strict conditions of transferring technology. That's what distinguishes China from India or Mexico, where neoliberal administrations were much less protective of interest of their nations and allowed Western monopolies more freedom.pgl : , February 10, 2017 at 01:47 AM
After all the Communist Party is still a ruling Party of China. With a neoliberal twist yes, but they still adhere to the ideas of Marx.Kuttner really captures the contributions of Dani Rodrik. If I had to pick one sentence to capture this review - it would be this:libezkova -> pgl... , -1
On the basis of careful empirical work, Rodrik concluded that "globalization makes it difficult to sustain the postwar social bargain" of labor peace in exchange for "steadily improving worker pay and benefits."It's not globalization, it's "neoliberal globalization" and neoliberalism in general which killed the New Deal capitalism. As soon as the US elite realized the cookies are not enough for everybody they start withdrawing them from the table. Stagnation and the subsequent collapse of the USSR also played an important role, allowing neoliberal propagandists to claim the victory.
Feb 09, 2017 | stumblingandmumbling.typepad.com
Nick Cohen makes a good point : it is not congenital liars that should worry us, but congenital believers – those who fall for the lies of charlatans. We know that many do so: almost half of voters believed the lie that leaving the EU would allow us to spend an extra £350m a week on the NHS.
This poses the question: why do people fall for lies? Here, we can learn from behavioural economics and research (pdf) into criminal fraud. I reckon there are several factors that liars exploit in politics.
One is wishful thinking. People want to believe there's a simple solution to NHS underfunding (leave the EU!) or to low wages (cut immigration!) just as they want to believe they can get rich quick or make money by taking no risk: Ponzi schemers like Bernie Madoff play upon that last one. The wish is often the father to the belief.
Relatedly, perhaps, there are lottery-type preferences. People like long-odds bets and pay too much for them: this is why they back longshots (pdf) too much and pay over the odds for speculative shares . To such people, the fact that an offer seems too good to be true is therefore, paradoxically, tempting. A study of fraud by the OFT found :
Some people viewed responding to a scam as taking a long-odds gamble: they recognised that there was something wrong with the offer, but the size of the possible prize or reward (relative to the initial outlay) induced them to give it a try on the off-chance that it might be genuine.
There's a particular type that is especially likely to take a long-odds bet: the desperate. Lonely people are vulnerable to the romance scam; gamblers who have lost take big bets to get even; losing teams try "hail Mary" tactics. In like fashion, people who feel like they have lost out in the era of globalization were tempted to vote for Trump and Brexit.
There's another mechanism here: people are likely to turn to con-men if the alternatives have failed. Werner Troesken shows (pdf) how snake-oil sellers exploited this. They invested a lot in advertising and in product differentiation and so when other products failed they could claim that theirs would work when the others hadn't. I suspect that fund managers use a similar trick: the failure of many to beat the market leads investors simply to trust others rather than tracker funds. The fact that previous policies had failed working people thus encouraged them to try something different – be it Brexit or Trump.
Yet another trick here is the affinity fraud. We tend to trust people like ourselves, or who at least who look like ourselves. Farage's endless posturing as a "man of the people" – fag and pint in hand, not caring about "political correctness" – laid the basis for people to trust him, just as Bernie Madoff joined all the right clubs to encourage wealthy (often Jewish) folk to trust him. By contrast, the claims from the Treasury and various think-tanks that Brexit would make us poorer came from metropolitan elites who were so different from poorer working class people that they weren't trusted. And in fact the very talk of "liberal elites" carried the subtext: "don't trust them: they're not like you".
All of these tendencies have been reinforced by another – the fact that, as David Leiser and Zeev Kril have shown , people are bad at making connections in economics. The idea that Brexit would hurt us rested upon tricky connections: between the terms of Brexit and trade rules; from trade rules to actual trade; and from trade to productivity. By contrast, the idea that leaving the EU would save us money was simple and easy to believe.
Now, I don't say all this merely to be a Remoaner; complaining about liars is like a fish complaining that the water is wet. Instead, I want to point out that it is not sufficient to blame the BBC for not calling out Brexiters' lies. Yes, the BBC disgraced itself during the plebiscite campaign. But we must also understand how voters fall for such mendacity. As Akerlof and Shiller write:
Voters are phishable in two major ways. First, they are not fully informed; they are information phools. Second, voters are also psychological phools; for example, because they respond to appeals such as lawnmower ads [a candidate seen mowing his own lawn is regarded as a man of the people] ( Phishing for Phools , p 75)
All this raises a challenge for liberals. Many used to believe the truth would win out over lies in the marketplace for ideas. This is no longer true, if it ever were. Instead, the questions now are: what can we do about this? And what should we do? The two questions might well have different answers. But we can make a start by understanding how lies are sometimes believed. Keith | February 07, 2017 at 04:47 PMThe marketplace of ideas assumes that the consumers are able and willing to inform themselves and be rational rather than emotional. Clearly this is not true of a lot of voters when confronted by a manipulative press and Tories like Jim with their right wing agenda slyly hidden for the time being.Matthew Moore | February 07, 2017 at 05:37 PM
Equally as in other areas such as health care shopping around is impossible to do as the consumers lack expert knowledge. Allowing the profit motive to apply to many areas is sure to be a disaster for human welfare as the profit incentive stops the experts using their knowledge for good. Finance is a classic example of the uninformed being repeatedly duped into unsound investments decade after decade. Benjamin Graham describes how in his first job selling Bonds to grannies he came to realise that he was being asked to steal the life savings of pensioners via commissions designed to get a sale of junk paper. Which is why he moved elsewhere to a more ethical line of work. But I am sure leaving the biggest most integrated market in the world where lots of foreigners have helpfully learned our language will surely increase our prosperity....Nigel says so.
There will always be gullible people (/ people constrained by high opportunity cost of information search, as I prefer to think of them)Dipper | February 07, 2017 at 07:47 PM
And there will always be liars looking to take advantage of them. Like 99% of politicians ever.
It's very Marxist to wonder how we might change this basic fact of humanity, when the real solution is clear. Don't set up powerful central institutions that rely on coercion: it attracts liars, rewards them, and makes new liars out of honest people.
Oh, we Leavers are being lectured again by our Remainer betters on our stupidity.Dipper | February 07, 2017 at 08:09 PM
If the statements of the amount we pay to the EU were lies, how come we owe them €50 billion?
how come no-one ever asks why we have to implement the four freedoms when Germany gets a free pass on the Free market in Services?
the government announced house building plans today, and no-one asks whether a cause of high house prices and a housing shortage is too much immigration?
It's not the lies, it's the questions never asked that stand out.
@ Keith - "Tories like Jim"Ralph Musgrave | February 07, 2017 at 09:45 PM
I don't read Jim as a Tory. I read him as someone who was a Labour supporter but now just stares in amazement at a group of people who have become EU Federalist fanatics spouting delusional slogans who can never answer a straight question and refuse to acknowledge the obvious problems of democratic accountability.
How on earth did that happen? How did apparently intelligent people completely lose their critical faculties and join a quasi-religious cult that chants empty slogans and denounces anyone who questions them?
But I'm sure Jim can speak for himself.
Chris missed out the fact that people tend to give others the benefit of the doubt. I.e. if X tells a monster lie, peoples' immediate reaction is: "X is is a bastard". But then on second thoughts they feel ashamed at accusing someone else of being a bastard, and assume it's they themselves that must be wrong.Sotto Voce | February 07, 2017 at 10:45 PM
There is a bit of a danger here of another comment thread being derailed with Brexit mud-slinging. Chris's post isn't really about the pros and cons of Brexit, it just offers a vivid example of the phenomenon under discussion.e | February 07, 2017 at 10:57 PM
The point Chris makes in the last paragraph is more general and profound. If any and all data/information/evidence/argument is interpreted in partisan fashion and subject to massive confirmation bias so that debates increasingly polarise - or if different sides in debates proffer their own favoured but incompatible versions of the truth - then meaningful dialogue, deliberation and compromise become near impossible. All we get is intolerance, mistrust and greater partisanship. Clearly these are not entirely new issues, but it seems undeniable that there has been a qualitative shift in 'quality' of public debate.
We appear to be witnessing the US political system at great risk of imploding, as enlightenment values are abandoned and key tenets of liberal democratic practice are wilfully rejected. This is the route to chaos.
The questions Chris poses are, to my mind at least, the right ones. The very nature of the problem means that the old/favoured remedies are unlikely to be effective. But what can replace them? Is a violent conflagration the only way of shocking the system out of hyper-partisanship and the rejection of the foundational belief that we live in a shared reality (i.e. for people to 'come to their senses')? Or can we back out of this particular cul-de-sac peacefully? You've got to hope so. But, if so, how?
Our upper echelon, i.e. our long-standing middle of the road Labour MPs and commentators, have long been successful in fighting off calls for left leaning policy/talk of how things work (because who knows where this will end) under a guise of fighting off racism/ a closed shop mentality; the routes of least resistance 50s – 00s which should alert us to the ability of the English working class to embrace immigration and avoid base philosophies. But it seems not. Seems to me our shared interest beyond race creed colour and gender continues to be deliberately and systematically no-platformed. What I fail to understand, given the rise of UKIP, is why this is not glaringly obvious; because if you're one of the majority who live life as best you might with as much consideration and tolerance as you can muster where does credence go when an ordinary workers tendency to sound 'populist' is marked up to racism no matter known history...aragon | February 07, 2017 at 11:53 PM
Not again!aragon | February 08, 2017 at 12:29 AM
Phishing for Phools. The Political Brain...
"Serious thinkers set to work, and produced a long shelf of books answering this question. Their answers tended to rely on similar themes. First, Democrats lose because they are too intelligent. Their arguments are too complicated for American voters. Second, Democrats lose because they are too tolerant. They refuse to cater to racism and hatred. Finally, Democrats lose because they are not good at the dark art of politics. Republicans, though they are knuckle-dragging simpletons when it comes to policy, are devilishly clever when it comes to electioneering. They have brilliant political consultants like Lee Atwater and Karl Rove, who frame issues so fiendishly, they can fool the American people into voting against their own best interests."
And immigration is about economics. This is Sweden an immigration superpower.
"Swedish police last year issued a report where it detailed incidents from more than 55 areas which it branded as "no-go zones" as it detailed brutal attacks on police, sexual assaults, children carrying weapons and general turmoil sweeping across the country."
"A ban was supported by 71 per cent of people in Poland, 65 per cent in Austria, 53 per cent in Germany and 51 per cent in Italy.
In the UK, 47 per cent supported a ban.
In no country did more than 32 per cent disagree with a ban."
Phishing for PhoolsGuano | February 08, 2017 at 12:42 AM
"It thereby explains a paradox: why, at a time when we are better off than ever before in history, all too many of us are leading lives of quiet desperation."
"Pour the sweet milk of concord into hell,
Uproar the universal peace, confound
All unity on earth."
Human Nature has not changed.
The truth is complicated.Tony Holmes | February 08, 2017 at 09:13 AM
The truth is challenging.
Chris, a bit off the point, but if everyone followed your advice and put money in tracker funds and active funds disappeared, what would happen to the stock market ? Instinct tells me it would become extremely volatile, but instinct is a bad guide...gastro george | February 08, 2017 at 09:35 AM
FFS aragon, that "report" from Sweden is from the Express quoting directly a Swedish fascist.reason | February 08, 2017 at 11:29 AM
Isn't the key point here prospect theory (I've just finished reading Kahneman). People with no good options gamble.reason | February 08, 2017 at 11:30 AM
P.S. The no good options bit is a very good reason for opposing first past the post and the limited options consequence.aragon | February 08, 2017 at 11:47 AM
gasto georgeDipper | February 08, 2017 at 12:03 PM
It is not an extreme story, I don't speak Swedish or have any contact with Sweden. I only read the main stream media which includes the Daily Express.
As you would expect most of the media does not report on Sweden, unless it has a British angle.
e.g. Birmingham Boy killed by a hand grenade.
(I don't know how you can spin Hand Grenade)
The report originates with the Swedish Police the situation in Malmo is serious and individual police officers like Peter Springare's Facebook post.
Here is a report from the thelocal.se
"After a wave of violence in Sweden's third city, police boss Stefan Sintéus has appealed to residents in Malmö: "Help us. Help us to tackle the problems. Cooperate with us.""
@ gastro georgeGuano | February 08, 2017 at 02:06 PM
This isn't the first time facists have made inflammatory comments about muslims. Nick Griffin did this and was prosecuted for inciting racial hatred in 2006. The summary of what he said is some way down this article.
Eleven years later we have this http://www.bbc.co.uk/news/uk-england-south-yorkshire-38845332
And that, in a nutshell, is the problem with banning "fake news". You have to be really open, transparent and clear and be absolutely sure you are right, otherwise you end up making heroes of facists and stoking the notion that its all a plot to hide the truth from the people. And that is a really bad outcome.
MPs wrestling with their consciences, loud debates, arguments about the truth ... this is the sound of a properly functioning parliamentary democracy and long may that noise continue.
The first two words of the article: Nick Cohen.gastro george | February 08, 2017 at 02:24 PM
Nick Cohen does make some good points but he himself has a complicated relationship with the truth in some areas. When he isn't talking about congenital liars and congenital believers, he continues to get into a rage about people who opposed the invasion of Iraq. As far as I can see, the invasion of Iraq has been the disaster that some of us feared (because regime change involves putting in place a new regime change, which is very difficult and for which the USA and UK do not have the skills). And, as far as I can see, some of the assumptions made by Nick Cohen in 2002 and 2003 in supporting the invasion (such as the ability of the Iraqi National Congress to create a new regime) were very dubious and their weakness of these assumptions is why the invasion was a failure and has had created an array of other problems.
In his campaign to avoid a post-truth future, Nick Cohen claims that people like him "are on their own" and he explicitly rejects working with the kind of people who opposed the invasion of Iraq. That's a pity, really, because many people appear to have started their opposition to the invasion because the information provided and the logic used appeared to be dodgy. The period from August 2002 to March 2003 prefigured the Trump/Brexit era for post-truth information and arguments. Nick Cohen would be on stronger ground if he admitted that the invasion of Iraq has not necessarily worked to anyone's advantage.
I guess that what is going on in Nick Cohen's mind (and I can only guess) is that he has built up a negative image of the type of person who opposed the invasion of Iraq and he has difficulty getting past that image and come to terms with what those people were saying and what has actually happened in Iraq. Thus in between writing articles about the need for truth, Nick Cohen writes expressions of outrage about opponents of the invasion of Iraq as if they had been found to be wrong.
It seems to be a very extreme example of seeing the messenger and not the message, which is one of the issues with failing to recognise lies.
@aragonBarbara Konstant | February 08, 2017 at 05:36 PM
OK, well I've worked most of my life with Swedes and Norwegians, and have regularly visited Malmo three or four times a year recently, although the last was a bit over a year ago.
So, yes, immigration is an issue, and the Sweden Democrats (fascists) have been rising in the polls. Malmo itself has some problems in the suburbs.
But there are no no-go areas. Armed violence has more traditionally been associated with biker-gang turf-related drug wars - otherwise with the far right (see Breivik in Norway) and then, as your last link discusses, lone serial killers.
Reading anything the Sweden Democrats have to say is the equivalent of believing Wilders in the Netherlands - they are loons.
Despairing as it seems, our humanity has not reached the necessary level of awareness needed to function peacefully in our world.
Feb 07, 2017 | economistsview.typepad.com
Short-Run Effects of Lower Productivity Growth : A Twist on the Secular Stagnation Hypothesis: Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future.anne -> anne... , February 06, 2017 at 04:30 PMHaving read the paper again, the work still reads as parody. I find no coherence.libezkova -> anne... , February 06, 2017 at 06:44 PMAnne,
> Having read the paper again, the work still reads as parody. I find no coherence.
I agree. Looks like
There are two major forces behind secular stagnation:
1. Neoliberalism which undermines the purchasing power of lower 80% of population due to redistribution of wealth up. Like in the "classic Marxism" theory of the absolute impoverishment of the working class under capitalism.
2. End of cheap oil, which undermines both productivity growth and, simultaneously, neoliberal globalization, which was the source of (fake) productivity growth in GDP statistics (which by itself is very suspect).
Feb 06, 2017 | economistsview.typepad.compgl : February 04, 2017 at 03:41 PM , 2017 at 03:41 PMNot that Wikipedia gets everything right but here is a snippet of what it says about the Goldman Sachs CEO:libezkova -> pgl... , February 04, 2017 at 07:12 PM
'Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee on Investigations. He said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they were buying from Goldman Sachs because it was not acting in a fiduciary role. The company was sued on April 16, 2010, by the SEC for the fraudulent selling of a synthetic CDO tied to subprime mortgages. With Blankfein at the helm, Goldman has also been criticized "by lawmakers and pundits for issues from its pay practices to its role in helping Greece mask the size of its debts". In April 2011, a Permanent Subcommittee on Investigations report accused Goldman Sachs of misleading clients about complex mortgage-related investments in 2007, and Senator Carl Levin alleged that Blankfein misled Congress, though no perjury charges have been brought against Blankfein. In August of the same year, Goldman confirmed that Blankfein had hired high-profile defense lawyer Reid Weingarten'
Weingarten helped in the defense of the Worldcom thieves. Why would anyone do business with a company led by such an ethically challenged CEO?
The problem here is probably deeper then personality of Blankfein.
There is such thing as system instability of economy caused by outsized financial sector and here GS fits the bill. Promotion of psychopathic personalities with no brakes and outsize taste for risk is just an icing on the cake.
> Why would anyone do business with a company led by such an ethically challenged CEO?
Why you are assuming the other TBTF are somehow better then GS?
Feb 03, 2017 | economistsview.typepad.comProMarket's Guy Rolnik interviews Bernie Yeung: "In a System with Dominance, There is Built-In Resistance to Change": ProMarket Interviews Bernie Yeung, Part 2 :
Last week, we published the first part of an extensive three-part interview with Bernard (Bernie) Yeung, Dean of National University of Singapore's business school. This is the second part. The third and final part will be published next week. In the first part of our interview with Bernard Yeung, we talked about his seminal papers on power concentration, on which he collaborated mainly with Randall Morck. The discussion there focused on dominant players and their ability to shape their own markets, the capital market, and even the economy. In this installment, we talk about how free trade may have backfired, how wealth and power are connected, how big corporations can control and distort the market for ideas, and why governments may actually prefer markets that are controlled by dominant players rather than by many competitors. ...... GR: Can you elaborate on what you call economic conditioning, mainly the part in which you say it may not be vicious?BY: Let's imagine I got rich and now own and control a bank. I'm saying to myself that I know what's right and what's wrong. I cannot allow new people to set up new banks and compete with me in an unruly manner. That will create chaos. They will cause people to lose their jobs. I help to set up barriers to entry in the financial sector. I myself lend money to my rich friends and they will create many jobs. I think I'm right-and I am righteous.I overlook the positive effects that competition will generate for the economy. I overlook the contributions of new ideas and innovations which leads to strong future growth and good future jobs. I focus on my lending to the established, which preserves current jobs and creates interest earnings for me. I am not [attuned] to the counterfactuals. I'm conditioned to believe that all I've done is good for my bank, for the financial sector, and for the country. That's economic conditioning. I'm not being sinful. I'm not being vicious. I only see what's good for me, and I believe that's good for the whole society.GR: This was the case for the Robber Barons in the U.S. more then a century ago.BY: Oh yes, and I believe it's very much how Donald Trump is thinking.GR: Do you think they genuinely believe that the country should be run by the incumbent oligarchs?BY: If it ain't broken don't fix it, right? 'Look at all the good things I have done. If I'm so rich and keep so many people employed, I cannot be so bad. I will never see people who cannot get into the market because of my behavior. I never see them. Indeed, I am always thinking that, in helping my established friends and using business judgment that brings me profits, I help society, create jobs and wealth, and my donations help society further. I see myself and my friends as pillars of our country.' ...... In a system with dominance, and I've already put that in paper, I think there is built-in resistance to change. Rich people don't like change and competition. And they themselves don't invest too much in innovations that displace their own business; that is, no creative self-destruction.I believe that a vibrant and robust capital market that gives people with good ideas a chance is very important. The problem is failed capital markets, lack of transparency and alternatives and dominant players in control who don't encourage entrepreneurship. ...... GR: Is there empirical data that shows that, when we take out economic concentration, we get better growth, better distribution of income, and a better quality of life?BY: Yes. Once, Randall, his student, and I looked at a current list of top firms, compared it to a similar list of 20 years earlier, and asked ourselves how many survived. We showed that high stability is correlated with lower growth, lower productivity, and poorer Gini. ...
New Deal democrat , February 03, 2017 at 02:11 PMThis is really good stuff. And I think it gets to the central core of what is wrong with traditional macroeconomic models: bargaining power.kthomas -> New Deal democrat... , February 03, 2017 at 03:04 PM
Traditional models assume a supply curve and a demand curve, but do not ask *why* particular players might have a particullar supply or demand curve. If there is market power, and sooner or later just via random chance the number of players in any given area will shrink down to a small numbe rthat have bargaining power, the ultimate rule is, "Thims that has, gits."
"thims that has, gits" is why libertarianism -- and neoclassical economic theory -- are ultimately nonsense.It's interesting. More sociology than economics. There is some wisdom in this.sanjait -> kthomas... , February 03, 2017 at 04:29 PMIt's especially important for labor markets.kthomas -> sanjait... , February 03, 2017 at 04:47 PM
An individual worker typically has undiversified skills, constraints on liquidity, constraints on mobility, limited information on local market wages, few options of potential employers and a short time horizon to consider.
Labor markets behave in very unideal fashion and generally disadvantage the worker in negotiations with employers. Employers, these days, can set up offices anywhere, outsource, hire from large numbers of candidates, and they usually know what they can get away with paying. They can also survive without a position filled for an extended time, while employees can only go limited time without a job.Thank you. What I find especially odd is that our normal cast of bloggers have yet to yield any thoughts. This one begs opinion.Half Mast Tailgate Streamlining : , February 03, 2017 at 04:20 PMthink of each corporation as encapsulated by a circle! Each circle encapsulates the corporate directors, the company's workers, customers, suppliers, creditors, part time consultants, institutional share holders, private shareholders and foreign share holders. Such overlapping circles constitute a Venn-diagram which provides a view of innumerable distinct classes of folks.kthomas -> Half Mast Tailgate Streamlining... , February 03, 2017 at 04:53 PM
... ... ...Was the author's post about Corp structures? This is more high-level, but you are free to continue beating your straw man.Justin Cidertrades -> sanjait... , February 03, 2017 at 08:06 PMhttps://en.wikipedia.org/wiki/Porter's_five_forces_analysis#/media/File:Elements_of_Industry_Structure.svgcm -> sanjait... , February 04, 2017 at 12:35 PM
For anyone interested in tinkering with this :
As I understand it, scalable vector graphics is a file that can be easily modified using programs like inkscape.Technology is not driving consolidation. It only enables it, by enabling larger economies of scale. Without IT, managing operations in a large and complex company would require much higher personnel overhead just to handle all the data, information, coordination, conveying orders, etc. This overhead is not a linear function of size.cm -> sanjait... , February 04, 2017 at 12:39 PM
Fundamentally with IT this overhead doesn't go away, but the maximal size at which a company still remains manageable increases.
There is one "driving" aspect of technology - as having technology becomes mandatory, the technology overhead costs for smaller businesses tend to be larger, again because of economies of scale and differentials in variable cost being low compared to fixed cost, i.e. having an IT installation that has twice the capacity doesn't cost nearly twice as much (because it doesn't need twice the equipment and staff).Actually you did mention the latter aspect. But in the case you cite it is not only about the equipment and operating cost of technology, but (by law or de facto) high fixed costs to manage all kinds of processes and bureaucracy. Again, the technology is only there to enable or execute the processes and the complexity.
Feb 01, 2017 | economistsview.typepad.comDani Rodrik:Is Global Equality the Enemy of National Equality? : The question in the title is perhaps the most important question we confront, and will continue to confront in the years ahead. I discuss my take in this paper .Many economists tend to be global-egalitarians and believe borders have little significance in evaluations of justice and equity. From this perspective, policies must focus on enhancing income opportunities for the global poor. Political systems, however, are organized around nation states, and create a bias towards domestic-egalitarianism.How significant is the tension between these two perspectives? Consider the China "trade shock." Expanding trade with China has aggravated inequality in the United States, while ameliorating global inequality. This is the consequence of the fact that the bulk of global inequality is accounted for by income differences across countries rather than within countries.But the China shock is receding and other low-income countries are unlikely to replicate China's export-oriented industrialization experience. So perhaps the tension is going away?Not so fast. The tension is even greater somewhere else: Relaxing restrictions on cross-border labor mobility would have an even stronger positive effect on global inequality, at the cost of adverse effects at the lower end of labor markets in rich economies. On the other hand, international labor mobility has some advantages compared to further liberalizing international trade in goods.I discuss these issues and more here .
Mr. Bill : , January 22, 2017 at 12:39 PMWell said, Dani.TrumpisaJew : , January 22, 2017 at 12:43 PM
Adam Smith never sited poverty, environmental intransigents, and malliable governments as a desireable " comparative advantage". Quite the opposite.The export model was a credit bubble illusion. It just wasn't sustainable, it was a lie. Now China has massive capital flight.anne : , January 22, 2017 at 01:56 PMhttp://rodrik.typepad.com/Is%20Global%20Equality%20the%20Enemy%20of%20National%20Equality.pdfMr. Bill -> anne... , January 22, 2017 at 03:56 PM
Is Global Equality the Enemy of National Equality?
By Dani Rodrik
The bulk of global inequality is accounted for by income differences across countries rather than within countries. Expanding trade with China has aggravated inequality in some advanced economies, while ameliorating global inequality. But the "China shock" is receding and other low-income countries are unlikely to replicate China's export-oriented industrialization experience. Relaxing restrictions on cross-border labor mobility might have an even stronger positive effect on global inequality. However it also raises a similar tension. While there would likely be adverse effects on low-skill workers in the advanced economies, international labor mobility has some advantages compared to further liberalizing international trade in goods. I argue that none of the contending perspectives -- national-egalitarian, cosmopolitan, utilitarian -- provides on its own an adequate frame for evaluating the consequences.
[ An excellent and necessary paper for which I am grateful. Now for another reading. ]What is excellent about it ? Please explain.anne -> Mr. Bill... , January 22, 2017 at 04:09 PMhttp://rodrik.typepad.com/Is%20Global%20Equality%20the%20Enemy%20of%20National%20Equality.pdfanne -> Mr. Bill... , January 22, 2017 at 04:22 PM
Is Global Equality the Enemy of National Equality?
By Dani Rodrik
Whether one thinks the last quarter century has been good or bad for equity depends critically on whether one takes a national or global perspective. Within nations, inequality has typically risen in rich and poor nations alike. (Latin American countries, where we observe the highest levels of inequality in the world, were the only ones that significantly bucked the trend.) When commentators talk about inequality, this is usually what they have in mind. But there is another way of looking at inequality, which is to disregard national borders and focus on the distribution of income across all households in the world. Analyzed in this way global inequality actually fell sharply over the same period, thanks in large part to the very rapid growth of China and India, the world's two largest developing economies. In fact, this transformation has been so momentous that the contours of the global distribution of income have changed drastically. The two humps in the distribution – reflecting the all-too recent reality of a world divided into two clear segments, one small and rich, the other large and poor – have disappeared, with an emergent global "middle class" filling out the valley between the two humps (Figure 1).
The bulk of global income equality today is accounted for by income gaps between countries, rather than within them. This explains why economic growth in countries like China and India has a significant positive effect on global equality, even when inequality rises domestically in those countries, as it has done substantially in China's case.
To drive home the importance of between-country gaps, I sometimes ask my audience the following question: would you rather be rich in a poor country, or poor in a rich country? I tell them to assume they care only about their own income and purchasing power....Among the excellent aspects, the question is raised as to what development means for relatively poor countries in which growth even when significant for a time shuts out much of a population; what has to be sacrificed by the fortunate for growth to be inclusive and as such sustainable; after all among the poorer countries growth has been decidedly subject to disruption for decades now; supposing trade is to be limited as a driver of growth, what then?Think -> anne... , January 22, 2017 at 05:21 PM
Add then to these questions in reading.Thank you, Anne. You seem to adhere to a reality that says that the US is an illegitimate society.Think -> Think... , January 22, 2017 at 05:32 PMPersonally, I love the USA. Especially being able to shoot my mouth off.JohnH -> anne... , January 22, 2017 at 06:32 PM
Hell. i don't know if its right or wrong.
Eight billionaires have as much wealth as half the world's population.Ashok Hegde -> JohnH... , January 24, 2017 at 07:59 PM
I would have to conclude that the bulk of global inequality is accounted for by income differences between the 0.1% and the bottom 95%.Ridiculous.DrDick : , January 22, 2017 at 04:31 PM
If people with no wealth continue to procreate at high rates, of course inequality will only grow. The real issue here is population growth. The poor are replicating at high rates, and the wealthy do not. This accounts for the growth of so much of this 'natural' inequality.There is a major problem with Rodrik's piece. Between country inequality has been declining steadily since the 1990s, while within country inequality has been increasing since the 1980s. As I keep saying, the only real beneficiaries of globalization have been the wealthy of the world.Think -> DrDick... , January 22, 2017 at 04:40 PM
https://unu.edu/media-relations/releases/global-income-inequality-unu-wider-press-release.html#infoWell, I agree with you, singing to the choir. My Dad raised seven on the union wage. How can I convince the folks of this simple fact ?anne -> Think... , January 22, 2017 at 06:06 PMMy Dad raised seven on the union wage. How can I convince the folks of this simple fact?Think -> anne... , January 23, 2017 at 01:23 AM
[ By carefully explaining how this came to pass, the history of family told in context of the times is important. ]Well, my dear, the truth is so simple that it eludes us. If American families have enough money, they will succeed.DrDick -> Think... , January 23, 2017 at 07:25 AM
My Dad was part of the cohort from WW2. They came back and were not about to succumb to those who did so little.I remember, during a strike, him going out with a bat to put an end to the company running scabs. They beat the hell out of them.
Some things are worth fighting for.Bull. We are of the same generation and the 1950s was a period of almost unprecedented prosperity and upward mobility. Several factors drove this. First was the GI Bill, with free college and low cost home loans for vets. Second was the emergence or expansion of several industries which created a high demand for skilled labor and technical professionals (electronics, aerospace, petrochemicals, etc.). Third was massive government infrastructure investment, like the interstate highway system. Finally, strong unions fighting for the interests of the workers. Violence and bigotry help no one and the Tangerine Turd in the White House will do nothing good for working people.Kaleberg : , January 22, 2017 at 05:00 PMThe problem is that every nation that has ever developed in terms of productive capacity and increased living standards on this here earth of ours has done so by erecting some type of barrier. There really is no other way, at least not one that has been demonstrated to work. The barriers may take different forms and be more or less penetrable, but they remain. Before the turbine and diesel engines, transportation could be considered a barrier, but it is not much of a barrier today.realpc : , January 22, 2017 at 06:39 PM
One of the big problems we have nowadays is trying to solve problems that are basically too big to be solved, let alone solved simplistically. The nation state, for all its myriad faults, was a driving force for development and our current level of wealth. It was a powerful counter to the multi-nationalism of the feudal era which had an international upper class that was favored over the actually productive urban and trading classes. Encouraging multi-national corporations and coddling world-wide elites by trying to provide them the benefits of development without its political costs has been a formula for disaster.Nationalism is natural. You either have nations or you have one big all-powerful world government.DrDick -> realpc... , January 23, 2017 at 07:27 AM
Caring about your own nation first is common sense. Incredible that Trump even has to say it. But in this crazy political environment, it has to be said.
If you don't put yourself first, you will stop existing. If you don't put your nation first, it will stop existing.
All software developers understand modular design. Nature is designed modularly, and human society is part of nature.
We have nations because we are part of nature.
Sure you can love the whole world if you want. But if you care more about the rest of the world than your own nation, you are nuts. And yes, it is normal to be nuts these days."Nationalism is natural"river -> DrDick... , January 23, 2017 at 12:34 PM
Proving once again that you are an idiot who knows nothing. Nationalism is an artificial construct which only emerges in the late 18th-early 19th centuries, and does not spread widely until the late 19th-early 20th centuries.I don't know the history between you two, and realpc may in fact be an idiot, but what he said above hardly proves that he is an idiot.DrDick -> river... , January 23, 2017 at 01:02 PM
"nationalism is an artificial construct?" What does that even mean? I presume it means something like what is talked about here: http://ostrovletania.blogspot.com/2010/01/are-nations-artificial-or-natural.html
So here is some quick google information about native american tribes who fought over limited resources. I wonder if that was an artificial construct as well? Or if one tribe fought other tribes to help their own families out. I wonder if a starving neanderthal would share the meat off of a recent kill with a neanderthal not part of his tribe? Would that be an artificial construct? Surely Germany came into existence in the late 18th and early 19th centuries, but before that, the groups that became Germany were just as nationalistic as they were after they became Germany . . . they just defined their nation in more limited terms.*sigh*river -> DrDick... , January 23, 2017 at 01:41 PM
People pay me good money to teach them about this stuff, but I do not think either of you could pass the entrance exam. Read Benedict Anderson, "Imagined Communities", or the works of E. J. Hobsbawm and T. O. Ranger on nationalism to start with. The truth is that mobile foragers(what all humans were until about 20,000 years ago) are not really very territorial. See the work of Brian Ferguson on the anthropology of warfare.
https://books.google.com/books?id=CDAWBQAAQBAJ&pg=PA152&lpg=PA152&dq=hunter+gatherers+not+very+territorial&source=bl&ots=uqmsMIK3Jb&sig=HlrZ1Wr6nPGzsGId__be2XfR9Z4&hl=en&sa=X&ved=0ahUKEwj_j625k9nRAhUY0mMKHU0cDggQ6AEIGjAA#v=onepage&q=hunter%20gatherers%20not%20very%20territorial&f=falseSorry, I am just a stupid engineer, and make sure that the building that you live and work in will stand up in an earthquake, yet, I am probably too stupid to ever know what you know. But that said, I didn't know that I am stupid, so I will probably ask a question that will make a genius like yourself roll their eyes in disgust that I was ever awarded a degree from an american university . . . but I don't have time to read four different authors on the subject of a simple blog post, so I am going to ask it anyways . . . you said that nationalism is an artificial construct that only came around about 200 years ago, and I came back with some ideas about, if that were the case, then why did different indian tribes battle over scarce resources (and also simply assumed that ancient humans behaved very similar to native american tribes). You rebutted that by insulting my intelligence, pointing me to four obscure academic authors (if I was as cool and as smart as Good Will Hunting, I am sure I would have read and remembered all the authors that you are pointing me to already, but alas, I am not), and then said that up until 20,000 years ago, there was surprisingly little conflict among people. So, what is it, was nationalism something that came about 20,000 years ago, or was it something that came about 200 years ago. And did indian tribes wage wars against each other? If they did, is that a form of nationalism, or is it different? If it is different, explain how.anne : , January 22, 2017 at 08:09 PM
IF you are not smart enough to be able to answer these simple questions that support what you have asserted, then I would suggest that you don't go on message boards and insult the intelligence of others!http://econospeak.blogspot.com/2017/01/auerbachs-tax-and-clone-wars.htmlanne -> anne... , January 22, 2017 at 08:10 PM
January 22, 2017
Auerbach's Tax and the Clone Wars
Menzie Chinn * introduces a new asset to economist blogging. Joel Trachtman ** provides an excellent discussion of whether the Destination-Based Cash Flow Tax violates WTO rules concluding that it does. He adds:
"If enacted, the plan would likely lead to lengthy litigation at the World Trade Organization. A (likely) ruling that the tax is an income tax, and is applied in a discriminatory manner, would mean that exempting exports would be considered an illegal subsidy and taxes on imports an illegal tariff. This could lead to trade sanctions against the U.S. and open the door to counter sanctions and the start of a trade war."
President Trump strikes me as someone who could care less about WTO rules. And starting a trade war fits his grand design of governance. As Yoda noted:
"Begun the clone war has"
President Trump is Lord Palpatine.
-- PGLNicely done.Tom aka Rusty : , January 23, 2017 at 07:09 AMRodrik seems to spend less time with math models and more time engaging with reality.Robert C Shelburne : , January 23, 2017 at 09:10 AM
Perhaps a model for other economists?Another good article by Rodrik but a weakness of his analysis is that welfare is assumed to be based upon real income and not relative income with ones "group". Most analyses of welfare find that relative income is quite important. Obviously if one assumes that one's reference group is the world, then the problem goes away; but empirically this is not the case. Assuming that welfare is strongly affected by relative income with a group which is smaller than the world, then global equality is no longer welfare maximizing. Those interested in these issues might be interested in Robert Shelburne, A Utilitarian Analysis of Trade Liberalization, available as a UN working paper.river : , January 23, 2017 at 11:05 AMMuch like how the biggest environmentalist is the one who already has her house built, the economists safely in their ivory tower and comfortable with their tenured positions in academia were more than happy to volunteer the American working class to give up some of their wealth so that people living in extreme property in the developing world could have slightly better positions. I am glad to see that this is what you guys argued for with all of your "free trade" agreements that you pushed for over the last several decades. Sadly, this is exactly what led us to Trump as president.reason -> river... , January 24, 2017 at 01:48 AMTheir models told them precisely that some people would suffer and others gain, but also that with appropriate redistribution everybody could gain. But appropriate redistribution was never forthcoming. Time for a national dividend.river -> reason ... , January 24, 2017 at 01:20 PMAppropriate redistribution will NEVER be forthcoming. It is so easily demonized, and people don't want redistributed income. They want jobs!
This is why the Democrats lost. And frankly, this is the whole point of democracy.
Feb 01, 2017 | economistsview.typepad.comriver : January 23, 2017 at 11:05 AMMuch like how the biggest environmentalist is the one who already has her house built, the economists safely in their ivory tower and comfortable with their tenured positions in academia were more than happy to volunteer the American working class to give up some of their wealth so that people living in extreme property in the developing world could have slightly better positions.reason -> river... , January 24, 2017 at 01:48 AM
I am glad to see that this is what you guys argued for with all of your "free trade" agreements that you pushed for over the last several decades. Sadly, this is exactly what led us to Trump as president.Their models told them precisely that some people would suffer and others gain, but also that with appropriate redistribution everybody could gain. But appropriate redistribution was never forthcoming. Time for a national dividend.river -> reason ... , January 24, 2017 at 01:20 PMAppropriate redistribution will NEVER be forthcoming. It is so easily demonized, and people don't want redistributed income. They want jobs!
This is why the Democrats lost. And frankly, this is the whole point of democracy.
Feb 01, 2017 | economistsview.typepad.comTom aka Rusty : January 30, 2017 at 12:02 PM , 2017 at 12:02 PMThere has not been "free trade" for a long long time if ever.Peter K. -> Tom aka Rusty... , January 30, 2017 at 12:29 PM
There is "negotiated trade" with rules set by governments.
Yuuuuge difference.Exactly. And the rules have been set by U.S. multinational corporate negotiators. Just look at TPP.Paul Samuelson also praised Australia's Tariffs & US became ultra rich under Lincoln's protectionism : , -1
There is also dollar policy which is again set by corporate interests.In case anyone cared, Samuelson also argued cogently for Australia's high tariff regime in a famous 1981 article.
In case economists want to bother learning history (why would they?) - you can also consider the funny example of Abraham Lincoln who "took away property rights" and raised tariffs sky high.
Did the US become a poor third world country because it took away plantation owners' property rights and jacked up tariffs? Hmm. Reason to pause and reflect economists?
Feb 01, 2017 | economistsview.typepad.comFred C. Dobbs : January 29, 2017 at 06:13 AM , 2017 at 06:13 AMThe end of manly laborjonny bakho -> Fred C. Dobbs... , January 29, 2017 at 09:02 AM
via @BostonGlobe - Rob Walker - January 29, 2017
It may be simplistic, or even wrongheaded, but the working-class man has become a political obsession. President Trump won this voting bloc with promises of resurrecting the "good jobs" of America's industrial heyday, ostensibly by toughening trade rules and jawboning individual companies. Democrats agree on the need to appeal to working-class men, but the party's strategy for doing so hasn't changed much since Nov. 8: Mostly we hear about addressing income inequality by raising the minimum wage, improving family leave, and making college more affordable.
But it's not clear that those issues resonate with the archetypal Rust Belt factory worker displaced by globalism, technology, or both. For starters, there's no grand-gesture proposal - no modern heir to the job-creating Works Progress Administration, let's say - to capture the imagination. The minimum wage doesn't mean much to this group, and family leave is more of a "new working class" issue, says Lance Compa, who teaches US labor law and international labor rights at Cornell University. After all, we're talking about a theoretical voter who once earned up to $30 an hour and could support a family without advanced skills or education beyond high school - and basically wants that life back.
And maybe there's another factor lurking in the background: This guy - you pictured a guy, right? - frames his concerns more bluntly. "Manly dignity is a big deal for most men," argued Joan C. Williams, founding director of the Center for WorkLife Law at the University of California, Hastings College of the Law, in a November essay for Harvard Business Review. "So is breadwinner status: Many still measure masculinity by the size of a paycheck. White working-class men's wages hit the skids in the 1970s and took another body blow during the Great Recession. . . . For many blue-collar men, all they're asking for is basic human dignity (male varietal)."
Let's acknowledge the obvious: The collision between 21st-century economic realities and the male ego makes an odd topic for think tank symposiums or congressional hearings. To consider "manly dignity" in the context of economic policy is no excuse to bring back a "when men were men" vision of Manhood 1.0 - much less to embrace the alt-right tweeters raining hatred upon women.
But just because an issue is awkward for scholars and politicians to address doesn't mean it isn't shaping our economy and our politics. "Look," Williams wrote, "I wish manliness worked differently."
Ultimately, men who are truly stuck in the past are going to find out that sloganeering and braggadocio won't revive it. Economist Betsey Stevenson has a point when she argues that "Manly Men Need to Do More Girly Jobs," as the title of her recent Bloomberg View column put it.
Still, as a straightforward matter of both policy and rhetoric, courting any group involves understanding, not belittling, its core concerns and addressing them in ways that make sense specifically to members of that group. Boosting an industrial policy that speaks to this class of men on its own terms "has just not been on the radar of the Democratic Party or progressives in general," Williams said in an interview.
After all, the wave of post-election attention notwithstanding, blue-collar men have been or felt under assault for decades. Writing in The Baffler, author Susan Faludi recently revisited some of her reporting for her 1999 book, "Stiffed: The Betrayal of the American Man." Her subjects, bitter about lost jobs, declining status, shifting gender values, and untrustworthy elite power structures, seem remarkably familiar.
It's not quite right to suggest that no one before Trump paid attention to these men. One popular and pragmatic-sounding solution is retraining: taking workers from sectors that economic change has destroyed and equipping them with the skills to participate in those it is creating. The problem is that men often don't seem to want those newer jobs. "These are working-class people," Ohio congressman Tim Ryan told NPR not long after the election, when he was challenging Nancy Pelosi for the Democratic House leadership role. "They don't want to get retrained, you know, to run a computer. They want to run a backhoe. They want to build things."
Moreover, newer job categories often involve work that has been dominated by women. Janette Dill, an assistant professor of sociology at the University of Akron, has researched lower-level jobs in the health care industry - a fast-growing category, according to government statistics - such as medical and nursing assistants. Very few men pursue such work. "There's some stigma around doing these kind of feminized job tasks," Dill says, such as helping a patient get out of bed or use the bathroom. While it's often physically demanding, it's "seen as women's work," she adds.
At the same time, Dill has seen some evidence of an uptick in younger male workers embracing health care positions with "more of a technical dimension." A gig as a surgical technician, respiratory therapist, or occupational therapist can pay $40,000. The proliferation of jobs like these may not sound as exciting as lightning-bolt gestures toward new car plants. But these new health care jobs generally require a two-year degree, not a four-year baccalaureate, and they "seem more masculine," as Dill carefully puts it.
Meanwhile, manufacturing itself isn't a lost cause, even if its golden age is unlikely to return, argues Timothy Bartik, a senior economist at the Upjohn Institute for Employment Research in Kalamazoo, Mich. Bartik advocates several ideas that could appeal to the working-man crowd: a more demand-driven approach to retraining; manufacturing extension services designed to help existing smaller manufacturers grow; and economic "empowerment zones" - a Bill Clinton-era policy that provided block grants to regions that devised plans to deploy them according to strategic local needs. These involve federal help but, importantly, play out at regional levels.
This could be more effective than doling out company-specific tax breaks or deploying the blunt instrument of tariffs on the one hand and a more macro-oriented, top-down approach on the other. Empowerment zones are an unlikely successor to the Works Progress Administration - the Depression-era federal agency that put unemployed men to work on public building projects - but could be positioned as a WPA-like expression of tangible government action.
Bartik notes the importance of "rhetorical emphasis" - selling these ideas as specifically beneficial to communities built on old-school working-class economics. Hillary Clinton did propose policies (including some that overlap with these ideas) to help US manufacturing, but for whatever reason, he says, "that didn't seem to get much attention."
What's missing is a more sweeping vision that gives alienated men - and others - a sense that the economy has a use for the kind of work they want to do.
Williams, of UC Hastings, says this is where progressives have been misguided and failed to think big and advocate a comprehensive industrial and educational policy. She points to the Markle Foundation's Rework America initiative, which calls for better matching of skills and training with real job demand. Germany's approach, involving apprenticeship programs and educational structures that also produce middle-skill workers that industry actually needs, offers an example. The point is to think beyond a one-size-fits-all advocacy of the four-year college degree - a "delusory" solution, as Williams puts it, that leaves some workers cold. "The kind of work that college grads do doesn't appeal to them," she says. "That's not their skill set."
Clearly this shift would take time, but Compa, the Cornell labor scholar, adds a couple of practical suggestions that could speak directly and immediately to displaced manufacturing workers. One is an effort to reinvigorate workers' compensation laws, which have withered in many states. Another is to improve COBRA policies, which allow laid-off workers to hang onto health benefits, by extending their duration and forcing companies to pay for them. "I don't want to stereotype," he says, "but men want to feel that they're providing for their family, and one way to provide for your family is to make sure they have health insurance." (Bartik further suggests considering ways of bridging later-career manufacturing layoff victims to retirement if retraining isn't a realistic possibility.)
Finally, Compa thinks we should embrace another facet of America's industrial peak: unions. Building bonds among working-class people as they take their own interests into their own hands, unions can still help provide the sense of dignity that some feel is lost. "The idea that we're going to stand together against this powerful force on the other side," he says, "I think that gives a sense of meaning and purpose."
That basic idea speaks to lost manliness, but also transcends it. Compa mentions that he was surprised to learn how little the sorts of low-level health care workers that Dill studies earn - maybe $12 an hour. "I understand they didn't go to college," he says. "But their work is so important, and requires the same skill and care and attention that a machinist job requires. They should get those kind of wages." Since the market's not making that happen, maybe organizing could.
Dill herself points out that these low wages are symptomatic of a direct link between the "stigma" of feminized labor that those manly men avoid and its direct economic consequences: "The kind of work that women do is often not as valued, by society." So more broadly, maybe this suggests that policy could speak to "the working man" in a way that's also heard by the broader and more diverse working class.
For all her frustration with the way she feels Democrats have ignored or misunderstood seekers of "dignity (male varietal)," Williams thinks so, too. "I don't think this is a zero-sum game," she says. Aggressively advocating for ways to create more and better middle-skill jobs will benefit workers of any race or gender.
But doing that will require progressive policy thinkers to dream bigger and push harder - to man up, you might say.
Not helpfullibezkova -> Fred C. Dobbs... , January 29, 2017 at 02:56 PM
Our media relentlessly markets "culture" to males
Sports culture, car culture, gun culture &c are supported by Big$
It is difficult to change the culture when Ad$$ are creating headwinds.
It is all a BigLie, but very appealing
Cultural change is slow, one funeral at a timeThis talk about "manliness" is disingenuous.libezkova -> libezkova... , January 29, 2017 at 02:59 PM
Loss of work is a loss of social status in any industrial society.
And often involves real hardships, such as loss of home, breakup of family, etc.Neoliberals seek to redistribute profits up and for this noble goal all means are good. Including decimation of lower 80% of their compatriots. Who cares. They are all cosmopolitans now.
Feb 01, 2017 | economistsview.typepad.comPeter K. : January 30, 2017 at 12:37 PM , 2017 at 12:37 PMBranko Milanovic had the best link in today's links. Of course PGL passed it over as unworthy of comment. kthomas called him a Russian.Peter K. -> Peter K.... , January 30, 2017 at 12:38 PM
Is there a rise in hate crime against Russian businesses and people with Eastern European sounding names? Wouldn't be surprised.
Sunday, January 29, 2017
Is liberalism to blame? by Branko Milanovic
By "liberalism" I mean what is considered under this term in the US. By "to blame" I mean "for the rise of Trump and similar nationalist-populists".
What are the arguments for seeing liberal triumphalism which began with the collapse of Communism in the 1990s as having produced the backlash we are witnessing today? I think they can be divided into three parts: economics, personal integrity, and ideology.
In economics, liberalism espoused "neo-liberalism" which was the replacement economic ideology for social-democracy. It championed, especially under the Clinton-Blair duo, financial liberalization, much smaller welfare state, and so-called "meritocracy" which essentially meant the ability of the rich to place their kids into the best schools out of which 90% would graduate and thus "meritocratically" claim later in life huge wage premiums. Free trade agreement privileged, as Dean Baker has written, the interests of the rich in advanced economies through protection of patents and intellectual property rights and with scant or no attention to labor rights. In the international arena, through the World Bank and the IMF, Clintonite neo-liberalism was associated with Washington consensus policies. They are in many respects reasonable policies, but were applied dogmatically and mindlessly especially with respect to privatization and often with the principal objective of ensuring that the debts be collected regardless of the social effects on the population. Greece is the best known example of such policies because it sits in the middle of Europe and the results of "debt collections" are easiest to see. But the same principles were applied across the world.
Underpinning such policies was an ideology that saw economic success as the only dimension (in addition to the acceptance of certain liberal tropes which I will mention below) in which worth of an individual is expressed or measured. That ideology found broad acceptance across the world, fanned by globalization and by what that ideology has pleasing to the human psyche which craves acquisition of more. It was thus consistent with human nature and probably helped increase world output several-fold and reduce world poverty. But it might have been pushed too hard to the exclusion of other human characteristics and helped create especially among those who were economically less successful resentment and estrangement from the values promoted by liberals.
Corruption. A corollary of this hyper-economicism in ordinary life was the corruption of the elites who espoused the same yardstick of success as everybody else: enrichment by all means. Avner Offer documents this shift in his analysis of where social-democracy went astray with "New Labour" and "New Democrats". The corruption of the political class, not only in the West but in the entire world, had a deeply corrosive and demoralizing effect on the electorates everywhere. Being politician became increasingly seen as a way to acquire personal riches, a career like any other, divorced from any real desire either to do "public service" or to try to promote own values and provide leadership. "Electoralism", that is doing anything to be elected, was liberalism's political credo. In that it presaged the populists.
It is, I think, important to see the link between the economic ideology of "commercialism" which informed economic policies since the early 1980s in the West and China, and since the 1990s in the formerly Communist countries, and systemic and all-pervasive corruption of the elites. Since being successful meant amassing most money, politicians could not operate in a different dimension (for example in "ideals") nor could they get elected without being corrupt because campaigns could not be fought without money. It is an illusion that the political space may operate according to different rules from the rest of society.
Pensée unique. Liberalism introduced a dogmatic set of principles, "the only politically correct way of thinking" characterized by identity politics and "horizontal equality" (no differences, on average, in wages between men and women, different races or religions) which left actual inequality go unchecked. A tacit hierarchy was introduced, where the acceptance of these watered-down principles of equality combined with economic success, was the requirement to be "non-deplorable". Others, those who did not do well economically or did not adhere to all the tenets of the mainstream thinking, were not only failures but morally inferior.
The high priests of liberalism, ruling the media, loved to hold, at the same time, logically contradictory beliefs which somehow were both "good". Thus they created terminological or behavioral contortions that were either direct attacks on common sense or examples of hypocrisy as "supporting the troops" while being "against the war" or giving enormous donations to private schools (in order to get their names emblazoned in classrooms) while "supporting public education". They were not embarrassed by contradictions, nor accepted trade-offs: you could support soldiers killing civilians "because soldiers protect us" and be against the war and killing of civilians at the same time; you could send kids to private schools and be in favor of public education; you could fret about climate change, berate others who do not, and emit more CO2 than 99% of the mankind. It was ideologically an extremely comfortable position. It required very little mental effort to accept five or six essential tenets (you could just read a couple of writers who repeated ad nauseum the same ideas in the main liberal publications), and it allowed you to do wherever you liked while claiming that every such action was ethically unimpeachable. Everybody was a paragon of virtue and indulged all their preferences.
Others who failed to appreciate the advantages of such a position were ignored until their dissatisfaction exploded. No one among liberals seemed to think it odd (much less to do something about it) that the best educated country in the world with one of the highest world per capita GDPs, could have a third of the population who believed in creationism or in aliens running our lives. It really did not matter to the elite so long as these people existed in the Netherworld.
Those who trusted in Fukuyama, and to whom the 1990s seemed like a triumph that would keep them at the pinnacle of human evolution forever, see today's events as a catastrophe not only because they could indeed lead to a catastrophe but because their carefully nurtured ersatz ideology and place in society have collapsed.
I am writing this in Vienna, in Prater, overlooking a giant Ferris Wheel which inevitably makes one think of Harry Lime. One can see liberalism as having set the Ferris Wheel in motion, with each car moving at first slowly and then faster and faster. The ride brought immense joy at first, but eventually, it seems, somebody turned on the switch to super-fast, locked the control room, and most of us are now in these cars that no one controls and no one can stop, running at break-neck speed, and wondering how and when the crash will come.
"A corollary of this hyper-economicism in ordinary life was the corruption of the elites who espoused the same yardstick of success as everybody else: enrichment by all means. Avner Offer documents this shift in his analysis of where social-democracy went astray with "New Labour" and "New Democrats". The corruption of the political class, not only in the West but in the entire world, had a deeply corrosive and demoralizing effect on the electorates everywhere. Being politician became increasingly seen as a way to acquire personal riches, a career like any other, divorced from any real desire either to do "public service" or to try to promote own values and provide leadership. "Electoralism", that is doing anything to be elected, was liberalism's political credo. In that it presaged the populists."
Think of Hillary's speeches to Goldman Sachs, etc, and Obama's failure to throw bankers in jail.
Feb 01, 2017 | economistsview.typepad.com
pgl : , January 29, 2017 at 01:45 AMBill McBride on Trump's Muslim ban:Jerry Brown -> pgl... , January 29, 2017 at 02:10 AM
'Mr. Trump's executive order is un-American, not Christian, and hopefully unconstitutional. This is a shameful act and no good person can remain silent.'
Thanks for saying this Bill. JFK International had a demonstration against this ban that featured the detention of a brave Iraqi who helped US troops. This ban is also incredibly stupid.I add my thanks to yours. Very important post from Bill McBride.pgl -> Jerry Brown... , January 29, 2017 at 03:04 AMA temporary victory from the courts:New Deal democrat -> pgl... , January 29, 2017 at 05:24 AM
http://thehill.com/blogs/blog-briefing-room/news/316714-federal-judge-blocks-trump-immigration-ban-nationwideAgreed in full.EMichael -> New Deal democrat... , January 29, 2017 at 05:29 AM
I happen to think the heartlessness of this Order was a feature, not a bug, in order to garner maximum attention. I just read Mish's comment section, and Trump's base is cheering.
But on a longer term scale, heartlessness towards Muslim immigrants and DREAMers is going to turn persuadables against Trump. That and the next recession.We'll differ on this one part, people that voted for Trump are not persuadables. They have always voted the same way in every single election they have voted in.ilsm -> EMichael... , January 29, 2017 at 05:45 AM
Amazes me that even now people keep thinking that Trump voters are anything but loyal GOP voters. And I think the best argument against this (besides common sense) is the reaction of Rep leaders to this obviously illegal action.
They cannot afford to speak out against this racist policy, as their own voters are for this racist policy.silent on ethnic racism and the rest of US so much more guilty ..... on drone assassination and militarist nation building gone awry, tilting with nuclear war to keep NATO less recondite, etc, etc.......New Deal democrat -> EMichael... , January 29, 2017 at 06:11 AM
Are the libruls all riled up because the immigrant ban might reduce terror shootings in US to reduce screaming for techno-murder?There were a fair amount of voters who "came home" to the GOP before the election, even though they found Trump himself distasteful. At least some of those nouveau-Reagan democrats also voted for him because of his economic agenda. They believed that his racism was all for show.New Deal democrat -> EMichael... , January 29, 2017 at 06:57 AMA further historical analogy ....anon -> New Deal democrat... , January 29, 2017 at 08:24 AM
Once upon a time, for academic reasons I read the same book that Trump was rumored to have by his bedside in NYC: the english translation of the full text of Adolf Hitler's speeches. Hitler's argument for getting ordinary Germans to go along with his extreme anti-Semitic agenda was masterful. It went in essence like this: "I know that there are a very few good Jews, and you may know a few of them. But the vast majority of Jews, who you don't know, are evil. But in order to get to the mass of bad apples, we might have to inflict some hardship on a few good people." By getting people to overlook their own experience with Jews they knew, he prevailed.
In contrast - for example - gay rights triumphed when enough people knew gays in their ordinary lives, and realized that they were no different from anybody else. So they were unable to see any valid reason to discriminate against them.
This ban is much more like the second situation than the first. It is inflicting a lot of pain on a lot of good people, in order to get to (allegedly) a few bad apples, and people can see that. It is not going to be popular." for academic reasons I read the same book that Trump was rumored to have by his bedside in NYC"New Deal democrat -> anon... , January 29, 2017 at 08:36 AM
unsubstantiated nonsense. other wise known as fake newsUnsubstantiated = It may or may not be nonsense, since we don't know if it is true or not. Hence, as I said, "rumor."ilsm -> New Deal democrat... , January 29, 2017 at 01:24 PM
Have a nice day.Before the Nazi had the power to go after the Jews they had effect the party's police state, before which ordinary Germans [and whatever police there were after the depression shuttered everything] permitted the party to do organized violence on their opponents: the social democrats, socialists, bolshevists, et al.Peter K. -> EMichael... , January 29, 2017 at 08:05 AM
It was way too late when the pogrom started.BenIsNotYoda -> Peter K.... , January 29, 2017 at 08:26 AM
"We'll differ on this one part, people that voted for Trump are not persuadables. They have always voted the same way in every single election they have voted in."
Reminds me of the obstinate, closed-mindedness which Trump voters direct at immigrants and Muslims.The ban on returning residents is utterly against the law.Peter K. -> BenIsNotYoda... , January 29, 2017 at 08:34 AM
However, I agree on PeterK. The closed mindedness of neoliberals to their own follies has brought this state of affairs upon us. Wake up.Neoliberals have not delivered a growing, healthy economy despite Krugman's claims that everything is great, crime is down, etc.Gibbon1 -> Peter K.... , January 29, 2017 at 11:48 AM
Obama's record for 8 years is an average of 1.7 percent growth. NGDP is even worse which is why I support an NGDP target for the Fed. It would show how poorly they have done.
This after decades of corporate trade deals and a shrinking middle class.
People are angry. They want scapegoats. Trump provided them with scapegoats and the uneducated white working class took the bait.
Peter K shows an understanding of politics.ilsm -> pgl... , January 29, 2017 at 05:33 AM
I agree!point -> pgl... , January 29, 2017 at 05:36 AM
but..... there are a lot more for all parties in starting with funding and training jihadis to do Assad like US did Qaddafi and Libya......
"Republicans in Congress who remain quiet or tacitly supportive of the ban should recognize that history will remember them as cowards."
Most of the 95% rest of the world see the US like the NYT says history see GOP congress.I appreciate Bill's judgement that Trump's acts are odious, but "un-American, not Christian, and hopefully unconstitutional" seems to be going too far.New Deal democrat -> point... , January 29, 2017 at 06:04 AM
It only takes a quick tour of historical US acts on immigration to find plenty of precedent.
1932, everybody, especially Mexicans.
This according to the useful article:
Small historical anecdote.kthomas -> New Deal democrat... , January 29, 2017 at 06:23 AM
Mme. Chiang Kai Shek (recently deceased at age 106 on Long Island) has much to answer for before the bar of history, but she had one shining moment.
Supposedly at one point during WW2 both she and Winston Churchill were living at the White House (must have made for interesting dinner conversation). Anyway, during that time she gave a speech to Congress. In that speech she pointed out that Japanese militarist propaganda, that America's myth of liberty and equality before the law was hypocritical, had one inconvenient feature: given the Chinese and Japanese Exclusion Acts, it was true.
This speech was so shaming that Congress changed the law to allow Asian immigation - in a trickle at first, but thereafter a river.Thank you for sharing.ilsm -> New Deal democrat... , January 29, 2017 at 06:48 AMMme Chiang was Christian, spent part of youth in Georgia.New Deal democrat -> ilsm... , January 29, 2017 at 07:15 AM
Japanese militarist propaganda used 'Asian co-prosperity' propaganda to point out imperialism..... too!
Java was Dutch, etc.Yes, and her teenage voyage to San Francisco ended with her being treated exactly like the people being detained at airports this weekend. It made a lifelong impression on her.ilsm -> New Deal democrat... , January 29, 2017 at 01:27 PMShe married Chiang to give him a link to the west....BenIsNotYoda -> point... , January 29, 2017 at 08:27 AM
Aside I am no fan of Chiang and Mme C.whenever bans were by democrat presidents, people here will never criticize.Tom aka Rusty -> pgl... , January 29, 2017 at 05:51 AMGiven at least 16 years of intentional presidential failure to fully enforce immigration laws, this seems pretty small change.EMichael -> Tom aka Rusty... , January 29, 2017 at 05:57 AM
But enough to make lefty heads explode.
Have a nice day.
PS: Did the State Department intentionally avoid Christian Arabs for refugee status? Not certain.Wow.kthomas -> EMichael... , January 29, 2017 at 06:23 AM
Five feet over your head.What head? Brain by accident.ilsm -> EMichael... , January 29, 2017 at 06:49 AMad hom when you ate wrog the best tool.Observer -> Tom aka Rusty... , January 29, 2017 at 06:49 AM
kt too!Yes, its pretty unremarkable. And you are correct the that Christian Arab refugees from Syria have been accepted at 5% of the rate their population would suggest:BenIsNotYoda -> Tom aka Rusty... , January 29, 2017 at 08:31 AM
"But the numbers tell a different story: The United States has accepted 10,801 Syrian refugees, of whom 56 are Christian. Not 56 percent; 56 total, out of 10,801. That is to say, one-half of 1 percent.
The BBC says that 10 percent of all Syrians are Christian, which would mean 2.2 million Christians. It is quite obvious, and President Barack Obama and Secretary John Kerry have acknowledged it, that Middle Eastern Christians are an especially persecuted group."
Here's a quite detailed discussion of the background around the EO and its implementation ... including the 2015 law limiting visas from those countries, and the reference for the above quote. It also contrasts the headlines in much of the press. As they say, read the whole thing.
"There is a postponement of entry from 7 countries (Iraq, Syria, Iran, Libya, Somalia, Sudan and Yemen) previously identified by the Obama administration as posing extraordinary risks.
That they are 7 majority Muslim countries does not mean there is a Muslim ban, as most of the countries with the largest Muslim populations are not on the list (e.g., Egypt, Indonesia, Malaysia, India, Pakistan, Bangladesh, Turkey, Nigeria and more).
Thus, the overwhelming majority of the Muslim world is not affected.
Moreover, the "ban" is only for four months while procedures are reviewed, with the exception of Syria for which there is no time limit.
There is a logic to the 7 countries. Six are failed states known to have large ISIS activity, and one, Iran, is a sworn enemy of the U.S. and worldwide sponsor of terrorism.
And, the 7 countries on the list were not even so-designated by Trump. Rather, they were selected last year by the Obama administration as posing special risks for visa entry ..."
I believe they don't mention that IIRC we were bombing 5 of the 7 counties on the list last month.
http://legalinsurrection.com/2017/01/most-claims-about-trumps-visa-executive-order-are-false-or-misleading/The current system relies on referrals from the United Nations High Commissioner for Refugees. Syria's population in 2011 was 90 percent Muslim and 10 percent Christian, CNS said. Less than 3% admitted as refugees are Christian. But not the state dept's doing.Peter K. -> Tom aka Rusty... , January 29, 2017 at 09:48 AMwhy was Obama called "Deporter in chief?"DrDick -> pgl... , January 29, 2017 at 07:37 AM
Too bad your empathy for those in the Rust Belt doesn't extend to honest, innocent immigrants trying to make a better life for their families.Yep! But we need to get used to it, because this is just the beginning.pgl : , January 29, 2017 at 01:52 AMI've seen some farmers of late complaining about Trump's protectionism hurting their business. Yes they are smart enough to realize that the dollar appreciation will reduce their exports. Too bad these rural Americans were not smart enough on election day not to vote Trump in as President.kthomas -> pgl... , January 29, 2017 at 04:04 AMStupid is as stupid does. Stupid is the new Smart.ken melvin -> kthomas... , January 29, 2017 at 04:42 AMThe man knows only what he's seen on cable TV most of which he doesn't understand. Knows nothing about: economics, trade, foreign affairs, government, law, ... He epitomizes the know nothings of the world, and, the fact that he doesn't know doesn't bother him in the least. A narcissists-grandiose type with neither regard nor interest for the probable consequences.ken melvin -> ken melvin... , January 29, 2017 at 04:45 AMI think it's wrong to even hope Trump turns out well. I think the country needs act to save democracy, to save itself from traveling down the road of despots and tyrants, from the likes of Trump who can be manipulated by the likes of Bannon.ilsm -> ken melvin... , January 29, 2017 at 05:36 AMWe need a Dr. King, America's Gandhi!RC AKA Darryl, Ron -> ilsm... , January 29, 2017 at 07:57 AMWe have needed one ever since the last one we had was murdered.im1dc -> kthomas... , January 29, 2017 at 07:37 AM'Stupid is as stupid does. Stupid is the new Smart."BenIsNotYoda -> kthomas... , January 29, 2017 at 08:33 AM
LOL, loved that.
It will make a great Bumper Sticker coupled with the GOP logo of its Red, White, and Blue elephantstupid is one who ignores that Obama presidency growth averaged 1.7% and failed to lift millions while wall street prospered and corporate market power increased both in goods and labor markets.kthomas -> BenIsNotYoda... , January 29, 2017 at 09:25 AMHe's not President anymore. Now go f yourself, Vlad.BenIsNotYoda -> kthomas... , January 29, 2017 at 09:38 AM
awwww. did I hurt your fragile sensibility?ilsm -> pgl... , January 29, 2017 at 05:35 AMI will dig out that best seller about Jackson and review the chapter on Nullification in Charleston,. SC........
Jan 30, 2017 | economistsview.typepad.comcm -> Chris G ... Reply Sunday, January 29, 2017 at 12:21 AM , January 29, 2017 at 12:21 AMThe comparison comes 20 years late. In the 90's, MS Word was unsuitable for academic and scientific writing, period. Even for short documents like a conference or term paper. It was geared entirely to corporate users. In addition it was riddled with bugs and layout "quirks".Chris G -> cm... , January 29, 2017 at 06:35 AM
In reality, you also have to fiddle with Latex, and in the 90's embedding images was big PITA.
What I did not see in the comparison is price. I suppose one would need to compare legally-owned copies of one product vs. the other.
It is not just a matter of the author being able to afford Word and the equipment and other software to use it productively. E.g. how do you prepare your graphs and images? Also business partners accepting or returning the documents will have to buy into the "ecosystem".
Academia is a highly collaborative venture, and one has to consider overall cost and productivity.
Today there is PDF as a pretty established (readonly) document format, back in the day the standard in academia was Postscript.
>In the 90's, MS Word was unsuitable for academic and scientific writing, period... It is not just a matter of the author being able to afford Word and the equipment and other software to use it productively. E.g. how do you prepare your graphs and images?
I used Word when writing my thesis in '94-95 - each chapter a separate doc, figures inserted by creating artwork separately and then using a high-end copy machine to integrate text and figures. It was an ugly process.
> Also business partners accepting or returning the documents will have to buy into the "ecosystem".
That's what led my employer to switch from WordPerfect to MS Word and from Lotus 1-2-3 to Excel in the late '90s. Our customer, the US Govt, imposed a requirement that all reports and supplementary material, e.g., presentations and spreadsheets, be submitted in MS Office formats.
> What I did not see in the comparison is price. I suppose one would need to compare legally-owned copies of one product vs. the other.
Figure the business owns legal copies. Purchase price is one consideration, another is the cost to maintain the software and keep staff trained in how to use it.
The inertia - the tendency to stick with what you've got - can be huge when taking the latter factors into account. In an academic research group not only is there a mentality that you want to use the best available tool for the job but there's constant turnover, which supports rapid adaptation and evolution. Inertia is low. In contrast, turnover in (non-startup) business environments is comparatively slow.
Those businesses make cost-benefit assessments of adopting new software. The tendency is to stick with what you've got until it's absolutely positively unsustainable to do so.
Jan 30, 2017 | economistsview.typepad.comcm -> Observer... , January 29, 2017 at 01:07 AMEvery product is made for a market/audience. When TeX/LaTeX were created, the itch to be scratched was technical and scientific publications with content and formatting requirements that most commercial tools targeted at corporate users were simply unsuitable for, regardless of price level. Aside from affordability by organizations and individuals largely in the non-commercial sector.Fred C. Dobbs -> supersaurus... , January 28, 2017 at 11:05 PM
So academia standardized, and contributed to, the most promising "free" and "working" alternative.
If you don't have an appreciation for that, it's probably because you never had the need. Like with everything else. Most people are not interested in arcane medical implements and materials, or even mundane home furnishings, until they need them.
When the first paper volume of Donald Knuth's The Art of Computer Programming was published in 1968, it was typeset using hot metal typesetting set by a Monotype Corporation typecaster. This method, dating back to the 19th century, produced a "good classic style" appreciated by Knuth. When the second edition of the second volume was published, in 1976, the whole book had to be typeset again because the Monotype technology had been largely replaced by phototypesetting, and the original fonts were no longer available. When Knuth received the galley proofs of the new book on 30 March 1977, he found them awful. Around that time, Knuth saw for the first time the output of a high-quality digital typesetting system, and became interested in digital typography. The disappointing galley proofs gave him the final motivation to solve the problem at hand once and for all by designing his own typesetting system. On 13 May 1977, he wrote a memo to himself describing the basic features of TeX. ...
The first version of TeX was written in the SAIL programming language to run on a PDP-10 under Stanford's WAITS operating system. For later versions of TeX, Knuth invented the concept of literate programming, a way of producing compilable source code and cross-linked documentation typeset in TeX from the same original file. The language used is called WEB and produces programs in DEC PDP-10 Pascal. ...(Wikipedia)
(And so, Tex begat LaTex.
Much as UNIX begat Linux, etc.)
Jan 29, 2017 | economistsview.typepad.comanne : January 28, 2017 at 05:12 AM , 2017 at 05:12 AMhttp://krugman.blogs.nytimes.com/2017/01/27/border-tax-two-step-wonkish/ilsm -> anne... , January 28, 2017 at 05:19 AM
January 27, 2017
Border Tax Two-Step (Wonkish) By Paul Krugman
Trump tantrums aside, you may be finding the whole border tax adjustment discussion confusing. If so, you're not alone; I've worked in this area my whole life, I co-wrote a widely cited paper * (with Martin Feldstein) on why a Value Added Tax isn't an export subsidy, and I have still had a hard time wrapping my mind around the Destination-Based Cash Flow Tax border adjustment that sort-of-kind-of constituted the basis for the Mexico incident.
But I have what I think may be a (relatively) easy way to think about it, which starts with the competitive effects of a VAT, then analyzes the DBCFT as a change from a VAT.
So, first things first: a VAT does not give a nation any kind of competitive advantage, period.
Think about two firms, one domestic and one foreign, selling into two markets, domestic and foreign. Ask how the VAT affects competition in each market.
In the domestic market, imports pay the border adjustment; but domestic firms pay the VAT, so the playing field is still level.
In the foreign market, domestic firms don't pay the VAT, but neither do foreign firms. Again, the playing field is still level.
So a VAT is just a sales tax, with no competitive impact.
But a DBCFT isn't quite the same as a VAT.
With a VAT, a firm pays tax on the value of its sales, minus the cost of intermediate inputs – the goods it buys from other companies. With a DBCFT, firms similarly get to deduct the cost of intermediate inputs. But they also get to deduct the cost of factors of production, mostly labor but also land.
So one way to think of a DBCFT is as a VAT combined with a subsidy for employment of domestic factors of production. The VAT part has no competitive effect, but the subsidy part would lead to expanded domestic production if wages and exchange rates didn't change.
But of course wages and/or the exchange rate would, in fact, change. If the US went to a DBCFT, we should expect the dollar to rise by enough to wipe out any competitive advantage. After the currency adjustment, the trade effect should once again be nil. But there might be a lot of short-to-medium term financial consequences from a stronger dollar.
I think this is right, and I hope it clarifies matters. Oh, and no, none of this helps pay for the wall.
* http://www.nber.org/chapters/c7211.pdfad hominem, then I appeal to my authority let my shark out and think like me....poor pkPeter K. -> ilsm... , January 28, 2017 at 05:36 AM
appeal to cognitive biases.
I suggest a referee!There are no referees in the world of alternative facts. Might makes right.ilsm -> Peter K.... , January 28, 2017 at 09:55 AMThe last time I subsidized the NYT a Clinton was president.Peter K. -> ilsm... , January 28, 2017 at 10:17 AMI stopped when Krugman and the NYT became so rude and unfair about Bernie Sanders and his supporters.ilsm -> Peter K.... , January 28, 2017 at 01:01 PM
Finally an authentic left alternative appears on the scene and they lose their minds.DNC = RNC!Peter K. -> anne... , January 28, 2017 at 05:35 AM
The odd man is Trump!" If the US went to a DBCFT, we should expect the dollar to rise by enough to wipe out any competitive advantage. After the currency adjustment, the trade effect should once again be nil. "
This is the big lie the progressive neoliberals like Krugman and PGL are pushing. Why? To combat Trump's economic nationalism.
Trump told his advisers the tax is too complicates so it probably won't see the light of day.
He'll do the 20 percent import tax on Mexico to pay for the wall. Then he'll do something with China.
Jan 28, 2017 | economistsview.typepad.comFred C. Dobbs January 28, 2017 at 01:06 PM
Putin, Trump, in 'Positive' Call, Say Want to Cooperate in Syria: Kremlin https://nyti.ms/2jIzuKa
NYT - REUTERS - January 28, 2017
MOSCOW - Russian President Vladimir Putin and U.S. President Donald Trump said in a "positive" phone call on Saturday they favored their two countries cooperating in Syria to defeat Islamic State, the Kremlin said in a statement.
In an eagerly awaited phone call, the first since Trump's inauguration, the two men stressed the importance of restoring economic ties between the two countries and of stabilizing relations, the Kremlin said.
U.S.-Russia relations had hit a post-Cold War low under Barack Obama and Trump has made clear he wants a rapprochement with Moscow if he can get along with Putin.
"Both sides demonstrated a mood for active, joint work on stabilizing and developing Russian-American cooperation," the Kremlin said in a statement, saying Putin and Trump had agreed to work on finding a possible time and place for a meeting.
There was no mention in the statement that the possibility of Trump easing sanctions on Moscow imposed over the Ukraine conflict had been mentioned, a subject widely expected to be raised.
The Kremlin said Trump and Putin had agreed to establish "partner-like cooperation" when it came to global issues such as Ukraine, Iran's nuclear program, tensions on the Korean peninsula and the Israeli-Arab conflict.
Trump's stance on Russia has been under intense scrutiny from critics who say he was elected with help from Russian intelligence, an allegation he denies. His detractors have also accused him of being too eager to make an ally of Putin.
For Putin, an easing of Western sanctions would be a major coup ahead of next year's presidential election as it would help the economy recover.
libezkova -> Fred C. Dobbs... , January 28, 2017 at 03:58 PMCompare the coverage with
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In their first phone conversation that lasted nearly an hour, Russian President Vladimir Putin and the new US President Donald Trump have outlined their intent to cooperate on issues ranging from defeating Islamic State to mending bilateral economic ties.
"Both sides expressed their readiness to make active joint efforts to stabilize and develop Russia-US cooperation on a constructive, equitable and mutually beneficial basis," as well as "build up partner cooperation" on a wide range of international issues, according to a Kremlin statement following their discussion.
The White House said that the "positive" conversation was "a significant start to improving the relationship between the United States and Russia that is in need of repair."
"Both President Trump and President Putin are hopeful that after today's call the two sides can move quickly to tackle terrorism and other important issues of mutual concern," the White House statement added.
After speaking with Chancellor Merkel for 45 minutes @POTUS is now onto his 3rd of 5 head of government calls, speaking w Russian Pres Putin pic.twitter.com/RPAWIgcO2C
- Sean Spicer (@PressSec) January 28, 2017Q
"The Presidents have spoken in favor of establishing a real coordination between the US and Russian actions in order to defeat ISIS and other terrorist organizations in Syria," the Kremlin statement said.
The two leaders also discussed the Israeli-Palestinian conflict as well as Iran's nuclear program. "Major aspects of the Ukrainian crisis have been also touched upon," the Kremlin announced.
The leaders of Russia and the US have noted a need to restore economic ties "to stimulate" further development of the relationship between the nations. Putin and Trump also agreed to initiate a process to "work out possible dates and venue of their personal meeting."
Telephone conversation with US President Donald Trump https://t.co/mjp9Tta1sE
- President of Russia (@KremlinRussia_E) 28 января 2017 г.Q
During the conversation the Presidents also expressed their desire to "maintain regular personal contacts," the Kremlin statement said.
The Kremlin said the US President asked his Russian counterpart "to wish the Russian people happiness and prosperity" on his behalf, adding Americans "have warm feelings towards Russia and its citizens." Putin said the feeling was "mutual," stressing that historically, the Russians and the Americans were close allies on more than one occasion.
Putin said "for over two centuries Russia has supported the United States, was its ally during the two world wars, and now sees the United States as a major partner in fighting international terrorism."
U.S. President Donald Trump © Mark MakelaTrump hopes to get along with Russia, 'knock the hell out of ISIS together'
On Friday, speaking at a joint briefing with British Prime Minister Theresa May, Trump said he hoped he would have a "fantastic relationship" with Russia's president, but understands that might not happen. Trump has said previously that he would welcome Moscow's involvement in a joint effort to battle Islamic State (IS, formerly ISIS/ISIL).
"I don't know Putin, but if we can get along with Russia that's a great thing. It's good for Russia; it's good for us; we go out together and knock the hell out of ISIS, because that's a real sickness," he said in an interview with Fox News.
Moscow, for its part, has repeatedly suggested fostering closer cooperation between the Russian and US Air Forces in Syria, but blamed the previous Obama administration for failing to adequately respond to its entreaties. Relations between the two countries have been marred in recent years over various issues, including divisions on the Syrian crisis and allegations of Russian meddling into the US elections in November of 2016. US sanctions against Russia - imposed over the crisis in Ukraine - was one of the issues expected to be on the agenda of the Trump-Putin exchange. However, the issue was not mentioned in the Kremlin's statement summarizing the conversation.
Citing an unnamed source in the White House, a researcher at the Atlantic Council analytical center, Fabrice Pothier, wrote in a Twitter post on Thursday that the Trump administration "has an executive order ready" to lift the restrictions on Moscow, but Trump said on Friday that it is "very early to be talking about that."
U.S. House of Representatives in Washington © Gary Cameron Top Dem to propose bill to hamstring Trump in relaxing sanctions on Russia with GOP wingmen
However, earlier in January, Trump said that he would consider lifting restrictions if Moscow cooperates with Washington on certain issues, such as nuclear arms reduction.
"They have sanctions on Russia - let's see if we can make some good deals with Russia. For one thing, I think nuclear weapons should be way down and reduced very substantially, that's part of it," Trump was quoted as saying by the Times.
Trump also said in one of his Tweets that "having a good relationship with Russia is a good thing, not a bad thing," warning only "fools" would think otherwise. However, several US Senators proposed a bill last week that would make it impossible for the US President to lift restrictions without congressional approval.
Russia has been cautious about the prospects for a potential "reset" with the US under the new administration. Russian Foreign Minister Lavrov said the country has no "naive expectations" and is under no "illusions."