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Stability is destabilizing: The idea of Minsky moment

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. ”

Uncle Billy Cunctator
In comment to Economic Donkeys

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

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

 

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

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

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

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

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

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

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

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

Minsky on capitalism:

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

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

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

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

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

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

Blissex said...

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

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

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

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

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

Not very hands-off at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What were the sources of this imaginary wealth?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The late Hunt Taylor wrote, in 2006:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Attempts to reinvent Minsky will never stop

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

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

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

Double Capitulation said...

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

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

Did Kurt Vonnegut once quip

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

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

djb said...

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

but I doubt BIS was worried about that particular issue

Peter K. -> djb...

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

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

mulp -> djb...

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

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

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

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

Arne said...

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

Blissex said...

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

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

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

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

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

Not very hands-off at all.

mulp -> Blissex...

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

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

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

Signs of free lunch economic smoke and mirrors.

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


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[Dec 15, 2017] Neoliberalism undermines workers health not only via the financial consequences of un/under employment and low wages, but also through chronic exposure to stress due to insecurity

Neoliberalism as "Die-now economics." "Embodiment into lower class" or "the representation as a member the lower class" if often fatal and upper mobility mobility is artificially limited (despite all MSM hype it is lower then in Europe). So just being a member of lower class noticeably and negatively affects your life expectancy and other social metrics. Job insecurity is the hazard reserved for lower and lower middle classes destructivly effect both physical and mental health. Too much stress is not good for humans. Neoliberalism with its manta of competition uber alles and atomization of the workforce is a real killer. also the fact that such article was published and the comments below is a clear sign that the days of neoliberalism are numbered. It should go.
Notable quotes:
"... In our new book , we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies. Focusing on the social determinants of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives, while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity, stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. ..."
"... Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment, inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in biologically measurable ways . ..."
"... Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction." In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children, families, household work ). So, even if class in our political economy is the driver, it's not everything. ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
"... Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve." ..."
"... As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we" are not possible because we have all become "I". ..."
"... Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is at once belittling (it's all about f-e-e-e-lings ..."
"... "we have measurable health outcomes from political choices" So True!!! ..."
Dec 12, 2017 | www.nakedcapitalism.com

...Neoliberal epidemics are particular pathways of embodiment. From Ted Schrecker and Clare Bambra in The Conversation :

In our new book , we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies. Focusing on the social determinants of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives, while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity, stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. They are epidemics because they are observable on such an international scale and have been transmitted so quickly across time and space that if they were biological contagions they would be seen as of epidemic proportions.

(The Case-Deaton study provides an obvious fifth: Deaths of despair. There are doubtless others.) Case in point for one of the unluckier members of the 90%:

On the morning of 25 August 2014 a young New Jersey woman, Maria Fernandes, died from inhaling gasoline fumes as she slept in her 13-year-old car. She often slept in the car while shuttling between her three, low-wage jobs in food service; she kept a can of gasoline in the car because she often slept with the engine running, and was worried about running out of gasoline. Apparently, the can accidentally tipped over and the vapours from spilled gasoline cost her life. Ms Fernandes was one of the more obvious casualties of the zero-hours culture of stress and insecurity that pervades the contemporary labour market under neoliberalism.

And Schrecker and Bambra conclude:

Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment, inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in biologically measurable ways .

... ... ...

Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction." In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children, families, household work ). So, even if class in our political economy is the driver, it's not everything.

nonclassical , December 11, 2017 at 8:30 pm

L.S. reminiscent of Ernst Becker's, "The Structure of Evil" – "Escape from Evil"? (..not to indicate good vs. evil dichotomy) A great amount of perspective must be agreed upon to achieve "change" intoned. Divide and conquer are complicit, as noted .otherwise (and as indicated by U.S. economic history) change arrives only when all have lost all and can therefore agree begin again.

There is however, Naomi Klein perspective, "Shock Doctrine", whereby influence contributes to destabilization, plan in hand leading to agenda driven ("neoliberal"=market fundamentalism) outcome, not at all spontaneous in nature:

"Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning.

Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve."

Amfortas the Hippie , December 11, 2017 at 4:20 pm

Well done, as usual.

On Case-Deason: Sounds like home. I keep the scanner on(local news) ems and fire only since 2006(sheriff got a homeland security grant). The incidence of suicide, overdose and "intoxication psychosis" are markedly increased in the last 10+ years out here in the wilderness(5K folks in whole county, last I looked). Our local economy went into near depression after the late 90's farm bill killed the peanut program then 911 meant no hunting season that year(and it's been noticeably less busy ever since) then drought and the real estate crash(we had 30 some realtors at peak..old family land being sold off, mostly). So the local Bourgeoisie have had less money to spend, which "trickles down" onto the rest of us.:less construction, less eating out even at the cheap places, less buying of gas, and on and on means fewer employees are needed, thus fewer jobs. To boot, there is a habit among many employers out here of not paying attention to labor laws(it is Texas ) the last minwage rise took 2 years to filter out here, and one must scrutinize one's pay stub to ensure that the boss isn't getting squirrelly with overtime and witholding.
Geography plays into all this, too 100 miles to any largish city.

... ... ...

Rosario , December 11, 2017 at 10:55 pm

I'm not well versed in Foucault or Lacan but I've read some of both and in reading between the lines of their writing (the phantom philosophy?) I saw a very different message than that often delivered by post-modern theorists.

As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we" are not possible because we have all become "I".

Considering what both their philosophies claimed, if identity is a lie, and the subject is always generated relative to the other, then how the hell can there be any security or well being in self-actualization? It is like trying to hit a target that does not exist.

All potentially oppressive cultural categorizations are examples of this (black, latino, gay, trans, etc.). If the identity is a moving target, both to the oppressor and the oppressed, then how can it ever be a singular source of political action? You can't hit what isn't there. This is not to say that these groups (in whatever determined category) are not oppressed, just that formulating political action based strictly on the identity (often as an essential category) is impossible because it does not actually exist materially. It is an amalgamation of subjects who's subjectivity is always relative to some other whether ally or oppressor. Only the manifestations of oppression on bodies (as brought up in Lambert's post) can be utilized as metrics for political action.

... ... ...

Lambert Strether Post author , December 11, 2017 at 11:20 pm

I thought of a couple of other advantages of the "embodiment" paradigm:

Better Framing . Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is at once belittling (it's all about f-e-e-e-lings *) and disempowering (solutions are individual, like therapy or drugs). Embodiment by contrast insists that neoliberalism (the neoliberal labor market (class warfare)) has real, material, physiological effects that can be measured and tracked, as with any epidemic.

... ... ...

oaf , December 12, 2017 at 7:11 am

"we have measurable health outcomes from political choices" So True!!!

Thank you for posting this.

[Dec 13, 2017] Stress of long-term unemployment takes a toll on thousands of Jerseyans who are out of work by Leslie Kwoh

Notable quotes:
"... Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147. ..."
Jun 13, 2010 | www.nj.com

At 5:30 every morning, Tony Gwiazdowski rolls out of bed, brews a pot of coffee and carefully arranges his laptop, cell phone and notepad like silverware across the kitchen table.

And then he waits.

Gwiazdowski, 57, has been waiting for 16 months. Since losing his job as a transportation sales manager in February 2009, he wakes each morning to the sobering reminder that, yes, he is still unemployed. So he pushes aside the fatigue, throws on some clothes and sends out another flurry of resumes and cheery cover letters.

But most days go by without a single phone call. And around sundown, when he hears his neighbors returning home from work, Gwiazdowski -- the former mayor of Hillsborough -- can't help but allow himself one tiny sigh of resignation.

"You sit there and you wonder, 'What am I doing wrong?'" said Gwiazdowski, who finds companionship in his 2-year-old golden retriever, Charlie, until his wife returns from work.

"The worst moment is at the end of the day when it's 4:30 and you did everything you could, and the phone hasn't rung, the e-mails haven't come through."

Gwiazdowski is one of a growing number of chronically unemployed workers in New Jersey and across the country who are struggling to get through what is becoming one long, jobless nightmare -- even as the rest of the economy has begun to show signs of recovery.

Nationwide, 46 percent of the unemployed -- 6.7 million Americans -- have been without work for at least half a year, by far the highest percentage recorded since the U.S. Labor Department began tracking the data in 1948.

In New Jersey, nearly 40 percent of the 416,000 unemployed workers last year fit that profile, up from about 20 percent in previous years, according to the department, which provides only annual breakdowns for individual states. Most of them were unemployed for more than a year.

But the repercussions of chronic unemployment go beyond the loss of a paycheck or the realization that one might never find the same kind of job again. For many, the sinking feeling of joblessness -- with no end in sight -- can take a psychological toll, experts say.

Across the state, mental health crisis units saw a 20 percent increase in demand last year as more residents reported suffering from unemployment-related stress, according to the New Jersey Association of Mental Health Agencies.

"The longer the unemployment continues, the more impact it will have on their personal lives and mental health," said Shauna Moses, the association's associate executive director. "There's stress in the marriage, with the kids, other family members, with friends."

And while a few continue to cling to optimism, even the toughest admit there are moments of despair: Fear of never finding work, envy of employed friends and embarassment at having to tell acquaintances that, nope, still no luck.

"When they say, 'Hi Mayor,' I don't tell a lot of people I'm out of work -- I say I'm semi-retired," said Gwiazdowski, who maxed out on unemployment benefits several months ago.

"They might think, 'Gee, what's wrong with him? Why can't he get a job?' It's a long story and maybe people really don't care and now they want to get away from you."


SECOND TIME AROUND

Lynn Kafalas has been there before, too. After losing her computer training job in 2000, the East Hanover resident took four agonizing years to find new work -- by then, she had refashioned herself into a web designer.

That not-too-distant experience is why Kafalas, 52, who was laid off again eight months ago, grows uneasier with each passing day. Already, some of her old demons have returned, like loneliness, self-doubt and, worst of all, insomnia. At night, her mind races to dissect the latest interview: What went wrong? What else should she be doing? And why won't even Barnes & Noble hire her?

"It's like putting a stopper on my life -- I can't move on," said Kafalas, who has given up karate lessons, vacations and regular outings with friends. "Everything is about the interviews."

And while most of her friends have been supportive, a few have hinted to her that she is doing something wrong, or not doing enough. The remarks always hit Kafalas with a pang.

In a recent study, researchers at Rutgers University found that the chronically unemployed are prone to high levels of stress, anxiety, depression, loneliness and even substance abuse, which take a toll on their self-esteem and personal relationships.

"They're the forgotten group," said Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers, and a co-author of the report. "And the longer you are unemployed, the less likely you are to get a job."

Of the 900 unemployed workers first interviewed last August for the study, only one in 10 landed full-time work by March of this year, and only half of those lucky few expressed satisfaction with their new jobs. Another one in 10 simply gave up searching.

Among those who were still unemployed, many struggled to make ends meet by borrowing from friends or family, turning to government food stamps and forgoing health care, according to the study.

More than half said they avoided all social contact, while slightly less than half said they had lost touch with close friends. Six in 10 said they had problems sleeping.

Kafalas says she deals with her chronic insomnia by hitting the gym for two hours almost every evening, lifting weights and pounding the treadmill until she feels tired enough to fall asleep.

"Sometimes I forget what day it is. Is it Tuesday? And then I'll think of what TV show ran the night before," she said. "Waiting is the toughest part."


AGE A FACTOR

Generally, the likelihood of long-term unemployment increases with age, experts say. A report by the National Employment Law Project this month found that nearly half of those who were unemployed for six months or longer were at least 45 years old. Those between 16 and 24 made up just 14 percent.

Tell that to Adam Blank, 24, who has been living with his girlfriend and her parents at their Martinsville home since losing his sales job at Best Buy a year and half ago.

Blank, who graduated from Rutgers with a major in communications, says he feels like a burden sometimes, especially since his girlfriend, Tracy Rosen, 24, works full-time at a local nonprofit. He shows her family gratitude with small chores, like taking out the garbage, washing dishes, sweeping floors and doing laundry.

Still, he often feels inadequate.

"All I'm doing on an almost daily basis is sitting around the house trying to keep myself from going stir-crazy," said Blank, who dreams of starting a social media company.

When he is feeling particularly low, Blank said he turns to a tactic employed by prisoners of war in Vietnam: "They used to build dream houses in their head to help keep their sanity. It's really just imagining a place I can call my own."


LESSONS LEARNED

Meanwhile, Gwiazdowski, ever the optimist, says unemployment has taught him a few things.

He has learned, for example, how to quickly assess an interviewer's age and play up or down his work experience accordingly -- he doesn't want to appear "threatening" to a potential employer who is younger. He has learned that by occasionally deleting and reuploading his resume to job sites, his entry appears fresh.

"It's almost like a game," he said, laughing. "You are desperate, but you can't show it."

But there are days when he just can't find any humor in his predicament -- like when he finishes a great interview but receives no offer, or when he hears a fellow job seeker finally found work and feels a slight twinge of jealousy.

"That's what I'm missing -- putting on that shirt and tie in the morning and going to work," he said.

The memory of getting dressed for work is still so vivid, Gwiazdowski says, that he has to believe another job is just around the corner.

"You always have to hope that that morning when you get up, it's going to be the day," he said.

"Today is going to be the day that something is going to happen."

Leslie Kwoh may be reached at lkwoh@starledger.com or (973) 392-4147.

DrBuzzard Jun 13, 2010

I collect from the state of iowa, was on tier I and when the gov't recessed without passing extension, iowa stopped paying tier I claims that were already open, i was scheduled to be on tier I until july 15th, and its gone now, as a surprise, when i tried to claim my week this week i was notified. SURPRISE, talk about stress.

berganliz Jun 13, 2010

This is terrible....just wait until RIF'd teachers hit the unemployment offices....but then, this is what NJ wanted...fired teachers who are to blame for the worst recession our country has seen in 150 years...thanks GWB.....thanks Donald Rumsfeld......thanks Dick Cheney....thanks Karl "Miss Piggy" Rove...and thank you Mr. Big Boy himself...Gov Krispy Kreame!

rp121 Jun 13, 2010

For readers who care about this nation's unemployed- Call your Senators to pass HR 4213, the "Extenders" bill. Unfortunately, it does not add UI benefits weeks, however it DOES continue the emergency federal tiers of UI. If it does not pass this week many of us are cut off at 26 wks. No tier 1, 2 -nothing.

[Dec 13, 2017] Unemployment health hazard and stress

The longer you are unemployed, the more you are effected by those factors.
Notable quotes:
"... The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects. ..."
"... Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system. ..."
"... Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises. ..."
"... Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem. ..."
"... One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available. ..."
"... Depression is universally hated by anyone who's ever had it. ..."
"... Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either. ..."
"... You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard. ..."
Dec 13, 2017 | www.cvtips.com

It's almost impossible to describe the various psychological impacts, because there are so many. There are sometimes serious consequences, including suicide, and, some would say worse, chronic depression.

There's not really a single cause and effect. It's a compound effect, and unemployment, by adding stress, affects people, often badly.

The world doesn't need any more untrained psychologists, and we're not pretending to give medical advice. That's for professionals. Everybody is different, and their problems are different. What we can do is give you an outline of the common problems, and what you can do about them.

The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects.

For others, there are a series of issues, and the big three are:

Stress

Stress is Stage One. It's a natural result of the situation. Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system.

Over an extended period, the body's natural hormonal balances are affected, and this can lead to problems. These are actually physical issues, but the effects are mental, and the first obvious effects are, naturally, emotional.

Anger, and other negative emotions

Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises.

If the actual situation was already bad, this mental state makes it a lot worse. Constant aggravation doesn't help people to keep a sense of perspective. Clear thinking isn't easy when under constant stress.

Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem.

One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available.

If you have reservations about seeking help, bear in mind it can't possibly be any worse than the problem.

Depression

Depression is universally hated by anyone who's ever had it. This is the next stage, and it's caused by hormonal imbalances which affect serotonin. It's actually a physical problem, but it has mental effects which are sometimes devastating, and potentially life threatening.

The common symptoms are:

It's a disgusting experience. No level of obscenity could possibly describe it. Depression is misery on a level people wouldn't conceive in a nightmare. At this stage the patient needs help, and getting it is actually relatively easy. It's convincing the person they need to do something about it that's difficult. Again, the mental state is working against the person. Even admitting there's a problem is hard for many people in this condition.

Generally speaking, a person who is trusted is the best person to tell anyone experiencing the onset of depression to seek help. Important: If you're experiencing any of those symptoms:

Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either.

Alcohol, in particular, makes depression much worse. Alcohol is a depressant, itself, and it's also a nasty chemical mix with all those stress hormones.

If you've ever had alcohol problems, or seen someone with alcohol wrecking their lives, depression makes things about a million times worse.

Just don't do it. Steer clear of any so-called stimulants, because they don't mix with antidepressants, either.

Unemployment and staying healthy

The above is what you need to know about the risks of unemployment to your health and mental well being.

These situations are avoidable.

Your best defense against the mental stresses and strains of unemployment, and their related problems is staying healthy.

We can promise you that is nothing less than the truth. The healthier you are, the better your defenses against stress, and the more strength you have to cope with situations.

Basic health is actually pretty easy to achieve:

Diet

Eat real food, not junk, and make sure you're getting enough food. Your body can't work with resources it doesn't have. Good food is a real asset, and you'll find you don't get tired as easily. You need the energy reserves.

Give yourself a good selection of food that you like, that's also worth eating.

The good news is that plain food is also reasonably cheap, and you can eat as much as you need. Basic meals are easy enough to prepare, and as long as you're getting all the protein veg and minerals you need, you're pretty much covered.

You can also use a multivitamin cap, or broad spectrum supplements, to make sure you're getting all your trace elements. Also make sure you're getting the benefits of your food by taking acidophilus or eating yogurt regularly.

Exercise

You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard.

Don't just sit and suffer

If anything's wrong, check it out when it starts, not six months later. Most medical conditions become serious when they're allowed to get worse.

For unemployed people the added risk is also that they may prevent you getting that job, or going for interviews. If something's causing you problems, get rid of it.

Nobody who's been through the blender of unemployment thinks it's fun.

Anyone who's really done it tough will tell you one thing:

Don't be a victim. Beat the problem, and you'll really appreciate the feeling.

[Dec 12, 2017] Can Uber Ever Deliver Part Eleven Annual Uber Losses Now Approaching $5 Billion

Notable quotes:
"... Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. ..."
"... Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins. ..."
"... In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week. ..."
"... An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8] ..."
"... Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017. ..."
"... Socialize the losses, privatize the gains, VC-ize the subsidies. ..."
"... The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. ..."
"... "Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs ..."
Dec 12, 2017 | www.nakedcapitalism.com

Uber lost $2.5 billion in 2015, probably lost $4 billion in 2016, and is on track to lose $5 billion in 2017.

The top line on the table below shows is total passenger payments, which must be split between Uber corporate and its drivers. Driver gross earnings are substantially higher than actual take home pay, as gross earning must cover all the expenses drivers bear, including fuel, vehicle ownership, insurance and maintenance.

Most of the "profit" data released by Uber over time and discussed in the press is not true GAAP (generally accepted accounting principles) profit comparable to the net income numbers public companies publish but is EBIDTAR contribution. Companies have significant leeway as to how they calculate EBIDTAR (although it would exclude interest, taxes, depreciation, amortization) and the percentage of total costs excluded from EBIDTAR can vary significantly from quarter to quarter, given the impact of one-time expenses such as legal settlements and stock compensation. We only have true GAAP net profit results for 2014, 2015 and the 2nd/3rd quarters of 2017, but have EBIDTAR contribution numbers for all other periods. [5]

Uber had GAAP net income of negative $2.6 billion in 2015, and a negative profit margin of 132%. This is consistent with the negative $2.0 billion loss and (143%) margin for the year ending September 2015 presented in part one of the NC Uber series over a year ago.

No GAAP profit results for 2016 have been disclosed, but actual losses likely exceed $4 billion given the EBIDTAR contribution of negative $3.2 billion. Uber's GAAP losses for the 2nd and 3rd quarters of 2017 were over $2.5 billion, suggesting annual losses of roughly $5 billion.

While many Silicon Valley funded startups suffered large initial losses, none of them lost anything remotely close to $2.6 billion in their sixth year of operation and then doubled their losses to $5 billion in year eight. Reversing losses of this magnitude would require the greatest corporate financial turnaround in history.

No evidence of significant efficiency/scale gains; 2015 and 2016 margin improvements entirely explained by unilateral cuts in driver compensation, but losses soared when Uber had to reverse these cuts in 2017.

Total 2015 gross passenger payments were 200% higher than 2014, but Uber corporate revenue improved 300% because Uber cut the driver share of passenger revenue from 83% to 77%. This was an effective $500 million wealth transfer from drivers to Uber's investors. These driver compensation cuts improved Uber's EBIDTAR margin, but Uber's P&L gains were wiped out by higher non-EBIDTAR expense. Thus the 300% Uber revenue growth did not result in any improvement in Uber profit margins.

In 2016, Uber unilaterally imposed much larger cuts in driver compensation, costing drivers an additional $3 billion. [6] Prior to Uber's market entry, the take home pay of big-city cab drivers in the US was in the $12-17/hour range, and these earnings were possible only if drivers worked 65-75 hours a week.

An independent study of the net earnings of Uber drivers (after accounting for the costs of the vehicles they had to provide) in Denver, Houston and Detroit in late 2015 (prior to Uber's big 2016 cuts) found that driver earnings had fallen to the $10-13/hour range. [7] Multiple recent news reports have documented how Uber drivers are increasing unable to support themselves from their reduced share of passenger payments. [8]

A business model where profit improvement is hugely dependent on wage cuts is unsustainable, especially when take home wages fall to (or below) minimum wage levels. Uber's primary focus has always been the rate of growth in gross passenger revenue, as this has been a major justification for its $68 billion valuation. This growth rate came under enormous pressure in 2017 given Uber efforts to raise fares, major increases in driver turnover as wages fell, [9] and the avalanche of adverse publicity it was facing.

Since mass driver defections would cause passenger volume growth to collapse completely, Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

MKS , December 12, 2017 at 6:19 am

"Uber's business model can never produce sustainable profits"

Two words not in my vocabulary are "Never" and "Always", that is a pretty absolute statement in an non-absolute environment. The same environment that has produced the "Silicon Valley Growth Model", with 15x earnings companies like NVIDA, FB and Tesla (Average earnings/stock price ratio in dot com bubble was 10x) will people pay ridiculous amounts of money for a company with no underlying fundamentals you damn right they will! Please stop with the I know all no body knows anything, especially the psychology and irrationality of markets which are made up of irrational people/investors/traders.

JohnnySacks , December 12, 2017 at 7:34 am

My thoughts exactly. Seems the only possible recovery for the investors is a perfectly engineered legendary pump and dump IPO scheme. Risky, but there's a lot of fools out there and many who would also like to get on board early in the ride in fear of missing out on all the money to be hoovered up from the greater fools. Count me out.

SoCal Rhino , December 12, 2017 at 8:30 am

The author clearly distinguishes between GAAP profitability and valuations, which is after all rather the point of the series. And he makes a more nuanced point than the half sentence you have quoted without context or with an indication that you omitted a portion. Did you miss the part about how Uber would have a strong incentive to share the evidence of a network effect or other financial story that pointed the way to eventual profit? Otherwise (my words) it is the classic sell at a loss, make it up with volume path to liquidation.

tegnost , December 12, 2017 at 9:52 am

apples and oranges comparison, nvidia has lots and lots of patented tech that produces revenue, facebook has a kajillion admittedly irrational users, but those users drive massive ad sales (as just one example of how that company capitalizes itself) and tesla makes an actual car, using technology that inspires it's buyers (the put your money where your mouth is crowd and it can't be denied that tesla, whatever it's faults are, battery tech is not one of them and that intellectual property is worth a lot, and tesla's investors are in on that real business, profitable or otherwise)

Uber is an iphone app. They lose money and have no path to profitability (unless it's the theory you espouse that people are unintelligent so even unintelligent ideas work to fleece them). This article touches on one of the great things about the time we now inhabit, uber drivers could bail en masse, there are two sides to the low attachment employees who you can get rid of easily. The drivers can delete the uber app as soon as another iphone app comes along that gets them a better return

allan , December 12, 2017 at 6:52 am

Yet another source (unintended) of subsidies for Uber, Lyft, etc., which might or might not have been mentioned earlier in the series:

Airports Are Losing Money as Ride-Hailing Services Grow [NYT]

For many air travelers, getting to and from the airport has long been part of the whole miserable experience. Do they drive and park in some distant lot? Take mass transit or a taxi? Deal with a rental car?

Ride-hailing services like Uber and Lyft are quickly changing those calculations. That has meant a bit less angst for travelers.

But that's not the case for airports. Travelers' changing habits, in fact, have begun to shake the airports' financial underpinnings. The money they currently collect from ride-hailing services do not compensate for the lower revenues from the other sources.

At the same time, some airports have had to add staff to oversee the operations of the ride-hailing companies, the report said. And with more ride-hailing vehicles on the roads outside terminals,
there's more congestion.

Socialize the losses, privatize the gains, VC-ize the subsidies.

Thuto , December 12, 2017 at 6:55 am

The cold hard truth is that Uber is backed into a corner with severely limited abilities to tweak the numbers on either the supply or the demand side: cut driver compensation and they trigger driver churn (as has already been demonstrated), increase fare prices for riders and riders defect to cheaper alternatives. The only question is how long can they keep the show going before the lights go out, slick marketing and propaganda can only take you so far, and one assumes the dumb money has a finite supply of patience and will at some point begin asking the tough questions.

Louis Fyne , December 12, 2017 at 8:35 am

The irony is that Uber would have been a perfectly fine, very profitable mid-sized company if Uber stuck with its initial model -- sticking to dense cities with limited parking, limiting driver supply, and charging a premium price for door-to-door delivery, whether by livery or a regular sedan. And then perhaps branching into robo-cars.

But somehow Uber/board/Travis got suckered into the siren call of self-driving cars, triple-digit user growth, and being in the top 100 US cities and on every continent.

Thuto , December 12, 2017 at 11:30 am

I've shared a similar sentiment in one of the previous posts about Uber. But operating profitably in decent sized niche doesn't fit well with ambitions of global domination. For Uber to be "right-sized", an admission of folly would have to be made, its managers and investors would have to transcend the sunk cost fallacy in their strategic decision making, and said investors would have to accept massive hits on their invested capital. The cold, hard reality of being blindsided and kicked to the curb in the smartphone business forced RIM/Blackberry to right-size, and they may yet have a profitable future as an enterprise facing software and services company. Uber would benefit from that form of sober mindedness, but I wouldn't hold my breath.

David Carl Grimes , December 12, 2017 at 6:57 am

The question is: Why did Softbank invest in Uber?

Michael Fiorillo , December 12, 2017 at 9:33 am

I know nothing about Softbank or its management, but I do know that the Japanese were the dumb money rubes in the late '80's, overpaying for trophy real estate they lost billions on.

Until informed otherwise, that's my default assumption

JimTan , December 12, 2017 at 10:50 am

Softbank possibly looking to buy more Uber shares at a 30% discount is very odd. Uber had a Series G funding round in June 2016 where a $3.5 billion investment from Saudi Arabia's Public Investment Fund resulted in its current $68 billion valuation. Now apparently Softbank wants to lead a new $6 billion funding round to buy the shares of Uber employees and early investors at a 30% discount from this last "valuation". It's odd because Saudi Arabia's Public Investment Fund has pledged $45 billion to SoftBank's Vision Fund , an amount which was supposed to come from the proceeds of its pending Aramco IPO. If the Uber bid is linked to SoftBank's Vision Fund, or KSA money, then its not clear why this investor might be looking to literally 'double down' from $3.5 billion o $6 billion on a declining investment.

Yves Smith Post author , December 12, 2017 at 11:38 am

SoftBank has not yet invested. Its tender is still open. If it does not get enough shares at a price it likes, it won't invest.

As to why, I have no idea.

Robert McGregor , December 12, 2017 at 7:04 am

"Growth and Efficiency" are the sine qua non of Neoliberalism. Kalanick's "hype brilliance" was to con the market with "revenue growth" and signs of efficiency, and hopes of greater efficiency, and make most people just overlook the essential fact that Uber is the most unprofitable company of all time!

divadab , December 12, 2017 at 7:19 am

What comprises "Uber Expenses"? 2014 – $1.06 billion; 2015 $3.33 billion; 2016 $9.65 billion; forecast 2017 $11.418 billion!!!!!! To me this is the big question – what are they spending $10 billion per year on?

ALso – why did driver share go from 68% in 2016 to 80% in 2017? If you use 68% as in 2016, 2017 Uber revenue is $11.808 billion, which means a bit better than break-even EBITDA, assuming Uber expenses are as stated $11.428 billion.

Perhaps not so bleak as the article presents, although I would not invest in this thing.

Phil in Kansas City , December 12, 2017 at 7:55 am

I have the same question: What comprises over 11 billion dollars in expenses in 2017? Could it be they are paying out dividends to the early investors? Which would mean they are cannibalizing their own company for the sake of the VC! How long can this go on before they'll need a new infusion of cash?

lyman alpha blob , December 12, 2017 at 2:37 pm

The Saudis have thrown a few billion Uber's way and they aren't necessarily known as the smart money.

Maybe the pole dancers have started chipping in too as they are for bitcoin .

Vedant Desai , December 12, 2017 at 10:37 am

Oh article does answer your 2nd question. Read this paragraph:-

Since mass driver defections would cause passenger volume growth to collapse completely , Uber was forced to reverse these cuts in 2017 and increased the driver share from 68% to 80%. This meant that Uber's corporate revenue, which had grown over 300% in 2015 and over 200% in 2016 will probably only grow by about 15% in 2017.

As for the 1st, read this line in the article:-

There are undoubtedly a number of things Uber could do to reduce losses at the margin, but it is difficult to imagine it could suddenly find the $4-5 billion in profit improvement needed merely to reach breakeven.

Louis Fyne , December 12, 2017 at 8:44 am

in addition to all the points listed in the article/comments, the absolute biggest flaw with Uber is that Uber HQ conditioned its customers on (a) cheap fares and (b) that a car is available within minutes (1-5 if in a big city).

Those two are not mutually compatible in the long-term.

Alfred , December 12, 2017 at 9:49 am

Thus (a) "We cost less" and (b) "We're more convenient" -- aren't those also the advantages that Walmart claims and feeds as a steady diet to its ever hungry consumers? Often if not always, disruption may repose upon delusion.

Martin Finnucane , December 12, 2017 at 11:06 am

Uber's business model could never produce sustainable profits unless it was able to exploit significant anti-competitive market power.

Upon that dependent clause hangs the future of capitalism, and – dare I say it? – its inevitable demise.

Altandmain , December 12, 2017 at 11:09 am

When this Uber madness blows up, I wonder if people will finally begin to discuss the brutal reality of Silicon Valley's so called "disruption".

It is heavily built in around the idea of economic exploitation. Uber drivers are often, especially when the true costs to operate an Uber including the vehicle depreciation are factored in, making not very much per hour driven, especially if they don't get the surge money.

Instacart is another example. They are paying the deliver operators very little.

Jim A. , December 12, 2017 at 12:21 pm

At a fundamental level, I think that the Silicon Valley "disruption" model only works for markets (like software) where the marginal cost for production is de minimus and the products can be protected by IP laws. Volume and market power really work in those cases. But out here in meat-space, where actual material and labor are big inputs to each item sold, you can never just sit back on your laurels and rake in the money. Somebody else will always be able to come and and make an equivalent product. If they can do it more cheaply, you are in trouble.

Altandmain , December 12, 2017 at 5:40 pm

There aren't that many areas in goods and services where the marginal costs are very low.

Software is actually quite unique in that regard, costing merely the bandwidth and permanent storage space to store.

Let's see:

1. From the article, they cannot go public and have limited ways to raise more money. An IPO with its more stringent disclosure requirements would expose them.

2. They tried lowering driver compensation and found that model unsustainable.

3. There are no benefits to expanding in terms of economies of scale.

From where I am standing, it looks like a lot of industries gave similar barriers. Silicon Valley is not going to be able to disrupt those.

Tesla, another Silicon Valley company seems to be struggling to mass produce its Model 3 and deliver an electric car that breaks even, is reliable, while disrupting the industry in the ways that Elon Musk attempted to hype up.

So that basically leaves services and manufacturing out for Silicon Valley disruption.

Joe Bentzel , December 12, 2017 at 2:19 pm

UBER has become a "too big to fail" startup because of all the different tentacles of capital from various Tier 1 VCs and investment bankers.

VCs have admitted openly that UBER is a subsidized business, meaning it's product is sold below market value, and the losses reflect that subsidization. The whole "2 sided platform" argument is just marketecture to hustle more investors. It's a form of service "dumping" that puts legacy businesses into bankruptcy. Back during the dotcom bubble one popular investment banker (Paul Deninger) characterized this model as "Terrorist Competition", i.e. coffers full of invested cash to commoditize the market and drive out competition.

UBER is an absolute disaster that has forked the startup model in Silicon Valley in order to drive total dependence on venture capital by founders. And its current diversification into "autonomous vehicles", food delivery, et al are simply more evidence that the company will never be profitable due to its whacky "blitzscaling" approach of layering on new "businesses" prior to achieving "fit" in its current one.

It's economic model has also metastasized into a form of startup cancer that is killing Silicon Valley as a "technology" innovator. Now it's all cargo cult marketing BS tied to "strategic capital".

UBER is the victory of venture capital and user subsidized startups over creativity by real entrepreneurs.

It's shadow is long and that's why this company should be ..wait for it UNBUNDLED (the new silicon valley word attached to that other BS religion called "disruption"). Call it a great unbundling and you can break up this monster corp any way you want.

Naked Capitalism is a great website.

Phil in KC , December 12, 2017 at 3:20 pm

1. I Agree with your last point.

2. The elevator pitch for Uber: subsidize rides to attract customers, put the competition out of business, and then enjoy an unregulated monopoly, all while exploiting economically ignorant drivers–ahem–"partners."

3. But more than one can play that game, and

4. Cab and livery companies are finding ways to survive!

Phil in KC , December 12, 2017 at 3:10 pm

If subsidizing rides is counted as an expense, (not being an accountant, I would guess it so), then whether the subsidy goes to the driver or the passenger, that would account for the ballooning expenses, to answer my own question. Otherwise, the overhead for operating what Uber describes as a tech company should be minimal: A billion should fund a decent headquarters with staff, plus field offices in, say, 100 U.S. cities. However, their global pretensions are probably burning cash like crazy. On top of that, I wonder what the exec compensation is like?

After reading HH's initial series, I made a crude, back-of-the-envelope calculation that Uber would run out of money sometime in the third fiscal quarter of 2018, but that was based on assuming losses were stabilizing in the range of 3 billion a year. Not so, according to the article. I think crunch time is rapidly approaching. If so, then SoftBank's tender offer may look quite appetizing to VC firms and to any Uber employee able to cash in their options. I think there is a way to make a re-envisioned Uber profitable, and with a more independent board, they may be able to restructure the company to show a pathway to profitability before the IPO. But time is running out.

A not insignificant question is the recruitment and retention of the front line "partners." It would seem to me that at some point, Uber will run out of economically ignorant drivers with good manners and nice cars. I would be very interested to know how many drivers give up Uber and other ride-sharing gigs once the 1099's start flying at the beginning of the year. One of the harsh realities of owning a business or being an contractor is the humble fact that you get paid LAST!

Jan Stickle , December 12, 2017 at 5:00 pm

We became instant Uber riders while spending holidays with relatives in San Diego. While their model is indeed unique from a rider perspective, it was the driver pool that fascinates me. These are not professional livery drivers, but rather freebooters of all stripes driving for various reasons. The remuneration they receive cannot possibly generate much income after expenses, never mind the problems associated with IRS filing as independent contractors.

One guy was just cruising listening to music; cooler to get paid for it than just sitting home! A young lady was babbling and gesticulating non stop about nothing coherent and appeared to be on some sort of stimulant. A foreign gentleman, very professional, drove for extra money when not at his regular job. He was the only one who had actually bought a new Prius for this gig, hoping to pay it off in two years.

This is indeed a brave new world. There was a period in Nicaragua just after the Contra war ended when citizens emerged from their homes and hit the streets in large numbers, desperately looking for income. Every car was a taxi and there was a bipedal mini Walmart at every city intersection as individuals sold everything and anything in a sort of euphoric optimism towards the future. Reality just hadn't caught up with them yet .

[Dec 05, 2017] House Members Tee Up Bipartisan Bill to Kill CFPB Payday Lending Rule

Notable quotes:
"... By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans. ..."
"... The Unbanking of America: How the New Middle Class Survives ..."
Dec 05, 2017 | www.nakedcapitalism.com

Posted on December 4, 2017 by Jerri-Lynn Scofield By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

Three Democrats and three Republicans have co-sponsored a resolution, under the Congressional Review Act (CRA), to scuttle the Consumer Financial Protection Bureau's payday lending rule.

CRA's procedures to overturn regulations had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (as I've previously discussed (see here , here , here and here ). Not only does CRA provide expedited procedures to overturn regulations, but once it's used to kill a regulation, the agency that promulgated the rule is prevented from revisiting the issue unless and until Congress provides new statutory authority to do so.

Payday Lending

As I wrote in an extended October post, CFPB Issues Payday Lending Rule: Will it Hold, as the Empire Will Strike Back, payday lending is an especially sleazy part of the finance sewer, in which private equity swamp creatures, among others, operate. The industry is huge, according to this New York Times report I quoted in my October post, and it preys on the poorest, most financially-stressed Americans:

The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald's restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.

The CFPB's payday lending rule attempted to shut down this area of lucrative lending– where effective interest rates can spike to hundreds of points per annum, including fees (I refer interested readers to my October post, cited above, which discusses at greater length how sleazy this industry is, and also links to the rule; see also this CFPB fact sheet and press release .)

Tactically, as with the ban on mandatory arbitration clauses in consumer financial contracts– an issue I discussed further in RIP, Mandatory Arbitration Ban , (and in previous posts referenced therein), the CFPB under director Richard Cordray made a major tactical mistake in not completing rule-making sufficiently before the change of power to a new administration- 60 "session days" of Congress, thus making these two rules subject to the CRA.

The House Financial Services Committee press release lauding introduction of CRA resolution to overturn the payday lending rule is a classic of its type, so permit me to quote from it at length:

These short-term, small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB's rule would mark the first time the federal government has gotten involved in the regulation of these loans.

.

House Financial Services Committee Chairman Jeb Hensarling (R-TX), a supporter of the bipartisan effort, said the CFPB's rule is an example of how "unelected, unaccountable government bureaucracy hurts working people."

"Once again we see powerful Washington elites using the guise of 'consumer protection' to actually harm consumers and make life harder for lower and moderate income Americans who may need a short-term loan to keep their utilities from being cut off or to keep their car on the road so they can get to work," he said. "Americans should be able to choose the checking account they want, the mortgage they want and the short-term loan they want and no unelected Washington bureaucrat should be able to take that away from them."

[Rep Dennis Ross, a Florida Republican House co-sponsor]. said, "More than 1.2 million Floridians per year rely on Florida's carefully regulated small-dollar lending industry to make ends meet. The CFPB's small dollar lending rule isn't reasonable regulation -- it's a de facto ban on what these Floridians need. I and my colleagues in Congress cannot stand by while an unaccountable federal agency deprives our constituents of a lifeline in times of need, all while usurping state authority. Today, we are taking bipartisan action to stop this harmful bureaucratic overreach dead in its tracks."

As CNBC reports in New House bill would kill consumer watchdog payday loan rule , industry representatives continue to denounce the rule, with a straight face:

"The rule would leave millions of Americans in a real bind at exactly the time need a fast loan to cover an urgent expense," said Daniel Press, a policy analyst with the Competitive Enterprise Institute, in a statement after the bill's introduction.

Consumer advocates think otherwise (also from CNBC):

"Payday lenders put cash-strapped Americans in a crippling cycle of 300 percent-interest loan debt," Yana Miles, senior legislative counsel at the Center for Responsible Lending, said in a statement.

Prospects Under CRA

When I wrote about this topic in October, much commentary assumed that prospects for CRA overturn were weak. I emphasized instead the tactical error of failing to insulate the rule from CRA, which could have been done if the CFPB had pushed the rule through well before Trump took office:

If the payday rule had been promulgated in a timely manner during the previous administration it would not have been as vulnerable to a CRA challenge as it is now. Even if Republicans had then passed a CRA resolution of disapproval, a presidential veto would have stymied that. Trump is an enthusiastic proponent of deregulation, who has happily embraced the CRA– a procedure only used once before he became president to roll back a rule.

Now, the Equifax hack may have changed the political dynamics here and made it more difficult for Congressional Republicans– and finance-friendly Democratic fellow travellers– to use CRA procedures to overturn the payday lending rule.

The New York Times certainly seems to think prospects for a CRA challenge remote:

The odds of reversal are "very low," said Isaac Boltansky, the director of policy research at Compass Point Research & Trading.

"There is already C.R.A. fatigue on the Hill," Mr. Boltansky said, using an acronymn for the act, "and moderate Republicans are hesitant to be painted as anti-consumer.

I'm not so sure I would take either side of that bet. [Jerri-Lynn here: my subsequent emphasis.]

A more telling element than CRA-fatigue in my assessment of the rule's survival prospects was my judgment that Democrats wouldn't muster to defend the payday lending industry– although that assumption has not fully held, as this recent American Banker account makes clear:

After the payday rule was finalized in October , it was widely expected that Republicans would attempt to overturn it. It's notable, though, that the effort has attracted bipartisan support in the House.

.

Passage in the Senate, however, may be a much heavier lift. The chamber's vote to overturn the arbitration rule in late October came down to the wire, forcing Republicans to call in Vice President Mike Pence to cast the tie-breaking vote.

Bottom Line

I continue to think that this rule will survive– as the payday lending industry cannot count on a full court press lobbying effort by financial services interests. Yet as I wrote in October, I still hesitate to take either side of the bet on this issue.

Dpfaef , December 4, 2017 at 10:53 am

I think this whole article is totally disingenuous. There is a serious need for many Americans to have access to small amount, short term loans. While, these lenders may appear predatory, they do serve a large sector of society.

Maybe you need to read: The Unbanking of America: How the New Middle Class Survives by Lisa Servon . It might be worth the read.

GF , December 4, 2017 at 11:02 am

Where's the Post Office Bank when you need it. This overturning of the rule is just an effort to stop the Post Office Bank from gaining traction as the alternative non-predatory source of small loans to the people. Most pay day lender companies are owned by large financial players.

Jerri-Lynn Scofield Post author , December 4, 2017 at 11:11 am

I agree that's a far better approach and indeed, I discussed the Post Office bank in my October post– which is linked to in today's post. Permit me to quote from my earlier post:

The payday lending industry preys on the poorest financial consumers. One factor that has allowed it to flourish is current banking system's inability to provide access to basic financial services to a shocking number of Americans. Approximately 38 million households are un or underbanked– roughly 28% of the population.

Now, a sane and humane political system would long ago have responded with direct measures to address that core problem, such as a Post Office Bank (which Yves previously discussed in this post, Mirabile Dictu! Post Office Bank Concept Gets Big Boost and which have long existed in other countries.)

Regular readers are well aware of who benefits from the current US system, and why the lack of institutions that cater to the basic needs of financial consumers rather than focusing on extracting their pound(s) of flesh is not a bug, but a feature.

So, instead, the United States has a wide-ranging payday lending system. Which charges borrowers up to 400% interest rates for short-term loans, many of which are rolled over so that the borrower becomes a prisoner of the debt incurred.

Wisdom Seeker , December 4, 2017 at 3:23 pm

With phrasing like "unbanked" or "underbanked", I worry that you've bought into the banking-industry framing of this issue, which I'm sure is not your intent.

Ordinary people should not need any bank (not even a government or post office bank) for everyday life, with the possible exception of mortgages. De-financialization of the medium of exchange, and basic payments, is something the public should be fighting for.

lyman alpha blob , December 4, 2017 at 3:30 pm

I would consider myself an ordinary person and I pay in cash when purchasing day to day items the vast majority of the time and yet I'd still prefer to deposit my money in a bank rather than hiding it in my mattress for any number of good reasons.

Banks aren't the problem – their predatory executives are.

Wisdom Seeker , December 4, 2017 at 3:44 pm

But there are, or at least ought to be, safe and secure ways to store money other than by lending it to banks or stuffing it into mattresses. Or carrying wads of cash.

For instance, a debit card (or possibly cell phone) with a secure identity / password can already act as a cashless wallet. The digital cash could be stored directly on the device, and accounted for through something similar to TreasuryDirect, without any intermediaries. But this would require the Federal Government to get serious about having a modern Digital Dollar of some kind (not bitcoin, shudder)

Cary D Berkelhamer , December 4, 2017 at 4:32 pm

Even better would be State Banks. Every state should have one. I believe the State Bank of North Dakota made money in 2008. While the TBTF Banks came hat in hand to our Reps. Of course OUR Reps handed them a blank check and told them to "Make it go Away". However Post Office Banks would be GREAT!!

diptherio , December 4, 2017 at 11:08 am

This is the boilerplate argument that always gets brought up by payday loan defenders, and there is a good bit of truth to it. However, what you are not mentioning is that there are already far superior options available to pretty much any person who needs a small, short term loan. That solution is your friendly neighborhood Credit Union, most of which offer very low interest lines of overdraft coverage. I don't mind saying that it has saved my heiny on more than one occasion. Pay check a little late in arriving? No problem, transfer $200 from your overdraft account into your checking account on-line and you're good to go. Pay it back at your convenience, also on-line, at 7% APR.

Payday lenders are legal loansharks. The problems with their predatory lending model and the damage it does to low-income people are well documented. Simply pointing out that there is a reason that people end up at payday lenders is not a valid justification for the business practices of those lenders, especially when there are much better alternatives readily available.

Vatch , December 4, 2017 at 11:19 am

Payday lenders are legal loansharks.

Very true! There are several web sites that point out how the fees associated with payday loans raise the effective annual percentage rate into the stratosphere, ranging from 300% to over 600%. Here's one:

http://paydayloansonlineresource.org/average-interest-rates-for-payday-loans/

Off The Street , December 4, 2017 at 12:10 pm

One frustration that I have with legislation in general, and finance legislation in particular, is that it does not tell the truth, the whole truth and nothing but the truth.

In my Panglossian world, I envision a financial services bill that lays out the following:

Define the problem
Unserviced people: X percent( for discussion, say 10% to make the math easy) of people are un-serviced (or under-, or rapaciously-serviced) by conventional financial companies, whether banks, credit unions or other, whatever other is conventionally.
Unserviced and don't want: Y percent of that X percent (say, 50% of 10%, so 5%) doesn't want services.
Unserviced and want: 1-Y percent of that X percent (say, 50% of 10%, so 5%) wants services but can not get them. That could be due to various factors, ranging from bad credit (how defined?, say FICO < 600?) to geographic remoteness (no branches within miles, no internet, precious little slow mail service, whatever).

Within that deemed unserved 5% of the population, what are the costs to serve and what are the alternatives?

What would an honest service provider need to provide service, accounting for credit risks and the like, and still make a profit sufficient to induce investment?

If I knew how to make and add a nice graphic, I'd include a waterfall chart here to show the costs and components of the interest and fees paid in regular and default mode. Sorry, please bear with me as I make up numbers.

Regular costs
Interest at 30%
Less: cost of funds at, say, 10%
Less: personnel, overhead, everything else at, say, 5%
Pre-tax profit: 15%

Default mode costs:
Interest at 275%
Plus: Fees at 25%
Less: cost of funds 20%
Less: personnel, overhead, etc 5%
Less: added default cost not in personnel etc line, say 25%
Pre-tax profit: 250%

In that little example, who couldn't make money at those rates?

Extending the notion of APR and Truth-In-Lending to include payday lenders and anyone else without a brick-and-mortar branch who wants to do business in the US, how about mandating some type of honest waterfall chart as dreamt of above?

Then cross-reference and publicize the voting on finance legislation with the campaign contributions from payday people and their ilk, and layer in the borrower costs and credit scores and other metrics in those Congressional districts and zip+4 codes and census tracts and whatever other level of granularity will help provide any amount of disinfecting sunlight to help see the scattering cockroaches.

a different chris , December 4, 2017 at 12:57 pm

The problem I suspect is that your "friendly neighborhood credit union" is actually rarely anywhere near the neighborhoods where people who need these kind of loans live.

They don't have cars and mass transit is non-existent or so slow they couldn't get to the Credit Union during business hours, and back again, anyway. That's the problem with expecting Private Enterprise to be a solution for people at the bottom. They don't set up shop where those people live, or the ones that do are not exactly do-gooders.

lyle , December 4, 2017 at 7:33 pm

I just checked and a lot of credit unions let you apply for a loan online, (earlier you can set up membership online). So the issue of transport and time is lessened assuming folks have some form of net access.

JTMcPhee , December 4, 2017 at 1:04 pm

One might ask why there are millions of people reduced to having to get ripped off by payday and auto-title lenders, to somehow survive from week to week. Maybe because people can't make a living wage? Can't save any money, however prudent and abstemious they may be? Because inter-citizen cruelty and Calvinism are so very strong a force in this rump of an Empire?

Some of the comments here seem to build on the baseline assumption that's part of the liberal-neoliberal mantra, "You get what's coming to you (or the pittance we can't quite squeeze out of you yet)".

diptherio, I am guessing you may mean that there are models of better alternatives readily available, like paying a living wage, a social safety net for the worst off, a postal bank, national health care, stuff like that. I don't see that there are any alternatives actually available to most real people "on the ground."

Wukchumni , December 4, 2017 at 1:08 pm

There is an alternative to excessive payday loans, but only if you're in the military, where it's capped @ 36%.

Why not 36% for everybody?

diptherio , December 4, 2017 at 1:27 pm

You are, of course, correct in that the underlying problem is that so many people are forced to live on so little that they need payday loans in the first place. Thanks for pointing that out.

My point is simply that in the short-term, as a matter of practicality for those of us who don't always make it until payday before running out of money, a CU overdraft account is a very good option.

mpalomar , December 4, 2017 at 1:36 pm

Agree. The AB article from October deadpans a description of the ins and outs governing the hellishness of the company town we're living in.

lyman alpha blob , December 4, 2017 at 1:32 pm

This is a far superior option and thank you for bringing it up. The only problem is most banks and credit unions will not tell you it exists because they make a lot more money if you just keep bouncing checks.

I only learned about it when I worked for WAMU. We were tasked by management with promoting various new products to customers as a condition of being paid a monthly bonus which was the only thing that made the job pay enough to live on. Funny, they never asked us to promote the overdraft line of credit (aka an ODLOC), ever. I do remember one of my managers tell me that circa 2000 or so, WAMUs operating costs for the entire company for the entire year were offset just by the fees they collected off of bounced checks etc.

The fees or interest you pay for using an ODLOC are a small fraction of what you'd pay for bouncing just one check. IIRC, if I overdrew by $200 or so and paid it back on my next payday, the interest was generally less than $1. My local credit union has since added a $5 fee for accessing the ODLOC on top of the interest, but it's still much less than a bounced check fee or interest on a payday loan. I believe that depending on your credit history, you can get an ODLOC of up to $2500 or so which pretty much negates the need for any payday loans.

sd , December 4, 2017 at 11:14 am

A friend of mine was evicted from her apartment because of a payday loan. She failed to pay it off in full quick enough and it spiraled out of control tripling in a very short time. I really fail to see how usury is beneficial to society.

RepubAnon , December 4, 2017 at 11:55 am

Yes, there's a need for high-interest loans that bankrupt borrowers:

Mom-and-Pop Loan Sharks Being Driven Out by Big Credit Card Companies

Frank Pistone is part of the dying breed known as the American Loan Shark. Not so long ago, the loan shark flourished, offering short-term, high-interest loans to desperate people with nowhere else to turn. Today, however, Pistone and countless others like him are being squeezed out by the major credit-card companies, which can offer money to the down-and-out at lower rates of interest and without the threat of bodily harm

FluffytheObeseCat , December 4, 2017 at 12:25 pm

I read Servon's book. It is not a brief on behalf of the payday loan industry. She worked at a couple of payday lenders and explains how they serve the communities they're in, but a few things need to be noted:

The business she was most sympathetic with was a small, local one with only a couple of storefronts, in an east coast inner city. The owner and his help knew the customer base, often by name. Much of her sympathy came from her respect for the women who were dishing out the loans at the windows, not the owners and not the business model. This local joint operated like the most benign of old time pawnbroker/loansharking operation from the early part of the last century.

Most "Cash America" storefront shops (on shabby, midcentury shopping strips in inner ring scuburbs across the US) aren't this decent. They aren't "part of a community" in any sense. And the rates are usurious any way, for all of them.

Thank you to Ms. Scofield for continuing to cover this and related businesses. The upper, cleaner part of our finance industry derives more filthy lucre from these kinds of loan shops than they ever want you to know (sub-prime lending shops, title loans shops . there are a lot of modalities for fleecing the poor and the near-poor nowadays).

JTMcPhee , December 4, 2017 at 12:35 pm

The NC staff must be pleased that it seems like so many subtle apologists for the looters, predators, "intelligence community," and so forth, appear to be turning up here early in the opening of new site posts. I'm guessing the Elite are not exactly quaking in fear that NC's reporting will catalyze some change that might sweep the political economy in the direction of what the mopery would categorize as "fairness," but still

ger , December 4, 2017 at 12:42 pm

Raised the dollar definition of middle class and declared a 'new middle class' or could it be 'new middle class' is actually referring to the 'new middle poor'. The former middle class is desperately trying to avoid a plunge into the pits of the 'poor poor'. Payday Loan predators are greasing the handrails.

Matthew Cunningham-Cook , December 4, 2017 at 3:15 pm

"Where will the money-changers change money if not in the Holy Temple? Aren't we starving the priests of much-needed revenue? This Jesus guy is totally disingenuous."

John , December 4, 2017 at 9:32 pm

In good neo liberal fashion that Jesus dude got exactly what he deserved. The effrontry of that guy to chase those hard working money lenders out of the temple square. Got exactly what was coming to him.

sd , December 4, 2017 at 11:11 am

H.J.Res.122 – Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Bureau of Consumer Financial Protection relating to "Payday, Vehicle Title, and Certain High-Cost Installment Loans".

December 1, 2017

Sponsor Rep. Ross, Dennis A. [R-FL-15] (Introduced 12/01/2017)
Rep. Hastings, Alcee L. [D-FL-20]
Rep. Graves, Tom [R-GA-14]
Rep. Cuellar, Henry [D-TX-28]
Rep. Stivers, Steve [R-OH-15]
Rep. Peterson, Collin C. [D-MN-7]

perpetualWAR , December 4, 2017 at 12:21 pm

Ahhh ..look at this list. TWO Florida lawbreakers introducing this banker bill. And one from Minnesota. Y'all know that Jacksonville, FL and St. Paul, MN are the two places where the forgeries continue to be provided to the financial crooks? So, it goes to figure that the lawbreakers are attempting to protect the financial crooks committing forgery in their prospective states! How appro.

jawbone , December 4, 2017 at 1:44 pm

If any of these House critters are "representing" you, time for lots of calls to them.

And thanks, SD, for listing them. I always wonder why our vaunted free press so seldom lists the sponsors of legislation when it's reported on . Hhmm .
m .

Mike R. , December 4, 2017 at 1:19 pm

I have mixed feelings about this specific issue.
The larger issue of a grossly skewed economic system is what needs to be fixed.
There will always be people that lack common sense and brains regarding money. There will always be people that will take advantage of that.
I don't know how or why you would try and legislate that away.
We need to move in the direction of solving the biggest problems and not get wrapped up in the little problems.
The numbers above sound horrendous, but 7 billion in profit on 46 billion loaned is 14% return. Credit card companies are worse. 7 billion in profit off of 12 million people is $600 per person. Alot for poor folks I recognize, but not necessarily life shattering for all.

The "system" loves to wrangle around with issues like this (trivial in my mind) so the handful of big ones go unattended.

nonclassical , December 4, 2017 at 1:46 pm

some have apparently not felt it necessary to bail out family members for aggressive, egregious and immediate interest rates and escalations charged by these scammers

but there certainly appears concerted effort by (likely) shills to perpetuate scams (and to discredit Consumer Financial Protection Agency and Liz Warren )

Warren-Sanders 2020

Wisdom Seeker , December 4, 2017 at 3:37 pm

I think there's an error in the original article, where it says:

CRA's procedures to overturn legislation had been invoked, successfully, only once before Trump became president. Congressional Republicans and Trump have used CRA procedures multiple times to kill regulations (emphasis added)

My understanding is that CRA gives Congress the power to overturn executive branch regulations , not legislation (which Congress already can overturn anyway). Is that incorrect?

P.S. It's sad that it might not even matter. Nowadays the public can't tell the difference between regulations (written by unaccountable, unelected officials who take the revolving door back to working at the firms they regulated) and legislation (written by unaccountable, only notionally elected politicians who get paid off in various ways by lobbyists for the same firms)

Jerri-Lynn Scofield Post author , December 4, 2017 at 8:07 pm

You're correct– fixed it! Slip of the fingers there that I didn't catch when I proofread the post. As the rest of the paragraph makes clear, CRA procedures are used to overturn regulations.

Thanks for reading my work so carefully and drawing the error to my attention.

John k , December 4, 2017 at 8:26 pm

Finally bipartisan!
Trump loves it
Obomber woulda loved it
She who cannot be named woulda loved it, too.
Time for them all to get over that little spat she did it before trump should appoint her to something useful I bet she'd love secdef

Taras 77 , December 4, 2017 at 10:40 pm

Where is the lovely Debbie Wasserman schultz in all of this? She has not surprisingly been a leading cheerleader for these pay day lender sharks. but hey, what the hey, the lobby money is good!

[Dec 05, 2017] Inside Casino Capitalism by Max Holland

Notable quotes:
"... Barbarians at the Gate: The Fall of RJR Nabisco ..."
"... The Wall Street Journal ..."
"... The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire ..."
"... Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll. ..."
"... the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles ..."
"... Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development. ..."
"... The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains. ..."
Washington DeCoded

Inside Casino Capitalism Barbarians at the Gate: The Fall of RJR Nabisco
By Bryan Burrough and John Helyar
Harper & Row. 528 pp. $22.95

In 1898, Adolphus Green, chairman of the National Biscuit Company, found himself faced with the task of choosing a trademark for his newly formed baking concern. Green was a progressive businessman. He refused to employ child labor, even though it was then a common practice, and he offered his bakery employees the option to buy stock at a discount. Green therefore thought that his trademark should symbolize Nabisco's fundamental business values, "not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States." Eventually he decided that a cross with two bars and an oval – a medieval symbol representing the triumph of the moral and spiritual over the base and material – should grace the package of every Nabisco product.

If they had wracked their brains for months, Bryan Burrough and John Helyar could not have come up with a more ironic metaphor for their book. The fall of Nabisco, and its corporate partner R.J. Reynolds, is nothing less than the exact opposite of Green's business credo, a compelling tale of corporate and Wall Street greed featuring RJR Nabisco officers who first steal shareholders blind and then justify their epic displays of avarice by claiming to maximize shareholder value.

The event which made the RJR Nabisco story worth telling was the 1988 leveraged buyout (LBO) of the mammoth tobacco and food conglomerate, then the 19th-largest industrial corporation in America. Battles for corporate control were common during the loosely regulated 1980s, and the LBO was just one method for capturing the equity of a corporation. (In a typical LBO, a small group of top management and investment bankers put 10 percent down and finance the rest of their purchase through high-interest loans or bonds. If the leveraged, privately-owned corporation survives, the investors, which they can re-sell public shares, reach the so-called "pot of gold"; but if the corporation cannot service its debt, everything is at risk, because the collateral is the corporation itself.

The sheer size of RJR Nabisco and the furious bidding war that erupted guaranteed unusual public scrutiny of this particular piece of financial engineering. F. Ross Johnson, the conglomerate's flamboyant, free-spending CEO (RJR had its own corporate airline), put his own company into play with a $75-a-share bid in October. Experienced buyout artists on Wall Street, however, immediately realized that Johnson was trying to play two incompatible games. LBOs typically put corporations such as RJR Nabisco through a ringer in order to pay the mammoth debt incurred after a buyout. But Johnson, desiring to keep corporate perquisites intact, "low-balled" his offer. Other buyout investors stepped forward with competing bids, and after a six-week-long auction the buyout boutique of Kohlberg, Kravis, Roberts & Company (KKR) emerged on top with a $109-a-share bid. The $25-billion buyout took its place as one of the defining business events of the 1980s

Burrough and Helyar, who covered the story for The Wall Street Journal, supply a breezy, colorful, blow-by-blow account of the "deal from hell" (as one businessman characterized a leveraged buyout). The language of Wall Street, full of incongruous "Rambo" jargon from the Vietnam War, is itself arresting. Buyout artists, who presumably never came within 10,000 miles of wartime Saigon, talk about "napalming" corporate perquisites or liken their strategy to "charging through the rice paddies, not stopping for anything and taking no prisoners."

At the time, F. Ross Johnson was widely pilloried in the press as the embodiment of excess; his conflict of interest was obvious. Yet Burrough and Helyar show that Johnson, for all his free-spending ways, was way over his head in the major leagues of greed, otherwise known as Wall Street in the 1980s. What, after all, is more rapacious: the roughly $100 million Johnson stood to gain if his deal worked out over five years, or the $45 million in expenses KKR demanded for waiting 60 minutes while Ross Johnson prepared a final competing bid?

Barbarians is, in the parlance of the publishing world, a good read. At the same time, unfortunately, a disclaimer issued by the authors proves only too true. Anyone looking for a definitive judgment of LBOs will be disappointed. Burrough and Helyar do at least ask the pertinent question: What does all this activity have to do with building and sustaining a business? But authors should not only pose questions; they should answer them, or at least try.

Admittedly, the single most important answer to the RJR puzzle could not be provided by Burrough and Helyar because it is not yet known. The major test of any financial engineering is its effect on the long-term vitality of the leveraged corporation, as measured by such key indicators as market share (and not just whether the corporation survives its debt, as the authors imply). However, a highly-leveraged RJR Nabisco is already selling off numerous profitable parts of its business because they are no longer a "strategic fit": Wall Street code signifying a need for cash in order to service debts and avoid bankruptcy.

If the authors were unable to predict the ultimate outcome, they still had a rare opportunity to explain how and why an LBO is engineered. Unfortunately, their fixation on re-creating events and dialogue – which admittedly produces a fast-moving book – forced them to accept the issues as defined by the participants themselves. There is no other way to explain the book's uncritical stance. When, for example, the RJR Nabisco board of directors tried to decide which bid to accept, Burrough and Helyar report that several directors sided with KKR's offer because the LBO boutique "knew the value of keeping [employees] happy." It is impossible to tell from the book whether the directors knew this to be true or took KKR's word. Even a cursory investigation would have revealed that KKR is notorious for showing no concern for employees below senior management after a leveraged buyout.

The triumph of gossip over substance is manifest in many other ways. Wall Street's deft manipulation of the business press is barely touched upon, and the laissez-faire environment procured by buyout artists via their political contributions is scarcely mentioned, crucial though it is. Nowhere are the authors' priorities more obvious than in the number of words devoted to Henry Kravis's conspicuous consumption compared to those devoted to the details of the RJR deal. In testimony before Congress last year, no less an authority than Treasury Secretary Nicholas Brady – himself an old Wall Street hand – noted that the substitution of tax-deductible debt for taxable income is "the mill in which the grist of takeover premiums is ground."

In the case of RJR Nabisco, 81 percent of the $9.9 billion premium paid to shareholders was derived from tax breaks achievable after the buyout. This singularly important fact cannot be found in the book, however; nor will a reader learn that after the buyout the U.S. Treasury was obligated to refund RJR as much as $1 billion because of its post-buyout debt burden. In Barbarians, more time is spent describing Kravis's ostentatious gifts to his fashion-designer wife than to the tax considerations that make or break these deals.

Fulminations about the socially corrosive effects of greed aside, the buyout phenomenon may represent one of the biggest changes in the way American business is conducted since the rise of the public corporation, nothing less than a transformation of managerial into financial capitalism. The ferocious market for corporate control that emerged during the 1980s has few parallels in business history, but there are two: the trusts that formed early in this century and the conglomerate mania that swept corporate America during the 1960s. Both waves resulted in large social and economic costs, and there is little assurance that the corporate infatuation with debt will not exact a similarly heavy toll.

As the economist Henry Kaufman has written, the high levels of debt associated with buyouts and other forms of corporate restructuring create fragility in business structures and vulnerability to economic cycles. Inexorably, the shift away from equity invites the close, even intrusive involvement of institutional investors (banks, pension funds, and insurance companies) that provide the financing. Superficially, this moves America closer to the system that prevails in Germany and Japan, where historically the relationship between the suppliers and users of capital is close. But Germany and Japan incur higher levels of debt for expansion and investment, whereas equivalent American indebtedness is linked to the recent market for corporate control. That creates a brittle structure, one that threatens to turn the U.S. government into something of an ultimate guarantor if and when things do fall about. It is too easy to construct a scenario in which corporate indebtedness forces the federal government into the business of business. The savings-and-loan bailout is a painfully obvious harbinger of such a development.

The many ramifications of the buyout mania deserve thoughtful treatment. Basic issues of corporate governance and accountability ought to be openly debated and resolved if the American economy is to deliver the maximum benefit to society and not just unconscionable rewards to a handful of bankers, all out of proportion to their social productivity. It is disappointing, but a sign of the times, that the best book about the deal of deals fails to educate as well as it entertains.

[Nov 29, 2017] Positive Feedback Loops, Financial Instability, The Blind Spot Of Policymakers

Highly recommended!
Notable quotes:
"... Primates with about exponentially increasing physical technologies continue to deliberately ignore and misunderstand themselves as much as is humanly possible, due to the history of warfare making and maintaining the currently existing political economy, whose maliciousness is manifesting through runaway vicious feedback loops, whereby the excessively successful control of Civilization through applications of the methods of organized crime are resulting in that Civilization manifesting runaway criminal insanities. Indeed, in that context, where there is almost nothing but the central core of triumphant organized crime, namely bankster dominated governments, surrounded by various layers of controlled "opposition" groups, which stay within the same bullshit-based frames of reference regarding those phenomena, the overall situation is that society becoming about exponentially sicker and insane. ..."
"... In general, "Asset Managers" are stuck inside taking for granted that everything they do has become almost totally based on being able to enforce frauds, despite some of them noticing the increasingly blatant ways that there are accumulating apparent anomalies in those systems, as vicious feedback loops drive those systems to become about exponentially more fraudulent, and therefore increasingly unbalanced. To come to better terms with those apparent anomalies requires going through series of intellectual scientific revolutions and profound paradigm shifts, which overall become ways that human beings better understand themselves as manifestations of general energy systems. However, since doing so requires recognizing how and why governments are necessarily the biggest forms of organized crime, dominated by the best organized gangsters, the banksters, it continues to be politically impossible to accomplish that. ..."
"... At each open, algos compute the increase in their AUM from the prior day and their margin reach. They then begin buying. All algos do this. Buying whenever cash/margin exists; selling whenever profit targets exist. On pullbacks, the algos withdraw, volume evaporates, minimizing the drop. The algos collectively increase equity prices without consideration of the value of the money involved. Not valuations. No fundamentals. Just ones and zeroes. Just a program. ..."
Nov 22, 2017 | www.zerohedge.com

Macro-prudential regulations follow financial crises, rarely do they precede one. Even when evidence is abundant of systemic risks building up, as is today, regulators and policymakers have a marked tendency to turn an institutional blind eye, hoping for imbalances to fizzle out on their own – at least beyond the duration of their mandates. It does not work differently in economics than it does for politics, where short-termism drives the agenda, oftentimes at the expenses of either the next government, the broader population or the next generation.

It does not work differently in the business world either, where corporate actions are selected based on the immediate gratification of shareholders, which means pleasing them at the next round of earnings, often at the expenses of long-term planning and at times exposing the company itself to disruption threats from up-and-comers.

Long-term vision does not pay; it barely shows up in the incentive schemes laid out for most professions . Economics is no exception. Orthodoxy and stillness preserve the status quo, and the advantages hard earned by the few who rose from the ranks of the establishment beforehand.

Yet, when it comes to Central Banking, and more in general policymaking, financial stability should top the priority list. It honorably shows up in the utility function, together with price stability and employment, but is not pursued nearly as actively as them. Central planning and interventionism is no anathema when it comes to target the decimals of unemployment or consumer prices, yet is residual when it comes to master systemic risks, relegated to the camp of ex-post macro-prudential regulation. This is all the more surprising as we know all too well how badly a deep unsettlement of financial markets can reverberate across the real economy, possibly leading into recessions, unemployment, un-anchoring of inflation expectations and durable disruption to consumer patterns. There is no shortage of reminders for that in the history books, looking at the fallout of dee dives in markets in 1929, 2000 and 2007, amongst others.

Intriguingly, the other way round is accepted and even theorized. Manipulating bond and stock prices, directly or indirectly, is mainstream policy theory today. From Ben Bernanke's 'portfolio balance channel theory', to the relentless pursuit of the 'wealth effect' via financial repression under Janet Yellen and Haruhiko Kuroda, to Mario Draghi tackling the fragmentation of credit markets across the EU via direct asset purchases, the practice has become commonplace. To some, like us, the 'wealth effect' may be proving to be more of an 'inequality effect' than much, leading to populism and constantly threatening regime change, but that is beyond the scope of this note today.

What we want to focus on instead is the direct impact that monetary interventionism like Quantitative Easing ('QE') and Negative or Zero Interest Rate Policies ('NIRP' or 'ZIRP') have on the structure of the market itself, how they help create a one-sided investment community, oftentimes long-only, fully invested when not levered up, relying on record-highs for bonds and stocks to perpetuate themselves endlessly - despite a striking disconnect from fundamentals, life-dependent on the lowest levels of volatility ever seen in history . The market structure morphed under the eyes of policymakers over the last few years, to become a pressure cooker at risk of blowing-up, with a small but steadily growing probability as times goes by and the bubble inflates. The positive feedback loops between monetary flooding and the private investment community are culpable for transforming an ever present market risk into a systemic risk, and for masking as peaceful what is instead an unstable equilibrium and market fragility.

Positive Feedback Loops create divergence from general equilibrium, and Systemic Risks

Positive feedback loops , in finance like in biology, chemistry, cybernetics, breed system instability, as they orchestrate a further divergence from equilibrium . An unstable equilibrium is defined as one where a small disturbance is sufficient to trigger a large adjustment.

QE and NIRP have two predominant effects on markets: (i) relentless up-trend in stocks and bonds (the 'Trend Factor') , dominated by the buy-the-dip mentality, which encapsulates the 'moral hazard' of investors knowing Central Banks are prompt to come to their rescue (otherwise known as 'Bernanke/Yellen/Kuroda/Draghi put'), and (ii) the relentless down-trend in volatility the 'Volatility Factor').

Two Factors Explain All: Trend and Volatility

The most fashionable investment strategies these days are directly impacted by either one or both of these drivers. Such strategies make the bulk of the overall market, after leverage or turnover is taken into account : we will refer to them in the following as 'passive' or 'quasi-passive' . The trend impacts the long-only community, crowning it as a sure winner, making the case for low- cost passive investing. The low volatility permeates everything else, making the case for full- investment and leverage.

The vast majority of investors these days are not independent from the QE environment they operate within : ETFs and index funds, Risk Parity funds and Target Volatility vehicles, Low Volatility / Short Volatility vehicles, trend-chasing algos, Machine Learning-inspired funds, behavioral Alternative Risk Premia funds. They are the poster children of the QE world. We estimate combined assets under management of in excess of $8trn across the spectrum. They form a broad category of 'passive' or 'quasi-passive' investors, as are being mechanically driven by two main factors: trend and volatility.

Source: Fasanara Presentations | Market Fragility - How to Position for Twin Bubbles Bust, 16 th October 2017. The slide is described in details in this video recording.

Extraordinary monetary policies have feedback loops with the asset management industry as a whole, reinforcing the effects on markets of such policies in a vicious – or virtuous - cycle . QE and NIRP help a large number of investment strategies to flourish, validating their success and supporting their asset gathering in the process, and are in return helped in boosting bond and stock markets by their flows joining the already monumental public flows.

Private flows so reach singularity with public flows, and the whole market economy morphs into a one big common bet on ever-rising prices, in shallow volatility. Here is the story of how $15trn of money printing by major Central Banks in the last ten years, of which $3.7trn in 2017 alone, is joined by total assets of $8trn managed into buying the same safe and risk assets across, with leverage, indiscriminately.

How Market Risk became Systemic Risk

Let's give a cursory look at the main players involved (a recent presentation we did is recorded here) . As markets trend higher, no matter what happens (ever against the shocked disbeliefs of Brexit, Trump, an Italian failed referendum and nuclear threats in North Korea), investors understand the outperformance that comes from pricing risks out of their portfolios entirely and going long-only and fully-invested. Whoever under-weighs positions in an attempt to be prudent ends up underperforming its benchmarks and is then penalized with redemptions. Passive investors who are long-only and fully invested are the winners, as they are designed to be bold and insensitive to risks. As Central Banks policies reduce the level of interest rates to zero or whereabouts, fees become ever more relevant, making the case for passive investing most compelling. The rise of ETF and passive index funds is then inevitable.

According to JP Morgan, in the last 10 years, $2trn left active managers in equities and $2trn entered passive managers (pag.39 here) . We may be excused for thinking they are the same $ 2trn of underlying investors progressively pricing risk provisions out of books, de facto , while chasing outperformance and lower fees.

To be sure, ETFs are a great financial innovation, helping reducing costs in an expensive industry and giving entry to markets previously un-accessible to most investors. Yet, what matters here is their impact on systemic risks, via positive feedback loops. In circular reference, beyond Central Banks flows, markets are helped rise by such classes of valuations-insensitive passive investors, which are then rewarded with further inflows, with which they can then buy more. The more expensive valuations get, the more they disconnect from fundamentals, the more divergence from equilibrium occurs, the larger fat-tail risks become.

In ever-rising markets, 'buy-and-hold' strategies may only possibly be outsmarted by 'buy-the-dip' strategies. Whatever the outcome of risk events, be ready to buy the dip quickly and blindly. As more investors design themselves up to do so, the dips are shallower over time, leading to an S&P500 that never lost 3% in 2017, an historical milestone. Machine learning is another beautiful market innovation, but what is there to learn from the time series of the last several years, if not that buy- the-dip works, irrespective of what caused the dip. Big Data is yet another great concept, shaping the future of us all. Yet, most data ever generated in humankind dates back three years only, in and by itself a striking limitation. The quality of the deduction cannot exceed the quality of the time series upon which the data science was applied. If the time series is untrustworthy, as is heavily influenced by monumental public flows ($300bn per months), what trust can we put on any model output originating from it? What pattern recognition can we really be hopeful of getting, in the first place? May some of it just be a commercial disguise for going long, selling volatility and leveraging up in various shapes or forms? What is hype and what is real? A short and compromised data series makes it hard, if not possible, to really know. Once public flows abate and price discovery is let free again, then and only then will we be in a position to know the difference.

Low volatility does what trending markets alone cannot. A state of low volatility presents the appearance of stuporous, innocuous, narcotized markets, thus enticing new swathes of unfitting investors in, mostly retail-type 'weak hands'. Weak hands are investors who are brought to like investments by certain characteristics which are uncommon to the specific investment itself, such as featuring a low volatility. It is in this form that we see bond-like investors looking at the stock market for yield pick-up purposes, magnetized by levels of realized volatility similar to what fixed income used to provide with during the Great Moderation. It is in this form that Tech companies out of the US have started filling the coffers of not just Growth ETF, where they should rightfully reside, but also Momentum ETF, and even, incredibly, Low-Volatility ETF.

Low volatility is also a dominant input for Risk Parity funds and Target Volatility vehicles . The lower the volatility, the higher the leverage allowed in such players, mechanically. All of which are long-only players, joining public flows, again helping the market rise to record levels in the process, in circular reference. Rewarded by new inflows, the buying spree gathers momentum, in a virtuous circle. Valuations are no real input in the process, volatility is what matters the most. Volatility is not risk, except for them it is.

It goes further than that. It is not only the level of volatility that count, but its direction too . As volatility implodes, relentlessly, into historical lows never seen before in history, a plethora of investment strategies is launched to capitalize on just that, directly: Short Volatility vehicles . They are the best performing strategy of the last decade, by and large. The problem here is that, due to construction, as volatility got to single-digit territory, relatively small spikes are now enough to trigger wipe-out events on several of these instruments. Our analysis shows that if equity volatility doubles up from current levels (while still being half of what it was as recently as in August 2015), certain Short Vol ETFs may stand to lose up to 75% or more. Moreover, short positions on long-vol ETFs can lose up to 250% of capital. For some, 'termination events' are built into contracts for sudden losses of this magnitude, meaning that the notes would be prematurely withdrawn. It is one thing to expect a spike in volatility to cause losses, it is quite another to know that a minor move is all it takes to trigger a default event.

On such spikes in volatility, Morgan Stanley Quant Derivatives Strategy desk warns further that market makers may be forced to rebalance their exposure non-linearly on a spike in volatility. A drop in the S&P 500 of 5% in one day may trigger approximately $ 400mn of Vega notional of rebalancing (pag.48 here) . We estimate that half a trillion dollars of additional selling on S&P stocks may occur following a correction of between 5% and 10%. That is a lot of selling, pre-set in markets, waiting to strike. Unless you expect the market to not have another 5% sell-off, ever again.

For more details, we describe the role of these different players in a recent video presentation and in our June Investment Outlook and May Investment Outlook.

It's All One Big Position

What do ETFs, Risk Parity and Target Vol vehicles, Low Vol / Short Vol vehicles, trend-chasing algos, Machine Learning, behavioral Alternative Risk Premia, factor investing have in common? Except, of course, being the 'winners take all' of QE-driven markets. They all share one or more of the following risk factors: long-only, fully invested when not leveraged-up, short volatility, short correlation, short gamma Thanks to QE and NIRP, the whole market is becoming one single big position.

The 'Trend Factor' and the 'Volatility Factor' are over-whelming, making it inevitable for a high- beta, long-bias, short-vol proxy to disseminate across. Almost inescapably so, given the time series the asset management industry has to deal with, and derive its signals from.

Several classes of investors may move to sell in lock-steps if and when markets turn. The boost to asset prices and the zero-volatility environment created the conditions for systemic risks in the form of an over-compensation to the downside. Record-low volatility breeds market fragility, it precedes system instability.

Flows Matter, Both Ways!

We will know soon if the fragility of markets is that bad. The undoing of loose monetary policies (NIRP, ZIRP) will create a liquidity withdrawal of over $1 trillion in 2018 alone (pag.61-62 here) . The reaction of the passive and quasi-passive communities will determine the speed of the adjustment in the pricing for both safe and risk assets, and how quickly risk provisions will re- enter portfolios. Such liquidity withdrawal will represent the first real crash-test for markets in 10 years.

As public spending on Wall Street abates, the risk is evident of seeing the whole market turning with it. The shocks of Trump and Brexit did not manage to derail markets for long, as public flows were overwhelming. Flows is what mattered, above all elusive, over-fitting economic narratives justifying price action at the margin. Flows may matter again now as they fade

Systemic Risk is Not Just About Banks: Look at Funds

The role of trending markets is known when it comes to systemic risks: a not sufficient but necessary condition. Most trends do not necessarily lead to systemic risks, but hardly systemic risks ever build up without a prolonged period of uptrend beforehand. Prolonged uptrends in any asset class hold the potential to instill the perception that such asset class will grow forever, irrespective of the fundamentals, and may thus lead to excessive risk taking, excess leverage, the formation of a bubble and, ultimately, systemic risks. The mind goes to the asset class of real estate, its undeterred uptrend into 2006/2007, its perception of perpetuity ("we have never had a decline in house prices on a nationwide basis'' Ben Bernanke) , the credit bubble built on banks hazardous activities on subprime mortgages as a result, and the systemic risks which emanated, with damages spanning well beyond the borders of real estate.

The role of volatility is also well-researched, especially low volatility. Hayman Minsky, in his " Financial Instability Hypothesis '' in 1977, analyses the behavioral changes induced by a reduction of volatility, postulating that economic agents observing a low risk are induced to increase risk taking, which may in turn lead to a crisis: "stability is destabilizing". In a recent study, Jon Danielsson, Director of the Systemic Risk Centre at the LSE, finds unambiguous support for the 'low volatility channel', insofar as prolonged periods of low volatility have a strong predictive power over the incidence of a banking crisis, owing to excess lending and excess leverage . The economic impact is the highest if the economy stays in the low volatility environment for five years : a 1% decrease in volatility below its trend translates in a 1.01% increase in the probability of a crisis. He also finds that, counter-intuitively, high volatility has little predictive power : very interesting, when the whole finance world at large is based on retrospective VAR metrics, and equivocates high volatility for high risk.

Both a persistent trend and prolonged low-volatility can lead banks to take excessive risks. But what about their impact on the asset management industry?

Thinking at the hard economic impact of the Great Depression (1929-1932) and the Great Recession (2007-2009), and the eminent role played by banks in both, it comes as little surprise that the banking sector captures all the attention. However, what remains to be looked into, and perhaps more worrying in today's environment, is the role of prolonged periods of uptrend and low-vol on the asset management industry

In 2014, the Financial Stability Board (FSB), an international body that makes recommendations to G20 nations on financial risks, published a consultation paper asking whether fund managers might need to be designated as " global systemically important financial institution " or G-SIFI, a step that would involve greater regulation and oversight. It did not result in much, as the industry lobbied in protest, emphasizing the difference between the levered balance sheet of a bank and the business of funds.

The reason for asking the question is evident: (i) sheer size , as the AM industry ballooned in the last few years, to now represent over [15trnXX] for just the top 5 US players!, (ii) funds have partially substituted banks in certain market-making activities, as banks dialed back their participation in response to tighter regulation and (iii) , funds can indeed do damage: think of LTCM in 1998, the fatal bailout of two Real Estate funds by Bear Stearns in 2007, the money market funds 'breaking the buck' in 2008 amongst others.

But it is not just sheer size that matters for asset managers. What may worry more is the positive feedback loops discussed above and the resulting concentration of bets in one single global pot , life-dependent on infinite momentum/trend and ever-falling volatility. Positive feedback loops are the link for the sheer size of the AM industry to become systemically relevant. Today more than ever, they morph market risks in systemic risks.

Volatility will not forever be low, the trend will not forever go: how bad a damage when it stops? As macro prudential policy is not the art of "whether or not it will happen" but of "what happens if", it is hard not to see this as a blind spot for policymakers nowadays.

ebworthen , Nov 22, 2017 10:55 AM

In other words, it's a Ponzi scheme.

Let it Go , Nov 22, 2017 11:49 AM

I have never seen it this bad, the numbers are all moutof wack!

It seems many of us are drawn to a good illusion and this proves true for most people in their daily life as well. In some ways, it could be said that our culture has become obsessed with avoiding what is real.

We must remember that politicians and those in power tend to throw people under the bus rather than rise up and take responsibility for the problems they create. The article below looks at how we have grown to believe things are fine.

http://The Allure Of Ilusions-Five Favorite Financial Myths.html

Batman11 , Nov 22, 2017 12:47 PM

The real estate boom features all the unknowns in today's thinking, which is why they are global.

This simple equation is unknown.

Disposable income = wages – (taxes + the cost of living)

You can immediately see how high housing costs have to be covered by wages; business pays the high housing costs for expensive housing adding to costs and reducing profits. The real estate boom raises costs to business and makes your nation uncompetitive in a globalised world.

The unproductive lending involved that leads to financial crises.

The UK:

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

The economy gets loaded up with unproductive lending as future spending power has been taken to inflate the value of the nation's housing stock. Housing is more expensive and the future has been impoverished.

US:

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

Unproductive lending is not good for the economy and led directly to 1929 and 2008.

Neoliberalism's underlying economics, neoclassical economics, doesn't look at private debt and so no one really knew what they were doing.

The real estate boom feels good for a reason that is not known to today's thinkers.

Monetary theory has been regressing since 1856, when someone worked out how the system really worked.

Credit creation theory -> fractional reserve theory -> financial intermediation theory

"A lost century in economics: Three theories of banking and the conclusive evidence" Richard A. Werner

http://www.sciencedirect.com/science/article/pii/S1057521915001477

" banks make their profits by taking in deposits and lending the funds out at a higher rate of interest" Paul Krugman, 2015. He wouldn't know, that's financial intermediation theory.

Bank lending creates money, which pours into the economy fuelling the boom; it is this money creation that makes the housing boom feel so good in the general economy. It feels like there is lots of money about because there is.

The housing bust feels so bad because the opposite takes place, and money gets sucked out of the economy as the repayments overtake new lending. It feels like there isn't much money about because there isn't.

They were known unknowns, the people that knew weren't the policymakers to whom these things were unknown.

The global economy told policymakers there was something seriously wrong in 2008, but they ignored it, I didn't.

Batman11 -> Batman11 , Nov 22, 2017 12:51 PM

The most fundamental of all fundamentals was unknown.

The relationship between debt and money.

the money supply = all the debt in the system, public and private

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

M3 is going exponential before 2008, a credit bubble is underway (debt = money)

The FED and everyone else doesn't realise.

Batman11 -> Batman11 , Nov 22, 2017 1:25 PM

This is why austerity doesn't work in a balance sheet recession, e.g. Greece.

The IMF predicted Greek GDP would have recovered by 2015 with austerity.

By 2015 it was down 27% and still falling.

Oh dear.

Richard Koo had to explain the problem to the IMF.

https://www.youtube.com/watch?v=8YTyJzmiHGk

They had pushed Greece into debt deflation by cutting Government spending with austerity.

It wasn't just the IMF, the Troika all went along with this fatally flawed policy, this means the ECB and EU Commission also didn't know what they were doing.

Richard Koo had watched as Western "experts" told Japan to cut Government spending and seen the fall in GDP as the economy went downhill. The only way to get things going again was to increase Government spending and he has had decades to work out what was going on.

The Troika's bad economics has been wreaking havoc across the Club-Med.

Mark Blythe looks at the data.

https://www.youtube.com/watch?v=B6vV8_uQmxs&feature=em-subs_digest-vrecs

It comes out of knowledge that is missing from the mainstream.

Batman11 -> Batman11 , Nov 22, 2017 1:31 PM

Balancing the budget ............ be careful you might head into debt deflation.

If the private sector aren't borrowing the Government needs to borrow to keep the money supply stable.

You don't want to end up like Greece do you?

Radical Marijuana , Nov 22, 2017 3:15 PM

Another superficially correct analysis of "Positive Feedback Loops create divergence from general equilibrium, and Systemic Risks." The vicious feedback loops which have the most leverage are all aspects of the funding of the political processes, which have resulted in runaway systems of legalized lies, backed by legalized violence, the most important of which are the ways that the powers of public governments enforce frauds by private banks, the big corporations that have grown up around those big banks.

About exponentially advancing technologies have enabled enforced frauds to become about exponentially more fraudulent. The underlying drivers were the ways that the combined money/murder systems developed, whose social successfulness became more and more based on maximizing maliciousness. From a superficial point of view, those results may appear to be due to incompetence, however, from a deeper point of view those results make sense as due to the excessively successful applications of the methods of organized crime through the political processes, due to the vicious feedback loops of the funding of those political processes.

The only connections between human laws and natural laws are the abilities to back up lies with violence. Natural selection pressures have driven Globalized Neolithic Civilization to develop the most dishonest artificial selection systems possible, while the continuation of the various vicious feedback loops that made and maintained those developments are driving about exponentially increasing dishonesty. Although the laws of nature are not going to stop working, and the laws of nature underpinned the runaway development of excessively successful vicious feedback loops of organized crime, on larger and larger scales, to result in Globalized Neolithic Civilization, the overall results are that Civilization is becoming about exponentially more psychotic. Since Civilization necessarily operates according to the principles and methods of organized crime, while those who became the biggest and best organized forms of organized crime, namely, banker dominated governments, also necessarily became most dishonest about themselves, and yet, their bullshit social stories continue to dominate the public schools, and mainstream mass media, as well as the publicly significant controlled "opposition" groups.

Political economy is INSIDE human ecology, and therefore, the greatest systematic risks are to be found in the tragic trajectory of human ecologies which are almost totally buried under maximized maliciousness. "Public debates" about the human death control systems are based on previously having being as deceitful and treacherous as possible regarding those topics. The most extreme forms of that manifest as the ways that money is measurement backed by murder. Of course, that the debt controls are backed by the death controls are issues which are generally not publicly admitted nor addressed.

Global Neolithic Civilization has become almost totally based on being able to enforce frauds, in ways which have become about exponentially more fraudulent, as the vicious feedback loops which enable that to happen automatically reinforce themselves to get worse, faster. The almost total triumph of enforced frauds has resulted in social "realities" which are becoming exponentially more insane, since the social successfulness of enforced frauds requires the most people do not understand that, because they have been conditioned to not want to understand that. Rather, almost everyone takes for granted deliberately ignoring and misunderstanding the laws of nature in the most absurdly backward ways possible, because of the long history of successful warfare based on deceits and treacheries becoming the more recent history of successful finance based on enforcing frauds, despite that tragic trajectory of vicious feedback loops resulting in about exponentially increasing overall fraudulence.

Various superficially correct analyses, such as the one in the article above, are typical of the content on Zero Hedge , which does not come remotely close to recognizing the degree to which the dominate natural languages and philosophy of science have undergone series of compromises with the biggest bullies' bullshit-based world views, which became the banksters' bullshit about economics. Although it is theoretically possible for human beings to better understand themselves and Civilization, it continues to become more and more politically impossible to do so, due to the ever increasing vicious feedback loops of enforced frauds achieving symbolic robberies ...

Although the laws of nature are never going to stop working, it is barely possible to exaggerate the degree to which Civilization overall is becoming about exponentially more psychotic, due to the social "realities" based on successfully enforcing frauds becoming more and more out of touch with the surrounding, relatively objective, physical and biological facts. The various superficially correct analyses presented on Zero Hedge regarding that kind of runaway collective psychosis, driven by the vicious feedback loops of the funding of all aspects of the funding of the political processes, tend to always grossly understate the seriousness of that situation, especially including the crucial issues of how to operate the human murder systems after the development of weapons of mass destruction, which is unavoidable due to the rapid development of globalized electronic monkey money frauds, backed by the threat of force from apes with atomic weapons.

Those who believe that possessing precious metals, or cryptocurrencies, etc., are viable solutions to those problems are not remotely close to being in the right order of magnitude. Although there is no doubt that exponentially more "money" is being made out of nothing as debts, in order to "pay" for strip-mining the natural resources of a still relatively fresh planet, and so, there is no doubt that the exponentially decreasing value of that "money" is driving the accumulation of apparent anomalies, such as outlined in the article above, the actually crucial issues continue to be the ways that money is measurement backed by murder, as the most abstract ways that private property are claims backed by coercions. Stop-gap individual responses to the runaway fraudulence, such as faith in possessing precious metals or cryptocurrencies, make some relative sense in terms of the public "money" supplies becoming exponentially more fraudulent, but otherwise dismally fail to be in the ball park of the significant issues driven by prodigious progress in physical sciences, WITHOUT any genuine progress in political sciences, other than to continue to be able to better enforce bigger frauds, through the elaborations of oxymoronic scientific dictatorships, which adamantly refuse to become more genuinely scientific about themselves.

Primates with about exponentially increasing physical technologies continue to deliberately ignore and misunderstand themselves as much as is humanly possible, due to the history of warfare making and maintaining the currently existing political economy, whose maliciousness is manifesting through runaway vicious feedback loops, whereby the excessively successful control of Civilization through applications of the methods of organized crime are resulting in that Civilization manifesting runaway criminal insanities. Indeed, in that context, where there is almost nothing but the central core of triumphant organized crime, namely bankster dominated governments, surrounded by various layers of controlled "opposition" groups, which stay within the same bullshit-based frames of reference regarding those phenomena, the overall situation is that society becoming about exponentially sicker and insane.

That Civilization has been driven by natural selection pressures to manifest runaway psychoses is not going to stop the laws of nature from continuing to work through that Civilization. However, that will nevertheless drive the currently dominate artificial selection systems to become increasingly psychotic, in ways whereby their vicious feedback loops are less and less able to be sanely responded to ... Although some human beings have better and better understood some general energy systems, e.g., electric and atomic energy, etc., since warfare was the oldest and best developed forms of social science and engineering, whose successfulness was based on being able to maximize maliciousness, and since those then enabled successful finance to become based on runaway enforced frauds, human beings living within Globalized Neolithic Civilization are so hidebound by adapting to living inside those vicious feedback loops based on being able to enforce frauds that those human beings are mostly unwilling and unable to better understand themselves as also manifestations of general energy systems.

As the report, embedded in the article, begins by quoting Leonardo da Vinci:

"Learn how to see. Realize that everything connects to everything else."

In general, "Asset Managers" are stuck inside taking for granted that everything they do has become almost totally based on being able to enforce frauds, despite some of them noticing the increasingly blatant ways that there are accumulating apparent anomalies in those systems, as vicious feedback loops drive those systems to become about exponentially more fraudulent, and therefore increasingly unbalanced. To come to better terms with those apparent anomalies requires going through series of intellectual scientific revolutions and profound paradigm shifts, which overall become ways that human beings better understand themselves as manifestations of general energy systems. However, since doing so requires recognizing how and why governments are necessarily the biggest forms of organized crime, dominated by the best organized gangsters, the banksters, it continues to be politically impossible to accomplish that.

Muppet , Nov 22, 2017 7:03 PM

At each open, algos compute the increase in their AUM from the prior day and their margin reach. They then begin buying. All algos do this. Buying whenever cash/margin exists; selling whenever profit targets exist. On pullbacks, the algos withdraw, volume evaporates, minimizing the drop. The algos collectively increase equity prices without consideration of the value of the money involved. Not valuations. No fundamentals. Just ones and zeroes. Just a program.

[Nov 22, 2017] Unemployment is Miserable and Doesn't Spawn an Upsurge in Personal Creativity

Notable quotes:
"... By Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity at the University of Newcastle, NSW, Australia. Originally published at billy blog ..."
"... The overwhelming importance of having a job for happiness is evident throughout the analysis, and holds across all of the world's regions. ..."
"... The pattern of human concerns ..."
"... The pattern of human concerns ..."
"... Journal of Happiness Studies ..."
"... The results show the differences between having a job and being unemployed are "very large indeed" on the three well-being measures (life evaluation, positive and negative affective states). ..."
"... Psychological Bulletin ..."
"... 1. "unemployment tends to make people more emotionally unstable than they were previous to unemployment". ..."
"... 2. The unemployed experience feelings of "personal threat"; "fear"; "sense of proportion is shattered"; loss of "common sense of values"; "prestige lost in own eyes and as he imagines, in the eyes of his fellow men"; "feelings of inferiority"; loss of "self-confidence" and a general loss of "morale". ..."
"... in the light of the structure of our society where the job one holds is the prime indicator of status and prestige. ..."
"... Psychological Bulletin ..."
"... Related studies found that the "unemployed become so apathetic that they rarely read anything". Other activities, such as attending movies etc were seen as being motivated by the need to "kill time" – "a minimal indication of the increased desire for such attendance". ..."
"... In spite of hopeless attempts the unemployed continually look for work, often going back again and again to their last place of work. Other writers reiterate this point. ..."
"... The non-pecuniary effects of not having a job are significant in terms of lost status, social alienation, abandonment of daily structure etc, and that has not changed much over history. ..."
"... I think what is missing from this article is the term "identity." If you meet new people, often the conversation starts with what you do for a living. Your identity, in part, is what you do. You can call yourself a plumber, a writer, a banker, a consultant, a reporter but the point is this is part of your identity. When you lose your job long term, your identity here loses one of its main anchor points. ..."
"... This is a crucial point that UBI advocates often ignore. There is a deeply entrenched cultural bias towards associating our work status with our general status and prestige and feelings of these standings. ..."
"... When unemployed, the stress of worry about money may suppress the creative juices. Speaking from experience. People may well 'keep looking for jobs' because they know ultimately they need a job with steady income. The great experience of some freelancers notwithstanding, not all are cut out for it. ..."
"... When considering the world's population as a whole, people with a job evaluate the quality of their lives much more favorably than those who are unemployed. ..."
"... Data like that provided by Mitchell is important to demolishing the horrid "economic anxiety" frame much beloved by liberals, especially wonkish Democrats.* It's not (a) just feelings , to be solved by scented candles or training (the liberal version of rugged individualism) and (b) the effects are real and measurable. It's not surprising, when you think about it, that the working class is about work . ..."
Nov 22, 2017 | www.nakedcapitalism.com

Posted on November 21, 2017 by Yves Smith Yves here. Reader UserFriendly sent this post with the message, "I can confirm this." I can too. And before you try to attribute our reactions to being Americans, note that the study very clearly points out that its finding have been confirmed in "all of the world's regions".

By Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity at the University of Newcastle, NSW, Australia. Originally published at billy blog

Here is a summary of another interesting study I read last week (published March 30, 2017) – Happiness at Work – from academic researchers Jan‐Emmanuel De Neve and George Ward. It explores the relationship between happiness and labour force status, including whether an individual is employed or not and the types of jobs they are doing. The results reinforce a long literature, which emphatically concludes that people are devastated when they lose their jobs and do not adapt to unemployment as its duration increases. The unemployed are miserable and remain so even as they become entrenched in long-term unemployment. Further, they do not seem to sense (or exploit) a freedom to release some inner sense of creativity and purpose. The overwhelming proportion continually seek work – and relate their social status and life happiness to gaining a job, rather than living without a job on income support. The overwhelming conclusion is that "work makes up such an important part of our lives" and that result is robust across different countries and cultures. Being employed leads to much higher evaluations of the quality of life relative to being unemployed. And, nothing much has changed in this regard over the last 80 or so years. These results were well-known in the 1930s, for example. They have a strong bearing on the debate between income guarantees versus employment guarantees. The UBI proponents have produced no robust literature to refute these long-held findings.

While the 'Happiness Study' notes that "the relationship between happiness and employment is a complex and dynamic interaction that runs in both directions" the authors are unequivocal:

The overwhelming importance of having a job for happiness is evident throughout the analysis, and holds across all of the world's regions. When considering the world's population as a whole, people with a job evaluate the quality of their lives much more favorably than those who are unemployed. The importance of having a job extends far beyond the salary attached to it, with non-pecuniary aspects of employment such as social status, social relations, daily structure, and goals all exerting a strong influence on people's happiness.

And, the inverse:

The importance of employment for people's subjective wellbeing shines a spotlight on the misery and unhappiness associated with being unemployed.

There is a burgeoning literature on 'happiness', which the authors aim to contribute to.

They define happiness as "subjective well-being", which is "measured along multiple dimensions":

life evaluation (by way of the Cantril "ladder of life"), positive and negative affect to measure respondents' experienced positive and negative wellbeing, as well as the more domain-specific items of job satisfaction and employee engagement. We find that these diverse measures of subjective wellbeing correlate strongly with each other

Cantril's 'Ladder of Life Scale' (or "Cantril Ladder") is used by polling organisations to assess well-being. It was developed by social researcher Hadley Cantril (1965) and documented in his book The pattern of human concerns .

You can learn more about the use of the 'Cantril Ladder' HERE .

As we read, the "Cantril Self-Anchoring Scale consists of the following":

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time? (ladder-present) On which step do you think you will stand about five years from now? (ladder-future)

[Reference: Cantril, H. (1965) The pattern of human concerns , New Brunswick, Rutgers University Press.]

Christian Bjørnskov's 2010 article – How Comparable are the Gallup World Poll Life Satisfaction Data? – also describes how it works.

[Reference: Bjørnskov, C. (2010) 'How Comparable are the Gallup World Poll Life Satisfaction Data?', Journal of Happiness Studies , 11 (1), 41-60.]

The Cantril scale is usually reported as values between 0 and 10.

The authors in the happiness study use poll data from 150 nations which they say "is representative of 98% of the world's population". This survey data is available on a mostly annual basis since 2006.

The following graph (Figure 1 from the Study) shows "the self-reported wellbeing of individuals around the world according to whether or not they are employed."

The "bars measure the subjective wellbeing of individuals of working age" by employment status .

The results show the differences between having a job and being unemployed are "very large indeed" on the three well-being measures (life evaluation, positive and negative affective states).

People employed "evaluate the quality of their lives around 0.6 points higher on average as compared to the unemployed on a scale from 0 to 10."

The authors also conduct more sophisticated (and searching) statistical analysis (multivariate regression) which control for a range of characteristics (gender, age, education, marital status, composition of household) as well as to "account for the many political, economic, and cultural differences between countries as well as year-to-year variation".

The conclusion they reach is simple:

the unemployed evaluate the overall state of their lives less highly on the Cantril ladder and experience more negative emotions in their day-to-day lives as well as fewer positive ones. These are among the most widely accepted and replicated findings in the science of happiness Here, income is being held constant along with a number of other relevant covariates, showing that these unemployment effects go well beyond the income loss associated with losing one's job.

These results are not surprising. The earliest study of this sort of outcome was from the famous study published by Philip Eisenberg and Paul Lazersfeld in 1938. [Reference: Eisenberg, P. and Lazarsfeld, P. (1938) 'The psychological effects of unemployment', Psychological Bulletin , 35(6), 358-390.]

They explore four dimensions of unemployment:

I. The Effects of Unemployment on Personality.

II. Socio-Political Attitudes Affected by Unemployment.

III. Differing Attitudes Produced by Unemployment and Related Factors.

IV. The Effects of Unemployment on Children and Youth.

On the first dimension, they conclude that:

1. "unemployment tends to make people more emotionally unstable than they were previous to unemployment".

2. The unemployed experience feelings of "personal threat"; "fear"; "sense of proportion is shattered"; loss of "common sense of values"; "prestige lost in own eyes and as he imagines, in the eyes of his fellow men"; "feelings of inferiority"; loss of "self-confidence" and a general loss of "morale".

Devastation, in other words. They were not surprised because they note that:

in the light of the structure of our society where the job one holds is the prime indicator of status and prestige.

This is a crucial point that UBI advocates often ignore. There is a deeply entrenched cultural bias towards associating our work status with our general status and prestige and feelings of these standings. That hasn't changed since Eisenberg and Lazersfeld wrote up the findings of their study in 1938.

It might change over time but that will take a long process of re-education and cultural shift. Trying to dump a set of new cultural values that only a small minority might currently hold to onto a society that clearly still values work is only going to create major social tensions. Eisenberg and Lazarsfeld also considered an earlier 1937 study by Cantril who explored whether "the unemployed tend to evolve more imaginative schemes than the employed".

[Reference: Cantril, H. (1934) 'The Social Psychology of Everyday Life', Psychological Bulletin , 31, 297-330.]

The proposition was (is) that once unemployed, do people then explore new options that were not possible while working, which deliver them with the satisfaction that they lose when they become jobless. The specific question asked in the research was: "Have there been any changes of interests and habits among the unemployed?" Related studies found that the "unemployed become so apathetic that they rarely read anything". Other activities, such as attending movies etc were seen as being motivated by the need to "kill time" – "a minimal indication of the increased desire for such attendance".

On the third dimension, Eisenberg and Lazersfeld examine the questions – "Are there unemployed who don't want to work? Is the relief situation likely to increase this number?", which are still a central issue today – the bludger being subsidized by income support.

They concluded that:

the number is few. In spite of hopeless attempts the unemployed continually look for work, often going back again and again to their last place of work. Other writers reiterate this point.

So for decades, researchers in this area, as opposed to bloggers who wax lyrical on their own opinions, have known that the importance of work in our lives goes well beyond the income we earn. The non-pecuniary effects of not having a job are significant in terms of lost status, social alienation, abandonment of daily structure etc, and that has not changed much over history. The happiness paper did explore "how short-lived is the misery associated with being out of work" in the current cultural settings.

The proposition examined was that:

If the pain is only fleeting and people quickly get used to being unemployed, then we might see joblessness as less of a key public policy priority in terms of happiness.

They conclude that:

a number of studies have demonstrated that people do not adapt much, if at all, to being unemployed there is a large initial shock to becoming unemployed, and then as people stay unemployed over time their levels of life satisfaction remain low . several studies have shown that even once a person becomes re-employed, the prior experience of unemployment leaves a mark on his or her happiness.

So there is no sudden or even medium-term realisation that being jobless endows the individual with a new sense of freedom to become their creative selves, freed from the yoke of work. To bloom into musicians, artists, or whatever.

The reality is that there is an on-going malaise – a deeply entrenched sense of failure is overwhelming, which stifles happiness and creativity, even after the individual is able to return to work.

This negativity, borne heavily by the individual, however, also impacts on society in general.

The paper recognises that:

A further canonical finding in the literature on unemployment and subjective wellbeing is that there are so-called "spillover" effects.

High levels of unemployment "increase fear and heighten the sense of job insecurity". Who will lose their job next type questions?

The researchers found in their data that the higher is the unemployment rate the greater the anxiety among those who remain employed.

Conclusion

The overwhelming conclusion is that "work makes up such an important part of our lives" and that result is robust across different countries and cultures.

Being employed leads to much higher evaluations of the quality of life relative to being unemployed.

The unemployed are miserable and remain so even as they become entrenched in long-term unemployment. They do not seem to sense (or exploit) a freedom to release some inner sense of creativity and purpose.

The overwhelming proportion continually seek work – and relate their social status and life happiness to gaining a job, rather than living without a job on income support.

Modern Monetary Theory (MMT) allows us to understand that it is the government that chooses the unemployment rate – it is a political choice.

For currency-issuing governments it means their deficits are too low relative to the spending and saving decisions of the non-government sector.

For Eurozone-type nations, it means that in surrendering their currencies and adopting a foreign currency, they are unable to guarantee sufficient work in the face of negative shifts in non-government spending. Again, a political choice.

The Job Guarantee can be used as a vehicle to not only ensure their are sufficient jobs available at all times but also to start a process of wiping out the worst jobs in the non-government sector.

That can be done by using the JG wage to ensure low-paid private employers have to restructure their workplaces and pay higher wages and achieve higher productivity in order to attract labour from the Job Guarantee pool.

The Series So Far

This is a further part of a series I am writing as background to my next book with Joan Muysken analysing the Future of Work . More instalments will come as the research process unfolds.

The series so far:

  1. When Austrians ate dogs .
  2. Employment as a human right .
  3. The rise of the "private government .
  4. The evolution of full employment legislation in the US .
  5. Automation and full employment – back to the 1960s .
  6. Countering the march of the robots narrative .
  7. Unemployment is miserable and does not spawn an upsurge in personal creativity .

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due in 2018. The book will likely be published by Edward Elgar (UK).

That is enough for today!

divadab , November 21, 2017 at 6:11 am

Perhaps I'm utterly depressed but I haven't had a job job for over 5 years. Plenty of work, however, more than I can handle and it requires priorisation. But I am deliberately not part of the organized herd. I stay away from big cities – it's scary how managed the herd is in large groups – and I suppose that unemployment for a herd animal is rather distressing as it is effectively being kicked out of the herd.

Anyway my advice, worth what you pay for it but let he who has ears, etc. – is to go local, very local, grow your own food, be part of a community, manage your own work, and renounce the energy feast herd dynamics. "Unemployment", like "recession", is a mechanism of control. Not very practical advice for most, I realize, trapped in the herd as they are in car payments and mortgages, but perhaps aspirational?

The Rev Kev , November 21, 2017 at 6:35 am

I think what is missing from this article is the term "identity." If you meet new people, often the conversation starts with what you do for a living. Your identity, in part, is what you do. You can call yourself a plumber, a writer, a banker, a consultant, a reporter but the point is this is part of your identity. When you lose your job long term, your identity here loses one of its main anchor points.

Worse, there is a deliberate stigma attached with being long term unemployed. In that article you have seen the word bludger being used. In parts of the US I have read of the shame of 'living off the county'. And yes, I have been there, seen that, and got the t-shirt. It's going to be interesting as mechanization and computers turn large portions of the population from workers to 'gig' workers. Expect mass demoralization.

nonclassical , November 21, 2017 at 10:24 am

yes the lives many of us have lived, no longer exist though we appear not notice, as we "can" live in many of same "ways" ..rather well known psychologist defined some 40 years ago, best to "drop through cracks"

jrs , November 21, 2017 at 12:13 pm

Well, you also lose money, maybe you become homeless etc. as you have nowhere else to turn (if there are kids involved to support it gets even scarier though there are some programs). Or maybe you become dependent on another person(s) to support you which is of course degrading as you know you must rely on them to live, whether it's a spouse or lover when you want to work and bring in money, or mom and dads basement, or the kindest friend ever who lets you sleep on their couch. I mean these are the things that really matter.

Privileged people whose main worry in unemployment would be losing identity, wow out of touch much? Who cares about some identity for parties, but the ability to have a stable decent life (gig work hardly counts) is what is needed.

sgt_doom , November 21, 2017 at 2:20 pm

I believe your comment sums up the situation the best -- and most realistically.

jgordon , November 21, 2017 at 7:08 pm

I normally wouldn't comment like this, but you have brought up some extremely important points about identity that I would like to address.

Recently I had the most intense mushroom experience of my entire life–so intense that my identity had been completely stripped and I was left in a formless state, at the level of seeing my bare, unvarnished animal neural circuitry in operation. Suddenly with a flash of inspiration I realized that the identity of everyone, all of us, is inextricably tied up in what we do and what we do for other people.

Following from that, I understood that if we passively rely on others for survival, whether it be relying on friends, family, or government, then we do not have an identity or reason for existing. And the inner self, the animal core of who we are, will realise this lack of identity (even if the concious mind denies it), and will continually generate feelings of profound depression and intense nihilism that will inevitably destroy us if the root cause is not addressed.

Before this experience I was somewhat ambivalent about my politics, but immediately after I knew that the political right was correct on everything important, from attitudes on sex to economic philosophy. People need a core of cultural stability and hard work to grow and become actualized. The alternative is rudderless dissatisfaction and envy that leads nowhere.

On the topic of giving "out of kindnes and goodwill", giving without demanding anything in return is a form of abuse, as it deprives those who receive our feel-good generosity the motivation to form a coherent identity. If the parents of a basement-dweller were truly good people, instead of supporting said dweller they'd drag her out by the ear and make her grow food in the yard or some such. Likewise, those who have supported you without also giving concrete demands and expecations in return have been unkind, and for your own good I hope that you will immediately remove yourself from their support. On the other hand, if you have been thoughtlessly giving because it warms the cockles of your heart, then stop it now. You are ruining other people this way, and if your voting habits are informed by this kind of malevolence I'd encourage you to change those as well.

Anyway the original poster is right about everything. Working and having a purpose in life is an entirely different animal from making money and being "successful" in the government-sponsored commercial economy. Society and government deliberately try to conflate the two for various reasons, primarily graft of labor and genius, but that is only a deliberate mis-framing that needlessly harms people when the mainstream economic system is in catastrophic decline, as ours is today. You should try to clear up this misconception within yourself as a way of getting better.

Well, I hope this message can give you a few different thoughts and help you find your way out of the existential angst you're caught in. Don't wallow in helplessness. Think of something useful to do, anything, whether it earns you money or not, and go out and start doing it. You'll be surprised at how much better you feel about yourself in no time.

skippy , November 22, 2017 at 12:45 am

The problem is you said – I – had an extreme experience [burning bush], the truth was reviled to – I – and I alone during this extreme chemically altered state. Which by the way just happens to conform to a heap of environmental biases I collected. This is why sound methodology demands peer review. disheveled some people think Mister Toads Wild ride at Disneyland on psychotropics is an excellent adventure too.

Jeremy Grimm , November 21, 2017 at 12:33 pm

I think your observation about the importance of work to identity is most perceptive. This post makes too little distinction between work and a job and glosses over the place of work in defining who we are to ourselves and to others. I recall the scene in the movie "About a Boy" when the hero meets someone he cares about and she asks him what he does for a living.

I believe there's another aspect of work -- related to identity -- missing in the analysis of this post. Work can offer a sense of mission -- of acting as part of an effort toward a larger goal no individual could achieve alone. However you may regard the value in putting man on the moon there is no mistaking the sense of mission deeply felt by the engineers and technicians working on the project. What jobs today can claim service to a mission someone might value?

Henry Moon Pie , November 21, 2017 at 7:00 am

Agreed on your points. Wage slavery is nothing to aspire to. Self-determination within a context of an interdependent community is a much better way to live. We do our thing in the city, however.

ambrit , November 21, 2017 at 8:29 am

Finding that "interdependent community" is the hard part. My experience has been that this endeavour is almost chance based; Serendipity if you will.
Here Down South, the churches still seem to have a stranglehold on small and mid scale social organization. One of the big effects of 'churching' is the requirement that the individual gave up personal critical thinking. Thus, the status quo is reinforced. One big happy 'Holy Circlejerk.'

UserFriendly , November 21, 2017 at 10:10 am

from the article

This is a crucial point that UBI advocates often ignore. There is a deeply entrenched cultural bias towards associating our work status with our general status and prestige and feelings of these standings.

That hasn't changed since Eisenberg and Lazersfeld wrote up the findings of their study in 1938. It might change over time but that will take a long process of re-education and cultural shift. Trying to dump a set of new cultural values that only a small minority might currently hold to onto a society that clearly still values work is only going to create major social tensions.

FelicityT , November 21, 2017 at 3:07 pm

I would agree about the entenched cultural norms, etc. But not the pessimism and timeline for change. An individual can communicate a complex idea to millions in seconds, things move fast these days.

For me, it seems that what we (we being UBI/radical change proponents) are lacking is a compelling easily accessible story. Not just regarding UBI (as that is but one part of the trully revolutionary transformations that must occur) but encompassing everything.

We have countless think pieces, bits of academic writing, books, etc that focus on individual pieces and changes in isolation. But we've largely abandoned the all-encompassing narrative, which at their heart is precisely what religion offers and why it can be so seductive, successful, and resilient for so long.

The status quo has this type of story, it's not all that compelling but given the fact that it is the status quo and has inertia and tradition on its side (along with the news media, political, entertainment, etc) it doesn't have to be.

We need to abandon the single narrow issue activism that has become so prominent over the years and get back to engaging with issues as unseparable and intimately interconnected.

Tinkering around the edges will do nothing, a new political religion is what is required.

Yves Smith Post author , November 21, 2017 at 4:23 pm

Sorry, I disagree vehemently. Deeply held cultural attitudes are very slow to change and the study found that work being critical to happiness examined a large number of societies.

Look at feminism. I was a half-generation after the time when women were starting to get a shot at real jobs. IIRC, the first class that accepted women at Harvard Law School was in the 1950 and at Harvard Business School, 1965. And the number of first attendees was puny. The 1965 class at HBS had 10 8 women out of a graduating class of over 800; my class in 1981 had only 11% women.

In the 1980s, you saw a shift from the belief that women could do what men could do to promotion of the idea that women could/should be feminine as well as successful. This looked like seriously mixed messages, in that IMHO the earlier tendency to de-emphasize gender roles in the workplace looked like a positive development.

Women make less than 80% of what men do in the US. Even female doctors in the same specialities make 80% of their male peers.

The Speenhamland in the UK had what amounted to an income guarantee from the 1790s to 1832. Most people didn't want to be on it and preferred to work. Two generations and being on the support of local governments was still seen as carrying a stigma.

More generally, social animals have strongly ingrained tendencies to resent situations they see as unfair. Having someone who is capable of working not work elicits resentment from many, which is why most people don't want to be in that position. You aren't going to change that.

And people need a sense of purpose. There are tons of cases of rich heirs falling into drug addiction or alcoholism and despair because they have no sense of purpose in life. Work provides that, even if it's mundane work to support a family. That is one of the great dissservices the Democrats have done to the citizenry at large: sneering at ordinary work when blue-collar men were the anchors of families and able to take pride in that.

FelicityT , November 21, 2017 at 5:11 pm

So a few points.

Regarding the large number of societies, we often like to think we're more different than we actually are focusing on a few glaringly obvious differences and generalizing from there. Even going back a few hundred years when ideas travelled slower we were still (especially the "west" though the "east" wasn't all that much more different either) quite similar. So I'm less inclined to see the large number of societies as evidence.

Generally on societal changes and movements: The issue here is that the leadership has not changed, they may soften some edges here or there (only to resharpen them again when we're looking elsewhere) but their underlying ideologies are largely unchanged. A good mass of any population will go along to survive, whether they agree or not (and we find increasing evidence that many do not agree, though certainly that they do not agree on a single alternative).

It may be impossible to implement such changes in who controls the levers of power in a democratic fashion but it also may be immoral not implement such changes. Of course this is also clearly a similar path to that walked by many a demonized (in most cases rightfully so) dictator and despot. 'Tread carefully' are wise words to keep in mind.

Today we have a situation which reflects your example re: social animals and resentment of unfairness: the elite (who falls into this category is of course debatable, some individuals moreso than others). But they have intelligently, for their benefit, redirected that resentment towards those that have little. Is there really any logical connection between not engaging in wage labor (note: NOT equivalent to not working) and unfairness? Or is it a myth crafted by those who currently benefit the most?

That resentment is also precisely why it is key that a Basic income be universal with no means testing, everyone gets the same.

I think we should not extrapolate too much from the relatively small segment of the population falling into the the inherited money category. Correlation is not causation and all that.

It also seems that so often individuals jump to the hollywood crafted image of the layabout stoner sitting on the couch giggling at cartoons (or something similarly negative) when the concept of less wage labor is brought up. A reduction of wage labor does not equate to lack of work being done, it simply means doing much of that work for different reasons and rewards and incentives.

As I said in the Links thread today, we produce too much, we consume too much, we grow too much. More wage labor overall as a requirement for survival is certainly not the solution to any real problem that we face, its a massively inefficient use of resources and a massive strain on the ecosystems.

Yves Smith Post author , November 21, 2017 at 8:34 pm

I am really gobsmacked at the sense of entitlement on display here. Why are people entitled to an income with no work? Being an adult means toil: cleaning up after yourself, cleaning up after your kids if you have them, if you are subsistence farmer, tending your crops and livestock, if you are a modern society denizen, paying your bills and your taxes on time. The idea that people are entitled to a life of leisure is bollocks. Yet you promote that.

Society means we have obligations to each other. That means work. In rejecting work you reject society.

And the touting of "creativity" is a top 10% trope that Thomas Frank called out in Listen, Liberal. It's a way of devaluing what the bottom 90% do.

WobblyTelomeres , November 21, 2017 at 8:53 pm

My argument with the article is that, to me, it smacks of Taylorism. A follow-on study would analyze how many hours a laborer must work before the acquired sense of purpose and dignity and associated happiness began to decline. Would it be 30 hours a week of backbreaking labor before dignity found itself eroded? 40? 50? 60? When does the worker break? Just how far can we push the mule before it collapses?

The author alludes to this: "The overwhelming proportion relate their social status and life happiness to gaining a job"

Work equals happiness. Got it.

But, as a former robotics instructor, and as one who watches the industry (and former students), I see an automated future as damn near inevitable. Massive job displacement is coming, life as a minimum wage burger flipper will cease, with no future employment prospects short of government intervention (WPA and CCC for all, I say). I'm not a Luddite, obviously, but there are going to be a lot of people, billions, worldwide, with no prospect of employment. Saying, "You're lazy and entitled" is a bit presumptuous, Yves. Not everyone has your ability, not everyone has my ability. When the burger flipping jobs are gone, where do they go? When roombas mop the floors, where do the floor moppers go?

flora , November 21, 2017 at 9:38 pm

"WPA and CCC for all, I say. "

+1

We could use a new Civilian Conservation Corps and and a Works Progress Administration. There's lots of work that needs doing that isn't getting done by private corporations.

nihil obstet , November 21, 2017 at 10:05 pm

The outrage at non-work wealth and income would be more convincing if it were aimed also at owners of capital. About 30% of national income is passive -- interest, rents, dividends. Why are the owners of capital "entitled to an income with no work?" It's all about the morality that underlies the returns to capital while sugaring over a devaluation of labor. As a moral issue, everyone should share the returns on capital or we should tax away the interest, rents, and dividends. If it's an economic issue, berating people for their beliefs isn't a reason.

WobblyTelomeres , November 21, 2017 at 10:14 pm

Why are the owners of capital "entitled to an income with no work?"

THIS!!!! So much, THIS!!!! But, what else is a Wobbly to say, eh?

Yves Smith Post author , November 22, 2017 at 2:27 am

The overwhelming majority do work. The top 0.1% is almost entirely private equity managers who are able to classify labor income as capital gains through the carried interest loophole. Go look at the Forbes 400.

The 1% are mainly CEOs, plus elite professionals, like partners at top law and consulting firms and specialty surgeons (heart, brain, oncology). The CEOs similarly should be seen as getting labor income but have a lot of stock incentive pay (that is how they get seriously rich) which again gets capital gains treatment.

You are mistaking clever taking advantage of the tax code for where the income actually comes from. Even the kids of rich people are under pressure to act like entrepreneurs from their families and peers. Look at Paris Hilton and Ivanka as examples. They both could have sat back and enjoyed their inheritance, but both went and launched businesses. I'm not saying the kids of the rich succeed, or would have succeed to the extent they do without parental string-pulling, but the point is very few hand their fortune over to a money manager and go sailing or play the cello.

IsotopeC14 , November 22, 2017 at 2:58 am

Isn't the brother of the infamous Koch duo doing exactly that? Actually, if all the .001%ers were like him, we'd all be better off

IsotopeC14 , November 22, 2017 at 1:34 am

What's your take on Rutger Bergman's ted talk? i think most jobs aren't real jobs at all, like marketing and ceo's. why can't we do 20 hour work weeks so we don't have huge amounts of unemployment? Note, I was "unemployed" for years since "markets" decide not to fund science in the US. Yay Germany At least I was fortunate enough to not be forced to work at Walmart or McDonalds like the majority of people with absolutely no life choices. Ah the sweet coercion of capitalism.

flora , November 21, 2017 at 9:09 pm

Your hopes for a UBI are undone by some of the real world observations I've made over many years, with regard to how a guaranteed income increase, of any measure, for a whole population of an area, affects prices. Shorter: income going up means prices are raised by merchants to capture the new income.

Your assumption that any UBI would not be instantly captured by raised prices is naive, at best. It's also naive to assume companies would continue to pay wages at the same level to people still employed, instead of reducing wages and letting UBI fill in the rest. Some corporations already underpay their workers, then encourage the workers to apply for food stamps and other public supports to make up for the reduced wage.

The point of the paper is the importance of paid employment to a person's sense of well being. I agree with the paper.

Andrew Dodds , November 22, 2017 at 2:48 am

For the vast majority, a UBI would be income-neutral – it would have to be, to avoid massive inflation. So people would receive a UBI, but pay more tax to compensate. The effect on prices would be zero.

The advantage of a UBI is mostly felt at the lower end, where insecure/seasonal work does now pay. At the moment, a person who went from farm labourer to Christmas work to summer resort work in the UK would certainly be working hard, but also relentlessly hounded by the DWP over universal credit. A UBI would make this sort of lifestyle possible.

jsn , November 21, 2017 at 11:28 am

Davidab, Good for you, but your perspicacity is not scalable. People are social animals and your attitude toward "the herd", at least as expressed here, is that of a predator, even if your taste doesn't run toward predation. Social solutions will necessarily be scalable or they won't be solutions for long.

Lambert Strether , November 22, 2017 at 1:44 am

> the organized herd a herd animal trapped in the herd

I don't think throwing 80% to 90% of the population into the "prey" bucket is especially perspicacious politically (except, of course, for predators or parasites). I also don't think it's especially perspicacious morally. You write:

Not very practical advice for most, I realize, trapped in the herd as they are in car payments and mortgages, but perhaps aspirational?

Let me translate that: "Trapped in the herd as many are to support spouses and children." In other words, taking the cares of the world on themselves in order to care for others.

BJ , November 21, 2017 at 6:37 am

Unemployed stay at home dad here. My children are now old enough to no longer need a stay at home dad. Things I have done: picked up two musical instruments and last year dug a natural swimming pond by hand. Further, one would need to refute all the increased happiness in retirement (NBER). Why social security but not UBI? I get being part of the precariat is painful and this is a reality for most the unemployed no matter where you live in the world. A UBI is unworkable because it will never be large enough to make people's lives unprecarious. Having said that, I am almost positive if you gave every unemployed person 24 k a year and health benefits, there would be a mass of non working happy creative folks.

divadab , November 21, 2017 at 7:41 am

UBI seems to me to encourage non-virtuous behavior – sloth, irresponsibility, fecklessness, and spendthriftness. I like the Finnish model – unemployment insurance is not limited – except if you refuse work provided by the local job center. Lots of work is not being done all over America – we could guarantee honest work to all with some imagination. Start with not spraying roundup and rather using human labor to control weeds and invasive species.

I do agree that universal health insurance is necessary and sadly Obamacare is not that.

ambrit , November 21, 2017 at 8:34 am

The crux of this problem is the definition used for "non-virtuous behaviour." A new CCC is a good place to start though. (Your Tax Dollars At Work! [For some definition of tax dollars.]) As for BJ above, I would suppose that child rearing was his "employment" for years. good so far, but his follow-up is untypical. The 'Empty Nester' mother is a well known meme.

a different chris , November 21, 2017 at 9:19 am

Spendthriftness on 24K a year? Seriously? If we are disgorging unprofessional opinions, I will add my own: sloth and irresponsibility are more signs of depression rather than freedom from having to work. In fact, I believe (and I think much of the stuff here) supports the idea that people want to be seen as useful in some way. Doesn't include me! :) .. unfortunately, I have the charmingly named "dependents" so there you have it.

BJ , November 21, 2017 at 11:18 am

I lived 6 years as a grad student on 24k a year and would say it was easy. Only thing I would have to had worried about was awful health insurance. A two household each with 24k would be even easier, especially if you could do it in a low cost area. So I am not sure what you mean by spendthrift. But again it will never happen, so we will be stuck with what we have or most likely an even more sinister system. I guess I am advocating for a JG with unlimited number of home makers per household.

roadrider , November 21, 2017 at 9:23 am

except if you refuse work provided by the local job center

And who's to say that the local "job center" has work that would be appropriate for every person's specific talents and interests? This is no better than saying that you should be willing to go work for some minimum-wage retail job with unpredictable scheduling and other forms of employer abuses after you lose a high-paying job requiring special talents. I have to call bullshit on this model. I went through a two-year stretch if unemployment in no small part because the vast majority of the available jobs for my skill set were associated with the MIC, surveillance state or the parasitic FIRE sector. I was able to do this because I had saved up enough FY money and had no debts or family to support.

I can also attest to the negative aspects of unemployment that the post describes. Its all true and I can't really say that I'e recovered even now, 2.5 years after finding another suitable job.

Jesper , November 21, 2017 at 10:55 am

The job center in the neighbouring Sweden had the same function. Had is the important word. My guess is that the last time someone lost their unemployment insurance payout due to not accepting a job was in the early 1980s. Prior to that companies might, maybe, possibly have considered hiring someone assigned to them – full employment forced companies to accept what was offered. Companies did not like the situation and the situation has since changed.

Now, when full employment is a thing of the past, the way to lose unemployment insurance payouts is by not applying to enough jobs. An easily gamed system by people not wanting to work: just apply to completely unsuitable positions and the number of applications will be high. Many companies are therefore overwhelmed by applications and are therefore often forced to hire more people in HR to filter out the unsuitable candidates.
People in HR tend not to know much about qualifications and or personalities for the job so they tend to filter out too many. We're all familiar with the skills-shortage .
Next step of this is that the companies who do want to hire have to use recruitment agencies. Basically outsourcing the HR to another company whose people are working on commission. Recruiters sometimes know how to find 'talent', often they are the same kind of people with the same skills and backgrounds as people working in HR.

To even get to the hiring manager a candidate has to go through two almost identical and often meaningless interviews. Recruiter and then HR. Good for the GDP I suppose, not sure if it is good for anything else.

But back on topic again, there is a second way of losing unemployment insurance payout: Time. Once the period covered has passed there is no more payouts of insurance. After that it it is time to live on savings, then sell all assets, and then once that is done finally go to the welfare office and prove that savings are gone and all assets are sold and maybe welfare might be paid out. People on welfare in Sweden are poor and the indignities they are being put through are many. Forget about hobbies and forget about volunteering as the money for either of those activities simply aren't available. Am I surprised by a report saying unemployed in Sweden are unhappy? Nope.

nonclassical , November 21, 2017 at 10:42 am

meanwhile NYTimes testimonials Friday, show average family of 4 healthprofit costs (tripled, due to trump demise ACA) to be $30,000. per year, with around $10,000. deductible end of any semblance of affordable access, "murKa"

https://www.nytimes.com/2017/11/16/us/politics/obamacare-premiums-middle-class.html

Jeremy Grimm , November 21, 2017 at 1:53 pm

What do you mean by virtuous behavior?

Where does a character like Bertie Wooster in "Jeeves" fit in your notions of virtuous behavior? Would you consider him more virtuous working in the management of a firm, controlling the lives and labor of others -- and humorously helped by his his brilliant valet, Jeeves, getting him out of trouble?

For contrast -- in class and social status -- take a beer-soaked trailer trash gentleman of leisure -- and for sake of argument blessed with less than average intelligence -- where would you put him to work where you'd feel pleased with his product or his service? Would you feel better about this fellow enjoying a six-pack after working 8 hours a day 5 days a week virtuously digging and then filling a hole in the ground while carefully watched and goaded by an overseer? [Actually -- how different is that from "using human labor to control weeds and invasive species"? I take it you're a fan of chain-gangs and making the poor pick up trash on the highways?]

What about some of our engineers and scientists virtuously serving the MIC? Is their behavior virtuous because they're not guilty of sloth, irresponsibility [in executing their work], fecklessness, and spendthriftness? On this last quality how do you feel about our government who pay the salaries for all these jobs building better ways to kill and maim?

Bill Smith , November 21, 2017 at 8:01 am

How big is the swimming pool and how long did it take? Where did you put the dirt?

BJ , November 21, 2017 at 11:07 am

It is a design by David Pagan Butler. It is his plunge pool design, deepend is 14 by 8 by 7 deep. I used the dirt to make swales around some trees. Win win all around.

tegnost , November 21, 2017 at 9:32 am

curious to know whether you are married to someone with a job?

BJ , November 21, 2017 at 11:25 am

The answer is yes my spouse works. So I do have a schedule of waking up to make her lunch everyday, meeting her at lunch to walk, and making dinner when she gets home, but we do all those things on her days off so .

But again we would need to explain away, why people who are retired are happier? Just because they think they payed into social security? Try explaining to someone on the SS dole how the government spends money into existence and is not paid by taxes or that the government never saved their tax money, so there are not entitled to this money.

David Kane Miller , November 21, 2017 at 6:55 am

I hated working for other people and doing what they wanted. I began to feel some happiness when I had a half acre on which I could create my own projects. Things improved even more when I could assure myself of some small guaranteed income by claiming Social Security at age 62. To arise in the morning when I feel rested, with interesting projects like gardens, fences, small buildings ahead and work at my own pace is the essence of delight for me. I've been following your arguments against UBI for years and disagree vehemently.

a different chris , November 21, 2017 at 9:23 am

I feel I would behave the same as you, if I had the chance. *But* no statements about human beings are absolute, and because UBI would work for either of us does not mean it would work for the majority. Nothing devised by man is perfect.

Mel , November 21, 2017 at 9:42 am

It's not you; it's not me. It's those deplorable people.

tegnost , November 21, 2017 at 9:37 am

first you had to buy the half acre in a suitable location, then you had to work many years to qualify for social security, the availability of which you paid for and feel you deserve. You also have to buy stuff for fences gardens and small buildings. At most that rhymes with a ubi but is significantly different in it's make up.

Lambert Strether , November 22, 2017 at 1:56 am

> when I had a half acre on which I could create my own projects

That is, when you acquired the half acre, which not everyone can do. It seems to me there's a good deal of projecting going on with this thread from people who are, in essence, statistical outliers. But Mitchell summarizes the literature:

So for decades, researchers in this area, as opposed to bloggers who wax lyrical on their own opinions, have known that the importance of work in our lives goes well beyond the income we earn.

If the solution that works for you is going to scale, that implies that millions more will have to own land. If UBI depends on that, how does that happen? (Of course, in a post-collapse scenario, the land might be taken , but that same scenario makes the existence of institutions required to convey the UBI highly unlikely. )

Carla , November 21, 2017 at 7:16 am

Very glad to hear that Bill Mitchell is working on the "Future of Work" book, and to have this post, and the links to the other segments. Thank you, Yves!

Andrew , November 21, 2017 at 7:25 am

I don't agree with this statement. Never will. I'm the complete opposite. Give me more leisure time and you'll find me painting, writing, playing instruments and doing things that I enjoy. I recall back to when I was a student, I relished in the free time I got (believe me University gave me a lot of free time) between lectures, meaning I could enjoy this time pursuing creative activities. Sure I might be different than most people but I know countless people who are the same.

My own opinion is that root problem lies in the pathology of the working mentality, that 'work' and having a 'job' is so engrained into our society and mindset that once you give most people the time to enjoy other things, they simply can't. They don't know what to do with themselves and they eventually become unhappy, watching daytime TV sat on the sofa.

I recall back to a conversation with my mother about my father, she said to me, 'I don't know how your father is going to cope once he retires and has nothing to do' and it's that very example of where work for so many people becomes so engrained in their mindset, that they are almost scared of having 'nothing to do' as they say. It's a shame, it's this systemic working mentality that has led to this mindset. I'm glad I'm the opposite of this and proud by mother brought me up to be this way. Work, and job are not in my vocabulary. I work to live, not live to work.

I_Agree , November 21, 2017 at 11:26 am

I agree with Andrew. I think this data on the negative effects says more about how being employed fundamentally breaks the human psyche and turns them into chattel, incapable of thinking for themselves and destroying their natural creativity. The more a human is molded into a "good worker" the less they become a full fledged human being. The happiest people are those that have never placed importance on work, that have always lived by the maxim "work to live, not live to work". From my own experience every assertion in this article is the opposite of reality. It is working that makes me apathethic, uncreative, and miserable. The constant knowing that you're wasting your life, day after day, engaged in an activity merely to build revenue streams for the rich, instead of doing things that help society or that please you on a personal level, is what I find misery inducing.

nycTerrierist , November 21, 2017 at 12:18 pm

I agree. If financial insecurity is removed from the equation -- free time can be used creatively for self-actualization, whatever form that may take: cultivating the arts, hobbies, community activities, worthy causes and projects. The ideology wafting from Mitchell's post smells to me like a rationale for wage slavery (market driven living, neo-liberalism, etc.)

jrs , November 21, 2017 at 12:48 pm

Besides how are people supposed to spend their time "exploring other opportunities" when unemployed anyway? To collect unemployment which isn't exactly paying that much anyway, they have to show they are applying to jobs. To go to the movies the example given costs money, which one may tend to be short on when unemployed. They probably are looking for work regardless (for the income). There may still be some free time. But they could go back to school? Uh in case one just woke up from a rock they were under for 100 years, that costs money, which one may tend to be short on when unemployed, plus there is no guarantee the new career will pan out either, no guarantee someone is just chomping at the bit to hire a newly trained 50 year old or something. I have always taken classes when unemployed, and paid for it and it's not cheap.

Yes to use one's time wisely in unemployment in the existing system requires a kind of deep psychological maturity that few have, a kind of Surrender To Fate, to the uncertainty of whether one will have an income again or not (either that or a sugar daddy or a trust fund). Because it's not easy to deal with that uncertainty. And uncertainty is the name of the game in unemployment, that and not having an income may be the pain in it's entirety.

FelicityT , November 21, 2017 at 3:18 pm

Sadly this breaking down into a "good worker" begins for most shortly after they begin school. This type of education harms society in a myriad of ways including instilling a dislike of learning, deference to authority (no matter how irrational and unjust), and a destruction of a child's natural curiosity.

Yves Smith Post author , November 21, 2017 at 5:21 pm

I don't buy your premise that people are "creative". The overwhelming majority do not have creative projects they'd be pursuing if they had leisure and income. Go look at retirees, ones that have just retired, are healthy, and have money.

Yves Smith Post author , November 21, 2017 at 4:29 pm

You are really misconstruing what the studies have found and misapplied it to your situation. Leisure time when you have a job or a role (being a student) is not at all the same as having time when you are unemployed, with or without a social safety net.

Summer , November 21, 2017 at 6:25 pm
jrs , November 21, 2017 at 6:37 pm

one often has a role when unemployed: finding work. But it's not a very fulfilling one! But if one is trying to find work, it's not exactly the absence of a role either even if it still leaves significantly more free time than otherwise, maybe winning the lottery is the absence of a role.

But then it's also not like we give people a UBI even for a few years (at any time in adult life) to get an education. Only if they take out a student loan approaching the size of a mortgage or have parents willing to pony up are they allowed that (to pay not just for the education but to live because having a roof over one's head etc. is never free, a UBI via debt it might be called).

Lambert Strether , November 22, 2017 at 2:00 am

> Give me more leisure time and you'll find me painting, writing, playing instruments and doing things that I enjoy.
Nothing to breed resentment of "the creative class" here! Blowback from Speenhamland brought on the workhouses, so be careful what you wish for.

Jesper , November 21, 2017 at 7:47 am

Again the UBI vs JG debate .

UBI won't happen and JG has been tried (and failed).

The argument that JG would allow the public sector to hire more people is demeaning to people already employed in the public sector and demonstrably false – people are hired into the public sector without there being a JG. It is most certainly possible to be against a JG while wanting more people working in the public sector.

The way forward is to have a government acting for people instead of for corporations. Increase the amount of paid vacations, reduce the pension age and stop with the Soviet style worship of work: While some people are apparently proud of their friends and relatives who died while at work it is also possible to feel sad about that.

diptherio , November 21, 2017 at 10:00 am

JG has been tried (and failed).

When and where? The NCCC seemed to work pretty good here in the Western US.

Jesper , November 21, 2017 at 10:27 am

The JG was tried in Communist countries in Europe, Asia and Americas. The arguments then and there were the same as here and now, made by the same type of social 'scientists' (economists).

Would a JG be different here and now as the Republicans and Democrats are representing the best interests of the people? Or are they representing the same kind of interests as the Communist parties did?

Yves Smith Post author , November 21, 2017 at 4:39 pm

Data, please. The USSR fell because it was spending on its military to keep up with the US, a much larger economy. Countering your assertion we have this:

tegnost , November 21, 2017 at 10:00 am

As long as people argue that "it's not fair" to fix the inequality issue and employ things like debt jubilee or student loan forgiveness, or if we fix the ridiculous cost of health care what will all those insurance agents do then we will wind up with the real kind of class warfare, rather than the current punching from the top down, the punching will come from the bottom, because the situation is not fair now, it's just TINA according to those who profit from it. In my own life there is a balance of creativity and work, and I find work enables my creativity by putting some pressure on my time, i.e., I get up earlier, I practice at 8:30 am instead of sleeping til 10 and winding up with S.A..D., I go to bed rather than watch tv or drink to excess.. in other words i have some kind of weird schedule, I have days off sort of When I've been unemployed I feel the way s described in the article. I find the arguments in favor of ubi tend to come from people who already have assets, or jobs, or family who they take care of which is actually a job although uncommonly described as such. The only truth I see in real life is that the unemployed I am intimately familiar with first are mentally oppressed by the notion that to repair their situation will require they work every waking hour at substandard wages for the rest of their life and that is a major barrier to getting started, and that is a policy choice the gov't and elite classes purposefully made which created the precariat and will be their undoing if they are unable to see this.

tegnost , November 21, 2017 at 10:15 am

Hey look, even the msm is looking at it
https://www.seattletimes.com/seattle-news/is-uprising-the-only-way-out-of-gross-inequality-maybe-so/

j84ustin , November 21, 2017 at 10:08 am

As someone who works in the public sector I never quite thought of it like that, thanks.

hunkerdown , November 21, 2017 at 7:53 am

Disappointing that there's no analysis in this context of less employment, as in shorter work weeks and/or days, as opposed to merely all or none.

nonclassical , November 21, 2017 at 10:45 am

see – hear

(but no possibility without healthcare access, rather than healthtprofit)

Vatch , November 21, 2017 at 11:31 am

Interesting point. I read a science fiction story in which the protagonist arrives for work at his full time job at 10:00 AM, and he's finished for the day at 4:00 PM. I can't remember the name of the story or novel, unfortunately.

jrs , November 21, 2017 at 1:04 pm

Agreed. And they already have it in places like Denmark. Why don't we talk about that? It actually exists unlike utopian schemes for either total UBI or total work guarantee (government job creation is not utopian, but imagining it will employ everyone is, and I would like the UBI to be more widely tried, but in this country we are nowhere close). Funny how utopia becomes more interesting to people than actual existing arrangements, even though of course those could be improved on too.

The Danish work arrangement is less than a 40 hour week, and mothers especially often work part-time but both sexes can. It's here in this country where work is either impossibly grueling or you are not working. No other choice. In countries with more flexible work arrangements more women actually work, but it's flexible and flexible for men who choose to do the parenting as well. I'm not saying this should be for parents only of course.

Lambert Strether , November 22, 2017 at 2:02 am

Because the JG sets the baseline for employment, which private companies must meet, the JG (unlike the UBI) can do this.

Otis B Driftwood , November 21, 2017 at 7:58 am

My own situation is that I am unhappy in my well-paying job and would like nothing more than to devote myself to other interests. I'm thirty years on in a relationship with someone who grew up in bad financial circumstances and panics whenever I talk about leaving my job. I tell her that we have 2 years of living expenses in the bank but I can't guarantee making the same amount of money if I do leave my job. She has a job that she loves and is important and pays barely 1/2 of my own income. So she worries about her future with me. She worries about losing her home. I suppose that makes me the definition of a wage slave. And it makes for an increasingly unhappy marriage. I admire those who have faced similar circumstances and found a way through this. Sorry to vent, but this topic and the comments hit a nerve with me and I'm still trying to figure this out.

ambrit , November 21, 2017 at 8:38 am

Otis; We are presently going through a period where that "two year cushion" has evaporated, for various reasons. We are seeing our way through this, straight into penury and privation. Take nothing for granted in todays' economy.

jrs , November 21, 2017 at 1:11 pm

yes find the lower paying job that you like more first. If you just quit for nothing in the hopes of finding one it might not happen. Of course unemployment also happens sometimes, whether we want it or not.

bronco , November 21, 2017 at 12:47 pm

The newer generations are worse when it comes to lifestyle. Those of that are older can at least remember a time without cellphones internet streaming services leasing a new car every 2 years etc.

What about the young? My niece and her husband should be all set , his mom sunk money into a home on the condition she moved into a mother in law apartment. So far so good right? 2 years in they are imploding even with the free child care she provides. Combined their wireless bill a month is over $300. The sit on the couch side by side and stream netflix shows to dueling iphones in front of a 65 inch tv that is not even turned on. Wearing headphones in silence.

Both driving new vehicles , both have gym memberships they don't use . They buy lattes 3 or 4 times a day which is probably another 500 a month.

My uncle passed away recently and my niece asked if she was in the will. It was literally her only communication on the subject. They are going under and could easily trim a few thousand a month from the budget but simply won't. No one in the family is going to lift a finger for them at this point they burned every possible bridge already. I have seen people living in cars plenty lately but I think these will be the first I see to living in brand new cars .

Somewhere along the line they got the impression that the american dream was a leased car a starbucks in one hand and an iphone in the other .

Confront them with the concept of living within a paycheck and they react like a patient hearing he has 3 months to live.

Lambert Strether , November 22, 2017 at 2:03 am

Ah. Reagan's "welfare queens" updated. Kids these days!

JBird , November 22, 2017 at 3:00 am

Yeah being poor, never mind growing up poor, just well and truly sucks and it can really @@@@ you up. Gives people all sorts of issues. I'm rather like her, but I have had the joy of multi-hour commutes to unexciting soul crushing work. Happy, happy, joy, joy! However don't forget that with the current political economy things are likely to go bad in all sorts of ways. This whole site is devoted to that. My suggestion is to keep the job unless you have something lined up. Not being able to rent has it own stresses too. Take my word for it.

Thuto , November 21, 2017 at 8:00 am

I may be engaging in semantics but I think conflating work and jobs makes this article a bit of a mixed bag. I know plenty of people who are terribly unhappy in their jobs, but nonetheless extract a sense of wellbeing from having a stable source of INCOME to pay their bills (anecdotally speaking, acute stress from recent job losses is closely linked to uncertainty about how bills are going to be paid, that's why those with a safety net of accumulated savings report less stress than those without). Loss of status, social standing and identity and the chronic stress borne from these become evident much later I.e. when the unemployment is prolonged, accompanied of course by the still unresolved top-of-mind concern of "how to pay the bills".

As such, acute stress for the recently unemployed is driven by financial/income uncertainty (I.e. how am I going to pay the bills) whereas chronic stress from prolonged unemployment brings into play the more identity driven aspects like loss of social standing and status. For policy interventions to have any effects, policy makers would have to delineate the primary drivers of stress (or lack of wellbeing as the author calls it) during the various phases of the unemployment lifecycle. An Unemployment Insurance Fund (UIF) like we have here in South Africa appears to address the early stages of unemployment, and the accompanying acute stress, quite well by providing the income guarantee (for six months) that cushions the shock of losing a job. What's still missing of course are interventions that promote the quick return to employment for those on UIF, so maybe a middle of the road solution between UBI and a jobs guarantee scheme is how policy makers should be framing this, instead of the binary either/or we currently have.

TroyMcClure , November 21, 2017 at 9:19 am

Lots' of people think they're unhappy with their jobs. Let them sit unemployed for 9 months and ask them if they want that job back. The usual parade of anecdata is on display here in the comments. Mitchell's real data and analysis in the article above still stand.

Thuto , November 21, 2017 at 10:06 am

If you'd read through my comment, and not rushed through it with a view of dishing out a flippant response, you'd have seen that nowhere do I question the validity of his data, I merely question how the argument is presented in some areas (NC discourages unquestioning deference to the views of experts no??). By the way, anecdotes do add to richer understanding of a nuanced and layered topic (as this one is) so your dismissal of them in your haste to invalidate people's observations is hardly helpful.

jrs , November 21, 2017 at 1:15 pm

Yes people many not like their jobs but prefer the security of having them to not. Yes even if the boss sexually harasses one (as we are seeing is very common). Yes even if there is other workplace abuse. Yes even when it causes depression or PTSD (but if one stays with such a job long term it ruins the self confidence that is one prerequisite to get another job!). Yes even if one is in therapy because of job stress, sexual harassment or you name it. The job allows the having health insurance, allows the therapy, allows the complaining about the job in therapy to make it through another week.

Lambert Strether , November 22, 2017 at 2:04 am

> The usual parade of anecdata is on display here in the comments. Mitchell's real data and analysis in the article above still stand.

Ding ding ding!

Democrita , November 21, 2017 at 8:13 am

When unemployed, the stress of worry about money may suppress the creative juices. Speaking from experience. People may well 'keep looking for jobs' because they know ultimately they need a job with steady income. The great experience of some freelancers notwithstanding, not all are cut out for it.

I would love to see some more about happiness or its lack in retirement–referenced by stay-at-home dad BJ , above.

I wonder, too, about the impact of *how* one loses one's job. Getting laid off vs fired vs quitting vs involuntary retirement vs voluntary, etc feel very different. Speaking from experience on that, too. I will search on these points and post anything of interest.

jrs , November 21, 2017 at 1:40 pm

There are also other things that are degrading about the very process of being unemployed not mentioned here. What about the constant rejection that it can entail? One is unemployed and looking for work, one sends out resumes, many of them will never be answered, that's rejection. Then if one is lucky they get interviews, many will never lead to jobs, yet more rejection. Does the process of constant rejection itself have a negative effect on a human being whether it's looking for jobs or dates or whatever? Isn't it learned helplessness to if one keeps trying for something and keeps failing. Isn't that itself demoralizing entirely independent of any doubtful innate demoralizing quality of leisure.

freedeomny , November 21, 2017 at 10:23 am

I am not so sure if I agree with this article. I think it really depends on whether or not you have income to support yourself, hate or love your job, and the amount of outside interests you have, among other things. Almost everyone I know who lives in the NYC area and commutes into the city .doesn't like their job and finds the whole situation "soul-crushing".

Those that live in Manhattan proper are (feel) a bit better off. I for one stopped working somewhat voluntarily last year. I write somewhat because I began to dislike my job so much that it was interfering with my state of well being, however, if I had been allowed to work remotely I probably would have stuck it out for another couple of years.

I am close enough to 62 that I can make do before SS kicks in although I have completely changed my lifestyle – i.e. I've given up a materialistic lifestyle and live very frugally.

Additionally I saved for many years once I decided to embark on this path. I do not find myself depressed at all and the path this year has been very enriching and exciting (and scary) as I reflect on what I want for the future. I'm pretty sure I will end up moving and buying a property so that I can become as self sufficient as possible. Also, I probably will get a job down the line – but if I can't get one because I am deemed too old that will be ok as well. The biggest unknown for me is how much health insurance will cost in the future .

Yves Smith Post author , November 21, 2017 at 5:15 pm

The article made clear that the studies included "unemployed but with income" from government support. It is amazing the degree to which readers ignore that and want to make the findings about "unemployed with no income".

JBird , November 22, 2017 at 3:30 am

That's because we Americans all have work=good=worthy=blessed by God while workless=scum=worthless=accursed by God engraved into our collective soul. Our politics, our beliefs, are just overlays to that.

Even when we agree that the whole situation just crushes people into paste, and for which they have no defense regardless of how hard they work, how carefully they plan, or what they do, that underlay makes use feel that this is their/our fault. Any suggestions that at least some support can be decoupled from work, and that maybe work, and how much you earn, should not determine their value, brings the atavistic fear of being the "undeserving poor," parasites and therefore reprobated scum.

So we don't hear what you are saying without extra effort because it's bypassing our conscious thoughts.

Jamie , November 21, 2017 at 10:43 am

Add my voice to those above who feel that forced labor is the bane of existence, not the wellspring. All this study says to me is that refusing to employ someone in capitalist society does not make them happy. It makes them outcasts.

So, I say yes to a JG, because anyone who wants work should be offered work. But at the same time, a proper JG is not forced labor. And the only way to ensure that it is not forced labor, is to decouple basic needs from wage slavery.

Left in Wisconsin , November 21, 2017 at 12:02 pm

I am critical of those who distinguish between the job and the income. Of course the income is critical to the dignity of the job. For many jobs, it is the primary source of that dignity. The notion that all jobs should provide some intrinsic dignity unrelated to the income, or that people whose dignity is primarily based on the income they earn rather than the work they do are deluded, is to buy in to the propaganda of "passion" being a requirement for your work and to really be blind to what is required to make a society function. Someone has to change the diapers, and wipe the butts of old people. (yes, I've done both.) It doesn't require passion and any sense of satisfaction is gone by about the second day. But if you could make a middle class living doing it, there would be a lot fewer unhappy people in the world.

It is well known that auto factory jobs were not perceived as good jobs until the UAW was able to make them middle class jobs. The nature of the actual work itself hasn't changed all that much over the years – mostly it is still very repetitive work that requires little specialized training, even if the machine technology is much improved. Indeed, I would guess that more intrinsic satisfaction came from bashing metal than pushing buttons on a CNC machine, and so the jobs may even be less self-actualizing than they used to be.

The capitalist myth is that the private sector economy generates all the wealth and the public sector is a claim on that wealth. Yet human development proves to us that this is not true – a substantial portion of "human capital" is developed outside the paid economy, government investment in R&D generates productivity growth, etc. And MMT demonstrates that we do not require private sector savings to fund public investment.

We are still a ways from having the math to demonstrate that government investment in caring and nurturing is always socially productive – first we need productivity numbers that reflect more than just private sector "product." But I think we are moving in that direction. Rather than prioritize a minimum wage JG of make-work, we should first simply pay people good wages to raise their own children or look after their elderly and disabled relatives. The MMT JG, as I understand it, would still require people to leave their kids with others to look after them in order to perform some minimum wage task. That is just dumb.

jrs , November 21, 2017 at 1:31 pm

Maybe it's dumb, it's certainly dumb in a system like the U.S. where work is brutal and often low paid and paid childcare is not well remunerated either. But caretakers also working seems to work in countries with greater income equality, good job protections, flexible work arrangements, and a decent amount of paid parental leave – yea Denmark, they think their children should be raised by professionals, but also work-life balance is still pretty good.

Whiskey Bob , November 21, 2017 at 1:34 pm

My take is that capitalism has made the benefits and malus of having a job so ingrained into culture and so reinforced. Having a job is so closely linked to happiness because it gives you the money needed to pursue it.

A job affords you the ability to pursue whatever goals you want within a capitalist framework. "Everything" costs money and so having a job gives you the money to pay for those costs and go on to fulfill your pursuit of happiness.

Analyzing whether people are happy or not under these conditions seem apparent that it is going to lead to results heavily biased towards finding happiness through employment.

The unemployed are often living off someone else's income and feel like an undeserving parasite. Adults are generally ingrained with the culture that they have to grow up and be independent and be able to provide for a new family that they will start up. Becoming unemployed is like being emasculated and infantile, the opposite of what is expected of adults.

There's also that not having a job is increasingly being punished especially in the case of America. American wages have stayed either largely static or have worsened, making being unemployed that much more of a burden on family or friends. Unemployment has been demonized by Reaganism and has become systematically punishable for the long term unemployed. If you are unemployed for too long, you start losing government support. This compounds the frantic rush to get out of unemployment once unemployed.

There is little luxury to enjoy while unemployed. Life while unemployed is a frustrating and often disappointing hell of constant job applications and having many of them lead to nothing. The people providing support often start to become less so over time and become more convinced of laziness or some kind of lack of character or willpower or education or ability or whatever. Any sense of systemic failure is transplanted into a sense of personal failure, especially under neoliberalism.

I am not so sure about the case of Europe and otherwise. I am sure that the third world often has little or no social safety nets so having work (in exploitative conditions in many cases) is a must for survival.

Anyways, I wonder about the exact methodologies of these studies and I think they often take the current feelings about unemployment and then attempt to extrapolate talking points for UBI/JG from them. Yes, UBI wouldn't change culture overnight and it would take a very, very long time for people to let down their guard and adjust if UBI is to be implemented in a manner that would warrant trust. This article seems to understand the potential for that, but decides against it being a significant factor due to the studies emphasizing the malus of unemployment.

I wonder how different the results would be if there were studies that asked people how they would feel if they were unemployed under a UBI system versus the current system. I know a good number of young people (mostly under 30) who would love to drop out and just play video games all day. Though the significance of such a drastic demographic shift would probably lead to great political consequences. It would probably prove the anti-UBI crowd right in that under a capitalist framework, the capitalists and the employed wouldn't tolerate the unemployed and would seek to turn them into an underclass.

Personally I think a combination of UBI and JG should be pursued. JG would work better within the current capitalist framework. I don't think it is without its pitfalls due to similar possible issues (with the similar policy of full employment) either under Keynesianism (e.g. Milton Friedman sees it as inefficient) or in the USSR (e.g. bullshit jobs). There is the possibility of UBI having benefits (not having the unemployed be a burden but a subsidized contributer to the economy) so I personally don't think it should be fully disregarded until it is understood better. I would like it if there were better scientific studies to expand upon the implications of UBI and better measure if it would work or not. The upcoming studies testing an actual UBI system should help to end the debates once and for all.

redleg , November 21, 2017 at 2:28 pm

My $0.02: I have a creative pursuit (no money) and a engineering/physical science technical career (income!). I am proficient in and passionate about both. Over the last few years, the technical career became tenuous due to consolidation of regional consulting firms (endemic to this era)- wages flat to declining, higher work stress, less time off, conversation to contact employment, etc.- which has resulted in two layoffs.

During the time of tenuous employment, my art took on a darker tone. During unemployment the art stopped altogether.

I'm recently re-employed in a field that I'm not proficient. Both the peter principle and imposter syndrome apply. My art has resumed, but the topics are singular about despair and work, to the point that I feel like I'm constantly reworking the same one piece over and over again. And the quality has plummeted too.

In some fields (e.g. engineering), being a wage slave is the only realistic option due to the dominance of a small number of large firms. The big players crowd out independents and free lancers, while pressuring their own employees through just-high-enough wages and limiting time off. Engineering services is a relationship- based field, and the big boys (and they are nearly all boys) have vastly bigger networks to draw work from than a small firm unless that small firm has a big contact to feed them work (until they get gobbled up). The big firms also have more areas of expertise which limits how useful a boutique firm is to a client pool, except under very narrow circumstances. And if you are an introvert like most engineering people, there's no way to compete with big firms and their marketing staff to expand a network enough to compete.

In that way, consulting is a lot like art. To make a living at it you need either contacts or a sponsor. Or an inheritance.

ChrisPacific , November 21, 2017 at 5:30 pm

I would be interested to know what the definition of unemployment was for the purpose of this study (I couldn't find it in the supplied links). If it's simply "people who don't have a job," for example, then it would include the likes of the idle rich, retirees, wards of the state, and so on. Binary statements like this one do make it sound like the broad definition is the one in use:

When considering the world's population as a whole, people with a job evaluate the quality of their lives much more favorably than those who are unemployed.

The conclusion seems at odds with results I've seen for some of those groups – for example, I thought it was fairly well accepted that retirees who are supported by a government plan that is sufficient for them to live on were generally at least as happy as they had been during their working life.

If, on the other hand, the study uses a narrow definition (e.g. people who are of working age, want a job or need one to support themselves financially, but can't find one) then the conclusion seems a lot more reasonable. But that's a heavily loaded definition in economic and cultural terms. In that case, the conclusion (people are happier if they have a job) only holds true in the current prevailing model of society. It doesn't rule out the possibility of structuring society or the economy differently in such a way that people can be non-working and happy. The existence of one such population already (retirees) strongly suggests that outcomes like this are possible. A UBI would be an example of just such a restructuring of society, and therefore I don't think that this study and its result are necessarily a valid argument against it.

nihil obstet , November 21, 2017 at 6:07 pm

Which makes a person happier -- being considered worthless by one's society or valuable? How many studies do we need to answer that question? Apparently, a lot, because studies like this one keep on going. The underlying assumption is that jobs make one valuable. So if you don't have a job you're worthless. Now, who's happier on the whole, people with jobs or the unemployed? That's surely good for a few more studies. Did you know that members of socially devalued groups (minorities, non-heteros, and the like) have higher rates of dysfunction, rather like the unemployed? Hmm, I wonder if there's maybe a similar principle at work. And my solution is not to turn all the people of color white nor to change all the women to men nor to "cure" gays. Well, maybe a few more conclusive studies of this kind will convince me that we must all be the same, toeing the line for those whom it has pleased God to dictate our values to us.

I am convinced that we shouldn't outlaw jobs, because I believe the tons of stories about happy people in their jobs However, I also believe we shouldn't force everyone into jobs, because I know tons of stories about happy people without jobs. You know, the stories that the JG people explain away: parents caring for their children (JG -- "oh, we'll make that a job!"), volunteers working on local planning issues (JG -- "oh, we'll make that a job, too. In fact, we'll make everything worth doing a job. The important thing is to be able to force people to work schedules and bosses, because otherwise, they'll all lie around doing nothing and be miserable"), the retired (JG -- "that's not really the same, but they'd be better off staying in a job"). And this is all before we get to those who can't really hold a job because of disability or geography or other responsibilities.

I support the JG over the current situation, but as to what we should be working for, the more I read the JG arguments, the more paternalistic and just plain narrow minded judgmental they seem.

Summer , November 21, 2017 at 6:52 pm

If someone else gives you a sense of purpose and takes it away what was the purpose?

Lambert Strether , November 22, 2017 at 1:24 am

Data like that provided by Mitchell is important to demolishing the horrid "economic anxiety" frame much beloved by liberals, especially wonkish Democrats.* It's not (a) just feelings , to be solved by scented candles or training (the liberal version of rugged individualism) and (b) the effects are real and measurable. It's not surprising, when you think about it, that the working class is about work .

* To put this another way, anybody who has really suffered the crawling inwardness of anxiety, in the clinical sense, knows that it affects every aspect of one's being. Anxiety is not something deplorables deploy as cover for less than creditable motives.

[Nov 15, 2017] Alex Azar Can There Be Uglier Scenarios than the Revolving Door naked capitalism

Notable quotes:
"... By Lambert Strether ..."
"... So should Mr Azar be confirmed as Secretary of DHHS, the fox guarding the hen house appears to be a reasonable analogy. ..."
"... In this post, I'd like to add two additional factors to our consideration of Azar. The first: Democrat credentialism makes it hard for them to oppose Azar. The second: The real ..."
Nov 15, 2017 | www.nakedcapitalism.com

Alex Azar: Can There Be Uglier Scenarios than the Revolving Door? Posted on November 15, 2017 by Lambert Strether By Lambert Strether

Clearly, Alex Azar, nominated yesterday for the position of Secretary of Health and Human Services by the Trump Administration, exemplifies the case of the "revolving door," through which Flexians slither on their way to (or from) positions of public trust. Roy Poses ( cross-posted at NC ) wrote, when Azar was only Acting Secretary:

Last week we noted that Mr Trump famously promised to &#8220;drain the swamp&#8221; in Washington. Last week, despite his previous pledges to not appoint lobbyists to powerful positions, he appointed a lobbyist to be acting DHHS Secretary. This week he is apparently strongly considering Mr Alex Azar, a pharmaceutical executive to be permanent DHHS Secretary, even though the FDA, part of DHHS, has direct regulatory authority over the pharmaceutical industry, and many other DHHS policies strongly affect the pharmaceutical industry. (By the way, Mr Azar was also in charge of one lobbying effort.)

So should Mr Azar be confirmed as Secretary of DHHS, the fox guarding the hen house appears to be a reasonable analogy.

Moreover, several serious legal cases involving bad behavior by his company, and multiple other instances of apparently unethical behavior occurred on Mr Azar&#8217;s watch at Eli Lilly. So the fox might be not the most reputable member of the species.

So you know the drill&#8230;. The revolving door is a species of conflict of interest . Worse, some experts have suggested that the revolving door is in fact corruption. As we noted here , the experts from the distinguished European anti-corruption group U4 wrote ,

The literature makes clear that the revolving door process is a source of valuable political connections for private firms. But it generates corruption risks and has strong distortionary effects on the economy , especially when this power is concentrated within a few firms.

The ongoing parade of people transiting the revolving door from industry to the Trump administration once again suggests how the revolving door may enable certain of those with private vested interests to have excess influence, way beyond that of ordinary citizens, on how the government works, and that the country is still increasingly being run by a cozy group of insiders with ties to both government and industry. This has been termed crony capitalism.

Poses is, of course, correct. (Personally, I've contained my aghastitude on Azar, because I remember quite well how Liz Fowler transitioned from Wellpoint to being Max Baucus's chief of staff when ObamaCare was being drafted to a job in Big Pharma , and I remember quite well the deal with Big Pharma Obama cut, which eliminated the public option , not that the public option was anything other than a decreasingly gaudy "progressive" bauble in the first place.)

In this post, I'd like to add two additional factors to our consideration of Azar. The first: Democrat credentialism makes it hard for them to oppose Azar. The second: The real damage Azar could do is on the regulatory side.[1]

First, Democrat credentialism. Here is one effusive encomium on Azar. From USA Today, "Who is Alex Azar? Former drugmaker CEO and HHS official nominated to head agency" :

"I am glad to hear that you have worked hard, and brought fair-minded legal analysis to the department," Democratic Sen. Max Baucus said at Azar's last confirmation hearing.

And:

Andy Slavitt, who ran the Affordable Care Act and the Centers for Medicare & Medicaid Services during the Obama administration, said he has reason to hope Azar would be a good secretary.

"He is familiar with the high quality of the HHS staff, has real-world experience enough to be pragmatic, and will hopefully avoid repeating the mistakes of his predecessor," Slavitt said.

So, if Democrats are saying Azar is "fair-minded" and "pragmatic" -- and heaven forfend that the word "corruption"[2] even be mentioned -- how do they oppose him, even he's viscerally opposed to everything Democrats supposedly stand for? (Democrats do this with judicial nominations, too.) Azar may be a fox, alright, but the chickens he's supposedly guarding are all clucking about how impeccable his qualifications are!

Second, let's briefly look at Azar's bio. Let me excerpt salient detail from USA Today :

1. Azar clerked for Supreme Court Justice Antonin Scalia .

2. Azar went to work for his mentor, Ken Starr , who was heading the independent counsel investigation into Bill and Hillary Clinton's Whitewater land deal.

3. Azar had a significant role in another major political controversy when the outcome of the 2000 presidential election hinged on a recount in Florida . Azar was on the Bush team of lawyers whose side ultimately prevailed [3]

For any Democrat with a memory, that bio provokes one of those "You shall know them by the trail of the dead" moments. And then there's this:

When Leavitt replaced Thompson in 2005 and Azar became his deputy, Leavitt delegated a lot of the rule-making process to Azar.

So, a liberal Democrat might classify Azar as a smooth-talking reactionary thug with a terrible record and the most vile mentors imaginable, and on top of it all, he's an effective bureaucratic fixer. What could the Trump Administration possibly see in such a person? Former (Republican) HHS Secretary Mike Leavitt explains:

"Understanding the administrative rule process in the circumstance we're in today could be extraordinarily important because a lot of the change in the health care system, given the fact that they've not succeeded legislatively, could come administratively."

We outlined the administration strategy on health care in "Trump Adminstration Doubles Down on Efforts to Crapify the Entire Health Care System (Unless You're Rich, of Course)" . There are three prongs:

1) Administratively, send ObamaCare into a death spiral by sabotaging it

2) Legislatively, gut Medicaid as part of the "tax refom" package in Congress

3) Through executive order, eliminate "essential health benefits" through "association health plans"

As a sidebar, it's interesting to see that although this do-list is strategically and ideologically coherent -- basically, your ability to access health care will be directly dependent on your ability to pay -- it's institutionally incoherent, a bizarre contraption screwed together out of legislation, regulations, and an Executive order. Of course, this incoherence mirrors to Rube Goldberg structure of ObamaCare itself, itself a bizarre contraption, especially when compared to the simple, rugged, and proven single payer system. ( Everything Obama did with regulations and executive orders, Trump can undo, with new regulations and new executive orders . We might compare ObamaCare to a child born with no immune system, that could only have survived within the liberal bubble within which it was created; in the real world, it's not surprising that it's succumbing to opportunistic infections.[2])

On #1, The administration has, despite its best efforts, not achieved a controlled flight into terrain with ObamaCare; enrollment is up. On #2, the administration and its Congressional allies are still dickering with tax reform. And on #3 . That looks looks like a job for Alex Azar, since both essential health benefits and association health plans are significantly affected by regulation.

So, yes, there are worse scenarios than the revolving door; it's what you leave behind you as the door revolves that matters. It would be lovely if there were a good old-fashioned confirmation battle over Azar, but, as I've pointed out, the Democrats have tied their own hands. Ideally, the Democrats would junk the Rube Goldberg device that is ObamaCare, rendering all of Azar's regulatory expertise null and void, but that doesn't seem likely, given that they seem to be doing everything possible to avoid serious discussion of policy in 2018 and 2020.

NOTES

[1] I'm leaving aside what will no doubt be the 2018 or even 2020 issue of drug prices, since for me that's subsumed under the issue of single payer. If we look only at Azar's history in business, real price decreases seem unlikely. Business Insider :

Over the 10-year period when Azar was at Lilly, the price of insulin notched a three-fold increase. It wasn't just Lilly's insulin product, called Humalog. The price of a rival made by Novo Nordisk has also climbed, with the two rising in such lockstep that you can barely see both trend lines below.

The gains came despite the fact that the insulin, which as a medication has an almost-century-long history, hasn't really changed since it was first approved.

Nice business to be in, eh? Here's that chart:

It's almost like Lilly (Azar's firm) and Novo Nordisk are working together, isn't it?

[2] Anyhow, as of the 2016 Clinton campaign , the Democrat standard -- not that of Poses, nor mine -- is that if there's no quid pro quo, there's no corruption.

[3] And, curiously, "[HHS head Tommy] Thompson said HHS was in the eye of the storm after the 2001 terrorist attacks, and Azar had an important role in responding to the resulting public health challenges, as well as the subsequent anthrax attacks "

MedicalQuack , November 15, 2017 at 10:31 am

Oh please, stop quoting Andy Slavitt, the United Healthcare Ingenix algo man. That guy is the biggest crook that made his money early on with RX discounts with his company that he and Senator Warren's daughter, Amelia sold to United Healthcare. He's out there trying to do his own reputation restore routine. Go back to 2009 and read about the short paying of MDs by Ingenix, which is now Optum Insights, he was the CEO and remember it was just around 3 years ago or so he sat there quarterly with United CEO Hemsley at those quarterly meetings. Look him up, wants 40k to speak and he puts the perception out there he does this for free, not so.

diptherio , November 15, 2017 at 11:25 am

I think you're missing the context. Lambert is quoting him by way of showing that the sleazy establishment types are just fine with him. Thanks for the extra background on that particular swamp-dweller, though.

a different chris , November 15, 2017 at 2:01 pm

Not just the context, it's a quote in a quote. Does make me think Slavitt must be a real piece of work to send MQ so far off his rails

petal , November 15, 2017 at 12:52 pm

Alex Azar is a Dartmouth grad (Gov't & Economics '88) just like Jeff Immelt (Applied Math & Economics '78). So much damage to society from such a small department!

sgt_doom , November 15, 2017 at 1:21 pm

Nice one, petal !!!

Really, all I need to know about the Trumpster Administration:

From Rothschild to . . . .

https://en.wikipedia.org/wiki/Wilbur_Ross

Since 2014, Ross has been the vice-chairman of the board of Bank of Cyprus PCL, the largest bank in Cyprus.

He served under U.S. President Bill Clinton on the board of the U.S.-Russia Investment Fund. Later, under New York City Mayor Rudy Giuliani, Ross served as the Mayor's privatization advisor.

Jen , November 15, 2017 at 7:56 pm

Or from a "small liberal arts college" (which is a university in all but name, because alumni).

Tim Geitner ('82 – Goverment)
Hank Paulson ('68 – English)

jo6pac , November 15, 2017 at 2:13 pm

Well it's never ending game in the beltway and we serfs aren't in it.

https://consortiumnews.com/2017/11/15/trump-adds-to-washingtons-swamp/

Alfred , November 15, 2017 at 2:53 pm

I don't believe that the President's "swamp" ever consisted of crooked officials, lobbyists, and cronies I think it has always consisted of those regulators who tried sincerely to defend public interests.

It was in the sticky work of those good bureaucrats that the projects of capitalists and speculators bogged down. It is against their efforts that the pickup-driving cohort of Trumpism (with their Gadsden flag decals) relentlessly rails.

Trump has made much progress in draining the regulatory swamp (if indeed that is the right way to identify it), and no doubt will make considerably more as time wears on, leaving America high and dry. The kind of prevaricator Trump is may simply be the one who fails to define his terms.

Henry Moon Pie , November 15, 2017 at 4:13 pm

I think we've moved past the revolving door. We hear members of the United States Senate publicly voice their concerns about what will happen if they fail to do their employers' bidding (and I'm not talking about "the public" here). In the bureaucracy, political appointees keep accruing more and more power even as they make it clearer and clearer that they work for "the donors" and not the people. Nowhere is this more true than the locus through which passes most of the money: the Pentagon. The fact that these beribboned heroes are, in fact, setting war policy on their own makes the knowledge that they serve Raytheon and Exxon rather than Americans very, very troubling.

I suspect Azar's perception is that he is just moving from one post to another within the same company.

Watt4Bob , November 15, 2017 at 5:28 pm

Perfect cartoon over at Truthout

I'm amazed there is enough private security available on this planet to keep these guys safe.

Larry , November 15, 2017 at 8:01 pm

Big pharma indeed has so much defense from the supposed left. It combines their faith in technological progress, elite institutions, and tugs on the heart strings with technology that can save people from a fate of ill health or premature death. Of course, the aspect of the laws being written to line the pockets of corrupt executives is glossed over. While drug prices and medical costs spiral ever higher, our overall longevity and national health in the US declines. That speaks volumes about what Democrats really care about.

[Oct 14, 2017] Ilargi The Curious Case of Missing the Market Boom naked capitalism

Notable quotes:
"... Had he bailed out Main Street, the bubble would be smaller, ..."
"... Minsky had it right; capitalism's instability is the power to turn doing good into speculative fervor. ..."
"... Chauncey Gardiner , October 14, 2017 at 4:29 pm ..."
"... Thanks to interest rate suppression below the rate of inflation through central bank QE over the past nine years, suppression of Market Volatility through 'risk parity' funds and futures, trillions of dollars of corporate stock buybacks funded with debt that have so enriched a generation of CEOs, direct purchases of equities by central banks or their agents, a constant barrage of corporate media spin and taunting of market nonparticipants such as Ilargi pointed out here, massive engineered short squeezes, HFT algorithms to prevent price discovery, and other devices, I am once again reminded of the "‪WUN'ERFUL, WUN'ERFUL!" ‬parody of the old Lawrence Welk Show by comedian Stan Freberg when he repeatedly called out, "Turn off the bubble machine!" ..."
"... Funny how the corporate media presents stock prices as being the product of Mom's and Pop's freely made decisions in a "free market" environment. Never a mention of centrally planned policies of financial repression and wealth concentration to benefit a small segment of the population both economically and politically. ..."
"... Appreciated former IMF chief economist Simon Johnson's 2009 article about the three different kinds of bubbles. Believe this one can best be characterized as a "Type 3" political bubble where rising asset prices generate wealth that are fed into the political process. (See: https://baselinescenario.com/2009/07/24/after-peak-finance-larry-summers-bubble/ ) ..."
Oct 14, 2017 | www.nakedcapitalism.com

Look, emerging markets and developed economies have borrowed up the wazoo. Because they could. Often in US dollars. That may cause a -temporary- gain in stock markets, but it casts a dark spell over the reality of these markets. If it's that obvious that a substantial part of your happy news comes from debt, there's very little reason to celebrate.

Technology megacaps occupy all top six spots in the ranks of the world's largest companies by market capitalization for the first time ever. Up 39% this year, the $1 trillion those firms added in value equals the combined worth of the world's six-biggest companies at the bear market bottom in 2009. Apple, priced at $810 billion, is good for the total value of the 400 smallest companies in the S&P 500.

To cast those exact same words in a whole different light, no, Apple is not 'good for the total value of the 400 smallest companies in the S&P 500'. Yes, you can argue that Apple's 'value' has lifted other stocks too, but this has happened in a time of zero price discovery AND near zero interest rates. That means people have no way to figure out if a company is actually doing well, so it's safer to park their cash in Apple.

Ergo: Apple, and the FANGs in general, take valuable money out of the stock market. At the same time that they, companies with P/E earnings ratios to the moon and back, buy back their stocks at blinding speeds. So yeah, Apple may be 'good' for the total value of the 400 smallest companies in the S&P 500 , but at the same time it's not good for that value at all. It's killing companies by sucking up potential productive investment.

And Apple's just an example. Silicon Valley as a whole is a scourge upon America's economy, hoovering away even the cheapest and easiest money and redirecting it to questionable start-up projects with very questionable P/E ratios. But then, that's what you get without price discovery.

Bill Smith , October 14, 2017 at 7:28 am

Misquoting a Keynes misquote: markets can remain irrational for a long time.

So for those that rode the market up, extracted something real from the gains and then end up riding it down are still better off. Oh, yeah: avoid leverage.

esb , October 14, 2017 at 12:33 pm

Bill, who really knows what rational and irrational actually mean in the instant financial environment, an environment in which debt is being allowed to function, in many ways, as an asset rather than as a liability.

I only know two things with certainty first, that every investor I speak with and asset manager I respect is frightened beyond any measure I have experienced before in an rising equity market and second, that approximately half of my contacts fear that we will awaken one morning to the beginning of a war that will not easily be contained (many use the term, miscalculation).

So rather that being a moment or period of extreme euphoria this feels more like the 'mother' of all walls of worry.

Strategist , October 14, 2017 at 7:37 am

Shorter version: "the time to sell is when they start targeting the propaganda to buy at the shoeshine boy"
??

Wukchumni , October 14, 2017 at 10:43 am

Financial bubbles used to work in a fashion where there was oh so much confidence on the way up, and a leper-like quality to whatever was the object of desire once they start on their way down.

When the housing bubble got reignited here after collapse in 2008'ish, I was frankly shocked that it could happen, but I was thinking of the old ways, which used to make sense.

Seeing as there's a bubble in oh so many ways now (fancy a $100 million+ 20th century painting, do ya?) the bust is gonna be epic.

Steven Greenberg , October 14, 2017 at 11:16 am

I am hoping that owning the few remaining undervalued stocks will give me some sort of cover. I am also hoping that the long history of dividend payments from these companies will not drop as precipitously as their prices. I am also hoping that the amount of cash I am holding will take me through the worst of the crash.

Beyond that, I am not going to try to time the market.

Tomonthebeach , October 14, 2017 at 11:35 am

It is difficult not to conclude that globally, central bankers cannot seem to apply what they learned in Econ 101 (which is all most of us ever understood). Markets will always be best explained by Chaos theory , and thus it is best for central banks to head off bubbles rather than lend more inflation to them out of political concern. In 2008, Obama bailed out the wrong sector merely kicking the can down the road. Had he bailed out Main Street, the bubble would be smaller, and there would be more cash chasing after goods instead of the next spin of the stock market wheel of fortune.

Most of us put our coin in ETFs and mutual funds in the hope that we will still have some wealth in whichever sectors survive the impending crash that our governments have brought upon themselves. It's just a damned shame that unlike 1929, the windows of most high rise office buildings no longer open for easy egress. Well, there is always street fentanyl.

Synoia , October 14, 2017 at 4:40 pm

Markets will always be best only explained by Chaos theory

nonclassical , October 14, 2017 at 8:22 pm

not difficult to explain markets read history

Susan the other , October 14, 2017 at 12:12 pm

I've discovered Roger Penrose on YouTube. He just explained cosmological inflation as tubular rather than parabolic. Like one long perpetual piston back-pressured by dark matter barriers when enough entropy builds up – like snake grass sectioned off and growing into eternity and it all works because time=matter=frequency=time. And entropy fills the end stage of an aeon like raindrops in a pond. And then a new aeon begins. The universe just devalues an goes on forever. Mark Blythe might like this. We should just let it rain.

Milton , October 14, 2017 at 12:23 pm

They sure make it tough to get out or stay on the sidelines – case in point, Fidelity's Fixed Income earns exactly 0%. I moved assets from S&P fund in March and feel like a shmuck as I'm not only not earning anything, I get the pleasure of paying fees for my non-participation.

shinola , October 14, 2017 at 1:28 pm

A couple of old cliches: "Buy low & sell high" – Apparently, no longer operational. "There's a sucker born every minute" – seems the "global market analysts" still believe in this one (and probably with good reason)

Burritonomics , October 14, 2017 at 3:01 pm

Evaluating anything and ignoring all save the end product is jaw-dropping foolishness. In poker and gambling, it's called "playing the results". You're gonna up up broke, and will never see it coming. Minsky had it right; capitalism's instability is the power to turn doing good into speculative fervor.

Chauncey Gardiner , October 14, 2017 at 4:29 pm

Thanks to interest rate suppression below the rate of inflation through central bank QE over the past nine years, suppression of Market Volatility through 'risk parity' funds and futures, trillions of dollars of corporate stock buybacks funded with debt that have so enriched a generation of CEOs, direct purchases of equities by central banks or their agents, a constant barrage of corporate media spin and taunting of market nonparticipants such as Ilargi pointed out here, massive engineered short squeezes, HFT algorithms to prevent price discovery, and other devices, I am once again reminded of the "‪WUN'ERFUL, WUN'ERFUL!" ‬parody of the old Lawrence Welk Show by comedian Stan Freberg when he repeatedly called out, "Turn off the bubble machine!"

Funny how the corporate media presents stock prices as being the product of Mom's and Pop's freely made decisions in a "free market" environment. Never a mention of centrally planned policies of financial repression and wealth concentration to benefit a small segment of the population both economically and politically. Where's the SEC? or are we just to blame it all on economist Larry Summers' observation that artificially low interest rates over long time periods cause asset bubbles and high systemic debt leverage, but that repeated asset bubbles are not such a bad thing in an era of "secular stagnation"?

Appreciated former IMF chief economist Simon Johnson's 2009 article about the three different kinds of bubbles. Believe this one can best be characterized as a "Type 3" political bubble where rising asset prices generate wealth that are fed into the political process. (See: https://baselinescenario.com/2009/07/24/after-peak-finance-larry-summers-bubble/ )

[Oct 06, 2017] Prof. Philip Mirowski keynote for Life and Debt conference

Highly recommended!
Among interesting ideas that Mirkowski presented in this lecture are "privatization of science" -- when well paid intellectual prostitutes produce the reuslt which are expected by their handlers. the other is his thought on the difference between neoclassical economics and neoliberalism. Neoliberalism believes in state intervention and this intervention should take the form of enforcing market on all spheres of human society.
Another interesting idea that neoliberalism in many cases doe not need the success of its ideas. The failure can also be exploited for enforcing "more market" on the society.
In other words market fundamentalism has all features of civil religion and like in Middle Ages it is enforced from above. heretics are not burned at the stake but simply ostracized.
Notable quotes:
"... how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. ..."
"... As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading. ..."
Aug 18, 2013 | www.youtube.com

Life and Debt: Living through the Financialisation of the Biosphere

How can it be that the climate crisis, the biodiversity crisis and the deepest financial crisis since 1930s have done so little to undermine the supremacy of orthodox economics?

The lecture will preview material from Mirowski's new book: Never Lt a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown (Verso, 2013).

In this lecture, Professor Mirowski responds to the question of how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. Charting the contradictions of the contemporary political landscape, he notes that science denialism, markets for pollution permits and proposals for geo-engineering can all be understood as political strategies designed to neutralize the impact of environmentalism, as they all originated in the network of corporate-sponsored think-tanks that have made neoliberal accounts of society, politics and the economy so prevalent that even the most profound crises are unable to shake their grip on the political imagination.

For those of us who are still paying attention, the task of constructing an alternative politics of science and markets is a vital one.

Philip Mirowski is Carl E. Koch Professor at the University of Notre Dame, Indiana. His most famous book, More Heat Than Light: Economics as Social Physics (1989) established his reputation as a formidable critic of the scientific status of neoclassical economics. His Machine Dreams: Economics becomes a Cyborg Science (2002) presents a history of the Cold War consolidation of American economic orthodoxy in the same intellectual milieu that produced systems theory, the digital computer, the atomic bomb, the strategy of Mutually Assured Destruction, and the 'think tank'. The Road from Mont Pelerin: the Making of the Neoliberal Thought Collective (with Dieter Plewhe, 2009), drawn from the archives of the Mont Pelerin Society and the Chicago School, presents a scholarly history of neoliberalism: the political movement initiated by Friedrich Hayek and Milton Friedman in the 1940s, which has since become the world's dominant philosophy of government.

As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading.

This lecture is presented by the UTS Cosmopolitan Civil Societies Research Centre and the Australian Working Group on Financialisation at the University of Sydney.

[Oct 01, 2017] Crisis is the way neoliberalism evolves. It limps from one economic crisis to another

Oct 01, 2017 | www.theguardian.com

The turn to neoliberal politics occurred in the midst of a crisis in the 1970s , and the whole system has been a series of crises ever since. And of course crises produce the conditions of future crises.

In 1982–85 there was a debt crisis in Mexico, Brazil, Ecuador, and basically all the developing countries including Poland. In 1987–88 there was a big crisis in US savings and loan institutions. There was a wide crisis in Sweden in 1990, and all the banks had to be nationalized .

Then of course we have Indonesia and Southeast Asia in 1997–98, then the crisis moves to Russia, then to Brazil, and it hits Argentina in 2001–2.

And there were problems in the United States in 2001 which they got through by taking money out of the stock market and pouring it into the housing market. In 2007–8 the US housing market imploded, so you got a crisis here

[Sep 27, 2017] The architect of supply-side economics is now a professor at Columbia University, former University of Chicago economist Robert Mundell is an academic charlatan

Notable quotes:
"... For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan ..."
"... The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. ..."
Jan 20, 2017 | economistsview.typepad.com
RC AKA Darryl, Ron :

Thanks to New Deal democrat, who made me curious about yesterday's "comment section in re Summers' piece." Then thanks to Ron Waller for his comment which closed with: (Good read: "Robert Mundell, evil genius of the euro".)

https://www.theguardian.com/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro

Robert Mundell, evil genius of the euro

Greg Palast

For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan

The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of "supply-side economics" is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell's research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

"They won't even let me have a toilet. They've got rules that tell me I can't have a toilet in this room! Can you imagine?"

As it happens, I can't. But I don't have an Italian villa, so I can't imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

"It's very hard to fire workers in Europe," he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government's control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as "optimum currency area". This was a rule devised by Bob Mundell.

That doesn't bother Mundell. For him, the euro wasn't about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

"Ronald Reagan would not have been elected president without Mundell's influence," once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, "voodoo economics": the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

"Monetary discipline forces fiscal discipline on the politicians as well."

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Thus, we see that (unelected) Prime Minister Mario Monti is demanding labor law "reform" in Italy to make it easier for employers like Mundell to fire those Tuscan plumbers. Mario Draghi, the (unelected) head of the European Central Bank, is calling for "structural reforms" – a euphemism for worker-crushing schemes. They cite the nebulous theory that this "internal devaluation" of each nation will make them all more competitive.

Monti and Draghi cannot credibly explain how, if every country in the Continent cheapens its workforce, any can gain a competitive advantage.
But they don't have to explain their policies; they just have to let the markets go to work on each nation's bonds. Hence, currency union is class war by other means.

The crisis in Europe and the flames of Greece have produced the warming glow of what the supply-siders' philosopher-king Joseph Schumpeter called "creative destruction". Schumpeter acolyte and free-market apologist Thomas Friedman flew to Athens to visit the "impromptu shrine" of the burnt-out bank where three people died after it was fire-bombed by anarchist protesters, and used the occasion to deliver a homily on globalization and Greek "irresponsibility".

The flames, the mass unemployment, the fire-sale of national assets, would bring about what Friedman called a "regeneration" of Greece and, ultimately, the entire eurozone. So that Mundell and those others with villas can put their toilets wherever they damn well want to.

Far from failing, the euro, which was Mundell's baby, has succeeded probably beyond its progenitor's wildest dreams.

[Needless to say, I am not a fan of Robert Mundell's.]

Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:19 AM

Excellent article!

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

Reminded me of a point made by J.W. Mason:

http://jwmason.org/slackwire/what-does-crowding-out-even-mean/

"..It's quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported consumption goods, output can't rise without higher imports. And a country may well run out of foreign exchange before it runs out of domestic savings, finance or productive capacity. This is the idea behind multiple gap models in development economics, or balance of payments constrained growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness is bidding to replace inflation as the overriding concern of macro policy."

Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:30 AM
I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser.

Like would they advise Greece to boost their national savings rate or doesn't it matter since Germany controls monetary policy?

RC AKA Darryl, Ron said in reply to Peter K.... , January 20, 2017 at 08:58 AM
"I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser."

[Don't know and it sounds like way too much work for me to try to figure out. Savings rate is not a problem for us and it is difficult to see how Greece could realistically increase theirs sufficient to change anything without some other intervention being made first to decrease unemployment and increase output.]

pgl -> RC AKA Darryl, Ron... , January 20, 2017 at 09:47 AM
It is also too much work for PeterK. If he can't cherry pick it, he don't bother.

But note our net national savings rate has been less than 2% for a long, long time.

[Sep 11, 2017] The only countervailing force, unions, were 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.

Highly recommended!
Apr 15, 2017 | economistsview.typepad.com
Denis Drew , April 15, 2017 at 06:58 AM
What'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.

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).

cm -> Denis Drew ... , April 15, 2017 at 12:16 PM
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).

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.

Peter K. -> cm... , April 15, 2017 at 12:18 PM
"What automation and globalization have done is created a glut of labor - "

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.

cm -> Peter K.... , April 15, 2017 at 01:32 PM
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 PM
Same 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.

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.

Denis Drew -> cm... , April 15, 2017 at 03:19 PM
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.

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.

libezkova -> Denis Drew ... , April 15, 2017 at 04:14 PM
"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 .

http://www.cdc.gov/nchs/products/databriefs/db267.htm

http://economistsview.typepad.com/economistsview/2017/03/paul-krugman-the-scammers-the-scammed-and-americas-fate.html#comment-6a00d83451b33869e201b7c8e3c7c6970b

== 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...

[Jul 12, 2017] Ever more official lies from the US government by Paul Craig Roberts

Notable quotes:
"... John Williams counts the long term discouraged workers (discouraged for more than one year) who formerly (before "reforms") were counted officially. When the long term discouraged are counted, the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the labor force participation rate has been falling throughout the alleded "recovery." Normally, labor force participation rates rise during economic recoveries. ..."
"... It is an extraordinary thing that although the US government itself reports that if even a small part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute financial media, a collection of professional liars, still reports, in the face of the government's admission, that the unemployment rate as 4.4%. ..."
Jul 12, 2017 | www.unz.com

The "recovery" is more than a mystery. It is a miracle. It exists only on fake news paper.

According to CNN, an unreliable source for sure, Jennifer Tescher, president and CEO of the Center for Financial Services Innovation, reports that about half of Americans report that their living expenses are equal to or exceed their incomes. Among those aged 18 to 25 burdened by student loans, 54% say their debts are equal to or exceed their incomes. This means that half of the US population has ZERO discretionary income. So what is driving the recovery?

Nothing. For half or more of the US population there is no discretionary income there with which to drive the economy.

The older part of the population has no discretionary income either. For a decade there has been essentially zero interest on the savings of the elderly, and if you believe John Williams of shadowstats.com, which I do, the real interest rates have been zero and even negative as inflation is measured in a way designed to prevent Social Security cost of living adjustments.

In other words, the American economy has been living on the shrinkage of the savings and living standards of its population.

Last Friday's employment report is just another lie from the government. The report says that the unemployment rate is 4.4% and that June employment increased by 222,000 jobs. A rosy picture. But as I have just demonstrated, there are no fundamentals to support it. It is just another US government lie like Saddam Hussein's weapons of mass destruction, Assad's use of chemical weapons against his own people, Russian invasion of Ukraine, and so forth and so on.

The rosy unemployment picture is totally contrived. The unemployment rate is 4.4% because discouraged workers who have not searched for a job in the past four weeks are not counted as unemployed.

The BLS has a second measure of unemployment, known as U6, which is seldom reported by the presstitute financial media. According to this official measure the US unemployment rate is about double the reported rate.

Why? the U6 rate counts discouraged workers who have been discouraged for less than one year.

John Williams counts the long term discouraged workers (discouraged for more than one year) who formerly (before "reforms") were counted officially. When the long term discouraged are counted, the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the labor force participation rate has been falling throughout the alleded "recovery." Normally, labor force participation rates rise during economic recoveries.

It is very easy for the government to report a low jobless rate when the government studiously avoids counting the unemployed.

It is an extraordinary thing that although the US government itself reports that if even a small part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute financial media, a collection of professional liars, still reports, in the face of the government's admission, that the unemployment rate as 4.4%.

Now, let's do what I have done month after month year after year. Let's look at the jobs that the BLS alleges are being created. Remember, most of these alleged jobs are the product of the birth/death model that adds by assumption alone about 100,000 jobs per month. In other words, these jobs come out of a model, not from reality.

Where are these reported jobs? They are where they always are in lowly paid domestic services. Health care and social assistance, about half of which is "ambulatory health care services," provided 59,000 jobs. Leisure and hospitality provided 36,000 jobs of which 29,300 consist of waitresses and bartenders. Local government rose by 35,000. Manufacturing, once the backbone of the US economy, provided a measly 1,000 jobs.

As I have emphasized for a decade or two, the US is devolving into a third world workforce where the only employment available is in lowly paid domestic service jobs that cannot be offshored and that do not pay enough to provide an independent existance. This is why 50% of 25-year olds live at home with their parents and why there are more Americans aged 24-34 living with parents than living indepenently.

This is not the economic profile of a "superpower" that the idiot neoconservatives claim the US to be. The American economy that offshoring corporations and financialization have created is incapable of supporting the enormous US debt burden. It is only a matter of time and circumstance.

I doubt that the United States can continue in the ranks of a first world economy. Americans have sat there sucking their thumbs while their "leaders" destroyed them.

(Republished from PaulCraigRoberts.org by permission of author or representative)

[Jun 30, 2017] Robert Shiller The Index I Invented Is At Levels Last Seen In 1929 And 2000

Jun 30, 2017 | www.zerohedge.com
With the Shiller CAPE index having surpassed the 30x for the first time since September 2001, its creator, Nobel Laureate and Yale School of Management Economics Professor Robert Shiller is warning investors that they should be cautious about investing in such an "unusual" market.

" the CAPE index that John Campbell and I devised 30 years ago is at unusual highs.

The only time in history going back to 1881 when it has been higher are, A: 1929 and B: 2000."

"We are at a high level, and its concerning."

However, the index has risen to these levels before without precipitating an immediate collapse, Shiller said. Indeed, during the history of the stock market, it has only traded at a richer valuation during one period - June 1997 to September 2001 - as the dotcom farce blew and burst. Historical data for the index is available going back to 1881.

Luckily, Shiller says, US investors at least have the option of investing in foreign markets. There are plenty of venues today that allow clients paying in dollars to invest in foreign markets.

"I think people should be cautious now. We have a high market. That doesn't mean I would avoid it all together. One can invest abroad also, the US has an unusually high stock market compared with other countries, or one can invest in low cape sectors."

"The world looks better and cheaper than we do?," CNBC asked.

"Yea – well the world believes in us, I guess. I think everyone should diversify.

"One should have a little of everything if one hasn't diversified this would be a good time to do that."

The market's fragility is becoming increasingly apparent as vol events become more frequent. In Thursday trading, the S&P 500 was off as much as 1.4% - sending the VIX up 50%+ before the panic-vol sellers stepped in. The FANG stocks, which contributed an outsize portion to this year's rally, are facing their worst week in five months.

GUS100CORRINA -> The_Juggernaut , Jun 29, 2017 10:13 PM

Robert Shiller : "The Index I Invented Is At Levels Last Seen In 1929 And 2000"

My response; As long as CBs have control of the global money supply and its creation, the party can continue indefinitely. We live in a world of relativism. His model is based on absolutes which no longer exist.

I do have one observation about the graph. DEBT structures were much different in previous centuries than they are today. As a result, DEBT would most definitely alter the SHILLER CAPE RATIO graph to the point the today's level would approach or exceed the level during the 2000 time frame.

XXX, Jun 29, 2017 9:36 PM

And the only time since the '50s market cap has been higher relative to gdp was 2000...

http://thesoundingline.com/putting-the-us-stock-market-in-perspective/

squid -> Zorba's idea , Jun 29, 2017 10:23 PM

If they had tried QE in the way we do it today, there would have been civil war.

FDR did do QE, but he used gold. He made everyone sell their gold for 20USD and then devalued the USD in terms of gold to 35USD, a loss of 70% for the poor mugs that sold the government their gold. As such, FRD increased the potential USD supply by 70% overnight.

Same thing. Squid

chosen , Jun 29, 2017 10:13 PM

Shiller predicted the collapse of the 2000 bubble. Most economists can't predict shit. So I respect him for that.

hoytmonger -> chosen , Jun 29, 2017 10:28 PM

Shiller is a shill for the state. https://mises.org/blog/robert-shiller-shilling-state

GooseShtepping Moron -> Gab Timov , Jun 29, 2017 10:48 PM

The Shiller P/E uses a 10-year moving average adjusted for inflation, so it captures market behavior from slightly before 2008 and everything since then. To the extent that QE causes inflation, the Shiller index should reflect some of that too. But the answer to your second question is yes, things certainly could go higher, but this time I don't think they will.

All the Fed-bashers and Yellen-haters up-thread seem to be stuck on shitposter autopilot. They're just repeating the same comments they've been making for the last 9 years. Don't you guys realize that the Fed is tightening now? That Yellen does not have the market's back anymore? Haven't you guys heard that she's unwinding the Fed's balance sheet? It's been in a couple of ZH posts, you know. It's time to start changing your tune about the central banks, because Yellen is serious about tightening and this sucker's coming down.

Dewey Cheatum a... , Jun 29, 2017 11:13 PM

Shiller's index is the closest thing out there that has any semblance of reality. And as usual the Fed is out of balance as a washing machine on spin cycle with a load of wet towels on one side and some socks and a few undies on the other.

Yen Cross , Jun 29, 2017 11:14 PM

Chew on these. Investment Grade Bond I've spent the better part of Q-2 '17 looking at[real] GAAP earnings across all sectors, and then looked at bond issuance [debt financing] and found some astounding divergences.

I think we're going to see a cascade event, when investors realize what is actually happening. CAPex isn't happening. The cost of buy-backs is getting very expensive, and the fraud/ mis-reporting is really troublesome.

[Jun 02, 2017] Why International Financial Crises naked capitalism

Notable quotes:
"... By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development and Anis Chowdhury, former Professor of Economics, University of Western Sydney, who held various senior United Nations positions in New York and Bangkok.Originally published at Inter Press Service ..."
"... The author doing political economics, and leaving the politics out. Some big elephant in the room, the Cold War. Peace is war by other means. Finance was weaponized by Bretton-Woods et al. ..."
"... Profit and loss occur together, and neither can occur without instability. Think of balancing feather on the end of your finger and getting paid for it. What matters is who is doing the balancing, the securitizing of everything, the privatizing of profits and the socializing of losses. ..."
"... This is close to what Steve Keen was saying, that finance gets ahead of the real economy and there's no way to get the balance back I like the way this is written. There is no system. So matter-of-fact. What is better, the deflation caused by a gold standard or inflation without one? That's an argument that never gets resolved. Because it's not the real question. The thing we should ask is what is better, a sustainable, healthy planet or capital gains? ..."
"... In addition to debt peonage for the masses, over-financialization and monopolies go hand in hand. ..."
"... Why the "subordination of the real economy to finance"? When debt is used as the monetary base, creation of more debt is incentivized. And they're STILL DOING IT. Since the ECB is running out of German debt to buy, now there's a proposal for eurozone structured sovereign debt, so the ECB can buy EVEN MORE debt. Prepare for MOAB (Mother Of All Bubbles). It ends in a supernova. ..."
Jun 02, 2017 | www.nakedcapitalism.com
Why International Financial Crises? Posted on June 2, 2017 by Yves Smith Yves here. I have some small quibbles with this otherwise fine post.

The first is that, as Keynes stressed, the problem with past international monetary systems like the gold standard was that there was no punishment for countries that engaged in mercantilist strategies and ran trade surpluses. Countries have strong incentives to do so because they effectively steal demand, and thus jobs, from their trade partners. The US has been willing to accommodate this desire because it saw ways to get geopolitical advantage from this situation. Second is that the US has been explicit about trying to make the world safer for US banks and later investment banks. Among other things, it was seen as a way to promote US multinationals. Believe it or not, globalization was supposed to be a force for peace. See this tweetstorm .

Note also that Carmen Reinhart and Ken Rogoff had a simpler explanation: they looked at 800 years of financial crises and concluded that higher levels of international capital flows lead to more frequent and severe financial crises. And before you blame that on trade deals, keep in mind that the Bank of International Settlements found that the ratio of money movements related to securities transactions has exploded. In the runup to the crisis, international capital flows were over 60 times the level of trade.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development and Anis Chowdhury, former Professor of Economics, University of Western Sydney, who held various senior United Nations positions in New York and Bangkok.Originally published at Inter Press Service

International currency and financial crises have become more frequent since the 1990s, and with good reason. But the contributory factors are neither simple nor straightforward. Such financial crises have, in turn, contributed to more frequent economic difficulties for the economies affected, as evident following the 2008-2009 financial crisis and the ensuing Great Recession still evident almost a decade later.

Why International Coordination?

Why is global co-ordination so necessary? There are two main reasons. One big problem before the Second World War was the contractionary macroeconomic consequences of the "gold standard."

In 1944, before the end of the Second World War, President Franklin Delano Roosevelt convened the United Nations Conference on Monetary and Financial Affairs – better known as the Bretton Woods Conference – even before the UN itself was set up the following year in San Francisco. After almost a month, the conference established the framework for the post-war international monetary and financial system, including the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), or World Bank.

To be sure, the Bretton Woods system reflected sometimes poor compromises made among the negotiating government representatives. Nevertheless, it served post-war reconstruction and early post-colonial development reasonably well until 1971.

In September of that year, the Nixon Administration in the US – burdened with mounting inflation and unsustainable budget deficits, partly due to the costly Vietnam War – unilaterally withdrew from its core commitment to ensure full US dollar convertibility to gold at the agreed rate. Thus, the unilateral US action did not involve a transition from the Bretton Woods system to any coherent, internationally agreed alternative.

Birth of a "Non-System"

The pre-1971 post-Second World War period has often been referred to as a Golden Age, a period of rapid reconstruction, growth and employment expansion after the devastation of the Second World War. It was also a period of development and structural transformation in many developing countries.

All this came to an end when coordination and multilateralism collapsed following President Nixon's decision to renege on 1944 US commitments at Bretton Woods which became the basis for the post-war international monetary system.

The leading international monetary economist of the post-war period, Robert Triffin, described the post-1971 arrangements as amounting to a "non-system." Now, with the international monetary system essentially the cumulative outcome of various, sometimes contradictory and ad hoc responses to new challenges, the need for coordination is all the more urgent.

A strong case for co-ordination has long been made by the United Nations. For example, soon after the global financial crisis exploded in late 2008, the 2009 mid-year update of the UN's World Economic Situation and Prospects showed how better coordinated and more equitable fiscal stimuli would have benefited all parties – developed countries, developing countries, transition economies and, most of all, the least developed countries.

Anarchy and Fragility

Since the collapse of the Bretton Woods system in 1971, a small handful of currencies – especially the US dollar, the international favourite by far – have been held by others as reserve currencies. This has allowed the issuers of these currencies – especially the US – to run massive trade deficits, contributing to unsustainable global imbalances in savings and consumption.

A second underlying cause of international financial crises has been the ascendance, transformation and hegemony of the financial sector – termed "financialization" – over the past three to four decades. Partly as a consequence, many decision-makers are now often more concerned with short-term financial indicators than other key economic indicators, often presuming that the former reflect the latter despite the lack of such evidence.

A third factor has been growing "financial fragility," partly due to the global financial "non-system" in place since the collapse of the Bretton Woods system. Referring to this "non-system" as an international financial "architecture" is really insulting to architects. The lack of coherence and coordination has been exacerbated by financial deregulation, liberalization and globalization over the past three decades.

Finance Calling the Shots

The growing and spreading subordination of the real economy to finance in recent decades is a fundamental part of the problem. While finance is indeed a very important, if not an essential handmaiden for the functioning of the real economy, the subordination of the real economy to finance has transformed macro-financial dynamics, with unproductive, contractionary, even dangerous consequences.

So, to address the root causes of crises, much better, including more appropriate regulation of the financial system is needed to ensure consistently counter-cyclical macro-financial institutions, instruments and policies, and to subordinate the financial sector to the real economy.

The 2008 financial crisis has catalyzed many debates on these issues – some old, some new – for instance, between Keynesian/Minskyian economists and their opponents; between Anglo-American and continental European worldviews; and between the global North and South. Any sustainable solution will clearly require much better international cooperation and co-ordination.

Hence, almost a decade since the 2008 global financial crisis began, there is no shared political commitment to much needed international financial reforms. It took fifteen years from the beginning of the Great Depression, a world war and Roosevelt's extraordinary leadership before the world was able to reform the international financial system in 1944. But sadly, there is no Roosevelt for our times.

Disturbed Voter , June 2, 2017 at 6:36 am

The author doing political economics, and leaving the politics out. Some big elephant in the room, the Cold War. Peace is war by other means. Finance was weaponized by Bretton-Woods et al.

Coordination is occurring, but only on the Elite level per conspiracy theory. Really important political economic activity has to occur outside of public scrutiny.

epynonymous , June 2, 2017 at 2:36 am

Theoretically, the Paris Climate agreement should be a neutral proposition, with no industrial state standing to lose.

Conservatives always say that money costs jobs, but Keynes says it creates jobs. Like New Jersey demanding full-service gasoline stations. Conservatives are right that they may not be the right jobs, but Keynes says any jobs are better than none. So I suppose Keynes is a liberal.

Of course, your answer to what problem/solution is the re-appearing financial crises. Volatility has obvious winners. The insurance industry is both winner and loser here.

– Should have bought bitcoin

Disturbed Voter , June 2, 2017 at 6:34 am

Profit and loss occur together, and neither can occur without instability. Think of balancing feather on the end of your finger and getting paid for it. What matters is who is doing the balancing, the securitizing of everything, the privatizing of profits and the socializing of losses.

The reason why this is tolerated, is that people don't want to escape wage slavery and debt slavery, they simply want to be successful in the existing system. The alternative is a no-win no-loss system which is called stagnation by economists who are paid to say that.

epynonymous , June 2, 2017 at 1:07 pm

I ultimately concluded that Nixon was actually, unexpectedly, opposing Rockefeller, somehow. I'd say the Trump parallel is obvious, controlled opposition. He's pretty much in Hillary's pocket and if we accept the premise of Kayfabe((it's a story-line for the uninformed, deplorable, etc.)) then maybe he wasn't supposed to win.) Hillary came first, so there's no way she's his alter-ego. Also, there is still no messaging on the Democratic side.

We are off-script. Today, I'm am watching the Whitest Kids You Know sketch group. I'm currently enjoying "Moon Bears"

https://www.youtube.com/watch?v=pvjgIxuVdo4

JCC , June 2, 2017 at 8:52 am

Yves, Your "See this tweetstorm" link above is broken. I assume you meant to put in this link???

http://www.nakedcapitalism.com/2016/06/matt-stoller-how-the-us-saw-multinationals-as-means-to-prevent-war.html (which is an excellent point by Mr. Stoller, by the way)

Susan the other , June 2, 2017 at 9:35 am

This is close to what Steve Keen was saying, that finance gets ahead of the real economy and there's no way to get the balance back I like the way this is written. There is no system. So matter-of-fact. What is better, the deflation caused by a gold standard or inflation without one? That's an argument that never gets resolved. Because it's not the real question. The thing we should ask is what is better, a sustainable, healthy planet or capital gains?

Keen was talking about the folly of the "great moderation" and the levels of debt in the system killing the real economy and so is this article. It indicates we need an overriding theme – like, say, survival? My first thought is always the planet. Financialization has devastated the planet and caused awful inequality and at the same time has allowed sustainability to become a lost cause because it is essentially too expensive so it becomes an "externality". Fixing the planet is our best solution to our global/financial non-system. I don't care how many ratholes money gets poured down as long as it is put into maintaining the proper ecology of the earth – which must include equality. Sustainability and equality will be the countercyclical we need. And money is just cooperation.

LT , June 2, 2017 at 9:55 am

In addition to debt peonage for the masses, over-financialization and monopolies go hand in hand.

epynonymous , June 2, 2017 at 1:49 pm

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

The Hinkley Move- A La WKUK

Jim Haygood , June 2, 2017 at 5:06 pm

Why the "subordination of the real economy to finance"? When debt is used as the monetary base, creation of more debt is incentivized. And they're STILL DOING IT. Since the ECB is running out of German debt to buy, now there's a proposal for eurozone structured sovereign debt, so the ECB can buy EVEN MORE debt. Prepare for MOAB (Mother Of All Bubbles). It ends in a supernova.

[May 16, 2017] Mohamed El-Erian: We get signals that the system is under enormous stress

Notable quotes:
"... "The minute you to start talking about the inequality of opportunity, you fuel the politics of anger. The politics of anger have a tendency to produce improbable results. The major risk is that we don't know how much we've strained the underlying system. But what we do know is we are getting signals that suggest it's under enormous stress, which means the probability of either a policy mistake or market accident goes up." ..."
"... Third, pockets of extreme indebtedness must be addressed, a lesson he learned working with the IMF in Latin America in the 1980s. "When you have a debt overhang, it's like a black cloud," he argues. "It sucks oxygen out of the system. You cannot grow of it: whether it's Greece or student loans in the US, you need to deal with debt overhangs." The process of debt forgiveness is hard, he concedes, because some people are unfairly rewarded – "but the alternatives are worse." ..."
May 16, 2017 | www.theguardian.com

Leading economist and investor believes world leaders, and global capitalism, have reached fork in road between equality and chaos

This is the nub of El-Erian's analysis of why the developed world is approaching a fork in the road. The inequality generated by the current low-growth climate has three elements: inequality of wealth, income and opportunity. The last of the three – manifested in high youth unemployment in many eurozone countries, for example – is the most explosive element.

"The minute you to start talking about the inequality of opportunity, you fuel the politics of anger. The politics of anger have a tendency to produce improbable results. The major risk is that we don't know how much we've strained the underlying system. But what we do know is we are getting signals that suggest it's under enormous stress, which means the probability of either a policy mistake or market accident goes up."

... ... ...

How do we take the high, benign road? El-Erian has a four-point plan.

First, "we need to get back to investing in things that promote economic growth, infrastructure, a more pro-growth tax system for the US, serious labour retooling ... If you're in Europe, youth employment is an issue you've really got to think about very seriously."

Second, countries that can afford to do so must "exploit the fiscal space," meaning borrowing to invest or cutting taxes. He puts the US and Germany unambiguously in that category "and to a certain extent the UK".

Third, pockets of extreme indebtedness must be addressed, a lesson he learned working with the IMF in Latin America in the 1980s. "When you have a debt overhang, it's like a black cloud," he argues. "It sucks oxygen out of the system. You cannot grow of it: whether it's Greece or student loans in the US, you need to deal with debt overhangs." The process of debt forgiveness is hard, he concedes, because some people are unfairly rewarded – "but the alternatives are worse."

Fourth, regional and global governance needs repair. He compares the eurozone to a stool with one-and-a-half legs instead of four. The complete leg is monetary union, the half is banking union. The missing legs are fiscal integration, meaning a common budget, and political harmonisation. No wonder the eurozone is unstable, he says: "You can do three legs, you can't do one and half."

To return to El-Erian's core T-junction analogy, none of the required manoeuvres sound easy. "You don't need a big bang," he replies. "If you want to take the good turn you have to see some progress on some of these elements. If you don't, then we take the other turn." He ascribes equal probabilities – "it's a political judgment."

What's an investor to do? El-Erian says his own approach, which he admits is hard for the average person to copy, is framed like a bar-bell. At one end, he's invested in high-risk startups where you don't need all to succeed. At the other, he's in cash and cash-like investments. In the middle, he'll invest in public markets only tactically.

The bottom line: "I'm risk off."

[Apr 27, 2017] Elizabeth Warren on Big Banks and Their (Cozy Bedmate) Regulators

Notable quotes:
"... "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." ..."
"... 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 27, 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.

  • "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.

    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.

    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."

    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 21, 2017] Elizabeth Warren on Big Banks and Their (Cozy Bedmate) Regulators - The New York Times

    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.

    Photo

    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.

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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] Statistical Significance Is Overrated - Noah Smith

    Apr 15, 2017 | economistsview.typepad.com
    Gerald Scorse , April 14, 2017 at 06:20 AM
    Statistical Significance Is Overrated - Noah Smith

    "[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.

    Chris G -> Gerald Scorse... , April 14, 2017 at 07:29 AM
    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).

    [Apr 14, 2017] DeLong statement 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

    With oversized financial system crashes are inevitable; in a way oversize financial system is enough for producing financial crash: swine will always find the dirt.
    Notable quotes:
    "... Major Malinvestments Do Not Have to Produce Large Depressions by Brad DeLong ..."
    "... 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. ..."
    "... 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. ..."
    "... It'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. ..."
    "... 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. ..."
    Mar 18, 2017 | economistsview.typepad.com
    Peter K. : March 18, 2017 at 09:29 AM
    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.html

    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.[4] 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..."

    Peter K. -> Peter K.... , March 18, 2017 at 09:31 AM
    http://jwmason.org/slackwire/links-and-thoughts-for-march-15-2017/

    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.html

    libezkova -> Peter K.... , March 18, 2017 at 07:11 PM
    It'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.

    DeLong statement

    "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] Richmond Fed's Jeffrey Lacker Departs Due to Leak Defenestration as Coverup

    Apr 06, 2017 | www.nakedcapitalism.com
    From 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] Lack Hawk Down

    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] Richmond Fed president, Jeff Lacker Quits Today After Improper Disclosure of QE to analyst at firm selling research to hedge funds

    Apr 04, 2017 | economistsview.typepad.com
    BenIsNotYoda April 04, 2017 at 10:25 AM
    https://www.bloomberg.com/news/articles/2017-04-04/fed-s-lacker-quits-today-after-improper-disclosure-ny-times

    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.

    BenIsNotYoda , April 04, 2017 at 10:41 AM
    Statement Of Dr. Jeffrey Lacker

    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.

    libezkova , April 04, 2017 at 11:26 AM
    "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! "

    http://www.imdb.com/title/tt0034583/quotes?ref_=tt_ql_trv_4

    == quote ==
    Rick: How can you close me up? On what grounds?

    Captain Renault:
    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.

    [aloud]

    Captain Renault: Everybody out at once!

    [Apr 03, 2017] Why Has Italys Banking Crisis Gone Off the Radar?

    Notable quotes:
    "... By Don Quijones of Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street ..."
    "... across the wire ..."
    "... raised eyebrows ..."
    Apr 03, 2017 | www.nakedcapitalism.com
    Posted 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:

    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, shhhhhhhh

    0 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 .
    Trade now with TradeStation – Highest rated for frequent traders
    Subscribe to Post Comments 28 comments jsn , March 31, 2017 at 10:05 am

    Texas Ratio!

    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!

    craazyman , March 31, 2017 at 5:49 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 . . . )

    AbateMagicThinking but Not money , March 31, 2017 at 10:44 pm

    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!

    Dr Duh , March 31, 2017 at 11:09 am

    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?

    John Tipre , April 2, 2017 at 8:30 pm

    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.

    craazyman , March 31, 2017 at 11:41 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.

    Susan the other , April 1, 2017 at 11:01 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.

    DJG , March 31, 2017 at 11:57 am

    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).

    ChrisAtRU , March 31, 2017 at 12:40 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 "

    JustAnObserver , March 31, 2017 at 1:46 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))

    dontknowitall , March 31, 2017 at 2:10 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_border

    ChrisAtRU , March 31, 2017 at 7:33 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 ;-)

    ChrisAtRU , March 31, 2017 at 7:31 pm

    Ha! Yes, it was JKG. And for sure, the Words of Doom will be uttered just before well, Doom.

    John , March 31, 2017 at 9:12 pm

    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.

    ScottB , April 2, 2017 at 2:13 am

    "Shhhhh ..".

    Followed by, "ittttttt."

    BillC , March 31, 2017 at 1:02 pm

    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.

    Stein , April 1, 2017 at 7:57 am

    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.

    sunny129 , March 31, 2017 at 4:03 pm

    What's Shhhhhhhhh?

    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!

    LT , April 1, 2017 at 1:30 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.

    Gman , March 31, 2017 at 6:02 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.

    TheCatSaid , March 31, 2017 at 7:35 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.)

    John , March 31, 2017 at 9:19 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.

    H. Alexander Ivey , March 31, 2017 at 10:05 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 , April 1, 2017 at 1:26 pm

    Well, Cameron was an idiot for holding that referendum. And it's also important to remember that Germans hate referendums.

    John , March 31, 2017 at 8:29 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.

    RBHoughton , March 31, 2017 at 10:03 pm

    " . 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.

    Stein , April 1, 2017 at 7:58 am

    I was left under the impression that naked capitalism endorses the bail out of Italian banks. Has that changed?

    Ignim Brites , April 1, 2017 at 2:55 pm

    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] Ilargi: Our Economies Run On Housing Bubbles

    Notable quotes:
    "... By Raúl Ilargi Meijer, editor of Automatic Earth. Originally published at Automatic Earth ..."
    "... 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. ..."
    "... 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. ..."
    "... 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. ..."
    Apr 02, 2017 | www.nakedcapitalism.com
    Posted 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 .
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    Subscribe to Post Comments 122 comments JEHR , April 1, 2017 at 5:54 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!

    Moneta , April 1, 2017 at 7:39 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.

    Norb , April 1, 2017 at 7:57 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.

    Moneta , April 1, 2017 at 8:11 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 5:30 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 resource

    c , April 2, 2017 at 5:35 am

    SAND MINING

    Teejay , April 2, 2017 at 8:03 am

    Beach sand can not be used for making concrete.
    https://www.quora.com/Why-is-sea-sand-not-used-for-construction-purposes-1

    Bryan Kavanagh , April 1, 2017 at 6:00 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.

    Carla , April 1, 2017 at 6:21 am

    "We want growth by default, we want growth for growth's sake, without caring much where it will lead us."

    We are cancer.

    http://www.steadystate.org

    "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!

    HBE , April 1, 2017 at 11:56 am

    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.

    nonsense factory , April 1, 2017 at 2:47 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.

    bob , April 1, 2017 at 2:59 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.

    Moneta , April 1, 2017 at 3:38 pm

    It does. What goes up must come down.

    PhilM , April 1, 2017 at 10:56 pm

    Congratulations. You just proved his point.

    Jeotsu , April 1, 2017 at 5:20 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.

    Carla , April 1, 2017 at 7:30 pm

    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.

    Moneta , April 1, 2017 at 7:17 am

    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.

    sunny129 , April 2, 2017 at 4:03 pm

    Who needs MONEY when one can have debt to infinity?

    jackiebass , April 1, 2017 at 7:35 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.

    Moneta , April 1, 2017 at 7:51 am

    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.

    JTMcPhee , April 1, 2017 at 1:02 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!

    HopeLB , April 1, 2017 at 8:29 pm

    Thank Joe Biden for that.

    JTMcPhee , April 1, 2017 at 10:02 pm

    Yah, that jovial bustards name was in mind at the moment.

    Of course, he didn't do it all by himself

    different clue , April 2, 2017 at 1:12 am

    No . . . but he was happy to help. In fact, he was happy to lead and take some of the credit for it.

    lyman alpha blob , April 1, 2017 at 10:13 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.

    JTMcPhee , April 1, 2017 at 10:41 am

    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?

    lyman alpha blob , April 1, 2017 at 12:56 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.

    HopeLB , April 1, 2017 at 9:05 pm

    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?

    Anti Schmoo , April 2, 2017 at 1:39 am

    Apparently the great "die-off" has already started in the U.S., and white Usian's are leading the way.
    https://www.nytimes.com/2016/06/01/health/american-death-rate-rises-for-first-time-in-a-decade.html?_r=0
    Just 72 myself; so I don't expect to see the worst of it

    Anonymous , April 2, 2017 at 4:10 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.

    Gman , April 2, 2017 at 5:04 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.

    Moneta , April 2, 2017 at 6:37 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.

    Gman , April 2, 2017 at 7:29 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.'

    Anonymous , April 2, 2017 at 10:04 am

    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.

    optimader , April 1, 2017 at 12:23 pm

    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??

    different clue , April 2, 2017 at 1:13 am

    Perhaps 'letting the Joneses pull ahead' is a viable behavioral alternative. At least for some.

    johnnygl , April 1, 2017 at 8:31 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.

    Moneta , April 1, 2017 at 8:37 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?

    Alejandro , April 1, 2017 at 9:37 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 deception

    Moneta , April 1, 2017 at 9:51 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 used

    Alejandro , April 1, 2017 at 10:43 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 will

    Moneta , April 1, 2017 at 11:50 am

    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.

    Moneta , April 1, 2017 at 12:11 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.

    Alejandro , April 1, 2017 at 12:42 pm

    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".

    different clue , April 2, 2017 at 1:17 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.

    Moneta , April 2, 2017 at 6:30 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.

    meme , April 2, 2017 at 11:52 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.

    Moneta , April 2, 2017 at 6:52 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 joules

    justanotherprogressive , April 1, 2017 at 10:13 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 sense

    Mark , April 2, 2017 at 9:51 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 badly

    craazyboy , April 1, 2017 at 10:57 am

    Quick! Take out a home equity loan before they change their minds!

    optimader , April 1, 2017 at 12:25 pm

    it's a real eye opener to look at the price escalation of Chicago lakefront condos on Zillow

    perpetualWAR , April 2, 2017 at 10:58 am

    House across the street just sold for $649,000. It is 684 sf.

    Seattle Bubble intact, ready for popping.

    Sound of the Suburbs , April 1, 2017 at 8:46 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.

    Moneta , April 1, 2017 at 9:43 am

    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 life

    Sound of the Suburbs , April 1, 2017 at 12:36 pm

    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.

    craazyboy , April 1, 2017 at 11:13 am

    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.

    Sound of the Suburbs , April 1, 2017 at 12:42 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.

    JTMcPhee , April 1, 2017 at 10:09 pm

    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.

    different clue , April 2, 2017 at 1:27 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.

    perpetualWAR , April 2, 2017 at 11:06 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.

    craazyboy , April 2, 2017 at 3:31 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.

    skippy , April 2, 2017 at 4:43 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 – ?????

    craazyboy , April 2, 2017 at 10:53 am

    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.

    skippy , April 2, 2017 at 3:42 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 imo

    craazyboy , April 2, 2017 at 4:13 pm

    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.

    Ruben , April 2, 2017 at 5:57 am

    "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.

    sunny129 , April 2, 2017 at 4:07 pm

    '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!

    human , April 1, 2017 at 9:15 am

    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.

    PhilM , April 1, 2017 at 11:32 pm

    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.

    different clue , April 2, 2017 at 1:38 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.

    https://slowmoney.org/

    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.
    https://solari.com/blog/

    And there is Richard Heinberg with his Power Down, and there is the Transition Town movement, and other such groups.

    BeekeeperRorie , April 1, 2017 at 9:24 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.

    justanotherprogressive , April 1, 2017 at 10:53 am

    "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?

    LT , April 1, 2017 at 12:07 pm

    Indeed.
    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.

    meme , April 1, 2017 at 11:50 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.

    Moneta , April 1, 2017 at 11:58 am

    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 war

    sunny129 , April 2, 2017 at 4:10 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!

    Moneta , April 2, 2017 at 5:29 pm

    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.

    fresno dan , April 1, 2017 at 11:55 am

    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.

    oh , April 1, 2017 at 2:49 pm

    Let's look forward, not back. /s

    different clue , April 2, 2017 at 1:43 am

    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.?

    McWatt , April 1, 2017 at 12:37 pm

    It certainly seems as if our country was much better off with 150 million people in it rather than
    the current 330 million.

    craazyboy , April 1, 2017 at 1:24 pm

    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.

    animalogic , April 2, 2017 at 12:08 am

    The shoes might be sensible, but the xanax isn't: it's
    vicious addictive.

    different clue , April 2, 2017 at 1:48 am

    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."

    JerryDenim , April 1, 2017 at 1:24 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.

    Dead Dog , April 1, 2017 at 3:13 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.

    james wordsworth , April 1, 2017 at 1:48 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.

    JerryDenim , April 1, 2017 at 8:57 pm

    ++ Bhutan measures "GNH" – Gross National Happiness instead of GDP. Let the thoughtful Buddhists lead the way perhaps?

    John , April 1, 2017 at 2:09 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.

    ExtraT , April 1, 2017 at 2:21 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:
    http://www.nakedcapitalism.com/2017/03/michael-hudson-democracy-collaborative.html

    James McFadden , April 1, 2017 at 2:22 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."

    craazyboy , April 1, 2017 at 3:08 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.

    James McFadden , April 1, 2017 at 7:26 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.

    craazyboy , April 1, 2017 at 8:00 pm

    ???

    John , April 2, 2017 at 7:02 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.

    Moneta , April 2, 2017 at 7:35 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.

    John , April 2, 2017 at 8:46 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.

    Norb , April 2, 2017 at 9:46 am

    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.

    John , April 2, 2017 at 4:00 pm

    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).

    Norb , April 2, 2017 at 9:32 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.

    JTMcPhee , April 2, 2017 at 10:33 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.pdf

    craazyboy , April 2, 2017 at 11:24 am

    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.

    JTMcPhee , April 2, 2017 at 3:47 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 system

    craazyboy , April 2, 2017 at 4:19 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.

    John , April 2, 2017 at 4:02 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).

    oh , April 1, 2017 at 3:18 pm

    Good comments, all. I agree with you.

    Dead Dog , April 1, 2017 at 3:26 pm

    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.

    different clue , April 2, 2017 at 1:54 am

    Are you in a position to speak force louder than the upper class can speak force?

    toolate , April 1, 2017 at 8:50 pm

    Beautiful post JM

    HopeLB , April 1, 2017 at 11:19 pm

    Thank You!

    Rexl , April 1, 2017 at 3:06 pm

    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.

    animalogic , April 2, 2017 at 12:33 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)

    different clue , April 2, 2017 at 1:55 am

    The bankster bailouts did not help the economy. They helped the bankster predasite anticonomy.

    Dead Dog , April 1, 2017 at 3:33 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 much

    Moneta , April 1, 2017 at 3:44 pm

    A debt jubilee would also wipe out pensions. Then who would pay the retirees?

    kgw , April 1, 2017 at 5:39 pm

    Boy, are you a dullard or what? (in somewhat of a jest, he said!) Who pays for anything? (rhetorical) ALL OF US!

    Moneta , April 1, 2017 at 6:46 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.

    UnhingedBecauseLucid , April 1, 2017 at 8:14 pm

    Probably one of Ilargi all time best post

    clevinger , April 1, 2017 at 8:15 pm

    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?

    Gman , April 2, 2017 at 6:06 am

    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.

    sunny129 , April 2, 2017 at 4:00 pm

    '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] The end – its demands for payment cannot be met. It was fictitious

    Notable quotes:
    "... When Schumpeter said that corporatism would induce the public will to adopt social democracy it seemed like a classic bait and switch to me. ..."
    Apr 02, 2017 | economistsview.typepad.com

    Soul Super Bad -> RGC... , April 02, 2017 at 11:39 AM

    the end – its demands for payment cannot be met. It was fictitious because it consisted
    "

    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?

    Get
    it --

    cm -> RGC... , April 02, 2017 at 11:57 AM
    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.

    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.

    RC AKA Darryl, Ron -> RGC... , April 02, 2017 at 02:29 PM
    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 PM
    IIRC, 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.

    [Apr 02, 2017] Reply

    Apr 02, 2017 | onclick="TPConnect.blogside.reply('6a00d83451b33869e201b7c8e7a08b970b'); return false;" href="javascript:void 0">
    Friday, March 31, 2017 at 09:33 AM RGC said in reply to libezkova... "It's tough to make predictions, especially about the future"

    -Yogi Berra
    ................
    We could add Schumpeter's "creative destruction" to your thought.

    https://en.wikipedia.org/wiki/Creative_destruction

    ....................
    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] 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.

    Apr 02, 2017 | economistsview.typepad.com
    RGC , April 02, 2017 at 10:24 AM
    Das 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.


    (edited from-)
    http://michael-hudson.com/2015/10/the-paradox-of-financialized-industrialization/

    [Mar 31, 2017] http://www.calculatedriskblog.com/2017/03/weekly-initial-unemployment-claims_30.html

    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.

    http://www.economicpopulist.org/content/how-many-jobs-are-needed-keep-population-growth

    == 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] S tandard Keynesian liquidity trap analysis was largely correct

    Mar 31, 2017 | economistsview.typepad.com
    Peter K. , March 31, 2017 at 05:53 AM
    I 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.)

    http://douglaslcampbell.blogspot.com/2017/03/raise-rates-to-raise-inflation.html

    Campbell:

    "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."

    * https://www.minneapolisfed.org/~/media/files/pubs/eppapers/17-1/the-great-recession-a-macroeconomic-earthquake.pdf

    The Great Recession: A Macroeconomic Earthquake

    Lawrence J. Christiano Northwestern University Federal Reserve Bank of Minneapolis

    February 2017

    EXECUTIVE SUMMARY

    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.

    [Mar 24, 2017] Are Empirical Economists Idiot Savants?

    Notable quotes:
    "... Only the people who understand both the data and its limitations, and not get lost in the illusion of precision ..."
    "... Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right. ..."
    www.ritholtz.com

    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 . . .

    Source:
    Data birth
    Economist Nov 18th 2010
    http://www.economist.com/node/17519706?story_id=17519706

    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

    http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors

    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

    Bill W

    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

    Opir@9.27 AM

    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

    RMM,

    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] Cambell law: 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

    Mar 23, 2017 | economistsview.typepad.com
    reason : , March 22, 2017 at 07:25 AM
    The most valuable part of Chris Dillow's piece is the link to Campbell's law.

    https://en.wikipedia.org/wiki/Campbell%27s_law

    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).

    anne -> reason ... , March 22, 2017 at 07:36 AM
    https://en.wikipedia.org/wiki/Campbell%27s_law

    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."

    JF -> anne... , March 22, 2017 at 07:50 AM
    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 AM
    I had Donald Campbell's stuff next to my bed for a long long time.

    [ Do suggest a reading for us. ]

    JF -> anne... , March 22, 2017 at 10:31 AM
    "Experimental and Quasi-Experimental Designs for Research" - copyright 1963, my version was the tenth printing in 1973
    anne -> JF... , March 22, 2017 at 08:23 AM
    http://www.nytimes.com/1996/05/12/us/donald-t-campbell-master-of-many-disciplines-dies-at-79.html

    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....

    JF -> anne... , March 22, 2017 at 10:34 AM
    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 AM
    It 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.

    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.

    libezkova -> im1dc... , March 22, 2017 at 02:08 PM
    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] http://michael-hudson.com/2017/01/the-land-belongs-to-god/

    Mar 23, 2017 | michael-hudson.com
    Reply Tuesday, March 21, 2017 at 02:32 PM

    [Mar 09, 2017] DrDick

    Mar 09, 2017 | profile.typepad.com
    said... 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] Problems of asymmetry in regulation: People who especially benefit from a particular regulation will be inclined to lobby or bribe government officials for it

    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] John Kenneth Galbraith, like John Maynard Keynes, was a giant among midgets both figuratively and literally.

    Notable quotes:
    "... John 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. ..."
    Feb 18, 2017 | economistsview.typepad.com
    RC AKA Darryl, Ron... , February 16, 2017 at 07:35 AM
    John 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.

    Nothing like overlooking the elephant is the room...something that economists are better at doing than trying to do their jobs.

    RC AKA Darryl, Ron -> JohnH... , February 16, 2017 at 08:27 AM
    Totally. John Kenneth Galbraith, like John Maynard Keynes, was a giant among midgets both figuratively and literally.

    [Feb 15, 2017] Contrary to What Robert Samuelson Says We Did Bail Out the Bankers and Did Not Prevent a Second Great Depression

    Notable quotes:
    "... 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? ..."
    Feb 15, 2017 | economistsview.typepad.com

    RGC : February 15, 2017 at 10:04 AM

    Contrary to What Robert Samuelson Says We Did Bail Out the Bankers and Did Not Prevent a Second Great Depression

    Dean Baker
    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.

    http://cepr.net/blogs/beat-the-press/contrary-to-what-robert-samuelson-says-we-did-bail-out-the-bankers-and-did-not-prevent-a-second-great-depression

    [Feb 15, 2017] Lysenkoism in the US economics: Mainstream economists who get paid well for their services are not that diverse

    Notable quotes:
    "... 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. ..."
    Feb 15, 2017 | economistsview.typepad.com
    sanjait -> Jerry Brown..., February 15, 2017 at 10:38 AM
    Economists are enormously diverse as a group. Any piece that explicitly or implicitly describes them as being homogeneous is being reductionist at best.

    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.

    DrDick -> sanjait... , February 15, 2017 at 10:51 AM
    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.

    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.

    Peter K. -> sanjait... , February 15, 2017 at 11:20 AM
    "there is probably mutual blame to be assigned."

    What a masochist.

    Stockholm syndrome.

    Jerry Brown -> sanjait... , February 15, 2017 at 11:31 AM
    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] John Kenneth Galbraith on Monetary Policy:

    Notable quotes:
    "... 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. ..."
    Feb 13, 2017 | economistsview.typepad.com
    RGC : February 13, 2017 at 06:13 AM , 2017 at 06:13 AM
    John Kenneth Galbraith on Monetary Policy:

    "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.

    anne -> RGC... , February 13, 2017 at 08:19 AM
    https://www.amazon.com/Money-Whence-Came-Where-Went/dp/0735100705

    1975

    Money: Whence it came, Where it went
    By John Kenneth Galbraith

    RC AKA Darryl, Ron said in reply to RGC... , -1
    Excellent! THANKS!

    [Feb 13, 2017] Under Maestro Greenspan Fed as an institution became this sense 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 13, 2017 | economistsview.typepad.com
    llisa2u2, February 13, 2017 at 10:34 AM
    Just 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/2up

    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.

    Sanjait, February 13, 2017 at 11:10 AM
    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.

    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.

    libezkova : February 13, 2017 at 03:07 PM , 2017 at 03:07 PM
    Fed independence was always a convenient fiction. This is an independence limited to implementing neoliberal policies.

    http://www.levyinstitute.org/pubs/wp_625.pdf

    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.

    http://www.mit.edu/~thistle/v13/2/imf.html

    [Feb 12, 2017] Half of US finance is parasitic

    Approximately nine percent of U.S. GDP is finance of that probably three to five percent is useful for allocating capital and the rest is preying on asymmetric information
    Notable quotes:
    "... asymmetric information, and the recent illuminating example of Wells Fargo's excellence in pushing products that customers did not want nor need. ..."
    "... 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 ..."
    "... 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? ..."
    Feb 12, 2017 | economistsview.typepad.com

    Choco Bell -> Ed Brown... February 12, 2017 at 07:50 AM , 2017 at 07:50 AM

    asymmetric 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
    "
    ~~Guy Roinik~

    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] Austerity The History of a Dangerous Idea by Mark Blyth

    See also Mark Blyth--"Liberalisms' great trick has been to naturalize very difficult political contests."
    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 programs

    " 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.

    David Lindsay on September 25, 2016 Format: Paperback Verified Purchase
    Brilliant Overview

    " 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 an